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Detective & Protective Bureau Inc. v. Hon. Gaudenciao Cloribel, et al. - Ysa Gokongwei v. SEC, et al.- Nikki & Ali (Facts from Tricias digest) DOCTRINES: An amendment to the corporation by-law which renders a stockholder ineligible to be a director, if he be also director in a corporation whose business is in competition with that of the other corporation has been sustained as valid. Mere ultra vires acts or those which are not illegal and void ab initio, but are not within the scope of the articles of incorporation are merely voidable and may become binding and enforceable when ratified by the stockholders.
FACTS: - John Gokongwei Jr. (stockholder of San Miguel Corporation/SMC) filed with the Securities and Exchange Commission a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. o First cause of action: Gokongwei alleged that on 18 September 1976, respondents Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto amended the bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on 13 March 1961, when the outstanding capital stock of the corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,043, with a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. o Second cause of action: It was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist. o Third cause of action: Gokongwei averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being 6 new directors.

o Fourth cause of action: It was claimed that prior to the questioned amendment, Gokongwei had all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that as a stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as aforementioned, hence the amended by-laws are null and void. o Addtl cause of action: It was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with the corporation, which was avowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended by-laws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of directors shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive. - It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that Soriano, et. al. be made to pay damages, in specified amounts, to Gokongwei. - On 28 October 1976, in connection with the same case, Gokongwei filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of the corporation refused to allow him to inspect its records despite request made by Gokongwei for production of certain documents enumerated in the request, and that the corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. - The motion was opposed by respondents alleging among others that it has no legal basis; demand is not based on good faith; that the motion is premature; and that it fails to show good cause and constitutes continued harassment and some parts of records are privileged. - Meanwhile, on 10 December 1976, while the petition was yet to be heard, the corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws", setting such meeting for 10 February 1977. This prompted Gokongwei to ask the SEC for a summary judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, the respondents admitted the invalidity of the amendments of 18 September 1976. - The motion for summary judgment was opposed by the respondents. Pending action on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of Gokongwei's application for the issuance of a preliminary injunction and/or Gokongwei's motion for summary judgment, a TRO may be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as scheduled. This motion was duly opposed by the respondents. - On 10 February 1977, Respondent Commission issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, the respondents conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. - On 14 February 1977, Gokongwei filed a consolidated motion for contempt and for nullification of the special stockholders' meeting. - A motion for reconsideration of the order denying Gokongwei's motion for summary judgment was filed by Gokongwei before the SEC on 10 March 1977. - SEC Case 1423: Gokongwei alleged that, having discovered that the corporation has been

investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he filed with SEC, on 20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and Jose M. Soriano, as well as the corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages. - On 4 February 1977, motions to dismiss were filed by the respondents to which a consolidated motion to strike and to declare Soriano, et. al. in default and an opposition ad abundantiorem cautelam were filed by Gokongwei. Despite the fact that said motions were filed as early as 4 February 1977, the Commission acted thereon only on 25 April 1977, when it denied the respondent's motions to dismiss and gave them 2 days within which to file their answer, and set the case for hearing on April 29 and May 3, 1977. - The respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting on 20 March 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto." By reason of the foregoing, on 28 April 1977, Gokongwei filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain the respondents from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on 3 May 1977, the date set for the second hearing of the case on the merits. - The SEC, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. - For the purpose of urging the Commission to act, Gokongwei filed an urgent manifestation on 3 May 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition. - Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, with the Supreme Court, alleging that there appears a deliberate and concerted inability on the part of the SEC to act. ISSUES: 1) Whether a corporation has the power to set a qualification to disqualify a stockholder from being a board member. YES. 2) Whether respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to ratify the investment of corporate funds in a foreign corporation. NO. (Note: 7 Justices thought that this issue was moot. Thus dismissing the case as to this particular issue.) HELD: 1) YES. The Supreme Court upheld the validity of the additional qualifications as a necessary means to safeguard the corporation of its trade secrets and highly confidential information wherein the access of such information to Gokongwei would be detrimental to the corporations management and prosperity. Based on U.S. authorities, in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and legal inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation. Sec. 21 of of the Corporation Law allows a corporation to prescribe in its by-laws the qualifications duties and compensation of directors, officers and employees. This refers to additional qualifications that may be imposed aside from those provided for under Sec. 30 of the

Corporation Code. Additional Note: SMC Board members may access: (1) marketing strategies and pricing structure, (2) budget for expansion and diversification, (3) research and development, and (4) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms. 2) NO. Section 17- of the Corporation Law allows a corporation to invest its funds in any other corporation or business or for any other purpose other than the main purpose for which it is organized If not within corporate purpose (purchase of shares solely for investment) - Board of Directors must be authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least of voting power If investment is made in pursuance to the corporate purpose - does not need the approval of stockholders.

The purchase of beer manufacturing facilities by SMC was an investment in the same business stated in its main purpose in its Articles of Incorporation which is to manufacture and market beer. The court cited De la Rama v Ma-ao Sugar Central Co. Inc. where it said that if the investment is made in a corporation whose business is important to the investing corporation and would aid its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of Directors (BoD) Assuming arguendo that the BoD does not have authority to make the investment, its act however, may be ratified by the stockholders. Mere ultra vires acts or those which are not illegal and void ab initio, but are not within the scope of the articles of incorporation are merely voidable and may become binding and enforceable when ratified by the stockholders. Note: submission of assailed investment for ratification at the annual meeting cannot be construed as admission the respondent corp. had committed and ultra vires act considering the common practice of corporation to periodically submitting for the ratification of their stockholders the acts of their directors, officers and managers.

