OUTLINE 6

5. ID.; ID.; QUESTION ON PROBABLE LOSSES OR DECREASE IN PROFITS NOT

REVIEWABLE BY COURTS. Whether or not a valid and binding resolution passed by the
board of directors, will cause losses or decrease the profits of the corporation, may not be
reviewed by the courts.

XIII. DUTIES OF DIRECTORS & CONTROLLING STOCKHOLDERS

DECISION
EN BANC

REYES, J. B. L., J p:

[G.R. No. L-15092. May 18, 1962.]

ALFREDO MONTELIBANO,
appellants, vs. BACOLOD-MURCIA
appellee.

ET
MILLING

CO.,

AL., plaintiffsINC., defendant-

Taada, Teehankee & Carreon for plaintiffs-appellants.

Hilado & Hilado for defendant-appellee.
SYLLABUS
1. SUGAR CENTRALS; MILLING CONTRACTS; CONCESSIONS GIVEN BY CENTRAL TO
PLANTERS, IF RETRACTED, WILL CONSTITUTE FRAUD; CASE AT BAR. Since there is no
rational explanation for the company's asserting to the further concessions asked by the planters
before the contracts were signed, except as further inducement for the planters to agree to the
extension of the contract period, to allow the company now to retract such concessions would be
to sanction a fraud upon he planters who relied on such additional stipulation.

Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in
its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel the defendant
Milling Company to increase plaintiff's share in the sugar produced from their cane, from 60% to
62.33 %, starting from the 1951-1952 crop year.
It is undisputed that 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. Originally executed in
1919, said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop,
and provided that the resulting product should be divided in the ratio of 45% for the mill and 55%
for the planters. Sometime in 1936, it was 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. To this effect, a printed Amended Milling Contract form was drawn up. On
August 20, 1936, the Board of Directors of the appellee Bacolod Murcia Milling Co., Inc.,
adopted a resolution (Acta No. 11, Acuerdo No. 1) granting further concessions to the planters
over and above those contained in the printed Amended Milling Contract. The bone of contention
is paragraph 9 of this resolution, that reads as follows:
"ACTA NO. 11
SESION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936

2. CONTRACTS; NOVATION; MODIFICATION BEFORE A BARGAIN NOT NOVATION IN

LAW. There can be no novation unless two distinct and successive binding contracts take
place, with the later one designed to replace the preceding convention. Modifications introduced
before a bargain becomes obligatory can in no sense constitute novation in law.

xxx xxx xxx

3. ID.; ASSENT AND CONCURRENCE OF PARTIES NECESSARY TO PERFECT A

CONTRACT; SETTING DOWN OF TERMS NOT IMPORTANT EXCEPT IN CERTAIN CASES.
Except in the case of statutory forms or solemn agreements, it is the assent and concurrence
of the parties, and not the setting down of its terms, that constitute a binding contract.

Acuerdo No. 1 Previa mocion debidamente secundada, la Junta en

consideracin a una peticion de los plantadores hecha por un comit
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado mediante las siguientes:"

4. CORPORATIONS; EXERCISE OF CHARTER POWERS; TESTS TO BE APPLIED. "It is a

question, therefore, in each case, of the logical relation of the act as 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." (Fletcher Cyc. corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)

xxx xxx xxx

"9.a Que si durante la vigencia de este contrato de Molienda
Enmendado, las centrales azucareras, de Negros Occidental, cuya
produccin anual de azucar centrifugado sea ms de una tercera parte
de la produccin total anual de todas las centrales azucareras de Negros
Occidental, concedieren a sus plantadores mejores condiciones que las
estipuladas en el presente contrato, entonces esas mejores condiciones
se concedern y por el presente se entendern concedidas a los
plantadores que hayan otorgado este Contrato de Molienda
Enmendado."
1

Appellants signed and executed the printed Amended Milling Contract on September 10, 1936;
but a copy of the resolution of August 20, 1936, signed by the Central's General Manager, was
not attached to the printed contract until April 17, 1937; with the notation
"Las enmiendas arriba transcritas forman parte del contrato de molienda
enmendado, otorgado por y la Bacolod Murcia Milling Co., Inc."
In 1953, the appellants initiated the present action, contending that three Negros sugar centrals
(La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production exceeding onethird of the production of all the sugar central mills in the province, had already granted
increased participation (of 62.5%) to their planters, and that under paragraph 9 of the resolution
of August 20, 1936, heretofore quoted, the appellee had become obligated to grant similar
concessions to the plaintiffs (appellants herein). 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.
We agree with appellants that the appealed decisions can not stand. It must be remembered
that the controverted resolution was adopted by appellee corporation as a supplement to, or
further amendment of, the proposed milling contract, and that it was approved on August 20,
1936, twenty-one days prior to the signing by appellants on September 10, of the Amended
Milling Contract itself; so that when the amended milling contract was executed, the concessions
granted by the disputed resolution had been already incorporated into its terms. No reason
appears of record why, in the face of such concessions, the appellants should reject them or
consider them as separate and apart from the main amended milling contract, specially taking
into account that appellant Alfredo Montelibanowas, at the time, the President of the Planters
Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the resolution of
August 20, 1936. That the resolution formed an integral part of the amended milling contract,
signed on September 10, and not a separate bargain, is further shown by the fact that a copy of
the resolution was simply attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were
supported by the same causa or consideration underlying the main amended milling contract;
i.e., the promises and obligations undertaken thereunder by the planters, and, particularly, the
extension of its operative period for an additional 15 years over and beyond the 30 years
stipulated in the original contract. Hence, the conclusion of the court below that the resolution
constituted gratuitous concessions not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the respondent
sugar milling company to make a gift to the planters would be relevant if the resolution in
question had embodied a separate agreement after the appellants had already bound
themselves to the terms of the printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were made by the company, the
appellants were not yet obligated by the terms of the printed contract, since they admittedly did
not sign it until twenty-one days later, on September 10, 1936. Before that date, the printed form
was no more than a proposal that either party could modify at its pleasure, and the appellee

actually modified it by adopting the resolution in question. So that by September 10, 1936,
defendant corporation already understood that the printed terms were not controlling, save as
modified by its resolution of August 20, 1936; and we are satisfied that such was also the
understanding of appellants herein, and that the minds of the parties met upon that basis.
Otherwise there would have been no consent or " meeting of the minds", and no binding contract
at all. But the conduct of the parties indicates that they assumed, and they do not now deny, that
the signing of the contract on September 10, 1962 did give rise to a binding agreement. That
agreement had to exist on the basis of the printed terms as modified by the resolution of August
20, 1936, or not at all. Since there is no rational explanation for the Company's assenting to the
further concessions asked by the planters before the contracts were signed, except as further
inducement for the planters to agree to the extension of the contract period, to allow the
company now to retract such concessions would be to sanction a fraud upon the planters who
relied on such additional stipulations.
The same considerations apply to the "void novation" theory of appellees. There can be no
novation unless two distinct and successive binding contracts take place, with the later one
designed to replace the preceding convention. Modifications introduced before a bargain
become obligatory and can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached
to the printed contract until April 17, 1937. But, except in the case of statutory forms or solemn
agreements (and it is not claimed that this is one), it is the assent and concurrence (the "meeting
of the minds") of the parties, and not the setting down of its terms, that constitute a binding
contract. And the fact that the addendum is only signed by the General Manager of the milling
company emphasizes that the addition was made solely in order that the memorial of the terms
of the agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors of the
appellee company in November 19, 1936 (Exhibit 4) only made mention of the 90 per cent, the
planters having agreed to the 60-40 sharing of the sugar set forth in the printed "amended milling
contract", and did not make any reference at all to the terms of the resolution of August 20,
1936. But a reading of this report shows that it was not intended to inventory all the details of the
amended contract; numerous provisions of the printed terms are also glossed over. The
Directors of the appellee Milling Company had no reason at the time to call attention to the
provisions of the resolution in question, since it contained mostly modifications in detail of the
printed terms, and the only major change was paragraph 9 heretofore quoted; but when the
report was made, that paragraph was not yet in effect, since it was conditioned on other centrals
granting better concessions to their planters, and that did not happen until after 1950. There was
no reason in 1936 to emphasize a concession that was not yet, and might never be, in effective
operation.
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
2

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." (Fletcher Cyc. Corp., Vol. 6, Rev. Ed.
1950, pp. 266-268)
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.
"They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be
controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss
during depression, or close down at a smaller loss, is a purely business
and economic problem to be determined by the directors of the
corporation and not by the court. 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." (Fletcher on
Corporations, Vol. 2, p. 390)
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual sugar
production in Occidental Negros) have granted progressively increasing participations to their
adhered planters, at an average rate of
62.333% for
the
64.2% for
64.3% for
64.5% for
the
63.5% for the 1955-1956,

1951-52
crop
the
the
1954-55;

year;
1952-53;
1953-54;
and

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of
August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed
sentencing defendant-appellee to pay plaintiffs-appellants the differential or increase of
participation in the milled sugar in accordance with paragraph 9 of the appellee's Resolution of
August 20, 1936, over and in addition to the 60% expressed in the printed Amended Milling
Contract, or the value thereof when due, as follows:
0.333% to appellants Montelibano for the 1951-1952 crop year,
said appellants having received an additional 2% corresponding
to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year;
and to all appellants thereafter

4.2% for the 1952-1953 crop year;

4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional
increases as they may be entitled to for the crop years subsequent to those herein
adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
LITWIG v. ALLEN, ET AL

25 NYS 2d 667 (1940)

Brief Fact Summary. This is a stockholders derivative suit against the directors of Guaranty Trust
Company, (Trust), its subsidiary Guaranty Company of New York, (Guaranty), and J.P. Morgan
& Co., (J.P.).
Synopsis of Rule of Law. Directors of a corporation have a duty to act with honesty diligence and
prudence. A director is not liable for loss or damage other than what was proximately caused by
his own acts or omissions in breach of his duty.

Facts. This is a stockholders derivative suit against the directors of Guaranty Trust Company,
(Trust), its subsidiary Guaranty Company of New York, (Guaranty), and J.P. Morgan & Co.,
(J.P.). The complaint alleges the directors breached their duty of care when they entered into the
Missouri Pacific Bond Transaction. Alleghany Corporation, (Alleghany), had purchased certain
properties the balance on which was $10,500,000 due on October 16. Alleghany needed money
to make the payment but because of certain borrowing limitations in its charter, could not borrow
the money. To overcome this limitation and to enable Alleghany to complete the purchase,
Alleghany was to sell some of the securities it held. Alleghany held debentures, which were
unsecured and subordinate to other Missouri Pacific bond issues.
J.P. purchased $10 million of these bonds at par giving an option to Alleghany to buy them back
within six months for the price paid. Trust committed to participate in the bond purchase and
Guaranty committed itself to Trust to take up the bonds if Alleghany failed to exercise its option
to repurchase. In October of 1929, the stock market crashed.
Issue.
Whether the directors breached a duty of care with respect to the Missouri Pacific Bond
Transaction.
Whether the directors should be liable for the total loss suffered when the bonds were ultimately
sold at an 81% loss.
Whether all of the directors shall be liable for the breach of the duty of care.
3

Held.
The directors plainly failed to bestow the care which the situation demanded because the entire
arrangement was so improvident, risky unusual and unnecessary as to be contrary to the
fundamental conceptions of prudent banking practice.
No. The directors should only be liable for the portion of the loss which accrued within the six
month option period
No. All the directors who were present and voted at the relevant meetings are liable.
Discussion.
It is against public policy for a bank to for a bank to purchase securities and give the seller the
option to buy them back at the same price thereby incurring the entire risk of loss with no
possibility of gain other than the interest derived from the securities in the interim. Any benefit of
a rise in price is assured to the seller and any risk of heavy loss s inevitably assumed by the
bank.

WALKER V. MAN
142 Misc. 288 (N.Y. Misc. 1931)

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

COLLINS, J.
The plaintiff, as trustee in bankruptcy of Frederick Southack Alwyn Ball, Jr., Inc., moves to strike
out and dismiss the third, fourth and fifth defenses pleaded as counterclaims in the answer of the
defendant Wadham. The amended complaint alleges eleven causes of action charging the
defendants, as directors of the bankrupt corporation, with various acts of nonfeasance and
misfeasance in the management of the business of the bankrupt. For wrecking the corporation,
recovery is sought in the sum of $1,677,411.19.
The answer of the defendant Wadham, after denying the charges, asserts seven separate
defenses, the third, fourth and fifth by way of counterclaim or setoff. The third defense and
counterclaim alleges that in or about May, 1926, he advanced $10,000 to the bankrupt
corporation, no part of which has been paid, excepting the sum of $19 05. The fourth defense
and counterclaim asserts a loan by Wadham to the bankrupt corporation in or about July, 1926,
of another $10,000, no part of which has been paid The fifth defense and counterclaim, after
realleging the third and fourth defenses, avers that in or about July, 1926, the bankrupt did not
have sufficient cash on hand to pay and discharge its obligations to the owners of buildings for
moneys received by the bankrupt, as the agents of such owners and that John Lowry, Inc., who
was a creditor of the bankrupt by virtue of its having built the Thayer West Point Hotel, in which
the bankrupt was interested, was insisting that the bankrupt pay it not less than $50,000 on
account, and that the bankrupt was unable to do so. Accordingly, this fifth defense and
counterclaim alleges, to provide the corporation with cash to pay the obligations to the owners of
the buildings which the bankrupt represented as agent, to pay the $50,000 to John Lowry, Inc.,
to relieve the bankrupt's temporary financial embarrassment, and to enable it to continue in
business, and, if possible, rehabilitate its affairs, the defendant Wadham advanced to the
bankrupt the $20,000 heretofore mentioned, and the defendants Comstock, Man, Perrine and
Guggenheim, at the request of the bankrupt, indorsed the bankrupt's note for $140,000 under
the terms of a written agreement annexed to the answer, and that as a part of that transaction
there was assigned to the defendants Comstock, Man, Perrine and Guggenheim certain assets
of the bankrupt; that, also, as a part of the transaction, the board of directors of the bankrupt
authorized the organization of, and there was formed, a corporation called Southack Ball
4

Management Corporation to take over the management business of the bankrupt, in

consideration of the issue to the bankrupt of all of the stock of the management corporation; that,
thereupon, the bankrupt transferred all of its assets to the management corporation for 1,000
shares of the latter's stock; that, as part of this transaction, the bankrupt pledged the 1,000
shares of the management corporation stock to the defendants Comstock, Man, Perrine and
Guggenheim as collateral, in addition to the collateral theretofore pledged, to secure them for
their indorsement of the bankrupt's note for $140,000.
Wadham's answer proceeds to allege that after the bankruptcy he and the defendants
Comstock, Man, Perrine and Guggenheim foreclosed their liens and sold the collateral pledged
by the bankrupt, and filed their claims in the bankruptcy proceeding for the balance claimed to
be due them after such sale, such balance being $21,422.60 to Wadham, and $128,876.90 to
Comstock, Man, Perrine and Guggenheim; that such claims were allowed over objection. This
fifth defense and counterclaim concludes with the allegation that, by reason of the foregoing, the
plaintiff, representing the bankrupt, is indebted to Wadham in the sum of $21,422.60, which he
pleads as a setoff.
These three separate defenses and counterclaims are assailed by the plaintiff on five grounds.
The primary one, and that most stressed, is that the counterclaims are not ones which may be
properly interposed in this action.
Thus, this motion presents the significant question of whether, in an action by a trustee of a
bankrupt corporation against a director for maladministration of the corporate affairs, the director
may offset an indebtedness due him from the corporation.
The position of the defendant Wadham as a director of the bankrupt is defined
in Kavanaugh v. Kavanaugh Knitting Co. (226 N.Y. 185, 193) thus: "The prerogatives and
functions of the directors of a private business corporation are sufficiently defined and
established. The affairs of the corporation shall be managed by its board of directors. The
relation of the directors to the stockholders is essentially that of trustee and cestui que trust. The
directors are bound by all those rules of conscientious fairness, morality and honesty in purpose,
which the law imposes as the guides for those who are under the fiduciary obligations and
responsibilities. They are held, in official action, to the extreme measure of candor,
unselfishness and good faith. Those principles are rigid, essential and salutary.
( Pollitz v.Wabash R.R. Co., 207 N.Y. 113, 124.)"
May one so situated, who has violated his trust, invoke the principles of setoff and counterclaim?
Section 68 of the Bankruptcy Act (U.S. Code, tit. 11, 108) provides:
"(a) In all cases of mutual debts or mutual credits between the estate of a bankrupt and a
creditor the account shall be stated and one debt shall be set off against the other, and the
balance only shall be allowed or paid.
"(b) A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1)
is not provable against the estate; or (2) was purchased by or transferred to him after the filing of
the petition, or within four months before such filing, with a view to such use and with knowledge
or notice that such bankrupt was insolvent, or had committed an act of bankruptcy."

The above section, however, "was not intended to enlarge the doctrine of set-off, or to enable a
party to make a set-off in cases where the principles of legal or equitable set-off did not
previously authorize it." ( Sawyer v. Hoag, 17 Wall. 610, 622.)
Morris v. Windsor Trust Co. ( 213 N.Y. 27, 29) is decisive of the question under consideration.
There a trustee in bankruptcy sued a pledgee for refusal to deliver property pledged by the
bankrupt to secure a debt, the debt having been paid. The pledgee sought to counterclaim an
indebtedness due him arising out of other transactions than that set forth in the complaint. It was
held that the counterclaims did not come within the clauses enumerated in section 266 of the
Civil Practice Act, nor could they be sustained as set-offs either under section 68 of the
Bankruptcy Act (U.S. Code, tit. 11, 108) or under the general principles of equity. Judge
CARDOZO said: "I think the set-off is without sanction, either statutory or equitable. A wrongdoer who has misapplied the subject of a trust is not entitled, either under the Bankruptcy Act or
under the rules of equitable set-off, to apply a credit that belongs to him in his own right in
cancellation of his liability as a fiduciary. * * * The law is thus settled that if the defendant held
the pledge in trust for the bankrupt, it cannot offset a debt that belongs to it in its own right. I
think that, within the meaning of the rule which forbids the set-off of claims and liabilities held in
inconsistent relations, a trust existed here. Within the meaning of that rule a trust may exist,
though it results by implication of law from the relation between the parties."
This defendant seeks to weaken the application and force of the doctrine expressed in
the Morris case by indicating that the counterclaim pleaded there was not connected with the
transaction set forth in the complaint.
I do not read that case as holding that a counterclaim by a fiduciary which is connected with the
transaction set forth in the complaint may be pleaded.
1
Even if the counterclaim here asserted came within the meaning and intent of section 266 of the
Civil Practice Act, it could not be availed of here because fundamental principles of justice and
equity oppose it.
In the Morris case it was held: "The respondent insists that section 1, subdivision 11, of the
present Bankruptcy Act has changed the law of set-off in providing that `"debt" shall include any
debt, demand or claim provable in bankruptcy.' The act still provides, however, that set-off is not
to be allowed unless the debts are mutual, and debts are not mutual unless held in the same
right. ( Sawyer v. Hoag, 17 Wall. 610, 622; Middleton v. Pollock, L.R. [20 Eq.]
29; Weston v.Barker, 12 Johns. 276.)" (Also Britton v. Ferrin, 171 N.Y. 235.)
The principle of the Morris case has been followed in otherjurisdictions. ( Putnam v. Handy, 251
Mass. 196; 146 N.E. 264; Matter of La Jolla Lumber Mill Co., [D.C.] 243 F. 1004;Lynchburg
Motor Co. v. Thomasson, 141 Va. 153; 126 S.E. 64;Libby v. Hopkins, 104 U.S. 303; 26 L.Ed.
769; Palmer v. Doull Miller Co., [D.C.] 233 F. 309; Topas v. John MacGregor Grant, Inc., [C.C.A.]
18 F. [2d] 724.)
The determination of the referee in bankruptcy cannot be accepted here as res adjudicata for all
purposes.

As recently as January 30, 1931, the First Department held that a decision of a referee in
bankruptcy determining a certain payment to be a preference was not binding on the State court
respecting the determination of value. ( Shea v.Riverview Canning Co., 231 A.D. 535, 539.)
The Shea holding was predicated mainly on Rudd v. Cornell ( 171 N.Y. 114, 127), where it was
said: "It is settled by the decisions of this court that a judgment is conclusive in a second action
only when the same question was at issue in a former suit and the subsequent action was
between the same parties or their privies, and that the conclusive character of a judgment
extends only to the precise issues which were tried in the former action; they must be identical in
each action, not merely in name, but in fact and in substance, and the party seeking to avail
himself of a former judgment must show affirmatively that the question involved in the second
action was material and actually determined in the former, as a former judgment will not operate
as an estoppel as to immaterial or unessential facts, even though put in issue and directly
decided. In other words, a former judgment is final only as to the facts which are actually litigated
and decided, which relate to the issue therein, and the determination of which was necessary to
the determination of that issue. (Reynolds v. AEtna Life Ins. Co., 160 N.Y. 635, 651.)"

eliminated b/c he may have discovered the reason behind them. Dresser, as president, was
much closer to the operation of the bank than the directors. He was there every day, and he
supervised the actual operation of the bank. This the directors didnt do; therefore, Dressers
position exposed him to the warning signs, while the directors were not exposed and, therefore,
he was personally liable while the directors were not.

The effect of permitting these counterclaims to prevail would be to accord one guilty of
wrongdoing to obtain a preference over the general creditors of the bankrupt. To disallow the
offset, it seems to me, is in consonance with law and right.
Accordingly, the motion of the plaintiff is granted.
BATES v. DRESSER
SECOND DIVISION
251 US 524 (1920)
[G.R. No. L-27155. May 18, 1978.]
Posted on April 17, 2014 | Business Law | Tags: Business Law Case Briefs
FACTS: Dresser (Defendant) was the president of a small bank in Cambridge. The bank had
only a few employees, and defendant supervised all the work that was done. One of the
employees, Coleman, was promoted from messenger to bookkeeper in 1904. From 1904 until
1907, there were several small shortages in the bank and indications that an employee was
stealing. There was no indication, however, that Coleman was dishonest. In 1907, Coleman
began using his access to the books to cover up the thefts he was making. He did this by
altering the records in such a way that the only way he could be caught was to examine the
deposit record of all the deposits. During this time, defendant had several indications that
someone at the bank was a thief. He never attempted to ascertain who the thief was or to
examine the books, even though he had the opportunity to do so.
ISSUE: Did the failure to take affirmative action to discover the thief amount to a breach of duty
to the corporation?
HOLDING: Yes, as far as the president is concerned, but not regarding the directors. The
directors acted reasonably by relying on the information given to them. They had no reason to
believe that there were any irregularities in the bank records. Dressers position was different.
He was in the bank daily. He had access to the books at all times. He knew of shortages and
apparent unexplained declines in deposits, yet he failed to make any attempt to discover the
reasons behind these peculiar events. The continued losses were his fault b/c the warnings that
he had should have led him to investigate. Had he investigated, the losses may have been

PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF

APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY,
INC., respondents.
Medina, Locsin, Corua & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.
SYNOPSIS
Upon failure of Rita Tapnio to pay her account with the Philippine National Bank
which was secured by a bond of the Philippine American General Insurance Company, Inc.
(PHILAMGEN), the latter paid the same and then sued Rita Tapnio on their indemnity
agreement. Rita Tapnio filed a third party complaint against petitioner Bank because,
earlier, the bank, as mortgagee of her sugar quota allocation for the year 1956-1957 at a
reasonable lease price and demanded parties to the lease contract to further raise their
consideration, the difference between the lease price offered and that demanded by the
Bank being a measly total of P200.00. As a result thereof, Rita Tapnio failed to utilize her
sugar quota for that particular crop year and to realize an amount which was more than
enough to pay the balance of her indebtedness to the bank which was secured and
6

subsequently paid by the bonding company. The trial court ordered the Philippine National
Bank to pay Rita Tapnio the same amounts she was ordered to pay to the PHILAMGEN.
This decision was affirmed by the Court of Appeals.
The Supreme Court found no reasonable basis for the Board of Directors of
petitioner Bank to disapprove the lease contract because of the measly sum of P200.00
and ruled that although the Bank had the ultimate authority of approving or disapproving the
proposed lease, since the sugar quota was mortgaged to it, it still had the responsibility of
observing, for the protection and interest of the mortgagor, that degree of care, precaution
and vigilance which the circumstances justly demand in approving or disapproving the
lease of said sugar quota.
SYLLABUS
1. MORTGAGES; RIGHT AND CORRESPONDING OBLIGATION OF MORTGAGE. While a
mortgagee bank has the authority of approving or disapproving a proposed lease of sugar quota
which are mortgaged to it, it certainly cannot escape its responsibility of observing, for the
protection and interest of the mortgagor, that degree of care, precaution and vigilance which the
circumstances justly demand in approving or disapproving the lease of said sugar quota.
2. ID.; ID.; DAMAGES; LIABILITY UNDER ARTICLE 21 OF THE NEW CIVIL CODE FOR
FAILURE TO OBSERVE CARE AND VIGILANCE UNDER ARTICLE 19 OF THE NEW CIVIL
CODE. The Philippine National Bank, as mortgagee of sugar quota allegations, is liable for
damages under Article 21 of the New Civil Code for its failure to observe reasonable care and
vigilance as required under Article 19 of the New Civil Code, by refusing to approve the lease of
the mortgaged sugar quota for a measly P200 difference in the lease price offered and the price
demanded by the Bank, and despite the fact that all the mortgagor's accounts with the Bank
were secured and that she had apparently the means to pay her obligation to the Bank.
3. CORPORATION LAW; LIABILITY FOR TORTS. The Philippine National Bank, as a
corporation, is civilly liable in the same manner as natural persons for torts, because "generally
speaking, the rules governing the liability of a principal or master for a tort committed by an
agent or servant are the same whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or artificial person. All the authorities
agree that a principal or master is liable for every tort which he expressly directs or authorizes,
and this is just as true of a corporation as of a natural person. A corporation is liable, therefor,
whenever a tortious act is committed by an officer or agent under express direction or authority
from the stockholders or members acting as a body, or, generally, from the directors as the
governing body."
4. APPEALS; JURISDICTION OF THE SUPREME COURT. The jurisdiction of the Supreme
Court in a petition for review is limited to reviewing only errors of law, accepting as conclusive
the factual findings of the Court of Appeals upon its own assessment of the evidence.
DECISION
ANTONIO, J p:
Certiorari to review the decision of the Court of Appeals which affirmed the judgment of the Court
of First Instance of Manila in Civil Case No. 34185, ordering petitioner, as third-party defendant,

to pay respondent Rita Gueco Tapnio, as third-party plaintiff, the sum of P2,379.71, plus 12%
interest per annum from September 19, 1957 until the same is fully paid, P200.00 attorney's fees
and costs, the same amounts which Rita Gueco Tapnio was ordered to pay the Philippine
American General Insurance Co., Inc., to be paid directly to the Philippine American General
Insurance Co., Inc. in full satisfaction of the judgment rendered against Rita Gueco Tapnio in
favor of the former; plus P500.00 attorney's fees for Rita Gueco Tapnio and costs. The basic
action is the complaint filed by Philamgen (Philippine American General Insurance Co., Inc.) as
surety against Rita Gueco Tapnio and Cecilio Gueco, for the recovery of the sum of P2,379.71
paid by Philamgen to the Philippine National Bank on behalf of respondents Tapnio and Gueco,
pursuant to an indemnity agreement. Petitioner Bank was made third-party defendant by Tapnio
and Gueco on the theory that their failure to pay the debt was due to the fault or negligence of
petitioner. LibLex
The facts as found by the respondent Court of Appeals, in affirming the decision of the Court of
First Instance of Manila, are quoted hereunder:
"Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as
principal, in favor of the Philippine National Bank Branch at San
Fernando, Pampanga, to guarantee the payment of defendant Rita
Gueco Tapnio's account with said Bank. In turn, to guarantee the
payment of whatever amount the bonding company would pay to the
Philippine National Bank, both defendants executed the indemnity
agreement, Exh. B. Under the terms and conditions of this indemnity
agreement, whatever amount the plaintiff would pay would earn interest
at the rate of 12% per annum, plus attorney's fees in the amount of 15%
of the whole amount due in case of court litigation.
"The original amount of the bond was for P4,000.00; but the amount was
later reduced to P2.000.00.
"It is not disputed that defendant Rita Gueco Tapnio was indebted to the
bank in the sum of P2,000.00, plus accumulated interests unpaid, which
she failed to pay despite demands. The Bank wrote a letter of demand to
plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on September
18, 1957, the full amount due and owing in the sum of P2,379.91, for and
on account of defendant Rita Gueco's obligation (Exhs. D and D-1).
"Plaintiff, in turn, made several demands, both verbal and written, upon
defendants (Exhs. E and F), but to no avail.
"Defendant Rita Gueco Tapnio admitted all the foregoing facts. She
claims, however, when demand was made upon her by plaintiff for her to
pay her debt to the Bank, that she told the plaintiff that she did not
consider herself to be indebted to the Bank at all because she had an
agreement with one Jacobo Tuazon whereby she had leased to the latter
her unused export sugar quota for the 1956-1957 agricultural year,
consisting of 1,000 piculs at the rate of P2.80 per picul, or for a total of
P2,800.00, which was already in excess of her obligation guaranteed by
plaintiff's bond, Exh. A. This lease agreement, according to her, was with
the knowledge of the bank. But the Bank has placed obstacles to the
consummation of the lease, and the delay caused by said obstacles
7

forced Tuazon to rescind the lease contract. Thus, Rita Gueco Tapnio
filed her third-party complaint against the Bank to recover from the latter
any and all sums of money which may be adjudged against her and in
favor of the plaintiff, plus moral damages, attorney's fees and costs.
"Insofar as the contentions of the parties herein are concerned, we quote
with approval the following findings of the lower court based on the
evidence presented at the trial of the case:
'It has been established during the trial that Mrs.
Tapnio had an export sugar quota of 1,000 piculs for the
agricultural year 1956-1957 which she did not need. She
agreed to allow Mr. Jacobo C. Tuazon to use said quota for the
consideration of P2,500.00 (Exh. "4"-Gueco). This agreement
was called a contract of lease of sugar allotment.
'At the time of the agreement, Mrs. Tapnio was
indebted to the Philippine National Bank at San Fernando,
Pampanga. Her indebtedness was known as a crop loan and
was secured by a mortgage on her standing crop including her
sugar quota allocation for the agricultural year corresponding to
said standing crop. This arrangement was necessary in order
that when Mrs. Tapnio harvests, the P.N.B., having a lien on
the crop, may effectively enforce collection against her. Her
sugar cannot be exported without sugar quota allotment.
Sometimes, however, a planter harvest less sugar than her
quota, so her excess quota is utilized by another who pays her
for its use. This is the arrangement entered into between Mrs.
Tapnio and Mr. Tuazon regarding the former's excess quota for
1956-1957 (Exh. "4"-Gueco).
'Since the quota was mortgaged to the P.N.B., the
contract of lease had to be approved by said Bank. The same
was submitted to the branch manager at San Fernando,
Pampanga. The latter required the parties to raise the
consideration of P2.80 per picul or a total of P2,800.00 (Exh "2Gueco") informing them that "the minimum lease rental
acceptable to the Bank, is P2.80 per picul." In a letter
addressed to the branch manager on August 10, 1956, Mr.
Tuazon informed the manager that he was agreeable to raising
the consideration to P2.80 per picul. He further informed the
manager that he was ready to pay said amount as the funds
were in his folder which was kept in the bank.
'Explaining the meaning of Tuazon's statement as to
the funds, it was stated by him that he had an approved loan
from the bank but he had not yet utilized it as he was intending
to use it to pay for the quota. Hence, when he said the amount
needed to pay Mrs. Tapnio was in his folder which was in the
bank, he meant and the manager understood and knew he had
an approved loan available to be used in payment of the quota.
In said Exh. "6-Gueco", Tuazon also informed the manager that

he would want for a notice from the manager as to the time

when the bank needed the money so that Tuazon could sign
the corresponding promissory note.'
"Further consideration of the evidence discloses that when the branch
manager of the Philippine National Bank at San Fernando recommended
the approval of the contract of lease at the price of P2.80 per picul (Exh.
11-Bank), whose recommendation was concurred in by the Vice
president of said Bank, J. V. Buenaventura, the board of directors
required that the amount be raised to P3.00 per picul. This act of the
board of directors was communicated to Tuazon, who in turn asked for a
reconsideration thereof. On November 19, 1956, the branch manager
submitted Tuazon's request for reconsideration to the board of directors
with another recommendation for the approval of the lease at P2.80 per
picul, but the board returned the recommendation unacted upon,
considering that the current price prevailing at the time was P3.00 per
picul (Exh. 9-Bank).
"The parties were notified of the refusal on the part of the board of
directors of the Bank to grant the motion for reconsideration. The matter
stood as it was until February 22, 1957, when Tuazon wrote a letter (Exh.
10-Bank) informing the Bank that he was no longer interested to continue
the deal referring to the lease of sugar quota allotment in favor of
defendant Rita Gueco Tapnio. The result is that the latter lost the sum of
P2,800.00 which she should have received from Tuazon and which she
could have paid the Bank to cancel off her indebtedness.
"The court below held, and in this holding we concur, that failure of the
negotiation for the lease of the sugar quota allocation of Rita Gueco
Tapnio to Tuazon was due to the fault of the directors of the Philippine
National Bank. The refusal on the part of the bank to approve the lease at
the rate of P2.80 per picul which, as stated above, would have enabled
Rita Gueco Tapnio to realize the amount of P2,800.00 which was more
than sufficient to pay off her indebtedness to the Bank, and its insistence
on the rental price of P3.00 per picul thus unnecessarily increasing the
value by only a difference of P200.00, inevitably brought about the
rescission of the lease contract to the damage and prejudice of Rita
Gueco Tapnio in the aforesaid sum of P2,800.00. The unreasonableness
of the position adopted by the board of directors of the Philippine National
Bank in refusing to approve the lease at the rate of P2.80 per picul and
insisting on the rate of P3.00 per picul, if only to increase the retail value
by only P200.00 is shown by the fact that all the accounts of Rita Gueco
Tapnio with the Bank were secured by chattel mortgage on standing
crops, assignment of leasehold rights and interests on her properties, and
surety bonds, aside from the fact that from Exh. 8-Bank, it appears that
she was offering to execute a real estate mortgage in favor of the Bank to
replace the surety bond. This statement is further bolstered by the fact
that Rita Gueco Tapnio apparently had the means to pay her obligation to
the Bank, as shown by the fact that she has been granted several sugar
crop loans of the total value of almost P80,000.00 for the agricultural
years from 1952 to 1956." 1
8

