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CORPORATION

LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

DIRECTORS, TRUSTEES AND OFFICERS



Board of Directors is the body which:
1. Exercises all powers provided for under the Corporation Code;
2. Conducts all business of the corporation;
3. Controls and holds all property of the corporation.
Its members have been characterized as trustees or directors clothed
with a fiduciary character. It is clearly separate and distinct from the
corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003).

corporation of which he is a director shall thereby cease to be a


director. Trustees of non-stock corporations must be members
thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.

Doctrine of Centralized Management1


o General Rule: The corporations consent is that of its
Board of Directors.
o

Atty. Hofilea There must be a minimum of five (5) directors


and a maximum of fifteen (15).


I. DOCTRINE OF CENTRALIZED MANAGEMENT: Powers of Board of
Directors (Section 23)


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

Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director, which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the

Exception: Specified instances in the Corporation Code


where the particular exercise of the corporate power by
the Board, in order to be binding and effective, requires
the consent or ratification of the stockholders or
members, and also on the part of the State.
Right of Appraisal: It should be noted that although for
efficiency of running of corporate affairs the rule of
majority has been adopted in the case of stockholders
and members, the Corporation Code still recognizes
that in certain instances a dissenting stockholder whose
contractual expectation has either been frustrated or
altered by the decision of the majority, should be given
the right not have to stay within the confines of the
corporate contractual relationship. In such instances,
the dissenting stockholder is granted an option to

withdraw from such relationship, by the exercise of the


right of appraisal.
Courts Attitude Towards the Boards Exercise of
Power: The Board of a corporation has sole authority to

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


determine policy and conduct the ordinary business of
the corporation within the scope of its charter. As long
as the board acts honestly and the contract does not
defraud or abuse the rights of the minority, the courts
will not interfere in their judgments and transactions.
The minority members of the board and the minority

stockholders cannot come to court upon allegations of


want of judgment or lack of efficiency on the part of the
majority and change the course of the administration of
corporate affairs.

Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Gamboa v. Victoriano, 90


SCRA 40 (1979); Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319
(2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v.
Jochico, 517 SCRA 221 (2007); Republic v. Coalbrine International, 617 SCRA
491 (2010).
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.

Atty. Hofilea The one share required to be held by a director


is a qualifying share and in practice is ignorable.


A. Rationale for Centralized Management Doctrine:

The raison detre behind the conferment of corporate powers


on the Board of Directors is not lost on the Court indeed, the
concentration in the Board of the powers of control of
corporate business and appointment of corporate officers and
managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered and unfamiliar with
the business of a corporation to conduct its business directly.
And so the plan of corporate organization is for the stockholders

Just as a natural person may authorize another to do certain


acts in his behalf, so may the Board of Directors validly delegate
some of its functions to individual officers or agents appointed
by it.

or connected with the performance of authorized duties


of such director, are held not binding on the
corporation.

Section 23 expressly provides that the corporate powers of all


corporations shall be exercised by the Board of Directors.
Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).1
o The source of power of the Board of Directors is
primarily and directly vested by law; it is not a
delegated power from the stockholders or members of
the corporation.2

Thus, contracts or acts of a corporation must be made


either by the Board of Directors or by a corporate agent
duly authorized by the board.
Absent such valid delegation/authorization, the rule is
that the declarations of an individual director relating to
the affairs of the corporation, but not in the course of,

to choose the directors who shall control and supervise the


conduct of corporate business. Filipinas Port Services v. Go, 518
SCRA 453 (2007).

Filipinas Port Services v. Go

Facts: Filports Board of Directors (herein respondents) enacted a
resolution creating six new positions. People were elected into said 6


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


offices and given a monthly salary. They also increased the salaries of
the Chairman and other officers. Eliodoro Cruz (previous board director)
wrote a letter to the Board questioning these decisions, saying that the
Board was not authorized to do so by the companys by-laws as
required by Section 35 of the Corporation Code.

management of the corporations regular business affairs, unless more


extensive power is expressly conferred.

powers and transact its business through the instrumentalities


of its Board of Directors, and through its officers and agents,
when authorized by resolution or by its by-laws.
Examples:


Issue: Whether or not the Board of Directors had the power to create
the assailed positions

Held: YES. While the by-laws do not expressly provide for the boards
authority to create an executive committee, the Court cannot deem that
the positions created automatically formed an executive committee.

The executive committee referred to in Sec. 35 means a committee


that has equal powers with the board and must be distinguished from
other committees that can be created and controlled by the board. In
this case, the positions created are ordinary positions were created in
accordance with the regular business of Filport; thus, it is entirely within
the boards power to create them and provide remuneration therefor.
Plus, Cruz himself moved to create the positions of AVPS for Finance,
Operations, and Administration during his incumbency as Filport
president.

Doctrine: As per Section 23 of the Corporation Code, the corporate
powers of all corporations formed under the code shall be exercised by
the board, and all property owned and business conducted by the
corporation shall also be held and controlled by the board. The board is
the sole authority to determine policies, enter into contracts, and

A corporation is an artificial being and can only exercise its

Consequently, when legal counsel was clothed with


authority through formal board resolution, his acts bind
the corporation which must be held bound the
actuations of its counsel of record. De Liano v. Court of
Appeals, 370 SCRA 349 (2001).
The physical acts of the corporation, like the signing of
documents, can be performed only by natural persons
duly authorized for the purpose by corporate by-laws or
by a special act of the board of directors. Firme v.
Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003);
Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).


B. Theories on Source of Board Power
1. Theory of Original Power The source of the power of the
Board comes directly from the law, and the Board is originally

conduct the ordinary business of the corporation within the scope of its
charter. However, the authority of the board is restricted to the


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

and directly granted corporate power as the embodiment of the


corporation. This theory has no democratic notions but actually
is more akin to the principles of autocracy.
a. Accordingly there is little for the stockholders to do
beyond electing directors, making by-laws and
exercising certain other special powers defined by law.

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


These notions are in accordance with the mandate of
Section 23 of the Corporation Code.
b. Under the theory of original power, the Board is vested
with the legal or naked title to the properties and
business enterprise of the corporation, being viewed as
a medium or the corpus, with the stockholders being
considered as the beneficiaries, and thereby a fiduciary
relationship established between the Board as the
trustee, and the stockholders as the beneficiaries.
c. Atty. Hofilea the Board of Directors vis--vis the
stockholders have a fiduciary/trust relationship.
2. Theory of Delegated Power the authority exercised by the
Board is viewed as delegated to them by stockholders. Under
such theory, the source of primary theory can override the
decisions of its delegates.
a. Such theory promotes the notion of agency in the
corporate set-up, where the real sources of power are
the stockholders or members, and the representatives
thereof would be the Board. It is also consistent with
notions in Property Law that as a general rule, the


Angeles v. Santos

Facts: A complaint was instituted by Angeles, de Lara, Bernabe, as
stockholders and member of the minority of the Board of Directors, for
and in behalf of the corporation, Paraaque Rice Mill, Inc., against
Santos, Mayuga, Pascual, and Rodriguez who constitute the majority of
the Board of Directors. Generally, the allegations consists of denial of
Santos as president of the Corporation to give access to the
corporations books which was then necessary because (1) de Lara was
conducting an investigation, (2) such books should have been in the
hands of the treasurer (Bernabe) and not the president, and (3) that the
defendants had been disposing of the assets of the corporation without
authority from the Board. The court issued an ex parte order of
receivership appointing Melchor de Lara as receiver but the defendants
objected claiming that the Court had no jurisdiction over the Paraaque

Delegated Powers Coming from the Stockholders: The Board of

Rice Mill, Inc., because it had not been include as party defendant in this
case and that, therefore the court could not properly appoint a receiver
of the corporation pendente lite.

Issue: Whether or not the trial court was without jurisdiction to appoint
a receiver and should have dismissed the case

Held: NO. That the action was properly instituted by the plaintiff as

Directors is a creation of the stockholders and controls and


directs the affairs of the corporation by delegation of the

stockholders for and in behalf of the corporation Paraaque Rice Mill,


Inc. and the lower court committed no reveiwable error in appointing a

owners exercise ultimate power and disposition over


the subject matter to which he holds title. The
stockholders or members are the real owners of the
corporation, and to them the corporate powers must
belong, and that the Board of Directors or Trustees
merely act as their agents or representatives.

stockholders. By drawing themselves the powers of the


corporation, they occupy positions of trusteeship in relation to
the stockholders. Angeles v. Santos, 64 Phil. 697 (1937).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


receiver of the corporation pendente lite.

Doctrine: Where a majority of the board of directors wastes or
dissipates the funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires acts, the court, in the exercise of its

constitute the board of trustees. During the annual members meeting


held on April 6, 1998, there were only eleven (11) living member-
trustees, as four (4) had already died. Out of the eleven, seven (7)
attended the meeting through their respective proxies. The meeting
was convened and chaired by Atty. Sabino Padilla Jr. over the objection

equity jurisdiction, and upon showing that intra-corporate remedy is


unavailing, will entertain a suit filed by the minority members of the
board of directors, for and in behalf of the corporation, to prevent
waste and dissipation and the commission of illegal acts and otherwise
redress the injuries of the minority stockholders against the wrongdoing
of the majority.

of Atty. Antonio C. Pacis, who argued that there was no quorum. In the
meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and
Judith Tan were voted to replace the four deceased member-trustees.

Issue: Whether or not the meeting was null and void for lack of quorum

Held: NO. Under Section 52 of the Corporation Code, the majority of

One of the most important rights of a qualified shareholder or


member is the right to vote for the directors or trustees who are
to manage the corporate affairs. The right to choose the
persons who will direct, manage and operate the corporation is
significant, because it is the main way in which a stockholder
can have a voice in the management of corporate affairs, or in
which a member in a nonstock corporation can have a say on
how the purposes and goals of the corporation may be
achieved. Once the directors or trustees are elected, the
stockholders or members relinquish corporate powers to the
board in accordance with law. Tan v. Sycip, 499 SCRA 216
(2006).


Tan v. Sycip

Facts: Grace Christian High School (GCHS) is a nonstock, non-profit
educational corporation with fifteen (15) regular members, who also

the members representing the actual number of voting rights, not the
number or numerical constant that may originally be specified in the
articles of incorporation, constitutes the quorum. Under the By-Laws of
GCHS, membership in the corporation shall, among others, be
terminated by the death of the member. The dead members who are
dropped from the membership roster in the manner and for the cause
provided for in the By-Laws of GCHS are not to be counted in
determining the requisite vote in corporate matters or the requisite
quorum for the annual members meeting. With 11 remaining
members, the quorum in the present case should be 6. Therefore, there
being a quorum, the annual members meeting, conducted with six
members present, was valid (as to other resolutions).

HOWEVER, the election of the four trustees cannot be legally upheld
for the obvious reason that it was held in an annual meeting of the
members (where a majority of the Board were present), not of the
board of trustees. We cannot ignore the GCHS bylaw provision, which


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


specifically prescribes that vacancies in the board must be filled up by
the remaining trustees who must sit as a board in order to validly elect
the new ones.

Doctrine: Membership in and all rights arising from a non-stock


The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as

corporation are personal and non-transferable, unless the articles of


incorporation or the bylaws of the corporation provide otherwise. The
determination of whether or not dead members are entitled to
exercise their voting rights (through their executor or administrator)
depends on the articles of incorporation or bylaws.

fixed in the articles of incorporation shall constitute a quorum for the


transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the
members of the board.

Atty. Hofilea if you push the point that the directors are the
agents of the stockholders, there may be complications because
in agency, the principal can override the agent. However, in the
case of corporations, the stockholders (principal) are not
allowed to overrule or supplant the decisions of the Board of

Directors or trustees cannot attend or vote by proxy at board


meetings.

Directors (agent).

also be the treasurer. This was laid down via a SEC rule and not
found in the Corporation Code.


C. Board Must Act As a Body (Section 25)

Section 25. Corporate officers, quorum.


Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person, except that no
one shall act as president and secretary or as president and treasurer
at the same time.

Atty. Hofilea the secretary as a matter of policy should not

General Rule: The grant of corporate power is to the board as a


body, and not to the individual members. The corporation can
be bound only by the collective act of the board.
o The rationale for this rule is the public policy, that it
makes better management practice for the board to sit
down, to discuss corporate affairs, and decide on the
basis of their consensus.1

The SEC has opined that directors and trustees can only exercise their power
as a board, not individually. They shall meet and counsel each other and any
determination affecting the corporation shall be arrived at only after


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

Exception: A corporation can be bound even by the act of its


officers, but always because of the act or default of, or as an

implied authority coming from the Board.


1. Directors or Trustees Cannot Act Individually to Bind the
Corporation

corporation, especially when the by-laws specifically provided


that the acts entered into can only be done by the Board of
Directors. Ramirez v. Orientalist Co., 38 Phil. 634 (1918).
o The implication is clear in reference to outsiders dealing
with the corporation, that not all corporate actions
need formal board approval. The board need not come
together and act as a body to perform a corporate act.
In many cases no act is required of the members of the

Contracts or acts of corporation must be made either by the

Board of Directors or by a corporate agent duly authorized by


the Board. Absent such valid delegation, the rule is that the
declaration of an individual director relating to the affairs of the
corporation, but not in the course of, or connected with the
performance of authorized duties of such director, are held not
binding on the corporation.1
2. Ratification by the Board does not need formal meeting

board in order to bind the corporation; the fact that


they know of a particular corporate transaction or
contract, and they stayed silent about it, or worse, they
allowed the corporation to gain by the transaction or
contract, would already bind the corporation.2

A corporation, through its Board of Directors, should act in the


manner and within the formalities prescribed by its charter or
by the general law. Thus, directors must act as a body in a
meeting called pursuant, otherwise, any action taken therein
may be questioned by any objecting director or shareholder. Be

Between the act of the Board as a body affirming informally the


perfection of a contract entered into in behalf of the
corporation by a senior officer, and the subsequent formal
board resolution rejecting the same contract, the former must
prevail under the doctrine of estoppel. Acua v. Batac
Producers Cooperative Marketing Assn., 20 SCRA 526 [1967]).

that as it may, jurisprudence tells us that an action of the Board


of Directors during a meeting, which was illegal for lack of
notice, may be ratified either expressly, by the action of the
directors in subsequent legal meeting, or impliedly, by the
corporation's subsequent course of conduct. Lopez Realty v.
Fontecha, 247 SCRA 183 (1995).

Exercise of the powers of the Board of Directors may either be


express and formal through the adoption of a board resolution
in a meeting called for the purpose, or it may be implied where
the Board collectively and knowingly allows the President to
enter into important contracts in the pursuit of the business of


consultation at a meeting of the board attended by at least a quorum. SEC
Opinion, 10 March 1972, SEC FOLIO 1960-1976, at p. 526.
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.

A Director-Treasurer has no power to bind the company even in


transactions that are pursuant to the primary purpose its

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


the corporation. Board of Liquidators v. Heirs of Maximo M.
Kalaw, 20 SCRA 987 (1967).

2. Ratification from the board



3. Directors or Trustees cannot bind the Board in a Stockholders
or Members Meeting

Board of Liquidators v. Heirs of Maximo M. Kalaw


See Tan v. Sycip, 499 SCRA 216 (2006).


4. Directors or Trustees Cannot Attend or Act by Proxy or
Alternate1

Facts: National Coconut Corporation (NACOCO) through its Kalaw


entered into several contracts involving copra trading activities which
became unprofitable. NACOCO suffered losses NACOCO herein alleges
that under the by-laws of the corporation, the general manager only has
the power to perform or execute on behalf of the corporation upon
prior approval of the Board all contracts necessary and essential to the
proper accomplishment for which the Corporation was organized.

Issue: Whether or not Kalaw and the rest of the board were guilty
negligence and bad faith and/or breach of trust for having entered into
the unprofitable contracts

Held: NO. Under the circumstances, Kalaws acts were valid corporate
acts. Evidence shows that it was the practice of the corporation to allow
its general manager to negotiate contracts, in its copra trading for and
in NACOCOs behalf, without prior board approval. The Court ruled that
if the by-laws were to be literally followed, the board should give its
stamp of prior approval on all corporate contracts. But [in this case] the
board itself, by its acts and through acquiescence, practically laid aside
the by-law requirement of prior approval

Doctrine: There are 2 ways by which corporate actions may come about
through its Board of Directors:
1. The board may empower or authorize the act or contract

On account of their responsibility to the corporation, and by the


fact that they were elected into the Board based on their
personal qualifications, business acumen and background,
directors or trustees cannot validly act by proxy.

The SEC has ruled that alternate directors are not allowed by
law, since directors are required to exercise their judgment and
discretion in running the affairs of the corporation and cannot
be substituted by others because their position is one of trust
and confidence.2


D. Effects of Bogus Board: The acts or contracts effected by a bogus
board would be void pursuant to Article 1318 of Civil Code3 because of
the lack of consent. Islamic Directorate of the Philippines v. Court of
Appeals, 272 SCRA 454 (1997).

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
2
SEC Opinions, dated 27 May 1970 and 25 April 2985, addressed to
Polyphosphates, Inc.
3
Article 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established. (1261)


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


E. Executive Committee (Section 35)

General Rule: The Board can overrule the decisions of an


executive committee.

Section 35. Executive committee.


