Cagayan Fishing Development Co., Inc., vs.

Sandiko Facts: Manuel Tabora is the registered owner of four parcels of land. To guarantee the payment of two loans, Manuel Tabora, executed in favor of PNB two mortgages over the four parcels of land between August, 1929, and April 1930. Later, a third mortgage on the same lands was executed also on April, 1930 in favor of Severina Buzon to whom Tabora was indebted. On May, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation. The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry only on October, 1930 (Exhibit 2). A year later, the board of directors of said company adopted a resolution authorizing its president to sell the four parcels of lands in question to Teodoro Sandiko. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale where the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land. Exhibit C is a promissory note drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of mortgage executed where the four parcels of land were given a security for the payment of the promissory note, Exhibit C. The defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this action in the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum stated in the promissory note. After trial, the court rendered judgment absolving the defendant. Plaintiff presented a motion for new trial, which motion was denied by the trial court. After due exception and notice, plaintiff has appealed to this court and makes an assignment of various errors. Issue: Whether Exhibit B, the deed of sale executed in favor of Teodoro Sandiko, was valid. Held: No, it was not.

The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months before the incorporation of the company. Unquestionably, a duly organized corporation has the power to purchase and hold such real property as the purposes for which such corporation was formed may permit and for this purpose may enter into such contracts as may be necessary. But before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing of articles of incorporation. In the case before us it can not be denied that the plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. Not being in legal existence then, it did not possess juridical capacity to enter into the contract. Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized. There are, of course, exceptions, but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary.

Hall vs. Piccio Facts: Petitioners Arnold Hall, Bradley Hall and Private Respondents Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged the articles of incorporation of the Far Eastern Lumber and Commercial Co., Inc. organized to engage in a general lumber business to carry on as general contractors, operators and managers. Attached to the articles was an affidavit of the treasurer stating that 23, 428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation. Immediately after the execution of the articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers. Then, the articles of incorporation were filed in SEC for the issuance of the corresponding certificate of incorporation. Pending action on the articles of incorporation, Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella filed a civil case against the Halls alleging among other things that Far Eastern Lumber and Commercial Co, was an unregistered partnership and that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. The Halls filed a Motion to Dismiss contesting the courts jurisdiction and the sufficiency of the cause of action but Judge Piccio ordered the dissolution of the company and appointed a receiver. Issues: (1) Whether or not the court had jurisdiction to decree the dissolution of the company because it being a de facto corporation, dissolution may only be ordered in a quo warranto proceeding in accordance with Section 19. (2) Inasmuch as the Browns had signed the articles of incorporation, whether or not they are estopped from claiming that it is not a corporation but only a partnership. Held: (1) YES. The court had jurisdiction but Section 19 does not apply. First, not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its stockholders may not probably claim in good faith to be a corporation. The immunity of collateral attack is granted to corporations claiming in good faith to be corporation under this act. Such a claim is compatible with the existence of errors and irregularities but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law, the claim to be a corporation under this act could not be made in good faith. Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state. (2) NO. The Browns are not estopped. Because the SEC has not yet issued the corresponding certificate of incorporation, all of them know or ought to know that the personality of a corporation begins to exist only from the moment such certificate is issued and not before. The complaining associates have not represented to the others that they were incorporated any more than the latter had made similar representations to them. And as nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not apply. This is not an instance requiring the enforcement of contracts with the corporation through the rule of estoppel.

ALBERT VS UNIVERSITY PUBLISHING CO., INC. (Jan. 30, 1965) Reynaldo Lozano vs Eliezer De Los Santos Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego, its President, whereby University would pay plaintiff for the exclusive right to publish his revised Commentaries on the Revised Penal Code. The contract stipulated that failure to pay one installment would render the rest of the payments due. When University failed to pay the second installment, Albert sued for collection and won. However, upon execution, it was found that University was not registered with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego as the real defendant. University opposed, on the ground that Aruego was not a party to the case. The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but the court to believe in such representation. Aruego, acting as representative of such non-existent principal, was the real party to the contract sued upon, and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent. The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was Aruego who had induced him to act upon his (Aruego's) willful representation that University had been duly organized and was existing under the law.

Corporation Law Jurisdiction of the SEC

Facts: Reynaldo Lozano was the president of KAMAJDA (Kapatirang MabalacatAngeles Jeepney Drivers Association, Inc.). Antonio Anda was the president of SAMAJODA (Samahang Angeles-Mabalacat Jeepney Operators and Drivers Association, Inc.). In 1995, the two agreed to consolidate the two corporations, thus, UMAJODA (Unified Mabalacat-Angeles Jeepney Operators and Drivers Association, Inc.). In the same year, elections for the officers of UMAJODA were held. Lozano and Anda both ran for president. Lozano won but Anda alleged fraud and the elections and thereafter he refused to participate with UMAJODA. Anda continued to collect fees from members of SAMAJODA and refused to recognize Lozano as president of UMAJODA. Lozano then filed a complaint for damages against Anda with the MCTC of Mabalacat (and Magalang), Pampanga. Anda moved for the dismissal of the case for lack of jurisdiction. The MCTC judge denied Andas motion. On certiorari, Judge Eliezer De Los Santos of RTC Angeles City reversed and ordered the dismissal of the case on the ground that what is involved is an intra-corporate dispute which should be under the jurisdiction of the Securities and Exchange Commission (SEC). ISSUE: Whether or not the RTC Judge is correct. HELD: No. The regular courts have jurisdiction over the case. The case between Lozano and Anda is not an intra-corporate dispute. UMAJODA is not yet incorporated. It is yet to submit its articles of incorporation to the SEC. It is not even a dispute between KAMAJDA or SAMAJODA. The controversy between Lozano and Anda does not arise from intra-corporate relations but rather from a mere conflict from their plan to merge the two associations.

MUNICIPALITY OF MALABANG V. BENITO (29 SCRA 533; 1969) WON a corporation organized under a statute subsequently declared void acquires status as de facto corporation. No. A corporation organized under a statute subsequently declared invalid cannot acquire the status of a de facto corporation unless there is some other statute under which the supposed corporation may be validly organized. Hence, in the case at bar, the mere fact that the municipality was organized before the statute had been invalidated cannot conceivably make it a de facto corporation since there is no other valid statute to give color of authority to its creation.

NOTE: Regular courts can now hear intra-corporate disputes (expanded jurisdiction).

Manuela Vda. De Salvatierra vs Lorenzo Garlitos

SALVATIERRA VS GARLITOS (103 Phil. 757; 1958) Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. Judgment against both was obtained. President complains for being held personally liable. He is liable. An agent who acts for a non-existent principal is himself the principal. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk arising from the transaction. ASIA BANKING VS STANDARD PRODUCTS (46 Phil. 145; 1924) The corporation sued another corporation a promissory note. The defense was that the plaintiff was not able to prove the corporate existence of both parties. The defendant is estopped from denying its own corporate existence. It is also estopped from denying the others corporate existence. The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association is such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped from denying its corporate existence.

Corporation Law Separate and Distinct Personality When Not Applicable

Facts: In 1954, Manuela Vda. De Salvatierra entered into a lease contract with Philippine Fibers Producers Co., Inc. (PFPC). PFPC was represented by its president Segundino Refuerzo. It was agreed that Manuela shall lease her land to PFPC in exchange of rental payments plus shares from the sales of crops. However, PFPC failed to comply with its obligations and so in 1955, Manuela sued PFPC and she won. An order was issued by Judge Lorenzo Garlitos of CFI Leyte ordering the execution of the judgment against Refuerzos property (there being no property under PFPC). Refuerzo moved for reconsideration on the ground that he should not be held personally liable because he merely signed the lease contract in his official capacity as president of PFPC. Garlitos granted Refuerzos motion. Manuela assailed the decision of the judge on the ground that she sued PFPC without impleading Refuerzo because she initially believed that PFPC was a legitimate corporation. However, during trial, she found out that PFPC was not actually registered with the Securities and Exchange Commission (SEC) hence Refuerzo should be personally liable. ISSUE: Whether or not Manuela is correct. HELD: Yes. It is true that as a general rule, the corporation has a personality separate and distinct from its incorporators and as such the incorporators cannot be held personally liable for the obligations of the corporation. However, this doctrine is not applicable to unincorporated associations. The reason behind this doctrine is obvious-since an organization which before the law is nonexistent has no personality and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. In this case, Refuerzo was the moving spirit behind PFPC. As such, his liability cannot be limited or restricted that imposed upon [would-be] corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of such transaction.

LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953) The La Campana Gaugau Packing and La Campana Coffee Factory were operating under one single business although with 2 trade names. It is a settled doctrine that the fiction of law of having the corporate identity separate and distinct from the identity of the persons running it cannot be invoked to further the end subversive of the purpose for which it was created. In the case at bar, the attempt to make the two businesses appear as one is but a device to defeat the ends of the law governing capital and labor relations and should not be permitted to prevail.