Roxas, et al v. De la Rosa, et al - Em Asiddao DOCTRINE: Under the Law, directors can only be removed from office by a vote of the stockholders representing 2/3 of subscribed capital stock, while vacancies can be filled by a mere majority. A director cannot be removed by a mere majority by disguising it as filling a vacancy. FACTS: BINALBAGAN ESTATE, INC. is a corporation having its principal plant in Negros Occidental where it is engaged in the manufacture of raw sugar from canes, grown upon farms accessible to its central. In July 1924, majority shareholders of BINALBAGAN ESTATE, INC. formed a Voting Trust

composed of 3 members (Laguda, Monteblanco, and Fisher, as trustees). a) the shareholders undertook to assign their shares to the trustees on the books of the company. b) the trustees were authorized to represent and vote the shares pertaining to their constituents c) total number of outstanding shares of the corporation is somewhat over 5,500, while the number of shares controlled by the voting trust is less than 3,000 (majority but less than 2/3). In February 1926 the General Annual Meeting of the Shareholders took place and: a) Mr. Heilbronn appeared as representative of the voting trust, his authority being recognized by the holders of all the other shares present at this meeting. b) Mr. Heilbronn (by virtue of controlling the majority of the shares) was able to nominate and elect a Board of Directors to his own liking, without opposition from the minority. At the present time the Petitioners Roxas, Echaus, and Lacson presumably constitute membership of voting trust. Although the Board of Directors of BINALBAGAN ESTATE, INC. were elected by the representative of the voting trust, the present trustees are apparently desirous of ousting said officers, without awaiting the termination of their official term at the expiration of one year from the date of their election. In August 1926Petitioners (members of the voting trust) caused the secretary of the BINALBAGAN ESTATE, INC. to issue to the shareholders a notice calling for a special general meeting of shareholders on August 16, 1926, 10:00 a.m: a) for the election of the Board of Directors b) for the amendment of the By-Laws, and c) for any other business that can be dealt with in said meeting A few days after said notice was issued- Corua (as member of the existing Board of Directors) and Ledesma (as a simple shareholder) instituted before CFI Negros Occidental a civil action against the trustees and the BINALBAGAN ESTATE, INC. for the purpose of enjoining the meeting contemplated in the notice above-mentioned CFI: issued restraining order. In the dispositive part of said order the Binalbagan Estate, Inc., its lawyers, agents, representatives, and all others who may be assisting or corroborating with them, are restrained from holding the general shareholders' meeting called for the date mentioned and from electing new directors for the company in substitution of the present incumbents, said injunction to be effective until further order of the court. It is now asserted here by the petitioners that the making of this order was beyond the legitimate powers of the respondent judge, and it is accordingly prayed that said order be set aside. Petitioners file before the Supreme Court a Petition contending that the making of this order was beyond the legitimate powers of the respondent judge ISSUE: Whether or not the Respondent judge acted within his legitimate powers in making the order against which relief is sought. HELD: YES. Under the law the directors of a corporation can only be removed from office by a vote of

the stockholders representing at least 2/3 of the subscribed capital stock entitled to vote (Act No. 1459, sec. 34); while vacancies in the board, when they exist, can be filled by mere majority vote (Act No. 1459, sec. 25). Moreover, the law requires that when action is to be taken at a special meeting to remove the directors, such purpose shall be indicated in the call (Act No. 1459, sec. 34). While the voting trust controls a majority of the stock, it does not have a clear 2/3 majority. It was therefore impolitic for the petitioners, in forcing the call for the meeting of August 16, to come out frankly and say in the notice that one of the purposes of the meeting was to remove the directors of the corporation from office. Instead, the call was limited to the election of the board of directors, it being the evident intention of the voting trust to elect a new board as if the directorate had been then vacant. But the complaint in the civil action directly asserts that the members of the present directorate were regularly elected at the general annual meeting held in February, 1926. If that assertion be true, the proposal to elect another directorate, as per the call of August 2, if carried into effect, would result in the election of a rival set of directors, who would probably need the assistance of judgment of court in an independent action of quo warranto to get them installed into office, even supposing that their title to the office could be maintained. That the trial judge had jurisdiction to forestall that step and enjoin the contemplated election is a matter about which there cannot be the slightest doubt. The law contemplates and intends that there shall be one set of directors at a time and that new directors shall be elected only as vacancies occur in the directorate by death, resignation, removal, or otherwise. Angeles, et al v. Santos, et al- Tricia Cruz
HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE, as stockholders for an in behalf and for the benefit of the corporation, Paraaque Rice Mill, Inc. and the other stockholders who may desire to join, plaintiffs-appellees, vs. TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO PASCUAL, and BASILISA RODRIGUEZ,defendant-appellants. DOCTRINE: Where corporate directors are guilty of a breach of trust not of mere error of judgment or abuse of discretion and intra-corporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. FACTS: Plaintiff and the defendant are all stockholders and member of the board of directors (BoD) of the "Paraaque Rice Mill, Inc.," - a corporation organized for the purpose of operating a rice mill in the municipality of Paraaque, Province of Rizal. On September 6, 1932, a complaint was filed with the CFI of Rizal. The complaint avers substantially the following: (a) That the plaintiffs are stockholders and constitute the minority and the defendants are also stockholders and constitute the majority of the board of directors of the Paraaque Rice Mill, Inc.; (b) that at an extraordinary meeting held on February 21, 1932, the stockholders appointed an investigation committee of which the plaintiff Jose de Lara was chairman and the stockholders Dionisio Tomas and Aguedo Bernabe were members, to investigate and determine the properties, operations, and losses of the corporation