The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be

Exception: UNLESS, such contract has been executed by the


third party involved, or rights have already vested on third
parties.

appointed by the board. Said committee may act, by majority vote of


all its members, on such specific matters within the competence of the
board, as may be delegated to it in the by-laws or on a majority vote
of the board, except with respect to: (1) approval of any action for
which shareholders' approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or repeal of by-laws or the
adoption of new by-laws; (4) the amendment or repeal of any


II. BUSINESS JUDGMENT RULE:

resolution of the board which by its express terms is not so amendable


or repealable; and (5) a distribution of cash dividends to the
shareholders.

Ultimate power must remain with the Board of Directors, and it

It is within the power of the Board of Directors to authorize any


person or committee to undertake corporate acts. The board
has power to constitute even an executive committee, even
when no such committee is provided for in the articles and by-
laws of the corporation. Filipinas Port Services, Inc. v. Go, 518
SCRA 453 (2007).

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.

Business Judgment Rule The corporate principle recognizing


corporate power and competence to be lodged primarily with
the Board of Directors.

Established is the principle that when a resolution is 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," adding that
"[i]t is a well-known rule of law that questions of policy or
management are left solely to the honest decision of officers
and directors of a corporation, and the court is without
authority to substitute its judgment [for that] of the board of
directors; the board is the business manager of the corporation,
and so long as it acts in good faith its orders are not reviewable
by the courts." Montelibano v. Bacolod-Murcia Miling Co., 5
SCRA 36 (1962).

would be against corporate principle to empower the Executive


Committee with authority that the Board itself cannot
countermand.1


Montelibano v. Bacolod-Murcia Miling Co., Inc.

Facts: The Bacolod-Murica Milling entered into Milling Contracts with
Montelibano and Gonzaga & Co. (planters). The contract provided that
the resulting product should be divided in the ratio of 45% for the mill
and 55% for the planters. This was amended to give the planters an


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


increased participation of 60%. Years later, Bacolod denied the 5% share
increase of Petitioner citing that it had no consideration, thus its
considered a donation a ultra vires act.

Issue: Whether or not the Resolution is valid and binding on the

the corporation their management prerogatives/control on


business matters over to the state. PSE v. Court of Appeals, 281
SCRA 232 (1997).

PSE v. Court of Appeals

corporation and the planters



Held: YES. The amended contract has the same consideration as the
main contract at it was just attached to the latter. there is no rational
explanation for the company's assenting 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


Facts: Puerto Azul Land Inc. (PALI), a domestic real estate corporation,
made an application to the SEC for the purpose of having its stocks
listed in order for it to be sold in the public. A year after a permit to sell
was granted, heirs of the former President Marcos claimed that
President Marcos was the legal owner of certain properties forming part
of the Puerto Azul Beach Hotel Complex which PALI claims to be among

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 stipulations. 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. Such is not an ultra vires act.

its assets. The PSE, taking into consideration these claims, rejected the
application for listing. In response, PALI sought the decision of the SEC
which then reversed the decision of the PSE and ordered the latter to
list the PALI stocks.

Issue: Whether or not the SEC acted arbitrarily in reversing the decision
of the PSE and ordering the listing of PALI stocks

Doctrine: The court also reiterated the rule that questions of policy or of
management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to
substitute its judgment with that of the Board of Directors; the board is
the business manager of the corporation, and so long as it acts in good
faith its orders are nor reviewable by the courts.


Held: YES. The PSE is engaged in a business imbued with high public
interest and is under the control and supervision of the SEC. Though
under such control and supervision by the SEC, the PSE cannot be
questioned on matters of internal management, policies, and
administration in the absence of bad faith. In fact, in the decision
rendered by the board of the PSE, was found of good standing by the
court. PSE was correct in denying the listing of the PALI stocks since

Theoretical Basis for the Business Judgment Rule: The


recognition of the corporation merely as an association of
individuals who thereby do not give up through the medium of

there were various allegations against the listing. Taking all these into
consideration, the PSE deemed that PALI stocks are not for the best


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


interest of the investing public and will deteriorate the high standards
and goodwill upheld by the PSE.

Doctrine: Questions of policy and of management are left to the honest
decision of the officers and directors of a corporation, and the courts

citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998 ed), p.


288.

are without authority to substitute their judgment for the judgment of


the board of directors. The board is the business manager of the
corporation, and so long as it acts in good faith, its orders are
reviewable by the courts.

Facts: The Tiu family members are the owners of First Landlink Asia
Development Corporation (FLADC). One of the corporations projects is
the construction of Masagana Citimall in Pasay City. However, due to
financial difficulties (they were indebted to PNB for P190 million), the
Tius feared that the construction would not be finished. So to prevent
the foreclosure of the mortgage on the two lots where the mall was
being built, they invited the Ongs to invest in FLADC. The two parties


A. BJR First Branch: Resolutions approved, contracts and transactions
entered into, by the Board of Directors within the powers of the
corporation cannot be reversed by the Courts, not even on the behest
of the stockholders of the corporation.1

The Board of Directors is the business manager of the


corporation, and so long as it acts in good faith, its orders are
not reviewable by the courts. Estacio v. Pampanga I Electric
Cooperative, Inc., 596 SCRA 542 (2009).

Questions of policy and management are left to the honest


decision of the officers and directors of a corporation, and the
courts are without authority to substitute their judgment for the
judgment of the board of directors. Cua, Jr. v. Tan, 607 SCRA
645 (2009).

No court can, as an integral part of resolving the issues between


squabbling stockholders, order the corporation to undertake
certain corporate acts, since it would be in violation of the
business judgment rule. Ong Yong v. Tiu, 401 SCRA 1 (2003),

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.

Ong Yong v. Tiu


entered into a Presubscription Agreement whereby each of them would


hold 1,000,000 shares each and be entitled to nominate certain officers.
The Tius contributed a building and two lots, while the Ongs
contributed P100M.

Two years later, the Tuis filed for rescission of the Presubscription
Agremement because the Ongs refused to issue them their shares of
stock and from assuming positions of VP and Treasurer to which they
were entitled to nominate. The Ongs contended that they could not
issue the new shares to the Tius because the latter did not pay the
capital gains tax and the documentary stamp tax of the lots. And
because of this, the SEC would not approve the valuation of the
property contribution of the Tius. The Court of Appeals ordered
liquidation of FLADC to enforce rescission of the contract which was
granted only to prevent squabbles and numerous litigations between
the parties.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Issue: Whether or not the Court of Appeals erred in ordering liquidation

Held: YES. The Tius also argued that the rescission would not result into
liquidation because their case is actually a petition to decrease the
capital stock. As provided in Section 122 of the Corporation Code,

2. When he is guilty of gross negligence or bad faith in directing


the affairs of the corporation;3
3. When he acquires any personal or pecuniary interest in conflict
with his duty as such directors.4

distribution of any of its assets or property is permitted only after lawful


dissolution and payment of all debts and liabilities. An exception is by
decrease of capital stock. So the Tius claim that they do not violate the
liquidation procedures under the law. They were asking the court to
compel FLADC to file a petition with SEC to approve the decrease in
capital stock. The Supreme Court ruled that it has no right to intrude
into the internal affairs of the corporation so it cannot compel FLADC to

corporate officers may be held personally liable for corporate


acts, provide also the three (3) instances when courts are
authorized to supplant the decision of the board, which is
deemed to be biased and may prove detrimental to the
corporation.

Examples:

file the petition. Decreasing a corporations authorized capital stock is


an amendment of the Articles of Incorporation, a decision that only the
stockholders and the directors can make.

Doctrine: See above.

Exceptions:

1. When the director willfully and knowingly vote for patently


unlawful acts of the corporation;2
1

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
2
Section 31, Corporation Code.

If the cause of the losses is merely error in business judgment,


not amounting to bad faith or negligence, directors and/or
officers are not liable. For them to be held accountable, the
mismanagement and the resulting losses on account thereof are
not the only matters to be proven; it is likewise necessary to
show that the directors and/or officers acted in bad faith and
with malice in doing the assailed acts. Bad faith does not simply
connote bad judgment or negligence; it imports a dishonest

such business judgment cannot be held personally liable for the


consequences of such acts. However, when the directors or trustees
violate their duties, they can be held personally liable. This is consistent
with the Law on Agency.1

Directors and officers who purport to act for the corporation,


keep within the lawful scope of their authority and act in good
faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts, which are properly attributed to the
corporation alone. Benguet Electric Cooperative, Inc. v. NLRC,
209 SCRA 55 (1992).


B. BJR Second Branch: General Rule: Directors and officers acting within

The above-enumerated exceptions when directors, trustees and

purpose or some moral obliquity and conscious doing of a


wrong, a breach of a known duty through some motive or


3
4

Ibid.
Sections 31 and 34, Corporation Code.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


interest or ill-will partaking of the nature of fraud. Filipinas Port
Services, Inc. v. Go, 518 SCRA 453 (2007).

III. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE
CONTRACTS

The doctrine of estoppel or ratification (as well as the doctrine


of apparent authority), is premised on a reliance in good faith
by a third party that the representative of the corporation has
proper authority as generally derived from law, corporate by-
laws, or authorization from the board, either expressly or
impliedly by habit, custom, acquiescence in the general course
of business. The nature of the transaction and the
circumstances under which the transaction is pursued are
looked into by the courts to determine the proper application of
the estoppel doctrine.1


A. Theory of Estoppel or Ratification

The principle of estoppel precludes a corporation and its Board


of Directors from denying the validity of the transaction entered
into by its officer with a third party who in good faith, relied on
the authority of the former as manager to act on behalf of the
corporation. Lipat v. Pacific Banking Corp., 402 SCRA 339
(2003).


Lipat v. Pacific Banking Corp.

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.

Facts: Spouses Lipat (Alfredo and Estelita) owns Belas Export Trading
(BET), a single proprietorship engaged in garment manufacturing in
Quezon City. The Lipats also owned the Mystical Fashions in the United
States, which sells goods imported from the Philippines through BET.
Estelita designated her daughter, Teresita, to manage BET in the
Philippines while she was managing Mystical Fashions in the United
States.

In order to facilitate the convenient operation of BET, Estelita executed
a special power of attorney appointing Teresita as her attorney-in-fact
to obtain loans. By virtue of this SPA, Teresita obtained a sizeable loan
from Pacific Bank. Three months after the loan, BET was incorporated
into a family corporation named Belas Export Corporation (BEC),
engaged in the same business and utilized the same properties. The loan
was restructured in the name of BEC and secured with Lipats property.

BEC defaulted, and the bank foreclosed on the real mortgage and
Eugenio Trinidad was the highest bidder. The spouses Lipat claim that
the loan obtained by Teresita were ultra vires acts because they were
executed without the requisite board resolution of the Board of
Directors of BEC. Pacific Bank and Trinidad alleged in common that
petitioners Lipat cannot evade payments because they and the BEC are
one and the same, the latter being a family corporation. Respondent
Trinidad further claimed that he was a buyer in good faith and for value
and that petitioners are estopped from denying BECs existence after
holding themselves out as a corporation.

Issue: Whether or not petitioners are estopped from asserting that the
acts were ultra vires for not being supported by Board Resolutions.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



Held: YES. Firstly, it could not have been possible for BEC to release a
board resolution no business or stockholders meetings were conducted
nor were there election of officers held since its incorporation. In fact,
not a single board resolution was passed by the corporate board and it

by-laws, or relevant provisions of law, yet, just as a natural person may


authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to
officers, committees, or agents. The authority of such individuals to
bind the corporation is generally derived from law, corporate by-laws,

was Estelita Lipat and/or Teresita Lipat who decided business matters.

Secondly, the principle of estoppel precludes petitioners from denying
the validity of the transactions entered into by Teresita Lipat with Pacific
Bank, who in good faith, relied on the authority of the former as
manager to act on behalf of petitioner Estelita Lipat and both BET and
BEC. Teresita Lipat had dealt with Pacific Bank on the mortgage contract

or authorization from the board, either expressly or impliedly by habit,


custom, or acquiescence in the general course of business. Apparent
authority, is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act or, in other
words, the apparent authority to act in general, with which it clothes
him; or (2) the acquiescence in his acts of a particular nature, with

by virtue of a special power of attorney executed by Estelita Lipat.


Recall that Teresita Lipat acted as the manager of both BEC and BET and
had been deciding business matters in the absence of Estelita Lipat.
Further, the export bills secured by BEC were for the benefit of
Mystical Fashion owned by Estelita Lipat. Hence, Pacific Bank cannot
be faulted for relying on the same authority granted to Teresita Lipat by
Estelita Lipat by virtue of a special power of attorney. It is a familiar

actual or constructive knowledge thereof, whether within or beyond the


scope of his ordinary powers.

doctrine that if a corporation knowingly permits one of its officers or


any other agent to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts;
thus, the corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the agents
authority.

Doctrine: While the power and responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is
lodged in its board of directors, subject to the articles of incorporation,


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

In order to ratify the unauthorized act of an agent and make it


binding on the corporation, it must be shown that the governing
body or officer authorized to ratify had full and complete
knowledge of all the material facts connected with the
transaction to which it relates. Ratification can never be made
on the part of the corporation by the same person who
wrongfully assume the power to make the contract, but the
ratification must be by the officer or governing body having
authority to make such contract. Vicente v. Geraldez, 52 SCRA
210 (1973).

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

representative.1
o The admission by counsel on behalf of the corporation
of the latters culpability for personal loans obtained by
its corporate officers cannot be given legal effect when
the admission was without any enabling act or
attendant ratification of corporate act, as would
authorize or even ratify such admission. In the absence
of such ratification or authority, such admission does

not bind the corporation. Aguenza v. Metropolitan


Bank and Trust Co., 271 SCRA 1 (1997).
Acts done in excess of corporate officers scope of
authority cannot bind the corporation. However, when
subsequently a compromise agreement was on behalf
of the corporation being represented by its President
acting pursuant to a Board of Directors resolution, such
constituted as a confirmatory act signifying ratification
of all prior acts of its officers. National Power Corp. v.
Alonzo-Legasto, 443 SCRA 342 (2004).


B. Doctrine of Laches or Stale Demands

The principle of laches or stale demands provides that the


failure or neglect, for an unreasonable and unexplained length
of time, to do that which by exercising due diligence could or
should have been done earlier, or the negligence or omission to
assert a right within a reasonable time, warrants a presumption

that the party entitled to assert it either has abandoned it or


declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391
SCRA 176 (2002).

The ratificatory act that would bind the corporation would have
to come from the Board of Directors or a properly authorized

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


C. Doctrine of Apparent Authority: Article 1883, Civil Code.

If a corporation intentionally or negligently clothes its officers or


agents with apparent power to perform acts, it will be estopped
to deny such apparent authority is real, as to innocent third
persons dealing in good faith with such officers or agents.
Francisco v. GSIS, 7 SCRA 577 (1963).2
o

The Doctrine of Apparent Authority must proceed from


the nature of the position held by the corporate officer
in question in that he represents the will of the
corporation through the Board of Directors.3


Francisco v. GSIS

Facts: Trinidad J. Francisco, in consideration of a loan, mortgaged parcel
of land with 21 bungalows known as Vic-Mari Compound. In January
1959, GSIS extrajudicially foreclosed the mortgage on the ground that
up to that date the Francisco was in arrears on her monthly
installments. On the same date, Atty. Vicente Franciscos (father of
Trinidad) request was approved by the GSIS board which was sent in the
form of a telegram with the signature of Rodolfo Andal, general
manager of GSIS. The defendant received the said amount however it
did not, take over the administration of the compound as agreed upon.

United Coconut Planters Bank v. Planters Products, Inc., 672 SCRA 285 (2012).
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
3


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Thus, the Franciscos continued to administer the same, but remitting
the proceeds to the GSIS. Subsequently, letters were sent asking the
plaintiff for a proposal for the payment of her indebtedness, since the
one-year period for redemption had expired. In reply, Atty. Francisco
protested against this, saying that they have already accepted his offer

1. The acts of the purported corporate officer or agent justifying


belief in the agency by the principal corporation.
2. Knowledge thereof by the principal corporation (i.e. its Board of
Directors) which is sought to be held; and
3. Reliance thereon by the principal corporation (i.e. its Board of
Directors) consistent with ordinary care and prudence.

and that he has already commenced his part on the terms of his
contract.

Issue: Whether or not the compromise made is binding upon defendant
corporation.

Held: YES. The compromise made through the telegrams is binding.

Under Article 1910 of the New Civil Code,2 acts done by such
officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly,
or is estopped from denying themThus, contracts entered into
by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the

There was apparent authority that of the GM, Andal. Even assuming
there was a mistake in the telegram, GSIS notified the Franciscos too
late and only after having received several remittances. There was
also notice to the GSIS, because Vicente attached the disputed telegram
in replying to that which was sent by GSIS. Notice to an officer with
regard to matters within his authority is tantamount to notice to the
corporation. There was thus implied ratification.

Doctrine: Persons transacting with corporations need not disbelieve
every act of its officers, especially those regular on their face. They are
entitled to rely upon external manifestations of corporate consent. And
if a corporation knowingly permits its officers to do acts with apparent
authority, it is estopped from denying such authority.

For the Doctrine of Apparent Authority to apply, the party


invoking the same must prove the following:1

Corporation. Woodchild Holdings, Inc. v. Roxas Electric


Constructions Co., Inc., 436 SCRA 235 (2004).
o Atty. Hofilea what was unique here, which the
presidents action was not binding, is that there was a
limit to the authority of the president to sell in
connection with the land.

Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc., 436 SCRA
235 (2004) as cited in Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.
2
Article 1910.
The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is
not bound except when he ratifies it expressly or tacitly. (1727)


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc.