International Express Travel & Tour Services, Inc. vs Court of Appeals

MARVEL BLDG. CORP. V. DAVID (94 Phil. 376; 1954) The fact that: certificates in possession of Castro were endorsed in blank; Castro had enormous profits and had motive to hide them; other subscribers had no incomes of sufficient magnitude; and directors never met; shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may be pierced. Adelio Cruz vs Quiterio Dalisay

Corporation Law Corporation by Estoppel When Applied

In 1989, International Express Travel & Tour Services, Inc. (IETTI), offered to the Philippine Football Federation (PFF) its travel services for the South East Asian Games. PFF, through Henri Kahn, its president, agreed. IETTI then delivered the plane tickets to PFF, PFF in turn made a down payment. However, PFF was not able to complete the full payment in subsequent installments despite repeated demands from IETTI. IETTI then sued PFF and Kahn was impleaded as a co-defendant. Kahn averred that he should not be impleaded because he merely acted as an agent of PFF which he averred is a corporation with separate and distinct personality from him. The trial court ruled against Kahn and held him personally liable for the said obligation (PFF was declared in default for failing to file an answer). The trial court ruled that Kahn failed to prove that PFF is a corporation. The Court of Appeals however reversed the decision of the trial court. The Court of Appeals took judicial notice of the existence of PFF as a national sports association; that as such, PFF is empowered to enter into contracts through its agents; that PFF is therefore liable for the contract entered into by its agent Kahn. The CA further ruled that IETTI is in estoppel; that it cannot now deny the corporate existence of PFF because it had contracted and dealt with PFF in such a manner as to recognize and in effect admit its existence. ISSUE: Whether or not the Court of Appeals is correct. HELD: No. PFF, upon its creation, is not automatically considered a national sports association. It must first be recognized and accredited by the Philippine Amateur Athletic Federation and the Department of Youth and Sports Development. This fact was never substantiated by Kahn. As such, PFF is considered as an unincorporated sports association. And under the law, any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent. Kahn is therefore personally liable for the contract entered into by PFF with IETTI. There is also no merit on the finding of the CA that IETTI is in estoppel. The application of the doctrine of corporation by estoppel applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. In the case at bar, IETTI is not trying to escape liability from the contract but rather is the one claiming from the contract.

Corporation Law Piercing the Veil of Corporate Fiction Exercised by the Wrong Person
In 1984, the National Labor Relations Commission issued an order against Qualitrans Limousine Service, Inc. (QLSI) ordering the latter to reinstate the employees it terminated and to pay them backwages. Quiterio Dalisay, Deputy Sheriff of the court, to satisfy the backwages, then garnished the bank account of Adelio Cruz. Dalisay justified his act by averring that Cruz was the owner and president of QLSI. Further, he claimed that the counsel for the discharged employees advised him to garnish the account of Cruz. ISSUE: Whether or not the action of Dalisay is correct. HELD: No. What Dalisay did is tantamount to piercing the veil of corporate fiction. He actually usurped the power of the court. He also overstepped his duty as a deputy sheriff. His duty is merely ministerial and it is incumbent upon him to execute the decision of the court according to its tenor and only against the persons obliged to comply. In this case, the person judicially named to comply was QLSI and not Cruz. It is a well-settled doctrine both in law and in equity that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate entities.

Fermin Caram Jr. vs Court of Appeals

Corporation Law Separate and Distinct Personality

Emilio Cano Enterprises, Inc. vs Court of Industrial Relations Facts: A certain Barretto initiated the incorporation of a company called Filipinas Orient Airways (FOA). Barretto was referred to as the moving spirit of said corporation because it was through his effort that it was created. Before FOAs creation though, Barretto contracted with a third party, Alberto Arellano, for the latter to prepare a project study for the feasibility of creating a corporation like FOA. The project study was then presented to the would-be incorporators and investors. On the basis of said project study, Fermin Caram, Jr. and Rosa Caram agreed to be incorporators of FOA. Later however, Arellano filed a collection suit against FOA, Barretto, and the Carams. Arellano claims that he was not paid for his work on the project study. ISSUE: Whether or not the Carams are personally and solidarily liable considering that the project study was contracted before FOA became a corporation. HELD: No. The Carams cannot be solidarily liable with FOA. The FOA is now a bona fide corporation. As such, FOA alone should be liable for its corporate acts as duly authorized by its officers and directors. This includes acts which ultimately led to its incorporation i.e., the project study made by Arellano. FOA has a separate and distinct personality from its incorporators. It is not justified to make the Carams, as principal stockholders, to be responsible for FOAs obligations. CARAM V. CA (151 SCRA 373; 1987)
The case of the unpaid compensation for the preparation of the project study. The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corp and did not have a separate juridical personality to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioner for the claims of the private respondent.

Corporation Law Principle of the Corporate Fiction Equity Case

Facts: Honorata Cruz was terminated by Emilio Cano Enterprises, Inc. (ECEI). She then filed a complaint for unfair labor practice against Emilio Cano, in his capacity as president and proprietor, and Rodolfo Cano, in his capacity as manager. Cruz won and the Court of Industrial Relations (CIR) ordered the Canos to reinstate Cruz plus pay her backwages with interest. The Canos appealed to the CIR en banc but while on appeal Emilio died. The Canos lost on appeal and an order of execution was levied against ECEIs property. ECEI filed an ex parte motion to quash the writ as ECEI avers that it is a corporation with a separate and distinct personality from the Canos. Their motion was denied and ECEI filed a petition for certiorari with the Supreme Court. ISSUE: Whether or not the judgment of the Court of Industrial Relations is correct. HELD: Yes. This is an instance where the corporation and its members can be considered as one. ECEI is a close family corporation the incorporators are members of the Cano family. Further, the Canos were sued in their capacity as officers of ECEI not in their private capacity. Having been sued officially their connection with the case must be deemed to be impressed with the representation of the corporation. The judgment against the Canos has a direct bearing to ECEI. Verily, the order against them is in effect against the corporation. Further still, even if this technicality be strictly observed, what will simply happen is for this case to be remanded, change the name of the party, but the judgment will still be the same there can be no real benefit and will only subversive to the ends of justice. In this case, to hold ECEI liable is not to ignore the legal fiction but merely to give meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end subversive of justice.

Sulo ng Bayan vs. Araneta Facts: On 26 April 1966, Sulo ng Bayan, Inc. filed an accion de revindicacion with the Court of First Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against Gregorio Araneta Inc. (GAI), Paradise Farms Inc., National Waterworks & Sewerage Authority (NAWASA), Hacienda Caretas Inc., and the Register of Deeds of Bulacan to recover the ownership and possession of a large tract of land in San Jose del Monte, Bulacan, containing an area of 27,982,250 sq. ms., more or less, registered under the Torrens System in the name of GAI, et. al.'s predecessors-in-interest (who are members of the corporation). On 2 September 1966, GAI filed a motion to dismiss the amended complaint on the grounds that (1) the complaint states no cause of action; and (2) the cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions to dismiss based on the same grounds. NAWASA did not file any motion to dismiss. However, it pleaded in its answer as special and affirmative defenses lack of cause of action by Sulo ng Bayan Inc. and the barring of such action by prescription and laches. On 24 January 1967, the trial court issued an Order dismissing the (amended) complaint. On 14 February 1967, Sulo ng Bayan filed a motion to reconsider the Order of dismissal, arguing among others that the complaint states a sufficient cause of action because the subject matter of the controversy in one of common interest to the members of the corporation who are so numerous that the present complaint should be treated as a class suit. The motion was denied by the trial court in its Order dated 22 February 1967. Sulo ng Bayan appealed to the Court of Appeals. On 3 September 1969, the Court of Appeals, upon finding that no question of fact was involved in the appeal but only questions of law and jurisdiction, certified the case to the Supreme Court for resolution of the legal issues involved in the controversy. Issue: 1. Whether the corporation (non-stock) may institute an action in behalf of its individual members for the recovery of certain parcels of land allegedly owned by said members, among others. 2. Whether the complaint filed by the corporation in behalf of its members may be treated as a class suit Held: 1. It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its

stockholders or members. The property of the corporation is its property and not that of the stockholders, as owners, although they have equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless transferred to the corporation, "even in the case of a one-man corporation." The mere fact that one is president of a corporation does not render the property which he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate similarities. Similarly, stockholders in a corporation engaged in buying and dealing in real estate whose certificates of stock entitled the holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their stock certificates were considered not to have such legal or equitable title or interest in the land, as would support a suit for title, especially against parties other than the corporation. It must be noted, however, that the juridical personality of the corporation, as separate and distinct from the persons composing it, is but a legal fiction introduced for the purpose of convenience and to subserve the ends of justice. This separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work -an injustice, or where necessary to achieve equity. It has not been claimed that the members have assigned or transferred whatever rights they may have on the land in question to the corporation. Absent any showing of interest, therefore, a corporation, has no personality to bring an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or members in their personal capacities. 2. In order that a class suit may prosper, the following requisites must be present: (1) that the subject matter of the controversy is one of common or general interest to many persons; and (2) that the parties are so numerous that it is impracticable to bring them all before the court. Here, there is only one party plaintiff, and the corporation does not even have an interest in the subject matter of the controversy, and cannot, therefore, represent its members or stockholders who claim to own in their individual capacities ownership of the said property. Moreover, a class suit does not lie in actions for the recovery of property where several persons claim partnership of their respective portions of the property, as each one could alleged and prove his respective right in a different way for each portion of the land, so that they cannot all be held to have identical title through acquisition/prescription.

