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Loyola Grand Villas Homeowners Association, Inc.
(LGVHAI) was organized on 8 February 1983 as the
homeoenwers' association for Loyola Grand Villas. It
was also registered as the sole homeowners'
association in the said village with the Home
Financing Corporation (which eventually became
Home Insurance Guarantee Corporation ["HIGC"]).
However, the association was not able file its
corporate by-laws.
The LGVHAI officers then tried to registered its ByLaws in 1988, but they failed to do so. They then
discovered that there were two other homeowners'
organizations within the subdivision - the Loyola
Grand Villas Homeowners (North) Association, Inc.
[North Association] and herein Petitioner Loyola
Grand Villas Homeowners (South) Association, Inc.
["South Association].
Upon inquiry by the LGVHAI to HIGC, it was
discovered that LGVHAI was dissolved for its failure
to submit its by-laws within the period required by the
Corporation Code and for its non-user of corporate
charter because HIGC had not received any report on
the association's activities. These paved the way for
the formation of the North and South Associations.
LGVHAI then lodged a complaint with HIGC Hearing
Officer Danilo Javier, and questioned the revocation
of its registration. Hearing Officer Javier ruled in favor
of LGVHAI, revoking the registration of the North and
South Associations.
Petitioner South Association appealed the ruling,
contending that LGVHAI's failure to file its by-laws
within the period prescribed by Section 46 of the
Corporation Code effectively automatically dissolved
the corporation. The Appeals Board of the HIGC and
the Court of Appeals both rejected the contention of
the Petitioner affirmed the decision of Hearing Officer
W/N LGVHAI's failure to file its by-laws within the
period prescribed by Section 46 of the Corporation
Code had the effect of automatically dissolving the
said corporation.


The pertinent provision of the Corporation Code that

is the focal point of controversy in this case states:
Sec. 46. Adoption of by-laws. - Every corporation
formed under this Code, must within one (1) month
after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code.
Ordinarily, the word "must" connotes an imposition of
duty which must be enforced. However, the word
"must" in a statute, like "shall," is not always
imperative. It may be consistent with an ecercise of
discretion. If the language of a statute, considered as
a whole with due regard to its nature and object,
reveals that the legislature intended to use the words
"shall" and "must" to be directory, they should be
given that meaning.
The legislative deliberations of the Corporation Code
reveals that it was not the intention of Congress to
automatically dissolve a corporation for failure to file
the By-Laws on time.
Moreover, By-Laws may be necessary to govern the
corporation, but By-Laws are still subordinate to the
Articles of Incorporation and the Corporation Code. In
fact, there are cases where By-Laws are unnecessary
to the corporate existence and to the valid exercise of
corporate powers.
The Corporation Code does not expressly provide for
the effects of non-filing of By-Laws. However, these
have been rectified by Section 6 of PD 902-A which
provides that SEC shall possess the power to
suspend or revoke, after proper notice and hearing,
the franchise or certificate of registration of
corporations upon failure to file By-Laws within the
required period.
This shows that there must be notice and hearing
before a corporation is dissolved for failure to file its
By-Laws. Even assuming that the existence of a
ground, the penalty is not necessarily revocation, but
may only be suspension.
By-Laws are indispensable to corporations, since they
are required by law for an orderly management of
corporations. However, failure to file them within the
period prescribed does not equate to the automatic
dissolution of a corporation.



In 1991, PMI Colleges hired the services of Alejandro

Galvan for the latter to teach in said institution.
However, for unknown reasons, PMI defaulted from
paying the remunerations due to Galvan. Galvan
made demands but were ignored by PMI. Eventually,
Galvan filed a labor case against PMI. Galvan got a
favorable judgment from the Labor Arbiter; this was
affirmed by the National Labor Relations Commission.
On appeal, PMI reiterated, among others, that the
employment of Galvan is void because it did not
comply with its by-laws. Apparently, the by-laws
require that an employment contract must be signed
by the Chairman of the Board of PMI. PMI asserts
that Galvans employment contract was not signed by
the Chairman of the Board.

NO. The fact that Winchester, Inc. is a family corporation

should not in any way exempt respondents from complying
with the clear requirements and formalities of the rules for
filing a derivative suit.