Facts: Roxas Electric and Construction Company Inc (RECCI) owned 2
parcels of land, Lot B1 and Lot B2. RECCIs Board of Directors issued a
resolution authorizing the corporation through its President, Roberto
Roxas, to sell B2 and to sign and execute the necessary documents.
Roxas sold B2 to Woodchild Holdings Inc (WHI) through its President,
Jonathan Dy. In the Deed of Absolute Sale, Roxas also granted WHI a
right of way over B1 and an option to purchase certain portions thereof
in case the need arose as earlier requested by WHI. After Roxas died,
WHI demanded that RECCI sell a portion of B1 but it refused claiming it
never authorized Roxas to do so.


Doctrine: For an act of the principal to be considered as an implied
ratification of an unauthorized act of an agent, such act must be
inconsistent with any other hypothesis than that he approved and
intended to adopt what had been done in his name.

a particular act, ratification of that act must also be in writing.



Issue: Whether or not RECCI is estopped from claiming that Roxas had
not authority to sell B1.

Held: NO. For the principle of apparent authority to apply, the WHI was
burdened to prove the following: (a) the acts of RECCI justifying belief in
the agency by the WHI; (b) knowledge by RECCI which is sought to be
held; and, (c) reliance thereon by WHI consistent with ordinary care and
prudence.

The apparent power of an agent is to be determined by the acts of the
principal and not by the acts of the agent. There is no evidence of
specific acts made by the RECCI showing or indicating that it had full
knowledge of any representations made by Roxas to WHI that it had
authorized Roxas to grant WHI an option to buy B1, or to create a
burden or lien thereon. There is no implied ratification when RECCI
received the P5M purchase price for B2.

Ratification is based on waiver (intentional relinquishment of a


known right). Ratification cannot be inferred from acts that a
principal has a right to do independently of the unauthorized
act of the agent. If writing is required to grant an authority to do

The general rule remains that, in the absence of authority from


the Board of Directors, no person, not even its officers, can
validly bind a corporation. If a corporation, however,
consciously lets one of its officers, or any other agent, to act
within the scope of an apparent authority, it will be estopped
from denying such officers authorityUnmistakably, the Courts
directive in Yao Ka Sin Trading is that a corporation should first
prove by clear evidence that its corporate officer is not in fact
authorized to act on its behalf before the burden of evidence
shifts to the other party to prove, by previous specific acts, that
an officer was clothes by the corporation with apparent
authority. Westmont Bank v. Inland Construction and Dev.
Corp., 582 SCRA 230 (2009).


Westmont Bank v. Inland Construction and Dev. Corp.

Facts: Inland Construction and Development Corp. executed real estate
mortgages over its 3 properties and 3 promissory notes for the loans it


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


obtained from Westmont Bank. A Deed of Assignment, Conveyance and
Release was executed by Aranda (President of Inland) wherein he
assigns all his rights and interest in Hanil-Gonzalez Corp in favour of
Abrantes. In the deed, the obligations of Inland (including that with
Westmont Bank) shall be transferred to Abrantes. Westmont Banks

Account officer, Calo, signed for its conformity to the deed. Inland then
filed a complaint for injunction in the Regional Trial against Westmont
Bank when the latter foreclosed the properties mortgaged by Inland. In
their Answer, the bank claimed that it had no knowledge of such
assignment of obligation and did not conform to it.

Issue: Whether or not Westmont Bank is bound by the deed of

Assignment

Held: YES. Calo (signee in the deed of assignment) was the one assigned
to transact on behalf of the Bank with respect to the loan transactions
with Inland. Because of this, it is presumed that he had the authority to
sign for the bank in the Deed of Assignment. The Court stated that if a
corporation consciously lets one of its officers, or any other agent, to act

If a corporation knowingly permits one of its officers to


act within the scope of an apparent authority, it holds
him out to the public as possessing the power to do
those acts, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be
estopped from denying the agents authority. Soler v.
Court of Appeals, 358 SCRA 57 (2001); Rural Bank of
Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000)
The authority of a corporate officer dealing with third
persons may be actual or apparent . . . the principal is
liable for the obligations contracted by the agent. The
agents apparent representation yields to the principal's
true representation and the contract is considered as
entered into between the principal and the third
person. First Philippine Intl Bank v. Court of Appeals,
252 SCRA 259 (1996).

Victim Standing for doctrine to apply the doctrine of


apparent authority cannot apply to benefit a party who deals
with the corporation aware of the corporate representatives
lack of authority.1
o Apparent authority is determined only by the acts of the
principal and not by the acts of the agent. There can be
no apparent authority of an agent without acts or
conduct on the part of the principal; such acts must

within the scope of an apparent authority it will be estopped from


denying such officers authority. The burden of proof is set upon the
Corporation. In this case the Bank failed to discharge its primary burden
of proving that Calo was not authorized to bind it.

Doctrine: The Court stated that if a corporation consciously lets one of
its officers, or any other agent, to act within the scope of an apparent
authority it will be estopped from denying such officers authority. The

have been known and relied upon in good faith as a


result of the exercise of reasonable prudence by a third
party as claimant and such acts or conduct must have

burden of proof is set upon the Corporation.

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

produced a change of position to the third partys


detriment.
Persons who deal with corporate agents within
circumstances showing that the agents are acting in
excess of corporate authority, may not hold the
corporation liable. Traders Royal Bank v. Court of

transaction of discounting the checks involving the same


personalities wherein any enabling resolution from the Board
was dispensed with and yet the bank was able to collect from
the corporation. Nyco Sales Corp. v. BA Finance Corp., 200
SCRA 637 (1991).

Appeals, 269 SCRA 601 (1997).

Foundation, Inc., v. Court of Appeals, 421 SCRA 328 (2004).

A verbal promise given by the Chairman and President of the


company to the general manager and chief operating officer to
give the latter unlimited sick leave and vacation leave benefits
and its cash conversion upon his retirement or resignation,
when not an integral part of the companys rules and policies, is
not binding on the company when it is without the approval of
the Board of Directors. Kwok v. Philippine Carpet
Manufacturing Corp., 457 SCRA 465 (2005).

When an officer in a banking corporation arrange a credit line


agreement and forwards the same to the legal department at its
head officer, and the bank did no disaffirm the contract, then it
is bound by it. Premier Dev. Bank v. Court of Appeals, 427 SCRA
686 (2004).

President ostensible and apparent authority to inter alia deal


with the respondent Bank, and therefore the foundation is
estopped from questioning the Presidents authority to obtain
the subject loans from the respondent Bank. Lapulapu

Apparent authority may be ascertained through (1) the general


manner in which the corporation holds out an officer or agent
as having the power to act, or, in other words the apparent
authority to act in general with which is clothes them; or (2) the
acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond the scope of
his ordinary powers. Inter-Asia Investment Industries v. Court
of Appeals, 403 SCRA 452 (2003).
Examples:

Per its Secretarys Certificate, the foundation had given its

The acceptance of the offer to purchase by the clerk of the

A corporation cannot disown its Presidents act of applying to


the bank for credit accommodation, simply on the ground that it
never authorized the President by the lack of any formal board
resolution. The following placed the corporation and its Board

branch of the bank, and the representation that the manager


had already approved the sale (which in fact was not true),
cannot bind the bank to the contract of sale, it being obvious
that such a clerk is not among the bank officers upon whom
putative authority may be reposed by a third party. There is,

of Directors in estoppel in pais: Firstly, the by-laws provides for


the powers of the President, which includes, executing contracts
and agreements, borrowing money, signing, indorsing and
delivering checks; secondly, there were already previous

thus, no legal basis to bind the bank into any valid contract of
sale with the buyers, given the absolute absence of any
approval or consent by any responsible officer of the bank. DBP
v. Ong, 460 SCRA 170 (2005).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

Rationale for the Doctrine of Apparent Authority: Naturally,


the third person has little or no information as to what occurs in
corporate meeting; and he must necessarily rely upon the
external manifestations of corporate consent. The integrity of
commercial transactions can only be maintained by holding the
corporation strictly to the liability fixed upon it by its agents in
accordance with law. What transpires in the corporate board
room is entirely an internal matter. Hence, petitioner may not
impute negligence on the part of the respondents in failing to
find out the scope of Atty. Solutas authority. Indeed, the public
has the right to rely on the trustworthiness of bank officers and
their acts. Associated Bank v. Pronstroller, 558 SCRA 113
(2008).


Associated Bank v. Pronstroller

Facts: The Spouses Vaca executed a Real Estate Mortgage in favor of
Associated Bank over their parcel of residential land in Green Meadows
Subdivision. Eventually, the property was foreclosed and sold at public
auction with Associated Bank as the highest bidder. However, the Vacas
commenced an action for the nullification of the real estate mortgage
and the foreclosure sale. Pending its resolution in the Supreme Court,
Associated Bank negotiated with the Spouses Pronstroller through Atty.
Jose Soluta, the banks Vice President and member of its Board of
Directors. Letter agreements were executed whereby the Spouses
Pronstrollers would give a downpayment (first letter agreement), and
then given an extension to pay the balance which would be given upon
delivery of the property subsequent to the resolution of the Vaca case
with such property being free from occupants (embodied in the second

letter agreement). Later, the bank reorganised its management and


Atty. Dayday replaced Atty. Soluta. Atty. Dayday informed Spouses
Pronstroller that their deposit would be forfeited because the second
letter agreement was a mistake because Atty. Soluta had no authority to
give an extension.

Issue: Whether or not Associated Bank is bound by the Letter-
Agreement signed by Atty. Soluta under the doctrine of apparent
authority.

Held: YES. Undoubtedly, the Associated Bank had previously allowed
Atty. Soluta to enter into the first agreement without a board resolution
expressly authorizing him; thus, it had clothed him with apparent
authority to modify the same via the second letter-agreement. It is not
the quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with the power to bind the
corporation.

Doctrine: The doctrine of apparent authority, with special reference
to banks, had long been recognized in this jurisdiction. Apparent
authority is derived not merely from practice. Its existence may be
ascertained through 1) the general manner in which the corporation
holds out an officer or agent as having the power to act, or in other
words, the apparent authority to act in general, with which it clothes
him; or 2) the acquiescence in his acts of a particular nature, with actual
or constructive knowledge thereof, within or beyond the scope of his
ordinary powers.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

Atty. Hofilea the by-laws do not always have all the details
of the officers but it is a good place to start to determine

whether the officer you are dealing with has authority or not to
deal with you regarding the matter. Absent this, you can ask the
company to provide you with a Board Resolution authorizing a
particular person to deal with you and under what limitations.

IV. Qualifications of Directors/Trustees (Sections 23 and 27)

law requires is that he has legal title to the share. Under the old
Corporation Law it was required that every director must own
"in his own right" at least one share of the capital stock of the
corporation. Under the present Section 23 of the Corporation
Code, it requires only that the share of a director "shall stand in
his name on the books of the corporation."1

Section 23. The board of directors or trustees.


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

Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director, which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members
thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.

The fact that a director is only holding the share as a nominee of


another person does not disqualify him as a director. What the

The 1-share requirement is a continuing requirement

2. Rules on Additional Qualifications and Disqualifications

The qualifications provided for in the law are only minimum


qualifications; additional qualifications and disqualifications can
be provided for but only by proper provisions in the by-laws of
the corporation. Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).
o Atty. Hofilea other qualifications may be found
from the laws (e.g. Philippine resident, possess legal
capacity). As a general rule, citizenship is not a
requirement to be a director of a corporation. However,
it may be a requirement in cases directors of corporate
public utilities operating on a franchise.


Gokongwei, Jr. v. Securities and Exchange Commission

Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a
president and stockholder of Robina Corp. and Consolidated Foods
Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice


1. Qualifications

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Cream, Poultry and Hog Feeds and many more), filed a petition for
declaration of nullity of amended by-laws, cancellation of certificate of
filing of the amended-by laws, injunction and damages against the
majority of the members of the Board of Directors of the SMC based on
the following grounds:

directors is expressly conferred by law. 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. And under section 21 of the Corporation Law, a

Corporations have no inherent power to disqualify a


stockholder from being elected as director depriving him of his
vested right because he is an officer of a competitor company.

corporation may prescribe in its by-laws the qualifications, duties and


compensation of directors, officers and employees ...

The corporation has been investing corporate funds in other

A director must own at least one share of stock. Pea v. Court


of Appeals, 193 SCRA 717 (1991).1

corporations and business outside of the primary purpose of the


corporation


Issue: Whether or not the corporation has the power to disqualify a

The law does not require that a Vice-President be a stockholder.


Baguio v. Court of Appeals, 226 SCRA 366 (1993).

Beneficial ownership under VTA no longer qualifies. Lee v. Court


of Appeals, 205 SCRA 752 (1992).

competitor from being elected to the board of directors as a reasonable


exercise of corporate authority

Held: YES. Any corporation may amend its articles of incorporation by a
vote or written assent of the stockholders representing at least 2/3 of
the subscribed capital stock of the corporation. It cannot be said that
prior to this, Gokongwei has a vested right to vote and be voted for 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.
Every person who buys a stock with a corporation 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.

Doctrine: The authority of a corporation to prescribe qualifications of


Lee v. Court of Appeals

Facts: Herein petitioners were served summons in accordance with a
third party complaint filed against Alfa Integrated Textile Mills of which
Lee and Lacdao was president and vice president respectively. They
claim that the summons for Alfa was erroneously served upon them
considering that the management of Alfa had been transferred to
Development Bank of the Philippines. They claim that the voting trust
agreement between Alfa and DBP vests all management and control of
Alfa to the DBP. DBP claimed that it was not authorized to receive
summons on behalf of Alfa since DBP had not taken over the company
which has a separate and distinct corporate personality and existence.

Also Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



Issue: Whether or not the execution of the voting trust agreement by
Lee and Lacdao whereby all their shares to the corporation have been
transferred to the trustee deprives the stockholder of their positions as
directors of the corporation.

director, what is material is the legal title to, not beneficial ownership
of, the stock as appearing on the books of the corporation.

3. Rule on Corporate Stockholders1


Held: YES. Lee and Lacdao, by virtue of the voting trust agreement
executed in 1981 disposed of all their shares through assignment and
delivery in favor of DBP, as trustee. Consequently, Lee and Lacdao
ceased to own at least one outstanding share in their names on the
books of Alfa as required under Section 23 of the new Corporation code.
They also ceased to have anything to do with the management of the

corporation cannot attend personally board meetings of the


corporation wherein it is elected as a director, but only through
representative or a proxy, which would contravene the
established rule that a director may not be represented by a
proxy at a meeting of the board.2

enterprise, they ceased to be directors. Hence, the transfer of their


shares to the DBP created vacancies in their respective positions as
directors of Alfa. In the absence of a showing that DBP had caused to be
transferred in their names one share of stock for the purpose of
qualifying as directors of Alfa, Lee and Lacdao could no longer deemed
to retain their status as officers of Alfa. Hence, the service of summons
to Alfa through Lee and Lacbao was invalid.

Doctrine: A voting trust agreement results in the separation of the
voting rights of a stockholder from his other rights. This may create a
dichotomy between the equitable or beneficial ownership of the
corporate shares of a stockholder, on the one hand, and the legal title
thereto on the other. With the omission of the phrase "in his own right"
[in the new corporation code] the election of trustees and other persons
who in fact are not the beneficial owners of the shares registered in
their names on the books of the corporation becomes formally
legalized. Hence, this is a clear indication that in order to be eligible as a

In cases of corporate stockholders or corporate members of a


corporation, such entities cannot be qualified to be elected as
such to the board of the corporation. A corporation cannot act
by itself but only through its officers and agents, and as such a

In the case of corporate stockholders or corporate members,


their representation in the board can be achieved by making
their individual representatives trustees of the shares or
membership, which would then make them stockholders or
members of record, and thereby qualified to be elected to the
board, but at the same time maintaining legal responsibility of
trustees to the corporate stockholder or members.

4. Disqualifications

Section 27. Disqualification of directors, trustees or officers.
No person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the date of his election

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
2
Section 26, Corporation Code.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


or appointment, shall qualify as a director, trustee or officer of any
corporation.

Punishable by imprisonment or a period exceeding 6 years:


regardless of your actual sentence, so long as the crime was
punishable by a period exceeding 6 years, you will be
disqualified once convicted.

Conviction of a violation of the Corporation Code: since it is only


the Court who can determine if you have violated the Code,
then you probably need to have been convicted of such
violation in order to be considered disqualified.


V. Election of Directors and Trustees

A. Directors (Sections 24 and 26)

Section 24. Election of directors or trustees.
At all elections of directors or trustees, there must be present, either
in person or by representative authorized to act by written proxy, the

number of directors to be elected multiplied by the number of his


shares shall equal, or he may distribute them on the same principle
among as many candidates as he shall see fit: Provided, That the total
number of votes cast by him shall not exceed the number of shares
owned by him as shown in the books of the corporation multiplied by
the whole number of directors to be elected: Provided, however, That
no delinquent stock shall be voted. Unless otherwise provided in the
articles of incorporation or in the by-laws, members of corporations
which have no capital stock may cast as many votes as there are
trustees to be elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes shall be
declared elected. Any meeting of the stockholders or members called
for an election may adjourn from day to day or from time to time but
not sine die or indefinitely if, for any reason, no election is held, or if
there not present or represented by proxy, at the meeting, the owners
of a majority of the outstanding capital stock, or if there be no capital
stock, a majority of the member entitled to vote.

owners of a majority of the outstanding capital stock, or if there be no


capital stock, a majority of the members entitled to vote. The election
must be by ballot if requested by any voting stockholder or member.
In stock corporations, every stockholder entitled to vote shall have the
right to vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name on the
stock books of the corporation, or where the by-laws are silent, at the
time of the election; and said stockholder may vote such number of
shares for as many persons as there are directors to be elected or he
may cumulate said shares and give one candidate as many votes as the


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

Entitle to Vote Do you include in counting, for purposes of


a majority present in a meeting, those delinquent stockholders?
Does this phrase apply to stock corporations?