RUSTAN PULP & PAPER MILLS, INC., ET AL. vs. INTERMEDIATE APPELLATE COURT, ET AL. FACTS: 1. Petitioner established a pulp and paper mill with Lluch as one of its supplier of row materials. 2. In there contract of sale entered in to between petitioner and Lluch, it is provided that the contract to supply is not exclusive because the petitioner has the option to buy from other supplier who are qualified to sell and That the BUYER shall have the right to stop delivery of the said raw materials by the seller covered by this contract when supply of the same shall become sufficient until such time when need for said raw materials shall have become necessarily provided, however, that the SELLER is given sufficient notice. 2. during the test run of the pulp mill, the machinery line thereat had major defects while deliveries of the raw materials piled up, which prompted the Japanese supplier of the machinery to recommend the stoppage of the deliveries and so the suppliers were informed to stop deliveries. 4. Private respondent try to clarify whether the the respondent is terminating there contract but Respondent did not answer so Private respondent file a complaint of contractual breach but was dismiss by the court of origin. 5. On appeal to IAC, it modified the judgment by ordering the petitioner to pay private respondent moral damages and attorneys fees and hold Tantoko the representative of the respondent and Vergara president manager of the petitioner personally liable. ISSUE: Whether or not, Tantoko and Vergara will be held liable. Petitioners argue next that Tantoco and Vergara should not have been adjudged to pay moral damages and attorney's fees because Tantoco merely represented the interest of Rustan Pulp and Paper Mills, Inc. while Romeo S. Vergara was not privy to the contract of sale. On this score, We have to agree with petitioners' citation of authority to the effect that the President and Manager of a corporation who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity

in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the person composing it (Bangued Generale Belge vs. Walter Bull and Co., Inc., 84 Phil. 164). And because of this precept, Vergara's supposed non-participation in the contract of sale although he signed the letter dated September 30, 1968 is completely immaterial. The two exceptions contemplated by Article 1897 of the New Civil Code where agents are directly responsible are absent and wanting. WHEREFORE, the decision appealed from is hereby MODIFIED in the sense that only petitioner Rustan Pulp and Paper Mills is ordered to pay moral damages and attorney's fees as awarded by respondent Court. SO ORDERED.

CLAPAROLS V. CIR (65 SCRA 613; 1975) Both predecessor and successor were owned and controlled by petitioner and there was no break in the succession and continuity of the same business. All the assets of the dissolved Plant were turned over to the emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees. CEASE V. CA (93 SCRA 483; 1979) The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to operate already expired. The legal fiction of separate corporate personality was attempted to be used to delay and deprive the respondents of their succession rights to the estate of their deceased father. While originally, there were other incorporators of Tiaong, it has developed into a closed family corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his instrumentality. It was his business conduit and an extension of his personality. There is not even a showing that his children were subscribers or purchasers of the stocks they own.

PALAY V. CLAVE (124 SCRA 640; 1983) The case of the reliance on a default provision of the contract granting automatic extra-judicial rescission. The court found no badges of fraud on the part of the president of the corporation. The BOD had literally and mistakenly relied on the default provision of the contract. As president and controlling stockholder of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. He cannot, therefore, be made personally liable because he appears to be the controlling stockholder. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. respondent Clave, the Presidential Executive Assistant affirmed. Hence, this petition. Issues: (1) Whether or not the doctrine of piercing the veil of corporate fiction applies. (2) Whether or not petitioner Onstott is solidarily liable with Palay, Inc. for the refund. Held: (1) No. The SC held that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, 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 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. In this case, there was no finding of fraud on petitioners' part. They had literally relied, although mistakenly, on paragraph 6 of its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person. (2) No. The SC held that no sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality.

Palay, Inc. v. Clave Facts: That Palay, Inc., through its President, Albert Onstott executed in favor of private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land payable with a downpayment and monthly installments until fully paid. 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 expiration of the grace period of one month, without need of notice and with forfeiture of all installments paid. Private respondent Dumpit paid the downpayment and several installments. However, Dumpit failed to continue paying the installments for almost 6 years. Thereafter, Dumpit wrote petitioner 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. Petitioners replied that the Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold. Consequently, Dumpit filed a complaint questioning the validity of the rescission with the National Housing Authority (NHA) for reconveyance with an alternative prayer for refund. The NHA found the rescission void in the absence of either judicial or notarial demand. Thus, it ordered Palay, Inc. and Alberto Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Dumpit the amount paid with 12% interest from the filing of the complaint. On appeal,

Yutivo Sons Hardware Co. vs. CTA Facts: Yutivo, a domestic corporation incorporated in 1916 under Philippine laws, was engaged in the importation and sale of hardware supplies and equipment. After the first world war, it resumed its business and bought a number of cars and trucks from General Motors(GM), an American Corporation licensed to do business in the Philippines. On June 13, 1946, the Southern Motors Inc,(SM) was organized to engage in the business of selling cars, trucks and spare parts. One of the subscribers of stocks during its incorporation was Yu Khe Thai, Yu Khe Siong and Hu Kho Jin, who are sons of Yu Tiong Yee, one of Yutivos founders. After SMs incorporation and until the withdrawal of GM from the Philippines, the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which the latter sold to the public. Yutivo was appointed importer for Visayas and Mindanao by the US manufacturer of cars and trucks sold by GM. Yutivo paid the sales tax prescribed on the basis of selling price to SM. SM paid no sales tax on its sales to the public. An assessment was made upon Yutivo for deficiency sales tax. The Collector of Internal Revenue, contends that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being a subsidiary of the latter. The assessment was disputed by petitioner. After reinvestigation, a second assessment was made, sustaining the validity of the first assessment. Yutivo contested the second assessment, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner. Issue: Whether or not the corporate personality of SM could be disregarded. Held: Yes. A corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, when the notion of legal entity is used to defeat public

convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons, or, in the case of two corporations, merge them into one. When the corporation is a mere alter ego or business conduit of a person, it may be disregarded. SC ruled that CTA was not justified in finding that SM was organized to defraud the Government. SM was organized in June 1946, from that date until June 30, 1947, GM was the importer of the cars and trucks sold to Yutivo, which in turn was sold to SM. GM, as importer was the one solely liable for sales taxes. Neither Yutivo nor SM was subject to the sales taxes. Yutivos liability arose only until July 1, 1947 when it became the importer. Hence, there was no tax to evade. However, SC agreed with the respondent court that SM was actually owned and controlled by petitioner. Consideration of various circumstances indicate that Yutivo treated SM merely as its department or adjunct: a. The founders of the corporation are closely related to each other by blood and affinity. b. The object and purpose of the business is the same; both are engaged in sale of vehicles, spare parts, hardware supplies and equipment. c. The accounting system maintained by Yutivo shows that it maintained high degree of control over SM accounts. d. Several correspondences have reference to Yutivo as the head office of SM. SM may even freely use forms or stationery of Yutivo. e. All cash collections of SMs branches are remitted directly to Yutivo. f. The controlling majority of the Board of Directors of Yutivo is also the controlling majority of SM. g. The principal officers of both corporations are identical. Both corporations have a common comptroller in the person of Simeon Sy, who is a brother-inlaw of Yutivos president, Yu Khe Thai. h. Yutivo, financed principally the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM. YUTIVO VS. CTA (1 SCRA 160; 1961)
Southern Motors was actually owned and controlled by Yutivo as to make it a mere subsidiary or branch of the latter created for the purpose of selling vehicles at retail. Yutivo financed principally, if not wholly, the business of Southern Motors and actually exceeded the credit of the latter . At all times, Yutivo, through the officers and directors common to it and the Southern Motors exercised full control over the cash funds, policies, expenditures and obligations of the latter. Hence, Southern Motors, being a mere instrumentality or adjunct of Yutivo, the CTA correctly disregarded the technical defense of separate corporate identity in order to arrive at the true tax liability of Yutivo.

Concept Builders Inc. vs. NLRC Facts: Concept Builders, Inc., (CBI) a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business while Norberto Marabe; Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos were employed by said company as laborers, carpenters and riggers. On November 1981, Marabe, et. al. were served individual written notices of termination of employment by CBI, effective on 30 November 1981. It was stated in the individual notices that their contracts of employment had expired and the project in which they were hired had been completed. The National Labor Relations Commission (NLRC) found it to be, the fact, however, that at the time of the termination of Marabe, et.al.'s employment, the project in which they were hired had not yet been finished and completed. CBI had to engage the services of subcontractors whose workers performed the functions of Marabe, et. al. Aggrieved, Marabe, et. al. filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against CBI. On 19 December 1984, the Labor Arbiter rendered judgment ordering CBI to reinstate Marabe et. al. and to pay them back wages equivalent to 1 year or 300 working days. On 27 November 1985, the NLRC dismissed the motion for reconsideration filed by CBI on the ground that the said decision had already become final and executory. On 16 October 1986, the NLRC Research and Information Department made the finding that Marabe, et. al.'s back wages amounted to P199,800.00. On 29 October 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision, dated 19 December 1984. The writ was partially satisfied through garnishment of sums from CBI's debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount was turned over to the cashier of the NLRC. On 1 February 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from CBI the sum of P117,414.76, representing the balance of the judgment award, and to reinstate Marabe, et. al. to their former positions. On 13 July 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner through the security guard on duty but the service was refused on the ground that CBI no longer occupied the premises. On 26 September 1986, upon motion of Marabe, et. al., the Labor Arbiter issued a second alias writ of execution. The said writ had not been enforced by the special sheriff because, as stated in his progress report dated 2 November 1989, that all the employees inside CBI's premises claimed that they were employees of Hydro Pipes Philippines, Inc.