as shown in the auditor's report corresponding to the year 1931, but the defendants, particularly Teodorico B. Santos, who was the president of the corporation, denied access to the properties, books and record of the corporation which were in their possession (c) That the defendant Teodorico B. Santos, in violation of the by-laws of the corporation, had taken possession of the books, vouchers, and corporate records as well as of the funds and income of the Paraaque Rice Mill, Inc., all of which, according to the by-laws, should be under the exclusive control and possession of the secretary-treasurer, the plaintiff Aguedo Bernabe; (d) That the said Teodorico B. Santos, had appropriated to his own benefit properties, funds, and income of the corporation in the sum of P10K. (e) that Teodoro B. Santos, for the purpose of illegally controlling the affairs of the corporation, refuse to sign and issue the corresponding certificate of stock for the 600 fully paid-up share of the plaintiff, Higinio Angeles, of the total value of P15,000; ( f ) that notwithstanding written requests made in conformity with the by-laws of the corporation of 3 members of the BoD who are holders of more than 1/3 of the subscribed capital stock of the corporation, the defendant Teodorico B. Santos as president of the corporation refuse to call a meeting of the board of directors and of the stockholders; (g) that in violation of the by-laws of the corporation, the defendant who constitute the majority of the board of directors refused to hold ordinary monthly meetings of the board since March, 1932; (h) that Teodorico B. Santos as president of the corporation, in connivance with his co-defendants, was disposing of the properties and records of the corporation without authority from the board of directors or the stockholders of the corporation and without making any report of his acts and that, to prevent any interference with or examination of his arbitrary acts, he arbitrarily suspended plaintiff Jose de Lara from the office of general manager to which office the latter had been lawfully elected by the stockholders; (i) that the corporation had gained about P4K during the first half of the year 1932, but that because of the illegal and arbitrary acts of the defendants not only the funds but also the books and records of the corporation are in danger of disappearing. The complaint likewise prays: (a) Melchor de Lara be appointed receiver of the properties, funds and business of the Paraaque Rice Mill, Inc., as well as the books and record thereof, with authority to continue the business of the corporation; (b) Teodorico B. Santos be ordered to render a detailed accounting of the properties, funds and income of the corporation from the year 1927 to date; (c) Defendant be required to pay to the corporation the amount of P10K and other amounts which may be found due to the said corporation as damages or for my other cause, (d) Defendant be ordered to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles; and (e) Members of the BoD of the Paraaque Rice Mill, Inc., be removed and an extraordinary meeting of the stockholders called for the purpose of electing a new board of directors. The court issued an ex parte order of receivership appointing Melchor de Lara as receiver of the corporation upon the filing of a bond of P1K by the plaintiffs. The bond of the receiver was fixed at P4K. Upon an urgent motion of the defendants setting forth the reasons why Melchor de Lara should NOT have been appointed receiver, the trial court appointed Benigno Agco, as receiver, in lieu of Melchor de Lara. However, the court, after considering the memoranda filed by both parties revoked its order appointing Agco as receiver a month after. On July 12, 1933, the defendants presented their amended answer to the complaint, containing a general and specific denial, and alleging as special defense that the defendant Teodorico B. Santos refused to sign the certificate of stock in favor of the plaintiff Higinio Angeles for 600 shares valued at P15 because the board of directors decided to give Higinio Angeles only 320 shares of stock worth P8K. A cross-complaint was filed against the plaintiffs based on the alleged failure of Higinio Angeles to render a report of his administration of the corporation from February 14 to June 30, 1928, during which time the corporation is alleged to have accrued earnings of approximately P3K. In both the counter claim and

cross-complaint Paraaque Rice Mill, Inc. is joined as party defendant. The plaintiffs renewed their petition for the appointment of a receiver pendente lite alleging, among other things, that defendant Teodorico B. Santos was using the funds of the corporation for purely personal ends; that said Teodorico B. Santos was managing to the interest of the Corporation and its stockholders; that said defendant did not render any account of his management or for the condition of the business of the corporation; that since 1932 said defendant called no meeting of the board of directors or of the stockholders thus enabling him to continue holding, without any election, the position of present and, finally, that of manager; and that, without the knowledge and consent of the stockholders and of the board of directors, the said defendant installed a small rice mill for converting rice husk into "tiqui-tiqui", the income of which was never turned over or reported to the treasurer of the corporation. The defendants objected to the petition for the appointment of a receiver OTG that the court had no jurisdiction over the Paraaque Rice Mill, Inc., because it had not been included as party defendant in this case and that, therefore the court could not properly appoint a receiver of the corporation pendente lite. On October 31, 1934, the trial court appointed Emilio Figueroa, as receiver of the corporation, after giving a bond in the amount of P2K. An urgent for the reconsideration of this order was subsequently filed by counsel for the defendant but was later on denied by the court. On November 8, 1934, the trial court, having heard the case on its merits rendered a decision, the dispositive part of which is as follows: (text in Spanish but I read it in line with the defendants assignment of errors na lang to understand) Trial Court (TC) appointed a receiver of the corporation "Paraaque Rice Mill, Inc.," on October 31, 1934. Paraaque Rice Mill, Inc. is not a necessary party to the case. TC ordered the defendant Teodorico B. Santos to pay the corporation whatever sum or sums which may be found owing to said corporation, in accordance with the said accounting to be one by him. TC ordered the removal of the defendants from their office as members of the board of directors of the corporation. Higino Angeles is entitled to have in his name 600 shares of stock of the par value of P15,000. On November 21, 1934, the defendants-appellants, moved for reconsideration of the decision and at the same time prayed for the dismissal of the case, because of defect of parties defendant. On December 6, 1934, the Paraaque Rice Mill, Inc., thru counsel for the defendants, entered a special appearance for the sole purpose of objecting to the order of the court of October 31, 1934, appointing a receiver, on the ground that the Paraaque Rice Mill, Inc., was not a party to the proceedings. On December 8, 1934, the defendants excepted to the decision of the trial court and moved for a new trial on the ground that the evidence presented was insufficient to justify the decision and that said decision was contrary to law. The motions for reconsideration and new trial and the special appearance were, by separate orders bearing date of December 19, 1934, denied by the trial court. Case was elevated to the SC by bill of exceptions. Defendants contentions: (in case Sir asks) 1. The lower court erred in holding that it has jurisdiction to appoint a receiver of the corporation, "Paraaque Rice Mill, Inc.," on October 31, 1934. 2. The lower court erred in overruling the motion of the defendants the include the defendant corporation as party defendant and in holding that it is not a necessary party. 3. The lower court erred in not granting a motion for a new trial because there is a defect of party defendant. 4. The lower court erred in not dismissing the case because a necessary defendant was not made a party in the case. 5. The lower court erred in ordering the defendant Teodorico B. Santos to render a detailed accounting of the properties, funds and income of the corporation "Paraaque Rice Mill, Inc.," from the year 1931 to this date. 6. The lower court erred in condemning the defendant Teodorico B. Santos to pay the corporation whatever sum or sums which may be found owing to said corporation, in accordance with the said accounting to be one by him.