By ballot it is not necessary that a majority of the


stockholders agree that the election be by ballot. So long as one
(any) shareholder requests for the election to be conducted
by ballot, then such should be done.

Atty. Hofilea the number of seats for directors must be


maintained. It cannot be altered beyond that prescribed by the
articles of incorporation. However, in reality, if no one objects

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


then the stockholders can choose to just fill some of the seats
and not all.
1. Cumulative Voting1

Cumulative voting is a voting procedure wherein a


stockholder is allowed to concentrate his votes and give
one candidate as many votes as the number of directors
to be elected multiplied by the number of his shares
shall equal.
Straight voting allows a simple majority of the
shareholders to elect the entire board of directors
leaving the minority shareholders unrepresented. Under
straight voting, each shareholder simply votes the
number of shares he owns for each director nominated.

Section 24 of the Corporation Code expressly provides for


cumulative voting in the election of the directors of stock
corporations. The provisions for cumulative voting are
mandatory.

The policy of cumulative voting is to allow minority stockholders


the capacity to be able to elect representatives to the board of
directors.2
o No exception is provided for in Section 24 so that the
articles may not provide for restriction or suppression of
the principle of cumulative voting in stock corporations.

represents all interest groups in the corporate setting.


2. Report on Election of Directors, Trustees and Officers

Section 26. Report of election of directors, trustees and officers.
Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities and Exchange Commission,
the names, nationalities and residences of the directors, trustees, and
officers elected. Should a director, trustee or officer die, resign or in
any manner cease to hold office, his heirs in case of his death, the
secretary, or any other officer of the corporation, or the director,
trustee or officer himself, shall immediately report such fact to the
Securities and Exchange Commission.

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
2
Glazer, Glazer, & Grofman, Cumulative Voting In Corporate Elections:
Introducing Strategy into the Equation, 35 S. CAROLINA L. REV. 295 (1934).

Cumulative voting is reckoned to be equitable since it allows


stockholders the opportunity for representation on the board of
directors in proportion to their holdings. Such minority
representation is believed not to interfere with the principle of
majority rule since the number of directors elected by each
group will vary with its proportion of ownership.
o On the other hand, the system of cumulative voting has
been criticized by other sectors because in tends to
partisan representation in the board, which is
inconsistent with the notion that a director properly

Cumulative Voting v. Straight Voting


o


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

The provisions of Section 26 of the Corporation Code are


deemed to be mandatory and jurisdictional. And the
determination of who are the legal directors and officers of the

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


corporation is conditioned upon the reports submitted to the
SEC pursuant to said section.1

Since under Section 26 of the Corporation Code all corporations


are mandated to submit a formal report to the SEC on the
changes in their directors and officers, then only those directors
and officers appearing in such report (General Information
Sheet) to the SEC are deemed legally constituted to bind the
corporation, especially in the bringing of suits in behalf of the
corporation. Premium Marble Resources v. Court of Appeals,
264 SCRA 11 (1996).


Premium Marble Resources v. Court of Appeals

Facts: The case began when Premium Marble Resources Inc., assisted by
Atty. Arnulfo Dumadag as counsel, filed an action for damages against
International Corporate Bank. Later, the same corporation, i.e.,
Premium, but this time represented by Siguion Reyna, Montecillio and
Ongsiako Law Office as counsel, filed a motion to dismiss the action of
petitioners on the ground that the filing of the case was without
authority from its duly constituted board of directors as shown by the
excerpt of the minutes of the Premiums board of directors meeting. In
its opposition to the motion to dismiss, Premium thru Atty. Dumadag
contended that the persons who signed the board resolution namely
Belen, Jr., Nograles & Reyes, are not directors of the corporation and
were allegedly former officers and stockholders of Premium who were
dismissed for various irregularities and fraudulent acts; that Siguion

Reyna Law office is the lawyer of Belen and Nograles and not of
Premium and that the Articles of Incorporation of Premium shows that
Belen, Nograles and Reyes are not majority stockholders.

Issue: Whether or not the filing of the case for damages against private
respondent bank (International Corporate Bank) was authorized by a
duly constituted Board of Directors of the petitioner corporation

Held: NO. The Minutes of the Meeting of the Board on April 1, 1982
states that the newly elected officers for the year 1982 were Oscar Gan,
Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner however,
failed to show proof that this election was reported to the SEC. In fact,
the last entry in their General Information Sheet with the SEC, as of
1986 appears to be the set of officers elected in March 1981. The claim,
therefore, of petitioners as represented by Atty. Dumadag, that Zaballa,
et al., are the incumbent officers of Premium has not been fully
substantiated. Hence, the court agrees with the finding of the Court of
Appeals, that in the absence of any board resolution from its board of
directors the [sic] authority to act for and in behalf of the corporation,
the present action must necessarily fail. The power of the corporation to
sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers.

Doctrine: By the express mandate of the Corporation Code (Section 26),
all corporations duly organized pursuant thereto are required to submit
within the period therein stated (30 days) to the Securities and
Exchange Commission the names, nationalities and residences of the

directors, trustees and officer selected.

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

The underlying policy of the Corporation Code is that the


business and affairs of a corporation must be governed by a
board of directors whose members have stood for election, and
who have actually been elected by the stockholders, on an
annual basis. Only in that way can the directors continued
accountability to the shareholders, and the legitimacy of their
decisions that bind the corporations stockholders, be assured.
The shareholder vote is critical to the theory that legitimizes the
exercise of power by the directors or officers over properties
that they do not own. Valle Verde Country Club, Inc. v. Africa,
598 SCRA 202 (2009).


Valle Verde Country Club, Inc. v. Africa

Facts: The Valle Verde Country Club (VVCC) has a 9-member Board of
Directors. From 1997 to 2001, the requisite quorum for holding of the
stockholders meeting could not be obtained so the directors continued
to serve in hold-over capacity. In 1998, two directors resigned and were
replaced. Africa questions the election of the two directors with the
Securities and Exchange Commission for allegedly being in
contravention of Section 29 of the Corporation Code which states that
all vacancies that occur other than by removal by the stockholders or
expiration of term may be filled by the vote of at least a majority of the
remaining directors (if still constituting a quorum). However if the
vacancy was caused by either removal by the stockholders or expiration
of term, then it must be filled by a vote of the stockholders. Anyone
who would fill the vacancy prior to such will only serve for the
unexpired term. Africa points out that since Makalintals term had
already expired with the lapse of the one-year term provided in Section

23, there is no more unexpired term during which Ramirez could


serve. VVCC on the other hand alleges that a members term shall be for
one year and until his successor is elected and qualified; otherwise
stated, a members term expires only when his successor to the Board is
elected and qualified.

Issue: Whether or not the remaining directors of a corporations Board,
still constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director

Held: NO. Makalintals term of office began in 1996 and expired in 1997,
but, by virtue of the holdover doctrine in Section 23 of the Corporation
Code, he continued to hold office until his resignation on November 10,
1998. This holdover period, however, is not to be considered as part of
his term, which, as declared, had already expired. His resignation as a
holdover director did not change the nature of the vacancy (i.e. vacancy
by expiration of term of director); the vacancy due to the expiration of
Makalintals term had been created long before his resignation. As
correctly pointed out by the RTC, when remaining members of the VVCC
Board elected Ramirez to replace Makalintal, there was no more
unexpired term to speak of, as Makalintals one-year term had already
expired. Pursuant to law, the authority to fill in the vacancy caused by
Makalintals leaving lies with the VVCCs stockholders, not the remaining
members of its board of directors.

Doctrine: It also bears noting that the vacancy referred to in Section 29
contemplates a vacancy occurring within the directors term of office.
When a vacancy is created by the expiration of a term, logically, there is
no more unexpired term to speak of. Hence, Section 29 declares that it


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


shall be the corporations stockholders who shall possess the authority
to fill in a vacancy caused by the expiration of a members term.

Corporations are required under Section 26 of the Corporation


Code to submit to the SEC within thirty (30) days after the
election the names, nationalities, and residences of the
directors, trustees and officers of the Corporation. In order to
keep stockholders and the public transacting business with
domestic corporation properly informed of their organization
operational status, the SEC has issued the rule requiring the
filing of the General Information Sheet. Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).

When the names of some of the directors who signed the board
resolution does not appear in the General Information Sheet
filed with the SEC, then there is doubt whether they were
indeed duly elected members of the Board legally constituted to
bring suit in behalf of the Corporation. Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).


B. CUMULATIVE VOTING (Section 24)

more than fifteen (15) in number as may be fixed in their articles of


incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one- third (1/3) of their number
shall expire every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired
period.

No person shall be elected as trustee unless he is a member of the
corporation.

Unless otherwise provided in the articles of incorporation or the by-
laws, officers of a non-stock corporation may be directly elected by the
members. (n)

Section 138. Designation of governing boards.
The provisions of specific provisions of this Code to the contrary

Cumulative Voting in Corporate Elections: Introducing Strategy


in the Equation, 35 South Carolina L. Rev. 295

notwithstanding, non-stock or special corporations may, through their


articles of incorporation or their by-laws, designate their governing
boards by any name other than as board of trustees. (n)

See previous sections.


C. Trustee (Sections 92 and 138)

Section 92. Election and term of trustees.
Unless otherwise provided in the articles of incorporation or the by-
laws, the board of trustees of non-stock corporations, which may be


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

In non-stock corporations, the default rule in the election of


trustees is straight voting. Unlike the mandatory rule for
cumulative voting for stock corporations, in non-stock
corporations, it is possible to provide for other types of voting in

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


either the articles of incorporation or the by-laws of the
corporation.1


VI. Vacancy in Board (Section 29)

Code, in cases where the vacancy in the corporations board of


directors is caused not only by the expiration of a members
term, the successor so elected to fill in a vacancy shall be
elected only for the unexpired term of his predecessors in
office. The law has authorized the remaining members of the
board to fill in a vacancy only in specified instances, so as not to
retard or impair the corporations operations; yet, in recognition
of the stockholders right to elect the members of the board, it

Section 29. Vacancies in the office of director or trustee.


Any vacancy occurring in the board of directors or trustees other than
by removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special
meeting called for that purpose. A director or trustee so elected to fill

limited the period during which the successor shall serve only to
the unexpired term of his predecessor in office. Valle Verde
Country Club, Inc. v. Africa, 598 SCRA 202 (2009).

a vacancy shall be elected only or the unexpired term of his


predecessor in office.

A directorship or trusteeship to be filled by reason of an increase in
the number of directors or trustees shall be filled only by an election
at a regular or at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the meeting.

The theory of delegated power of the board of directors


similarly explains why, under Section 29 of the Corporation

Any position in the board to be filled by reason of an increase in


the number of directors or trustees shall be filled only by an
election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in
the notice of the meeting.2


VII. Term of Office, Hold-over Principle

A by-law provision or company practice of giving a stockholder a


permanent seat in the Board would be against the provision of

Sections 28 and 29 of Corporation Code which requires member


of the board of corporations to be elected. Grace Christian High
School v. Court of Appeals, 281 SCRA 133 (1997).

Hold-over a situation that arises when no successor is


cleared due to valid and justifiable reason, and the incumbent
holds over and continues to function until another officer is
chosen and qualified.3
o

A hold-over situation does not disqualify an incumbent


officer from seeking another term in office.

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.

Section 39, Corporation Code.


SEC Opinion No. 06-18, 20 March 2006


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

In the event no new board is elected and qualified after


the original one-year term of the board of directors,
then under the hold-over principle, the existing board, if
still constituting a quorum, is still a legitimate board
with full authority to bind the corporation.1
Directors may lawfully fill vacancies occurring in the

corporations stockholders. That a director continues to serve


after one year from his election (i.e., on a holdover capacity),
cannot be considered as extending his term. This holdover
period, however, is not to be considered as part of his term,
which, as declared, had already expired. Valle Verde Country
Club, Inc. v. Africa, 598 SCRA 202 (2009).

board, and such officials, as well as the original


directors, hold-over until qualification of their
successors. Government v. El Hogar Filipino, 50 Phil.
399 (1927).

1. Non-Permanency of Board Seat

The remedy is quo warranto to question the legality and proper

of the board of corporations to be elected. Grace Christian High


School v. Court of Appeals, 281 SCRA 133 (1997).

qualification of persons elected to the board. Ponce v.


Encarnacion, 94 Phil. 81 (1953).

that a vacancy occurring in the board of directors caused by the


expiration of a members term shall be filled by the

The remaining members of a corporations board of directors


cannot elect another director to fill in a vacancy caused by the
resignation of a hold-over director. The holdover period is not
part of the term of office of a member of the board of directors.
Consequently, when during the holdover period, a director
resigns from the board, the vacancy can only be filled-up by the
stockholders, since there is no term left to fill-up pursuant to
the provisions of Section 29 of the Corporation which mandates

The Corporation Code does not require the taking of an oath of office to
qualify the elected directors and officers. Election alone does not make the
person elected, a director but there must be an acceptance, either express or
implied, although he is rebuttably presumed to accept upon notification, or
enters upon the duties of an office after his election or appointment. SEC
Opinion, 21 January 1986, XX SEC QUARTERLY BULLETIN (Nos. 1 & 2, March & June,
1986).

A by-law provision or company practice of giving a stockholder a


permanent seat in the Board would be against the provision of
Sections 28 and 29 of Corporation Code which requires member

The mandatory requirements for an annual election of the


Board of Directors is an aspect of good corporate governance, in
that it subjects the directors to a periodic review of the
performance of their duties and responsibilities, thereby making
them more responsive to the interests of the stockholders
whose mandate they must win annually. Valle Verde Country
Club, Inc. v. Africa, 598 SCRA 202 (2009).


VIII. Removal of Directors or Trustees (Section 28)

Section 28. Removal of directors or trustees.
Any director or trustee of a corporation may be removed from office
by a vote of the stockholders holding or representing at least two-
thirds (2/3) of the outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal shall take
place either at a regular meeting of the corporation or at a special


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


meeting called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of the intention
to propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of removal
of directors or trustees, or any of them, must be called by the

if there is a 2/3 vote.

secretary on order of the president or on the written demand of the


stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the
written demand of a majority of the members entitled to vote. Should
the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary,
the call for the meeting may be addressed directly to the stockholders

Only stockholders or members have the power to remove the


directors or trustees elected by them, as laid down in Section 28
of Corporation Code. Raniel v. Jochico, 517 SCRA 221, 230
(2007).
o It is implied in Section 28 that since the power to
remove directors is vested with the stockholders, then
such power cannot be exercised by the Board, whether
that be pursuant to a resolution passed by the Board or
even when such power of removal is granted to the
Board by provisions in the articles of incorporation
and/or by-laws of the corporation. Such provision in the

articles or by-laws is null and void for being contrary to


law and public policy.1
3. What Constitutes Cause as Basis for Removal?

Code.

1. Removal of Directors and Trustees

General Rule: Any director may be removed from office by a


vote of the stockholders holding or representing two-third (2/3)
of the outstanding capital stock.
o When removal is for cause, the 2/3 vote is the minimum
to remove a director.
o When removal is without cause, the 2/3 vote is also
enough to remove a director.

A stockholders meeting called for the removal of a director is


valid only when called by at least two- thirds of the outstanding
capital stock. Roxas v. De la Rosa, 49 Phil. 609 (1926).

2. Board Has No Power to Discipline or Remove One of Their Own

or members by any stockholder or member of the corporation signing


the demand. Notice of the time and place of such meeting, as well as
of the intention to propose such removal, must be given by publication
or by written notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may not be used
to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this

Exception: When the director is elected by the minority through


cumulative voting, he may not be removed without cause even

The Corporation Code does not define the cause that can be a
legal basis for removal of a member of the Board. What is clear
is that for cause goes into the three duties of a director and
officer loyalty, obedience and diligence.

The provisions under Section 28 are mandatory (i.e. notice) and


failure to comply with the procedure, even if the removal

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


resolution was approved by at least 2/3 of the outstanding
capital stock, would make such removal void.1

IX. Directors or Trustees Meetings (Sections 49, 53, 54 and 92)

Section 49. Kinds of meetings.
Meetings of directors, trustees, stockholders, or members may be
regular or special. (n)

Section 53. Regular and special meetings of directors or trustees.
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide

The president shall preside at all meetings of the directors or trustee


as well as of the stockholders or members, unless the by-laws provide
otherwise. (n)

A. Requisites for a Valid Board Meeting
1. Meeting of the directors or trustees duly assembled as a
board, at the place, time and manner provided in the by-laws;

board meeting by proxy.2

otherwise.

Special meetings of the board of directors or trustees may be held at
any time upon the call of the president or as provided in the by-laws.

Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the by-laws provide
otherwise. Notice of regular or special meetings stating the date, time
and place of the meeting must be sent to every director or trustee at
least one (1) day prior to the scheduled meeting, unless otherwise
provided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly. (n)

Section 54. Who shall preside at meetings.

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.