Whether or not Galvans employment contract is void.
No. PMI Colleges never even presented a copy of the
by-laws to prove the existence of such provision. But
even if it did, the employment contract cannot be
rendered invalid just because it does not bear the
signature of the Chairman of the Board of PMI. ByLaws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they
have knowledge of the same. In this case, PMI was
not able to prove that Galvan knew of said provision
in the by-laws when he was employed by PMI.

The case stemmed from the petition of Anthony Yu et. al.
against his younger half-brother Joseph Yukayguan et. al.,
who were all shareholders of Winchester Industrial Supply
Inc., a company engaged in hardware and industrial
equipment business.
Accusing his older brothers family of misappropriating funds
and assets of the company, Yukayguan filed a derivative suit.
After trial, the Cebu Regional Trial Court dismissed the case,
saying Yukayguan failed to follow and observe the essentials
for filing of a derivative suit or action. The ruling was upheld
but later reversed by the Court of Appeals, prompting Yu to
elevate the matter to the SC.
Whether or not Derivative suits filed by Yukayguan is

A stockholders right to institute a derivative suit is not based

on any express provision of the Corporation Code, or even
the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers
liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. However,
there are mandatory requirements before a derivative suit
can be given due course by the Court.
Citing Section 1, Rule 8 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies, the SC said
derivative actions may be filed provided that the suing party
was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time
the action was filed; and he exerted all reasonable efforts,
and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires. As
additional requirements, the SC said there must be no
appraisal rights which would allow a stockholder to sell his
holdings back to the company available and the suit is not a
nuisance or harassment suit.


On 7 August 1991, the Presidential Commission on
Good Government (PCGG) conducted an Eastern
stockholders meeting during which a PCGG
controlled board of directors was elected.
A special stockholders meeting was later convened by
the registered ETPI stockholders wherein another set
of board of directors was elected, as a result of which
two sets of such board and officers were elected.
Victor Africa, a stockholder of ETPI, alleging that the
PCGG had since 29 January 1988 been "illegally
'exercising' the rights of stockholders of ETPI,"
especially in the election of the members of the board
of directors, filed a motion before the Sandiganbayan,
prayed that said court order the "calling and holding of
the Eastern Telecommunications, Philippines, Inc.
(ETPI) annual stockholders meeting for 1992 under
the [c]ourt's control and supervision and prescribed
guidelines." The PCGG did not object to Africa's
motion provided that "(1) An Order be issued
upholding the right of PCGG to vote all the Class "A"
shares of ETPI; (2) In the alternative, in the remote
event that PCGG's right to vote the sequestered
shares be not upheld, an Order be issued (a)
disregarding the Stock and Transfer Book and Booklet

of Stock Certificates of ETPI in determining who can

vote the shares in an Annual Stockholders Meeting of
ETPI, (b) allowing PCGG to vote 23.9% of the total
subscription in ETPI, and (c) directing the amendment
of the Articles of Incorporation and By-laws of ETPI
providing for the minimum safeguards for the
conservation of assets prior to the calling of a
stockholders meeting.
By the assailed Resolution of 13 November 1992, the
Sandiganbayan resolved Africa's motion, ordering the
conduct of an annual stockholders meeting of ETPI,
for 1992. Assailing the foregoing resolution, the
PCGG filed before the Supreme Court a petition (GR
107789) for Certiorari, Mandamus and Prohibition.
By Resolution of 26 November 1992, the Supreme
Court enjoined the Sandiganbayan from (a)
implementing its Resolution of 13 November 1992,
and (b) holding the stockholders' meeting of ETPI
scheduled on 27 November 1992. On 7 December
1992, Aerocom Investors and Managers, Inc.
(AEROCOM), Benito Nieto, Carlos Nieto, Manuel
Nieto III, Ramon Nieto, Rosario Arellano, Victoria
Legarda, Angela Lobregat, Ma. Rita de los Reyes,
Carmen Tuazon and Rafael Valdez, all stockholders
of record of ETPI, filed a motion to intervene in GR
Their motion was granted by the Supreme Court by
Resolution of 14 January 1993. After the parties
submitted their respective memoranda, the PCGG, in
early 1995, filed a "VERY URGENT PETITION FOR
STOCK," it claiming that the increase in authorized
capital stock was necessary in light of the
requirements laid down by Executive Order 109 and
Republic Act 7975. By Resolution of 7 May 1996, the
Supreme Court resolved to refer the PCGG's very
urgent petition to hold the special stockholders'
meeting to the Sandiganbayan for reception of
evidence and resolution. In compliance therewith, the
Sandiganbayan issued a Resolution of 13 December
1996, granting the PCGG "authority to cause the
holding of a special stockholders' meeting of ETPI for
the sole purpose of increasing ETPI's authorized
capital stock and to vote therein the sequestered
Class 'A' shares of stock." The PCGG-controlled ETPI
board of directors thus authorized the ETPI Chair and
Corporate Secretary to call the special stockholders
meeting. Notices were sent to those entitled to vote
for a meeting on 17 March 1997.
The meeting was held as scheduled and the increase
in ETPI's authorized capital stock from P250 Million to