Its motion for the reconsideration of the decision of the Court of Appeals having been denied,
petitioner filed the present petition. LLphil
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota allocation
of respondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to the unjustified refusal of
petitioner to approve said lease contract, and its unreasonable insistence on the rental price of
P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of sugar quota in the
possession of the petitioner, the latter's Board of Directors correctly fixed the rental of price per
picul of 1,000 piculs of sugar quota leased by respondent Rita Gueco Tapnio to Jacobo C.
Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both under its
own Charter and under the Corporation Law, to safeguard and protect its rights and interests
under the deed of assignment, which include the right to approve or disapprove the said lease of
sugar quota and in the exercise of that authority, its Board of Directors necessarily had authority
to determine and fix the rental price per picul of the sugar quota subject of the lease between
private respondents and Jacobo C. Tuazon, It argued further that both under its Charter and the
Corporation Law, petitioner, acting thru its Board of Directors, has the perfect right to adopt a
policy with respect to fixing of rental prices of export sugar quota allocations, and in fixing the
rentals at P3.00 per picul, it did not act arbitrarily since the said Board was guided by statistics of
sugar price and prices of sugar quotas prevailing at the time. Since the fixing of the rental of the
sugar quota is a function lodged with petitioner's Board of Directors and is a matter of policy, the
respondent Court of Appeals could not substitute its own judgment for that of said Board of
Directors, which acted in good faith, making as its basis therefore the prevailing market price as
shown by statistics which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great injustice
because as a creditor, it shall be deprived of a just claim against its debtor (respondent Rita
Gueco Tapnio) as it would be required to return to respondent Philamgen the sum of P2,379.71,
plus interest, which amount had been previously paid to petitioner by said insurance company in
behalf of the principal debtor, herein respondent Rita Gueco Tapnio, and without recourse
against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in proceedings of this nature is
limited to reviewing only errors of law, accepting as conclusive the factual findings of the Court of
Appeals upon its own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco Tapnio
and Jacobo C. Tuazon was executed on April 17, 1956. This contract was submitted to the
Branch Manager of the Philippine National Bank at San Fernando, Pampanga. This
arrangement was necessary because Tapnio's indebtedness to petitioner was secured by a
mortgage on her standing crop including her sugar quota allocation for the agricultural year
corresponding to said standing crop. The latter required the parties to raise the consideration to
P2.80 per picul, the minimum lease rental acceptable to the Bank, or a total of P2,800.00.
Tuazon informed the Branch Manager, thru a letter dated August 10, 1956, that he was
agreeable to raising the consideration to P2.80 per picul. He further informed the manager that
he was ready to pay the said sum of P2,800.00 as the funds were in his folder which was kept in

the said Bank. This referred to the approved loan of Tuazon from the Bank which he intended to
use in paying for the use of the sugar quota. The Branch Manager submitted the contract of
lease of sugar quota allocation to the Head Office on September 7, 1956, with a
recommendation for approval, which recommendation was concurred in by the Vice-President of
the Bank, Mr. J. V. Buenaventura. This notwithstanding, the Board of Directors of petitioner
required that the consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked for a reconsideration
thereof. On November 19, 1956, the Branch Manager submitted the request for reconsideration
and again recommended the approval of the lease at P2.80 per picul, but the Board returned the
recommendation unacted, stating that the current price prevailing at that time was P3.00 per
picul. cdrep
On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer
interested in continuing the lease of sugar quota allotment. The crop year 1956-1957 ended and
Mrs. Tapnio failed to utilize her sugar quota, resulting in her loss in the sum of P2,800.00 which
she should have received had the lease in favor of Tuazon been implemented.
It has been clearly shown that when the Branch Manager of petitioner required the parties to
raise the consideration of the lease from P2.50 to P2.80 per picul, or a total of P2,800.00, they
readily agreed. Hence, in his letter to the Branch Manager of the Bank on August 10, 1956,
Tuazon informed him that the minimum lease rental of P2.80 per picul was acceptable to him
and that he even offered to use the loan secured by him from petitioner to pay in full the sum of
P2,800.00 which was the total consideration of the lease. This arrangement was not only
satisfactory to the Branch Manager but it was also approved by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement, Rita Gueco Tapnio could have realized the
amount of P2,800.00, which was more than enough to pay the balance of her indebtedness to
the Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota for the crop year 1956-1957
was due to the disapproval of the lease by the Board of Directors of petitioner. The issue,
therefore, is whether or not petitioner is liable for the damage caused.
As observed by the trial court, time is of the essence in the approval of the lease of sugar quota
allotments, since the same must be utilized during the milling season, because any allotment
which is not filled during such milling season may be reallocated by the Sugar Quota
Administration to other holders of allotments. 3 There was no proof that there was any other
person at that time willing to lease the sugar quota allotment of private respondents for a price
higher than P2.80 per picul. "The fact that there were isolated transactions wherein the
consideration for the lease was P3.00 a picul", according to the trial court, "does not necessarily
mean that there are always ready takers of said price." The unreasonableness of the position
adopted by the petitioner's Board of Directors is shown by the fact that the difference between
the amount of P2.80 per picul offered by Tuazon and the P3.00 per picul demanded by the
Board amounted only to a total sum of P200.00. Considering that all the accounts of Rita Gueco
Tapnio with the Bank were secured by chattel mortgage on standing crops, assignment of
leasehold rights and interests on her properties, and surety bonds and that she had apparently
"the means to pay her obligation to the Bank, as shown by the fact that she has been granted
several sugar crop loans of the total value of almost P80,000.00 for the agricultural years from
1952 to 1956", there was no reasonable basis for the Board of Directors of petitioner to have
rejected the lease agreement because of a measly sum of P200.00.
9

While petitioner had the ultimate authority of approving or disapproving the proposed lease since
the quota was mortgaged to the Bank, the latter certainly cannot escape its responsibility of
observing, for the protection of the interest of private respondents, that degree of care,
precaution and vigilance which the circumstances justly demand in approving or disapproving
the lease of said sugar quota. The law makes it imperative that every person "must in the
exercise of his rights and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith." 4 This petitioner failed to do. Certainly, it knew that
the agricultural year was about to expire, that by its disapproval of the lease private respondents
would be unable to utilize the sugar quota in question. In failing to observe the reasonable
degree of care and vigilance which the surrounding circumstances reasonably impose, petitioner
is consequently liable for the damages caused on private respondents. Under Article 21 of the
New Civil Code, "any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the damage."
The afore-cited provisions on human relations were intended to expand the concept of torts in
this jurisdiction by granting adequate legal remedy for the untold number of moral wrongs which
is impossible for human foresight to specifically provide in the statutes. 5
A corporation is civilly liable in the same manner as natural persons for torts, because "generally
speaking, the rules governing the liability of a principal or master for a tort committed by an
agent or servant are the same whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or artificial person. All of the
authorities agree that a principal or master is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a natural person. A corporation is liable,
therefore, whenever a tortious act is committed by an officer or agent under express direction or
authority from the stockholders or members acting as a body, or, generally, from the directors as
the governing body." 6
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby
AFFIRMED. LibLex
Fernando, Aquino, Concepcion, Jr. and Santos, JJ., concur.
||| (PNB v. Court of Appeals, G.R. No. L-27155, [May 18, 1978], 172 PHIL 592-602)

Quisumbing Torres & Evangelista for Western Institute of Technology.

Teodulfo L.C. Castro for private respondents.
SYNOPSIS
Private respondents, majority and controlling members of the Board of Trustees of Western
Institute of Technology, Inc. were acquitted of the crimes of estafa and falsification of public
document. The falsification charge was anchored on private respondents submission of the
school's income statement for fiscal year 1985-1986 with the Securities and Exchange
Commission reflecting therein the disbursement of corporate funds for the compensation of
private respondents based on Resolution No. 4, series of 1986, and making it appear that the
Resolution was passed by the board on March 30, 1986, when in truth the same was actually
passed on June 1, 1986, a date not covered by the corporation's fiscal year. The charge of
estafa is based on private respondent's having disbursed funds of the corporation by effecting
payment of their retroactive salaries of P186,470.00 and subsequently paying themselves every
15th and 30th of the month starting June 15, 1986 in the amount of P19,500.00 per month. After
trial, the court acquitted the private respondents on both counts without imposing any civil liability
against them. The individual petitioners, minority stockholders of the corporation, thus seek to
hold the private respondents civilly liable despite their acquittal based on the alleged illegal
issuance by private respondents of Resolution No. 4, series of 1986, ordering the disbursement
of corporate funds and that the grant of compensation to private respondents is proscribed under
Sec. 30 of the Corporation Code.
The Supreme Court held that the proscription against granting compensation to
directors/trustees of a corporation is not a sweeping rule. The implication under Sec. 30 of the
Corporation Code 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. Resolution No. 4 s. 1986 granted compensation to private respondents not in
their capacity as members of the board but rather as officers of the corporation. The instant case
which is merely an appeal on the civil aspect of the criminal cases for estafa and falsification of
public document, is not a derivative suit. Even if the case is a derivative suit, the same was
wrongfully filed in the regular court as the proper forum is the Securities and Exchange
Commission which exercises original and exclusive jurisdiction over intra-corporate disputes.
The acquittal in the criminal cases is not merely based on reasonable doubt but rather on a
finding that the accused-private respondents did not commit action ex delicto cannot prosper.
Petition denied.

1.

Compensation of directors

SYLLABUS
FIRST DIVISION

[G.R. No. 113032. August 21, 1997.]

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L.
VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD
F. VILLASIS, petitioners, vs. RICARDO T. SALAS, SALVADOR T.
SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS,
RICHARD S. SALAS & HON. JUDGE PORFIRIO PARIAN, respondents.
Tranquilino R. Gale for petitioners.

1. COMMERCIAL LAW; CORPORATION LAW; BOARD OF DIRECTORS; GENERAL RULE ON

COMPENSATION; EXCEPTION; CASE AT BAR. There is no argument that 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 the foregoing
section, 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.
The proscription, however, against granting compensation to directors/trustees of a corporation
is not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: " . . .
[T]he directors shall not receive any compensation, as such directors, . . . ." The phrase as such
10

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. In the case at bench, Resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity as members of the board, but rather
as officers of the corporation, more particularly as Chairman, Vice Chairman, Treasurer and
Secretary of Western Institute of Technology. Thus, the prohibition with respect to granting
compensation to corporate directors/trustees as such under Section 30 is not violated in this
particular case. HDCAaS
2. ID.; ID.; DERIVATIVE SUIT; NOT THE CASE AT BAR WHICH IS MERELY AN APPEAL ON
THE CIVIL ASPECT OF A CRIMINAL CASE. A derivative suit is an action brought by minority
shareholders in the name of the corporation to redress wrongs committed against it, for which
the directors refuse to sue. It is a remedy designed by equity and has been the principal defense
of the minority shareholders against abuses by the majority. Here, however, the case is not a
derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and
37098 filed with the RTC of Iloilo for estafa and falsification of public document. Among the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and
on behalf of the corporation must allege in his complaint before the proper forum that he is suing
on a derivative cause of action on behalf of the corporation and all other shareholders similarly
situated who wish to join. This is necessary to vest jurisdiction upon the tribunal in line with the
rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasijudicial body concerned over the subject matter and nature of the action. This was not complied
with by the petitioners either in their complaint before the court a quonor in the instant petition.
By no amount of equity considerations, if at all deserve, can a mere appeal on the civil aspect of
a criminal case be treated as a derivative suit.
3. ID.; ID.; ID.; JURISDICTION; SECURITIES AND EXCHANGE COMMISSION. Granting, for
purposes of discussion, that this is a derivative suit, the same is outrightly dismissible for having
been wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. The
case should have been filed with the Securities and Exchange Commission (SEC) which
exercises original and exclusive jurisdiction over derivative suits, they being intra-corporate
disputes, per Section 5(b) of P.D. No. 902-A.. Once the case is decided by the SEC, the losing
party may file a petition for review before the Court of Appeals raising questions of fact, of law, or
mixed questions of fact and law. It is only after the case has ran this course, and not earlier, can
it be brought to us via a petition for review on certiorari under Rule 45 raising only pure questions
of law.
4. REMEDIAL LAW; CRIMINAL PROCEDURE; ACQUITTAL FOR NOT COMMITTING CRIME
IMPUTED BARS CIVIL ACTION. As an appeal on the civil aspect of Criminal Cases Nos.
37097 and 37098 for falsification of public document and estafa, which this petition truly is, we
have to deny the petition just the same. From the factual findings, which we find to be amply
substantiated by the records, it is evident that there is simply no basis to hold the accused,
private respondents herein, civilly liable. The acquittal in Criminal Cases Nos. 37097 and 37098
is not merely based on reasonable doubt but rather on a finding that the accused-private
respondents did not commit the criminal acts complained of. Thus, pursuant to Section 2(b) of
Rule III of the New Rules on Criminal Procedure and last paragraph of Section 2, Rule 120, and
settled jurisprudence, any civil action ex delicto cannot prosper. Acquittal in a criminal action
bars the civil action arising therefrom where the judgment of acquittal holds that the accused did
not commit the criminal acts imputed to them.

DECISION
HERMOSISIMA, JR., J p:
Up for review on certiorari are: (1) the Decision dated September 6, 1993 and (2) the Order
dated November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City in Criminal
Cases Nos. 37097 and 37098 for estafa and falsification of a public document, respectively. The
judgment acquitted the private respondents of both charges, but petitioners seek to hold them
civilly liable. cdphil
Private respondents 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, for short), a
stock corporation engaged in the operation, among others, of an educational institution.
According to petitioners, the minority stockholders of WIT, sometime on June 1, 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 one of the petitioners Reginald Villasis. Prior to
aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986, were distributed
to all Board Members. The notice allegedly indicated that the meeting to be held on June 1, 1986
included Item No. 6 which states:
"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." 1
In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting monthly
compensation to the private respondents as corporate officers retroactive June 1, 1985, viz.:
"Resolution No. 48 s. 1986.
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs.
Soledad Tubilleja (accused), it was unanimously resolved that:
'The Officers of the Corporation be granted monthly
compensation for services rendered as follows: 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 superceed (sic) any previous resolution.'
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on March
30, 1986 is true and correct to the best of my knowledge and belief.
11

(Sgd.) ANTONIO S.
SALAS

Iloilo City, Philippines, November 22, 1991." 3 [Emphasis ours].

The Information, on the other hand, for estafa reads:

Corporate Secretary" 2
A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Preston Villasis,
Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents
before the Office of the City Prosecutor of Iloilo, as a result of which two (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 the private respondents' 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 private respondents based on
Resolution No. 4, series of 1986, making it appear that the same was passed by the board on
March 30, 1986, when in truth, the same was actually passed on June 1, 1986, a date not
covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1995 and ending April 30,
1986). The Information for falsification of a public document states:
"The undersigned City Prosecutor accuses RICARDO T. SALAS,
SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS and RICHARD S. SALAS (whose dates and places of birth cannot
be ascertained) of the crime of FALSIFICATION OF A PUBLIC
DOCUMENT, Art. 171 of the Revised Penal Code, committed as follows:
That on or about the 10th day of June, 1986, in the City of
Iloilo, Philippines and within the jurisdiction of this Honorable
Court, the above-named accused, being then the Chairman,
Vice-Chairman, Treasurer, Secretary, and Trustee (who later
became Secretary), respectively, of the board of trustees of the
Western Institute of Technology, Inc., a corporation duly
organized and existing under the laws of the Republic of the
Philippines, conspiring and confederating together and mutually
helping one another, to better realized (sic) their purpose, did
then and there wilfully, unlawfully and criminally prepare and
execute and subsequently cause to be submitted to the
Securities and Exchange Commission an income statement of
the corporation for the fiscal year 1985-1986, the same being
required to be submitted every end of the corporation fiscal
year by the aforesaid Commission, and therefore, a public
document, including therein the disbursement of the retroactive
compensation of accused corporate officers in the amount of
P186,470.70, by then and there making it appear that the basis
thereof Resolution No. 4, Series of 1986 was passed by the
board of trustees on March 30, 1986, a date covered by the
corporation's fiscal year 1985-1986, (i.e., from May 1, 1985 to
April 30, 1986) when in truth and in fact, as said accused well
knew, no such Resolution No. 48, Series of 1986 was passed
on March 30, 1986.
CONTRARY TO LAW.

"The undersigned City Prosecutor accuses RICARDO SALAS,

SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS, RICHARD S. SALAS (whose dates and places of birth cannot be
ascertained) of the crime of ESTAFA, Art. 315, par. 1 (b) of the Revised
Penal Code, committed as follows:
That on or about the 1st day of June, 1986, in the City of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court,
the above-named accused, being then the Chairman, ViceChairman, Treasurer, Secretary, and Trustee (who later
became Secretary), respectively, of the Board of Trustees of
Western Institute of Technology, Inc., a corporation duly
organized and existing under the laws of the Republic of the
Philippines, conspiring and confederating together and mutually
helping one another to better realize their purpose, did then
and there wilfully, unlawfully and feloniously defraud the said
corporation (and its stockholders) in the following manner, to
wit: herein accused, knowing fully well that they have no
sufficient authority to disburse let alone violation of
applicable laws and jurisprudence, disbursed the funds of the
corporation by effecting payment of their retroactive salaries in
the amount of P186,470.00 and subsequently paying
themselves every 15th and 30th of the month starting June 15,
1986 until the present, in the amount of P19,500.00 per month,
as if the same were their own, and when herein accused were
informed of the illegality of these disbursements by the minority
stockholders by way of objections made in annual stockholders'
meeting held on June 14, 1986 and every year thereafter, they
refused, and still refuse, to rectify the same to the damage and
prejudice of the corporation (and its stockholders) in the total
sum of P1,453,970.79 as of November 15, 1991.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22, 1991." 4 [Emphasis ours]
Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos. 37097 and 37098,
was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of
acquittal on both counts 5 dated September 6, 1993 without imposing any civil liability against
the accused therein.cdpr
Petitioners filed a Motion for Reconsideration 6 of the civil aspect of the RTC Decision which
was, however, denied in an Order dated November 23 1993. 7
Hence, the instant petition.
12

Significantly on December 8, 1994, a Motion for Intervention, dated December 2, 1994, was filed
before this Court by Western Institute of Technology, Inc., supposedly one of the petitioners
herein, disowning its inclusion in the petition and submitting that Atty. Tranquilino R. Gale,
counsel for the other petitioners, 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 January 16, 1995. 8
Petitioners would like us to hold private respondents civilly liable despite their acquittal in
Criminal Cases Nos. 37097 and 37098. They base their claim on the alleged illegal issuance by
private respondents of Resolution No. 48, series of 1986 ordering the disbursement of corporate
funds in the amount of P186,470.70 representing retroactive compensation as of June 1, 1985 in
favor of private respondents, board members of WIT, plus P1,453,970.79 for the subsequent
collective salaries of private respondents every 15th and 30th of the month until the filing of the
criminal complaints against them on March 1991. Petitioners maintain that this grant of
compensation to private respondents is proscribed under Section 30 of the Corporation Code.
Thus, private respondents are obliged to return these amount to the corporation with interest.

"Resolution No. 48 s. 1986.

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs.
Soledad Tubilleja (accused), it was unanimously resolved that:
'The Officers of the Corporation be granted monthly
compensation for services rendered as follows: 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 superceed (sic) any previous
resolution.'
There were no other business.

We cannot sustain the petitioners. The pertinent section of the Corporation Code provides:
The Chairman declared the meeting adjourned at 5:11 P.M.
"Sec. 30. Compensation of directors. In the absence of any provision
in the by-laws fixing their compensation, the directors shall not receive
any compensation, as such directors, except for reasonable per
diems: Provided, however, That any such compensation (other than per
diems) may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent
of the net income before income tax of the corporation during the
preceding year." [Emphasis ours]
There is no argument that 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. 9 Under the foregoing section, 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.
This 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. 10 In the case at bench, resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity as members of the board, but rather
as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and
Secretary of Western Institute of Technology. We quote once more Resolution No. 48, s. 1986
for easy reference, viz.:

This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on March
30, 1986 is true and correct to the best of my knowledge and belief.
(Sgd.) ANTONIO S. SALAS
Corporate
Secretary" 11 [Emphasis
ours]
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:
". . . 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." [Emphasis ours]
does not likewise find application in this case since the compensation is being given to private
respondents in their capacity as officers of WIT and not as board members.
Petitioners assert that the instant case is a derivative suit brought by them as minority
shareholders of WIT for and behalf of the corporation to annul Resolution No. 48, s. 1986
which is prejudicial to the corporation.
We are unpersuaded. A derivative suit is an action brought by minority shareholders in the name
of the corporation to redress wrongs committed against it, for which the directors refuse to
sue. 12 It is a remedy designed by equity and has been the principal defense of the minority
shareholders against abuses by the majority. 13 Here, however, the case is not a derivative suit
13

but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with
the RTC of Iloilo for estafa and falsification of public document. Among the basic requirements
for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of
the corporation must allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other shareholders similarly
situated who which to join. 14 This is necessary to vest jurisdiction upon the tribunal in line with
the rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasijudicial body concerned over the subject matter and nature of the action. 15 This was not
complied with by the petitioners either in their complaint before the court a quonor in the instant
petition which, in part, merely states that "this is a petition for review on certiorari on pure
questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and
37098" 16 since the trial court's judgment of acquittal failed to impose any civil liability against
the private respondents. By no amount of equity considerations, if at all deserved, can a mere
appeal on the civil aspect of a criminal case be treated as a derivative suit. prcd
Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which
it is not, the same is outrightly dismissible for having been wrongfully filed in the regular court
devoid of any jurisdiction to entertain the complaint. The case should have been filed with the
Securities and Exchange Commission (SEC) which exercises original and exclusive jurisdiction
over derivative suits, they being intra-corporate disputes, per Section 5 (b) of P.D. No. 902-A:
"In addition to the regulatory and adjudicative functions of the Securities
and Exchange Commission over corporations, partnerships and other
forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:
xxx xxx xxx
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any
or all of them and the corporation, partnership or association of which
they are stockholders, members or associates, respectively; and between
such corporation, partnership or association and the State insofar as it
concerns their individual franchise or right to exist as such entity;
xxx xxx xxx." [Emphasis ours]
Once the case is decided by the SEC, the losing party may file a petition for review before the
Court of Appeals raising questions of fact, of law, or mixed questions of fact and law. 17 It is only
after the case has ran this course, and not earlier, can it be brought to us via a petition for review
on certiorari under Rule 45 raising only pure questions of law. 18 Petitioners, in pleading that we
treat the instant petition as a derivative suit, are trying to short-circuit the entire process which
we cannot here sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for falsification of
public document and estafa, which this petition truly is, we have to deny the petition just the
same. It will be well to quote the respondent court's ratiocinations acquitting the private
respondents on both counts:

"The prosecution wants this Court to believe and agree that there is
falsification of public document because, as claimed by the prosecution,
Resolution No. 48, Series of 1986 (Exh. '1-E-1') was not taken up and
passed during the Regular Meeting of the Board of Trustees of the
Western Institute of Technology (WIT), Inc. on March 30, 1986, but on
June 1, 1986 special meeting of the same board of trustees.
This Court is reluctant to accept this claim of falsification. The prosecution
omitted to submit the complete minutes of the regular meeting of the
Board of Trustees on March 30, 1986. It only presented in evidence
Exh. 'C' which is page 5 or the last page of the said minutes. Had the
complete minutes (Exh. '1' ') consisting of five (5) pages, been submitted
it can be readily seen and understood that Resolution No. 48, Series of
1986 (Exh. '1-E-1' ) giving compensation to corporate officers, was
indeed included in Other Business, No. 6 of the Agenda, and was taken
up and passed on March 30, 1986. The mere fact of existence of Exh. C
also proves that it was passed on March 30, 1986 for Exh. C is part and
parcel of the whole minutes of the Board of Trustees Regular Meeting on
March 30, 1986. No better and more credible proof can be considered
other than the Minutes (Exh. '1' ) itself of the Regular Meeting of the
Board of Trustees on March 30, 1986. The imputation that said
Resolution No. 48 was neither taken up nor passed on March 30, 1986
because the matter regarding compensation was not specifically stated or
written in the Agenda and that the words 'possible implementation of said
Resolution No. 48, was expressly written in the Agenda for the Special
Meeting of the Board on June 1, 1986, is simply an implication. This
evidence by implication to the mind of the court cannot prevail over the
Minutes (Exh. '1') and cannot ripen into proof beyond reasonable doubt
which is demanded in all criminal prosecutions.
This Court finds that under the Eleventh Article (Exh. '3-D-1') of the
Articles of Incorporation (Exh. '3-B') of the Panay Educational Institution,
Inc., now the Western Institute of Technology, Inc., the officers of the
corporation shall receive such compensation as the Board of Directors
may provide. These Articles of Incorporation was adopted on May 17,
1957 (Exh. '3-E'). The Officers of the corporation and their corresponding
duties are enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of
the Amended By-Laws of the Corporation (Exh. '4-A') which was adopted
on May 31, 1957. According to Sec. 6, Art. III of the same By-Laws, all
officers shall receive such compensation as may be fixed by the Board of
Directors.
It is the perception of this Court that the grant of compensation or salary
to the accused in their capacity as officers of the corporation, through
Resolution No. 48, enacted on March 30, 1986 by the Board of Trustees,
is authorized by both the Articles of Incorporation and the By-Laws of the
corporation. To state otherwise is to depart from the clear terms of the
said articles and by-laws.In their defense the accused have properly and
rightly asserted that the grant of salary is not for directors, but for their
being officers of the corporation who oversee the day to day activities and
operations of the school.
14

xxx xxx xxx

. . . [O]n the question of whether or not the accused can be held liable for
estafa under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is
perceived by this Court that the receipt and the holding of the money by
the accused as salary on basis of the authority granted by the Articles
and By-Laws of the corporation are not tainted with abuse of
confidence. The money that received belongs to them and cannot be said
to have been converted and/or misappropriated by them.
xxx xxx xxx." 19 [Emphasis ours]
From the foregoing factual findings, which we find to be amply substantiated by the records, it is
evident that there is simply no basis to hold the accused, private respondents herein, civilly
liable.Section 2(b) of Rule 111 on the New Rules on Criminal Procedure provides:

Padilla, Bellosillo, Vitug and Kapunan, JJ ., concur

2.

Duty of diligence / Business Judgment Rule

EN BANC
[G.R. No. L-18805. August 14, 1967.]
THE BOARD OF LIQUIDATORS 1 representing THE GOVERNMENT
OF
THE
REPUBLIC
OF
THE
PHILIPPINES, plaintiffappellant, vs. HEIRS OF MAXIMO M. KALAW, 2 JUAN BOCAR,
ESTATE OF THE DECEASED CASIMIRO GARCIA, 3 and LEONOR
MOLL, defendants-appellees.

Simeon M. Gopengco and The Solicitor General for plaintiff-appellant.

"SEC. 2. Institution of separate civil action.
xxx xxx xxx
(b) Extinction of the penal action does not carry with it extinction of the
civil, unless the extinction proceeds from a declaration in a final judgment
that the fact from which the civil might arise did not exist." [Emphasis
ours]
Likewise, the last paragraph of Section 2, Rule 120 reads:
"SEC. 2. Form and contents of judgment.
xxx xxx xxx
In case of acquittal, unless there is a clear showing that the act from
which the civil liability might arise did not exist, the judgment shall make a
finding on the civil liability of the accused in favor of the offended party."
[Emphasis ours]
The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on reasonable doubt
but rather on a finding that the accused-private respondents did not commit the criminal acts
complained of. Thus, pursuant to the above rule and settled jurisprudence, any civil action ex
delicto cannot prosper. Acquittal in a criminal action bars the civil action arising therefrom where
the judgment of acquittal holds that the accused did not commit the criminal acts imputed to
them. 20
WHEREFORE, the instant petition is hereby DENIED with costs against petitioners. LLpr

L.H. Hernandez, Emma Quisumbing Fernando and Quisumbing, Jr., Ponce Enrile, Siguion
Reyna, Montecillo D. Belo for defendants-appellees.
SYLLABUS
1. APPEAL; APPELLATE COURT; POWER TO BASE AFFIRMANCE ON POINTS IGNORED
BY TRIAL COURT. An appellate court may base its decision of affirmance of the judgment
below on a point or points ignored by the trial court on which said court was in error (Garcia
Valdez vs. Tuason, 40 Phil. 943; Lucero vs. Guzman, 45 Phil. 852; Relativo vs. Castro, 76 Phil.
563).
2. CORPORATION LAW; THREE METHODS OF WINDING UP CORPORATE AFFAIRS. A
corporation may wind up its affairs in one of the following methods: (1) under Section 3, Rule
104, of the Rules of Court (which superseded Section 66 of the Corporation Law), whereby,
upon voluntary dissolution of a corporation, the court may direct "such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets and pay the debts of the
corporation;" (2) under Section 77 of the Corporation Law, whereby a corporation whose
corporate existence is terminated, "shall nevertheless be continued as a body corporate for three
years after the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to settle and close its affairs, to
dispose of and convey its property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established;" and (3) under Section 78 of the
Corporation Law, by virtue of which the corporation, within the three-year period just mentioned,
"is authorized and empowered to convey all of its property to trustees for the benefit of
members, stockholders, creditors, and others interested" (Government vs. Wise & Co., Ltd., 37
Off. Gaz. 545).
3. ID.; BOARD OF LIQUIDATORS, EXISTENCE THEREOF NOT LIMITED. Executive Order
372 of the President of the Philippines placed no time limit on the term of life of the Board of
Liquidators and its function of closing the affairs of the various government-owned corporations.

SO ORDERED.
4. ID.; BOARD OF LIQUIDATORS AS TRUSTEE FOR GOVERNMENT. By Executive Order
No. 372, the government, the sole stockholder, abolished NACOCO, and placed its assets in the
15

hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of
the government. It was an express trust. The legal interest became vested in the trustee the
Board of Liquidators. The beneficial interest remained with the sole stockholder the
government.
5. ID.; ID.; RIGHT OF BOARD OF LIQUIDATORS TO PROCEED AS PARTY PLAINTIFF. As
the government had at no time withdrawn the property, or the authority to continue the suit, from
the Board of Liquidators which acts as trustee for the government by Section 78 of the
Corporation Law providing for the third method of winding up corporate affairs, said board has
personality to proceed as party-plaintiff in the case.
6. REMEDIAL LAW; ESTATE PROCEEDINGS; ACTIONS THAT SURVIVE. Rule 87, Section
1, Rules of Court, enumerates actions that survive against a decedent's executors or
administrators, and they are: (1) actions to recover real and personal property from the estate;
(2) actions to enforce a lien thereon; and (3) actions to recover damages for an injury to person
or property.
7. ID.; ID.; ID.; TORTUOUS ACTS SURVIVE. Where the suit revolves around alleged
negligent acts of decedent for having entered into contracts without the prior approval of the
Board of Directors, to plaintiff's damage and prejudice, and is against the decedent and other
directors for having subsequently approved those contracts in bad faith and/or breach of trust,
the case is not a mere action for money nor a claim for money arising from contract, but is
embraced in suits filed "to recover damages for an injury to person or property, real or personal,"
which survive. Section 1, Rule 87, Rules of Court.
8. CORPORATION LAW; IMPLIED AUTHORITY OF CORPORATE OFFICER TO ENTER INTO
CONTRACTS. A corporate officer intrusted with the general management and control of its
business, has implied authority to make any contract or do any other act which is necessary or
appropriate to the conduct of the ordinary business of the corporation (2 Fletcher Cyclopedia
Corporations, p. 607; Yu Chuck vs. Kong Li Po, 46 Phil. 608). As such officer, he may, without
any special authority from the Board of Directors, perform all acts of an ordinary nature, which by
usage or necessity are incident to his office, and may bind the corporation by contracts in
matters arising in the usual course of business (Sparksvs. Despatch Transfer Co., 15 S.W. 417;
Pacific Concrete Products Corporation vs. Dimmick, 289 P. 2d. 501; Massachussetts Bonding &
Ins. Co. vs. Transamerican Freight Lines, 281 N.W. 584; Sealy Oil Mill & Mfg. Co. vs. Bishop
Mfg. Co., 235 S.W. 850).
9. ID.; ID.; WHERE SIMILAR ACTS WERE APPROVED BY DIRECTORS; CASE AT BAR.
Where similar acts have been approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without formal authorization of the board
of directors (Harrisvs. H.C. Talton Wholesale Grocery Co., 123 So. 480). In varying language,
existence of such authority is established, by proof of the course of business, the usages and
practices of the company and by the knowledge which the board of directors has, or must be
presumed to have, of acts and doings of its subordinates in and about the affairs of the
corporation (Van Denburgh vs. Tungsten Reef Mines Co., 67 P. 2d. 360, citing First National Fin.
Corp. vs. Five-O Drilling Co., 289 P. 844). In the case at bar, the practice of the corporation has
been to allow its general manager to negotiate and execute contracts in its copra trading
activities for and in NACOCO's behalf without prior board approval. If the by-laws were to be
literally followed, the board should give its stamp of prior approval on all corporate contracts. But
that board itself, by its acts and through acquiescence, practically laid aside the by-law
requirement of prior approval. Under the given circumstances, the contracts executed by the
general manager are valid corporate acts.

10. ID.; ID.; RATIFICATION BY CORPORATION OF UNAUTHORIZED CONTRACT OF ITS

OFFICERS. Ratification by a corporation of an unauthorized act or contract by its officers or
others relates back to the time of the act or contract ratified, and is equivalent to original
authority; and that the corporation and the other party to the transaction are in precisely the
same position as if the act or contract had been authorized at the time (2 Fletcher, p. 858, citing
cases). "The adoption or ratification of a contract by a corporation is nothing more nor less than
the making of an original contract. The theory of corporate ratification is predicated on the right
of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior
authority" (Kridelbaugh vs. Aldrehn Theatres Co., 191 N.W. 803, citing cases).
11. CIVIL LAW CONTRACTS; BAD FAITH. Bad faith does not simply connote bad judgment
or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of
the nature of fraud.
12. CORPORATION LAW; DIRECTORS, ACCOUNTABILITY THEREOF. Directors of a
corporation are not personally accountable except when they themselves have been personally
guilty of rome fraud on the corporation, or have known or connived at some fraud in others, or
where such fraud might have been prevented had they given ordinary attention to their duties.
13. ID.; ID.; PROFIT OR LOSS NOT A CRITERION. Profit or loss resulting from business
ventures is not a ground for determining personal liability of members of the board of directors.
14. ID.; CIVIL LAW; DAMNUM ABSQUE INJURIA. Where the damage suffered by the
corporation was due to a force majeure, which prevented it from fulfilling obligations on contracts
executed without fault or negligence of the general manager or the directors, there is a case of
damnum absque injuria, where conjunction of damage and wrong is here absent. There cannot
be an actionable wrong if either one or the other is wanting.
15. ID.; DIRECTORS; ACTS IN GOOD FAITH NOT REVIEWABLE BY COURTS. The board
of directors of a corporation holds the duty to act for the corporation according to their best
judgment, and in so doing it cannot be controlled in the reasonable exercise and performance of
such duty. So long as it acts in good faith its orders are not reviewable by the courts.
DECISION
SANCHEZ, J p:
The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit
governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the
protection, preservation and development of the coconut industry in the Philippines. On August
1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation the express
power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra, and
dessicated coconut, as well as their by-products, and to act as agent, broker or commission
merchant of the producers, dealers or merchants" thereof. The charter amendment was enacted
to stabilize copra prices, to serve coconut producers by securing advantageous prices for them,
to cut down to a minimum, if not altogether eliminate, the margin of middlemen, mostly aliens. 4

16

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and
Casimiro Garcia were members of the Board; defendant Leonor Moll became director only on
December 22, 1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst
the scores of contracts executed by general manager Kalaw are the disputed contracts, for the
delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00 per ton, f.o.b.,
delivery: August and September, 1947. This contract was later assigned to Louis Dreyfus & Co.
(Overseas) Ltd.