A director or trustee cannot attend nor be represented in a


SEC Memorandum Circular No. 15, series of 2001, pursuant to
the terms of the Code of Commerce, embodies the guidelines
for the conduct of teleconferencing and videoconferencing (i.e.,
conferences or meetings through electronic medium or
telecommunications where the participants who are not
physically present are located at different local or international
places) of board of directors, providing for safeguards to ensure
the integrity of the meeting, the proper recording of the
minutes thereof and the safekeeping of the electronic recording
mechanism as part of the records of the corporation.3

SEC held that a trustee may now be allowed to vote through the
internet, provided that the internet medium to be used is akin
to or similar to the one being used in videoconferencing or
teleconferencing, where a participant can see or hear the actual
proceedings of a board meeting and actively participate in the

SEC Opinion, 7 February 1994, XXVIII SEC Quarterly Bulletin 4 (No. 3, March
1994)
3
Likewise, Section 15 of the General Banking Law of 2000 provides that the
meeting of the board of directors of banks may be conducted through modern
technologies such as, but not limited to, teleconferencing and
videoconferencing.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


deliberation of the Board; but that a trustee may not validly
vote by email along, which was deemed an inadequate medium
because a user-participants role in such case is passive
considering that his access to the entire proceedings is limited
to the information in print transmitted through the internet.1

meetings. Dead members shall not be counted. Tan v. Sycip,


499 SCRA 216 (2006).

and counted on the basis of the outstanding capital stock, as


defined by Section 137 of the Corporation Code. Tan v. Sycip,
499 SCRA 216 (2006).

The SEC has opined that the Corporation Code does not confer

upon any stockholder the right to attend board meeting and


that the allowance of stockholders to attend board meeting is
upon the discretion of the board itself.2
2. Presence of the required quorum; and
3. Decision of the majority of the quorum or, in other cases, a
majority of the entire board.

B. Quorum

The quorum in the meeting of the Board shall be the presence


of a majority of the number of directors as fixed in the articles
of incorporation. The required vote to pass a resolution shall be
a majority vote of the directors present at such meeting where
quorum is achieved.3

When the principle for determining quorum for stock


corporations is applied by analogy to non-stock corporations,
only those who are actual members with voting rights should be
counted. Tan v. Sycip, 499 SCRA 216 (2006).


C. Abstention: In a board meeting, an abstention is presumed to be
counted as an affirmative vote insofar as it may be construed as an
acquiescence in the action of those who voted affirmatively; but such
presumption, being merely prima facie would not hold in the face of
clear evidence to the contrary. Lopez v. Ericta, 45 SCRA 539 (1972).

D. Minutes of Meetings

For stock corporations, the quorum referred to in Section 52


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

The signing of the minutes by all the members of the board is


not requiredthere is no provision in the Corporation Code
that requires that the minutes of the meeting should be signed
by all the members of the board. The signature of the corporate
secretary gives the minutes of the meting probative value and
credibility. People v. Dumlao, 580 SCRA 409 (2009).

of the Corporation Code is based on the number of outstanding


voting stocks. For non-stock corporations, only those who are
actual, living members with voting rights shall be counted in
determining the existence of a quorum during members
SEC Opinion No. 26, addressed to Ms. Jaycel E. Sato; SEC Opinion No. 27,
series of 2003, addressed to Mr. Arthur Mar O. Alivio.
2
SEC Opinion, 21 January 1992, XXVI SEC QUARTERLY BULLETIN 6 (No. 2, June
1992).
3
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.

In stock corporations, the presence of a quorum is ascertained

The entries contained in the minutes are prima facie evidence of


what actually took place during the meeting, pursuant to
Section 44, Rule 130 of the Revised Rule on Evidence. People v.
Dumlao, 580 SCRA 409 (2009).

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

resolution is a formal action by a corporate board of directors or


other corporate body authorizing a particular act, transaction,
or appointment, while, on the other hand, minutes are a brief
statement not only of what transpired at a meeting, usually of
stockholders/members or directors/trustees, but also at a
meeting of an executive committee. People v. Dumlao, 580
SCRA 409 (2009).

X. COMPENSATION OF DIRECTORS (Section 30)

Section 30. Compensation of directors.
In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as
such directors, except for reasonable pre diems: Provided, however,
That any such compensation other than per diems may be granted to
directors by the vote of the stockholders representing at least a
majority of the outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total yearly compensation
of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding
year.

Western Institute of Technology, Inc. v. Salas



Facts: The Salas family are the majority and controlling members of the
Board of Trustees of the Western Institute of Technology, a stock
corporation engaged in the operation, among others, of an educational
institution. The Villasis (minority stock holders of the corporation)
contest the resolution passed by the Board of Directors which increased
the officers of the officers of the corporation. Such resolution was
supposedly passed in accordance with the amended by-laws of the WIT
on compensation of all officers of the corporation.

Issue: Whether or not such grant of compensation is in violation of the
proscription against such under Section 30 of the Corporation Code.

Functions of Directors and Trustees v. Functions of Officers:


Directors and trustees are not entitled to salary or other
compensation when they perform nothing more than the usual

Held: NO. The proscription, however, against granting compensation to


director/trustees of a corporation is not a sweeping rule. Worthy of
note is the clear phraseology of Section 30 which state: "[T]he directors
shall not receive any compensation, as such directors." The 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. Herein, resolution 48, s. 1986
granted monthly compensation to Salas, et. al. not in their capacity as

and ordinary duties of their office, founded on the presumption


that directors and trustees render service gratuitously, and that

the return upon their shares adequately furnishes the motives


for service, without compensation. But they can receive
remunerations for executive officer position. Western Institute
of Technology, Inc. v. Salas, 278 SCRA 216 (1997).1

Resolution versus Minutes of Meetings: A resolution is distinct


and different from the minutes of the meetinga board

Singson v. Commission on Audit, 627 SCRA 36 (2010).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of
Western Institute of Technology. Clearly, therefore, the prohibition with
respect to granting compensation to corporate directors/trustees as
such under Section 30 is not violated in this particular case.


Doctrine: Directors or trustees, as the case may be, are not entitled to
salary or other compensation when they perform nothing more than
the usual and ordinary duties of their office. This rule is founded upon a
presumption that directors/trustees render service gratuitously, and
that the return upon their shares adequately furnishes the motives for
service, without compensation. Under Section 30 of the Corporation
Code, there are only two (2) ways by which members of the board can
be granted compensation apart from reasonable per diems: (1) when
there is a provision in the by-laws fixing their compensation; and (2)
when the stockholders representing a majority of the outstanding
capital stock at a regular or special stockholders' meeting agree to give
it to them.

Relationship between Directors and Stockholders


A director when he sits on the Board is required to act
in independence from those who elected him.
In this sense, the director is not a mere
representative or agent of the stockholder

The director is an agent of the

corporation NOT of the stockholder.


There is a trust relationship (fiduciary)

Relationship between Directors/Officers and the Corporation


o
o

Directors act in representation of the Corporation.


As such, the directors must act for the interest of the
corporation.


A. Directors as Fiduciaries

Pre-Corporation Code: Palting v. San Jose Petroleum, Inc., 18


SCRA 924.

Palting v. San Jose Petroleum, Inc.

General Rule: The Courts of law will not meddle into business
determination, one of which is salary scale of people.


Facts: San Jose Petroleum, Inc. (SJ PETROLEUM), a corporation

Exception: When the amount becomes huge and unreasonable,

organized and existing in the Republic of Panama, applied and was


granted by the Securities and Exchange Commission license to sell 2M
(later increased to 5M) shares of capital stock. SJ Petroleum claims that
the proceeds of the sale will be used to finance the operations of San
Jose Oil Corporation which has 14 petroleum exploration concessions in
various provinces. Palting and other prospective investors filed with the
SEC an opposition to said registration on the ground that the tie-up

the courts may come in and suspend the enforcement of the by-
law provision.
o Generally, dividends and compensation policies
represent areas of conflicts of interests and these are an
exception to the business judgment rule.

XI. FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS

between SJ Petroleum, a Panamanian corporation and SJ Oil, a domestic


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


corporation violates the Constitution, the Corporation Law and the
Petroleum Act of 1949. In its answer, SJ Petroleum stated that it was a
business enterprise enjoying parity rights, with respect to mineral
resources in the Philippines, which may be exercised pursuant to the
Laurel-Langley Agreement, through a medium, the SJ Oil.

citizens by virtue of the Parity Agreement. Said US citizens can either


directly or indirectly own or control the business enterprise.


Issue: Whether or not the tie-up between the respondent San Jose
Petroleum, a foreign corporation, and San Jose Oil Company, Inc., a
domestic mining corporation, is violative of the Constitution, the Laurel-
Langley Agreement, the Petroleum Act of 1949, and the Corporation
Law.

Held: YES. SJ Petroleum is not accorded with Parity Rights, which would
have allowed the Company to interest in mining.
1. It is not owned or controlled directly by US citizens because it is
owned and controlled by Panamanian corporation;
2. It is not indirectly owned and controlled by US citizens because
the controlling corporation is in turn owned by two Venezuelan
corporations;
3. Although the two Venezuelan corporations claim to be owned
by stockholders residing in the US, there is no showing that said
stockholders were US citizens;
4. The word indirectly should not be unduly stretched in
application.

Doctrine: Our Constitution provides that, the exploitation of natural
resources shall be limited to citizens of the Philippines or to
corporations or associations at least 60% of the capital of which is
owned by such citizens. However, this right was earlier extended to US

Nature of Duties of Directors and Officers: Prime White


Cement Corp. v. IAC, 220 SCRA 103 (1993).
Prime White Cement Corp. v. Intermediate Appellate Court


Facts: Prime White Cement Corp (PWCC) thru its President and
Chairman of the Board entered into a dealership agreement with
Alejandro Te, making him the exclusive dealer and/or distributor of
PWCCs cement products in the entire Mindanao area for 5 years. The
agreement is that the price of cement per bag (P9.70) is fixed for the
entire 5-year period, and that Te must sell 20,000 bags per month.

Later, PWCC through its corporate secretary informed Te that the board
of directors decided to impose limitations on their agreement, including
limiting the period of the dealership (3 months), decreasing allocation
(8,000 bags) and increasing the price per bag (P13.30). Te demanded the
enforcement of the original dealership agreement but PWCC refused to
comply. The latter even entered into an exclusive dealership agreement
with Napoleon Co for the marketing of the cement in Mindanao, hence
this suit.

Issue: Whether or not the "dealership agreement" referred by the
President and Chairman of the Board of PWCC is a valid and enforceable
contract.

Held: NO. The general rules provided by the Corporate Law (in force at


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


the time of the case) as well as the present Corporation Code whereby
the corporate powers are exercised by the Board of Directors and may
be delegated to its president or officers cannot apply with the case on
hand, since the said rules pertain to dealings with 3rd persons (i.e.
person outside the corporation). In this case, Te was not only an
ordinary stockholder of PWCC, but was a member of the Board of
Directors and Auditor of the corporation. He is what is often referred to
as a self-dealing director.

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

his own advantage and benefit. As corporate managers, directors are


committed to seek the maximum amount of profits for the corporation.

void or voidable. If the contract is fair and reasonable under the


circumstances, it may be ratified by the stockholders provided a
full disclosure of his adverse interest is made.

such, he owes a duty of loyalty to his corporation. In case his interests


conflict with those of the corporation, he cannot sacrifice the latter to

Section 32 of the Corporation Code provides the general rule as


well as the exception on dealings of directors, trustees or
officers with the corporation. Although the old Corp Law does
not contain a similar provision, the said provision incorporates
well-settled principles in corporate law.

the contract was a Director and Auditor of the petitioner corporation


changes the whole situation. The contract was neither fair nor
reasonable. Based on the original agreement that provided a flat rate of
P9.70 per bag for 5-years, respondent Te must have knowledge that
within that period, there would be a considerable rise in the price of
white cement. As director, respondent Tes bounden duty was to act in
such manner as not to unduly prejudice PWCC. However, it is quite clear
that he was guilty of disloyalty to the corporation, that he was
attempting in effect, to enrich himself at the expense of the
corporation. Furthermore, there is no showing that the stockholders
ratified the dealership agreement or that they were fully aware of its
provisions. The contract was therefore not valid and this Court cannot
allow him to reap the fruits of his disloyalty.

Doctrine: A director of a corporation holds a position of trust and as

A director's contract with his corporation is not in all instances

In Philippine jurisdiction, the members of the Board of Directors


have a three-fold duty: duty of obedience, duty of diligence, and
the duty of loyalty. Accordingly, the members of the board of
directors (1) shall direct the affairs of the corporation only in
accordance with the purpose for which it was organized; (2)
shall not willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad faith or with gross
negligence in directing the affairs of the corporation; and (3)
shall not acquire any personal or pecuniary interest in conflict
with their duty as such directors or trustees. Strategic Alliance
Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009),
citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2001, p. 318.


Strategic Alliance Dev. Corp. v. Radstock Securities Ltd.

Facts: The Construction Development Corporation of the Philippines
(CDCP) had a 30-year franchise to construct, operate and maintain toll


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


facilities in the North and South Luzon Tollways. Basay Mining
Corporation (an affiliate of CDCP) obtained loans from Marubeni
Corporation of Japan amounting to P10 billion, which CDCP guaranteed
solidarily. Thereafter, CDCP changed its corporate name to PNCC to
reflect the governments (90.3%) shareholding in the corporation.


Second. The PNCC Board admitted liability for the Marubeni loans
despite PNCCs total liabilities far exceeding its assets. There is no
dispute that the Marubeni loans, once recognized, would wipe out the
assets of PNCC, virtually emptying the coffers of the PNCC. While


The money owed Marubeni remained unpaid and unacknowledged for
20 years. But in October 2000, PNCC recognized this financial obligation
to Marubeni. Barely 3 months after, Marubeni assigned its entire credit
to Radstock Corporation for less than P100 million, who in turn sought
to collect from PNCC. Eventually, Radstock and PNCC entered into the
compromise agreement whereby PNCC shall assign to a third party

PNCC insists that it remains financially viable, the figures in the COA
Audit Reports tell otherwise.

Third. In a debilitating self-inflicted injury, the PNCC Board revived what
appeared to have been a dead claim by abandoning one of PNCCs
strong defenses, which is the prescription of the action to collect the
Marubeni loans. In this case, Basay Mining obtained the Marubeni loans

assignee (designated by Radstock) all its rights and interests in specified


real properties (amounting to P6Billion - reduced obligation) provided
the assignee shall be duly qualified to own real properties in the
Philippines. PNCC shall also assign to Radstock 20% of the outstanding
capital stock of PNCC, and 6% share in the gross toll revenue of the
Manila North Tollways Corporation from 2008-2035.

sometime between 1978 and 1981. While Radstock claims that


numerous demand letters were sent to PNCC, based on the records, the
extrajudicial demands to pay the loans appear to have been made only
in 1984 and 1986. Meanwhile, the written acknowledgment of the debt,
in the form of Board Resolution No. BD-092-2000, was issued only on 20
October 2000. The PNCC Board admitted liability for the Marubeni loans
despite the fact that the same might no longer be judicially collectible.

Issue: Whether or not the PNCC Board Acted in Bad Faith and with
Gross Negligence in Directing the Affairs of PNCC

Held: YES. The PNCC Board blatantly violated its duty of diligence as it
miserably failed to act in good faith in handling the affairs of PNCC.

First. For almost two decades, the PNCC Board had consistently refused
to admit liability for the Marubeni loans because of the absence of a


Fourth. The basis for the admission of liability for the Marubeni loans,
which was an opinion of the Feria Law Office, was not even shown to
the PNCC Board. Atty. Raymundo Francisco, the Asset Privatization Trust
trustee overseeing the proposed privatization of PNCC at the time, was
responsible for recommending to the PNCC Board the admission of
PNCCs liability for the Marubeni loans. Atty. Francisco based his
recommendation solely on a mere alleged opinion of the Feria Law

PNCC Board resolution authorizing the issuance of the letters of


guarantee.

Office - which he did not show to the board. The PNCC Board admitted
liability for the P10.743 billion Marubeni loans without seeing, reading


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


charter or by the general law. Lopez Realty, Inc. v. Fontecha,
247 SCRA 183 (1995)

or discussing the Feria opinion which was the sole basis for its
admission of liability. Such act surely goes against ordinary human
nature, and amounts to gross negligence and utter bad faith, even
bordering on fraud, on the part of the PNCC Board in directing the
affairs of the corporation. Owing loyalty to PNCC and its stockholders,


C. Duty of Diligence (Section 31)

the PNCC Board should have exercised utmost care and diligence in
admitting a gargantuan debt that would certainly force PNCC into
insolvency, a debt that previous PNCC Boards in the last two decades
consistently refused to admit. The PNCC Board knew that PNCC, as a
government owned and controlled corporation (GOCC), must rely
exclusively on the opinion of the Office of the Government Corporate
Counsel (OGCC), which they did not abide by.

Section 31. Liability of directors, trustees or officers.


Directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its


The act of the PNCC Board in issuing Board Resolution No. BD-092-2000
expressly admitting liability for the Marubeni loans demonstrates the
PNCC Boards gross and willful disregard of the requisite care and
diligence in managing the affairs of PNCC, amounting to bad faith and
resulting in grave and irreparable injury to PNCC and its stockholders.
This reckless and treacherous move on the part of the PNCC Board

stockholders or members and other persons.



When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect
of any matter which has been reposed in him in confidence, as to
which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account for

clearly constitutes a serious breach of its fiduciary duty to PNCC and its
stockholders, rendering the members of the PNCC Board liable under
Section 31 of the Corporation Code.