(HPPI) and not by CBI; that levy was made upon personal properties he found in the premises; and that security guards with high-powered guns prevented him from removing the properties he had levied upon. The said special sheriff recommended that a "break-open order" be issued to enable him to enter CBI's premises so that he could proceed with the public auction sale of the aforesaid personal properties on 7 November 1989. On 6 November 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by HPPI, of which he is the Vice-President. On 23 November 1989, Marabe, et. al. filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI and CBI were owned by the same incorporator/stockholders. They also alleged that petitioner temporarily suspended its business operations in order to evade its legal obligations to them and that Marabe, et. al. were willing to post an indemnity bond to answer for any damages which CBI and HPPI may suffer because of the issuance of the break-open order. On 2 March 1990, the Labor Arbiter issued an Order which denied Marabe, et. al.'s motion for break-open order. Marabe, et. al. then appealed to the NLRC. On 23 April 1992, the NLRC set aside the order of the Labor Arbiter, issued a break-open order and directed Marabe, et. al. to file a bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied upon. It dismissed the third-party claim for lack of merit. CBI moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated 3 December 1992. Hence, the petition.
Issue: Whether the NLRC was correct in issuing the break-open order to levy the HPPI properties located at CBI amd/or HPPIs premises at 355 Maysan Road, Valenzuela, Metro Manila.

Held: It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit: (1) Stock ownership by one or common ownership of both corporations; (2) Identity of directors and officers; (3) The manner of

keeping corporate books and records; and (4) Methods of conducting the business. The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate juridical personality of corporations as "Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the "instrumentality" may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of instances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made." The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff's legal rights; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that operation. Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one of fact. Here, while CBI claimed that it ceased its business operations on 29 April 1986, it filed an Information Sheet with the Securities and Exchange Commission on 15 May 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. Further, both information sheets were filed by the same Virgilio O. Casio as the corporate secretary of both corporations. Both corporations had the same president, the same board of directors, the same corporate officers, and substantially the same subscribers. From the foregoing, it appears that, among other things, the CBI and
the HPPI shared the same address and/or premises. Under these circumstances, it cannot be said that the property levied upon by the sheriff were not of CBI's. Clearly, CBI ceased its business operations in order to evade the payment to Marabe, et. al. of back wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of CBI and its emergence was skillfully orchestrated to avoid the financial liability that already attached to CBI.

TAN BOON BEE CO. V. JARENCIO (163 SCRA 205; 1988)

Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay. G's printing machine levied upon to satisfy claim but PADCO, another corpo intercedes, saying it is the owner of the machine, having leased such to G. Printing machine was allowed by the Court to satisfy G's liability. Both G and PADCO's corporate entities pierced because they have: the same board of directors, PADCO owns 50% of G, PADCO never engaged in the business of printing. Obviously, the board is using PADCO to shield G from fulfilling liability to T.

Corporation Law Piercing the Veil of Corporate Fiction Alter Ego Case
In 1972, Anchor Supply Co. (ASC), through Tan Boon Bee, entered into a contract of sale with Graphic Publishing Inc. (GPI) whereby ASC shall deliver paper products to GPI. GPI paid a down payment but defaulted in paying the rest despite demand from ASC. ASC sued GPI and ASC won. To satisfy the indebtedness, the trial court, presided by Judge Hilarion Jarencio, ordered that one of the printing machines of GPI be auctioned. But before the auction can be had, Philippine American Drug Company (PADCO) notified the sheriff that PADCO is the actual owner of said printing machine. Notwithstanding, the sheriff still went on with the auction sale where Tan Boon Bee was the highest bidder. Later, PADCO filed with the same court a motion to nullify the sale on execution. The trial court ruled in favor of PADCO and it nullified said auction sale. Tan Boon Bee assailed the order of the trial court. Tan Boon Bee averred that PADCO holds 50% of GPI; that the board of directors of PADCO and GPI is the same; that the veil of corporate fiction should be pierced based on the premises. PADCO on the other hand asserts ownership over the said printing machine; that it is merely leasing it to GPI. ISSUE: Whether or not the veil of corporate fiction should be pierced. HELD: Yes. PADCO, as its name suggests, is a drug company not engaged in the printing business. So it is dubious that it really owns the said printing machine regardless of PADCOs title over it. Further, the printing machine, as shown by evidence, has been in GPIs premises even before the date when PADCO alleged that it acquired ownership thereof. Premises considered, the veil of corporate fiction should be pierced; PADCO and GPI should be considered as one. When a corporation is merely an adjunct, business conduit or alter ego of another corporation the fiction of separate and distinct corporation entities should be disregarded.

Remo Jr. v. IAC Lesson Applicable: Dealings Between Corporation and Stockholders FACTS: 1. December, 1977: the BOD of Akron Customs Brokerage Corporation (Akron), composed of Jose Remo, Jr., Ernesto Baares, Feliciano Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution authorizing the purchase of 13 trucks for use in its business to be paid out of a loan the corporation may secure from any lending institution 2. January 25, 1978: Feliciano Coprada, as President and Chairman of Akron, purchased the trucks from E.B. Marcha Transport Company, Inc. (Marcha) for P 525K as evidenced by a deed of absolute sale. a. parties agreed on a downpayment in the amount of P50K and that the balance of P 475K shall be paid within 60 days from the date of the execution of the agreement. b. They also agreed that until balance is fully paid, the down payment of P 50K shall accrue as rentals and failure to pay the balance within 60 days, then the balance shall constitute as a chattel mortgage lien covering the cargo trucks and the parties may allow an extension of 30 days and Marcha may ask for a revocation of the contract and the reconveyance of all trucks. i. The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated that the balance shall be paid from the proceeds of a loan obtained from the Development Bank of the Philippines (DBP) within 60 days ii. After the lapse of 90 days, Marsha tried to collect from Coprada but the Coprada promised to pay only upon the release of the DBP loan. 1. Marsha sent Coprada a letter of demand dated May 10, 1978.

a. Coprada reiterated that he was applying for a loan from the DBP from the proceeds of which payment of the obligation shall be made. c. Meanwhile, 2 of the trucks were sold under a pacto de retro sale to a Mr. Bais of the Perpetual Loans and Savings Bank at Baclaran. i. March 15, 1978: sale was authorized by board resolution 3. Marsha found that no loan application was ever filed by Akron with DBP. 4. Akron paid rentals of P 500/day pursuant to a subsequent agreement, from April 27, 1978 (the end of the 90-days to pay the balance) to May 31, 1978. Thereafter, no more rental payments were made. 5. June 17, 1978: Coprada wrote Marsha begging for a grace period of until the end of the month to pay the balance of the purchase price; that he will update the rentals within the week; and in case he fails, then he will return the 13 units should Marsha elect 6. August 1, 1978: Marsha through counsel, wrote Akron demanding the return of the 13 trucks and the payment of P 25K back rentals from June 1 to August 1, 1978. 7. August 8, 1978: Coprada asked for another grace period of up to August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan application from a financing company, and that 10 trucks have been returned to Bagbag, Novaliches. 8. December 9, 1978: Coprada informed Marsha that he had returned 10 trucks to Bagbag and that a resolution was passed by the board of directors confirming the deed of assignment to Marsha of P 475K

from the proceeds of a loan obtained by Akron from the State Investment House, Inc. 9. In due time, Marsha filed a compliant for the recovery of P 525K or the return of the 13 trucks with damages against Akron and its officers and directors a. Remo Jr. sold all his shares in Akron to Coprada. It also appears that Akron amended its articles of incorporation thereby changing its name to Akron Transport International, Inc. which assumed the liability of Akron to Marsha. 10. CA affirmed RTC: favor of Marsha ISSUE: W/N Remo Jr. should be held personally liable together with Akron Transport International, Inc. HELD: NO. Petition is granted. The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of Akron and hold petitioner personally liable While it is true that in December, 1977 petitioner was still a member of the board of directors of Akron and that he participated in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage business of Akron to be paid out of a loan to be secured from a lending institution, it does not appear that said resolution was intended to defraud anyone Coprada, President and Chairman of Akron, who negotiated o The word "WE' in the said promissory note must refer to the corporation which Coprada represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the said promissory note so he cannot be personally bound thereby.