When it became clear that the contracts would be unprofitable Kalaw submitted them to the
board for approval. It was not until December 22, 1947 when the membership was completed.
Defendant Moll took her oath on that date. A meeting was then held. Kalaw made a full
disclosure of the situation, apprised the board of the impending heavy losses. No action was
taken on the contracts. Neither did the board vote thereon at the meeting of January 7, 1948
following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO
head did his best to avert the losses, emphasized that government concerns faced the same
risks that confronted private companies, that NACOCO was recouping its losses, and that Kalaw
was to remain in his post. Not long thereafter, that is, on January 30, 1948, the board met again
with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts
hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the contracts, as follows:
Buyers Tons Delivered Undelivered

(b) August 14, 1947: Alexander Adamson & Co., for 3,000 long tons, $145.00 per long ton, f.o.b.,
Philippine ports, to be shipped: September/October, 1947. This contract was also assigned to
Louis Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co, for 3,000 tons, $137.50 per ton, delivery: September,
1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los
Angeles, California delivery: November, 1947.
(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long
tons, $164.00 per ton, c.i.f., New York, to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per
ton, f.o.b., 3 Philippine ports, delivery: November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons $175.00 per ton, delivery: November
and December, 1947. This contract was assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons $210.00 per short ton, c.i.f., Pacific ports,
delivery: December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable
Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons $210.00 per short ton, c.i.f., Pacific ports,
delivery: January, 1948. This contract was assigned to Pacific Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature
supervened. Four devastating typhoons visited the Philippines: the first in October, the second
and third in November, and the fourth in December, 1947. Coconut trees throughout the country
suffered extensive damage. Copra production decreased. Prices spiralled. Warehouses were
destroyed. Cash requirements doubled. Deprivation of export facilities increased the time
necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a
problem.

Pacific Vegetable Oil 2,386.45 4,613.55

Spencer Kellog None 1,000
Franklin Baker 1,000 500
Louis Dreyfus 800 2,200
Louis Dreyfus (Adamson
contract of July 30, 1947) 1,150 850
Louis Dreyfus (Adamson
contract of August 14, 1947) 1,755 245

T O T A L S 7,091.45 9,408.55
The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil
Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210,00;
Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Co. (Overseas) Ltd., did in fact sue before the Court of First
Instance of Manila, upon claims as follows: For the undelivered copra under the July 30 contract
(Civil Case 4459), P287,028.00; for the balance on the August 14, contract (Civil Case 4398,
P75,098.63; for that per the September 12 contract reduced to judgment (Civil Case 4322,
appealed to this Court in L- 2829), P447,904.40. These cases culminated in an out-of-court
amicable settlement - when the Kalaw management was already out. The corporation
thereunder paid Dreyfus P567,024.52 representing 70% of the total claims. With particular
reference to the Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were void
because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business here; and (2)
failure to deliver was due to force majeure, the typhoons. To project the utter unreasonableness
of this compromise, we reproduce in haec verba this finding below:
". . . However, in similar cases brought by the same claimant [Louis
Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for non- delivery
of copra also involving a claim of P345,654.68 wherein defendant set
up same defenses as above, plaintiff accepted a promise of P5,000.00
only (Exhs. 31 & 32-Heirs). Following the same proportion, the claim of
Dreyfus against NACOCO should have been compromised for only
P10,000.00, if at all. Now, why should defendant be held liable for the
large sum paid as compromise by the Board of Liquidators? This is just a
17

sample to show how unjust it would be to hold defendants liable for the
readiness with which the Board of Liquidators disposed of the NACOCO
funds, although there was much possibility of successfully resisting the
claims, or at least settlement for nominal sums like what happened in the
Syjuco case." 5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the above sum of
P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan
Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of
the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including
Kalaw, with bad faith and/or breach trust for having approved the contracts. The fifth amended
complaint, on which this case was tried, was filed on July 2, 1959. Defendants resisted the
action upon defenses hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint without costs as well as
defendant's counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw
the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from
NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not question the judgment on Kalaw's counterclaim for the sum of P2,601.94.
Right at the outset, two preliminary questions raised before, but adversely decided by, the court
below, arrest our attention. On appeal, defendants renew their bid. And this, upon established
jurisprudence that an appellate court may base its decision of affirmance of the judgment below
on a point or points ignored by the trial court or in which said court was in error. 6
1. First of the threshold questions is that advanced by defendants that plaintiff Board of
Liquidators has lost its legal personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1)
under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the
Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct
"such disposition of its assets as justice requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation Law,
whereby a corporation whose corporate existence is terminated, "shall nevertheless be
continued as a body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its property and to divide its
capital stock, but not for the purpose of continuing the business for which it was established";
and (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the
three-year period just mentioned, "is authorized and empowered to convey all of its property to
trustees for the benefit of members, stockholders, creditors, and others interested." 8
It is defendants' pose that their case comes within the coverage of the second method. They
reason out that suit was commenced in February, 1949; that by Executive Order 372, dated
November 24, 1950, NACOCO, together with other government-owned corporations, was

abolished, and the Board of Liquidators was entrusted with the function of settling and closing its
affairs; and that, since the three-year period has elapsed, the Board of Liquidators may not now
continue with, and prosecute, the present case to its conclusion, because Executive Order 372
provides in Section 1 thereof that
"SECTION 1. The National Abaca and Other Fibers Corporation, the
National Coconut Corporation, the National Tobacco Corporation, the
National Food Products Corporation and the former enemy-owned or
controlled corporations or associations, . . . are hereby abolished. The
said corporations shall be liquidated in accordance with law, the
provisions of this Order, and/or in such manner as the President of the
Philippines may direct; Provided, however, That each of the said
corporations shall nevertheless be continued as a body corporate for a
period of three (3) years from the effective date of this Executive Order for
the purpose of prosecuting and defending suits by or against it and of
enabling the Board of Liquidators gradually to settle and close its affairs,
to dispose of and convey its property in the manner hereinafter provided."
Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found
impossible within the 3-year period to reduce disputed claims to judgment, nonetheless, "suits by
or against a corporation abate when it ceases to be an entity capable of suing or being sued"
(Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris
Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its
existence so that there must be statutory authority for prolongation of its life even for purposes of
pending litigation"; 9 and that suit "cannot be continued or revived; nor can a valid judgment be
rendered therein, and a judgment, if rendered, is not only erroneous, but void and subject to
collateral attack." 10 So it is, that abatement of pending actions follows as a matter of course
upon the expiration of the legal period for liquidation, 11 unless the statute merely requires a
commencement of suit within the added time. 12 For, the court cannot extend the time alloted by
statute. 13
We, however, express the view that the executive order abolishing NACOCO and creating the
Board of Liquidators should be examined in context. The proviso in Section 1 of Executive Order
372, whereby the corporate existence of NACOCO was continued for a period of three years
from the effectivity of the order for "the purpose of prosecuting and defending suits by or against
it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of
and convey its property in the manner hereinafter provided", is to be read not as an isolated
provision but in conjunction with the whole. So reading, it will be readily observed that no time
limit has been tackled to the existence of the Board of Liquidators and its function of closing the
affairs of the various government-owned corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of the various corporations
were abolished, their powers and functions and duties under existing laws were to be assumed
and exercised by the Board of Liquidators. The President thought it best to do away with the
boards of directors of the defunct corporations; at the same time, however, the President had
chosen to see to it that the Board of Liquidators step into the vacuum. And nowhere in the
executive order was there any mention of the lifespan of the Board of Liquidators. A glance at
the other provisions of the executive order buttresses our conclusion. Thus, liquidation by the
Board of Liquidators may, under section 1, proceed in accordance with law, the provisions of the
executive order, "and/or in such manner as the President of the Philippines may direct." By
Section 4, when any property, fund, or project is transferred to any governmental instrumentality
"for administration or continuance of any project," the necessary funds therefor shall be taken
18

from the corresponding special fund created in Section 5. Section 5, in turn, talks of special
funds established from the "net proceeds of the liquidation" of the various corporations
abolished. And by Section 7, fifty per centum of the fees collected from the copra standardization
and inspection service shall accrue "to the special fund created in section 5 hereof for the
rehabilitation and development of the coconut industry." Implicit in all these, is that the term of
life of the Board of Liquidators is without time limit. Contemporary history gives us the fact that
the Board of Liquidators still exists as an office with officials and numerous employees
continuing the job of liquidation and prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed to the final determination
of the present case is without jurisprudential support. The first judicial test before this Court is
National Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case,
the corporation, already dissolved, commenced suit within the three-year extended period for
liquidation. That suit was for recovery of money advanced to defendant for the purchase of hemp
in behalf of the corporation. She failed to account for that money. Defendant moved to dismiss,
questioned the corporation's capacity to sue. The lower court ordered plaintiff to include as coparty plaintiff. The Board of Liquidators, to which the corporation's liquidation was entrusted
by Executive Order 372. Plaintiff failed to effect inclusion. The lower court dismissed the suit.
Plaintiff moved to reconsider. Ground: excusable negligence, in that its counsel prepared the
amended complaint, as directed, and instructed the board's incoming and outgoing
correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court
and a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to
send the original to the court. This motion was rejected below. Plaintiff came to this Court on
appeal. We there said that "the rule appears to be well settled that, in the absence of statutory
provision to the contrary, pending actions by or against a corporation are abated upon expiration
of the period allowed by law for the liquidation of its affairs." We there noted that "[o]ur
Corporation Law contains no provision authorizing a corporation, after three (3) years from the
expiration of its lifetime, to continue in its corporate name actions instituted by it within said
period of three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in that
case that the Board of Liquidators escapes from the operation thereof for the reason that
"[o]bviously, the complete loss of plaintiffs corporate existence after the expiration of the period
of three (3) years for the settlement of its affairs is what impelled the President to create a Board
of Liquidators, to continue the management of such matters as may then be pending." 15 We
accordingly directed the record of said case to be returned to the lower court, with instructions to
admit plaintiff's amended complaint to include, as party plaintiff, The Board of Liquidators.

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their
nineteenth special defense, that plaintiffs action is personal to the deceased Maximo M. Kalaw,
and may not be deemed to have survived after his death.18 They say that the controlling statute
is Section 5, Rule 87, of the 1940 Rules of Court, 19 which provides that "[a]ll claims for money
against the decedent, arising from contract, express or implied," must be filed in the estate
proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered into the
questioned contracts without prior approval of the board of directors, to the damage and
prejudice of plaintiff; and is against Kalaw and the other directors for having subsequently
approved the said contracts in bad faith and/or breach of trust. Clearly then, the present case is
not a mere action for the recovery of money nor a claim for money arising from contract. The suit
involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for
an injury to person or property, real or personal," which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962.
There, plaintiffs sought to recover damages from defendant Llemos. The complaint averred that
Llemos had served plaintiff by registered mail with a copy of a petition for a writ of possession in
Civil Case 4824 of the Court of First Instance at Catbalogan, Samar, with notice that the same
would be submitted to the Samar court on February 23, 1960 at 8:00 am.; that in view of the
copy and notice served, plaintiffs proceeded to the said court of Samar from their residence in
Manila accompanied by their lawyers, only to discover that no such petition had been filed; and
that defendant Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and
trouble turned out to be in vain, causing them mental anguish and undue embarrassment.
Defendant died before he could answer the complaint. Upon leave of court, plaintiffs amended
their complaint to include the heirs of the deceased. The heirs moved to dismiss. The court
dismissed the complaint on the ground that the legal representative, and not the heirs, should
have been made the party defendant; and that, anyway, the action being for recovery of money,
testate or intestate proceedings should be initiated and the claim filed therein. This Court, thru
Mr. Justice Jose B. L. Reyes, there declared:

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed
its assets in the hands of the Board of Liquidators. The Board of Liquidators thus became
the trustee on behalf of the government. It was an express trust. The legal interest became
vested in the trustee the Board of Liquidators. The beneficial interest remained with the sole
stockholder the government. At no time had the government withdrawn the property, or the
authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we
cannot stay the hand of the Board of Liquidators from prosecuting this case to its final
conclusion. 16 The provisions of Section 78 of the Corporation Law the third method of
winding up corporate affairs find application.

"Plaintiffs argue with considerable cogency that contrasting the correlated

provisions of the Rules of Court, those concerning claims that are barred
if not filed in the estate settlement proceedings (Rule 87, sec. 5) and
those defining actions that survive and may be prosecuted against the
executor or administrator (Rule 88, sec. 1), it is apparent that actions for
damages caused by tortious conduct of a defendant (as in the case at
bar) survive the death of the latter. Under Rule 87, section 5, the actions
that are abated by death are: (1) claims for funeral expenses and those
for the last sickness of the decedent; (2) judgments for money; and (3) 'all
claims for money against the decedent, arising from contract express or
implied.' None of these includes that of the plaintiffs appellants; for it is
not enough that the claim against the deceased party be for money, but it
must arise from 'contract express or implied,' and these words (also used
by the Rules in connection with attachments and derived from the
common law) were construed in Leung Ben vs. O'Brien, 38 Phil., 182,
189-194,

We, accordingly, rule that the Board of Liquidators has personality to proceed as party-plaintiff in
this case.

'to include all purely personal obligations other than those

which have their source indelict or tort.'

Defendant's position is vulnerable to attack from another direction.

2. Defendant's second poser is that the action is unenforceable against the heirs of Kalaw.
19

Upon the other hand, Rule 88, section 1, enumerates actions that survive
against a decedent's executors or administrators, and they are: (1)
actions to recover real and personal property from the estate; (2) actions
to enforce a lien thereon; and (3) actions to recover damages for an injury
to person or property. The present suit is one for damages under the last
class, it having been held that 'injury to property' is not limited to injuries
to specific property, but extends to other wrongs by which personal estate
is injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171
A.L.R., 1395). To maliciously cause a party to incur unnecessary
expenses, as charged in this case, is certainly injury to that party's
property (Javier vs. Araneta, 90 Phil. 287).
The ruling in the preceding case was hammered out of facts comparable to those of the present.
No cogent reason exists why we should break away from the views just expressed. And, the
conclusion remains: Action against the Kalaw heirs and, for that matter, against the Estate of
Casimiro Garcia, survives.
The preliminaries out of the way, we now go to the core of the controversy.
3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into
the controverted contracts without the prior approval of the corporation's directorate. Plaintiff
leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as
amongst the duties of the general manager, the obligation: "(b) To perform or execute on behalf
of the Corporation upon prior approval of the Board, all contracts necessary and essential to the
proper accomplishment for which the Corporation was organized."
Not of de minimis importance in a proper approach to the problem at hand, is the nature of a
general manager's position in the corporate structure. A rule that has gained acceptance through
the years is that a corporate officer "intrusted with the general management and control of its
business, has implied authority to make any contract or do any other act which is necessary or
appropriate to the conduct of the ordinary business of the corporation." 21 As such officer, "he
may, without any special authority from the Board of Directors, perform all acts of an ordinary
nature, which by usage or necessity are incident to his office, and may bind the corporation by
contracts in matters arising in the usual course of business." 22
The problem, therefore, is whether the case at bar is to be taken out of the general concept of
the powers of a general manager, given the cited provision of the NACOCO by-laws requiring
prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this
enterprise are copra sales for future delivery. The movement of the market requires that sales
agreements be entered into, even though the goods are not yet in the hands of the seller. Known
in business parlance as forward sales, it is concededly the practice of the trade. A certain
amount of speculation is inherent in the undertaking. NACOCO was much more conservative
than the exporters with big capital. This short-selling was inevitable at the time in the light of
other factors, such as availability of vessels, the quantity required before being accepted for
loading, the labor needed to prepare and sack the copra for market. To NACOCO, forward sales
were a necessity. Copra could not stay long in its hands; it would lose weight, its value
decrease. Above all, NACOCO'S limited funds necessitated a quick turnover. Copra contracts
then had to be executed on short notice at times within twenty-four hours. To be appreciated
then is the difficulty of calling a formal meeting of the board.

Such were the environmental circumstances when Kalaw went into copra trading.
Long before the disputed contracts came into being, Kalaw contracted by himself alone as
general manager for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw
signed some 60 such contracts for the sale of copra to divers parties. During that period, from
those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was
NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to grant
him a special bonus "in recognition of the signal achievement rendered by him in putting the
Corporation's business on a self-sufficient basis within a few months after assuming office,
despite numerous handicaps and difficulties."
These previous contracts, it should be stressed, were signed by Kalaw without prior
authority from the board. Said contracts were known all along to the board members. Nothing
was said by them. The aforesaid contracts stand to prove one thing. Obviously NACOCO board
met the difficulties attendant to forward sales by leaving the adoption of means to end, to the
sound discretion of NACOCO's general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by NACOCO's general
manager and submitted to the board after their consummation, not before. These agreements
were not Kalaw's alone. One at least was executed by a predecessor way back in 1940, soon
after NACOCO was chartered. It was a contract of lease executed on November 16, 1940 by the
then general manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the
lease of a space in Soriano Building. On November 14, 1946, NACOCO, thru its general
manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca.
On December 22, 1947, when the controversy over the present contracts cropped up, the board
voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and
Ulpiana Isberto covering a warehouse of the latter. On the same date, the board gave its nod to
a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the
board requested Kalaw to report for action all copra contracts signed by him "at the meeting
immediately following the signing of the contracts." This practice was observed in a later
instance when, on January 7, 1948, the board approved two previous contracts for the sale of
1,000 tons of copra each to a certain "SCAP" and a certain "GNAPO."
And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2%
of Smith Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government.
Such ratification was necessary because, as stated by Kalaw in that same meeting, "under am
existing resolution he is authorized to give a brokerage fee of only 1% on sales of copra made
through brokers." On January 15, 1947, the brokerage fee agreements of 1 1/2% on three export
contracts, and 2% on three others, for the sale of copra were approved by the board with a
proviso authorizing the general manager to pay a commission up to the amount of 1 1/2%
'without further action by the Board." On February 5, 1947, the brokerage fee of 2% of J.
Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by the board. On
March 19, 1947, a 2% brokerage commission was similarly approved by the board for Pacific
Trading Corporation on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee agreements were passed
upon by the board, not the sales contracts themselves. And even those fee agreements were
submitted onlywhen the commission exceeded the ceiling fixed by the board.
Knowledge by the board is also discernible from other recorded instances.
20

When the board met on May 10, 1947, the directors discussed the copra price situation: There
was a slow downward trend but belief was entertained that the nadir might have already been
reached and an improvement in prices was expected. In view thereof, Kalaw informed the board
that "he intends to wait until he has signed contracts to sell before starting to buy copra." 23
In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current:
The copra market appeared to have become fairly steady; it was not expected that copra prices
would again rise very high as in the unprecedented boom during January- April, 1947; the prices
seemed to oscillate between $140 to $150 per ton; a radical rise or decrease was not indicated
by the trends. Kalaw continued to say that "the corporation has been closing contracts for the
sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:
"521. In connection with the buying and selling of copra the Board
inquired whether it is the practice of the Management to close contracts
of sale first before buying. The General Manager replied that this practice
is generally followed but that it is not always possible to do so for two
reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires that it
should not cease buying even when it does not have actual contracts of
sale since the suspension of buying by the Nacoco will result in
middlemen taking advantage of the temporary inactivity of the
Corporation to lower the prices to the detriment of the producers.
(2) The movement of the market is such that it may not be practical
always to wait for the consummation of contracts of sale before beginning
to buy copra.
The General Manager explained that in this connection a certain amount
of speculation is unavoidable. However he said that the Nacoco is much
more conservative than the other big exporters in this respect." 25
Settled jurisprudence has it that where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general manager may bind the company
without formal authorization of the board of directors. 26 In varying language, existence of such
authority is established, by proof of the course of business, the usages and practices of the
company and by theknowledge which the board of directors has, or must be presumed to have,
of acts and doings of its subordinates in and about the affairs of the corporation. 27 So also,
". . . authority to act for and bind a corporation may be presumed from
acts of recognition in other instances where the power was in fact
exercised." 28
". . . Thus, when, in the usual course of business of a corporation, an
officer has been allowed in his official capacity to manage its affairs, his
authority to represent the corporation may be implied from the manner in
which he has been permitted by the directors to manage its business." 29

In the case at bar, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCO's
behalf without prior board approval. If the by-laws were to be literally followed, the board should
give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and
through acquiescence practically laid aside the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
4. But if more were required, we need but turn to the board's ratification of the contracts in
dispute on January 30, 1948, though it is our (and the lower court's) belief that ratification here is
nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or contract
ratified, and is equivalent to original authority;" and that "[t]he corporation and the other party to
the transaction are in precisely the same position as if the act or contract had been authorized at
the time." 30 The language of one case is expressive: "The adoption or ratification of a contract
by a corporation is nothing more nor less than the making of an original contract. The theory of
corporate ratification ispredicated on the right of a corporation to contract, and any ratification or
adoption is equivalent to a grant of prior authority." 31
Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the
moment it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are
thus purged of whatever vice or defect they may have. 33
In sum, a case is here presented whereunder, even in the face of an express by-law requirement
of prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to
recognize equitable considerations. And, the conclusion inevitably is that the embattled contracts
remain valid.
5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or
breach of trust" in the board's ratification of the contracts without prior approval of the board. For,
in reality, all that we have on the government's side of the scale is that the board knew that the
contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior
approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first
thrown on the way only when the contracts turned out to be unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means
breach of a known duty thru some motive or interest or ill will; it partakes of the nature of
fraud. 34 Applying this precept to the given facts herein, we find that there was no "dishonest
purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty,"
or "some motive or interest or ill will" that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to
serve their own private interests, or to pocket money at the expense of the corporation. 35 We
have had occasion to affirm that bad faith contemplates a "state of mind affirmatively operating
with furtive design or with some motive of self-interest or ill will or for ulterior
21

purpose." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with
approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close
examination of all the reported cases, although there are many dicta not easily reconcilable, yet I
have found no judgment or decree which has held directors to account, except when they have
themselves been personally guilty of some fraud on the corporation, or have known and
connived at some fraud in others, or where such fraud might have been prevented had they
given ordinary attention to their duties . . ." Plaintiff did not even dare charge its defendantdirectors with any of these malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates
of fairness. They did not think of raising their voice in protest against past contracts which
brought in enormous profits to the corporation. By the same token, fair dealing disagrees with
the idea that similar contracts, when unprofitable, should not merit the same treatment. Profit or
loss resulting from business ventures is no justification for turning one's back on contracts
entered into. The truth, then, of the matter is that in the words of the trial court the
ratification of the contracts was "an act of simple justice and fairness to the general manager and
in the best interest of the corporation whose prestige would have been seriously impaired by a
rejection by the board of those contracts which proved disadvantageous." 37

throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts
involved delivery of but 16,500 tons over a five-month period. Despite the typhoons, NACOCO
was still able to deliver a little short of 50% of the tonnage required under the contracts.
As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of
damage and wrong is here absent. There cannot be an actionable wrong if either one or the
other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented which would link
Kalaw's acts - ratified by the board to a matrix for defraudation of the government. Kalaw is
clear of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along
thought that he had authority to enter into the contracts; that he did so in the best interests of the
corporation; that he entered into the contracts in pursuance of an over-all policy to stabilize
prices, to free the producers from the clutches of the middlemen. The prices for which NACOCO
contracted in the disputed agreements, were at a level calculated to produce profits and higher
than those prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it
would be foolish to think that one would sign (a) contract when you are going to lose money" and
that no contract was executed "at a price unsafe for the Nacoco." 45 Really, on the basis of
prices then prevailing, NACOCO envisioned a profit of around P752,440,00. 46

The directors are not liable. 38

6. To what then may we trace the damage suffered by NACOCO?
The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions.
Result: Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers
could not be expected. NACOCO was not alone in this misfortune. The record discloses that
private traders, old, experienced, with bigger facilities, were not spared; also suffered
tremendous losses. Roughly estimated, eleven principal trading concerns did run losses to about
P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department
of NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in
the trade." 39 NACOCO was not immune from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus
& Co. by pleading in its answers force majeure as an affirmative defense, and there vehemently
asserted that "as a result of the said typhoons, extensive damage was caused to the coconut
trees in the copra producing regions of the Philippines and according to estimates of competent
authorities, it will take about one year until the coconut producing regions will be able to produce
their normal coconut yield, and it will take some time until the price of copra will reach normal
levels;" and that "it had never been the intention of the contracting parties in entering into the
contract in question that, in the event of a sharp rise in the price of copra in the Philippine market
produced by force majeure or by causes beyond defendant's control, the defendant should buy
the copra contracted for at exorbitant prices far beyond the buying price of the plaintiff under the
contract." 40
A high regard for normal judicial admissions made in court pleadings would suffice to deter us
from permitting plaintiff to stray away therefrom, to charge now that the damage suffered was
because of Kalaw's negligence, or for that matter, by reason of the board's ratification of the
contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual
obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with
NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and
quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict
the coming unpredictable typhoons. And even as typhoons supervened, Kalaw was not remiss in
his duty. He exerted efforts to stave off loses. He asked the Philippine National Bank to
implement its commitment to extend a P400,000.00 loan. The bank did not release the loan, not
even the sum of P200,000.00, which, in October, 1947, was approved by the bank's board of
directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained about
the bank's short-sighted policy. In the end, nothing came out of the negotiations with the bank.
NACOCO eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would
seem to be supported by the fact that even as the contracts were being questioned in Congress
and in the NACOCO board itself, President Roxas defended the actuations of Kalaw. On
December 27, 1947, President Roxas expressed his desire "that the Board of Directors should
reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut
Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly
disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting general
manager of the corporation.
Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co.,
Inc., L-15092, May 18, 1962:
"They (the directors) hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they cannot
be controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss
during a business depression, or closed down at a smaller loss, is a
purely business and economic problem to be determined by the directors
22

of the corporation, and not by the court. It is a well-known rule of law that
questions of policy 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 for the judgment of the board of directors; the
board is the business manager of the corporation, and so long as it acts
in good faith its orders are not reviewable by the courts.' (Fletcher on
Corporations, Vol. 2., p. 390)." 48
Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49
Viewed in the light of the entire record, the judgment under review must be, as it is hereby,
affirmed.
Without costs. So ordered.
Reyes, J .B.L., Makalintal, Bengzon, J .P., Zaldivar, Castro and Angeles, JJ ., concur.
Concepcion, C .J . and Dizon, J ., are on official leave.
Fernando, J ., did not take part.
||| (The Board of Liquidators v. Heirs of Kalaw, G.R. No. L-18805, [August 14, 1967], 127 PHIL
399-42
THIRD DIVISION
[G.R. No. 89070. May 18, 1992.]
BENGUET ELECTRIC COOPERATIVE, INC., petitioner, vs. NATIONAL
LABOR RELATIONS COMMISSION, PETER COSALAN and BOARD
OF DIRECTORS OF BENGUET ELECTRIC COOPERATIVE,
INC. * , respondents.
Raymundo W. Celino for respondent Peter Cosalan.
Reenan Orate for respondent Board of Directors of BENECO.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; TRANSMISSION THROUGH PRIVATE CARRIER
NOT A RECOGNIZED MODE OF FILING PLEADINGS; DATE PLEADING DEEMED FILED.
Respondent Board members' contention runs counter to the established rule that transmission
through a private carrier or letter-forwarder -- instead of the Philippine Post Office -- is not a
recognized mode of filing pleadings. The established rule is that the date of delivery of
pleadings to a private letter-forwarding agency is not to be considered as the date of filing
thereof in court, and that in such cases, the date of actual receipt by the court, and not the date
of delivery to the private carrier, is deemed the date of filing of that pleading.

2. LABOR LAW; NATIONAL LABOR RELATIONS COMMISSION; APPEALS; TEN-DAY

PERIOD TO PERFECT APPEAL MANDATORY AND JURISDICTIONAL; CASE AT BAR.
There was, therefore, no reason grounded upon substantial justice and the prevention of serious
miscarriage of justice that might have justified the NLRC in disregarding the ten-day
reglementary period for perfection of an appeal by the respondent Board members. Accordingly,
the applicable rule was that the ten-day reglementary period to perfect an appeal is mandatory
and jurisdictional in nature, that failure to file an appeal within the reglementary period renders
the assailed decision final and executory and no longer subject to review. The respondent Board
members had thus lost their right to appeal from the decision of the Labor Arbiter and the NLRC
should have forthwith dismissed their appeal memorandum.
3. ID.; ID.; ID.; APPEAL IN CASE AT BAR BEREFT OF MERIT; ILLEGAL SUSPENSION AND
ILLEGAL DISMISSAL ESTABLISHED. There is another and more compelling reason why the
respondent Board members' appeal should have been dismissed forthwith: that appeal was
quite bereft of merit. Both the Labor Arbiter and the NLRC had found that the indefinite
suspension and termination of services imposed by the respondent Board members upon
petitioner Cosalan was illegal. That illegality flowed, firstly, from the fact that the suspension of
Cosalan was continued long after expiration of the period of thirty (30) days, which is the
maximum period of preventive suspension that could be lawfully imposed under Section 4, Rule
XIV of the Omnibus Rules Implementing the Labor Code. Secondly, Cosalan had been deprived
of procedural due process by the respondent Board members. He was never informed of the
charges raised against him and was given no opportunity to meet those charges and present his
side of whatever dispute existed; he was kept totally in the dark as to the reason or reasons why
he had been suspended and effectively dismissed from the service of Beneco. Thirdly,
respondent Board members failed to adduce any cause which could reasonably be regarded as
lawful cause for the suspension and dismissal of respondent Cosalan from his position as
General Manager of Beneco. Cosalan was, in other words, denied due process both procedural
and substantive. Fourthly, respondent Board members failed to obtain the prior approval of the
NEA of their suspension and dismissal of Cosalan, which prior approval was required, inter
alia, under the subsisting loan agreement between the NEA and Beneco. The requisite NEA
approval was subsequently sought by the respondent Board members; no NEA approval was
granted. . . . The major difficulty with the conclusion reached by the NLRC is that the NLRC
clearly overlooked or disregarded the circumstances under which respondent Board members
had in fact acted in the instant case. As noted earlier, the respondent Board members
responded to the efforts of Cosalan to take seriously and implement the Audit Memoranda
issued by the COA explicitly addressed to the petitioner Beneco, first by stripping Cosalan of the
privileges and perquisites attached to his position as General Manager, then by suspending
indefinitely and finally dismissing Cosalan from such position. As also noted earlier, respondent
Board members offered no suggestion at all of any just or lawful cause that could sustain the
suspension and dismissal of Cosalan. They obviously wanted to get rid of Cosalan and so acted,
in the words of the NLRC itself, "with indecent haste" in removing him from his position and
denying him substantive and procedural due process. Thus, the record showed strong
indications that respondent Board members had illegally suspended and dismissed Cosalan
precisely because he was trying to remedy the financial irregularities and violations of NEA
regulations which the COA had brought to the attention of Beneco. The conclusion reached by
the NLRC that "the records do not disclose that the individual Board members were motivated by
malice or bad faith," flew in the face of the evidence of record. At the very least, a strong
presumption had arisen, which it was incumbent upon respondent Board members to disprove,
that they had acted in reprisal against respondent Cosalan and in an effort to suppress
knowledge about and remedial measures against the financial irregularities the COA Audits had
unearthed. That burden respondent Board members did not discharge.

23

4. COMMERCIAL LAW; PRIVATE CORPORATIONS; PROVISIONS OF CORPORATION CODE

APPLICABLE IN SUPPLEMENTARY MANNER TO ALL CORPORATIONS; ELECTRIC
COOPERATIVES ARE CORPORATIONS UNDER PRESIDENTIAL DECREE NO. 269. We
agree with the Solicitor General, firstly, that Section 31 of the Corporation Code is applicable in
respect of Beneco and other electric cooperatives similarly situated. Section 4 of the Corporation
Code renders the provisions of that Code applicable in a supplementary manner to all
corporations, including those with special or individual charters so long as those provisions are
not inconsistent with such charters. We find no provision in P.D. No. 269, as amended, that
would exclude expressly or by necessary implication the applicability of Section 31 of the
Corporation Code in respect of members of the boards of directors of electric cooperatives.
Indeed, P.D. No. 269 expressly describes these cooperatives as "corporations:" "Sec.
15. Organization
and
Purpose.
Cooperative non-stock,
non-profit
membership corporations may be organized, andelectric cooperative corporations heretofore
formed or registered under the Philippine non-Agricultural Co-operative Act may as hereinafter
provided be converted, under this Decree for the purpose of supplying, and of promoting and
encouraging the fullest use of, service on an area coverage basis at the lowest cost consistent
with sound economy and the prudent management of the business of such corporations."
5. ID.; ID.; LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS; BOARD MEMBERS AND
OFFICERS ACTING IN GOOD FAITH WITHIN SCOPE OF THEIR AUTHORITY INCUR NO
PERSONAL LIABILITY. The applicable general rule is clear enough. The Board members
and officers of a corporation who purport to act for and in behalf of the corporation, keep within
the lawful scope of their authority in so acting, and act in good faith, do not become liable,
whether civilly or otherwise, for the consequences of their acts. Those acts, when they are such
a nature and are done under such circumstances, are properly attributed to the corporation
alone and no personal liability is incurred by such officers and Board members.
6. ID.; ID.; ID.; GROSS NEGLIGENCE OR BAD FAITH OF BOARD MEMBERS IN DIRECTING
CORPORATE AFFAIRS ESTABLISHED IN CASE AT BAR. We agree with the Solicitor
General, secondly, that respondent Board members were guilty of "gross negligence or bad faith
in directing the affairs of the corporation" in enacting the series of resolutions noted earlier
indefinitely suspending and dismissing respondent Cosalan from the position of General
Manager of Beneco. Respondent Board members, in so doing, acted beyond the scope of their
authority as such Board members. The dismissal of an officer or employee in bad faith, without
lawful cause and without the procedural due process, is an act that is contra legem. It cannot be
supposed that members of boards of directors derive any authority to violate the express
mandates of law or the clear legal rights of their officers and employees by simply purporting to
act for the corporation they control.
7. ID.; ID.; ID.; CORPORATION NOT LIABLE FOR ULTRA VIRES ACTS OF DIRECTORS
DONE IN BAD FAITH. We believe and so hold, further, that not only are Beneco and
respondent Board members properly held solidarily liable for the awards made by the Labor
Arbiter, but also that petitioner Beneco which was controlled by and which could act only through
respondent Board members, has a right to be reimbursed for any amounts that Beneco may be
compelled to pay to respondent Cosalan. Such right of reimbursement is essential if the innocent
members of Beneco are not to be penalized for the acts of respondent Board members which
were both done in bad faith and ultra vires. The liability-generating acts here are the personal
and individual acts of respondent Board members, and are not properly attributed to Beneco
itself.

FELICIANO, J p:
Private respondent Peter Cosalan was the General manager of petitioner Benguet Electric
Cooperative, Inc. ("Beneco"), having been elected as such by the Board of Directors of Beneco,
with the approval of the National Electrification Administrator, Mr. Pedro Dumol, effective 16
October 1982.
On 3 November 1982, respondent Cosalan received Audit Memorandum No. 1 issued by the
Commission on Audit ("COA"). This Memorandum noted that cash advances received by officers
and employees of petitioner Beneco in the amount of P129,618.48 had been virtually written off
in the books of Beneco. In the Audit Memorandum, the COA directed petitioner Beneco to
secure the approval of the National Electrification Administration ("NEA") before writing off or
condoning those cash advances, and recommended the adoption of remedial measures. LLphil
On 12 November 1982, COA issued another Memorandum Audit Memorandum No. 2
addressed to respondent Peter Cosalan, inviting attention to the fact that the audit of per
diems and allowances received by officials and members of the Board of Directors of Beneco
showed substantial inconsistencies with the directives of the NEA. The Audit Memorandum once
again directed the taking of immediate action in conformity with existing NEA regulations. prcd
On 19 May 1983, petitioner Beneco received the COA Audit Report on the financial status and
operations of Beneco for the eight (8) month period ended 30 September 1982. This Audit
Report noted and enumerated irregularities in the utilization of funds amounting to P37 Million
released by NEA to Beneco, and recommended that appropriate remedial action be taken.
Having been made aware of the serious financial condition of Beneco and what appeared to be
mismanagement, respondent Cosalan initiated implementation of the remedial measures
recommended by the COA. The respondent members of the Board of Beneco reacted by
adopting a series of resolutions during the period from 23 June to 24 July 1984. These Board
Resolutions abolished the housing allowance of respondent Cosalan; reduced his salary and his
representation and commutable allowances; directed him to hold in abeyance all pending
personnel disciplinary actions; and struck his name out as a principal signatory to transactions of
petitioner Beneco.
During the period from 28 July to 25 September 1984, the respondent Beneco Board of
members adopted another series of resolutions which resulted in the ouster of respondent
Cosalan as General Manager of Beneco and his exclusion from performance of his regular
duties as such, as well as the withholding of his salary and allowances. These resolutions were
as follows:
"1. Resolution No. 91-4 dated 28 July 1984:
'. . . that the services of Peter M. Cosalan as General
Manager of BENECO is terminated upon approval of the
National Electrification Administration:'
2. Resolution No. 151-84 dated September 15, 1984;

DECISION
24

'. . . that Peter M. Cosalan is hereby suspended from

his position as General Manager of the Benguet Electric
Cooperative, Inc. (BENECO) effective as of the start of the
office hours on September 24, 1984, until a final decision has
been reached by the NEA on his dismissal;'

In a decision dated 21 November 1988, public respondent NLRC modified the award rendered
by the Labor Arbiter by declaring that petitioner Beneco alone, and not respondent Board
members, was liable for respondent Cosalan's backwages and allowances, and by ruling that
there was no legal basis for the award of moral damages and attorney's fees made by the Labor
Arbiter.