P2.6 Billion was "unanimously approved." On 1 April

1997, Africa filed before the Supreme Court a motion
to cite the PCGG "and its accomplices" in contempt
called/conducted by PCGG and its accomplices," he
contending that only this Court, and not the
Sandiganbayan, has the power to authorize the
PCGG to call a stockholders meeting and vote the
sequestered shares.
Africa went on to contend that, assuming that the
Sandiganbayan had such power, its Resolution of 13
December 1996 authorizing the PCGG to hold the
stockholders meeting had not yet become final
because the motions for reconsideration of said
resolution were still pending. Further, Africa alleged
that he was not given notice of the meeting, and the
PCGG had no right to vote the sequestered Class "A"
A motion for leave to intervene relative to Africa's
"Motion to Cite the PCGG and its Accomplices in
Contempt" was filed by ETPI. The Supreme Court
granted the motion for leave but ETPI never filed any
pleading relative to Africa's motion to cite the PCGG
in contempt. By Resolution of 16 February 2001, the
Sandiganbayan finally resolved to deny the motions
for reconsideration of its Resolution of 13 December
1996, prompting Africa to file on 6 April 2001 before
the Supreme Court a petition for Review on Certiorari
(GR 147214), challenging the Sandiganbayan
Resolutions of 13 December 1996 (authorizing the
holding of a stockholders meeting to increase ETPI's
authorized capital stock and to vote therein the
sequestered Class "A" shares of stock) and 16
February 2001 (denying reconsideration of the
December 13, 1996 Resolution). The petitions were
Whether the PCGG can vote the sequestered ETPI
Class "A" shares in the stockholders meeting for the
election of the board of directors.
Whether the Sandiganbayan can order the Division
Clerk of Court to call the stockholders meeting and in
appointing then Sandiganbayan Associate Justice
Sabino de Leon, Jr. to control and supervise the
1. When sequestered shares registered in the names
of private individuals or entities are alleged to have
been acquired with ill-gotten wealth, then the twotiered test is applied. However, when the sequestered

shares in the name of private individuals or entities

are shown, prima facie, to have been (1) originally
government shares, or (2) purchased with public
funds or those affected with public interest, then the
two-tiered test does not apply. Rather, the public
character exception in Baseco v. PCGG and
Cojuangco Jr. v. Roxas prevail; that is, the
government shall vote the shares.

2. The Clerk of Court, who is already saddled with

judicial responsibilities, need not be burdened with the
additional duties of a corporate secretary. Moreover,
the Clerk of Court may not have the requisite
knowledge and expertise to discharge the functions of
a corporate secretary. The case of Board of Directors
and Election Committee of SMB Workers Savings and
Loan Asso., Inc. v. Tan, etc., et al. (105 Phil. 426
(1959). Vide also 5 Fletcher Cyc Corp (Perm Ed)

2074; 18A Am Jur 2d ) provides a solution to the

Sandiganbayan's dilemma of calling a meeting when
ETPI had two sets of officers. There, the Supreme
Court upheld the creation of a committee empowered
to call, conduct and supervise the election of the
board of directors. Such a committee composed of
impartial persons knowledgeable in corporate
proceedings would provide the needed expertise and
objectivity in the calling and the holding of the meeting
without compromising the Sandiganbayan or its
officers. The appointment of the committee members
and the delineation of the scope of the duties of the
committee may be made pursuant to an agreement
by the parties or in accordance with the provisions of
Rule 9 (Management Committee) of the Interim Rules
of Procedure for Intra-Corporate Controversies insofar
as they are applicable.