As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a board resolution, Remo Jr. asserts that he never signed the resolution. o Be that as it may, the sale is not inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the corporation is free to dispose of the same. Of course, it was stipulated that in case of default , a chattel mortgage lien shall be constituted on the 13 units.

the new corporation confirmed and assumed the obligation of the old corporation. There is no indication of an attempt on the part of Akron to evade payment of its obligation it is his inherent right as a stockholder to dispose of his shares of stock anytime he so desires. Fraud must be established by clear and convincing evidence. If at all, the principal character on whom fault should be attributed is Feliciano Coprada, the President of Akron. Fortunately, a judgment against him from the trial court has long been final and executory.

RAMIREZ VS. ORIENTALIST CO AND FERNANDEZ (38 Phil. 634; 1918) In this case, the board of directors, before the financial inability of the corporation to proceed with the project was revealed, had already recognized the contracts as being in existence and had proceed with the necessary steps to utilize the films. The subsequent action by the stockholders in not ratifying the contract must be ignored. The functions of the stockholders are limited of nature. The theory of a corporation is that the stockholders may have all the profits but shall return over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by law. In conformity with this idea, it is settled that contracts between a corporation and a third person must be made by directors and not stockholders.

INDOPHIL TEXTILE MILL WORKERS UNION V. CALICA (205 SCRA

EVANGELISTA vs. SANTOS Facts: Plaintiffs are minority stockholders of the Vitali Lumber Company, Inc., a Philippine corporation organized for the exploitation of a lumber concession in Zamboanga, Philippines; that defendant holds more than 50 per cent of the stocks of said corporation and also is and always has been the president, manager, and treasurer thereof; and that defendant, in such triple capacity, through fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets to disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks. Their complaint therefore prays for judgment requiring defendant: (1) to render an account of his administration of the corporate affairs and assets: (2) to pay plaintiffs the value of their respective participation in said assets on the basis of the value of the stocks held by each of them; and (3) to pay the costs of suit. The complaint does not give plaintiffs residence, but, for purposes of venue, alleges that defendant resides at 2112 Dewey Boulevard, corner Libertad Street, Pasay, province of Rizal. Having been served with summons at that place, defendant filed a motion for the dismissal of the complaint on the ground of improper venue and also on the ground that the complaint did not state a cause of action in favor of plaintiffs. In support of the objection to the venue, defendant states that he is a resident of Iloilo City and not of Pasay, defendant also presented further affidavit to the effect that while he has a house in Pasay, where members of his family who are studying in Manila live and where he himself is sojourning for the purpose of attending to his interests in Manila, yet he has his permanent residence in the City of Iloilo where he is registered as a voter for election purposes and has been paying his residence certificate. Issue: Whether or not defendant is a resident of Iloilo, therefore, there was no proper venue when he was served with summons in Pasay. Held: The facts in this case show that the objection to the venue is wellfounded. Where the plaintiff is a nonresident and the contract upon which suit is brought was made in the Philippine Islands it may safely be asserted that the convenience of the defendant would be best served by a trial in the province where he resides. The fact that defendant was sojourning in Pasay at the time he was served with summons does not make him a resident of that place for purposes of venue. Residence is the permanent home, the place to which, whenever absent for business or pleasure, one intends to return.

698)
Rule: The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the CBA Indophil had with them (or it sought to include the other union in its bargaining leverage). SC: Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that businesses were related, that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the same compound - not sufficient to apply doctrine. THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW (20

SCRA 987; 1967)

Kalaw was a corporate officer entrusted with general management and control of NACOCO. He had implied authority to make any contract or do any act which is necessary for the conduct of the business. He may, without authority from the board, perform acts of ordinary nature for as long as these redound to the interest of the corporation. Particularly, he contracted forward sales with business entities. Long before some of these contracts were disputed, he contracted by himself alone, without board approval. All of the members of the board knew about this practice and have entrusted fully such decisions with Kalaw. He was never questioned nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and by acquiescence, have laid aside the by-law requirement of prior board approval. Thus, it cannot now declare that these contracts (failures) are not binding on NACOCO.

Alhambra Cigar & Cigarette Manufacturing Company, Inc. vs Securities and Exchange Commission

Ramirez vs Orientalist Co. Facts: Orientalist Company was engaged in the business of maintaining and conducting a theatre in the city of Manila for the exhibition of cinematographic films. engaged in the business of marketing films for a manufacturer or manufacturers, there engaged in the production or distribution of cinematographic material. In this enterprise the plaintiff was represented in the city of Manila by his son, Jose Ramirez. The directors of the Orientalist Company became apprised of the fact that the plaintiff in Paris had control of the agencies for two different marks of films, namely, the Eclair Films and the Milano Films; and negotiations were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of the plaintiff. The defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was chiefly active in this matter. Ramon J. Fernandez had an informal conference with all the members of the companys board of directors except one, and with approval of t hose with whom he had communicated, addressed a letter to Jose Ramirez, in Manila, accepting the offer contained in the memorandum the exclusive agency of the Eclair films and Milano films. In due time the films began to arrive in Manila, it appears that the Orientalist Company was without funds to meet these obligations. Action was instituted by the plaintiff to Orientalist Company, and Ramon J. Fernandez for sum of money. Issue: WON the Orientalist Co. is liable for the acts of its treasurer, Fernandez? Held: Yes. It will be observed that Ramon J. Fernandez was the particular officer and member of the board of directors who was most active in the effort to secure the films for the corporation. The negotiations were conducted by him with the knowledge and consent of other members of the board; and the contract was made with their prior approval. In the light of all the circumstances of the case, we are of the opinion that the contracts in question were thus inferentially approved by the companys board of directors and that the company is bound unless the subsequent failure of the stockholders to approve said contracts had the effect of abrogating the liability thus created.

Corporation Law Corporate Lifespan

On January 15, 1912, Alhambra Cigar & Cigarette Manufacturing Company, Inc. was incorporated. Its lifespan was for 50 years so on January 15, 1962, it expired. Thereafter, its Board authorized its liquidation. Under the prevailing law, Alhambra has 3 years to liquidate. In 1963, while Alhambra was liquidating, Republic Act 3531 was enacted. It amended Section 18 of the Corporation Law; it empowered domestic private corporations to extend their corporate life beyond the period fixed by the articles of incorporation for a term not to exceed fifty years in any one instance. Previous to Republic Act 3531, the maximum non-extendible term of such corporations was fifty years. Alhambra now amended its articles of incorporation to extend its lifespan for another 50 years. The Securities and Exchange Commission (SEC) denied the amended articles of incorporation. ISSUE: Whether or not a corporation under liquidation may still amend its articles of incorporation to extend its lifespan. HELD: No. Alhambra cannot avail of the new law because it has already expired at the time of its passage. When a corporation is liquidating pursuant to the statutory period of three years to liquidate, it is only allowed to continue for the purpose of final closure of its business and no other purposes. In fact, within that period, the corporation is enjoined from continuing the business for which it was established. Hence, Alhambras board cannot validly amend its articles of incorporation to extend its lifespan.

EVERETT V. ASIA BANKING (49 Phil. 512; 1926) BARRETO V. LA PREVISORA FILIPINA An amendment to the by-laws of a loan and building association which provides for the payment of life pension to the persons named therein for past services they have gratuitously rendered to the association cannot be held to be in consonance with the power granted to corporations to grant salaries to their board of directors. The authority conferred upon corporations refers only to providing compensation for the future services of directors, officers, and employees thereof after the adoption of the by-law or other provision in relation thereto, and cannot in any sense be held to authorize the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by them to the corporation. This case illustrates how VTA can give rise to effective control and how it can be abused. Original stockholders can set aside the VTA when their rights are trampled upon by the trustee.

REPUBLIC BANK V. CUADERNO, ET AL Facts: This is an appeal from a dismissal of the case against respondent Roman for alleged fraudulent grant of loans to relatives (while he was chairman of the Board of Directors of Republic Bank and its Executive Loan Committee) and for the selection of respondents Cuaderno and Dizon (as technical consultant and chairman of the board respectively) in order to shield himself from the alleged wrongdoing and from any prosecution that may be instituted against him. The complaint also alleges that the present composition of the board of directors of the bank are constituted by men chosen by respondent Roman so that it was futile to ask them, in the first place, to institute this action on behalf of the bank. Ruling: In a derivative suit, the corporation is the real party in interest and the stockholder is merely a nominal party. Normally, it is the corporation through its board of directors that should bring the suit. But where, as in this case and it is alleged in the complaint, that the members of the board of directors of the bank were the nominees and creatures of respondent Roman, thus, any demand for an intra-corporate remedy would be futile, the stockholder is permitted to bring a derivative suit. As to the question of should the corporation be made a party, the English practice is to make the corporation a party plaintiff while in the US the practice is to make it a party defendant. However, in our jurisdiction what is important is that the corporation should be made a party in order to make the courts judgment binding upon it, and thus bar future litigation of the issues. Misjoinder of parties (in a derivative suit) is not a ground to dismiss the action.

STRONG V. REPIDE The director and controlling stockholder who purchased the shares of another stockholder through an agent was held to be guilty of concealing the impending purchase of the friar lands they own by the government, a significant fact which would affect the price of the shares. Although ordinarily, the relationship between directors and stockholders of a corporation is not of a fiduciary character as to oblige the director to disclose to a stockholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any form a shareholder, there are cases when such duty and obligation upon the director is present. Being the chief negotiator for the sale of the lands, the director was the only person who knew of the advantages and the impending increase in the value of the shares such that he is precluded from acquiring stocks from other shareholders without first informing them of the pertinent facts affecting the value of the shares being bought. It is fraudulent for a stockholder to buy from a shareholder without disclosing his identity.