7. The lower court erred in ordering the destitution of the defendants from their office as members of the board of directors of the corporation, until the new election of the stockholders which shall be held once the decision has become final. 8. The lower court erred in declaring that Higino Angeles is entitled to have in his name 600 shares of stock of the par value of P15,000. 9. The lower court erred in overruling and denying appellants' motion for the reconsideration and the dismissal of the case dated November 21, 1934. 10. The lower court erred in denying the motion of these appellants for new trial. ISSUES: (in relation to removal of directors Sec. 28) W/N the lower court has jurisdiction in appointing a receiver of the corporation pendente lite? W/N lower court erred in ordering the removal of the defendants from their offices as members of the board of directors of the corporation. HELD: *First, second, third and fourth assignment of error: OVERRULED *Fifth and sixth assignment of error: MODIFIED. The decision of the lower court in this respect is therefore modified so that the defendant Santos shall render a complete accounting of all the corporate properties and funds that may have come to his possession during the period mentioned in the judgment of the lower court to the new board of director to be elected by the stockholders. *Seventh assignment of error: SUSTAINED. *Eighth assignment of error: No error in the decision of the lower court ordering the issuance of a certificate for 600 shares of stock of the total par value of P15,000 to Higinio Angeles. *Ninth and tenth assignment of error: UNNECESSARY to discuss accdg to SC. RATIO: 1. YES. There is ample evidence in the present case to show that the defendants have been guilty of breach of trust as directors of the corporation and the lower court so found. The board of directors of a corporation is a creation of the stockholders and controls and directs the affairs of the corporation by allegation of the stockholders. But the board of directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good faith, care and diligence in the administration of the affairs of the corporation and should protect not only the interest of the majority but also those of the minority of the stock. Where a majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that 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. The action in such a case is said to be brought derivatively in behalf of the corporation to protect the rights of the minority stockholders thereof. (Everett vs. Asia Banking) GEN RULE: Shareholders cannot ordinarily sue in equity to redress wrong done to the corporation, but that the action must be brought by the board of directors. EXCEPTION: However, if the defendants in a case constitute the majority of the BoD and that the plaintiff is under the complete control of the former/principal defendants, it is obvious that a demand upon the BoD to institute action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts.

The action having been properly brought and by the lower court entertained it was within its power, upon proper showing, to appoint a receiver of the corporation pendente lite (secs. 173, 174 Code of Civil Procedure). The appointment of a receiver upon application of the minority stockholders is power to be exercised with great caution. But this does not mean that right of the minority stockholders may be entirely disregarded, and where the necessity has arisen, the appointment of a receiver for a corporation is a matter resting largely in the sound discretion of the trial court. Counsel for appellants argue that the appointment of a receiver pendente lite in the present case has deprived the corporation, Paraaque Rice Mill, Inc., of property without due process of law. This arguments holds no water since the receiver was precisely appointed to preserve the properties of the corporation. The receivership in this case shall continue until a new board of directors shall have been elected and the corporation. 2. YES. The appellants contend (7th assignment of error) that the lower court erred in ordering the removal of the defendants from their offices as members of the board of directors of the corporation. Error sustained. The Corporation Law, (Act. No. 1459 Corp Law at this time), in section 29 to 34, provide for the election and removal of the directors of a corporation. These sections do not confer expressly upon the court the power to remove a director of a corporation. In some jurisdictions, statutes expressly provide a more or less summary method for the confirmation of the election and for the motion of the directors of a corporation. This is true in New York, New Jersey, Virginia and other states of the American Union. There are abundant authorities, however, which hold that if the court has acquired jurisdiction to appoint a receiver because of the mismanagement of directors, these directors may thereafter be removed and others appointed in their place by the court in the exercise of its equity jurisdiction. In the present case, however, the properties and assets of the corporation being amply protected by the appointment of a receiver and view of the statutory provisions above referred to, the Court is of the opinion that the removal of the directors is, under the circumstances, unnecessary and unwarranted. DISPOSITIVE PORTION: (1) That the action in the present case was properly instituted by the plaintiff as stockholders for and in behalf of the corporation Paraaque Rice Mill, Inc., and other stockholders of the said corporation; (2) That the lower court committed no reviewable error in appointing a receiver of the corporation pendente lite; (3) That the lower court committed no error in ordering an election of the new board of directors, which election shall be held within thirty days from the date this decision becomes final; (4) That Teodorico B. Santos shall render an accounting of all the properties, funds and income of the corporation which may have come into his possession to the new board of directors; (5) That the receiver, Emilio Figueroa, shall continue in office until the election and qualification of the members of the new board of directors; (6) That upon the constitution of the new board of directors, the said receiver shall turn over all the properties of the corporation in his possession to the corporation, or such person or persons as may be duly authorized by it; and. (7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of stock at the par value of P15,000 and the lower court committed no error in ordering the issuance of the corresponding certificate of stock.