'. . . that GM Cosalan's suspension from office shall

remain in full force and effect until such suspension is sooner
lifted, revoked or rescinded by the Board of Directors; that all
monies due him are withheld until cleared;'

Beneco, through its new set of directors, moved for reconsideration of the NLRC decision, but
without success.

3. Resolution No. 176-84 dated September 25, 1984;

'. . . that Resolution No. 151-84, dated September 15,
1984 stands as preventive suspension for GM Peter M.
Cosalan.'" 1
Respondent Cosalan nevertheless continued to work as General Manager of Beneco, in the
belief that he could be suspended or removed only by duly authorized officials of NEA, in
accordance with provisions of P.D. No. 269, as amended by P.D. No. 1645 (the statute creating
the NEA, providing for its capitalization, powers and functions and organization), the loan
agreement between NEA and petitioner Beneco 2 and the NEA Memorandum of 2 July
1980. 3 Accordingly, on 5 October and 10 November 1984, respondent Cosalan requested
petitioner Beneco to release the compensation due him. Beneco, acting through respondent
Board members, denied the written request of respondent Cosalan.
Respondent Cosalan then filed a complaint with the National Labor Relations Commissions
("NLRC") on 5 December 1984 against respondent members of the Beneco Board, challenging
the legality of the Board resolutions which ordered his suspension and termination from the
service and demanding payment of his salaries and allowances. On 18 February 1985, Cosalan
amended his complaint to implead petitioner Beneco and respondent Board members, the latter
in their respective dual capacities as Directors and as private individuals. LibLex
In the course of the proceedings before the Labor Arbiter, Cosalan filed a motion for
reinstatement which, although opposed by petitioner Beneco, was granted on 23 October 1987
by Labor Arbiter Amado T. Adquilen. Petitioner Beneco complied with the Labor Arbiter's order
on 28 October 1987 through Resolution No. 10-90.
On 5 April 1988, the Labor Arbiter rendered a decision (a) confirming Cosalan's reinstatement;
(b) ordering payment to Cosalan of his backwages and allowances by petitioner Beneco and
respondent Board members, jointly and severally, for a period of three (3) years without
deduction or qualification, amounting to P344,000.00; and (3) ordering the individual Board
members to pay, jointly and severally, to Cosalan moral damages of P50,000.00 plus attorney's
fees of ten percent (10%) of the wages and allowances awarded him.
Respondent Board members appealed to the NLRC, and there filed a Memorandum on Appeal.
Petitioner Beneco did not appeal, but moved to dismiss the appeal filed by respondent Board
members and for execution of judgment. By this time, petitioner Beneco had a new set of
directors.

In the present Petition for Certiorari, Beneco's principal contentions are two-fold: first, that the
NLRC had acted with grave abuse of discretion in accepting and giving due course to
respondent Board members' appeal although such appeal had been filed out of time; and
second, that the NLRC had acted with grave abuse of discretion amounting to lack of jurisdiction
in holding petitioner alone liable for payment of the backwages and allowances due to Cosalan
and releasing respondent Board members from liability therefor.
We consider that petitioner's first contention is meritorious. There is no dispute about the fact
that the respondent Beneco Board members received the decision of the Labor Arbiter on 21
April 1988. Accordingly, and because 1 May 1988 was a legal holiday, they had only up to 2 May
1988 within which to perfect their appeal by filing their memorandum on appeal. It is also not
disputed that the respondent Board members' memorandum on appeal was posted by registered
mail on 3 May 1988 and received by the NLRC the following day. 4 Clearly, the memorandum on
appeal was filed out of time.
Respondent Board members, however, insist that their Memorandum on Appeal was filed on
time because it was delivered for mailing on 1 May 1988 to the Garcia Communications
Company, a licensed private letter carrier. The Board members in effect contend that the date of
delivery to Garcia Communications was the date of filing of their appeal memorandum.
Respondent Board members' contention runs counter to the established rule that transmission
through a private carrier or letter-forwarder instead of the Philippine Post Office is not a
recognized mode of filing pleadings. 5 The established rule is that the date of delivery of
pleadings to a private letter-forwarding agency is not to be considered as the date of filing
thereof in court, and that in such cases, the date of actual receipt by the court, and not the date
of delivery to the private carrier, is deemed the date of filing of the pleading. 6
There was, therefore, no reason grounded upon substantial justice and the prevention of serious
miscarriage of justice that might have justified the NLRC in disregarding the ten-day
reglementary period for perfection of an appeal by the respondent Board members. Accordingly,
the applicable rule was that the ten-day reglementary period to perfect an appeal is mandatory
and jurisdictional in nature, that failure to file an appeal within the reglementary period renders
the assailed decision final and executory and no longer subject to review. 7 The respondent
Board members had thus lost their right to appeal from the decision of the Labor Arbiter and the
NLRC should have forthwith dismissed their appeal memorandum. cdrep
There is another and more compelling reason why the respondent Board members' appeal
should have been dismissed forthwith: that appeal was quite bereft of merit. Both the Labor
Arbiter and the NLRC had found that the indefinite suspension and termination of services
imposed by the respondent Board members upon petitioner Cosalan was illegal. That illegality
flowed, firstly, from the fact that the suspension of Cosalan was continued long after expiration of
the period of thirty (30) days, which is the maximum period of preventive suspension that could
25

be lawfully imposed underSection 4, Rule XIV of the Omnibus Rules Implementing the Labor
Code. Secondly, Cosalan had been deprived of procedural due process by the respondent
Board members. He was never informed of the charges raised against him and was given no
opportunity to meet those charges and present his side of whatever dispute existed; he was kept
totally in the dark as to the reason or reasons why he had been suspended and effectively
dismissed from the service of Beneco. Thirdly, respondent Board members failed to adduce any
cause which could reasonably be regarded as lawful cause for the suspension and dismissal of
respondent Cosalan from his position as General Manager of Beneco. Cosalan was, in other
words, denied due process both procedural and substantive. Fourthly, respondent Board
members failed to obtain the prior approval of the NEA of their suspension and dismissal of
Cosalan, which prior approval was required, inter alia, under the subsisting loan agreement
between the NEA and Beneco. The requisite NEA approval was subsequently sought by the
respondent Board members; no NEA approval was granted.
In reversing the decision of the Labor Arbiter declaring petitioner Beneco and respondent Board
members solidarily liable for the salary, allowances, damages and attorney's fees awarded to
respondent Cosalan, the NLRC said:
". . . A perusal of the records show that the members of the Board never
acted in their individual capacities. They were acting as a Board passing
resolutions affecting their general manager. If these resolutions and
resultant acts transgressed the law, then BENECO for which the Board
was acting in behalf should bear responsibility. The records do not
disclose that the individual Board members were motivated by malice or
bad faith, rather, it reveals an intramural power play gone awry and
misapprehension of its own rules and regulations. For this reason, the
decision holding the individual board members jointly and severally liable
with BENECO for Cosalan's backwages is untenable. The same goes for
the award of damages which does not have the proverbial leg to stand
on.
The Labor Arbiter below should have heeded his own observation in his
decision
'Respondent BENECO as an artificial person could
not have, by itself, done anything to prevent it. But because the
former have acted while in office and in the course of their
official functions as directors of BENECO, . . .'
Thus, the decision of the Labor Arbiter should be modified conformably
with all the foregoing holding BENECO solely liable for backwages and
releasing the appellant board members from any individual
liabilities." 8 (Emphasis supplied).
The applicable general rule is clear enough. The Board members and officers of a corporation
who purport to act for and in behalf of the corporation, keep within the lawful scope of their
authority in so acting, and act in good faith, do not become liable, whether civilly or otherwise, for
the consequences of their acts. Those acts, when they are such a nature and are done under
such circumstances, are properly attributed to the corporation alone and no personal liability is
incurred by such officers and Board members. 9

The major difficulty with the conclusion reached by the NLRC is that the NLRC clearly
overlooked or disregarded the circumstances under which respondent Board members had in
fact acted in the instant case. As noted earlier, the respondent Board members responded to the
efforts of Cosalan to take seriously and implement the Audit Memoranda issued by the COA
explicitly addressed to the petitioner Beneco, first by stripping Cosalan of the privileges and
perquisites attached to his position as General Manager, then by suspending indefinitely and
finally dismissing Cosalan from such position. As also noted earlier, respondent Board members
offered no suggestion at all of any just or lawful cause that could sustain the suspension and
dismissal of Cosalan. They obviously wanted to get rid of Cosalan and so acted, in the words of
the NLRC itself, "with indecent haste" in removing him from his position and denying him
substantive and procedural due process. Thus, the record showed strong indications that
respondent Board members had illegally suspended and dismissed Cosalan precisely because
he was trying to remedy the financial irregularities and violations of NEA regulations which the
COA had brought to the attention of Beneco. The conclusion reached by the NLRC that "the
records do not disclose that the individual Board members were motivated by malice or bad
faith," flew in the face of the evidence of record. At the very least, a strong presumption had
arisen, which it was incumbent upon respondent Board members to disprove, that they had
acted in reprisal against respondent Cosalan and in an effort to suppress knowledge about and
remedial measures against the financial irregularities the COA Audits had unearthed. That
burden respondent Board members did not discharge. prcd
The Solicitor General has urged that respondent Board members may be held liable for
damages under the foregoing circumstance under Section 31 of the Corporation Code which
reads as follows:
"Sec. 31. Liability of directors, trustees or officers. Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees
shall be jointly liable and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
persons . . ." (Emphasis supplied)
We agree with the Solicitor General, firstly, that Section 31 of the Corporation Code is applicable
in respect of Beneco and other electric cooperatives similarly situated. Section 4 of the
Corporation Code renders the provisions of that Code applicable in a supplementary manner to
all corporations, including those with special or individual charters so long as those provisions
are not inconsistent with such charters. We find no provision in P.D. No. 269, as amended, that
would exclude expressly or by necessary implication the applicability of Section 31 of the
Corporation Code in respect of members of the boards of directors of electric cooperatives.
Indeed, P.D. No. 269 expressly describes these cooperatives as "corporations:"
"Sec. 15. Organization and Purpose. Cooperativenon-stock, non-profit
membershipcorporations may be organized, and electric cooperative
corporations heretofore formed or registered under the Philippine nonAgricultural Co-operative Act may as hereinafter provided be converted,
under this Decree for the purpose of supplying, and of promoting and
encouraging the fullest use of, service on an area coverage basis at the
lowest cost consistent with sound economy and the prudent management
of the business of such corporations." 10(Emphasis supplied)
26

We agree with the Solicitor General, secondly, that respondent Board members were guilty of
"gross negligence or bad faith in directing the affairs of the corporation" in enacting the series of
resolutions noted earlier indefinitely suspending and dismissing respondent Cosalan from the
position of General Manager of Beneco. Respondent Board members, in doing so, acted beyond
the scope of their authority as such Board members. The dismissal of an officer or employee in
bad faith, without lawful cause and without procedural due process, is an act that is contra
legem. It cannot be supposed that members of boards of directors derive any authority to violate
the express mandates of law or the clear legal rights of their officers and employees by simply
purporting to act for the corporation they control.
We believe and so hold, further, that not only are Beneco and respondent Board members
properly held solidarily liable for the awards made by the Labor Arbiter, but also that petitioner
Beneco which was controlled by and which could act only through respondent Board members,
has a right to be reimbursed for any amounts that Beneco may be compelled to pay to
respondent Cosalan. Such right of reimbursement is essential if the innocent members of
Beneco are not to be penalized for the acts of respondent Board members which were both
done in bad faith and ultra vires. The liability -generating acts here are the personal and
individual acts of respondent Board members, and are not properly attributed to Beneco itself.
WHEREFORE, the Petition for Certiorari is GIVEN DUE COURSE, the comment filed by the
respondent Board members is TREATED as their answer, and the decision of the National Labor
Relations Commission dated 21 November 1988 in NLRC Case No. RAB-1-0313-84 is hereby
SET ASIDE and the decision dated 5 April 1988 of Labor Arbiter Amado T. Adquilen hereby
REINSTATED in toto. In addition, respondent Board members are hereby ORDERED to
reimburse petitioner Beneco any amounts that it may be compelled to pay to respondent
Cosalan by virtue of the decision of Labor Arbiter Amado T. Adquilen. No pronouncement as to
costs.
SO ORDERED.
Gutierrez, Jr. Bidin, Davide, Jr. and Romero, JJ., concur.
||| (Benguet Electric Cooperative v. National Labor Relations Commission, G.R. No. 89070, [May
18, 1992])

3.

[G.R. No. 68555. March 19, 1993.]

PRIME WHITE CEMENT CORPORATION, petitioner, vs. HONORABLE
INTERMEDIATE
APPELLATE
COURT
and
ALEJANDRO
TE, respondents.
SYLLABUS
1. COMMERCIAL LAW; CORPORATIONS; GENERALLY CORPORATE POWERS SHALL BE
EXERCISED BY THE BOARD OF DIRECTORS; EXCEPTIONS. Under the Corporation Law,
which was then in force at the time this 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 corporation, is dealing with a third person, i.e.,
person outside the corporation.
2. ID.; ID.; BOARD OF DIRECTORS; RULE IN CASE OF CONFLICT OF INTEREST. 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. This trust relationship "is not a matter of
statutory or technical law. It springs from the fact that directors have the control and guidance of
corporate affairs and property and hence of the property interests of the stockholders." In the
case of Gokongwei v. Securities and Exchange Commission, this Court quoted with favor
from Pepper v. Litton, (89 scra 336) thus: ". . . He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters . . . He cannot utilize his inside
information and his strategic position for his own preferment. He cannot violate rules of fair play
by doing indirectly through the corporation what he could not do directly. He cannot use his
power for his personal advantage and to the detriment of the stockholders and creditors no
matter how absolute in terms that power may be and no matter how meticulous he is to satisfy
technical requirements. For that power is at all times subject to the equitable limitation that it may
not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the
exclusion or detriment of the cestuis . . ."
3. ID.; ID.; DEALINGS OF DIRECTORS, TRUSTEES OR OFFICERS WITH THE
CORPORATION; RULE. 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 as provided in Section
32 of the Corporation Code.

Self-dealing directors
SECOND DIVISION

DECISION
27

CAMPOS, JR., J p:
Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement
Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court, the
dispositive portion of which reads as follows:
"WHEREFORE, in view of the foregoing, the judgment appealed from is
hereby affirmed in toto." 1
The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted,
to wit:
"On or about the 16th day of July, 1969, plaintiff and defendant
corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as
Chairman of the Board, entered into a dealership agreement (Exhibit A)
whereby said plaintiff was obligated to act as the exclusive dealer and/or
distributor of the said defendant corporation of its cement products in the
entire Mindanao area for a term of five (5) years and proving (sic) among
others that:

would thus enable him to sell his allocation of 20,000 bags regular supply
of the said commodity, by September, 1970 (Exhibits O, 0-1, 0-2, P, P-1,
P-2, Q, Q-1 and Q-2). After the plaintiff 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 August 18,
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 (Exhibit B), looking forward to the defendant
corporation's duty to comply with the dealership agreement. In reply to
the aforesaid letter of the plaintiff, the defendant corporation thru its
corporate secretary, replied that the board of directors of the said
defendant 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;

"a. The corporation shall, commencing September,

1970, sell to and supply the plaintiff, as dealer with 20,000
bags (94 lbs/bag) of white cement per month;
"b. The plaintiff shall pay the defendant corporation
P9.70, Philippine Currency, per bag of white cement, FOB
Davao and Cagayan de Oro ports;
"c. The plaintiff shall every time the defendant
corporation is ready to deliver the good, open with any bank or
banking institution a confirmed, unconditional, and irrevocable
letter of credit in favor of the corporation 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 the plaintiff entered into the aforesaid dealership agreement,
he placed an advertisement in a national, circulating newspaper the fact
of his being the exclusive dealer of the defendant corporation's white
cement products in Mindanao area, more particularly, in the Manila
Chronicle dated August 16, 1969 (Exhibits R and R-1) 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
months of September,
written agreement with
selling white cement in

dealership agreement, plaintiff sometime in the

October, and December, 1969, entered into a
several hardware stores dealing in buying and
the Cities of Davao and Cagayan de Oro which

"d. The price of white cement is subject

readjustment unilaterally on the part of the defendant;

to

"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. (Exhibit C)."
xxx xxx xxx
Several demands to comply with the dealership agreement (Exhibits D, E,
G, I, R, L, and N) were made by the plaintiff to the defendant, however,
defendant refused to comply with the same, and plaintiff 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 the plaintiff and
defendant was in force and subsisting, the defendant corporation, in
violation of, and with evident intention not to be bound by the terms and
28

conditions thereof, entered into an exclusive dealership agreement with a

certain Napoleon Co for the marketing of white cement in Mindanao
(Exhibit T) hence, this suit." (Plaintiff's Record on Appeal, pp. 86-90)." 2
After trial, the trial court adjudged the corporation 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 mainly on the following
basis, and We quote:
"There is no dispute that when Zosimo R. Falcon and Justo B. Trazo
signed the dealership agreement Exhibit "A", they were the President and
Chairman of the Board, respectively, of defendant-appellant corporation.
Neither is the genuineness of the said agreement contested. As a matter
of fact, it appears on the face of the contract itself that both officers were
duly authorized to enter into the said agreement and signed the same for
and in behalf of the corporation. When they, therefore, entered into the
said transaction they created the impression that they were duly clothed
with the authority to do so. It cannot now be said that the disputed
agreement which possesses all the essential requisites of a valid contract
was never intended to bind the corporation as this avoidance is barred by
the principle of estoppel." 3
In this petition for review, petitioner Prime White Cement Corporation made the following
assignment of errors: 4
I
"THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM
THE CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD
ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY
WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.
II
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED
JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF
DIRECTORS AND OFFICERS OF THE CORPORATION.
III
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE
CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL
CODE.
IV

THE DECISION AND RESOLUTION OF THE INTERMEDIATE

APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL
DAMAGES IS PROPER.
V
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED
IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH
COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS
CLEARLY DEPARTED FROM THE ACCEPTED USUAL COURSE OF
JUDICIAL PROCEEDINGS."
There is only one legal issue to be resolved by this Court: whether or not the "dealership
agreement" referred by the President and Chairman of the Board of petitioner corporation is a
valid and enforceable contract. We do not agree with the conclusion of the respondent Court that
it is.
Under the Corporation Law, which was then in force at the time this case arose, 5 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. 6 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. 7Furthermore, 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. 8 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. Cdpr
The situation is quite different where a director or officer is dealing with his own corporation. In
the instant case respondent 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 "selfdealing" director.
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his
corporation. 9 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. This trust relationship "is not a matter of
statutory or technical law. It springs from the fact that directors have the control and guidance of
corporate affairs and property and hence of the property interests of the stockholders." 10 In the
case of Gokongwei v. Securities and Exchange Commission, this Court quoted with favor
from Pepper v. Litton, 11 thus:
". . . He cannot by the intervention of a corporate entity violate the ancient
precept against serving two masters . . . He cannot utilize his inside
information and his strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the corporation what
29

he could not do directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no
matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all
times subject to the equitable limitation that it may not be exercised for
the aggrandizement, preference, or advantage of the fiduciary to the
exclusion or detriment of the cestuis . . ."
On the other hand, 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. Section 32 of the
Corporation Code provides, thus:
"SEC. 32. Dealings of directors, trustees or officers with the corporation.
A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation, unless
all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been
previously authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding paragraph
is absent, in the case of a contract with a director or trustee, such
contract may be ratified by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3)
of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is
made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances."
Although the old Corporation Law which governs the instant case did not contain a similar
provision, yet the cited provision substantially incorporates well-settled principles in corporate
law. 12
Granting arguendo that the "dealership agreement" involved here would be valid and
enforceable if entered into with a person other than a director or officer of the corporation, the
fact that the other party to the contract was a Director and Auditor of the petitioner corporation
changes the whole situation. First of all, We believe that the contract was neither fair nor
reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to
respondent Te 20,000 bags of white cement per month, for five years starting September, 1970,
at the fixed price of P9.70 per bag. Respondent Te is a businessman himself and must have

known, or at least must be presumed to know, that at that time, prices of commodities in general,
and white cement in particular, were not stable and were expected to rise. At the time of the
contract, petitioner corporation had not even commenced the manufacture of white cement, the
reason why delivery was not to begin until 14 months later. He must have known that within that
period of six years, there would be a considerable rise in the price of white cement. In fact,
respondent 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 five 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. We
believe that the fixed price of P9.70 per bag for a period of five years was not fair and
reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the
cement to his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:
"The price of white cement shall be mutually determined by us but in no
case shall the same be less than P14.00 per bag (94 lbs)."
The contract with Henry Wee was on September 15, 1969, and that with Gaudencio
Galang, on October 13, 1967. A similar contract with Prudencio Lim was made on
December 29, 1969. 15 All of these contracts were entered into soon after his "dealership
agreement" with petitioner corporation, and in each one of them he protected himself from
any increase in the market price of white cement. Yet, except for the contract with Henry
Wee, the contracts were for only two years from October, 1970. Why did he not protect the
corporation in the same manner when he entered into the "dealership agreement"? For that
matter, why did the President and the Chairman of the Board not do so either? As director,
specially since he was the other party in interest, respondent 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 this Court cannot allow
him to reap the fruits of his disloyalty.
As a result of this action which has been proven to be without legal basis, petitioner corporation's
reputation and goodwill have been prejudiced. However, there can be no award for moral
damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of
the Civil Code in favor of a corporation.
In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated
March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private respondent
Alejandro Te is hereby ordered to pay petitioner corporation the sum of P20,000.00 for attorney's
fees, plus the cost of suit and expenses of litigation.
SO ORDERED.
4.

Interlocking directors
Gokongwei vs. SEC et al.
30

5.

Doctrine of corporate opportunity

6.

Duty to stockholders
[No. 110. May 3, 1909.]
ELEANOR ERICA STRONG and RICHARD P. STRONG, her husband,
plaintiffs in error and appellants, vs. FRANCISCO
GUTIERREZ REPIDE. 1
1.APPEAL AND ERROR; REVIEW OF FACTS. The facts, when the
courts below differ, will be reviewed by the Federal Supreme
Court under the Act of July 1, 1902 (32 Stat. at L., 691, chapter
1369) section 10, on appeal from or writ of error to the
judgment of the Supreme Court of the Philippine Islands.
2.FRAUD; CONCEALMENT; PURCHASE OF STOCK BY DIRECTOR.
A purchase of stock in a corporation by a director and owner of
three-fourths of the entire capital stock, who was also
administrator general of the company, and engaged in the
negotiations which finally led to the sale of the company's lands
to the Philippine Islands Government at a price which greatly
enhanced the value of the stock, was fraudulent as procured by
"insidious machinations" inducing the execution of the contract
of sale within the meaning of P. I. Code, article 1269, defining
deceit where he employed an agent to make the purchase,
concealing both his own identity as the purchaser, and his
knowledge of the state of the negotiations and their probable
successful result.
3.FRAUD; CONCEALMENT; PURCHASE OF STOCK. The purchaser
of corporate stock cannot escape liability for his fraud in
concealing facts affecting its value which he was in good faith
bound to disclose, on the theory that, because of the insistence
of the seller that her agent was not authorized to make the
sale, there had never been any consent on her part, obtained
by fraud or otherwise, where the court finds that the agent's
authority was sufficient, since, in legal effect, her consent will
be deemed induced by the fraud.

IN ERROR TO and APPEAL from the Supreme Court of the Philippine Islands to review a
judgment which reversing the judgment of the Court of First Instance of the city of Manila,
dismissed the complaint in an action to recover certain shares of corporate stock from the
purchaser on the ground that such shares were sold by plaintiff's agent without authority, and
that the purchaser had fraudulently concealed facts affecting the value of such stock. Reversed.
The judgment of the Court of First Instance affirmed. See same case below, 6 Philippine,
680. IEaATD
Statement by Mr. Justice PECKHAM:

This action was commenced on the 12th day of January, 1904, in the Court of First Instance of
the city of Manila, Philippine Islands, by the plaintiffs in error, Eleanor Erica Strong and Richard
P. Strong, her husband, against the defendant in error. It was brought by the plaintiff
Mrs. Strong, as the owner of 800 shares of the capital stock of the Philippine Sugar Estates
Development Company, Limited (the other plaintiff being added as her husband), to recover
such shares from defendant (who was already the owner of 30,400 of the 42,030 shares issued
by the company), on the ground that the shares had been sold and delivered by plaintiff's agent
to the agent of defendant without authority from plaintiff; and also on the ground that defendant
fraudulently concealed from plaintiff's agent, one F. Stuart Jones, facts affecting the value of the
stock so sold and delivered. The stock was of the par value of $100 per share, Mexican
currency.
The plaintiff never had any negotiations for the sale of the stock herself, and was ignorant that it
was sold until some time after the sale, the negotiations for which took place between an agent
of the plaintiff and an agent of defendant, the name of the defendant being undisclosed.
In addition to his ownership of almost three-fourths of the shares of the stock of the company,
the defendant was one of the five directors of the company, and was elected by the board the
agent and the administrator general of such company, "with exclusive intervention in the
management" of its general business.
The defendant put in issue the lack of authority of the agent of the plaintiff, denied all fraud, and
alleged that the purchase of the stock from plaintiff's agent (which stock was payable to bearer
and transferable by delivery) was made by one Albert Kauffman, who afterwards sold and
conveyed the same to the defendant, and that the defendant, prior to the commencement of the
suit, and prior to any demand made upon him by the plaintiff in error herein, had sold,
transferred, and delivered the stock to Luis Gutierrez, a citizen and resident of Spain. (He was a
brother of the defendant.)
In April, 1904, the case came on for trial in the Court of First Instance, which, on the 29th of that
month, duly decided it and stated certain facts in the cause upon which it based its opinion and
judgment, among which were the facts that the agent of the plaintiff had no authority to sell or
transfer the shares of stock in question, and also that the transaction resulting in the delivery of
the stock to the agent of the defendant was fraudulent, because the defendant concealed from
the plaintiff's agent facts affecting the value of the stock which the defendant was in good faith
bound to reveal, by reason of which the sale of the stock to defendant was made for the total
sum of $16,000, Mexican currency, while within two months and a half the shares were worth
$76,256, United States currency. Upon the findings the court directed that the plaintiff recover
from the defendant the sum found to be due by the court, which (after deducting the $16,000,
Mexican currency) amounted to $138,352.71 Philippine currency, and the costs of suit, and it
was ordered that the judgment might be satisfied by the delivery to the plaintiff, Mrs. Strong, of
her 800 shares of stock within the time mentioned in the decree, in which event the plaintiff was
to pay the defendant $16,000, Mexican currency, or its equivalent in Philippine currency. Other
particulars were stated in the decree. CDHSac
On May 3, 1904, a motion was made by defendant for a new trial, which, on May 9, 1904, was
overruled.
A bill of exceptions was then made and appeal filed. Subsequently and on January 18, 1906, the
same was duly argued in the Supreme Court of the Philippine Islands and, on April 28, 1906, a
decision was rendered by the court, holding that the agent of the plaintiff had no power to sell or
31

deliver her stock, and it affirmed the decree of the Court of First Instance on that ground, but not
on the second ground taken by that court, that the sale of the stock through the plaintiff's agent
had been procured by fraud on the part of the defendant.
Subsequently to the affirmance of the judgment, the defendant, through his counsel, made a
motion for a new trial on the ground of newly-discovered evidence, which consisted of a power of
attorney (that had been mislaid and after the trial had been found) from Mrs. Strong to Mr. F.
Stuart Jones and Mr. Robert H. Wood, which authorized both, or either of them, to sell or
otherwise dispose of the property of the plaintiff as they or he might choose. After opposition this
motion was granted and leave given to the parties to submit new evidence as to the nature of the
authority delegated by the plaintiff in error to her agent Jones, and under that permission the
newly-discovered power of attorney was put in evidence. Upon that piece of evidence the court
held that the authority of the agent Jones was sufficient, and that the paper became absolutely
decisive of the issues in the case, and the order affirming the judgment of the court below was
therefore set aside, the judgment of the Court of First Instance reversed, and the action
dismissed upon its merits. From that decree of reversal and dismissal the plaintiffs seek to bring
the case here for review, and have sued out a writ of error and taken an appeal.
The facts out of which the controversy arises are in substance these:
In 1902 it was thought important for the Government of the United States to secure title, if
reasonably possible, to what were called the friar lands in the Philippine Islands. To that end
various inquiries were made on the part of the Government, from time to time, as to the
possibility of obtaining title to all those lands, and what would be the probable expense. The
lands were not owned by the same people, but were divided among different and separate
owners. The Philippine Sugar Estates Development Company, Limited, owned of these lands
what are more particularly described as the Dominican lands, and they were regarded as nearly
one-half the value of all the friar lands. AICHaS
On July 5, 1903, the Governor of the Philippine Islands, on behalf of the Philippine Government,
made an offer of purchase for the total sum of $6,043,219.47 in gold for all the friar lands, though
owned by different owners. This offer, so far as concerned that portion of the lands owned by
defendant's company, was rejected by defendant in his capacity as majority shareholder, without
any consultation with the other shareholders. The representatives of all the different owners of
all the lands, including defendant's company, in answer to the above offer, then fixed their selling
price at $13,700,000 for all such lands. During the negotiations consequent upon these different
offers, which lasted for sometime after the first offer was made, an offer was finally, and towards
the end of October, 1903, made by the Governor of $7,535,000. All the owners of all these friar
lands, with the exception of the defendant, who represented his company, were willing and
anxious to accept this offer and to convey the lands to the Government at that price. He alone
held out for a better offer while all the other owners were endeavoring to persuade him to accept
the offer of the Government. The defendant continued his refusal to accept until the other
owners consented to pay to his company $335,000 of the purchase price for their land, and until
the Government consented that a thousand hectares should be excluded from the sale to it of
the land of defendant's company. This being agreed to, the contract for the sale was finally
signed by the defendant as attorney in fact for his company, December 21, 1903. The
defendant, of course, as the negotiations progressed, knew that the decision of the question lay
with him, and that if he should decide to accept the last offer of the Government, his decision
would be the decision of his company, as he owned three-fourths of its shares, and the
negotiations would then go through as all the owners of the balance of the land desired it. If the
sale should not be consummated, and things should remain as they were, the defendant also
knew that the value of the lands and of the shares in the company would be almost nothing. He

himself says, in speaking of these lands owned by his company, that had the Government "given
the haciendas the protection which they ought to have received, they would have been worth
$6,000,000 gold; but, considering the abnormal condition in which they were on account of the
failure of the Government to protect these haciendas, it is impossible to fix any value; they were
worth nothing; they were a charge." Also, the company had paid no dividends, and only lived on
its credit, and could not even pay taxes. The company had no other property of any substantial
value than these lands. They were its own valuable asset.
While this state of things existed, and before the final offer had been made by the Governor, the
defendant, although still holding out for a higher price for the lands, took steps, about the middle
or latter part of September, 1903, to purchase the 800 shares of stock in his company owned by
Mrs.Strong, which he knew were in the possession of F. Stuart Jones, as her agent. The
defendant, having decided to obtain these shares, instead of seeing Jones, who had an office
next door, employed one Kauffman, a connection of his by marriage, and Kauffman employed a
Mr. Sloan, a broker, who had an office some distance away, to purchase the stock for him, and
told Sloan that the stock was for a member of his wife's family. Sloan communicated with the
husband of Mrs. Strong, and asked if she desired to sell her stock. The husband referred him to
Mr. Jones for consultation, who had the stock in his possession. Sloan did not know who wanted
to buy the shares, nor did Jones when he was spoken to. Jones would not have sold at the price
he did had he known it was the defendant who was purchasing, because, as he said, it would
show increased value, as the defendant would not be likely to purchase more stock unless the
price was going up. As the articles of incorporation, by subdivision 20, required a resolution of
the general meeting of stockholders for the purpose of selling more than one hacienda and as no
such general meeting had been called at the time of the sale of the stock, Mr. Jones might well
have supposed there was no immediate prospect of a sale of the lands being made, while, at the
same time, defendant had knowledge of the probabilities thereof, which he had acquired by his
conduct of the negotiations for their sale, as agent of all the shareholders, and while acting
specially for them and himself. HDCAaS
The result of the negotiations was that Jones, on or about October 10, 1903, assuming that he
had the power, and without consulting Mrs. Strong, sold the 800 shares of stock for $16,000,
Mexican currency, delivering the stock to Kauffman in Sloan's office, who paid for it with the
check of Rueda Hermanos for $18,000, the surplus, $2,000 being arranged for, and Kauffman
being paid $1,800 by defendant for his services. The defendant thus obtained the 800 shares for
about one-tenth of the amount they became worth by the sale of the lands between two and
three months thereafter. In all the negotiations in regard to the purchase of the stock from
Mrs. Strong, through her agent Jones, not one word of the facts affecting the value of this stock
was made known to plaintiff's agent by defendant, but, on the contrary, perfect silence was kept.
The real state of the negotiations with the Government was not mentioned, nor was the fact
stated that it rested chiefly with the defendant to complete the sale. The probable value of the
shares in the very near future was thus unknown to any one but defendant, while the agent of
the plaintiff had no knowledge or suspicion that defendant was the one seeking to purchase the
shares. The agent sold because, as he testified, he wanted to invest the money in some kind of
property that would pay dividends, and he was expecting nothing from this company, as
negotiations for the sale of the lands had gone on so long, and there appeared no prospect of
any sale being made; at any rate, not for a very long time.
It is undeniable that, during all this time, the subject of the sale of the friar lands was frequently
mooted and its probabilities publicly discussed in a general way. Such discussion was founded
upon rumors and gossip as to the condition of the negotiations. The public press referred to it not
infrequently, but the actual state of the negotiations, the actual probabilities of the sale being
consummated, and the particular position of power and influence which the defendant occupied
32

in such negotiations prior to the time of the purchase of plaintiff's stock, were not accurately
known by plaintiff's agent or by any one else outside those interested in the matter as
negotiators.
Mr. Henry E. Davis argued the cause and filed a brief for plaintiffs in error and appellants.
Mr. George E. Hamilton argued the cause, and, with Messrs. John W. Yerkes, M. J.
Colbert, and John J. Hamilton, filed a brief for defendant in error and appellee.
Mr. Justice PECKHAM, after making the foregoing statement, delivered the opinion of the
court:
The Court of First Instance at Manila gave judgment in favor of the plaintiffs on two grounds
discussed in the opinion, one ground being that the agent of plaintiff, by whom the sale was
concluded, had no authority to make it, and hence the delivery of the stock by him to defendant's
agent was illegal; the other ground was that the defendant had been guilty of fraud in concealing
certain facts from the seller affecting the value of the stock at the time when its sale was
concluded.
Upon appeal to the Supreme Court of the Islands, the judgment was affirmed by a divided court,
upon the ground of the lack of authority of the plaintiff's agent to make the sale, but not upon the
ground of the alleged fraud on the part of the defendant. Two of the judges dissented, on the
ground that there was authority to make the sale, although they agreed with the majority that
there was no fraud.
One of the majority held not only that there was no authority to sell, but that there was fraud, and
therefore only concurred in the result in affirming the judgment for the plaintiff. HCEcAa
When the motion for a new trial was subsequently granted on account of newly-discovered
evidence, the majority of the court, on the authority of the second power of attorney (which was
the newly-discovered evidence then received), held that it was sufficient to authorize the
plaintiff's agent to make the sale he did in her behalf, and, as the majority held that there was no
fraud in the case, the judgment for plaintiff was reversed and the complaint was dismissed.
Mr. Justice Johnson dissented, and filed a dissenting opinion in favor of the affirmance of the
judgment of the court of first instance on both the grounds taken by it.
We are now called upon to review the judgment of the Supreme Court dismissing the complaint
of the plaintiff. If the purchase of the stock by the defendant was obtained by reason of his fraud
or deceit, it is not material to inquire whether the agent of the plaintiff had power to sell the stock.
If fraud or deceit existed, the sale cannot stand. We shall therefore determine the question
whether or not there was evidence of such fraud or deceit as would avoid the sale.
Although there is no technical finding of facts by the Court of First Instance, yet, in its opinion,
that court does state facts upon which it bases its judgment, and which may be referred to for
the purpose of determining what the facts are. On appeal or writ of error from the judgment of
the Supreme Court of the Philippine Islands the facts (when the courts below differ) will be
reviewed by this court under the 10th section of the Act of July 1, 1902 (32 Stat. at L., 691, chap.