Charles Mead vs E. C. McCullough

Corporation Law The Corporation and Its Members
Charles Mead, Edwin McCullough and three others organized the corporation called The Philippine Engineering and Construction Company (PECC). The 4 organizers, except Mead, contributed to the majority of the capital stock of PECC, the remaining shares were offered to the public. Mead contributed some personal properties. Mead was assigned as a manager but he resigned as such when he accepted an engineering job in China. But even so, he remained as one of the five directors (the organizers). At that time, PECC was already incurring losses. McCullough, the president, proposed that he shall buy the assets of the corporation. The three other directors then voted in favor of this proposal hence the assets were transferred to McCullough. Mead learned of this and so he opposed it because the personal properties he contributed were also transferred to McCullough. Mead also argued that under the articles of incorporation of PECC, the board of directors only have ordinary powers; that the authorization made by the three directors to allow the sale of company assets to McCullough constitutes an act of agency which is invalid at that because no express commission was made, i.e., no power of attorney was made in favor of the directors. The requirement for a commission can be inferred from Article 1713 of the Civil Code which provides: An agency stated in general terms only includes acts of administration. In order to compromise, alienate, mortgage, or execute any other act of strict ownership an express commission is required. (Emphasis supplied). Mead also insists that under their charter, no resolution affecting the administration of the affairs of PECC should be binding upon the corporation unless the unanimous consent of the entire board was first obtained ISSUE: Whether or not the three directors had the authority to allow the sale/transfer of the company assets to McCullough. HELD: Yes. Several factors have to be considered. First is the fact that Mead abandoned his post when he took the job offer to work in China. He knew for a fact that the nature of the job offered is permanent. Second, a close reading of the articles of incorporation of PECC shows that there is no such intention for unanimity when it comes to votes affecting matters of administration. The only requirement is that At least three of said board must be present in order to constitute a legal meeting. Which was complied with when the other four directors were present when the decision to transfer the company assets was made. Third is the fact that PECC was in a downhill situation. A corporation is essentially a partnership, except in form. The directors are the trustees or managing partners, and the stockholders are the cestui que trust and have a joint interest in all the property and effects of the corporation. McCullough as a director himself and the president can be considered an agent but not the agent contemplated in Article 1713 of the Civil Code. Article 1713 deals with the broad aspect of agency and in ordinary cases but not in the case of a corporation and its directors. In the case at bar, the more appropriate analogy is that PECC, being a losing corporation, has its directors as the trustees. The trustees-directors hold the company assets in trust for the beneficiaries, which are the creditors. As trustees, they decided that it is beneficial to sell the company assets to McCullough to at least recover some cash equivalents in the winding up of the corporate affairs. Besides, there is no prohibition against the selling of company assets to one of its directors either from law or from PECCs articles of incorporation.

Yao Ka Sin Trading vs Court of Appeals

Francisco vs GSIS (1963) Facts: The plaintiff, Trinidad J. Francisco, in consideration of a loan mortgaged in favor of the defendant, Government Service Insurance System a parcel of land known as Vic-Mari Compound, located at Baesa, Quezon City. The System extrajudicially foreclosed the mortgage on the ground that up to that date the plaintiff-mortgagor was in arrears on her monthly instalments. The System itself was the buyer of the property in the foreclosure sale. The plaintiffs father, Atty. Vicente J. Francisco, sent a letter to the general manager of the defendant corporation, Mr. Rodolfo P. Andal. And latter the System approved the request of Francisco to redeem the land through a telegram. Defendant received the payment and it did not, however, take over the administration of the compound. The System then sent a letter to Francisco informing of his indebtedness and the 1 year period of redemption has been expired. And the System argued that the telegram sent to Francisco saying that the System has approved the request in redeeming the property is incorrect due to clerical problems. Issue: WON the System is liable for the acts of its employees regarding the telegram? Held: Yes. There was nothing in the telegram that hinted at any anomaly, or gave ground to suspect its veracity, and the plaintiff, therefore, can not be blamed for relying upon it. There is no denying that the telegram was within Andals apparent authority. Hence, even if it were the board secretary who sent the telegram, the corporation could not evade the binding effect produced by the telegram. Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to the corporation, whether he communicates such knowledge or not. Yet, notwithstanding this notice, the defendant System pocketed the amount, and kept silent about the telegram not being in accordance with the true facts, as it now alleges. This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff, constitutes in itself a binding ratification of the original agreement.

Corporation Law Liability of Officers Apparent Authority

In 1973, Constancio Maglana, president of Prime White Cement Corporation, sent an offer letter to Yao Ka Sin Trading. The offer states that Prime White is willing to sell 45,000 bags of cement at P24.30 per bag. The offer letter was received by Yao Ka Sins manager, Henry Yao. Yao accepted the letter and pursuant to the letter, he sent a check in the amount of P243,000.00 equivalent to the value of 10,000 bags of cement. However, the Board of Directors of Prime White rejected the offer letter sent by Maglana but it considered Yaos acceptance letter as a new contract offer hence the Board sent a letter to Yao telling him that Prime White is instead willing to sell only 10,000 bags to Yao Ka Sin and that he has ten days to reply; that if no reply is made by Yao then they will consider it as an acceptance and that thereafter Prime White shall deposit the P243k check in its account and then deliver the cements to Yao Ka Sin. Henry Yao never replied. Later, Yao Ka Sin sued Prime White to compel the latter to comply with what Yao Ka Sin considered as the true contract, i.e., 45,000 bags at P24.30 per bag. Prime White in its defense averred that although Maglana is empowered to sign contracts in behalf of Prime White, such contracts are still subject to approval by Prime Whites Board, and then it still requires further approval by the National Investment and Development Corporation (NIDC), a government owned and controlled corporation because Prime White is a subsidiary of NIDC. Henry Yao asserts that the letter from Maglana is a binding contract because it was made under the apparent authority of Maglana. The trial court ruled in favor of Yao Ka Sin. The Court of Appeals reversed the trial court. ISSUE: Whether or not the president of a corporation is clothed with apparent authority to enter into binding contracts with third persons without the authority of the Board. HELD: No. The Board may enter into contracts through the president. The president may only enter into contracts upon authority of the Board. Hence, any agreement signed by the president is subject to approval by the Board. Unlike a general manager (like the case of Francisco vs GSIS), the president has no apparent authority to enter into binding contracts with third persons. Further, if indeed the by-laws of Prime White did provide Maglana with apparent authority, this was not proven by Yao Ka Sin. As a rule, apparent authority may result from (1) the general manner, by which the corporation holds out an officer or agent as having power to act or, in other words, the apparent authority with which it clothes him to act in general or (2) acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers. These are not present in this case. Also, the subsequent letter by Prime White to Yao Ka Sin is binding because Yao Ka Sins failure to respond constitutes an acceptance, per stated in the letter itself which was not contested by Henry Yao during trial.

Trinidad Francisco vs Government Service Insurance System

Corporation Law Corporate Liability

In 1956, Trinidad Francisco obtained a P400k loan from the Government Service Insurance System (GSIS). She secured the loan with a parcel of land. In 1959 however, due to some difficulties, Trinidad incurred huge arrears. This prompted GSIS to foreclose the property. But then, Trinidads father, Atty. Vicente Francisco, wrote a letter to GSIS offering that he pay P30k off the loan and then allow GSIS to administer the mortgaged property instead of foreclosing it; that thereafter, GSIS shall receive rents from the tenants of the land until the arrears are paid and the account is made current or up to date (because the total of the monthly rents is bigger than the monthly loan payments supposed to be paid by Trinidad to GSIS). GSIS, through its general manager Rodolfo Andal, responded with a letter which states that the GSIS Board had accepted Vicentes offer. But GSIS for some reason did not take over the property. Nevertheless, the Franciscos collected rents and turned them over to GSIS. Then in 1960, GSIS demanded Francisco to pay off the loan. Vicente then reminded GSIS that the agreement in 1959 which is actually a compromise is binding upon GSIS. GSIS then averred that the letter sent to Vicente in response to his offer was not sent in error because Andal s secretary sent the poorly worded response without Andals knowledge. ISSUE: Whether or not a corporation like GSIS is bound by the acts of its officers acting in their apparent authority. HELD: Yes. A third party transacting with a corporation cannot be expected to know what occurs within a corporation, its meetings, without any external manifestations from the corporation. In the case at bar, the response by GSIS to Vicente by way of a telegram, is within the apparent authority of Andal. If there are any irregularities in the telegraph i.e., the sending of the secretary without the authority of Andal, Vicente is not expected to know it because the telegram on its face is clear as to the acceptance. Vicente cannot therefore be faulted for relying on the telegram; that GSIS accepted his offer. Hence, GSIS cannot now ask Francisco to suddenly pay off the debt. If a corporation knowingly permits one of its officers, or any other agent, to do acts within the scope of an apparent authority, and thus holds

him out to the public as possessing power to do those acts, the corporation will, as against anyone who has in good faith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said if the corporation permits this means the same as if the thing is permitted by the directing power of the corporation. GSIS cannot also deny that it has knowledge of the acceptance. A corporation cannot see, or know, anything except through its officers. Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to the corporation, whether he communicates such knowledge or not. Andal is presumed to have knowledge of the acceptance because it was his office which sent it to Vicente. Knowledge of Andal, an officer of GSIS, is deemed knowledge of GSIS. At any rate, even if the compromise agreement is void because of the unauthorized telegram, GSISs silence and acceptance of the subsequent remittances of the Franciscos ratified the compromise agreement.

DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL The Corporation Law says that every director must own at least one (1) share of the capital stock of the corporation.

CENTRAL COOPERATIVE EXCHANGE, INC. V. TIBE, ET. AL. This is an action instituted by the corporation against one of its former directors for advances drawn from the corporation by virtue of resolutions adopted by the board of directors allowing such directors to claim travel expenses and other allowances. The corporation claims that the board of directors has no right to determine the remuneration of directors and that the resolutions adopted by the board of directors are void. The fixing of the compensation of board of directors is lodged with the members of the cooperative as provided for in its by- laws. Even without the reservation in the by-laws, directors are not entitled to compensation.

Western Institute of Technology Inc. vs. Salas Facts: Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of Trustees of Western Institute of Technology, Inc. (WIT), a stock corporation engaged in the operation, among others, of an educational institution. According to Homero L. Villasis, Dimas Enriquez, peston F. Villasis, and Reginald F. Villasis, the minority stockholders of WIT, sometime on 1 June 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In attendance were other members of the Board including Reginald Villasis. Prior to said Special Board Meeting, copies of notice thereof, dated 24 May 1986, were distributed to all Board Members.The notice allegedly indicated that the meeting to be held on 1 June 1986 included Item 6 which states that "Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of Technology, Inc. on compensation of all officers of the corporation." In said meeting, the Board of Trustees passed Resolution 48, series 1986, granting monthly compensation to Salas, et. al. as corporate officers retroactive 1 June 1985, in the following amounts: Chairman 9,000.00/month, Vice Chairman P3,500.00/month, Corporate Treasurer P3,500.00/month and Corporate Secretary P3,500.00/month, retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed equally among the ten members of the Board of Trustees. This shall amend and supercede any previous resolution. A few years later, or on 13 March 1991, Homero Villasis, Preston Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against Salas, et. al. before the Office of the City Prosecutor of Iloilo, as a result of which 2 separate criminal informations, one for falsification of a public document under Article 171 of the Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for falsification of public document was anchored on Salas, et. al.'s submission of WIT's income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the disbursement of corporate funds for the compensation of Salas, et. al. based on Resolution 4, series of 1986, making it appear that the same was passed by the board on 30 March 1986, when in truth, the same was actually passed on 1 June 1986, a date not covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1995 and ending April 30, 1986). Thereafter, trial for the two criminal cases (Criminal Cases 37097 and 37098), was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on both counts dated 6 September 1993 without imposing any civil liability against the accused therein. Villasis, et. al. filed a Motion for Reconsideration of the

civil aspect of the RTC Decision which was, however, denied in an Order dated 23 November 1993. Villasis, et. al. filed the petition for review on certiorari. Significantly on 8 December 1994, a Motion for Intervention, dated 2 December 1994, was filed before this Court by Western Institute of Technology, Inc., disowning its inclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel for Villasis, et. al., had no authority whatsoever to represent the corporation in filing the petition. Intervenor likewise prayed for the dismissal of the petition for being utterly without merit. The Motion for Intervention was granted on 16 January 1995. Issue: Whether the grant of compensation to Salas, et. al. is proscribed under Section 30 of the Corporation Code. Held: 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. Also, 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 phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. Herein, resolution 48, s. 1986 granted monthly compensation to Salas, et. al. not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, ViceChairman, 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. Consequently, the last sentence of Section 30 which provides that "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" does not likewise find application in this case since the compensation is being given to Salas, et. al. in their capacity as officers of WIT and not as board members.

GOVT v. EL HOGAR (50 Phil 399; 1932)

(This case is an example of how the implied powers concept may be used to justify certain acts of a corporation.)

REYES V. TAN, ET AL Facts: This is an action instituted by a stockholder of Roxas-Kalaw Textile Mills, Inc. praying for the appointment of a receiver of the said corporation. The case is filed against the corporations board of directors for the purchases made by the manager in New York supposedly for raw materials but it turned out that what was bought were finished products from companies where said manger had interests. Said purchases led to the central banks stoppage of all dollar allocations in favor of said corporation which in turn paralyzed the entire operation of the corporation. It is alleged that said directors failed to act on the fraudulent purchases for a period of two (2) years, thus, forcing plaintiff to bring this derivative suit. Ruling: The importation of textiles instead of raw materials as well as the failure of the board of directors to take actions against those directly responsible for the misuse of the dollar allocations constitute fraud or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justifies the minority stockholders to institute a derivative suit on behalf of the corporation. The appointment of a receiver was not only expedient but also necessary to restore the faith and confidence of the Central Bank authorities in the administration of the affairs of the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the textile mills notes: The remedies of minority stockholders (by the institution of a derivative suit) include the appointment of a receiver or constitution of a management committee or removal of a director (personal note: it seems Sir Jacinto implies that this last remedy is not automatically available as a consequence of a derivative suit). As regards the exhaustion of intra-corporate remedies, it is sufficient to allege that there was an actual exhaustion or that it is futile to resort to such remedy.

A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan ass'n to deprive it of its corp. franchise. 1. El Hogar held title to real property for a period in excess of 5 years in good faith, hence this cause will not prosper. 2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its reasonable requirements, held valid bec, it was found to be necessary and legally acquired and developed. 3. El Hogar leased some office space in its bldg.; it administered and managed properties belonging to delinquent SHs; and managed properties of its SHs even if such were not mortgaged to them. Held: first two valid, but the third is ultra vires bec. the administration of property in that manner is more befitting of the business of a real estate agent or trust company and not of a building and loan ass'n. 4. Compensation to the promoter and organizer allegedly excessive and unconscionable. Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. or its SHs who may bring a complaint on such. 5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor make its loans usurious. 6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg. to the SC, the by-laws expressly authorizes the BOD to determine each year the amount to be written down upon the expenses of installation and the property of the corp. 7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such power is implied. All business enterprises encounter periods of gains and losses, and its officers would usually provide for the creation of a reserve to act as a buffer for such circumstances. 8. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid bec. there is no statute which expressly declares that loans may be made by these ass'ns solely for the purpose of bldg. homes. 9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and loan ass'n. The word "person" is used on a broad sense including not only natural persons but also artificial persons.

Montelibano, et.al. vs. Bacolod Murcia Milling Co. Inc. Facts: Plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited co-partnership Gonzaga and Company, had been and are sugar planters adhered to the defendant-appellee's sugar central mill under identical milling contracts. The contracts were stipulated to be in force for 30 years and that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. It was later proposed to execute amended milling contracts, increasing the planters' share to 60% of the manufactured sugar and resulting molasses, besides other concessions, but extending the operation of the milling contract from the original 30 years to 45 years. The Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution granting further concessions to the planters over and above those contained in the printed Amended Milling Contract. Appellants signed and executed the printed Amended Milling Contract but a copy of the resolution was not attached to the printed contract. In 1953, the appellants initiated the present action, contending that three Negros sugar centrals had already granted increased participation to their planters, and that under paragraph 9 of the abovementioned resolution, the appellee had become obligated to grant similar concessions to the plaintiffs (appellants herein). However, the appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that the stipulations contained in the resolution were made without consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. After trial, the court below rendered judgment upholding the stand of the defendant Milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court. Issue: Whether or not the resolution is valid and binding between the corporation and planters. Held: The Supreme Court held in the affirmative. There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. The rule is that It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. 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. It is a well-known rule of law 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 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. Hence, the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution, duty bound to grant similar increases to plaintiffs-appellants herein.