Campbell v. Leows Incorporated Campbell vs leows incorporated Plaintiff = Campbell

respondent = loews inc DOCTRINE: a director sought to be removed for a cause is entitled to an opportunity to be heard before the stockholders vote. Stockholders have the power to vote for the removal of a director. NATURE: decision on plaintiffs request for a preliminary injunction to restrain the holding of a stockholders meeting from considering certain matters or to prevent the voting of certain proxies. NOTE: number 8-14 ung related sa directors since eto ung topic sa campos. FACTS: two factions have been fighting for leows control. One faction is lead by joseph Tomlinson (Tomlinson faction) and the other is headed by leows president, Joseph Vogel (Vogel faction). At the annual meeting in February, each factions nominated 6 directors and they nominated a 13th director or a neutral director. July 17-18, 2 out of 6 Vorgel directors and the 13th director resigned. A quorum is seven. On the 19th of July, Tomlinson faction asked that a meeting be called for July 30 to address the problem of filling director vacancies. On the eve of this meeting, one of Tomlinson director resigned. This left 5 tomlinson director and 4 vogel directors. Only the 5 tomlinson director attended the meeting. The court ruled in Tomlinson vs leows inc that the election of 2 directors attended by 5 tomlinson directors was not valid for want of quorum. ON july 29, the day before the noticed directors meeting, vogel as president sent out a notice calling a stockholders meeting for September 12 for the following purposes: 1. To fill director vacancies 2. To amend by-laws to increase the number of the board from 13-19; to increase the quorum from 7-10 and to elect six additional directors 3. To remove Stanley Meyer and Joseph Tomlinson as directors and fill such vacancies. Later, another notice for September 12 was sent as well as a proxy statement went out over the signature of Joseph R. Vogel as president. It was accompanied by a letter from Vogel soliciting stockholder support for the matters abovementioned. Thereafter, plaintiff began this action. Plaintiff contentions: 1) Plaintiff contends that president had not authority in fact to call a special meeting of stockholders to act upon policy matters which have not been defined by the board of directors ANSWER: bylaws: Sec 7 of Article I provides: special meetings of the stockholders for any purpose other than those regulated by statute, may be called by the president. Even though Sec 8(11) of Article 2 provides that a board may call a special meeting of stockholders for any purpose, still according to the by-laws of leows, president has the power to state these broad purposes in his call. 2) Plaintiff argues that if this by-law purports to give the president the power to call special stockholders meetings for the purposes here stated, then it is contrary to 8 DEL. C. S 141 (a) which provides: the business of every corporation organized under the provision of this chapter shall be managed by a board of directors except as hereinafter or in its certificate of incorporation otherwise provided. ANSWER: the call of stockholders meeting for the purposes mention would not impinge upon

the power given the directors by the statute. A by law giving the president the power to submit matters for stockholder action presumably only embraced matters which are appropriate for stockholder action. 3) Plaintiff contends that president has no authority, without board approval to propose an amendment of the by-laws to enlarge the BODs. ANSWER: the by-law of section 7 which is broad covers this action; hence the president has the power to do so. 4) Plaintiff contends that the president had no power to call stockholders meeting to fill vacancies on the board. ANSWER: first of all, the by-laws permit the president to call a meeting for any purpose and therefore include the power to call a meeting to fill vacancies. The fact that the stockholders may on their initiative have the right to call a meeting for that purpose does not seem to be a sufficient reason for implying that the president is thereby deprived of such power. (note: ART V S 2 of the bylaws provide the power of the stockholders to fill vacancies) 5) Plaintiff contends that the presidents action in calling a stockholders meeting to fill vacancies was unlawful because it was in conflict with the previously scheduled action by the board on the same subject. (note: diba sabi sa facts nagschedule na ng meeting ung isang faction, tapos later si president nag send ng notice of meeting) ANS: the proxy statement sent out by the president states that the stockholders would ONLY fill the two vacancies, IF their election by the board was held to be INVALID. (eh invalid ung meeting nung TOMLINSON FACTION kasi want of quorum hence, the issue is moot) 6) Plaintiff contends that the president had no power to fix the record date for voting purposes. ANSWER: president had the power to call the meeting for the purpose noticed because it turned out that the executive committee fixed the record date and PLAINTIFFs counsel did not attack the action of the executive committee, in effect, plaintiff abandoned this contention. 7) Plaintiff argues that since Loews by-laws provide that the stockholders may fill vacancies, and since the courts have construed vacancy not to embrace newly created directorships, the attempt call by the president for the purpose of filing newly created directorships was invalid. ANSWER: according to jurisprudence, stockholders of have the right between annual meetings to elect directors to fill newly created directorships, hence the action of the president is valid. 8) Plaintiff argues that the stockholders of a Delaware Corporation have no power to remove directors from office even for cause and thus the call for that purpose is invalid. ANSWER: stockholders have the power to remove a director for a cause. This power must be implied when we consider that the director who is guilty of the worst sort of violation of his duty could nevertheless remain on the board. It is hardly to be believed that a director who is disclosing corporations trade secrets to a competitor would be immune from removal by the stockholders. PLAINTIFF correctly states that there is no provision in our law providing for the removal of directors by stockholder action. Plaintiff also notes that the Loews by-laws provide for the removal of officers and employees but not directors. But the court considered it pertinent to consider whether the absence of the power can be said to subject