Doctrine: See above.

the profits which otherwise would have accrued to the corporation.



B. Duty of Obedience

A corporation, through its Board of Directors, should act in the


manner and within the formalities, if any, prescribed by its


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

Duty of Diligence The directors must act with due diligence in


all the times that it would bind the corporation.

Exception to the Business Judgment Rule:


o Knowingly and willfully vote This is the default idea
about a directors vote, but it may be overturned.
o Patently unlawful Where the directors made a
decision without knowledge that the act was unlawful,
they are protected from being personally liable.

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


However, where a person with reasonable sense is
supposed to know that the act is unlawful, the directors
wont be protected.

The directors of the corporation shall be personally liable to


reimburse the corporation for the amounts of dividends
wrongfully declared and paid to stockholders, when they failed
to consider that the recorded retained earnings in the books of
the corporation was illusory considering the various accounts
receivables that had to be written off as uncollectible. Steinberg
v. Velasco, 52 Phil. 953 (1929).


Steinberg v. Velasco

Facts: Steinberg (plaintiff) was the receiver of Sibugey Trading Company,
while Velasco et. al (defendants) were the members of the Board of
Directors. In 1922, the Board of Directors of Sibugey authorized the
purchase of, and purchased, 330 shares of the capital stock of the
corporation at the price of P3,300, and that at the time the purchase,
the corporation was indebted in the sum of P13,807.50, and that, it had
accounts receivable in the sum of P19,126.02. In the same year, a
resolution to distribute dividends amounting to P3,000 was approved by
the board. In 1923, the petition was filed for its dissolution upon the
ground that it was insolvent, its accounts payable amounted to

and grossly ignorant, and therefore should pay for the losses

Held: YES. It appears that the dividends were made in installments so as
not to affect the 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. 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, it is apparent the directors did not
act in good faith or that they were grossly ignorant of their duties. As
such, they are liable to pay.

Doctrine: 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.

P9,241.19, and its accounts receivable P12,512.47. Stienberg now


alleges, this was all, wrongfully done and in bad faith, and to the injury
and fraud of its creditors. He now prays that Velasco et. al. pay the sums
of money wrongfully given to them with interest and cost.

Issue: Whether or not the board of directors did not act in good faith


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

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
they will be liable for damages cause, and that if they act
beyond their power, and the corporation losses, or dispose of
its property without authority, they will be required to make
good the loss out of their private estates.

Want of Knowledge, Skill, or Competency. If directors commit


an error of judgment through mere recklessness or want of
ordinary prudence or skill, they may be held liable for the

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


consequences. 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.

Issue: Whether or not the directors neglected their duty by accepting


the cashiers statement of liabilities and failing to inspect the depositors
ledger

Held: NO. The Court held that the directors should not be held

The President being closer to the operations of the bank on a


day-to-day basis is more liable for breach of diligence when
compared to directors who must act on the basis of reports and

answerable for taking the cashiers statement of liabilities to be as


correct as the statement of assets always was. The directors confidence
seemed warranted by the semi-annual examinations and they were
encouraged in their belief that all was well by the president, whose
responsibility and knowledge were greater than theirs. Dresser, on the
other hand, was daily at the bank, he had the deposit ledger in his
hands, and he had hints and warning regarding the theft from other

representations to them during board meetings. Bates v.


Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919).

Bates v. Dresser

Facts: Dresser was the president and executive officer, a large
stockholder, of the National City Bank of Cambridge. Earl was the
cashier and Coleman was the banks bookkeeper. An auditor reported
that the daily balance book was very much behind, that it was
impossible to prove the deposits and that a competent bookkeeper
should be employed. Coleman kept the deposit ledger and this was the
work that fell into his hands. Coleman then acted as paying and
receiving teller, in addition to his other duty. Later, Coleman began a
series of thefts which he effectively hid from the Board of Directors who
attributed the decline of monthly deposits to competition with rival
banks. The banks semi-annual examinations by national bank
examiners found nothing that would raise suspicion. The directors also
relied on the cashier since he was an honest man. However, if only Earl
had opened the envelopes that came from the clearinghouse, he
wouldve discovered the fraud.

employees of the bank. In accepting the presidency, Dresser must be


taken to have contemplated responsibility for losses to the bank, if
chargeable to his fault. Those that happened was chargeable to his
fault, after he had warnings that should have led to steps that would
have made the fraud impossible.

Doctrine: The directors were not bound by virtue of the office
gratuitously assumed by them to call in the passbooks and compare
them with the ledger, and until the event showed the possibility they
hardly could have seen that their failure to look at the ledger opened a
way to fraud.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

Although directors have the protection of the business


judgment rule against personal liability for decisions that cause
damage to the corporation, such protection is available only
when they act or decide based on an informed judgment and
not merely accept the representations and reports of the CEO.

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of
Delaware, 1985).

Smith v. Van Gorkam

duty by their failure to inform themselves of all information reasonably


available to them and relevant to their decision to recommend the
merger. Van Gorkom breached his duty to care by offering $55 a share
because, the record is devoid of any competent evidence that $55
represented the per share intrinsic value of the Company. The business

Facts: Trans Union was suffering a tax credit problem prompting Van
Gorkom to sell his shares but eventually negotiated to involve all the
stocks of Trans Union. A corporation called Marmon was attempting a
leverage buy-out of Trans Union. Van Gorkom proposed a price of $55 a
share. Van Gorkom and his CFO didnt bother to do any research to see
how much the company was actually worth. He didnt even inform
Trans Unions legal department about the transaction. Later, it was

judgment rule was not a defense because the directors and Van Gorkom
didnt use any business judgment when they came to their decision.

Doctrine: In order to hide behind the business judgment rule, you have
to show that you made an informed decision based on some principle of
business.

found that the value of $55 was only about 60% of what the company
was worth. Van Gorkom called an emergency meeting of the board of
directors, proposed the merger, and the directors gave preliminary
approval. In the meeting, Van Gorkom did not disclose that there was
no basis for the $55 price and that there had been objections by Trans
Union management regarding the merger. Neither did he provide the
directors with copies of the merger agreement. The directors eventually

decision, the directors of a corporation acted on an informed


basis, in good faith and in the honest belief that the action
taken was in the best interests of the company. ...Thus, the
party attacking a board decision as uninformed must rebut the

recommended that the shareholders approve the merger even though


they did not really learn if the terms of the merger were a good deal for
the company. The Appellate Court found that the directors were grossly
negligent because they approved the merger without substantial inquiry
or any expert advice. Therefore they breached their duty to care.

Issue: Whether or not the actions of Van Gorkom and the board is
protected by the Business Judgement Rule Doctrine.

The rule itself is a presumption that in making a business

presumption that its business judgment was an informed one.


Under the business judgment rule there is no protection for
directors who have made an unintelligent or unadvised
judgment. Basically, the actual decision is not so important,
what the courts will look to is whether there was an adequate
decision-making process.


Held: NO. The Court found that the directors breached their fiduciary


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

For wrongdoing to make a director personally liable for debts of


the corporation, the wrongdoing approved or assented to by
the director must be a patently unlawful act. Mere failure to
comply with the notice requirement of labor laws on company
closure or dismissal of employees does not amount to a
patently unlawful act. Patently unlawful acts are those declared

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


unlawful by law which imposes penalties for commission of such
unlawful acts. There must be a law declaring the act unlawful
and penalizing the act. Carag v. NLRC, 520 SCRA 28 (2007); Dy-
Dumalasa v. Fernandez, 593 SCRA 656 (2009).

Holding a corporate officer personally liable for directing the


corporate affairs with gross negligence or in bad faith does not
amount to an application of the doctrine of piercing the veil of
corporate fiction, for such personal liability is imposed directly
under Section 31 to directors and officers of corporation who
are guilty of violating their duty of diligence. Sanchez v.
Republic, 603 SCRA 229 (2009).


D. Duty of Loyalty (Sections 31 to 34)

Section 32. Dealings of directors, trustees or officers with the
corporation.
A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation,
unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the
approval of the contract;

3. That the contract is fair and reasonable under the circumstances;
and


4. That in case of an officer, the contract has been previously
authorized by the board of directors.

Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
circumstances.

Section 33. Contracts between corporations with interlocking
directors.
Except in cases of fraud, and provided the contract is fair and
reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other
corporation or corporations is merely nominal, he shall be subject to
the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Section 34. Disloyalty of a director.
Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account
to the latter for all such profits by refunding the same, unless his act

Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a


president and stockholder of Robina Corp. and Consolidated Foods
Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice
Cream, Poultry and Hog Feeds and many more), filed a petition for
declaration of nullity of amended by-laws, cancellation of certificate of

has been ratified by a vote of the stockholders owning or representing


at least two-thirds (2/3) of the outstanding capital stock. This
provision shall be applicable, notwithstanding the fact that the
director risked his own funds in the venture.

filing of the amended-by laws, injunction and damages against the


majority of the members of the Board of Directors of the SMC based on
the following grounds:

It is well established that corporate officers are not permitted to


use their position of trust and confidence to further their
private interests. The doctrine of corporate opportunity is
precisely recognition by the courts that the fiduciary standards
could not be upheld where the fiduciary was acting for two
entities with competing interest. The doctrine rest
fundamentally on the unfairness, in particular circumstances, of
an officer or director taking advantage of an opportunity for his
personal profit when the interest of the corporation justly calls
for protection. Gokongwei v. SEC, 89 SCRA 336 (1979).


Gokongwei v. SEC

stockholder from being elected as director depriving him of his


vested right because he is an officer of a competitor company.

Duty of Loyalty the directors must act primarily for the

interest of the corporation. The directors may pursue personal


endeavors provided these do not conflict with the interest of
the corporation.
1. Doctrine of Corporate Opportunity.
2. Using Inside Information

Corporations have no inherent power to disqualify a

The corporation has been investing corporate funds in other


corporations and business outside of the primary purpose of the

corporation

Issue: Whether or not the corporation has the power to disqualify a
competitor from being elected to the board of directors as a reasonable
exercise of corporate authority

Held: YES. It is well established that corporate officers "are not
permitted to use their position of trust and confidence to further their
private interests." 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


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


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.

Doctrine: See above.

When a director-majority stockholder, who is the administrator


of corporate affairs directly negotiating the sale of corporate
landholdings to the Government at great prices, purchases the
stocks of a shareholder without informing the latter of the on-
going negotiations, such director is deemed to have fraudulently
acquired the shareholdings by way of deceit practiced by means
of concealing his knowledge of important corporate affairs.
Strong v. Repide, 41 Phil. 947 (1909).

Doctrine of corporate opportunity applies to confidential


employees of the corporation. cf. Sing Juco v. Llorente, 43 Phil.
589 (1922).


E. Duty to Creditors and Outsiders

Under the trust fund doctrine, it would be a violation of the


right of creditors to allow the return to the stockholders of any
portion of their capital or declare dividends outside of the
unrestricted retained earnings. Also upon insolvency of the

corporation, the Board of Directors are duty bound to hold the


assets of the corporation primarily for the payment of the
creditors. Mead v. McCullough, 21 Phil. 95 (1911).

Mead v. McCullough

Facts: The complaint contains three causes of action one of which is for
the value of the personal effects alleged to have been left by Mead and
sold by the defendants. The parties organized the Philippine Engineering
& Construction Co. (PECC) by giving $2000 Mexican currency cash each,
except for Mead who contributed property. Mead was also the general
manager until he resigned to accept employment with the Canton &
Shanghai Railway Co.

Several contracts entered by Mead as general manager failed,
specifically a wrecking contract with the navy. Because of these failures,
the board voted to sell all the rights and interests of PECC to the
wrecking contract in favor of McCullough (along with some of Meads
personal effects). McCullough then incorporated a new company,
Manila Salvage Association, and transferred all his rights and interests to
the contract to MSA. Mead alleges that these were done in bad faith.

Issue: Whether or not the sale or transfer to McCullough of the assets of
said corporation was done within the laws and powers of the
corporation.

Held: YES. A private corporation, which owes no special duty to the
public and which has not been given the right of eminent domain, has
absolute right and power as against the whole world except the state, to


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


sell and dispose of all of its property. A transaction done in good faith
which achieves substantial justice cannot be disturbed based on mere
suspicions.

Doctrine: Generally speaking, the voice of a majority of the stockholders
is the law of the corporation, but there are exceptions to this rule. There
must necessarily be a limit upon the power of the majority. Without
such a limit the will of the majority would be absolute and irresistible
and might easily degenerate into an arbitrary tyranny. Notwithstanding
these limitations upon the power of the majority of the stockholders,
their (the majoritys) resolutions, when passed in good faith and for a
just cause, deserve careful consideration and are generally binding upon

directors resulting in the prejudice to one of the corporation,


has no application to cases where fraud is alleged to have been
committed to third parties. DBP v. Court of Appeals, 363 SCRA
307 (2001).

H. SEC Revised Code of Corporate Governance (SEC Memorandum.
Circular No. 6, s. 2009)

companies who actually offer you nothing since nothing


is backing them up.

the minority.


F. Corporate Dealings with Directors and Officers (Section 32)

dealings by directors/trustees and officers merely incorporate


well-established principles in Corporate Law. A director who
enters into a distributorship agreement with the corporation
would make the contract voidable at the option of the
corporation especially when the terms are disadvantageous to
the corporation. The director cannot claim the same doctrine as
an outsider dealing in good faith with the corporation. Prime

G. Contracts Between Corporations with Interlocking Directors
(Section 33)

SEC Revised Code of Corporate Governance applies to


specific corporations whose securities are registered in the
stock exchange; they are large companies with a lot of public
shareholders.
o The SEC hopes to protect the public from possible fraud
that large companies may commit in the process of
gathering investments.
o These large companies must have at least two
independent directors able to police the activities of the

The provisions of Section 32 of the Corporation Code on self-

White Cement Corp. v. IAC, 220 SCRA 103 (1993).

Securities Regulation Code was issued pursuance to a mandate


of the SEC.
o Blue Sky Law To secure you from being misled by

corporation (not merely a puppet of the shareholders)


and must be very transparent.

XII. CORPORATE OFFICERS

The rule under Section 33 of Corporation Code allowing


annulment of contracts between corporations with interlocking


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

The general principles of agency govern the relation between


the corporation and its officers or agents, subject to the articles
of incorporation, by-laws, or relevant provisions of law when
authorized, their acts bind the corporation, otherwise, their acts

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


cannot bind it. Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA
466 (2006); Litonjua v. Eternit Corp., 490 SCRA 204 (2006).

A. Powers of Corporate Officers:

Just as a natural person may authorize another to do certain


acts for and on his behalf, the Board of Directors may validly
delegate some of its functions and powers to officers,
committees or agents the authority of such individuals to
bind the corporation is generally derived from law, corporate
by-laws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general
course of business. Cebu Mactan Members Center Inc. v.
Tsukahara, 593 SCRA 172 (2009). While it is a general rule that,
in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation, the
Board may validly delegate some of its functions and powers to
its officers, committee and agents. Associated Bank v.
Pronstroller, 558 SCRA 113 (2008).1

Associated Bank v. Pronstroller



Facts: The Spouses Vaca executed a Real Estate Mortgage in favor of
Associated Bank over their parcel of residential land in Green Meadows
Subdivision. Eventually, the property was foreclosed and sold at public
auction with Associated Bank as the highest bidder. However, the Vacas
commenced an action for the nullification of the real estate mortgage

Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Cebu Mactan Members
Center Inc. v. Tsukahara, 593 SCRA 172 (2009).

and the foreclosure sale. Pending its resolution in the Supreme Court,
Associated Bank negotiated with the Spouses Pronstroller through Atty.
Jose Soluta, the banks Vice President and member of its Board of
Directors. Letter agreements were executed whereby the Spouses
Pronstrollers would give a downpayment (first letter agreement), and
then given an extension to pay the balance which would be given upon
delivery of the property subsequent to the resolution of the Vaca case
with such property being free from occupants (embodied in the second
letter agreement). Later, the bank reorganized its management and
Atty. Dayday replaced Atty. Soluta. Atty. Dayday informed Spouses
Pronstroller that their deposit would be forfeited because the second
letter agreement was a mistake because Atty. Soluta had no authority to
give an extension.

Issue: Whether or not Associated Bank is bound by the Letter-
Agreement signed by Atty. Soluta under the doctrine of apparent
authority.

Held: YES. Undoubtedly, the Associated Bank had previously allowed
Atty. Soluta to enter into the first agreement without a board resolution
expressly authorizing him; thus, it had clothed him with apparent
authority to modify the same via the second letter-agreement. It is not
the quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with the power to bind the
corporation.

Doctrine: The general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly bind a
corporation. The power and responsibility to decide whether the


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


bind the corporation, unless it has ratified such acts or is
estopped from disclaiming them. Reyes v. RCPI Employees
Credit Union, Inc., 499 SCRA 319 (2006).

corporation should enter into a contract that will bind the corporation is
lodged in the board of directors. However, just as a natural person may
authorize another to do certain acts for and on his behalf, the board
may validly delegate some of its functions and powers to officers,
committees and agents.

in writing. Contracts entered into by a corporate officer or


obligations or prestations assumed by such officer for and in
behalf of such corporation are binding on the said corporation
only if such officer acted within the scope of his authority or if
such officer exceeded the limits of his authority, the corporation
has ratified such contracts or obligations. Kwok v. Philippine

While the Court agrees that those who belong to the upper
corporate echelons would have more privileges, it cannot be
presume the existence of such privileges or benefitshe who
claims the same is burdened to prove not only the existence of
such benefits but also that he is entitled to the same. Kwok v.
Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).