Prime White Cement vs IAC Facts: On or about 16 July 1969, Alejandro Te and Prime White Cement Corporation (PWCC) thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement whereby Te was obligated to act as the exclusive dealer and/or distributor of PWCC of its cement products in the entire Mindanao area for a term of 5 years and providing among others that (a) the corporation shall, commencing September, 1970, sell to and supply Te, as dealer with 20,000 bags (94 lbs/bag) of white cement per month; (b) Te shall pay PWCC P9.70, Philippine Currency, per bag of white cement, FOB Davao and Cagayan de Oro ports; (c) Te shall every time PWCC is ready to deliver the good, open with any bank or banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of PWCC and that upon certification by the boat captain on the bill of lading that the goods have been loaded on board the vessel bound for Davao the said bank or banking institution shall release the corresponding amount as payment of the goods so shipped." Right after Te entered into the dealership agreement, he placed an advertisement in a national, circulating newspaper the fact of his being the exclusive dealer of PWWC's white cement products in Mindanao area, more particularly, in the Manila Chronicle dated 16 August 1969 and was even congratulated by his business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be his sub-dealer in the Mindanao area. Relying heavily on the dealership agreement, Te sometime in the months of September, October, and December, 1969, entered into a written agreement with several hardware stores dealing in buying and selling white cement in the Cities of Davao and Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular supply of the said commodity, by September, 1970. After Te was assured by his supposed buyer that his allocation of 20,000 bags of white cement can be disposed of, he informed the defendant corporation in his letter dated 18 August 1970 that he is making the necessary preparation for the opening of the requisite letter of credit to cover the price of the due initial delivery for the month of September 1970, looking forward to PWCC's duty to comply with the dealership agreement. In reply to the aforesaid letter of Te, PWCC thru its corporate secretary, replied that the board of directors of PWCC decided to impose the following conditions: (a) Delivery of white cement shall commence at the end of November, 1970; (b) Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered; (c) The price of white cement was priced at P13.30 per bag; (d) The price of white cement is subject to readjustment unilaterally on the part of the defendant; (e) The place of

delivery of white cement shall be Austurias (sic); (f) The letter of credit may be opened only with the Prudential Bank, Makati Branch; (g) Payment of white cement shall be made in advance and which payment shall be used by the defendant as guaranty in the opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in the manufacture of white cement. Several demands to comply with the dealership agreement were made by Te to PWCC, however, PWCC refused to comply with the same, and Te by force of circumstances was constrained to cancel his agreement for the supply of white cement with third parties, which were concluded in anticipation of, and pursuant to the said dealership agreement. Notwithstanding that the dealership agreement between Te and PWCC was in force and subsisting, PWCC, in violation of, and with evident intention not to be bound by the terms and conditions thereof, entered into an exclusive dealership agreement with a certain Napoleon Co for the marketing of white cement in Mindanao. Te filed suit. After trial, the trial court adjudged PWCC liable to Alejandro Te in the amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000 00 as and for attorney's fees and costs. The appellate court affirmed the said decision. Hence, PWCC filed the petition for review on certiorari. Issue: Whether the "dealership agreement" referred by the President and Chairman of the Board of PWCC is a valid and enforceable contract. Held: The dealership agreement is not valid and une nforceable. Under the Corporation Law, which was then in force at the time the case arose, as well as under the present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. Although it cannot completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied ratification may take various forms like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are basic, but are all general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporations, is dealing with a third person, i.e., a person outside the corporation. The situation is quite different where a director or officer is dealing with his own corporation. Herein, Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the

corporation as well. He was what is often referred to as a "self-dealing" director. A director of a corporation holds a position of trust and as 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 his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. A director's contract with his corporation is not in all instances 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. Granting arguendo that the "dealership agreement" would be valid and enforceable if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of PWCC changes the whole situation. First of all, the contract was neither fair nor reasonable. The "dealership agreement" entered into in July 1969, was to sell and supply to Te 20,000 bags of white cement per month, for 5 years starting September 1970, at the fixed price of P9.70 per bag. Te is a businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, PWCC had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known that within that period of 6 years, there would be a considerable rise in the price of white cement. In fact, Te's own Memorandum shows that in September 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole 5 years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without authority from the Board of Directors, void or voidable, although it may have been in the ordinary course of business. The fixed price of P9.70 per bag for a period of 5 years was not fair and reasonable. As director, specially since he was the other party in interest, Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense of the corporation. 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 the Court cannot allow him to reap the fruits of his disloyalty.

Western Institute of Technology Inc. vs. Salas Facts: Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of Trustees of Western Institute of Technology, Inc. (WIT), a stock corporation engaged in the operation, among others, of an educational institution. According to Homero L. Villasis, Dimas Enriquez, peston F. Villasis, and Reginald F. Villasis, the minority stockholders of WIT, sometime on 1 June 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In attendance were other members of the Board including Reginald Villasis. Prior to said Special Board Meeting, copies of notice thereof, dated 24 May 1986, were distributed to all Board Members.The notice allegedly indicated that the meeting to be held on 1 June 1986 included Item 6 which states that "Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of Technology, Inc. on compensation of all officers of the corporation." In said meeting, the Board of Trustees passed Resolution 48, series 1986, granting monthly compensation to Salas, et. al. as corporate officers retroactive 1 June 1985, in the following amounts: Chairman 9,000.00/month, Vice Chairman P3,500.00/month, Corporate Treasurer P3,500.00/month and Corporate Secretary P3,500.00/month, retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed equally among the ten members of the Board of Trustees. This shall amend and supercede any previous resolution. A few years later, or on 13 March 1991, Homero Villasis, Preston Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against Salas, et. al. before the Office of the City Prosecutor of Iloilo, as a result of which 2 separate criminal informations, one for falsification of a public document under Article 171 of the Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for falsification of public document was anchored on Salas, et. al.'s submission of WIT's income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the disbursement of corporate funds for the compensation of Salas, et. al. based on Resolution 4, series of 1986, making it appear that the same was passed by the board on 30 March 1986, when in truth, the same was actually passed on 1 June 1986, a date not covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1995 and ending April 30, 1986). Thereafter, trial for the two criminal cases (Criminal Cases 37097 and 37098), was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on both counts dated 6 September 1993 without imposing any civil liability against the accused therein. Villasis, et. al. filed a Motion for Reconsideration of the

civil aspect of the RTC Decision which was, however, denied in an Order dated 23 November 1993. Villasis, et. al. filed the petition for review on certiorari. Significantly on 8 December 1994, a Motion for Intervention, dated 2 December 1994, was filed before this Court by Western Institute of Technology, Inc., disowning its inclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel for Villasis, et. al., had no authority whatsoever to represent the corporation in filing the petition. Intervenor likewise prayed for the dismissal of the petition for being utterly without merit. The Motion for Intervention was granted on 16 January 1995. Issue: Whether the grant of compensation to Salas, et. al. is proscribed under Section 30 of the Corporation Code. Held: 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. Also, 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 phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. Herein, resolution 48, s. 1986 granted monthly compensation to Salas, et. al. not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, ViceChairman, 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. Consequently, the last sentence of Section 30 which provides that "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" does not likewise find application in this case since the compensation is being given to Salas, et. al. in their capacity as officers of WIT and not as board members.

SAN MIGUEL V. KAHN Facts: 14 corporations initially acquired shares of outstanding capital stock of San Miguel Corporation and constituted a Voting Trust thereon in favor of Andres Soriano, Jr. When the latter died Eduardo Cojuanco was elected as the substitute trustee. However, after the EDSA revolution, Cojuanco fled out of the country, and subsequently an agreement was entered into between the 14 corporations and Andres Soriano III (as an agent of several persons) for the purchase of the shares held by the former. Actually the buyer of the shares was Neptunia Corporation, a foreign corporation and wholly-owned subsidiary of another subsidiary wholly owned by San Miguel Corporation. Neptunia paid the downpayment from the proceeds of certain loans. PCGG then sequestered the shares subject of the sale so San Miguel suspended all the other installments of the price to the sellers. The 14 corporations then sued for recission and damages. Meanwhile, PCGG directed San Miguel to issue qualifying shares to seven (7) individuals including Eduardo de los Angeles from the sequestered shares for them to hold in trust. Then, the San Miguel board of directors passed a resolution assuming the loans incurred by Neptunia for the downpayment. De los Angeles assailed the resolution alleging that it was not passed by the board aside from its delitorious effects on the corporations interest. When his efforts to obtain relief within the corporation proved futile, he filed this action with the SEC. Respondent directors alleged that de los Angeles has no legal standing having been merely imposed by the PCGG and that the twent y (20) shares owned by him personally cannot fairly and adequately represent the interest of the minority. Ruling: The requisites of a derivative suit are: 1. the party bringing the suit should be a stockholder as of the time of the act or transactions complained of, the number of shares not being material; 2. exhaustion of intra-corporate remedies (has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea); and 3. the cause of action actually devolves on the corporation and not to the particular stockholder bringing the suit.

The bona fide ownership by a stockholder in his own right suffices to invest him with the standing to bring a derivative suit for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him individually but in behalf and for the benefit of the corporation. It is undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from any aspect be deemed to be beholden to the PCGG, his ownership of his shares being precisely what he invokes as the source of his authority to bring the derivative suit. Furthermore, it was not necessary for de los Angeles to be a director in order to bring a derivative suit. De los Angeles complaint is confined to the issue of the val idity of the assumption by the corporation of the indebtedness of Neptunia, allegedly for the benefit of certain of its officers and stockholders and is distinct from the ownership of the sequestered shares. The dispute concerns the acts of the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out of intra-corporate relations between and among stockholders, or between any or all of them and the corporation of which they are stockholders (meaning that the cause of action still belongs to the corporation). Class notes: In effect the result of the acts of the directors of San Miguel is the use of corporate assets for the benefit of certain directors/stockholders to the extent that the corporation will not be able to devote its assets in acquiring its own shares. But even without the presence of a self-interested director, still the transaction would result to a premature retirement of the shares (meaning a reduction of capital). In a derivative suit, the number of shares of a suing stockholder is immaterial. Even assuming that the suing stockholder had only qualifying shares, the law requires only one share without any distinction or qualification. besides, it is precisely within the scope of PCGGs duty to preserve the assets of the corporation.