the corporation to the possibility of real damage. Considering the damage a director might be able to inflict upon his corporation, the court believed that the doubt must be resolved by construing the statutes and by-laws as leaving untouched the question of director removal for cause. the court is to conclude on reason that the stockholders have such inherent power. The stockholders do have the power to remove directors for cause. 9) Plaintiff argues that the removal of Tomlinson and Meyer as directors would violate the right of minority shareholder to representation on the board and would be contrary to the policy of the Delaware regarding cumulative voting. ANSWER: stockholders have the power to remove a director for cause even where there is a provision for cumulative voting. To remove such power would open the corporation for real damage because directors are now open to fraudulent transactions and stockholders cannot remove them for any cause. 10) Plaintiff contends that the stockholders can vote to remove a director for cause only after such director has been given adequate notice of charges of grave impropriety and afforded an opportunity to be heard. Defendant contends that a stockholder has no standing to make the contention that the foregoing requirements have not been met. ANSWER: a stockholder has standing for such. Otherwise a director could be removed and his successor could be appointed and participate in important board action before the illegality of the removal was judicial established. Court conclude that the plaintiff can raise the issue as to the propriety of the removal procedure. 11) Plaintiff contention that there must be notice of charges as mentioned above in number 10. ANSWER: yes, the court agrees with plaintiff that the power of removal cannot be exercised in an arbitrary manner. 12) Plaintiff asserts that no specific charges have been served upon the two directors sought to be ousted; notice of special meeting fails to contain a specific statement of the charges; the proxy statement which accompanied the notice also failed to notify the stockholders of the specific charges; and that it does not inform the stockholders that the accused must be afforded an opportunity to meet the accusations before a vote is taken. ANSWER: the proxy statement specifically recites that the two directors are sought to be removed for the reasons stated in the presidents accompanying letter. The court said that the accompanying letter was sufficient compliance with the notice requirement. 13) Plaintiff contends that the charges against the two directors do not constitute cause as a matter of law. ANSWER: court first narrated the presidents letter. (Tomlinson and meyer failed to cooperate with Vogel in his announced program for rebuilding the company; that their purpose has been to put themselves in control; that they made baseless accusations against him and other management personnel; and immediately proceeded upon a planned scheme of harrament; they were rude to the personnel; Tomlinson sent daily letters to the directors making serious charges directly) Eto na sagot : a charge that the directors desired to take over control of the corporation is not a reason for their ouster. However, a charge in calculated plan of harassment to the detriment of corporation is a valid cause. In so concluding, the court expresses no opinion as to the truth of the charges. Therefore, a planned scheme of harassment as detailed in the letter constitutes a justifiable legal basis for removing a director.

14) Next issue to consider : whether the directors sought to be removed have been given a reasonable opportunity to be heard by the stockholders on the charges made ANSWER: NO, defendant corporation flatly refused to give Tomlinson director of a stockholders list. By this action, the corporation through the Vogel group has deliberately refused to afford the directors in question an adequate opportunity to be heard by the stockholders on the charges made. This is contrary to the legal requirements which must be met before a director can be removed for a cause. Also, only the Vogel accusations accompanied the request for a proxy, thus while the stockholder could for or against removal, he would be voting with only one viewpoint presented. In sum, an opportunity must be provided such directors to present their defense to the stockholders by a statement which must accompany or precede the initial solicitation of proxies seeking authority to vote for the removal of such director for cause. corporation has a duty to see that this opportunity was given the two directors involved. Therefore, proxy solicited by the Vogel group based upon unilateral presentation of the facts by those in control of the corporate facilities, must be declared invalid insofar as they purport to give authority to vote for the removal of the directors for cause. A preliminary injunction will issue restraining the corporation from recognizing or counting any proxies held by the VOGEL group and others insofar as such proxies purport to grant authority to vote for the removal of Tomlinson and Meyer as directors of the corporation.

De la Rama v. Ma-Ao Sugar Central - Jez Zapanta Gokongwei v. SEC - Ali Zapata In re Giant Portland Cement Co. - J.r. DOCTRINE: IN THE ELECTION OF DIRECTORS, VOTES MADE BY A PROXY OF THE RECORD OWNER USING STOCK SOLD WITHIN 20 DAYS OF THE ELECTION IS VALID; PROVIDED IT IS NOT INJURIOUS TO THE TRANSFEREE OF STOCK FACTS: The case stems from the results of an Election for the Board of Directors of the Giant Portland Cement Co. held in February 24, 1941 Nine Directors of the Corporation were to be elected, and two tickets were nominated: The Management and The Opposition. However, four persons were nominated on both tickets resulting in their unquestionable election. The Election resulted with the 4 nominees on both tickets and the 5 nominees from The Opposition being elected. Petitioners Brown and Murray question the results of the Election, filling a case in the Court of Chancery of Delaware Petitioners contend that the election inspectors were incorrect in counting certain votes for The Opposition