1369). (De la Rama vs. De la Rama, 201 U.S., 303, 309; 50 L. ed., 765, 767; 26 Sup. Ct. Rep.,
485.)
A careful perusal of the evidence brings us to the conclusion that it was ample to sustain the
judgment of the Court of First Instance, considered with reference to the law applicable to the
Philippine Islands.HAEDCT
The Civil Code of that jurisdiction, after providing by article 1261 for the requisites of a contract,
among which is the "consent of the contracting parties," says in article 1265 as follows: "Consent
given by error, under violence, by intimidation or deceit, shall be void." Articles 1266 to 1268,
inclusive, explain the meaning of the words as used in article 1265, and describe what may be
error, under violence, or by intimidation. It is then provided by article 1269 that "there is deceit
when, by words or insidious machinations on the part of one of the contracting parties, the other
is induced to execute a contract which, without them, he would not have made." The meaning of
the words "insidious machinations" may be said to be a deceitful scheme or plot with an evil
design, or, in other words, with a fraudulent purpose. Thus, the deceit which avoids the contract
need not be by means of misrepresentations in words. It exists where the party who obtains the
consent does so by means of concealing or omitting to state material facts, with intent to
deceive, by reason of which omission or concealment the other party was induced to give a
consent which he would not otherwise have given. (Article 1269.) This is the rule of the common
law also; but, in both cases, it is based upon the proposition that, under all the circumstances of
the case, it was the duty of the party who obtained the consent, acting in good faith, to have
disclosed the facts which he concealed. (Stewart vs. Wyoming Cattle Ranche Co., 128 U.S.,
383, 388; 32 L. ed., 439, 441; 9 Sup. Ct. Rep., 101.) This was the Spanish law before the
adoption of the Code. (Partidas 5, Ttulo 5, Ley 57; Partidas 7, Ttulo 16, Ley 1. See
alsoScvola, Cdigo Civil, arts. 1269, 1270.) In such cases concealment is equivalent to
misrepresentation.
The question in this case, therefore, is whether, under the circumstances above set forth, it was
the duty of the defendant, acting in good faith, to disclose to the agent of the plaintiff the facts
bearing upon or which might affect the value of the stock.
If it were conceded, for the purpose of the argument, that the ordinary relations between
directors and shareholders in a business corporation are not of such a fiduciary nature as to
make it the duty of a director to disclose to a shareholder the general knowledge which he may
possess regarding the value of the shares of the company before he purchases any from a
shareholder, yet there are cases where, by reason of the special facts, such duty exists. The
Supreme Courts of Kansas and of Georgia have held the relationship existed in the cases before
those courts because of the special facts which took them out of the general rule, and that,
under those facts, the director could not purchase from the shareholder his shares without
informing him of the facts which affected their value. (Stewart vs. Harris, 69 Kan., 498; 66 L. R.
A., 261; 105 Am. St. Rep., 178; 77 Pac., 277; 2 Am. & Eng. Ann. Cas., 873;Oliver vs. Oliver, 118
Ga., 362; 45 S. E., 232.) The case before us is of the same general character. On the other
hand, there is the case of Tippecanoe County vs. Reynolds, 44 Ind., 509-515; 15 Am. Rep., 245,
where it was held (after referring to cases) that no relationship of a fiduciary nature exists
between a director and a shareholder in a business corporation. Other cases are cited to that
effect by counsel for defendant in error. These cases involved only the bare relationship between
director and shareholder. It is here sought to make defendant responsible for his actions, not
alone and simply in his character as a director, but because, in consideration of all the existing
circumstances above detailed, it became the duty of the defendant, acting in good faith, to state
the facts before making the purchase. That the defendant was a director of the corporation is but
one of the facts upon which the liability is asserted, the existence of all the others in addition
33

making such a combination as rendered it the plain duty of the defendant to speak. He was not
only a director, but he owned three-fourths of the shares of its stock, and was, at the time of the
purchase of the stock, administrator general of the company, with large powers and engaged in
the negotiations which finally led to the sale of the company's lands (together with all the other
friar lands) to the Government at a price which very greatly enhanced the value of the stock. He
was the chief negotiator for the sale of all the lands, and was acting substantially as the agent of
the shareholders of his company by reason of his ownership of the shares of stock in the
corporation and by the acquiescence of all the other shareholders, and the negotiations were for
the sale of the whole of the property of the company. By reason of such ownership and agency,
and his participation as such owner and agent in the negotiations then going on, no one knew as
well as he the exact condition of such negotiations. No one knew as well as he the probability of
the sale of the lands to the Government. No one knew as well as he the probable price that
might be obtained on such sale. The lands were the only valuable asset owned by the company.
Under these circumstances, and before the negotiations for the sale were completed, the
defendant employs an agent to purchase the stock, and conceals from the plaintiff's agent his
own identity and his knowledge of the state of the negotiations and their probable result, with
which he was familiar as the agent of the shareholders, and much of which knowledge he
obtained while acting as such agent, and by reason thereof. The inference is inevitable that, at
this time, he had concluded to press the negotiations for a sale of the lands to a successful
conclusion; else, why would he desire to purchase more shares which, if no sale went through,
were, in his opinion, worthless because of the failure of the Government to properly protect the
lands in the hands of their then owners? The agent of the plaintiff was ignorant in regard to the
state of the negotiations for the sale of the land, which negotiations and their probable result
were a most material fact affecting the value of the shares of stock of the company, and he
would not have sold them at the price he did had he known the actual state of the negotiations
as to the lands, and that it was the defendant who was seeking to purchase the stock.
Concealing his identity when procuring the purchase of the stock, by his agent, was in
itselfstrong evidence of fraud on the part of the defendant. Why did he not ask Jones, who
occupied an adjoining office, if he would sell? But, by concealing his identity, he could, by such
means, the more easily avoid any questions relative to the negotiations for the sale of the lands
and their probable result, and could also avoid any actual misrepresentations on that subject,
which he evidently thought were necessary in his case to constitute a fraud. He kept up the
concealment as long as he could, by giving the check of a third person for the purchase money.
Evidence that he did so was objected to on the ground that it could not possibly even tend to
prove that the prior consent to sell had been procured by the subsequent check given in
payment. That was not its purpose. Of course, the giving of the check could not have induced
the prior consent, but it was proper evidence as tending to show that the concealment of identity
was not a mere inadvertent omission, an omission without any fraudulent or deceitful intent, but
was a studied and intentional omission, to be characterized as part of the deceitful machinations
to obtain the purchase without giving any information whatever as to the state and probable
result of the negotiations, to the vendor of the stock, and to, in that way, obtain the same at a
lower price. After the purchase of the stock he continued his negotiations for the sale of the
lands, and finally, he says, as administrator general of the company, under the special authority
of the shareholders, and as attorney in fact, he entered into the contract of sale December 21,
1903. The whole transaction gives conclusive evidence of the overwhelming influence defendant
had in the course of the negotiations as owner of a majority of the stock and as agent for the
other owners and it is clear that the final consummation was in his hands at all times. If, under all
these facts, he purchased the stock from the plaintiff, the law would indeed be impotent if the
sale could not be set aside or the defendant cast in damages for his fraud.

any duty to the members in respect to their individual stock, which would prevent them from
purchasing the same in the usual manner. While this may, in general, be true, we think it is not
an accurate statement of the case, regard being had to the facts above-mentioned.
It is said that, by the Code of Commerce, of the Philippine Islands the directors are declared to
be mandatories of the society, and that, by article 1459 of the Spanish Civil Code, they are
prohibited from acquiring by purchase, even at public or judicial auction, the property the
administration or sale of which may have been intrusted to them, and that this is the extent of the
prohibition. This provision has no reference to the purchase for himself, under such facts as
existed here, by an officer of a corporation, of stock in the corporation owned by another. The
case before us seems a plain one for holding that, under the circumstances detailed, there was
a legal obligation on the part of the defendant to make these disclosures.
It is further objected, however, that the plaintiff, Mrs. Strong, denied that she had ever authorized
her agent to sell this stock, and therefore, by her own evidence, there had never been any
consent by her, obtained by fraud or otherwise, because there had never been any consent at
all. There is nothing in this objection. Mrs. Strong contended that such authority as she had
given never authorized her agent to sell this stock. That had nothing to do with the obligation of
the defendant to make the disclosure of the facts already adverted to before the purchase of the
stock from plaintiff's agent, and if, by reason of such failure, the defendant was guilty of a fraud
in procuring the purchase from the plaintiff's agent, it was a fraud for which he became liable to
the plaintiff, even though the plaintiff maintained that her agent was not authorized to sell. The
court held that he was authorized, and therefore, if he sold by reason of the fraud committed by
defendant, the plaintiff was thereby injured and the defendant became liable. In legal effect her
consent was obtained by the fraud. IDESTH
We have not overlooked the objections made in regard to the form of the judgment in the Court
of First Instance, but are of opinion that such objections are not of a material nature, and we are
disposed to follow the course pursued by that court in this case.
Other objections made by the defendant's counsel we have examined, but do not regard them
as important. We therefore reverse the judgment of the Supreme Court, dismissing the
complaint, and affirm that of the Court of First Instance, and it is so ordered.
Reversed.
||| (Spouses Strong v. Repide, No. 110, [May 3, 1909])

The Supreme Court of the Islands, in holding that there was no fraud in the purchase, said that
the responsibility of the directors of a corporation to the individual stockholders did not extend
beyond the corporate property actually under the control of the directors; that they did not owe
34

4. IGNORANCE IS NO DEFENSE. A director of a corporation is bound to

exercise ordinary skill and judgment and cannot excuse his negligence or unlawful acts on
the ground of ignorance or inexperience.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of the Philippine Islands.

7.

Duty to creditors
EN BANC
[G.R. No. 30460. March 12, 1929.]
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,
Incorporated,plaintiff-appellant, vs.
GREGORIO
VELASCO
ET
AL., defendants-appellees.
Frank H. Young, for appellant.
Pablo Lorenzo and Delfin Joven, for appellees.
SYLLABUS

1. WHAT CREDITORS MAY ASSUME. The creditors of a corporation have

the right to assume that so long as there are debts and liabilities, the board of directors of
the corporation will not use its assets to purchase its own stock or to declare dividends to
its stockholders when the corporation is insolvent.
2. DUTIES OF DIRECTORS. The directors of a corporation are bound to care
for its property and manage its affairs in good faith, and for a violation of their duties
resulting in waste of its assets or injury to its property, they are liable to account the same
as any other trustee.
3. LIABILITY OF DIRECTORS. If the directors of a corporation do acts clearly
beyond their power, by reason of which a loss ensued, or dispose of its property without
authority, they will be required to make good the loss out of their private estate.

It is alleged that the defendants, Gregorio Velasco, as president, Felix del

Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel,
as director of the Trading Company, at a meeting of the board of directors held on July 24,
1922, approved and authorized various unlawful purchases already made of a large portion
of the capital stock of the company from its various stockholders, thereby diverting its funds
to the injury, damage and in fraud of the creditors of the corporation. That pursuant to such
resolution and on March 31, 1922, the corporation purchased from the defendant S. R.
Ganzon 100 shares of its capital stock of the par value of P10, and on June 29,1922, it
purchased from the defendant Felix D. Mendaros 100 shares of the par value of P10, and
on July 16, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, each, and on April 5, 1922, it purchased from the defendant Dionisio
Saavedra 10 shares of the same par value, and on June 29, 1922, it purchased from the
defendant Valentin Matias 20 shares of like value. That the total amount of the capital stock
unlawfully purchased was P3,300. That at the time of such purchase, the corporation had
accounts payable amounting to P13,807.50, most of which were unpaid at the time the
petition for the dissolution of the corporation was presented, and that the corporation was
then in a bad financial condition, in contemplation of an insolvency and dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the officers
and directors of the corporation approved a resolution for the payment of P3,000 as
dividends to its stockholders, which was wrongfully done and in bad faith, and to the injury
and fraud of its creditors. That at the time the petition for the dissolution of the corporation
was presented it had accounts payable in the sum of P9,241.19, "and practically worthless
accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio
Velasco, Felix del Castillo, Andres L. Navallo and Rufino Manuel, personally as members of
the Board of Directors, or for the recovery from the defendant S. R. Ganzon, of the sum of
P1,000, from the defendant Felix D. Mendaros, P2,000, and from the defendant Dionisio
Saavedra, P100, and under his second cause of action, he prays judgment for the sum of
P3,000, with legal interest against the board of directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon,
Dionisio Saavedra and Valentin Matias made a general and specific denial.
In his amended answer, the defendant Gregorio Velasco admits paragraphs 1, 2
and 3 of each cause of action of the complaint, and that the shares mentioned in paragraph
4 of the first cause of action were purchased, but alleges that they were purchased by
virtue of a resolution of the board of directors of the corporation "when the business of the
company was going on very well." That the defendant is one of the principal shareholders,
and that about the same time, he purchased other shares for his own account, because he
thought they would bring profits. As to the second cause of action, he admits that the
35

dividends described in paragraph 4 of the complaint were distributed, but alleges that such
distribution was authorized by the board of directors, "and that the amount represented by
said dividends really constitutes a surplus profit of the corporation," and as a counterclaim,
he asks for judgment against the receiver for P12,512.47 for and on account of his
negligence in failing to collect the accounts.
Although duly served, the defendant Mendaros did not appear or answer. The
defendant Navallo was not served, and the case against him was dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts, based
upon which the lower court dismissed plaintiff's complaint, and rendered judgment for the
defendants, with costs against the plaintiff, and absolved him from the cross-complaint of
the defendant Velasco, and on appeal, the plaintiff assigns the following errors:
"1. In holding that the Sibuguey Trading Company, Incorporated, could legally
purchase its own stock.
"2. In holding that the Board of Directors of the said Corporation could legally
declare a dividend of P3,000, July 24, 1922."
DECISION
JOHNS, J p:
It is stipulated that on July 24,1922, the directors of the corporation approved the
purchase of stock as follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price; which purchase
was made on June 29,1922 ; another
One hundred shares from Felix D. Mendaros at the same price on July 16,1922;
Ten shares from Dionisio Saavedra at the same price on June 29, 1922.
That during such times, the defendant Gregorio Velasco purchased 13 shares
from the corporation for P130; Felix del Castillo 42 shares for P420; Andres Navallo
15 shares for P150; and the defendant Mendaros 10 shares for P100. That during the
time these various purchases were made, the total amount of subscribed and paid up
capital stock of the corporation was P10,030, out of the authorized capital stock 2,000
shares of the par value of P10 each.
Paragraph 4 of the stipulation also recites:

"Be it also admitted as a fact that at the time of the said

purchases there was a surplus profit of the corporation above-named of
P3,314.72."
Paragraph 5 is as follows:
"That at the time of the repeatedly mentioned various
purchases of the said capital stock were made, the said corporation had
Accounts Payable in the total amount of P13,807.50 as shown by the
statement of the corporation, dated June 30, 1922, and Accounts
Receivable in the sum of P19,126.02 according to the books, and that the
intention of the Board of Directors was to resell the stocks purchased by
the corporations at a sum above par for each stock, this expectation
being justified by the then satisfactory and sound financial condition of the
business of the corporation."
It is also stipulated that on September 11, 1923, when the petition for the
dissolution of the Corporation was presented to the court, according to a statement made
June 30, 1923, it has accounts payable aggregating P9,241.19, and accounts receivable for
P12,512.47.
Paragraph 7 of the stipulation recites:
"That the same defendants, mentioned in paragraph 2 of this
stipulation of facts and in the same capacity, on the same date of July 24,
1922, and at the said meeting of the said Board of Directors, approved
and authorized by resolution the payments of dividends to its
stockholders, in the sum of three thousand pesos (P3,000), Philippine
currency, which payments were made at different dates, between
September 30, 1922, and May 12, 1923, both dates inclusive, at a time
when the corporation had accounts less in amount than the accounts
receivable, which resolution was based upon the balance sheet made as
June 30,1922, said balance sheet showing that the corporation had a
surplus of P1,069.41, and a profit on the same date of P2,656.08, or a
total surplus amount of P3,725.49, and a reserve fund of P2.889.23 for
bad and doubtful accounts and depreciation of equipment, thereby
leaving a balance of P3,314.72 of net surplus profit after paying this
dividend."
It is also stipulated at a meeting of the board of directors held on July 24, 1922,
as follows:
"6. The president and manager submitted to the Board of
Directors his statement and balance sheet for the first semester ending
June 30, 1922 and recommended that P3,000 out of the surplus
account be set aside for dividends payable, and that payments be made
in installments so as not to affect the financial condition of the
corporation. That stockholders having outstanding account with the
corporation should settle first their accounts before payments of their
dividends could be made. Mr. Castillo moved that the statement and
36

balance sheet be approved as submitted, and also the recommendations

of the president. Seconded by Mr. Manuel. Approved."

corporation did not then have an actual bona fide surplus from which the dividends could be
paid, and that the payment of them in full at that time would "affect the financial condition of
the corporation."

Paragraph 8 of the stipulation is as follows:

"That according to the balance sheet of the corporation, dated
June 30, 1923, it had accounts receivable in the sum of P12,512.47, due
from various contractor and laborers of the National Coal Company, and
also employees of the herein corporation, which the herein receiver, after
his appointment on February 28, 1924, although he made due efforts by
personally visiting the location of the corporation, and of National Coal
Company, at its offices, at Malangas, Mindanao, and by writing numerous
letters of demand to the debtors of the corporation, in order to collect
these accounts receivable, he was unable to do so as most of them were
without goods or property, and he could not file any suit against them that
might have any property, for the reason that he had no funds on hand
with which to pay the filing and sheriff fees to Malangas, and other places
of their residences."
From all of which, it appears that on June 30, 1922, the board of directors of the
corporation authorized the purchase of, purchased and paid for, 330 shares of the capital
stock of the corporation at the agreed price of P3,300, and that at the time the purchase
was made, the corporation was indebted in the sum of P13,807.50, and that according to its
books, it had accounts receivable in the sum of P19,126.02. That on September 11, 1923,
when the petition was filed for its dissolution upon the ground that it was insolvent, its
accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47, or an
apparent asset of P3,271.28 over and above its liabilities. But it will be noted that there is
no stipulation or finding of fact as to what was the actual cash value of its accounts
receivable. Neither is there any stipulation that those accounts or any part of them ever
have been or will be collected, and it does appear that after his appointment on February
28, 1924, the receiver made a diligent effort to collect them, and that he was unable to do
so, and it also appears from the minutes of the board of directors that the president and
manager "recommended that P3,000 out of the surplus account to be set aside for
dividends payable, and that payments be made in installments so as not to affect the
financial condition of the corporation."

It is, indeed, peculiar that the action of the board in purchasing the stock from the
corporation and in declaring the dividends on the stock was all done at the same meeting of
the board of directors, and it appears in those minutes that both Ganzon and Mendaros
were formerly directors and resigned before the board approved the purchase and declared
the dividends, and that out of the whole 330 shares purchased, Ganzon sold 100 and
Mendaros 200, or a total of 300 shares out of the 330, which were purchased by the
corporation, and for which it paid P3,300. In other words, that the directors were permitted
to resign so that they could sell their stock to the corporation. As stated, the authorized
capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, of which
only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of the
stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in
dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is
very apparent that the directors did not act in good faith or that they were grossly ignorant
of their duties.
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p.
473, section 454, where it is said:
"General Duty to Exercise Reasonable Care. The directors
of a corporation are bound to care for its property and manage its affairs
in good faith, and for a violation of these duties resulting in waste of its
assets or injury to the property they are liable to account the same as
other trustees. And there can be no doubt that if they do acts clearly
beyond their power, whereby loss ensues to the corporation, or dispose
of its property or pay away its money without authority, they will be
required to make good the loss out of their private estates. This is the rule
where the disposition made of money or property of the corporation is
one either not within the lawful power of the corporation, or, if within the
power of the corporation, is not within the power or authority of the
particular officer or officers."
And section 458 which says:

If in truth and in fact the corporation had an actual bona fide surplus of P3,000
over and above all of its debts and liabilities, the payment of the P3,000 in dividends would
not in the least impair the financial condition of the corporation or prejudice the interests of
its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on the
assumption that because it appeared from the books of the corporation that it. had
accounts receivable of the face value of P19,126.02, therefore it had a surplus over and
above its debts and liabilities. But as stated, there is no stipulation as to the actual cash
value of those accounts, and it does appear from the stipulation that on February 28,1924,
P12,512.47 of those accounts had but little, if any, value, and it must be conceded that, in
the purchase of its own stock to the amount of P3,300 and in declaring the dividends to the
amount of P3,000, the real assets of the corporation were diminished P6,300. It also
appears from paragraph 4 of the stipulation that the corporation had a "surplus profit" of
P3,314.72 only. It is further stipulated that the dividends should "be made in installments so
as not to affect the financial condition of the corporation." In other words. that the

"Want of Knowledge, Skill, or Competency. It has been said

that directors are not liable for losses resulting to the corporation from
want of knowledge on their part; or for mistakes of judgment, provided
they were honest, and provided they are fairly within the scope of the
powers and discretion confided to the managing body. But the
acceptance of the office of a director of a corporation implies a competent
knowledge of the duties assumed, and directors cannot excuse
imprudence on the ground of their ignorance or inexperience; and if they
commit an error of judgment through mere recklessness or want of
ordinary prudence or skill, they may be held liable for the consequences.
Like a mandatory, to ,whom he has been likened, a director is bound not
only to exercise proper care and diligence, but ordinary skill and
judgment. As he is bound to exercise ordinary skill and judgment, he
cannot set up that he did not possess them."
37

Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to stockholders
when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are
important, and we have given them the consideration which they deserve.
The judgment of the lower court is reversed, and (a), as to the first cause of
action, one will be entered for the plaintiff and against the defendant S. R. Ganzon for the
sum of P1,000, with legal interest from the 10th of February, 1926, and against the
defendant Felix D. Mendaros for P2,000, with like interest, and against the defendant
Dionisio Saavedra for P100, with like interest, and against each of them for costs, each on
their primary liability as purchasers of stock, and (b) against the defendants Gregorio
Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the board of
directors of the Sibuguey Trading Company, Incorporated, as secondarily liable for the
whole amount of such stock sold and purchased as above stated, and on the second cause
of action, judgment will be entered (c) for the plaintiff and jointly and severally against the
defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as
members of the board of directors of the Sibuguey Trading Company, Incorporated, for
P3,000, with interest thereon from February 10, 1926, at the rate of 6 per cent per annum,
and costs. So ordered.
Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.
||| (Steinberg v. Velasco, G.R. No. 30460, [March 12, 1929], 52 PHIL 953-962)
8.
9.

Gibbs & McDonough for appellees.

SYLLABUS
1. CIVIL PROCEDURE; BILLS OF DISCOVERY. Proceedings in the nature of
bills of discovery are not limited to the taking of depositions under subsection 1 of section
355 of the Code of Civil Code of Civil Procedure and to the compulsory attendance of
witnesses by means of subpoena.
2. ID.; ID.; PLEADING. In bills of discovery considerable latitude in the manner
of stating facts is allowed and what might be considered bad pleading in an ordinary action
at law is often allowed in a bill of discovery.
3. ID.; ID.; PLEADING IN THE ALTERNATIVE. If the petitioner for discovery is
unable to state with certainty facts which are peculiarly within the knowledge of his
adversary, it is proper for him to state the facts within his knowledge with certainty, but to
plead in the alternative the, to him, doubtful facts and call upon the defendant to make a full
disclosure of such facts.
4. ID.; CORPORATIONS, HOSTILE BOARD OF DIRECTORS; ACTION
BROUGHT BY STOCKHOLDERS. When the board of directors in a corporation is under
the complete control of the principal defendants in the case and it is obvious that a demand
upon the board of directors to institute an action and prosecute the same effectively would
be useless, the action may be brought by one or more of the stockholders without such
demand.
DECISION

Watered Stocks
Duty of shareholders in close corps.
OSTRAND, J p:

XIV. DEVICES AFFECTING CONTROL

1.
2.

This is an appeal from a decision of the Court of First Instance of Manila,

sustaining a demurrer to the complaint. The plaintiffs declined to amend and judgment was
rendered dismissing the case. The complaint in question reads as follows:

Proxy device
Voting trusts

HARRIE S. EVERETT, ET AL. vs. ASIA BANKING CORP., ET AL.

"The above named plaintiffs, by Thomas Cary Welch, their

attorney, complain of the above-named defendants and for cause of
action against them allege:

EN BANC
[G.R. No. 25241. November 3, 1926.]
HARRIE S. EVERETT, CARL G. CLIFFORD, ELLIS H. TEAL and
GEORGE W. ROBINSON,plaintiffs-appellants, vs. THE ASIA BANKING
CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED
F. KELLY, JOHN W. MEARS and CHARLES D.
MCINTOSH,defendants-appellants.
Thomas Cary Welch for appellants.

"1st. That at all times in this complaint mentioned the plaintiffs

Harrie S. Everett, Ellis H. Teal and George W. Robinson were and now
are residents of the City of Manila, Philippine Islands. That the plaintiff
Carl G. Clifford was formerly a resident of said City of Manila and now is
a resident of the City of Washington, District of Columbia.
"2nd. That at all times in this complaint mentioned the
defendant the Asia Banking Corporation hereinafter called 'the Bank,' was
and now is a foreign banking corporation duly licensed to transact
banking business in the Philippine Islands, having its principal office and
place of business at Manila aforesaid and that said Asia Banking
38

Corporation never has been empowered by law or licensed to do any

business other than commercial banking in the Philippine Islands. That
the defendants Nicholas E. Mullen, Alfred F. Kelly, John W. Mears, and
Charles D. McIntosh were residents of said City of Manila and were
officers, agents and employees of the said Asia Banking Corporation, the
said Mullen being the General Manager thereof in said City; That: the
defendant Eric Barclay is now a resident of Los Angeles, California, and
the defendant McIntosh is also residing in the United States, his exact
residence being unknown.
"3rd. That at all times in this complaint mentioned Teal &
Company hereinafter called 'the Company,' was and now is a domestic
corporation duly incorporated under the laws of the Philippine Islands and
having its principal office and place of business at Manila aforesaid. That
during said times the plaintiffs Everett, Clifford, Teal and Robinson were
the principal stockholders in the Company owning a total of 4,478 shares
therein and that the defendant Barclay was the only other stockholder,
owning one share thereof.
"4th. That in the year 1921, the said Teal & Company has
become indebted to the firm of H. W. Peabody & Company in about the
sum of P300,000, being for tractors, plows and parts which had been
ordered and delivered, the Bank and other banks in Manila held drafts
accepted by the Company under said H. W. Peabody & Company
guarantee. That said tractors having become unsalable by reason of the
financial and agricultural depression that had overtaken the Islands, the
said tractors were all returned to the said H. W. Peabody & Company and
as these plaintiffs are informed and verily believes were by it returned to
the United States, and while the events herein set forth were taking place
the Company made payments on its indebtedness through the Bank to H.
W. Peabody & Company, amounting to the sum of at least P150,000.
That at about the same time the Company had ordered another lot of
tractors, etc., from a business house in the United States, known as
Smith, Kirkpatrick & Co., under a commercial letter of credit which the
Company had from the Bank in New York City, but that shipment of such
tractors had been delayed until the credit had been rescinded by the
Bank and that upon such rescission Smith Kirkpatrick & Co., had been
advised by telegraph that the order was cancelled and not to ship the
tractors. That nevertheless and contrary to such advice the said Smith,
Kirkpatrick & Co. did ship the tractors doing so under D/A drafts therefor
and that when said tractors arrived in Manila and in order, if possible to
save Smith, Kirkpatrick & Co. from additional loss, the Company at the
request and on the advice of the said Bank accepted the drafts and
stored the same in a warehouse in Manila rented by it and gave receipts
therefor.
"5th. That thereafter and on or about March 1921 the Bank
persuaded the Company and the said H. W. Peabody & Co. and Smith,
Kirkpatrick & Co. to enter into a so-called 'creditors agreement' with itself,
wherein it was mutually agreed that neither of the parties should take
action to collect its debts from the Company, for the term of two years
after the date thereof. That these plaintiffs have no copy of said

agreement but beg leave to refer to the original of same, in possession of

the Bank, for greater certainty.
"6th. That the business of said Company consisted mainly in
the merchandising of automobiles, trucks, tractors, spareparts and
accessories therefor, and the repairing thereof. That on the 29th day of
December, 1922, said company was solvent and in the enjoyment of a
large, growing, and lucrative business and in the possession of a valuable
reputation and good-will. That since its organization in May, 1919, it had
done in its banking business and financing almost exclusively thru and
with the Bank and by reason of such continued relations the officers of
the Company had acquired trust and confidence in the integrity and goo
intentions of the said Bank and its officers and the other defendants in
their friendliness to themselves and the Company.
"7th. That on said 29th day of December, 1922, the said
Company was indebted to the Bank in about the sum of P750,000, which
said sum was secured by mortgage on its personal property and the
improvements upon the real estate occupied by it, which real estate was
held under a ninety-nine years lease upon very favorable terms and
which lease was a valuable asset and constantly increasing in value, and
that the said Bank held acceptances, warehouse receipts or pledges for
such other indebtedness, as was not covered by the last mentioned
mortgage, which said security was ample to cover the amount of the
indebtedness.
"8th. That toward the end of the year 1922; the Bank, through
its manager the defendant Mullen represented to the Company and its
managers that for the protection both of the Bank and the Company it
was advisable for them both that the Bank should temporarily obtain
control of the management and affairs of the Company in order that the
affairs of the Company could be conducted by the Bank without
interference or hindrance from outside, and to this end that it would be
necessary for the stockholders in the Company to place their shares
therein in a Voting Trust to be held by the Bank or one of its officers for
the benefit of the Company and represented that if this were done the
Bank would then finance the Company under its own supervision and that
if and when the same were successful and in position to resume
independent operation the said trust would be terminated and the stock
returned to its true owners, and further represented that in case at any
time the Bank decided to discontinue operation under the said trust that
then the stock also would be so returned.
"9th. That it was further represented by the Bank and the said
Mullen that in order to protect the mutual interests of the Bank and the
Company it was necessary to carry into effect the said proposed voting
trust without the knowledge of the creditors above named and thereby
place the Bank in an advantageous position with regard to them. That
relying upon the previous friendly relations between the bank and the
Company and between the individual defendants and these plaintiffs and
relying upon the promise and representations of the defendants, these
plaintiffs were induced to sign and did sign and deliver to the Bank
39

simultaneously a so-called 'Voting Trust Agreement,' executed by the

plaintiff stockholders and a 'Memorandum of Agreement' executed by the
Company, both dated and executed and delivered the 29th day of
December, 1922, the two forming one document, and a copy of which is
hereto attached and marked Exhibit A.
"10th. That by reason of the facts above set forth and of their
reliance upon the good faith and good-will of the defendants these
plaintiffs were induced to sign the 'Memorandum of Agreement,' and
'Voting Trust Agreement, Exhibit A, understanding from the defendants
that the same were intended for the protection of all parties thereto from
outside creditors, but that they were not intended to be enforced
according to the letter thereof, and that they did not contain the true
agreement between the Bank and the Company which was to finance the
Company without interference from the above named creditors, to hold
the voting trust as a protection to the bank as against the said creditors
and for its own advances, and the further agreement that in case the
Bank did not operate under the said voting trust because of the
disapproval by its New York headquarters of such action, or for any other
cause, the said trust would be cancelled and the stock in and control of
the Company returned to its true owners.
"11th. That shortly subsequent to the execution and delivery of
the voting trust and memorandum of agreement hereinabove described,
in violation of the obligations and duties imposed by law upon the trustee
and in pursuance of a scheme to defraud there plaintiffs herein below
more fully set forth, the said voting trustee, the defendants Mullen,
caused and procured, by virtue of the powers delegated in the said voting
trust, the displacement and removal from the Board of Directors of the
Company of each and every person who was at the time of the execution
of the said voting trust a stockholder in the Company and the substitution
in their places as such creditors, of the above named-persons defendant,
or of other persons at the time employees and servants of the Bank, that
thereafter and at no subsequent time did the said trustee allow or permit
to act as Director of the Company any person who was in fact a
stockholder in the Company; that no one of the so-called directors so
placed in ostensible office, at any time has ever purchased from any
stockholder of the Company a single share of the capital stock thereof, or
paid to any stockholder or the Company any money or consideration
whatsoever for the stock by virtue of the assumed ownership of which he
has assumed to be a director of the Company, exclusively controlled and
managed by the said defendants none of whom had any legal or
equitable right to a voice in the control or management thereof.
"12th. That in pursuance of the above-mentioned and herein
after described scheme to defraud these plaintiffs, the new so-called
directors proceeded to remove from office the Secretary of the Company,
and to discharge from employment all of the old responsible managers
and foremen in the office and shops who were loyal to the Company and
to these plaintiffs as the stockholders thereof and to displace them
substitute for them creatures of their own choosing whose interest
consisted wholly in pleasing themselves and Bank, and who were wholly

foreign to the stockholders, these plaintiffs who were and are the real
owners of the Company. That thereafter said defendants conducted the
business of the Company without consulting the stockholders thereof and
denied to the stockholders any knowledge or information as to their
actions, or the business of the Company, and at all times thereafter
carried on the business and management in all respects as if they and
the Bank were the real stockholders and owners thereof and in utter and
entire disregard of the rights and interests of these plaintiffs who were
and are the real owners. That the said individual defendants, as such
pretended stockholders and directors as aforesaid, from time to time gave
new mortgages upon the properties of the Company to the Bank as it
from time to time required and without regard to the interest of the
Company and looking solely to the advantage of the Bank whose
employees and henchmen all of them were and are.
"13th. That after excluding the real owners from voice in the
management or knowledge of the affairs of the Company, the said
individual de or because the individual defendants as employees were
coerced by the Bank, the said defendants gave pledges and mortgages
from the Company to the Bank and entered into contracts as directed by
the Bank, and permitted the Bank to foreclose the same and to sell the
property of the Company at such times and in such manners as to be
solely to the interests of the and in such manners as to be solely to the
interest of the Bank of themselves, and wholly without regard to the best
interests of the Company itself in disregard to the duties and obligations
of a trustee, and permitted the Bank to bring suit or suits against the
Company, in which the Company was not represented by anyone having
its interest at heart and in which by reason of the above set forth relation
of the Company to the Bank, the Bank in truth occupied the position of
both plaintiff and defendant and tricked and deluded the courts into giving
judgments in which the rights of the real parties were concealed and
unknown to the courts.
"14th. That on or about the 18th day of August, 1923, in order
more effectually to plunder the Company and to defraud these plaintiffs
the said defendants, Mullen, Barclay, Mears and McIntosh, made,
executed and filed in the Bureau of Commerce and Industry of the
Philippine Islands, articles of incorporation of a corporation called the
'Philippine Motors Corporation,' having its principal office in the City of
Manila, a capital stock of P25,000, of which the sum of P5,000, was
alleged to have been subscribed and paid as follows: the defendant
Barclay P200, defendant Mears P1,200, defendant Kelly P1,200,
defendant McIntosh P1,200, defendant Mullen P1,200, the treasurer
thereof being the defendant Mears. And these plaintiffs beg leave to refer
to the original articles of Incorporation on file in the said Bureau for
greater certainty.
"That at the time of such incorporation each and every one of
the last above named defendants was an officer or employee of the
defendant Bank. That these plaintiffs have no information nor means of
obtaining information as to whether the money alleged to have been
described by them for their shares of stock was of their personal funds
40

and property or whether it was money furnished them by the Bank for the
purpose. That in case such subscriptions were of their personal moneys
such incorporation was a fraud upon these plaintiffs for the reason that it
was intended for the sole purpose of taking over the assets of the
Company and said defendants were enabled to effectuate such intent by
reason of their positions as officers and employees of the Bank and
because each and every one of them were nominally and de
factodirectors of the Company, by reason of their appointments as such
by the defendant Mullen, the Voting Trustee, under the Voting Trust
hereinabove set forth, of which facts each and every one of said
defendant incorporators were at the time fully informed as these plaintiffs
verily believe.
"15th. That after the incorporation described in the last
preceding paragraph the said Bank turned over to the Philippine Motors
Corporation all of the business and assets of the Company of every name
nature and description and with the connivance and consent of the
individual defendants acting in their double capacity as directors of both
corporations, permitted and assisted the said Philippine Motors
Corporation to enter and possess itself of the premises and good will of
the Company and to continue and carry on the said business for the sole
benefit of the new corporation and to collect the debts owing to the
Company and convert the advantages, profits and proceeds thereof to
itself. And that at all times since the said Philippine Motors Corporation
has continued to conduct and advantage itself of the business of the
Company to the disregard of and detriment to the rights of these plaintiffs
and to their damage.
"16th. That these plaintiffs, by reason of the facts hereinabove
set forth were and are ignorant of the exact relations that have existed
and do exist between the Bank and the said Philippine Motors
Corporation, or between the Bank and the individual defendants as
ostensible stock-holders thereof and that the Bank has prevented these
plaintiffs from obtaining any such information by refusing after demand to
return to these plaintiffs their stock in the Company or to dissolve the
Voting Trust or in any wise to allow them to regain control of what is left of
the Company or its records and has endeavored to forestall and prevent
any action toward regaining such control or enforcement of their rights by
bringing suit against one of the principal stockholders in the Company,
the plaintiff Everett, based on an alteration and falsification of the books
of the Company and by threat of proceedings against another principal
holder in the Company, the plaintiff Clifford, to collect a large sum of
money as and for an alleged nonpayment of a subscription to the stock of
the Company which the records of the Company plainly show does not
exist and has no foundation in equity or in law.
"That by reason of the ignorance, so generated and
maintained, of facts wholly within the knowledge of defendants and
concealed from these plaintiffs, they are unable to allege positively and
therefore must charge as they do charge in the alternative;