An officers power as an agent of the corporation must be


sought from the statute, charter, the by-laws or in a delegation
of authority to such officer, from the acts of the board of
directors formally expressed or implied from a habit or custom
of doing business. Vicente v. Geraldez, 52 SCRA 210 (1973);
Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).

Carpet Manufacturing Corp., 457 SCRA 465 (2005).


2. President. Peoples Aircargo v. Court of Appeals, 297 SCRA 170
(1998).

Even though a judgment, decree or order is addressed to the

corporation only, the officers as well as the corporation itself,


may be punished for contempt for disobedience to its terms, at
least if they knowingly disobey the courts mandate, since a
lawful judicial command to a corporation is in effect a command
to the officers. Heirs of Trinidad de Leon Vda. De Roxas v. Court
of Appeals, 422 SCRA 101 (2004).
1. Rule on Corporate Officers Power to Bind Corporation

As a general rule, the acts of corporate officers within the scope


of their authority are binding on the corporation, but when
these officers exceeded their authority, their actions cannot

Doctrine of Apparent Authority: Corporate policies need not be

Requisites: Member of the Board of Directors and must possess


at least one share


Peoples Aircargo v. Court of Appeals

Facts: Peoples Aircargo is a domestic corporation, which was organized
in the middle of 1986 to operate a customs bonded warehouse. To
obtain a license for the corporation from the Bureau of Customs,
Antonio Punsalan Jr., the corporation president, solicited a proposal
from Stefano Sano (who was preferred because of his membership in
the task force supervising the transition of the bureau from the Marcos
to the Aquino Government) for a feasibility study. This constituted the
First Contract for which Sano was paid for. On December 1086, a
Second Contract, this time for consultancy services, was made upon
Punsalans request. The consultancy services included an Operations
Manual and Seminar/Workshop for the employees of Peoples Aircargo.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Sano was not paid for the 2nd contract so he filed a collection case. By
this time, Punsalan had sold his shares and resigned as president.
Peoples Aircargo denied that Sano conducted Consultancy services. It
alleged that the contract entered into between Sano and Punsalan was
without authority.

acts, and thus, the corporation will, as against anyone who has
in good faith dealt with it through such agent, be estopped from
denying the agents authority.


Issue: Whether or not Punsalan, as president, has apparent authority to
enter into the second contract that could bind the corporation

Held: YES. Since the corporation had previously allowed Punsalan to
enter into the first contract with Sano without a board resolution
expressly authorizing him, thus, it had clothed its president with
apparent authority to execute the Second Contract. Furthermore,
private respondent prepared an operations manual and conducted a
seminar for the employees of petitioner in accordance with their
contract. Petitioner accepted the operations manual, submitted it to the
Bureau of Customs and allowed the seminar for its employees. As a
result of this, petitioner was given by the Bureau of Customs a license to
operate a bonded warehouse. Even if the Second Contract was outside
the usual powers of the president, petitioners ratification of said
contract and acceptance of benefits have made it binding, nonetheless.

Doctrine: Contracts entered into by a corporate president without
express prior board approval bind the corporation, when such officers
apparent authority is established and when these contracts are ratified
by the corporation.

If a corporation knowingly permits one of its officers, or any


other agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

It is the Board of Directors, not the President, that exercises


corporate powers. It must be emphasized that the basis for
agency is representation and a person dealing with an agent is
put upon inquiry and must discover upon his peril the authority
of the agent. Safic Alcan & Cie v. Imperial Vegetable Oil Co.,
Inc., 355 SCRA 559 (2001).

A corporation may not distance itself from the acts of a senior


officer: "the dual roles of Romulo F. Sugay should not be
allowed to confuse the facts." R.F. Sugay v. Reyes, 12 SCRA 700
(1961).

The President is considered as the corporations agent, and as


such, his knowledge of the repeal of a resolution in another
juridical person in which his corporation has an interest, is
ascribed to his principal under the theory of imputed
knowledge. Rovels Enterprises, Inc. v. Ocampo, 392 SCRA 176
(2002).

The President of the corporation which becomes liable for the

accident caused by its truck driver cannot be held solidarily


liable for the judgment obligation arising from quasi-delict, since
the fact alone of being President is not sufficient to hold him
solidarily liable for the liabilities adjudged against the
corporation and its employee. Secosa v. Heirs of Erwin Suarez
Fancisco, 433 SCRA 273 (2004).
3. Corporate Secretary

Requisite: Resident and citizen of the Philippines

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

The corporate secretary can be a member of the Board


of Directors since there is no prohibition for such.

In the absence of provisions to the contrary, the corporate

4. Corporate Treasurer

Requirement: May or may not be a director

A corporate treasurers function have generally been described


as to receive and keeps funds of the corporation, and to
disburse them in accordance with the authority given him by
the board or the properly authorized officers. Unless duly

secretary is the custodian of corporate records he keeps the


stock and transfer book and makes proper and necessary
entries therein. It is his duty and obligation to register valid
transfers of stock in the books of the corporation; and in the
event he refuses to comply with such duty, the transferor-
stockholder may rightfully bring suit to compel performance.
Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).

Although the corporate secretarys duty to record transfers of


stock is ministerial, he cannot be compelled to do so when the
transferees title to said shares has no prima facie validity or is
uncertain. More specifically, a pledgor, prior to foreclosure and
sale, does not acquire ownership rights over the pledged shares
and thus cannot compel the corporate secretary to record his
alleged ownership of such shares on the basis merely of the
contract of pledge. Mandamus will not issue to establish a right,
but only to enforce one that is already established. Lim Tay v.
Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court
of Appeals, 349 SCRA 35 (2001).

A sale that fails to comply with Section 40 of Corporation Code,


cannot be invalidated when the buyer relies upon a Secretarys
Certificate confirming authority. A secretarys certificate which
is regular on its face can be relied upon by a third party who
does not have to investigate the truths of the facts contained in
such certification; otherwise business transactions of
corporations would become tortuously slow and unnecessarily
hampered. Esguerra v. Court of Appeals, 267 SCRA 380 (1997).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

authorized, a treasurer, whose power are limited, cannot bind


the corporation in a sale of its assets, which obviously is foreign
to a corporate treasurers function. San Juan Structural v. Court
of Appeals, 296 SCRA 631, 645 (1998).

A corporate treasurer whose negligence in signing a

confirmation letter for rediscounting of crossed checks, knowing


fully well that the checks were strictly endorsed for deposit only
to the payees account and not to be further negotiated, may be
personally liable for the damaged caused the corporation.
Atrium Management Corp. v. Court of Appeals, 353 SCRA 23
(2001).
5. Manager

Although a branch manager of a bank, within his field and as to


third persons, is the general agent and is in general charge of
the corporation, with apparent authority commensurate with
the ordinary business entrusted him and the usual course and
conduct thereof, yet the power to modify contracts of the bank
remains generally with the board of directors. Being a branch
manager alone is insufficient to support the conclusion that he
has been clothed with apparent authority to verbally alter
terms of the banks written contract, such as the mortgage
contract. Banate v. Philippine Countryside Rural Bank (Liloan,
Cebu), Inc., 625 SCRA 21 (2010).

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



B. POWER OF THE BOARD TO APPOINT AND TERMINATE CORPORATE
OFFICERS

The law does not expressly indicate a limit over the term of the

corporate officers. But it seems they should serve for a term of


one year so that the next set of directors will not be precluded
from appointing a new set of corporate officers.
1. Who Is a Corporate Officer? (Section 25)

Corporate officers in the context of P.D. No. 902-A are those


officers of the corporation who are given that character by the
Corporation Code or by the corporations by-laws. Gurrea v.
Lezama, 103 Phil. 553 (1958).1


Gurrea v. Lezama

Facts: Gurrea sought to have Resolution No. 65 of the Board of Directors
of the La Paz Ice Plant and Cold Storage Co., Inc., removing him from his
position of manager of said corporation declared null and void and to
recover damages incident thereto. The action is predicated on the
ground that said resolution was adopted in contravention of the
provisions of the by-laws of the corporation, of the Corporation Law and
of the understanding, intention and agreement reached among its
stockholders.

Issue: Whether or not Gurrea was properly removed from his position
as manager of La Paz Ice Plant by a mere resolution.


Held: YES. Guerras position was only created by the officers. The by
laws did not provide for the creation of his position. Therefore, he may
not be considered as an officer and the manner of removal provided
for in the by laws shall not be made applicable to him. He may thus be
removed by a mere resolution by the officers of the corporation.

The by-laws of the instant corporation in turn provide that in the board
of directors there shall be a president, a vice-president, a secretary and
a treasurer. These are the only ones mentioned therein as officers of the
corporation. The manager is not included. The by-laws provide that the
officers of the corporation may be removed or suspended by the
affirmative vote of 2/3 of the corporation. The conclusion is inescapable
that Guerra can be suspended or removed by said board of directors
under such terms as it may see fit and not as provided for in the by-
laws, without the 2/3 vote of the stockholders, as required when an
officer is to be removed.

Doctrine: One distinction between officers and agents of a corporation
lies in the manner of their creation. An officer is created by the charter
of the corporation, and the officer is elected by the directors or the
stockholders. An agency is usually created by the officers, or one or
more of them, and the agent is appointed by the same authority. It is
clear that the two terms officers and agents are by no means
interchangeable.

Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009);


WQPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

The position of Executive Secretary, which is provided for in the


Societys by-laws, is an officer position. Since the appointment
of the incumbent did not contain a fixed term, the implication

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


was that the appointee held the appointment at the pleasure of
the Board of Directors, such that when the Board opted to
replace the incumbent, technically there was no removal but
only an expiration of the term and there was no need of prior
notice, due hearing or sufficient grounds before the incumbent
could be separated from office. Mita Pardo de Tavera v.
1

Tuberculosis Society, 112 SCRA 243 (1982).



Mita Pardo de Tavera v. Tuberculosis Society

Facts: Dr. Buktaw, then executive secretary of the Board of Directors of
the Philippine Tuberculosis Society (Society) retired. Dr. Mita Pardo de
Tavera was appointed as his replacement. President Canizares sent an
appointment letter. The letter of appointment, however, didnt include
a fixed term. Subsequently, de Tavera was removed from her post
without telling her the cause. One of the defendants, Alberto Romulo
was appointed to her position with a vote of 7(affirm)-2(abstain)-
1(objection). The defendants claimed denying that plaintiff was illegally
removed from her position as Executive Secretary and averring that


Held: NO. Although the minutes of the organizational meeting show
that the Chairman mentioned the need of appointing a permanent
Executive Secretary, such statement alone cannot characterize the
appointment of petitioner without a contract of employment definitely
fixing her term because of the specific provision of Section 7.02 of the
Code of By-Laws that: The Executive Secretary shall hold office at the
pleasure of the Board of Directors, unless their term of employment
shall have been fixed in their contract of employment. Besides the
word permanent could have been used to distinguish the
appointment from acting capacity.

Doctrine: See above.

Management of the corporation who also determines the


compensation to be paid such employees. Corporate officers,
on the other hand, are elected or appointed by the directors or
stockholders, and are those who are given that character either
by the Corporation Code or by the corporations by-laws. Gomez
v. PNOC Dev. and Management Corp., 606 SCRA 187 (2009).2
o A mere manager not so named in the by-laws does is

under the Societys by-laws, said position is held at the pleasure of the
Board of Directors and when the pleasure is exercised, it only means
that the incumbent has to vacate the same because her term has
expired.

Issue: Whether or not de Tavera was illegally dismissed

PSBA v. Leao, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986);
Visayan v. NLRC, 196 SCRA 410 (1991); Easycall Communications Phils., Inc. v.
King, 478 SCRA 102 (2005); Marc II Marketing, Inc. v. Joson, 662 SCRA 35
(2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012).

Ordinary company employees are generally employed not by


action of the directors and stockholders but by that of the

not an officer of the corporation. Pamplona Plantation


Company v. Acosta, 510 SCRA 249 (2006).
When the by-laws provide for the position of
Superintendent/ Administrator, it is clearly a

Okol v. Slimmers World Intl, 608 SCRA 97 (2009).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


corporate officer position and issues of reinstatement
would be within the jurisdiction of the SEC and not the
NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997).

Although the by-laws provide expressly that the Board of


Directors shall have full power to create new offices and to
appoint the officers thereto, any office created, and any officer
appointed pursuant to such clause does not become a
corporate officer, but is an employee and the determination
of the rights and liabilities relating to his removal are within the
jurisdiction of the NLRC; they do not constitute intra-corporate
controversies. A different interpretation can easily leave the
way open for the Board of Directors to circumvent the
constitutionally guaranteed security of tenure of the employee
by the expedient inclusion in the By-Laws of an enabling clause
on the creation of just any corporate officer position. (at p. 27).
The rulings in Tabang v. NLRC, 266 SCRA 462 (1997), and Nacpil
v. International Broadcasting Corp., 379 SCRA 653 (2002),
should no longer be controlling. Matling Industrial and
Commercial Corp. v. Coros, 633 SCRA 12 (2010).1


Matling Industrial and Commercial Corp. v. Coros

Facts: Ricardo R. Coros is the Vice President for Finance and
Administration of Matling Industrial and Commercial Corporation.
However, Matling dismissed him. As a result, Coros filed a complaint for
illegal suspension and illegal dismissal against Matling and some of its

Reiterated in Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v.


Liceo de Cagayan University, 686 SCRA 648 (2012).

corporate officers before the NLRC. Matling, et al. moved to dismiss the
petition. They claimed that SEC, and not NLRC, had jurisdiction over the
case, the matter being an intra-corporate in nature. This is because
Coros was also a member of the corporations Board of Directors prior
to his termination.

Issue: Whether or not Coros, as Vice President for Finance and
Administration, was a corporate office of Matling Industrial and
Commercial Corporation.

Held: NO. The position of Vice President for Finance and
Administration was not explicitly written in the by-laws. Coros was
appointed Vice President by Matlings general manager and not by the
Board of Directors. It was also the general manager who determined the
amount of compensation he received. Therefore, Coros is merely an
employee and not a corporate officer. This being the case, NLRC and not
SEC has jurisdiction over his complaint for illegal dismissal. In addition,
there is no relation between his acquisition of his status as stockholder
or Director and his position as Vice President of Finance and
Administration. His position as stockholder or Director remained
unaffected by his dismissal as Vice President. This is not an intra-
corporate controversy, because an intra-corporate controversy is one,
which arises between a stockholder and a corporation.

Doctrine: A position must be expressly mentioned in the By-laws in
order to be considered as a corporate office. The creation of an office
under a by-law enabling provision is not enough to make a position a
corporate office. A different interpretation can easily allow the Board to
circumvent the constitutional guarantee of security of tenure by


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


including an enabling clause on the creation of any corporate office in
the by-laws. The Board may create appointive positions other than
those expressly mentioned in the by-laws. However, persons occupying
such positions are not considered as corporate officers within the
meaning of Section 25.

cases and intra-corporate affairs regarding elections and appointments.



Held: NO. It is the SEC who has jurisdiction in the abovementioned
cases. The Articles of Incorporation of MICC expressly states that de
Rossis position as Executive Vice-President was considered to be an

officer position.

Doctrine: The SEC has the jurisdiction over removal of corporate officers
as well as intra-corporate affairs regarding election and appointment of
corporate officers.

2. Nature of Exercise of Power to Terminate Officers

An officers removal is a corporate act, and if such removal


occasions an intra-corporate controversy, its nature is not
altered by the reason or wisdom, or lack thereof, with which the
Board of Directors might have in taking such action. Perforce,
the matter would come within the area of corporate affairs and
management, and such a corporate controversy would call for
SEC adjudicative expertise [now RTC Special Commercial
Courts], not that of NLRC. De Rossi v. NLRC, 314 SCRA 245
(1999); Okol v. Slimmers World International, 608 SCRA 97

of corporate officers is an officer of said corporation and not a


mere employee being a corporate officer, his removal is
deemed to be an intra-corporate dispute cognizable by the SEC
and not by the Labor Arbiter. Garcia v. Eastern

(2009).

De Rossi v. NLRC

Facts: Armando de Rossi is an Italian Citizen and was the Executive Vice-
President and General Manager of Matling Industrial and Commercial
Corp. (MICC). He started to work in 1985 and was terminated in 1988
for failing to secure his employment permit and grossly mismanaged the
business affairs of the companyhe allegedly diverted corporate funds
to his personal use. Aggrieved, he then filed a case against MICC in the
NLRC for illegal dismissal.

Issue: Whether or not the NLRC has jurisdiction over illegal dismissal

One who is included in the by-laws of a corporation in its roster

Telecommunications Philippines, 585 SCRA 450 (2009).