The contention is based on these facts: o In February 4, 1941 (20 days prior to the Election), in a resolution, the Board of Directors closed the Stock Transfer Books of the Corporation o In Sec. 17 of the General Corporation Law, it states: (1) each stockholder, shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock (2) except where the transfer books of the corporation shall have been closed or a date shall have been fixed as a record date for the determination of its stockholders entitled to vote xxx no share of stock shall be voted on at any election for directors which shall have been transferred on the books of the corporation within twenty days next preceding such election of directors (4) only such stockholders, as shall be stockholders of record on the date so fixed, shall be entitled to xxx vote at such meeting o Section 17 was also incorporated in the by-laws of the Corporation o During this period, no stock was transferred on the corporate records. o However, certain shares were sold by the record owners and the stock certificates were duly assigned and delivered to the purchasers prior to the stockholders meeting. o The record owners who sold their shares assigned proxies to vote based on shares they already sold o Of the shares sold within the 20 day period, 5,472 were voted in favor of The Opposition while 1,384 shares were voted for The Management. In essence, if these votes are not counted it may affect the result of the election in favor of The Management ISSUE: W/N certain votes for The Opposition should not be counted HELD: NO In accordance with the first and second paragraph of Section 17, stock transferred on the books within 20 days prior to stockholders meeting for the election of directors are temporarily disfranchised and cannot be voted either by the transferor or the transferee However, based on the fourth paragraph of Section 17, the stockholders of record on the date fixed are the ones entitled to vote The proxies who voted at the stockholders meeting were proxies assigned by the record owners, and NOT the purchasers As between the transferor (record owner) and the transferee (purchaser), the legal title of the stock is with the transferee. However, in relation to the corporation, until such transfer of stock is recorded, the recognized owner is the one on record. The votes of the proxy assigned by the record owners are, therefore, valid in the elections. It is true that the record owner/transferor would be liable to the purchaser/transferee if the votes were injurious to the latter. However, no evidence was presented that showed the purchasers of the stock objected to the votes made by the proxies of the record owners. In

fact, evidence was presented wherein the votes casted by the proxies were in accordance with the wishes of the purchasers. In any case, absent evidence, consent is presumed.

State ex. Rel. Everett Trust & Savings Bank v. Pacific Waxed Paper Co., et al - Klaire Esden DOCTRINE: The general rule is that a proxy is revocable even though by its express terms it is irrevocable. The exceptions are: (a) when authority is coupled with interest; (b) where authority is given as part of a security and is necessary to effectuate such a security. It is coupled with interest when there is interest in the share themselves (such as a right of first refusal in case of sale) and the rights inherent in the shares (such as voting rights; capacity to obtain majority) When a corporation is dissolved by its voluntary acts, the corporation remains bound by its outstanding executory contracts.

FACTS: - Alvah H.B. Jordan (Jordan) was the owner of all the capital stock of Paine Mitchell Co and ONE preferred share of Pacific Wax Paper Company - Engle was was the owner of preferred and common stocks of Pacific Waxed Paper Co, all stocks have voting power. - On July 20, 1931 Paine Mitchell owned common stock of Pacific Waxed such that the combined shares of Engle and Paine Mitchell in the company were more than majority of all the issued stocks. - Along with this,Engle and Paine Mitchell entered into an agreement of first refusal in case one would decide to sell his share. " The other party had the exclusive right and option to purchase the stock proposed to be sold for the price and upon the terms and conditions stated in the notice" - Other than this, Engle and Jordan (as owners) entered into an agreement (March 24, 1932) which had the ff. conditions: 1) Continued cooperation between the companies for its efficiency even after the death of Engle or Jordan 2) In case of Engle's death, and if Paine Mitchell still owns stocks of Pacific Waxed, Paine Mitchell should be entitled to vote in behalf of Engle's shares at ALL meetings of stockholders of Pacific Waxed Company 3) Paine Mitchell will then be an irrevocable proxy of Engle's heirs and legal representatives. 4) It was provided that in the event of Jordan's death, the same method shall apply. - Unfortunately, Jordan died first, testate. He named Everett Trust and Savings Bank as his executor - Everett cause the voluntary dissolution of Paine Mitchell and as a result, the stock owned it in Pacific Waxed was transferred to Everett (as executor) - Everett (as executor) sought to vote for the transfer of such shares in the stockholder's

meeting. Pacific Waxed did not recognize his right and upheld the validity of the irrevocable proxy agreement in favor of Engle ISSUE: WON the irrevocable proxy agreement was valid? HELD: YES. When a corporation is dissolved by its voluntary acts, the corporation remains bound by its outstanding executory contracts. General rule: Proxy given by a stockholder to vote his corporate stock at a meeting of stockholders is revocable by him even though the proxy by its terms is expressly made revocable Exceptions: A) Where the authority or power if coupled with an interest - Engle has this. More than being an agent of Paine Mitchell, he has interest in its share because it is linked with his voting power to control the affairs of Pacific Waxed. B) Where the authority is given as part of a security or is necessary to effectuate such a security It was clear was the agreement that the parties intended that Paine Mitchell stock should be used in conjunction with Engle's stock so that policies of Pacific Waxed could be controlled. The control of affairs of the corp was of such importance to Engle that this merging of share made him more secure of his dominance in Pacific Waxed

Alejandrino v. De Leon - Gab Uy Campbell v. Leows Inc. - Eunice Rosenfield v. Fairchild Engine and Airplane Co. - Aiyu Duffy v. Loft, Inc. - Vanessa Everett vs. The Asia Banking Corporation - Jon (Note: Sabog yung case pero if ever you have questions, you can ask me personally) Plaintiff-Appellants: Harrie Everett, Cral Clifford, Ellis Teal, George Robinson Stockholders of the Teal and Company