"(a) That the said Philippine Motors Corporation is a fictitious

entity brought into semblance of being by the Bank through the control of
its employees the above named individual defendants acting as
pretended incorporators, stockholders and directors, when in truth and in
fact the said individuals had and have no personal property interest
therein, and that in case of foregoing is found to be the fact the said
Philippine Motors Corporation never obtained and has now no legal
existence for the reason that it was and is the Bank itself operating under
a disguise and because said Bank, under its license to do business in the
Philippine Islands, is without power or authority to engage in the business
assumed by the Philippine Motors Corporation, and because said
corporation so pretendedly created by the Bank is in violation of its duties
and obligations assumed by it as Trustee of the stockholders of the
Company, Or
"(b) That in case the individual defendants as individuals
created the said, the Philippine Motors Corporation, and the same is the
property of themselves as stockholders and bona fide investors of their
own money in the stockholders the same, then such creation and all
subsequent operations of the said Corporation were a fraud upon these
plaintiffs because such incorporation and subsequent acts of the
Corporation were caused and procured by said individual defendants, the
defendant Mullen being the voting trustee of the Company and at the
same time being the Manager in the Philippine Islands of the Bank, and
by virtue of the power so focused and concentrated in himself together
with the powers of the other individual defendants as agents and
employees of the Bank, and simultaneously as officers and directors of
the Company enabled the said individual defendants to take advantage of
their position in respect to the Company and the Bank and to sue the
same to the defraudation of these plaintiffs.
"17th. That the return to the above named individual plaintiffs
by the Trustee of the stock in the Company, transferred to it by said
Voting Trust Agreement, has been demanded and refused.
"18th. That by reason of the facts above alleged these plaintiffs
have been kept and are in ignorance of accurate knowledge of the
actions of the defendants and of the amount of damage thereby caused
these plaintiffs and represent to the court what accurate information can
only be obtained by a discovery by the defendants and each of them of all
and every fact relevant to this cause.
"19th. That these plaintiffs are credibly informed and verily
believe that the defendants are now confabulating among themselves
further to conceal the facts and to damage these plaintiffs by a sale of the
Philippine Motors Corporation and all its assets tangible and intangible to
a new purchaser, in which new purchaser the said defendants will have
interests, and that in case such sale should be made it will damage these
plaintiffs in a manner for which there is no adequate remedy and will
cause and produce a multiplicity of actions.
"Wherefore these plaintiffs demand the decrees and judgment of this court:
41

"1st. Enjoining and restraining the defendants and each of them

from transferring the corporation called Philippine Motors Corporation or
any of the capital stock therein to any person or corporation during the
pendency of this action.
"2nd. Ordering the said defendant at once to cancel the said
Voting trust and to return to these plaintiffs their shares of the stock of
Teal & Company, taken under said trust and to return to them all the
books and records of every kind and nature of said Teal & Company, and
to regain to these defendants their pretended positions in and control of
Teal & Company.
"3rd. Decreeing that the defendants and each of them make full
and true discovery of all the facts in relation to the formation,
incorporation, and ownership of the Philippine Motors Corporation and of
all dealings and transactions between the defendant Asia Banking
Corporation and said Philippine Motors Corporation to the end that the
court and these plaintiffs shall have information whether said Philippine
Motors Corporation is in fact the Asia Banking Corporation operating
under a disguise or is the creation of the individual defendants availing
themselves of their connections with and positions in the said Bank in
order to take advantage of these plaintiffs and of Teal & Company.
"4th. Decreeing that the said defendants make discovery of all
and every one of the acts and transactions with respect to Teal &
Company since the same was taken by them adding and including a full
and true discovery of all sales of the property of Teal & Company of every
kind and nature with the full and true consideration received in every
case, the amount received from any compromise entered into by them in
the name of Teal & Company and the true consideration therefor.
"5th. In case it be found that the said Philippine Motors
Corporation is in fact the Asia Banking Corporation that a decree be
entered ordering the said Bank immediately to dissolve the same and to
account to these plaintiffs for a profits made thereby since its
organization.
"6th. For judgment against said defendants jointly and severally
for the damages caused by their acts aforesaid which the plaintiffs
charged to be not less than P500,000.
"7th. For such other or further relief, or both, in the premises as
to this court may seem just and equitable."
To this complaint the defendants demurred on the grounds (1) that it is
ambiguous, unintelligible and uncertain; (2) that the plaintiffs have not the legal capacity to
bring this action; (3) that the complaint does not state facts sufficient to constitute a cause
of action, and (4) that there is a defect of misjoinder of parties defendant.

The court below sustained the demurrer on all four grounds and held that the
complaint, especially in its paragraphs 4 and 5, is ambiguous, confusing, unintelligible and
vague; that Teal & Company should have been joined as a part plaintiff; that, as far as the
Philippine Motors Corporation is concerned, the plaintiffs, not being stockholders in that
corporation, had no legal right to proceed against it in this case; and that the court could not
be called upon to act as investigator of the facts referred to in paragraphs 3 and 4 of the
complaint, but that such investigations fall within the duty of the interested party, the
Attorney-General, the Insular Auditor or the Insular Treasurer.
I
If this were an ordinary action at law, the ruling of the court below would be
correct in most respects; it must be conceded that the complaint violates at least three of
the four principal rules as to the manner of stating facts in complaints in such actions. It
suffers from duplicity, the facts are not stated with certainty, and the statement is
sometimes indirect and partly in the alternative.
But we are not here dealing with a complaint in an action at law; this is in effect a
bill of discovery and the proceeding is primarily one for equitable relief, though it may
eventually develop into an action at law. In such proceedings considerable latitude in the
manner of stating facts in the pleadings is allowed. "The minute and varied statements of
the probative facts, the charges to anticipate a defense, and the interrogatories, become
necessary in the equity practice, because bills are for discovery as well as for relief, and in
order to search the conscience of the defendant, he is treated, in the pleading, somewhat
as though placed upon the stand and examined as an unwilling witness." (Bliss on Code
Pleading, 3rd edition, section 319.)
Counsel for the defendants argue that there is no press provision in the Code of
Civil Procedure for a proceeding such as the present, and that, therefore, proceedings for
discovery must be considered limited to the taking of depositions under subsection 1 of
section 355 of the Code and the compulsory attendance of witnesses by means of
subpoena. But, upon a moment's reflection, it becomes evident that the means of discovery
suggested by counsel are not always available or adequate. Before they can be utilized
there must be an action pending, or, in other words, a complaint must have been filed a
summons served upon the defendants. Now, there are cases where facts, essential to the
plaintiff's cause of action, are within the knowledge of the defendants, but of which the
plaintiff is so imperfectly informed that he cannot state them with certainty, even on
information and belief. He may, however, know that one out of two or more sets or facts is
true without knowing which of them is true. In such circumstances the plaintiff cannot, of
course, state any of the facts with certainty and it stands to reason that he cannot be
required to plead with certainty facts which he does not definitely believe to be true. But the
facts being essential to this cause of action, he must state them in one form or another and
cannot very well file his complaint before so doing. And if he cannot file his complaint, he
cannot, as we have already stated, avail himself of the remedy, provided for in subsection 1
of section 355, supra. It seems clear that, in such a case, the proper procedure is for the
plaintiff to state the facts within his knowledge with certainty, but to plead in the alternative
the, to him, doubtful facts, which are wholly within the defendant's knowledge and call upon
the defendant to make a full disclosure of these facts. That is exactly what the plaintiffs
have done in the present case, and bearing in mind the purpose of the action, their
complaint seems sufficiently intelligible and free from ambiguity.

42

The fact that there is no special or express provision in the Code of Civil
Procedure for bills of discovery of this character, does not necessarily signify that the
remedy does not exist in this jurisdiction. The maxim of equity that "Equity will not permit a
wrong without a remedy" still holds good, and our liberal Code of Civil Procedure is, if
properly interpreted, sufficiently broad and flexible to enable the courts to apply all
necessary remedies, both legal and equitable.
II
Invoking the well-known rule that shareholders cannot ordinarily sue in equity to
redress wrongs done to the corporation that the action must be brought by the Board of
Directors, the appellees argue and the court below held that the corporation Teal &
Company is a necessary party plaintiff and that the plaintiff stockholders, not having made
any demand on the Board to bring the action, are not the proper parties plaintiff. But, like
most rules, the rule in question has its exceptions. It is alleged in the complaint and,
consequently, admitted through the demurred that the corporation Teal & Company is
under the complete control of the principal defendants in the case, and, in these
circumstances, it is obvious that a demand upon the Board of Directors to institute action
and prosecute the same effectively would have been useless, and the law does not require
litigants to perform useless acts. (Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246;
Fleiming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickerham vs. Crittenden,
106 Cal., 329; Glenn vs. Kittanning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa
Water Company, 104 U. S., 450.)

SECOND DIVISION
[G.R. No. L-34192. June 30, 1988.]
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO
VILLATUYA,
MARIO
Y.
CONSING
and
ROBERTO
S.
BENEDICTO, petitioners, vs. HON. BENJAMIN AQUINO, in his official
capacity as Presiding Judge of Branch VIII of the Court of First Instance of
Rizal, BATJAK, INC., GRACIANO A. GARCIA and MARCELINO CALINAWAN,
JR., respondents.
[G.R. No. L-34213 June 30, 1988]
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. BENJAMIN H. AQUINO,
in his capacity as Presiding Judge of the Court of First Instance of Rizal,
Branch VIII and BATJAK, INCORPORATED, respondents.
Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No. 34192.
The Chief Legal Counsel for petitioner PNB in G.R. No. 34213.

III
Reyes and Sundiam Law Office for respondent Batjak, Inc.
The conclusion of the court below that the plaintiffs, not being stockholders in the
Philippine Motors Corporation, had no legal right to proceed against that corporation in the
manner suggested in the complaint evidently rest upon a misconception of the character of
the action. In this proceeding it was necessary for the plaintiffs to set forth in full the history
of the various transactions which eventually led to the alleged loss of their property and, in
making a full disclosure, references to the Philippine Motors Corporation appear to have
been inevitable. It is be noted that the plaintiffs seek no judgment against the corporation
itself at this stage of the proceedings.
IV
The court below also erred in holding that the investigation of the transactions
referred to in the complaint is not within the province of the courts, but should be conducted
by some other agency. That discovery, such as that demanded in the present action, is one
of the functions of a court of equity is so well established as to require no discussion.
In our opinion the plaintiffs state a good cause of action for equitable relief and
their complaint is not in any respect fatally defective. The judgment of the court below is
therefore reversed, the defendants' demurrer is overruled, and it is ordered that the
defendants answer the complaint within ten days from the return of the record to the Court
of First Instance. So ordered.
Avancea, C.J., Street, Villamor, Johns, Romualdez and Villa-Real, JJ., concur.

Duran, Chuanico, Oebanda, Benemerito & Associates for private respondents in G.R. Nos.
34192 & 34213.
Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L-34192.
DECISION
PADILLA, J p:
These two (2) separate petitions for certiorari and prohibition, with preliminary injunction, seek to
annul and set aside the orders of respondent judge, dated 16 August 1971 and 30 September
1971, in Civil Case No. 14452 of the Court of First Instance of Rizal, entitled "Batjak, Inc. vs.
NIDC, et al." The order of 16 August 1971 1 granted the alternative petition of private respondent
Batjak, Inc. (Batjak, for short) for the appointment of receiver and denied petitioners' motion to
dismiss the complaint of said private respondent. The order dated 30 September 1971 2 denied
petitioners' motion for reconsideration of the order dated 16 August 1971.
The herein petitions likewise seek to prohibit the respondent judge from hearing and/or
conducting any further proceedings in Civil Case No. 14452 of said court.
Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a Filipino-American
corporation organized under the laws of the Philippines, primarily engaged in the manufacture of
43

coconut oil and copra cake for export. In 1965, Batjak's financial condition deteriorated to the
point of bankruptcy. As of that year, Batjak's indebtedness to some private banks and to the
Philippine National Bank (PNB) amounted to P11,915,000.00, shown as follows:

Gentlemen:
We are pleased to advise that our Board of Directors approved for you
the following:

Republic Bank P2,324,000.00

Manufacturers Bank 440,000.00

1) That NIDC shall invest P6,722,500.00 in the form of preferred shares

of stocks at 9% cumulative, participating and convertible within 5 years at
par into common stocks to liquidate your accounts with the Republic
Bank, Manufacturers Bank & Trust Company and the PCIB which,
however, shall be applied to the latter three (3) banks accounts with the
Loans & Discounts Dept. NIDC shall match your P10 million subscription
by an additional investment of P3,277,500 within a period of one to two
years at NIDC's option;

Hongkong and Shanghai

Banking Corporation 250,000.00

2) That NIDC will guaranty for five (5 ) years your account with the Manila
Banking Corporation;

Foreign Export Advances

(against immediate shipment) 555,000.00

3) That the above banks (Republic Bank, PCIB, MBTC and Manila
Banking Corp.) shall release in favor of PNB the first and any mortgage
they hold on your properties;

Philippine Commercial and

Industrial Bank 1,346,000.00
Manila Banking Corporation 2,000,000.00

PNB export advance line

(against immediate shipment) 5,000,000.00
TOTAL 11,915,000.00
As security for the payment of its obligations and advances against shipments, Batjak
mortgaged its three (3) coco-processing oil mills in Sasa, Davao City, Jimenez, Misamis
Occidental and Tanauan, Leyte to Manila Banking Corporation (Manilabank), Republic Bank
(RB), and Philippine Commercial and Industrial Bank (PCIB), respectively. In need for additional
operating capital to place the three (3) coco-processing mills at their optimum capacity and
maximum efficiency and to settle, pay or otherwise liquidate pending financial obligations with
the different private banks, Batjak applied to PNB for additional financial assistance. On 5
October 1965, a Financial Agreement was submitted by PNB to Batjak for acceptance. The
Financial Agreement reads:
"PHILIPPINE NATIONAL BANK
Manila, Philippines
International Department
October 5, 1965
BATJAK, INCORPORATED
3rd Floor, G. Puyat Bldg.
Escolta, Manila
Attn.: Mr. CIRIACO B. MENDOZA

4) That you shall exercise (execute) a first mortgage on all your

properties located at Sasa, Davao City; Jimenez, Misamis Occidental;
and Tanauan, Leyte and assign leasehold rights on the property on which
your plant at Sasa, Davao City is erected in favor of PNB;
5) That a voting trust agreement for five (5) years over 60% of the
outstanding paid up and subscribed shares shall be executed by your
stockholders in favor of NIDC;
6) That this accommodation shall be secured by the joint and several
signatures of officers and directors;
7) That the number of the Board of Directors shall be increased to seven
(7), three (3) from your firm and the other four (4) from the PNB-NIDC;
8) That a comptroller, at your expense, shall be appointed by PNB-NIDC
to supervise the financial management of your firm;
9) That the past due accounts of P5 million with the International
Department of the PNB shall be transferred to the Loans & Discount
Department and to be treated as a Demand Loan;
10) That any excess of NIDC investment as required in Condition 1 after
payment of the obligations to three (3) Banks (RB, MBTC, & PCIB) shall
be applied to reduce the above Demand Loan of P5 million;

Vice-President & General Manager

44

11) That we shall grant you an export advance of P3 million to be used

for copra purchases, subject to the following conditions:
a) That the line shall expire on September 30,
1966 but revocable at the Bank(s) option; LLpr
b) That drawings against the line shall be
allowed only when an irrevocable export L/C for coconut
products has been established or assigned in your favor
and you shall assign to us all proceeds of negotiations to
be received from your export letters of credit;
c) That drawings against the line shall be
limited to 50% of the peso value of the export letters of
credit computed at P3.50 per $1.00 but total drawings
shall not in any event exceed P3,000,000.00;
d) That release or releases against the line
shall be covered by promissory note or notes for 90 days
but not beyond the expiry dates of the covering L/C and
proceeds of said L/C shall first be applied to the
correspondent drawings on the line;
e) That drawings against the line shall be
charged interest at the rate of 9% per annum and subject
to 1/2% penalty charge on all drawings not paid or
extended on maturity date; and

The terms and conditions of the Financial Agreement were duly accepted by Batjak. Under said
Agreement, NIDC would, as it actually did, invest P6,722,500.00 in Batjak in the form of
preferred shares of stock convertible within five (5) years at par into common stock, to liquidate
Batjak's obligations to Republic Bank (RB), Manufacturers Bank and Trust Company (MBTC)
and Philippine Commercial & Industrial Bank (PCIB), and the balance of the investment was to
be applied to Batjak's past due account of P5 million with the PNB.
Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any
mortgages they held on the properties of Batjak.
As agreed, PNB also granted Batjak an export-advance line of P3 million, later increased to P5
million, and a standby letter of credit facility in the amount of P5,850,000.00. As of 29 September
1966, the financial accommodation that had been extended by PNB to Batjak amounted to a
total of P14,207,859.51.
As likewise agreed, Batjak executed a first mortgage in favor of PNB on all its properties located
at Jimenez, Misamis Occidental and Tanauan, Leyte. Batjak's plant in Sasa, Davao City was
mortgaged to the Manila Bank which, in 1967, instituted foreclosure proceedings against the
same but which were aborted by the payment by Batjak of the sum of P2,400,000.00 to Manila
Bank, and which amount was advanced to Batjak by NIDC, a wholly-owned subsidiary of PNB.
To secure the advance, Batjak mortgaged the oil mill in Sasa, Davao City to NIDC. 4
Next, a Voting Trust Agreement was executed on 26 October 1965 in favor of NIDC by the
stockholders representing 60% of the outstanding paid-up and subscribed shares of Batjak. This
agreement was for a period of five (5) years and, upon its expiration, was to be subject to
negotiation between the parties. The Voting Trust Agreement reads: LLphil
"VOTING TRUST AGREEMENT

f) That within 90 days from date of release

against the line, you shall negotiate with us on equivalent
amount in export bills, otherwise, the line shall be
temporarily suspended until the outstanding export
advance is fully liquidated.
We are writing the National Investment & Development Corporation, the
Republic Bank, the Philippine Commercial & Industrial Bank and the
Manufacturers Bank & Trust Company and the Manila Banking
Corporation regarding the above.

KNOW ALL MEN BY THESE PRESENTS:

This AGREEMENT made and executed by the undersigned stockholders
of BATJAK, INC., a corporation duly organized and existing under the
laws of the Philippines, whose names are hereinbelow subscribed
hereinafter called the SUBSCRIBERS, and the NATIONAL INVESTMENT
AND DEVELOPMENT CORPORATION, hereinafter referred to as the
trustee.
WITNESSETH:

In connection with the above, kindly submit to us two (2) copies of your
board resolution certified to under oath by your corporate secretary
accepting the conditions enumerated above authorizing the above
transactions and the officer or officers to sign on behalf of the corporation.

WHEREAS, the SUBSCRIBERS are owners respectively of the capital

stock of the BATJAK, INC. (hereinafter called the CORPORATION) in the
amounts represented by the number of shares set forth opposite their
respective names hereunder;

Thank you.
Very truly yours,
(SGD.) JOSE B. SAMSON" 3

AND WHEREAS, with a view of establishing a safe and competent

management to operate the corporation for the best interest of all the
45

stockholders thereof, and as mutually agreed between the

SUBSCRIBERS and the TRUSTEE, this Voting Trust Agreement has
been executed under the following terms and conditions.
NOW THEREFORE, the undersigned stockholders, in consideration of
the premises and of the mutual covenants and agreements herein
contained and to carry out the foregoing purposes in order to vest in the
TRUSTEE the voting rights of the shares of stock held by the
undersigned in the CORPORATION as hereinafter stated it is mutually
agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5) years from and
after date hereof, without power of revocation on the part of the
SUBSCRIBERS, the TRUSTEE designated in the manner herein
provided is hereby made, constituted and appointed as a VOTING
TRUSTEE to act for and in the name of the SUBSCRIBERS, it being
understood, however, that this Voting Trust Agreement shall, upon its
expiration be subject to a re-negotiation between the parties, as may be
warranted by the balance and attending circumstance of the loan
investment of the TRUSTEE or otherwise in the CORPORATION.
2. ASSIGNMENT OF STOCK CERTIFICATES UPON ISSUANCE The
undersigned stockholders hereby transfer and assign their common
shares to the capital stock of the CORPORATION to the extent shown
hereunder:
JAMES A. KEISTER 21,500 shares
JOHNNY LIEUSON 20,300 shares
CBM FINANCE & INVESTMENT
CORP. (C.B. Mendoza, Pres.) 5,000 shares
ALEJANDRO G. BELTRAN 4,000 shares
ESPERANZA A. ZAMORA 3,000 shares
CIRIACO B. MENDOZA 2,000 shares
FIDELA DE GUZMAN 2,000 shares
LLOYD D. COMBS 2,000 shares
RENATO B. BEJAR 200 shares
TOTAL 60,000 shares

to the TRUSTEE by virtue of the provisions hereof and do hereby

authorize the Secretary of the CORPORATION to issue the
corresponding certificate directly in the name of the TRUSTEE and on
which certificates it shall appear that they have been issued pursuant to
this Voting Trust Agreement and the said TRUSTEE shall hold in escrow
all such certificates during the term of the Agreement. In turn, the
TRUSTEE shall deliver to the undersigned stockholders the
corresponding Voting Trust certificates provided for in Sec. 36 of Act No.
1459. cdphil
3. VOTING POWER OF TRUSTEE The TRUSTEE and its successors
in trust, if any, shall have the power and it shall be its duty to vote the
shares of the undersigned subject hereof and covered by this Agreement
at all annual, adjourned and special meetings of the CORPORATION on
all questions, motions, resolutions and matters including the election of
directors and such matters on which the stockholders, by virtue of the bylaws of the CORPORATION and of the existing legislations are entitled to
vote, which may be voted upon at any and all said meetings and shall
also have the power to execute and acknowledge any agreements or
documents that may be necessary in its opinion to express the consent or
assent of all or any of the stockholders of the CORPORATION with
respect to any matter or thing to which any consent or assent of the
stockholders may be necessary, proper or convenient.
4. FILING OF AGREEMENT An executed copy of this Agreement shall
be filed with the CORPORATION at its office in the City of Manila
wherever it may be transferred therefrom and shall constitute irrevocable
authority and absolute direction to the Officers of the CORPORATION
whose duty is to sign and deliver stock certificates to make delivery only
to said voting trustee of the shares and certificates of stock subject to the
provisions of this Agreement as aforesaid. Such copy of this Agreement
shall at all times be open to inspection by any stockholder, as provided by
law.
5. DIVIDEND The full and absolute beneficial interest in the shares
subject of this Agreement shall remain with the stockholders executing
the same and any and all dividends which may be declared by the
CORPORATION shall belong and be paid to them exclusively in
accordance with their stockholdings after deducting therefrom or applying
the same to whatever liabilities the stockholders may have in favor of the
TRUSTEE by virtue of any Agreement or Contract that may have been or
will be executed by and between the TRUSTEE and the CORPORATION
or between the former and the undersigned stockholders.
6. COMPENSATION; IMMUNITY The TRUSTEE or its successor in
trust shall not receive any compensation for its service except perhaps
that which the CORPORATION may grant to the TRUSTEE's authorized
representative, if any. Expenses, costs, charges, and other liabilities
incurred in the carrying out of the trust herein established or by reason
thereof, shall be paid for with the funds of the CORPORATION. The
TRUSTEE or any of its duly authorized representative shall incur no
46

liability by reason of any error of law or of any matter or thing done or

omitted under this Agreement, except for his own individual malfeasance.

ESPERANZA A. ZAMORA (SGD) ALEJANDRO G. BELTRAN

By: (SGD) MARIANO ZAMORA

7. REPRESENTATION The TRUSTEE, being a corporation and a

juridical person shall accomplish the foregoing objectives and perform its
functions under this Agreement as well as enjoy and exercise the powers,
privileges, rights and interests herein established through its duly
authorized and accredited representative/s with full authority under the
specific appointment or designation or Proxy.

Stockholder
ESPERANZA A. ZAMORA
(SGD) FIDELA DE GUZMAN (SGD) CIRIACO B. MENDOZA

8. IRREVOCABILITY This Agreement shall during its 5-year term or

any extension thereof be binding upon and inure to the benefit of the
undersigned stockholders and their respective legal representatives,
pledges, transferees, and/or assigns and shall be irrevocable during the
said terms and/or its extension pursuant to the provisions of paragraph 1
hereof. It is hereby understood and the undersigned stockholders have
bound as they hereby bind themselves to make a condition of every
pledge, transfer of assignment of their interests in the CORPORATION
that the interests and participation so pledged, transferred or assigned is
evidenced by annotations in the certificates of stocks or in the books of
the corporation, shall be subject to this Agreement and the same shall be
binding upon the pledgees, transferees and assigns while the trust herein
created still subsists. LLphil
9. TERMINATION Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof shall
be returned and delivered to the undersigned stockholders as the
absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and terminate.
10. ACCEPTANCE OF TRUST The TRUSTEE hereby accepts the
trust created by this Agreement under the signature of its duly authorized
representative affixed hereinbelow and agrees to perform the same in
accordance with the term/s hereof.
IN WITNESS HEREOF, the undersigned stockholders and the TRUSTEE
by its representatives, have hereunto affixed their signatures this 26 day
of October, 1965 in the City of Manila, Philippines.
(SGD) JAMES A. KEISER (SGD) JOHNNY LIEUSON
Stockholder Stockholder
CBM
FINANCE
CORPORATION

&

INVESTMENT

By: (SGD) C.B. MENDOZA

Stockholder Stockholder
(SGD) RENATO B. BEJAR (SGD) LLOYD D. COMBS
Stockholder Stockholder
NATIONAL
INVESTMENT
DEVELOPMENT CORPORATION

AND

By:
(SGD) IGNACIO DEBUQUE, JR.
Vice-President" 5
In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure
proceedings against the oil mills of Batjak located in Tanauan, Leyte and Jimenez, Misamis
Occidental. The properties were sold to PNB as the highest bidder. One year thereafter, or in
September 1968, final Certificates of Sale were issued by the provincial sheriffs of Leyte 6 and
Misamis Occidental 7 for the two (2) oil mills in Tanauan and Jimenez in favor of PNB, after
Batjak failed to exercise its right to redeem the foreclosed properties within the allowable one
year period of redemption. Subsequently, PNB transferred the ownership of the two (2) oil mills
to NIDC which, as aforestated, was a wholly-owned PNB subsidiary.
As regards the oil mill located at Sasa, Davao City, the same was similarly foreclosed
extrajudiciai by NIDC. It was sold to NIDC as the highest bidder. After Batjak failed to redeem
the property, NIDC consolidated its ownership of the oil mill. 8
Three (3) years thereafter, or on 31 August 1970, Batjak represented by majority stockholders,
through Atty. Amado Duran, legal counsel of private respondent Batjak, wrote a letter to NIDC
inquiring if the latter was still interested in negotiating the renewal of the Voting Trust
Agreement. 9 On 22 September 1970, legal counsel of Batjak wrote another letter to NIDC
informing the latter that Batjak would now safely assume that NIDC was no longer interested in
the renewal of said Voting Trust Agreement and, in view thereof, requested for the turn-over and
transfer of all Batjak assets, properties, management and operations. 10

President
47

On 23 September 1970, legal counsel of Batjak sent still another letter to NIDC, this time asking
for a complete accounting of the assets, properties, management and operation of Batjak,
preparatory to their turn-over and transfer to the stockholders of Batjak. 11

After a careful study and examination of the records of the case, the Court finds and holds for
the petitioners.
1. On the denial of petitioners' motion to dismiss.

NIDC replied, confirming the fact that it had no intention whatsoever to comply with the demands
of Batjak. 12
On 24 February 1971, Batjak filed before the Court of First Instance of Rizal a special civil action
for mandamus with preliminary injunction against herein petitioners docketed as Civil Case No.
14452. 13
On 14 April 1971, in said Civil Case No. 14452, Batjak filed an urgent ex parte motion for the
issuance of a writ of preliminary prohibitory and mandatory injunction. 14 On the same day,
respondent judge issued a restraining order "prohibiting defendants (herein petitioners) from
removing any record, books, commercial papers or cash, and leasing, renting out, disposing of
or otherwise transferring any or all of the properties, machineries, raw materials and finished
products and/or by-products thereof now in the factory sites of the three (3) modern coco milling
plants situated in Jimenez, Misamis Occidental, Sasa, Davao City, and Tanauan, Leyte." 15

The order of 14 April 1971 was subsequently amended by respondent judge upon an ex parte
motion of private respondent Batjak so as to include the premises of NIDC in Makati and those
of PNB in Manila, as among the premises which private respondent Batjak was authorized to
enter in order to conduct an inventory.
On 24 April 1971, NIDC and PNB filed an opposition to the ex parte application for the issuance
of a writ of preliminary prohibitory and mandatory injunction and a motion to set aside restraining
order.
Before the court could act on the said motion, private respondent Batjak filed on 3 May 1971 a
petition for receivership as alternative to writ of preliminary prohibitory and mandatory
injunction. 16 This was opposed by PNB and NIDC. 17
On 8 May 1971, NIDC and PNB filed a motion to dismiss Batjak's complaint. 18
On 16 August 1971, respondent judge issued the now assailed order denying petitioners' motion
to dismiss and appointing a set of three (3) receivers. 19 NIDC moved for reconsideration of the
aforesaid order. 20 On 30 September 1971, respondent judge denied the motion for
reconsideration. 21
Hence, these two (2) petitions, which have been consolidated, as they involve a resolution of the
same issues.
In their manifestation with motion for early decision, dated 25 August 1986, private respondent,
Batjak contends that the NIDC has already been abolished or scrapped by its parent company,
the PNB.

As a general rule, an order denying a motion to quash or to dismiss is interlocutory and cannot
be the subject of a petition for certiorari. The remedy of the aggrieved party in a denied motion to
dismiss is to file an answer and interpose, as defense or defenses, the objection or objections
raised by him in said motion to dismiss, then proceed to trial and, in case of adverse decision, to
elevate the entire case by appeal in due course. However, under certain situations, recourse to
the extraordinary legal remedies of certiorari, prohibition and mandamus to question the denial of
a motion to dismiss or quash is considered proper, in the interest of more enlightened and
substantial justice. As the court said in Pineda and Ampil Manufacturing Co. vs. Bartolome, 95
Phil. 930, 938:
"For analogous reasons it may be said that the petition for certiorari
interposed by the accused against the order of the court a quo denying
the motion to quash may be entertained, not only because it was
rendered in a criminal case, but because it was rendered, as claimed,
with grave abuse of discretion, as found by the Court of Appeals . . ."
and reiterated in Mead v. Argel 22 citing Yap v. Lutero (105 Phil. 1307):
"However, were we to require adherence to this pretense, the case at bar would have to be
dismissed and petitioner required to go through the inconvenience, not to say the mental agony
and torture, of submitting himself to trial on the merits in Case No. 166443, apart from the
expenses incidental thereto, despite the fact that his trial and conviction therein would violate
one of this [sic] constitutional rights, and that, an appeal to this Court, we would, therefore, have
to set aside the judgment of conviction of the lower court. This would, obviously, be most unfair
and unjust. Under the circumstances obtaining in the present case, the flaw in the procedure
followed by petitioner herein may be overlooked, in the interest of a more enlightened and
substantial justice." LibLex
Thus, where there is patent grave abuse of discretion, in denying the motion to dismiss, as in the
present case, this Court may entertain the petition for certiorari interposed by the party against
whom the said order is issued.
In their motion to dismiss Batjak's complaint, in Civil Case No. 14452, NIDC and PNB raised
common grounds for its allowance, to wit:
1. This Honorable Court (the trial court) has no jurisdiction over the
subject of the action or suit;
2. The venue is improperly laid; and
3. Plaintiff has no legal capacity to sue.
In addition, PNB contended that the complaint states no cause of action (Rule 16, Sec. 1, Par. a,
c, d & g, Rules of Court).
48

Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of First Instance to
issue a writ of preliminary or permanent injunction is confined within the boundaries of the
province where the land in controversy is situated. 23 The petition for mandamus of Batjak
prayed that NIDC and PNB be ordered to surrender, relinquish and turnover to Batjak the assets,
management and operation of Batjak particularly the three (3) oil mills located in Sasa, Davao
City, Jimenez, Misamis Occidental and Tanauan, Leyte.