XIII. LIABILITIES OF CORPORATE OFFICERS (Section 31)

Mere ownership by an officer (President) of majority of the


equity of the corporation do not warrant a piercing of the veil of
corporate fiction to make such officer personally liable for the
debts of the corporation. Palay, Inc. v. Clave, 124 SCRA 638
(1093).1


Palay, Inc. v. Clave

Pabalan v. NLRC, 184 SCRA 495 (1990); Sulo ng Bayan, Inc. v. Araneta, Inc. Inc.,
72 SCRA 347 (1976); Mindanao Motors Lines, Inc. v. CIR, 6 SCRA 710 (1962).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



Facts: Palay, Inc., through its President, Albert Onstott executed a
Contract to Sell a parcel of land to Dumpit. Paragraph 6 of the contract
provided for automatic extrajudicial rescission upon default in payment
of any monthly installment after the lapse of 90 days from the

petitioners part. They had literally relied, albeit mistakenly, on


paragraph 6 of its contract with Dumpit when it rescinded the contract
to sell extrajudicially and had sold it to a third person. Onstott was made
liable because he was then the President of the corporation. No
sufficient proof exists on record that said petitioner used the

expiration of the grace period of 1 month, without need of notice and


with forfeiture of all installments paid. Dumpit paid the downpayment
and several installments. Almost 6 years later, Dumpit wrote Palay, Inc.
offering to update all his overdue accounts with interest, and seeking its
written consent to the assignment of his rights to a certain Lourdes
Dizon. Palay, Inc. informed him that his Contract to Sell had long been
rescinded pursuant to paragraph 6 of the contract, and that the lot had

corporation to defraud private respondent. He cannot be made


personally liable just because he appears to be the controlling
stockholder.

Doctrine: The veil of corporate fiction may be pierced when it is used as
a shield to further an end subversive of justice; or for purposes that
could not have been intended by the law that created it; or to defeat

already been resold. Dumpit filed a letter complaint with the National
Housing Authority (NHA) for reconveyance.

Issue: Whether or not petitioners may be held liable for the refund of
the installment payments made by Dumpit.

Held: YES. Rights to the lot should be restored to Dumpit or the same

public convenience, justify wrong, protect fraud, or defend crime; or to


perpetuate fraud or confuse legitimate issues; or to circumvent the law
or perpetuate deception; or as an alter ego, adjunct or business conduit
for the sole benefit of the stockholders.

should be replaced by another acceptable lot. However, considering


that the property had already been sold to a third person and there is
no evidence on record that other lots are still available, private
respondent is entitled to the refund of installments paid plus interest at
the legal rate of 12% computed from the date of the institution of the
action.

As a general rule, a corporation may not be made to answer for acts or

are, as a general rule, not personally liable for their official acts,
because a corporation, by legal fiction, has a personality
separate and distinct from its officers, stockholders and
members. Price v. Innodata Phils., Inc., 567 SCRA 269 (2008).1

liabilities of its stockholders or those of the legal entities to which it may


be connected and vice versa. There were no badges of fraud on


A. GENERAL RULE: Corporate Officers Not Liable for Corporate Debts

Unless they have exceeded their authority, corporate officers

Corporate officers who entered into and signed contracts on


behalf of the corporation in their official capacities cannot be
made personally liable thereunder in the absence of stipulation

Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992); Lowe, Inc. v.
Court of Appeals, 596 SCRA 140 (2009); Marc II Marketing, Inc. v. Joson, 662
SCRA 35 (2011); St. Tomas v. Salac, 685 SCRA 245 (2012).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


to that effect, due to the personality of the corporation being
separate and distinct from the persons composing it. Western
Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709
(1990).1

wrongdoing of the director must be established clearly and


convincingly. Bad faith is never presumed. Bad faith does not
connote bad judgment or negligence. Bad faith imports a
dishonest purpose. Bad faith means [a] breach of a known duty
through some ill motive or interest. Bad faith partakes of the
nature of fraud. Carag v. NLRC, 520 SCRA 28 (2007).4

Officers of a corporation may become liable for its loans when


they have breached their duty of diligence under Section 31 of
the Corporation Code. Aratea v. Suico, 518 SCRA 501 (2007);2 or
when they have contractually made themselves personally
liable for a corporate loan. Prisma Construction & Dev. Corp. v.
Menchavez, 614 SCRA 590 (2010).

The finding of solidary liability among the corporation, its


officers and directors would patently be baseless when the
decision contains no allegation, finding or conclusion regarding
particular acts committed by said officers and director that
show them to have been individually guilty of unmistakable
malice, bad faith, or ill-motive in their personal dealings with

A corporation has a personality separate and distinct from the


persons composing or representing it; hence, personal liability
attaches only in exceptional cases, such as when the director,
trustee, or officer is guilty of bad faith or gross negligence in
directing the affairs of the corporation. Continental Cement
Corp. v. Asea Brown Boveri, Inc., 659 SCRA 137 (2011).3

To hold a director personally liable for debts of the corporation,


and thus pierce the veil of corporate fiction, the bad faith or

third parties. When corporate officers and directors are sued


merely as nominal parties in their official capacities as such,
they cannot be held liable personal for the judgment rendered
against the corporation. NPC. v. Court of Appeals, 273 SCRA 419
(1997).5

Where the Chairman & President has made himself accountable


in the promissory note in his personal capacity and as
authorized by the Board Resolution, and in the absence of any
representation on the part of corporation that the obligation is
all its own because of its separate corporate identity, we see no
occasion to consider piercing the corporate veil as material to
the case. Prisma Construction & Dev. Corp. v. Menchavez, 614
SCRA 590 (2010).

An officer-stockholder who signs in behalf of the corporation to


a fraudulent contract cannot claim the benefit of separate
juridical entity: Thus, being a party to a simulated contract of
management, petitioner Uy cannot be permitted to escape
liability under the said contract by using the corporate entity
theory. This is one instance when the veil of corporate entity

Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale
Belge v. Walter Bull and Co., 84 Phil. 164 (1949).
2
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005)
3
Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban
Ban, Inc. v. Pena, 659 SCRA 418 (2011).

EPG Constructions Co. v. CA, 210 SCRA 230 (1992).


Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of
Appeals, 215 SCRA 120 (1992).
5


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


has to be pierced to avoid injustice and inequity. Paradise
Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).
B. Rundown on Officers Liabilities: Tramat Mercantile, Inc. v. Court of
Appeals, 238 SCRA 14 (1994).1

personal capacity. Tramat has its own distinct and separate personality.
In the case at bench, there is no indication that petitioner David Ong
could be held personally accountable under any of the mentioned cases
(see doctrine).

Tramat Mercantile, Inc. v. Court of Appeals



Facts: Melchor de la Cuesta (doing business under the name of Farmers
Machineries) sold a tractor to Tramat Mercantile. David Ong, president
and manager of Tramat, issued a check for payment. In turn, Tramat
sold the tractor along with a lawn mower to MWSS. The latter refused
to pay when it learned that the tractor was not brand new and there

Doctrine: Personal liability of a corporate director, trustee or officer


along (although not necessarily) with the corporation may so validly
attach, as a rule, only when:
1. He assents
a. To a patently unlawful act of the corporation
b. For bad faith, or gross negligence in directing its affairs
c. For conflict of interest, resulting in damages to the

were hidden defects. Ong then issued a stop payment for the check
issued to de la Cuesta (it seems that Ong intended to pay de la Cuesta
with the proceeds of the sale to MWSS). Because of this, de la Cuesta
filed an action for recovery of the P33,500 payment as well as P10,000
as attorney's fees. Ong answered that de la Cuesta had no cause of
action, and that the transaction was between de la Cuesta and Tramat
Mercantile, not Ong.

corporation, its stockholders or other persons


2. He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with
the corporation;
4. He is made, by a specific provision of law, to personally answer


Issue: Whether or not Ong can be held liable in his personal capacity.

Held: NO. David Ong was acting as an officer of Tramat, not in his

for his corporate action.


corporate debts, a corporate officer may nevertheless divest


himself of this protection by voluntarily binding himself to the
payment of the corporate debts. Toh v. Solid Bank Corp., 408
SCRA 544 (2003).

MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. Court of Appeals, 311 SCRA
700 (1999); Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001);
Malayang Samahan ng mga Manggawgawa sa M. Greenfield v. Ramos, 357
SCRA 77 (2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003);
H.L. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004);
McLeod v. NLRC, 512 SCRA 222 (2007).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

While the limited liability doctrine is intended to protect the


stockholder by immunizing him from personal liability for the

The corporate representatives signing as a solidary guarantee as


corporate representative did not undertake to guarantee

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


personally the payment of the corporations debt embodied in
the trust receipts. Debts incurred by directors, officers and
employees acting as such corporate agents are not theirs but
the direct liability of the corporation they represent. As an
exception, directors or officers are personally liable for the
corporations debt if they so contractually agree or stipulate.
Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005).

Bad faith does not arise just because a corporation fails to pay
its obligation, because the inability to pay ones obligation is not
synonymous with fraudulent intent not to honor the
obligations. In order to piece the veil of corporate fiction, for
reasons of negligence by the director, trustee or officer in the
conduct of the transactions of the corporation, such negligence
must be gross. Magaling v. Ong, 562 SCRA 152 (2008).

Directors or trustees who willfully or knowingly vote for or


assent to patently unlawful acts of the corporation or acquire
any pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation. EDSA
Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25
(2008).


C. SPECIAL PROVISIONS IN LABOR LAWS:

Since a corporate employer is an artificial person, it must have


an officer who can be presumed to be the employer, being the
person acting in the interest of (the) employer as defined in
Article 283 of the Labor Code. A.C. Ransom Labor Union-CCLU
v. NLRC, 142 SCRA 269 (1986).

A.C. Ransom Labor Union-CCLU v. NLRC



Facts: On June 6, 1961, employees of AC Ransom, most being members
of the AC Ransom Labor Union, went on strike. The said strike was lifted
on June 21 with most of the strikers being allowed to resume their
work. However, twenty two strikers were refused reinstatement.

In 1969, the Hernandez family (owners of AC RANSOM) organized
another corporation under the name of Rosario Industrial Corporation.
The said company dealt in the same type of business as AC Ransom.

In 1972, a decision to reinstate the 22 strikers was rendered by the
Court of Industrial Relations.

In 1973, RAMSOM filed an application for clearance to close and cease
operations which was granted, and as such the reinstatement of the 22
strikers has been precluded. Because of this, the Union subsequently
asked the officers of Ransom to be personally liable for payment of the
back wages.

Issue: Whether or not the officers of the corporation should be held
personally liable to pay for the back wages.

Held: YES. In the instant case, RANSOM, in foreseeing the possibility or
probability of payment of back wages to the 22 strikers, organized
ROSARIO to replace RANSOM, with the latter to be eventually phased
out if the 22 strikers win their case.
Note: The record does not clearly identify the officer or officers of
RANSOM directly responsible for failure to pay the back wages of the 22


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


and bad faith in terminating their employment. AHS/Philippines
v. Court of Appeals, 257 SCRA 319 (1996).2

strikers. In the absence of definite proof in that regard, it should be


presumed that the responsible officer is the President of the
corporation who can be deemed the chief operation officer thereof.

Doctrine: Under Article 212 (c) of the Labor Code, Employee includes

illegally dismissing an employee should be held personally liable


for the corporate obligations arising from such act. Maglutac v.
NLRC, 189 SCRA 767 (1990); 3 and for the separate juridical
personality of a corporation to be disregarded as to make the
highest corporate officer personally liable on labor claims, the
wrongdoing must be clearly and convincingly established. Del
Rosario v. NLRC, 187 SCRA 777 (1990).

any person acting in the interest of an employer, directly or indirectly.


Since Ransom is an artificial person, it must have an officer who can be
presumed to be the employer, being the person acting in the interest
of the employer (Ransom).

1. Overturning the A.C. Ransom Ruling:

Article 212(e) of the Labor Code, by itself, does not make a


corporate officer personally liable for the debts of the
corporation because Section 31 of the Corporation Code is still
the governing law on personal liability of officers for the debts
of the corporation. David v. National Federation of Labor
Corporate officers cannot be held personally liable for damages
on account of the employees dismissal because the employer
corporation has a personality separate and distinct from its
officers who merely acted as its agents. Malayang Samahan ng
mga Mangagagawa sa M. Greenfields v. Ramos, 357 SCRA 77
(2001).1

Corporate officers are not personally liable for money claims of


discharged employees unless they acted with evident malice

AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009).

A corporation, being a juridical entity, may act only through its


directors, officers and employees and obligations incurred by
them, acting as corporate agents, are not theirs but the direct
accountabilities of the corporation they represent. In labor
cases, corporate directors and officers are solidarily liable with
the corporation for the termination of employment of
employees done with malice or bad faith. Brent Hospital, Inc. v.
NLRC, 292 SCRA 304 (1998).4

Unions, 586 SCRA 100 (2009).

Only the responsible officer of a corporation who had a hand in

Reiterated in Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and
Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252
(2008); M+W Zander Philippines, Inc. v. Enriquez, 588 SCRA 590 (2009); AMA
Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009); Lowe,
Inc. v. Court of Appeals, 596 SCRA 140, 155 (2009); Peaflor v. Outdoor
Clothing Manufacturing Corp., 618 SCRA 208 (2010).
3
Reiterated in Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA
353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997)
4
Culili v. Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011);
Grandteq Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011); Alert
Security and Investigation Agency, Inc. v. Pasawilan, 657 SCRA 655 (2011);
Lynvil Fishing Enterprises, Inc. v. Ariola, 664 SCRA 679 (2012); Blue Sky Trading
Co., Inc. v. Blas, 667 SCRA 727 (2012).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

In labor cases, corporate directors and officers are solidarily


liable with the corporation for the termination of employment

of corporate employees done with malice or in bad faith. In this


case, it is undisputed that the corporate officers have a direct
hand in the illegal dismissal of the employees. They were the
one, who as high-ranking officers and directors of the
corporation, signed the Board Resolution retrenching the
employees on the feigned ground of serious business losses that
had no basis apart from an unsigned and unaudited Profit and
Loss Statement which, to repeat, had no evidentiary value

laws. Villanueva v. Adre, 172 SCRA 876 (1989).


A.C. Ransom doctrine has been reiterated subsequently in
Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999).1

Since a corporation is an artificial person, it must have an officer

contemplated by the Labor code, who may be held jointly and


severally liable for the obligation of the corporation to its
dismissed employees. NYK International Knitwear Corp. Phil. v.
NLRC, 397 SCRA 607 (2003).
4. Definitive Overturning of A.C. Ransom Ruling:

A.C. Ransom is not in point because there the corporation


actually ceased operations after the decision of the Court was
promulgated against it, making it necessary to enforce it against
its former president. When the corporation is still existing and
able to satisfy the judgment in favor of the private respondent,
the corporate officers cannot be held personally liable. Lim v.
NLRC, 171 SCRA 328 (1989).

who can be presumed to be the employer, being the person


acting in the interest of the employer the corporation, in the
technical sense only, is the employer. The manager of the
corporation falls within the meaning of an employer as

whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997).


2. Limiting the A.C. Ransom Ruling to Insolvent Corporation

Under the Labor Code, in the case of corporations, it is the


president who responds personally for violation of the labor pay

It is settled that in the absence of malice, bad faith, or specific


provisions of law, a stockholder or an officer of a corporation
cannot be made personally liable for corporate liabilities.
McLeod v. NLRC, 512 SCRA 222 (2007).2

A.C. Ransom will apply only where the persons who are made
personally liable for the employees claims are stockholders-
officers of employer-corporation. In the case at bar, a mere
general manager while admittedly the highest ranking local
representative of the corporation, is nevertheless not a
stockholder and much less a member of the Board of Directors

nor an officer thereof. De Guzman v. NLRC, 211 SCRA 723


(1992).
3. Upholding the A.C. Ransom Ruling:

Reiterated in Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v.


NLRC, 256 SCRA 466 (1996).
2
Citing Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375 (2001);
Bogo-Medellin Sugarcane Planters Asso., Inc. v. NLRC, 296 SCRA 108 (1998);
Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999); Acesite
Corp. v. NLRC, 449 SCRA 360 (2005); Coca-Cola Bottlers Phils., Inc. v. Daniel, 460
SCRA 494 (2005); Suldao v. Cimech System Construction, Inc., 506 SCRA 256
(2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007); Culili v.
Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011). Grandteq
Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

Clearly, in A.C. Ransom, RANSOM, through its President,


organized ROSARIO to evade payment of backwages to the 22
strikers. This situation, or anything similar showing malice or
bad faith on the part of Patricio, does not obtain in the present
case. [What applies therefore is the ruling [i]n Santos v. NLRC,
[254 SCRA 673 (1996)]. McLeod v. NLRC, 512 SCRA 222 (2007).1

It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and


McLeod v. NLRC, 512 SCRA 22 (2007), that Article 212(e) of the
Labor Code, by itself, does not make a corporate officer
personally liable for the debts of the corporationthe
governing law on personal liability of directors or officers for
debts of the corporation is still Section 31 of the Corporation
Code. Pantranco Employees Association (PEA-PTGWO) v. NLRC,
581 SCRA 598 (2009).2


D. Personal Liability of Trustees and Officers of Non-Stock Corporation

The non-stock corporation acted in clear bad faith when it sent


the final notice to a member under the pretense they believed
him to be still alive, when in fact it had very well known that he
had already died. Valley Golf and Country Club, Inc. v. Vda. De
Caram, 585 SCRA 218 (2009).

Non-stock corporations and their officers are not exempt from


the obligation imposed by Articles 19, 20 and 21 under the
Chapter on Human Relations of the Civil Code, which provisions

Reiterated in H.R. Carlos Construction, Inc. v. Marina Properties Corp., 421


SCRA 428 (2004); Pamplona Plantation Company v. Acosta, 510 SCRA 249
(2006); Elcee Farms, Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526
SCRA 73 (2007).
2
Reiterated in David v. National Federation of Labor Unions, 586 SCRA 100
(2009).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

enunciate a general obligation under law for every person to act


fairly and in good faith towards one another. Valley Golf and
Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).