Note: Teal and Company Engaged in the business of merchandising of automobiles, trucks, tractors, spare parts and accessories and the repairing thereof Defendants-Appellees: Asia Banking Corporation; Nicholas E. Mullen, Eric Barclay, Alfred Kelly, John Mears, Charles Macintosh Officers of Asia Banking Corporation Nature: Appeal from a decision of the CFI sustaining a demurrer to the complaint Facts: In the year 1921, Teal and Company (TAC) has become indebted to the firm of H.W. Peabody and Company in the sum of P300,000 for the tractors, plows and parts which it has ordered and which have been delivered to it. The Asia Banking Corporation (ABC) and other banks in Manila held drafts accepted by TAC under said H.W. Peabody and Companys guarantee. TAC made payments on its indebtedness through ABC to H.W. Peabody and Company, amounting to the sum of at least P150,000. TAC had ordered another lot of tractors from Smith, Kirkpatrick and Company but that shipment of such tractors had been delayed until credit had been rescinded by ABC and that upon such rescission Smith, Kirkpatrick and Co., had been advised by telegraph that the order was cancelled and not to ship the tractors. Regardless of having been advised, Smith Kirkpatrick and Co. still shipped the tractors which were stored in a warehouse in Manila with the concurrence of ABC. On March 1921, ABC persuaded TAC and H.W. Peabody and Co. and Smith, Kirkpatrick and Co. to enter into a creditors agreement with itself, wherein it was mutually agreed that neither of the parties should take action to collect its debts from TAC for the term of two years after the date thereof. On 29 December 1922, TAC was indebted to ABC in about the sum of P750000 which said sum was secured by a mortgage. Toward the end of the year 1922, ABC, through its manager Mullen, represented to TAC and its managers that: * For the protection of both ABC and TAC, it was advisable for them both that the ABC should temporarily obtain control of the management and affairs of TAC in order that the affairs of TAC could be conducted by ABC without interference or hindrance from outside * It would be necessary for the stockholders in the Company to place their shares in a Voting Trust to be held by ABC. * ABC would then finance TAC under its own supervision on the condition that if TAC would be successful and in a position to resume independently its operation, the said trust would be terminated and the stocks returned to its true owners.

* The stocks would also be returned if ABC would decide to discontinue its operation under the said trust. It was further represented by ABC and Mullen that in order to protect the mutual interests of ABC and TAC, it was necessary to carry into effect the said proposed voting trust without the knowledge of its creditors (H.W. Peabody and Company and Smith, Kirkpatrick and Co.) and thereby place ABC in an advantageous position with regard to TAC. ABC and TAC signed the Memorandum of Agreement and the Voting Trust Agreement Shortly thereafter, Mullen caused and procured by the virtue of the powers delegated in the said voting trust: (1) the displacement and removal from the Board of Directors of TAC of each and every person who was at the time of the execution of the said voting trust a stockholder in TAC and (2) the substitution thereto by the defendants (Mullen, etc.) or of other employees of ABC. On 18 August 1923, the defendants (Mullen, etc.) made, executed and filed in the Bureau of Commerce and Industry of the Philippine Islands, articles of incorporation of a corporation called the Philippine Motors Corporation At the time of such incorporation, all of the defendants were an officer or employee of ABC. Subsequently, ABC turned over to the Philippine Motors Corporation all of the business and assets of TAC. Philippine Motors Corporation continued to conduct the business of TAC to the disregard and detriment to the rights of plaintiffs (Everett, etc.) ABC prevented the plaintiffs (Everett, etc.) from obtaining any information regarding any transactions which it had performed with Philippine Motors Corporation and TAC. Because of the aforesaid circumstances, the plaintiffs filed a complaint: a. Enjoining and restraining the defendants and each of them from transferring the corporation called Philippine Motors Corporation or any of the capital stock therein to any person or corporation during the pendency of this action b. Ordering defendants to cancel the Voting trust and to return to these plantifss their shares of stock of Teal and Company. c. Decreeing that the defendants and each of them make a full and true discovery of all the facts in relation to the formation, incorporation and ownership of Philippine Motors Corporation and all dealings and transactions between ABC and the Philippine Motors Corporation for plaintiffs to know whether said Philippine Motors Corporation is in fact ABC operating under a disguise. To this complaint, the defendants filed a demurrer on the grounds that (1) it is ambiguous, unintelligible and uncertain; (2) that the plaintiffs have not the legal capacity to bring this action; (3) that the complaint does not state facts sufficient to constitute a cause of action, and (4) that there is a defect or misjoinder of parties defendant. RTC: Sustained defendants demurrer; dismissed the case.

Issue: Whether the demurrer of the complaint is in order. Held: No; The complaint is a bill of discovery and the proceeding is primarily one for equitable relief, though it may eventually develop into an action at law. Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that action must be brought by the Board of Directors, the defendants and the court below held- that TAC is a necessary party plaintiff and that the plaintiff stockholders, not having made any demand on the Board to bring the action, are not the proper parties. BUT, it is alleged in the complaint and admitted through the demurrer that TAC is under the complete control of the principal defendants and it would be obvious that a demand upon the Board of Directors to institute an action and prosecute the same effectively would have been useless. Dispositive Portion: In our opinion, the plaintiffs state a good cause of action for equitable relief and their complaint is not in any respect fatally defective. The judgment of the court below is therefore reversed, the defendants demurrer is overruled, and it is ordered that the return of the record to the Court within ten days from the return of the records to the CFI. So ordered. Mackin, et al v. Nicollet Hotel, Inc. - Kelsey

National Investment & Development Corp. v. Aquino - Kikoy