(3) oil mills are now titled in the name of NIDC. From the foregoing, it is evident that Batjak had
no clear right to be entitled to the writ prayed for. In Lamb vs. Philippines (22 Phil. 456) citing the
case of Gonzales V. Salazar vs. The Board of Pharmacy, 20 Phil. 367, the Court said that the
writ of mandamus will not issue to give to the applicant anything to which he is not entitled by
law. prLL
2. On the appointment of receiver.

Clearly, what Batjak asked of respondent court was the exercise of power or authority outside its
jurisdiction.
On the matter of proper venue, Batjak's complaint should have been filed in the provinces where
said oil mills are located. Under Rule 4, Sec. 2, paragraph A of the Rules of Court, "actions
affecting title to, or for recovery of possession, or for partition or condemnation of, or foreclosure
of mortgage on, real property, shall be commenced and tried in the province where the property
or any part thereof lies."
In support of the third ground of their motion to dismiss, PNB and NIDC contend that Batjak's
complaint for mandamus is based on its claim or right to recovery of possession of the three (3)
oil mills, on the ground of an alleged breach of fiduciary relationship. Noteworthy is the fact that,
in the Voting Trust Agreement, the parties thereto were NIDC and certain stockholders of Batjak.
Batjak itself was not a signatory thereto. Under Sec. 2, Rule 3 of the Rules of Court, every action
must be prosecuted and defended in the name of the real party in interest. Applying the rule in
the present case, the action should have been filed by the stockholders of Batjak, who executed
the Voting Trust Agreement with NIDC, and not by Batjak itself which is not a party to said
agreement, and therefore, not the real party in interest in the suit to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays that the petition for
mandamus be dismissed. A careful reading of the Voting Trust Agreement shows that PNB was
really not a party thereto. Hence, mandamus will not lie against PNB.
Moreover, the action instituted by Batjak before the respondent court was a special civil action
for mandamus with prayer for preliminary mandatory injunction. Generally, mandamus is not a
writ of right and its allowance or refusal is a matter of discretion to be exercised on equitable
principles and in accordance with well-settled rules of law, and that it should never be used to
effectuate an injustice, but only to prevent a failure of justice. 24 The writ does not issue as a
matter of course. It will issue only where there is a clear legal right sought to be enforced. It will
not issue to enforce a doubtful right. A clear legal right within the meaning of Sec. 3, Rule 65 of
the Rules of Court means a right clearly founded in or granted by law, a right which is
enforceable as a matter of law.
Applying the above-cited principles of law in the present case, the Court finds no clear right in
Batjak to be entitled to the writ prayed for. It should be noted that the petition for mandamus filed
by it prayed that NIDC and PNB be ordered to surrender, relinquish and turn-over to Batjak the
assets, management, and operation of Batjak particularly the three (3) oil mills and to make the
order permanent, after trial, and ordering NIDC and PNB to submit a complete accounting of the
assets, management and operation of Batjak from 1965. In effect, what Batjak seeks to recover
is title to, or possession of, real property (the three (3) oil mills which really made up the assets
of Batjak) but which the records show already belong to NIDC. It is not disputed that the
mortgages on the three (3) oil mills were foreclosed by PNB and NIDC and acquired by them as
the highest bidder in the appropriate foreclosure sales. Ownership thereto was subsequently
consolidated by PNB and NIDC, after Batjak failed to exercise its right of redemption. The three

A receiver of real or personal property, which is the subject of the action, may be appointed by
the court when it appears from the pleadings that the party applying for the appointment of
receiver has an interest in said property. 25 The right, interest, or claim in property, to entitle one
to a receiver over it, must be present and existing.
As borne out by the records of the case, PNB acquired ownership of two (2) of the three (3) oil
mills by virtue of mortgage foreclosure sales. NIDC acquired ownership of the third oil mill also
under a mortgage foreclosure sale. Certificates of title were issued to PNB and NIDC after the
lapse of the one (1) year redemption period. Subsequently, PNB transferred the ownership of the
two (2) oil mills to NIDC. There can be no doubt, therefore, that NIDC not only has possession
of, but also title to the three (3) oil mills formerly owned by Batjak. The interest of Batjak over the
three (3) oil mills ceased upon the issuance of the certificates of title to PNB and NIDC
confirming their ownership over the said properties. More so, where Batjak does not impugn the
validity of the foreclosure proceedings. Neither Batjak nor its stockholders have instituted any
legal proceedings to annul the mortgage foreclosure sales aforementioned.

Batjak premises its right to the possession of the three (3) oil mills on the Voting Trust
Agreement, claiming that under said agreement, NIDC was constituted as trustee of the assets,
management and operations of Batjak, that due to the expiration of the Voting Trust Agreement,
on 26 October 1970, NIDC should turn over the assets of the three (3) oil mills to Batjak.
The relevant provisions of the Voting Trust Agreement, particularly paragraph 4 & No. 1 thereof,
are hereby reproduced:
"NOW THEREFORE, the undersigned stockholders, in consideration of
the premises and of the mutual covenants and agreements herein
contained and to carry out the foregoing purposes in order to vest in the
TRUSTEE the voting rights of the shares of stock held by the
undersigned in the CORPORATION as hereinafter stated it is mutually
agreed as follows:
"1. PERIOD OF DESIGNATION For a period of five (5) years from and
after date hereof, without power of revocation on the part of the
SUBSCRIBERS, the TRUSTEE designated in the manner herein
provided is hereby made, constituted and appointed as a VOTING
TRUSTEE to act for and in the name of the SUBSCRIBERS, it being
understood, however, that this Voting Trust Agreement shall, upon its
expiration be subject to a re-negotiation between the parties, as may be
warranted by the balance and attending circumstance of the loan
investment of the TRUSTEE or otherwise in the CORPORATION.
49

and No. 3 thereof reads:

"3. VOTING POWER OF TRUSTEE The TRUSTEE and its successors
in trust, if any, shall have the power and it shall be its duty to vote the
shares of the undersigned subject hereof and covered by this Agreement
at all annual, adjourned and special meetings of the CORPORATION on
all questions, motions, resolutions and matters including the election of
directors and all such matters on which the stockholders, by virtue of the
by-laws of the CORPORATION and of the existing legislations are
entitled to vote, which may be voted upon at any and all said meetings
and shall also have the power to execute and acknowledge any
agreements or documents that may be necessary in its opinion to
express the consent or assent of all or any of the stockholders of the
CORPORATION with respect to any matter or thing to which any consent
or assent of the stockholders may be necessary, proper or convenient."
From the foregoing provisions, it is clear that what was assigned to NIDC was the power to vote
the shares of stock of the stockholders of Batjak, representing 60% of Batjak's outstanding
shares, and who are the signatories to the agreement. The power entrusted to NIDC also
included the authority to execute any agreement or document that may be necessary to express
the consent or assent to any matter, by the stockholders. Nowhere in the said provisions or in
any other part of the Voting Trust Agreement is mention made of any transfer or assignment to
NIDC of Batjak's assets, operations, and management. NIDC was constituted as trustee only of
the voting rights of 60% of the paid-up and outstanding shares of stock in Batjak. This is
confirmed by paragraph No. 9 of the same Voting Trust Agreement, thus:
"9. TERMINATION Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof shall
be returned and delivered to the undersigned stockholders as the
absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall case and
terminate." LLphil
Under the aforecited provision, what was to be returned by NIDC as trustee to Batjak's
stockholders, upon the termination of the agreement, are the certificates of shares of stock
belonging to Batjak's stockholders, not the properties or assets of Batjak itself which were never
delivered, in the first place to NIDC, under the terms of said Voting Trust Agreement.

Moreover, the prevention of imminent danger to property is the guiding principle that governs
courts in the matter of appointing receivers. Under Sec. 1 (b), Rule 59 of the Rules of Court, it is
necessary in granting the relief of receivership that the property or fund be in danger of loss,
removal or material injury.
In the case at bar, Batjak in its petition for receivership, or in its amended petition therefor, failed
to present any evidence to establish the requisite condition that the property is in danger of
being lost, removed or materially injured unless a receiver is appointed to guard and preserve it.
WHEREFORE, the petitions are GRANTED. The orders of the respondent judge, dated 16
August 1971 and 30 September 1971, are hereby ANNULLED and SET ASIDE. The respondent
judge and/or his successors are ordered to desist from hearing and/or conducting any further
proceedings in Civil Case No. 14452, except to dismiss the same. With costs against private
respondents.
SO ORDERED.
Yap, C.J., Melencio-Herrera, Paras and Sarmiento, JJ., concur.
||| (National Investment and Development Corp. v. Aquino, G.R. No. L-34192 & L-34213 , [June
30, 1988], 246 PHIL 159-181)

THIRD DIVISION
[G.R. No. 93695. February 4, 1992.]
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners, vs. THE
HON. COURT OFAPPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and TOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.

In any event, a voting trust transfers only voting or other rights pertaining to the shares subject of
the agreement, or control over the stock. The law on the matter is Section 59, paragraph 1 ofthe
Corporation Code (BP 68) which provides:
"Sec. 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: . . ." 26
The acquisition by PNB-NIDC of the properties in question was not made or effected under the
capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and
valid obligation of Batjak.

Timbol & Associates for private respondents.

SYLLABUS
1. COMMERCIAL LAW; CORPORATIONS; VOTING TRUST; DEFINED. Under Section
59 of the new Corporation Code which expressly recognizes voting trust agreements, a more
definite meaning may be gathered. The said provision partly reads: "Section 59. Voting Trusts
One or more stockholders of a stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to
the shares for a period not exceeding five (5) years at any one time: Provided, that in the
case of a voting trust specifically required as a condition in a loan agreement, said voting trust
50

may be for a period exceeding (5) years but shall automatically expire upon full payment of the
loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and
conditions thereof. A certified copy of such agreement shall be filed with the corporation and with
the Securities and Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall
be cancelled and new ones shall be issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that
the transfer in the name of the trustee or trustees is made pursuant to said voting trust
agreement."
2. ID.; ID.; VOTING TRUST AGREEMENT; DEFINED. By its very nature, a voting trust
agreement results in the separation of the voting rights of a stockholder from his other rights
such as the right to receive dividends, the right to inspect the books of the corporation, the right
to sell certain interests in the assets of the corporation and other rights to which a stockholder
may be entitled until the liquidation of the corporation. However, in order to distinguish a voting
trust agreement from proxies and other voting pools and agreements, it must pass three criteria
or tests, namely: (1) that the voting rights of the stock are separated from the other
attributes ofownership; (2) that the voting rights granted are intended to be irrevocable for a
definite periodof time; and (3) that the principal purpose of the grant of voting rights is to acquire
voting controlof the corporation. (5 Fletcher, Cylopedia of the Law on Private Corporations,
section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)
3. ID.; ID.; ID.; EFFECT AS TO VOTING RIGHTS; CRITERIA TO DISTINGUISH IT FROM
OTHER AGREEMENTS. The law simply provides that a voting trust agreement is an
agreement in writing whereby one or more stockholders of a corporation consent to transfer his
or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said
shares for a period not exceeding five years upon the fulfillment of statutory conditions and such
other terms and conditions specified in the agreement. The five year-period may be extended in
cases where the voting trust is executed pursuant to a loan agreement whereby the period is
made contingent upon full payment of the loan.
4. ID.; ID.; ID.; LIMITATIONS THEREON. Under section 59 of the Corporation Code, supra, a
voting trust agreement may confer upon a trustee not only the stockholder's voting rights but
also other rights pertaining to his shares as long as the voting trust agreement is not entered "for
the purpose of circumventing the law against monopolies and illegal combinations in
restraint oftrade or used for purposes of fraud." (section 59, 5th paragraph of the Corporation
Code). Thus, the traditional concept of a voting trust agreement primarily intended to single out a
stockholder's right to vote from his other rights as such and made irrevocable for a limited
duration may in practice become a legal device whereby a transfer of the stockholders shares is
effected subject to the specific provision of the voting trust agreement. The execution of a voting
trust agreement, therefore, may create a dichotomy between the equitable or beneficial
ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto
on the other hand.
5. ID.; ID.; ID.; EFFECT THEREOF ON THE STATUS OF TRANSFERRING STOCKHOLDERS.
Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a party to its
execution from legal title holder or owner of the shares subject of the voting trust agreement,
he becomes the equitable or beneficial owner. (Salonga, Philippine Law on Private Corporations,
1958 ed., p. 268; Pineda and Carlos, the Law on Private Corporations and Corporate Practice,
1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes &

Selected Cases, 1981 ed., p. 386; Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536.
6. ID.; ID.; ID.; RIGHTS GRANTED THEREIN AUTOMATICALLY EXPIRE AT THE
END OF AGREED PERIOD. The 6th paragraph of section 59 of the new Corporation Code
which reads: "Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificates as well as
the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled
and new certificates ofstock shall be reissued in the name of the transferors."
7. ID.; ID.; ID.; ELIGIBILITY OF A DIRECTOR UNDER THE OLD CORPORATION CODE AND
UNDER THE NEW CORPORATION CODE. Under the old Corporation Code, the
eligibility of a director, strictly speaking, cannot be adversely affected by the simple act of such
director being a party to a voting trust agreement inasmuch as he remains owner (although
beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which
a transferof the stockholder's shares in favor of the trustee is required (section 36 of the old
Corporation Code). No disqualification arises by virtue of the phrase "in his own right" provided
under the old Corporation Code. With the omission of the phrase "in his own right" the
election of trustees and other persons who in fact are not the beneficial owners of the shares
registered in their names on the books of the corporation becomes formally legalized (see
Campos and Lopez-Campos, supra, p. 296). Hence, this is a clear indication that in order to be
eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as
appearing on the books ofthe corporation (2 Fletcher, Cyclopedia of the Law of Private
Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
8. ID.; ID.; REPRESENTATIVES THEREOF AUTHORIZED TO RECEIVE COURT PROCESSES
ON ITS BEHALF; RATIONALE. Under section 13, Rule 14 of the Revised Rules of Court, it is
provided that: "Section. 13. Service upon private domestic corporation or partnership. If the
defendant is a corporation organized under the laws of the Philippines or a partnership duly
registered, service may be made on the president, manager, secretary, cashier, agent or
any of its directors. It is a basic principle in Corporation Law that a corporation has a personality
separate and distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v.
Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and Employment, et
al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above role on service of processes on
a corporation enumerates the representatives of a corporation who can validly
receive court processes on its behalf. Not every stockholder or officer can bind the corporation
considering the existence of a corporate entity separate from those who compose it. The
rationale of the aforecited rule is that service must be made on a representative so integrated
with the corporation sued as to make ita priori supposable that he will realize his responsibilities
and know what he should do with any legal papers served on him. (Far Corporation v. Francisco,
146 SCRA 197 1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 303
[1978]).
9. ID.; ID.; BOUND ONLY BY ACTS WITHIN THE SCOPE OF ITS OFFICER'S OR AGENT'S
AUTHORITY. The general principle that a corporation can only be bound by such acts which
are within the scope of its officers' or agents' authority. (see Vicente v. Geraldez, 52 SCRA 210
[1973])
DECISION
GUTIERREZ, JR., J p:
51

What is the nature of the voting trust agreement executed between two parties in this case? Who
owns the stocks of the corporation under the terms of the voting trust agreement? How long can
a voting trust agreement remain valid and effective? Did a director of the corporation cease to be
such upon the creation of the voting trust agreement? These are the questions the answers to
which are necessary in resolving the principal issue in this petition for certiorari whether or not
there was proper service of summons on Alfa Integrated Textile Mills (ALFA, for short), through
the petitioners as president and vice-president, allegedly, of the subject corporation after the
execution of a voting trust agreement between ALFA and the Development Bank of the
Philippines (DBP, for short).

On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA
through the petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA
to file its answer through the petitioners as its corporate officers.

From the records of the instant case, the following antecedent facts appear:

On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating
their stand that by virtue of the voting trust agreement they ceased to be officers and
directorsof ALFA, hence, they could no longer receive summons or any court processes for or on
behalf ofALFA. In support of their second motion for reconsideration, the petitioners attached
thereto a copy of the voting trust agreement between all the stockholders of ALFA (the
petitioners included), on the one hand, and the DBP, on the other hand, whereby the
management and control of ALFA became vested upon the DBP.

On November 15, 1985, a complaint for a sum of money was filed by the International Corporate
Bank, Inc. against the private respondents who, in turn, filed a third party complaint against
ALFA and the petitioners on March 17, 1986.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January
2, 1989 and declared that service upon the petitioners who were no longer corporate
officers ofALFA cannot be considered as proper service of summons on ALFA.

On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which
the Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order
which was affirmed by the court in its Order dated August 14, 1989 denying the private
respondents' motion for reconsideration.

On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12, 1988, the trial issued an order requiring the issuance of an alias
summons upon ALFA through the DBP as a consequence of the petitioners' letter informing
the court that the summons for ALFA was erroneously served upon them considering that the
management ofALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not taken over the company which has a
separate and distinct corporate personality and existence.
On August 4, 1988, the trial court issued an order advising the private respondents to take the
appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for the
Declaration of Proper Service of Summons which the trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration submitting that the
Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer
officers of ALFA and the private respondents should have availed of another mode of service
under Rule 14, Section 16 of the said Rules, i.e., through publication to effect proper service
upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the private
respondents argued that the voting trust agreement dated March 11, 1981 did not divest the
petitioners of their positions as president and executive vice-president of ALFA so that
service ofsummons upon ALFA through the petitioners as corporate officers was proper.

On September 18, 1989, a petition for certiorari was belatedly submitted by the private
respondent before the public respondent which, nonetheless, resolved to give due course
thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition
forcertiorari with the public respondent issued an Order declaring as final the Order dated April
25, 1989. The private respondents in the said Order were required to take positive steps in
prosecuting the third party complaint in order that the court would not be constrained to dismiss
the same for failure to prosecute. Subsequently, on October 25, 1989 the private respondents
filed a motion for reconsideration on which the trial court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private respondents' petition
for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:
"WHEREFORE, in view of the foregoing, the orders of respondent judge
dated April 25, 1989 and August 14, 1989 are hereby SET ASIDE and
respondent corporation is ordered to file its answer within the
reglementary period." (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public
respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners filed
thiscertiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the
part of the public respondent in reversing the questioned Orders dated April 25, 1989 and
August 14, 1989 of the court a quo, thus, holding that there was proper service of summons on
ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on July 16,
1990 erroneously applying the rule that the period during which a motion for reconsideration has
been pending must be deducted from the 15-day period to appeal. However, in its Resolution
dated January 3, 1991, the public respondent set aside the aforestated entry ofjudgment after
52

further considering that the rule it relied on applies to appeals from decisions ofthe Regional Trial
Courts to the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the
case of Refractories Corporation of the Philippines v. Intermediate AppellateCourt, 176 SCRA
539 [1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
"(1) that the execution of the voting trust agreement by a stockholder
whereby all his shares to the corporation have been transferred to the
trustee deprives the stockholder ofhis position as director of the
corporation; to rule otherwise, as the respondent Court ofAppeals did,
would be violative of section 23 of the Corporation Code (Rollo, pp. 270273); and
(2) that the petitioners were no longer acting or holding any of the
positions
provided
under
Rule
14,
Section
13 of the
Rules of Court authorized to receive service of summons for and in
behalf of the private domestic corporation so that the service of summons
on ALFA effected through the petitioners is not valid and ineffective; to
maintain the respondent Court of Appeals' position that ALFA was
properly served its summons through the petitioners would be contrary to
the general principle that a corporation can only be bound by such acts
which are within the scope of its officers' or agents' authority (Rollo, pp.
273-275)
In resolving the issue of the propriety of the service of summons in the instant case, we dwell
first on the nature of a voting trust agreement and the consequent effects upon its creation in the
light of the provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
"(a) trust created by an agreement between a group of the
stockholders of a corporation and the trustee or by a group of identical
agreements between individual stockholders and a common trustee,
whereby it is provided that for a term of years, or for a period contingent
upon a certain event, or until the agreement is terminated, control over
the stock owned by such stockholders, either for certain purposes or for
all purposes, is to be lodged in the trustee, either with or without a
reservation to the owners, or persons designated by them, of the power
to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19
Am J 2d Corp. sec. 685)."
Under Section 59 of the new Corporation Code which expressly recognizes voting trust
agreements, a more definite meaning may be gathered. The said provision partly reads:
"Section 59. Voting Trusts. One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time:
Provided, that in the case of a voting trust specifically required as a

condition in a loan agreement, said voting trust may be for a period

exceeding (5) years but shall automatically expire upon full
payment of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A certified
copy of such agreement shall be filed with the corporation and with the
Securities and Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or certificates of stock
covered by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the corporation, it
shall be noted that the transfer in the name of the trustee or trustees is
made pursuant to said voting trust agreement."
By its very nature, a voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends, the right to inspect the
books of the corporation, the right to sell certain interests in the assets of the corporation and
other rights to which a stockholder may be entitled until the liquidation of the corporation.
However, in order to distinguish a voting trust agreement from proxies and other voting pools
and agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock
are separated from the other attributes of ownership; (2) that the voting rights granted are
intended to be irrevocable for a definite period of time; and (3) that the principal purpose of the
grant of voting rights is to acquire voting control of the corporation. (5 Fletcher, Cylopedia of the
Law on Private Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F.
Supp. 538)
Under Section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a
trustee not only the stockholder's voting rights but also other rights pertaining to his shares as
long as the voting trust agreement is not entered "for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or used for purposes of fraud."
(section 59, 5th paragraph of the Corporation Code). Thus, the traditional concept of a voting
trust agreement primarily intended to single out a stockholder's right to vote from his other rights
as such and made irrevocable for a limited duration may in practice become a legal device
whereby a transfer of the stockholder's shares is effected subject to the specific provision of the
voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between the
equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and
the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing whereby one or
more stockholders of a corporation consent to transfer his or their shares to a trustee in order to
vest in the latter voting or other rights pertaining to said shares for a period not exceeding five
years upon the fulfillment of statutory conditions and such other terms and conditions specified
in the agreement. The five year-period may be extended in cases where the voting trust is
executed pursuant to a loan agreement whereby the period is made contingent upon full
payment of the loan.
In the instant case, the point of controversy arises from the effects of the creation of the voting
trust agreement. The petitioners maintain that with the execution of the voting trust agreement
between them and the other stockholders of ALFA, as one party, and the DBP, as the other
party, the former assigned and transferred all their shares in ALFA to DBP, as trustee. They
argue that by virtue of the voting trust agreement the petitioners can no longer be considered
53

directors ofALFA. In support of their contention, the petitioners invoke section 23 of the
Corporation Code which provides, in part, that:
"Every director must own at least one (1) share of the capital stock of the
corporation ofwhich he is a director which share shall stand in his name
on the books of the corporation. Any director who ceases to be the
owner of at
least
one
(1)
share of the
capital
stock of the
corporation of which he is a director shall thereby cease to be director. x x
x." (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement between ALFA
and the DBP had all the more safeguarded the petitioners' continuance as officers and
directorsof ALFA inasmuch as the general object of voting trust is to insure permanency of the
tenure ofthe directors of a corporation. They cited the commentaries by Prof. Aguedo Agbayani
on the right and status of the transferring stockholder, to wit:
"The 'transferring stockholder', also called the 'depositing stockholder', is
equitable ownerof the stocks represented by the voting trust certificates
and the stock reversible on termination of the trust by surrender. It is said
that the voting trust agreement does not destroy the status of the
transferring stockholders as such, and thus render them ineligible as
directors. But a more accurate statement seems to be that for some
purposes the depositing stockholder holding voting trust certificates in
lieu of his stock and being the beneficial owner thereof, remains and is
treated as a stockholder. It seems to be deducible from the case that he
may sue as a stockholder if the suit is in equity or is of an equitable
nature, such as, a technical stockholders' suit in right of the corporation.
[Commercial Laws of the Philippines by Agbayani, Vol. 3, pp. 492-493,
citing 5 Fletcher 326, 327]" (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most immediate
effect of a voting trust agreement on the status of a stockholder who is a party to its execution
from legal title-holder or owner of the shares subject of the voting trust agreement, he becomes
the equitable or beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p.
268; Pineda and Carlos, the Law on Private Corporations and Corporate Practice, 1969 ed., p.
175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases,
1981 ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the change
in his status deprives the stockholder of the right to qualify as a director under section 23 of the
present Corporation Code which deletes the phrase "in his own right." Section 30 of the old Code
states that:
"Every director must own in his own right at least one share of the capital
stock of the stock corporation of which he is a director, which stock shall
stand in his name on the books of the corporation. A director who ceases
to be the owner of at least one share ofthe capital stock of a stock
corporation of which is a director shall thereby cease to be a director . . .."
(Underlining supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be
adversely affected by the simple act of such director being a party to a voting trust agreement
inasmuch as he remains owner (although beneficial or equitable only) of the shares subject ofthe
voting trust agreement pursuant to which a transfer of the stockholder's shares in favor ofthe
trustee is required (section 36 of the old Corporation Code). No disqualification arises by
virtue of the phrase "in his own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other persons who
in fact are not the beneficial owners of the shares registered in their names on the books ofthe
corporation becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296).
Hence, this is a clear indication that in order to be eligible as a director, what is material is the
legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation
(2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969]
citing Peoplev. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust agreement executed
in 1981 disposed of all their shares through assignment and delivery in favor of the DBP, as
trustee. Consequently, the petitioners ceased to own at least one share standing in their names
on the books of ALFA as required under Section 23 of the new Corporation Code. They also
ceased to have anything to do with the management of the enterprise. The petitioners ceased to
be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their
respective positions as directors of ALFA. The transfer of shares from the stockholders of ALFA
to the DBP is the essence of the subject voting trust agreement as evident from the following
stipulations:
"1. The TRUSTORS hereby assign and deliver to the TRUSTEE the
certificate of the shares of stocks owned by them respectively and shall
do all things necessary for the transfer of their respective shares to the
TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate
for the numberof shares transferred, which shall be transferable in the
same manner and with the same effect as certificates of stock subject to
the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all
meetings of ALFA, annual or special, upon any resolution, matter or
business that may be submitted to any such meeting, and shall possess
in that respect the same powers as owners of the equitable as well as the
legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one
share of stock for the purpose of qualifying such person as
director of ALFA, and cause a certificate of stock evidencing the share so
transferred to be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his
shares to the same trustee, without the need of revising this agreement,
54

and this agreement shall have the same force and effect upon that said
stockholder." (CA Rollo, pp. 137-138; Underlining supplied)
Considering that the voting trust agreement between ALFA and the DBP transferred legal
ownership of the stocks covered by the agreement to the DBP as trustee, the latter became the
stockholder of record with respect to the said shares of stocks. In the absence of a showing that
the DBP had caused to be transferred in their names one share of stock for the
purpose ofqualifying as directors of ALFA, the petitioners can no longer be deemed to have
retained their status as officers of ALFA which was the case before the execution of the subject
voting trust agreement. There appears to be no dispute from the records that DBP has taken
over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A.
Guevarra, Vice-President of its Special Accounts Department II, Remedial Management Group,
the petitioners were no longer included in the list of officers of ALFA "as of April 1982".
(CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim that the
subject voting trust agreement did not deprive the petitioners of their position as
directors ofALFA, the public respondent committed a reversible error when it ruled that:
". . . while the individual respondents (petitioners Lee and Lacdao) may
have ceased to be president and vice-president, respectively, of the
corporation at the time of service ofsummons on them on August 21,
1987, they were at least up to that time, still directors . . .".
The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No.
4 of the subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the
timeof the execution of the agreement that by virtue of the transfer of shares of ALFA to the
DBP, all the directors of ALFA were stripped of their positions as such.
There can be no reliance on the inference that the five-year period of the voting trust agreement
in question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th
paragraph of section 59 of the new Corporation Code which reads:

"Unless expressly renewed, all rights granted in a voting trust agreement

shall automatically expire at the end of the agreed period, and the voting
trust certificates as well as the certificates of stock in the name of the
trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors."
On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA
and the DBP that the duration of the agreement is contingent upon the fulfillment ofcertain
obligations of ALFA with the DBP. This is shown by the following portions of the agreement.

"WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit
is secured by a first mortgage on the manufacturing plant of said
company;
WHEREAS, ALFA is also indebted to other creditors for various financial
accommodations and because of the burden of these obligations is
encountering very serious difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations from the
TRUSTEE, ALFA has offered and the TRUSTEE has accepted
participation in the management and control of the company and to
assure the aforesaid participation by the TRUSTEE, the TRUSTORS
have agreed to execute a voting trust covering their shareholding in ALFA
in favor of the TRUSTEE;
AND WHEREAS, DBP, is willing to accept the trust for the purpose
aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is
renewable for as long as the obligations of ALFA with DBP, or any portion
thereof, remains outstanding;' (CARollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have
transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national
government through the Asset Privatization Trust (APT) as attested to in a Certification dated
January 24, 1989 of the Vice President of the DBP's Special Accounts Department II. In the
same certification, it is stated that the DBP, from 1987 until 1989, had handled APT's account
which included ALFA's assets pursuant to a management agreement by and between the DBP
and APT. (CA Rollo, p. 142) Hence, there is evidence on record that at the time of the
service of summons on ALFA through the petitioners on August 21, 1987, the voting trust
agreement in question was not yet terminated so that the legal title to the stocks of ALFA, then,
still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was
service ofsummons on ALFA through the petitioners is readily answered in the negative.

proper

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
"Sec. 13. Service upon private domestic corporation or partnership. If
the defendant is a corporation organized under the laws of the Philippines
or a partnership duly registered, service may be made on the president,
manager, secretary, cashier, agent or any of its directors."
It is a basic principle in Corporation Law that a corporation has a personality separate and
distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta,
55

Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and Employment, et al., G.R.
Nos. 83257-58, December 21, 1990). Thus, the above rule on service of processes on a
corporation
enumerates
the
representatives of a
corporation
who
can
validly
receive court processes on its behalf. Not every stockholder or officer can bind the corporation
considering the existence of a corporate entity separate from those who compose it.
XV. RIGHT OF INSPECTION
The rationale of the aforecited rule is that service must be made on a representative so
integrated with the corporation sued as to make it a priori supposable that he will realize his
responsibilities and know what he should do with any legal papers served on him. (Far
Corporation v. Francisco, 146 SCRA 197 1986] citing Villa Rey Transit, Inc. v. Far East Motor
Corp.,81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The
service ofsummons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise,
as correctly argued by the petitioners, will contravene the general principle that a corporation can
only be bound by such acts which are within the scope of the officer's or agent's authority.
(seeVicente v. Geraldez, 52 SCRA 210 [1973].)

FIRST DIVISION
[G.R. No. 15568. November 8, 1919.]
W. G. PHILPOTTS, petitioner, vs. PHILIPPINE
COMPANY and F. N. BERRY, respondents.

MANUFACTURING.

Lawrence & Ross for petitioner.

Crossfield & O'Brien for defendants.

WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision
dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and
the Orders dated April 25, 1989 and October 17, 1989 issued by the Regional
Trial Court ofMakati, Branch 58 are REINSTATED.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.

SYLLABUS
1. CORPORATIONS; EXAMINATION OF COMPANY'S AFFAIRS BY
STOCKHOLDER; RIGHT OF STOCKHOLDER TO ACT THROUGH REPRESENTATIVE.
The right of examination into corporate affairs which is conceded to the stockholder by
section 51 of the Corporation Law may be exercised either by the stockholder in person or
by any duly authorized representative.
DECISION

||| (Lee v. Court of Appeals, G.R. No. 93695, [February 4, 1992])

STREET, J p:

The petitioner, W. G.' Philpotts, a stockholder in the Philippine Manufacturing

Company, one of the respondents herein, seeks by this proceeding to obtain a writ of
mandamus to compel the respondents to permit the plaintiff, in person or by some
authorized agent or attorney, to inspect and examine the records of the business
transacted by said company since January 1, 1918. The petition is filed originally in this
court under the authority of section 515 of the Code of Civil Procedure, which gives to this
tribunal concurrent jurisdiction with the Court of First Instance in cases, among others,
where any corporation or person unlawfully excludes the plaintiff from the use and
enjoyment of some right to which he is entitled. The respondents interposed a demurrer,
and the controversy is now before us for the determination of the questions thus presented.
The first point made has reference to a supposed defect of parties, and it is said
that the action can not be maintained jointly against the corporation and its secretary
without the addition of the allegation that the latter is the custodian of the business records
of the respondent company.
By the plain language of sections 515 and 222 of our Code of Civil Procedure,
the right of action in such a proceeding as this is given against the corporation; and the
respondent corporation in this case was the only absolutely necessary party. In the Ohio
case of Cincinnati Volksblatt Co. vs. Hoffmister (61 Ohio St., 432; 48 L. R. A., 735), only the
56

corporation was named as defendant, while the complaint, in language almost identical with
that in the case at bar, alleged a demand upon and refusal by the corporation.
Nevertheless the propriety of naming the secretary of the corporation as a
codefendant cannot be questioned, since such official is customarily charged with the
custody of all documents, correspondence, and records of a corporation, and he is
presumably the person against whom the personal orders of the court would be made
effective in case the relief sought should be granted. Certainly there is nothing in the
complaint to indicate that the secretary is an improper person to be joined. The petitioner
might have named the president of the corporation as a respondent also; and this official
might be brought in later, even after judgment rendered, if necessary to the effectuation of
the order of the court.
Section 222 of our Code of Civil Procedure is taken from the California Code,
and a decision of the California Supreme Court Barber vs. Mulford (117 Cal., 356) is
quite clear upon the point that both the corporation and its officers may be joined as
defendants.
The real controversy which has brought these litigants into court is upon the
question argued in connection with the second ground of demurrer, namely, whether the
right which the law concedes to a stockholder to inspect the records can be exercised by a
proper agent or attorney of the stockholder as well as by the stockholder in person. There
is no pretense that the respondent corporation or any of its officials has refused to allow the
petitioner himself to examine anything relating to the affairs of the company, and the
petition prays for a peremptory order commanding the respondents to place the records of
all business transactions of the company, during a specified period, at the disposal of the
plaintiff or his duly authorized agent or attorney, it being evident that the Petitioner desires
to exercise said right through an agent or attorney. In the argument in support of the
demurrer it is conceded by counsel for the respondents that there is a right of examination
in the stockholder granted under section 51 of the Corporation Law, but it is insisted that
this right must be exercised in person.
The pertinent provision of our law is found in the second paragraph of section 51
of Act No. 1459, which reads as follows: "The record of all business transactions of the
corporation and the minutes of any meeting shall be open to the inspection of and director,
member, or stockholder of the corporation at reasonable hours."

many instances." An observation to the same effect is contained in Martin vs. Bienville Oil
Works Co. (28 La., 204), where it is said: "The possession of the right in question would be
futile if the possessor of it, through lack of knowledge necessary to exercise it, were
debarred the right of procuring in his behalf the services of one who could exercise it." In
Deadreck vs. Wilson (8 Baxt. [Tenn.], 108), the court said: "That stockholders have the right
to inspect the books of the corporation, taking minutes from the same, at all reasonable
times, and may be aided in this-by experts and counsel, so as to make the inspection
valuable to them, is a principle too well settled to need discussion." Authorities on this point
could be accumulated in great abundance, but as they may be found cited in any legal
encyclopedia or treaties devoted to the subject of corporations, it is unnecessary here to
refer to other cases announcing the same rule.
In order that the rule above stated may not be taken in too sweeping a sense, we
deem it advisable to say that there are some things which a corporation may undoubtedly
keep secret, notwithstanding the right of inspection given by law to the stockholder; as, for
instance, where a corporation, engaged in the business of manufacture, has acquired a
formula or process, not generally known, which has proved of utility to it in the manufacture
of its products. It is not our intention to declare that the authorities of the corporation, and
more particularly the Board of Directors, might not adopt measures for the protection of
such process from publicity. There is, however, nothing in the petition which would indicate
that the petitioner in this case is seeking to discover anything which the corporation is
entitled to keep secret; and if anything of the sort is involved in the case it may be brought
out at a more advanced stage of the proceedings.
The demurrer is overruled; and it is ordered that the writ of mandamus shall issue
as prayed, unless within 5 days from notification hereof the respondents answer to the
merits. So ordered.
Arellano, C. J., Torres, Johnson, Araullo Malcolmand Avancea, JJ., concur.
||| (Philpotts v. Philippine Manufacturing Co., G.R. No. 15568, [November 8, 1919], 40 PHIL 471475)

This provision is to be read of course in connection with the related provisions

o sections 51 and 52, defining the duty of the corporation in respect to the keeping of its
records.
Now it is our opinion, and we accordingly hold, that the right of inspection given
to a stockholder in the provision above quoted can be exercised either by himself or by any
proper representative or attorney in fact, and either with or without the attendance of the
stockholder. This is in conformity with the general rule that what a man may do in person
he may do through another; and we find nothing in the statute that would justify us in
qualifying the right in the manner suggested by the respondents. This conclusion is
supported by the undoubted weight of authority in the United States, where it is generally
held that the provisions of law conceding the right of inspection to stockholders of
corporations are to be liberally construed and that said right may be exercised through any
other properly authorized person. As was said in Foster vs. White (86 Ala., 467), "The right
may be regarded as personal, in the sense that only a stockholder may enjoy it; but the
inspection and examination may be made by another. Otherwise it would be unavailing in
57

SECOND DIVISION

The main ground upon which the defense appears to be rested has reference to
the time, or times, within which the right of inspection may be exercised. In this connection
the answer asserts that in article 10 of the By-laws of the respondent corporation its is
declared that "Every shareholder may examine the books of the company and other
documents pertaining to the same upon the days which the board of directors shall annually
fix." It is further averred that at the directors' meeting of the respondent corporation held on
February 16, 1924, the board passed a resolution to the following effect:

[G.R. No. 22442. August 1, 1924.]

ANTONIO PARDO, petitioner, vs. THE HERCULES LUMBER CO., INC.,
and IGNACIO FERRER, respondents.

"The board also resolved to call the usual general (meeting of

shareholders) for March 30 of the present year, with notice to the
shareholders that the books of the company are at their disposition from
the 15th to 25th of the same month for examination, in appropriate
hours."

W.J. O'Donovan and M. H. de Joya for petitioner.

Sumulong & Lavides and Ross, Lawrence & Selph for respondents.
SYLLABUS
1. CORPORATIONS; STOCKHOLDERS' RIGHT TO INSPECT RECORDS;
UNREASONABLE RESTRICTION BY DIRECTORS ON RIGHT OF INSPECTION. A
resolution of the board of directors of a corporation limiting the right of stockholders to
inspect its records to a period of ten days shortly prior to the annual stockholders' meeting
is an unreasonable restriction on the right of inspection may be exercised at reasonable
hours on business days throughout the year, and not merely during an arbitrary period of a
few days chosen by the directors.
DECISION
STREET, J p:
The petitioner, Antonio Pardo ,a stockholder in the Hercules Lumber Company,
Inc., one of the respondents herein, seeks by this original proceeding in the Supreme Court
to obtain a writ of mandamus to compel the respondents to permit the plaintiff and his duly
authorized agent and representative to examine the records and business transactions of
said company. To this petition the respondents interposed an answer, in which, after
admitting certain allegations of the petition, the respondents set forth the facts upon which
they mainly rely as a defense to the petition. To this answer the petitioner in turn interposed
a demurrer, and the cause is now before us for determination of the issue thus presented.
It is inferentially, if not directly admitted that the petitioner is in fact a stockholder
in the Hercules Lumber Company, Inc., and that the respondent, Ignacio Ferrer, as acting
secretary of the said company, has refused to permit the petitioner or his agent to inspect
the records and business transactions of the said Hercules Lumber Company, Inc., at times
desired by the petitioner. No serious question is of course made as to the right of the
petitioner, by himself or proper representative, to exercise the right of inspection conferred
by section 51 of Act No. 1459. Said provision was under the consideration of this court in
the case of Philpotts vs. Philippine Manufacturing Co. and Berry (40 Phil., 471), where we
held that the right of examination there conceded to the stockholder may be exercised
either by a stockholder in person or by any duly authorized agent or representative.

The contention for the respondent is that this resolution of the board constitutes a
lawful restriction on the right conferred by statute; and it is insisted that as the petitioner has
not availed himself of the permission to inspect the books and transactions of the company
within the ten days thus defined, his right to inspection and examination is lost, at least for
this year.
We are entirely unable to concur in this contention. The general right given by the
statute may not be lawfully abridged to the extent attempted in this resolution. It may be
admitted that the officials in charge of a corporation may deny inspection when sought at
unusual hours or under other improper conditions; but neither the executive officers nor the
board of directors have the power to deprive a stockholder of the right altogether. A by-law
unduly restricting the right of inspection is undoubtedly invalid. Authorities to this effect are
too numerous and direct to require extended comment. (14 C.J., 859; 7 R.C.L., 325; 4
Thompson on Corporations, 2d ed., sec. 4517; Harkness vs. Guthrie, 27 Utah, 248; 107
Am. St., Rep., 664, 681.) Under a statute similar to our own it has been held that the
statutory right of inspection is not affected by the adoption by the board of directors of a
resolution providing for the closing of transfer books thirty days before an election.
(State vs. St. Louis Railroad Co., 29 Mo. Ap., 301.)
It will be noted that our statute declares that the right of inspection can be
exercised "at reasonable hours." This means at reasonable hours on business days
throughout the year, and not merely during some arbitrary period of a few days chosen by
the directors.
In addition to relying upon the by-law, to which reference is above made, the
answer of the respondents calls in question the motive which is supposed to prompt the
petitioner to make inspection; and in this connection it is alleged that the information which
the petitioner seeks is desired for ulterior purposes in connection with a competitive firm
with which the petitioner is alleged to be connected. It is also insisted that one of the
purposes of the petitioner is to obtain evidence preparatory to the institution of an action
which he means to bring against the corporation by reason of a contract of employment
which once existed between the corporation and himself. These suggestions are entirely
apart from the issue, as, generally speaking, the motive of the shareholder exercising the
right is immaterial (7 R.C.L., 327.)
We are of the opinion that, upon the allegations of the petition and the
admissions of the answer, the petitioner is entitled to relief. The demurrer is, therefore,
58

sustained; and the writ of mandamus will issue as prayed, with costs against the
respondents. So ordered.
Johnson, Malcolm, Villamor, Ostrand, and Romualdez, JJ., concur.
||| (Pardo v. Hercules Lumber Co., Inc., G.R. No. 22442, [August 1, 1924], 47 PHIL 964-967)
FIRST DIVISION
[G.R. No. L-33320. May 30, 1983.]
RAMON A. GONZALES, petitioner, vs. THE PHILIPPINE NATIONAL
BANK,respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.
SYLLABUS
1. COMMERCIAL LAW; CORPORATION CODE;LIMITATIONS OF RIGHT OF INSPECTION
UNDER THE NEW CODE (B.P. BLG. 68). As may be noted, among the changes introduced
in the new Code with respect to the right of inspection granted to a stockholder are the following:
the records must be kept at the principal office of the corporation; the inspection must be made
on business days; the stockholder may demand a copy of the excerpts of the records or
minutes; and the refusal to allow such inspection shall subject the erring officer or agent of the
corporation to civil and criminal liabilities. However, while seemingly enlarging the right of
inspection, the new Code has prescribed limitations to the same. It is now expressly required as
a condition for such examination that the one requesting it must not have been guilty of using
improperly any information secured through a prior examination, and that the person asking for
such examinations must be "acting in good faith and for a legitimate purpose in making his
demand."
2. ID.; ID.; ID.; UNQUALIFIED PROVISION UNDER THE PREVIOUS LAW, NOW DISSIPATED
BY THE CLEAR PROVISION OF SECTION 74 OF B.P. BLG. 68. The unqualified provision
on the right of inspection previously contained in Section 51, Act No. 1459, as amended, no
longer holds true under the provisions of the present law. The argument of the petitioner that the
right granted to him under Section 51 of the former Corporation law should not be dependent on
the propriety of his motive or purpose in asking for the inspection of the books of the respondent
bank loses whatever validity it might have had before the amendment of the law. If there is any
doubt in the correctness of the ruling of the trial court that the right of inspection granted under
Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the
part of the stockholder demanding the same, it now dissipated by the clear language of the
pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.
3. ID.; ID.; ID.; MODE OF ACQUISITION OF ONE SHARE OF STOCK, AS EVIDENCE OF BAD
FAITH AND ULTERIOR MOTIVE. Although the petitioner has claimed that he has justifiable
motives in seeking the inspection of the books of the respondent bank, he has not set forth the
reasons and the purposes for which be desires such inspection, except to satisfy himself as to

the truth of published reports regarding certain transactions entered into by the respondent bank
and to inquire into their validity. The circumstances under which he acquired one share of stock
in the respondent bank purposely to exercise the right of inspection do not argue in favor of his
good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into
transactions entered into by the respondent bank even before he became a stockholder. His
obvious purpose was to arm himself with materials which he can use against the respondent
bank for acts done by the latter when the petitioner was a total stranger to the same. He could
have been impelled by a laudable sense of civil consciousness, but it could not be said that his
purpose is germane to his interest as a stockholder.
4. ID.; ID.; PROVIDES THAT CORPORATIONS CREATED BY CHARTERS SHALL BE
GOVERNED PRIMARILY BY SAID CHARTERS; RESPONDENT BANK WITH A CHARTER OF
ITS OWN IS NOT GOVERNED BY THE CORPORATION CODE. The Philippine National
Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule,
by the Corporation Code of the Philippines. Section 4 of the said Code provides: "SEC. 4.
Corporations created by special laws or charters. Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them
or applicable to them, supplemented by the provisions of this Code, insofar as they are
applicable." The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation
Code with respect to the right of a stockholder to demand an inspection or examination of the
books of the corporation may not be reconciled with the above-quoted provisions of the charter
of the bank. It is not correct to claim, therefore, that the right of inspection under Section 74 of
the new Corporation Code may apply in a supplementary capacity to the charter of the
respondent bank.
DECISION
VASQUEZ, J p:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a
special civil action for mandamus against the herein respondent praying that the latter be
ordered to allow him to look into the books and records of the respondent bank in order to satisfy
himself as to the truth of the published reports that the respondent has guaranteed the obligation
of Southern Negros Development Corporation in the purchase of a US$23 million sugar-mill to
be financed by Japanese suppliers and financiers; that the respondent is financing the
construction of the P21 million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and
the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as well as to inquire
into the validity of said transactions. The petitioner has alleged had his written request for such
examination was denied by the respondent. The trial court having dismissed the petition for
mandamus, the instant appeal to review the said dismissal was filed. LLjur
The facts that gave rise to the subject controversy have been set forth by the trial court in the
decision herein sought to be reviewed, as follows:
"'Briefly stated, the following facts gathered from the stipulation of the
parties served as the backdrop of this proceeding.
'Previous to the present action, the petitioner instituted several cases in
this Court questioning different transactions entered into by the Bank with
other parties. First among them is Civil Case No. 69345 filed on April 27,
1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza of Public
59

Works and Communications, the Commissioner of Public Highways, the

Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation,
Allis Chalmers and General Motors Corporation. In the course of the
hearing of said case on August 3, 1967, the personality of herein
petitioner to sue the bank and question the letters of credit it has
extended for the importation by the Republic of the Philippines of public
works equipment intended for the massive development program of the
President was raised. In view thereof, he expressed and made known his
intention to acquire one share of stock from Congressman Justiniano
Montano which, on the following day, August 30, 1967, was transferred in
his name in the books of the Bank.
'Subsequent to his aforementioned acquisition of one share of stock of
the Bank, petitioner, in his dual capacity as a taxpayer and stockholder,
filed the following cases involving the bank or the members of its Board of
Directors to wit:
'1. On October 18, 1967, Civil Case No. 71044
versus the Board of Directors of the Bank; the National
Investment and Development Corp., Marubeni Iida Co., Ltd.,
and Agro-Inc. Dev. Co. or Saravia;
'2. On May 11, 1968, Civil Case No. 72936 versus
Roberto Benedicto and other Directors of the Bank, Passi
(Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill
Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary
Central, Inc., and Batangas Sugar Central Inc.;
'3. On May 8, 1969, Civil Case No. 76427 versus
Alfredo Montelibano and the Directors of both the PNB and
DBP;
'On January 11, 1969, however, petitioner addressed a letter to the
President of the Bank (Annex A, Pet.), requesting submission to look into
the records of its transactions covering the purchase of a sugar central by
the Southern Negros Development Corp. to be financed by Japanese
suppliers and financiers; its financing of the Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar
Mills in Iloilo. On January 23, 1969, the Asst. Vice President and Legal
Counsel of the Bank answered petitioner's letter denying his request for
being not germane to his interest as a one share stockholder and for the
cloud of doubt as to his real intention and purpose in acquiring said
share. (Annex B, Pet.) In view of the Bank's refusal, the petitioner
instituted this action.'" (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its brief which he
characterized as having been "correctly stated." (Petitioner-Appellant's Brief, pp. 5-7.) LLjur
The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect
the books and records of the respondent bank regarding the transactions mentioned on the
grounds that the right of a stockholder to inspect the record of the business transactions of a

corporation granted under Section 51 of the former Corporation Law (Act No. 1459, as
amended) is not absolute, but is limited to purposes reasonably related to the interest of the
stockholder, must be asked for in good faith for a specific and honest purpose and not gratify
curiosity or for speculative or vicious purposes; that such examination would violate the
confidentiality of the records of the respondent bank as provided in Section 16 of its
charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his
administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the single error to the
lower court of having ruled that his alleged improper motive in asking for an examination of the
books and records of the respondent bank disqualifies him to exercise the right of a stockholder
to such inspection under Section 51 of Act No. 1459, as amended. Said provision reads in part
as follows:

"Sec. 51. . . . The record of all business transactions of the corporation

and the minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."
Petitioner maintains that the above-quoted provision does not justify the qualification made by
the lower court that the inspection of corporate records may be denied on the ground that it is
intended for an improper motive or purpose, the law having granted such right to a stockholder in
clear and unconditional terms. He further argues that, assuming that a proper motive or purpose
for the desired examination is necessary for its exercise, there is nothing improper in his purpose
for asking for the examination and inspection herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended,
regarding the right of a stockholder to inspect and examine the books and records of a
corporation. The former Corporation Law (Act No. 1459, as amended) has been replaced
byBatas Pambansa Blg. 68, otherwise known as the "Corporation Code of the Philippines." The
right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained,
but with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa
Blg. 68 provide the following:
"The records of all business transactions of the corporation and the
minutes of any meeting shall be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine
and copy excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order of
the board of directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for such
refusal: and Provided, further, That it shall be a defense to any action
60

under this section that the person demanding to examine and copy
excerpts from the corporation's records and minutes has improperly used
any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting
in good faith or for a legitimate purpose in making his demand."
As may be noted from the above-quoted provisions, among the changes introduced in the new
Code with respect to the right of inspection granted to a stockholder are the following the records
must be kept at the principal office of the corporation; the inspection must be made on business
days; the stockholder may demand a copy of the excerpts of the records or minutes; and the
refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil
and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code
has prescribed limitations to the same. It is now expressly required as a condition for such
examination that the one requesting it must not have been guilty of using improperly any
information secured through a prior examination, and that the person asking for such
examination must be "acting in good faith and for a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained in Section 51, Act No.
1459, as amended, no longer holds true under the provisions of the present law. The argument
of the petitioner that the right granted to him under Section 51 of the former Corporation
Lawshould not be dependent on the propriety of his motive or purpose in asking for the
inspection of the books of the respondent bank loses whatever validity it might have had before
the amendment of the law. If there is any doubt in the correctness of the ruling of the trial court
that the right of inspection granted under Section 51 of the old Corporation Law must be
dependent on a showing of proper motive on the part of the stockholder demanding the same, it
is now dissipated by the clear language of the pertinent provision contained in Section 74
of Batas Pambansa Blg 68.
Although the petitioner has claimed that he has justifiable motives in seeking the inspection of
the books of the respondent bank, he has not set forth the reasons and the purposes for which
he desires such inspection, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the respondent bank and to inquire into their
validity. The circumstances under which he acquired one share of stock in the respondent bank
purposely to exercise the right of inspection do not argue in favor of his good faith and proper
motivation. Admittedly he sought to be a stockholder in order to pry into transactions entered into
by the respondent bank even before he became a stockholder. His obvious purpose was to arm
himself with materials which he can use against the respondent bank for acts done by the latter
when the petitioner was a total stranger to the same. He could have been impelled by a laudable
sense of civic consciousness, but it could not be said that his purpose is germane to his interest
as a stockholder.

investigate the condition of the National Bank, shall not reveal to any
person other than the President of the Philippines, the Secretary of
Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in its
custody, its current accounts or deposits belonging to private individuals,
corporations, or any other entity, except by order of a Court of competent
jurisdiction.'
'Sec. 30. Penalties for violation of the provisions of this Act. Any
director, officer, employee, or agent of the Bank, who violates or permits
the violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or by imprisonment
of not more than five years, or both such fine and imprisonment.'"
The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not
governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code
provides:
"SEC. 4. Corporations created by special laws or charters.
Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar
as they are applicable."
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with
respect to the right of a stockholder to demand an inspection or examination of the books of the
corporation may not be reconciled with the above quoted provisions of the charter of the
respondent bank. It is not correct to claim, therefore, that the right of inspection under Section 74
of the new Corporation Code may apply in a supplementary capacity to the charter of the
respondent bank. cdrep
WHEREFORE, the petition is hereby DISMISSED, without costs.
Melencio-Herrera, Plana and Gutierrez, Jr., JJ., concur.
Teehankee, concurs in the result.
Relova J., is on leave.

We also find merit in the contention of the respondent bank that the inspection sought to be
exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No.
1300, as amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows:

||| (Gonzales v. PNB, G.R. No. L-33320, [May 30, 1983], 207 PHIL 425-433)

"'Sec. 15. Inspection by Department of Supervision and Examination of

the Central Bank. The National Bank shall be subject to inspection by
the Department of Supervision and Examination of the Central Bank.'
'Sec. 16. Confidential information. The Superintendent of Banks and
the Auditor General, or other officers designated by law to inspect or
61

3. ID.; ID.; ID.; ID. Pretexts may not be put forward by the officers of a
corporation to keep a director or shareholder from inspecting the books and minutes of the
corporation, and the right of inspection is not to be denied on the ground that the director or
shareholder is on unfriendly terms with the officers of the corporation whose records are
sought to be inspected.
4. ID.; ID.; ID.; ID. A director or shareholder can make copies, abstracts, and
memoranda of documents, books, and papers as an incident to the right of inspection, but
cannot, without an order of a court, be permitted to take books from the office of the
corporation.
5. ID.; ID.; ID.; ID. A director or stockholder has no absolute right to secure
certified copies of the minutes of a corporation until these minutes have been written up
and approved by the directors.
6. ID.; ID.; ID.; ID. On the facts and the law, it is ruled that the petitioner has
not made out a case for relief by mandamus.
DECISION
EN BANC
[G.R. No. 37064. October 4, 1932.]
EUGENIO VERAGUTH, Director and Stockholder of the Isabela
Sugar Company, Inc., petitioner, vs. ISABELA SUGAR COMPANY,
INC., GIL MONTILLA, Acting President, and AGUSTIN B. MONTILLA,
Secretary of the same corporation,respondents.
Jose B. Gamboa for petitioner.
Agustin P. Seva for respondents.
SYLLABUS
1. SPECIAL PROCEEDINGS; MANDAMUS; COGNIZANCE OF SPECIAL
PROCEEDINGS BY SUPREME COURT OF FIRST INSTANCE Where the Supreme
Court has concurrent jurisdiction with Courts of First Instance of special proceedings,
except for sufficient reasons being shown, the action will be left for determination by the
Court of First Instance. This practice is especially to be commended where questions of
fact are involved, since the Court of First Instance is better equipped for the taking of
testimony and the resolution of questions of fact than is the appellate court.
2. CORPORATIONS; CORPORATION LAW, SECTION 51 APPLIED AND
CONSTRUED; RIGHT OF INSPECTION OF THE BOOKS AND MINUTES OF A
CORPORATION; MANDAMUS. Directors of a corporation have the unqualified right to
inspect the books and records of the corporation at all reasonable times.

MALCOLM, J p:
The parties to this action are Eugenio Veraguth, a director and stockholder of the
Isabela Sugar Company, Inc., who is the petitioner, and the Isabela Sugar Company, Inc.,
Gil Montilla, acting president of the company, and Agustin B. Montilla, secretary of the
company, who are the respondents. The petitioner prays: (a) That the respondents be
required within five days from receipt of notice of this petition to show cause why they
refuse to notify the petitioner, as director, of the regular and special meetings of the board
of directors, and to place at his disposal at reasonable hours, the minutes, documents, and
books of the aforesaid corporation, for his inspection as director and stockholder, and to
issue, upon payment of the fees, certified copies of any documentation in connection with
said minutes, documents, and books of the corporation; and (b) that, in view of the
memoranda and hearing of the parties, a final and absolute writ of mandamus be issued to
each and all of the respondents to notify immediately the petitioner within the reglementary
period, of all regular and special meetings of the board of directors of the Isabela Sugar
Central Company, Inc., and to place at his disposal at reasonable hours the minutes,
documents, and books of said corporation for his inspection as director and stockholder,
and to issue immediately, upon payment of the fees, certified copies of any documentation
in connection with said minutes, documents, and books of the aforesaid corporation. To the
petition an answer has been interposed by the respondents, too long to be here
summarized, which raised questions of fact and law. Following the taking of considerable
testimony before the clerk as commissioner, the case has been submitted on memoranda.
It should first be observed that when the case was filed here, it was, in
accordance with settled practice, dismissed without prejudice to the right of the petitioner to
present the action before the Court of First Instance of Occidental Negros. Thereafter, on a
motion of reconsideration being presented, this order was set aside and the case was
permitted to continue in this court. On further reflection, we now feel that this was error, and
that it would have been the correct practice to have required the petitioner to present the
action in a Court of First Instance which is better equipped for the taking of testimony and
the resolution of questions of fact than is the appellate court. Only with considerable
62

difficulty, therefore, can we decide the issues of fact, since none of the members of the
court saw or heard the witnesses testify.
Speaking to the first point with which the petition is concerned, relating to the
alleged failure of the secretary of the company to notify the petitioner in due time of a
special meeting of the company, we find the by-laws, together with a resolution of the board
of directors, providing for the holding of ordinary and special meetings. Whether there was
a malicious attempt to keep Director Veraguth from attending a special meeting of the
board of directors at which the compensation of the attorneys of the company was fixed, or
whether Director Veraguth, in a spirit of antagonism, has made this merely a pretext to
cause trouble, we are unable definitely to say. This much, however, can appropriately be
stated and is decisive, and this is that the meeting in question is in the past and, therefore,
now merely presents an academic question; that no damage was caused to Veraguth by
the action taken at the special meeting which he did not attend, since his interests were
fully protected by the Philippine National Bank; and that as to meetings in the future it is to
be presumed that the secretary of the company will fulfill the requirements of the
resolutions of the company pertaining to regular and special meetings. It will, of course, be
incumbent upon Veraguth to give formal notice to the secretary of his post-office address if
he desires notice sent to a particular residence.
On the second question pertaining to the right of inspection of the books of the
company, we find Director Veraguth telegraphing the secretary of the company, asking the
latter to forward in the shortest possible time a certified copy of the resolution of the board
of directors concerning the payment of attorney's fees in the case against the Isabela Sugar
Company and others. To this the secretary made answer by letter stating that, since the
minutes of the meeting in question had not been signed by the directors present, a certified
copy could not be furnished, and that as to other proceedings of the stockholders a request
should be made to the president of the Isabela Sugar Company, Inc. It further appears that
the board of directors adopted a resolution providing for inspection of the books and the
taking of copies "by authority of the President of the corporation previously obtained in each
case."
The Corporation Law, section 51, provides that:
"All business corporations shall keep and carefully preserve a
record of all business transactions, and a minute of all meetings of
directors, members, or stockholders, in which shall be set forth in detain
the time and place of holding the meeting, how authorized, the notice
given, whether the meeting was regular or special, if special its object,
those present and absent, and every act done or ordered done at the
meeting. . . .
"The record of all business transactions of the corporation and
the minutes of any meeting shall be open to the inspection of any
director, member, or stockholder of the corporation at reasonable hours."
The above puts in statutory form the general principles of Corporation Law.
Directors of a corporation have the unqualified right to inspect the books and records of the
corporation at all reasonable times. Pretexts may not be put forward by officers of
corporations to keep a director or shareholder from inspecting the books and minutes of the
corporation, and the right of inspection is not to be denied on the ground that the director or

shareholder is on unfriendly terms with the officers of the corporation whose records are
sought to be inspected. A director or stockholder can of course make copies, abstracts, and
memoranda of documents, books, and papers as an incident to the right of inspection, but
cannot, without an order of a court, be permitted to take books from the office of the
corporation. We do not conceive, however, that a director or stockholder has any absolute
right to secure certified copies of the minutes of the corporation until these minutes have
been written up and approved by the directors. (See Fisher's Philippine Law of Stock
Corporations, sec. 153, and Flecher Cyclopedia Corporations, vol. 4, Chap. 45.)
Combining the facts and the law, we do not think that anything improper occurred
when the secretary declined of furnish certified copies of minutes which had not been
approved by the board of directors, and that while so much of the last resolution of the
board of directors as provides for the prior approval of the president of the corporation
before the books of the corporation can be inspected puts an illegal obstacle in the way of a
stockholder or director, that resolution, so far as we are aware, has not been enforced to
the detriment of anyone. In addition, it should be said that this is a family dispute, the
petitioner and the individual respondents belonging to the same family; that a test case
between the petitioner and the respondents has been begun in the Court of First Instance
of Occidental Negros involving hundreds of thousands of pesos, and that the appellate
court should not intrude its views to give an advantage to either party. We rule that the
petitioner has not made out a case for relief by mandamus.
Petition denied, with costs.
Avancea, C.J., Villamor, Villa-Real, Hull and Imperial, JJ., concur.
Gokongwei v. SEC
XVI. DERIVATIVE SUIT
JUAN D. EVANGELISTA ET AL. vs. RAFAEL SANTOS
FIRST DIVISION
[G.R. No. L-1721. May 19, 1950.]
JUAN D. EVANGELISTA ET AL., plaintiffs-appellants, vs. RAFAEL
SANTOS,defendant-appellee.
Antonio Gonzales for appellants.
Benjamin H. Tirol for appellee.
SYLLABUS
1. PLEADING AND PRACTICE; VENUE; MERE SOJOURNING IN A PLACE
DOES NOT MAKE THE LATTER A RESIDENT FOR PURPOSES OF VENUE. The facts
in this case show that the objection to the venue is well-founded. The fact that defendant
63

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.
2. PARTIES; CORPORATION; MISMANAGEMENT BY ITS OFFICER; RIGHT
OF STOCKHOLDERS TO BEING SUIT. The plaintiff stockholders have brought the
action not for the benefit of the corporation but for their own benefit, since they ask that the
defendant make good the losses occasioned by his mismanagement and pay to them the
value of their respective participation in the corporate assets on the basis of their respective
holdings.
DECISION
REYES, J p:
This is an action by the minority stockholders of a corporation against its principal
officer for damages resulting from his mismanagement of its affairs and misuse of its
assets.
The complaint alleges that plaintiff's 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, among
them machineries, buildings, warehouses, trucks, etc., to disappear, thus causing the
complete ruin of the corporation and total depreciation of its stocks. The 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. Plaintiffs also ask for such other remedy as may be just and equitable.
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, the motion, which is under oath, states
that defendant is a resident of Iloilo City and not of Pasay, and at the hearing of the motion
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. Plaintiffs opposed the motion for dismissal but
presented no counter proof and merely called attention to the Sheriff's return showing
service of summons on defendant personally at his alleged residence at No. 2112 Dewey
Boulevard, Pasay.

After hearing, the lower court rendered its order, granting the motion for dismissal
upon the two grounds alleged by defendant, and reconsideration of this order having been
denied, plaintiffs have appealed to this Court.
The appeal presents two questions. The first refers to venue and the second, to
the right of the plaintiffs to bring this action for their benefit.
As to the first question, it is important to remember that the laying of the venue of
an action is not left to plaintiff's caprice. The matter is regulated by the Rules of Court. And
in actions like the present, which is one in personam, the regulation applicable is that
contained in section 1 of Rule 5, which provides:.
"Civil action in Courts of First Instance may be commenced and tried where the
defendant or any of the defendant resides or may be found, or where the plaintiff or any of
the plaintiffs resides, at the election of the plaintiff.".
Objection to improper venue may be interposed at any time prior to the trial.
(Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p. 108.).
Believing that defendant resided in the province of Rizal, herein plaintiffs brought
their action in the Court of First Instance of that province. But that belief proved erroneous,
for the lower court found after hearing that defendant had his residence in Iloilo. The finding
is based on defendant's sworn statement not rebutted by any proof to the contrary.
There is nothing to the contention that defendant's motion to dismiss necessarily
presupposes a hypothetical admission of the allegations of the complaint, among them the
averment that defendant is a resident of Rizal province, for the motion precisely denies that
averment and alleges that his real residence is in Iloilo City. This, defendant had the right to
do in objecting to the court's jurisdiction on the ground of improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the venue
in the province where the defendant "may be found." But this phrase has already been held
to have a limited application. It is the same phrase used in section 377 of Act 190 from
which section 1 of Rule 5 was taken, and as construed by this Court it applies only to cases
where defendant has no residence in the Philippine Islands. This was the construction
adopted in the case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526, which was
an action brought in Manila by a nonresident against a corporation which had its residence
for legal purposes in Baguio but whose President was found in Manila and there served
with summons. This Court there said: "Section 377 provides that actions of this character
'may be brought in any province where the defendant or any necessary party defendant
may reside or be found, or in any province where the plaintiff or one of the plaintiffs resides,
at the election of the plaintiff.' The plaintiff in this action has no residence in the Philippine
Islands. Only one of the parties to the action resides here. There can be, therefore, no
election by plaintiff as to the place of trial. It must be in the province where the defendant
resides. The defendant resides, in the eye of the law, in Baguio. Was it 'found' in the city of
Manila under section 377, its president being in that city where the service of summons was
made? We think not. The word 'found' as used in section 377 has a different meaning that
belongs to it as used in section 394, which refers exclusively to the place where the
summons may be served. As we have said a summons may be legally served on a
defendant wherever he may be 'found,' i. e., wherever he may be, provided he be in the
Philippine Islands; but the venue cannot be laid wherever the defendant may be 'found.'
64

There is an element entering in section 377 which is not present in section 394, that is a
residence. Residence of the plaintiff or defendant does not affect the place where a
summons may be served; but residence is the vital thing when we deal with venue. The
venue must be laid in the province where one of the parties resides. If the plaintiff is a
nonresident the venue must be laid in the province of the defendant's residence. The venue
can be laid in the province where defendant is 'found' only when defendant has no
residence in the Philippine Islands. A defendant can not have a residence in one province
and be 'found' in another. As long as he has a residence in the Philippine Islands he can be
'found,' for the purposes of section 377, only in the province of his residence. In such case
the words 'residence' and 'found' are synonymous. If he is a nonresident then the venue
may be laid in the province where he is 'found' at the time the action is commenced or in
the province of plaintiff's residence. This applies also to a domestic corporation.
"While the service of the summons was good in either Baguio or Manila we are of
the opinion that the objection of the defendant to the place of trial was proper in both cases
and that the trial court should have held that the venue was improperly laid.".
And elaborating on the point when the case came up for reconsideration, the
Court further said:.
"The moving party contends that the venue was properly laid under section 377
in that it was laid in the province where the defendant was found at the time summons was
served on its president, he having been found and served with process in the city of Manila.
For the purposes of the discussion we assumed in the main case, as the plaintiff claimed,
that the defendant was in fact and in law found in the city of Manila; and proceeded to
decide the cause upon the theory that, even if the defendant were found in the city of
Manila, that did not justify, under the facts of the case, the laying of the venue in the city of
Manila.
"We do not believe that the moving party's objection that our construction
deprives the word 'found' of all significance and results, in effect, in eliminating it from the
statute, is sound. We do not deprive it of all significance and effect and do not eliminate it
from the statute. We give it the only effect which can be given it and still accord with the
other provisions of the section which give defendant the right to have the venue laid in the
province of his residence, the effect which it was intended by the legislature they should
have. We held that the word 'found' was applicable in certain cases, and in such cases
gave it full significance and effect. We declared that it was applicable and effective in cases
where the defendant is a nonresident. In such cases the venue may be laid wherever he
may be found in the Philippine Islands at the time of the service of the process, but we also
held that where he is a resident of the Philippine Islands the word 'found' has no application
and the venue must be laid in the province where he resides.
"The construction which the moving party asks us to place on that provision of
section 377 above quoted would result in the destruction of the privilege conferred by the
section upon a resident defendant which requires the venue to be laid in the province
where he resides. This is clear; for, if the venue may be laid in any province where the
defendant, although a resident of some other province, may be found at the time process is
served on him, then the provision that it shall be laid in the province where he resides is of
no value to him. If a defendant residing in the province of Rizal is helpless when the venue
is laid in the province of Mindoro in an action in which the plaintiff is a nonresident or
resides in Manila, what is the value of a residence in Rizal? If a defendant residing in Jolo is
without remedy when a nonresident plaintiff or a plaintiff residing in Jolo lays the venue in

Bontoc because the defendant happens to be found there, of what significance is a

residence in Jolo? The phrases 'where the defendant *** may reside' and 'or be found' must
be construed together and in such manner that both may be given effect. The construction
asked for by the moving party would deprive the phrase 'where the defendant *** may
reside' of all significance, as the plaintiff could always elect to lay the venue in the province
where the defendant was 'found' and not where he resided; whereas the construction which
we place upon these phrases permits both to have effect. We declare that, when the
defendant is a resident of the Philippine Islands, the venue must be laid either in the
province where the plaintiff resides or in the province where the defendant resides, and in
no other province. Where, however, the defendant is a nonresident the venue may be laid
wherever defendant may be found in the Philippine Islands. This construction gives both
phrases their proper and legitimate effect without doing violence to the spirit which informs
all laws relating to venue and which insists always that the action shall be tried in the place
where the greatest convenience of the parties will be served. Ordinarily a defendant's
witnesses are found where the defendant resides; and plaintiffs witnesses are generally
found where he resides or where the defendant resides. It is, therefore, generally desirable
to have the action tried where one of the parties resides. 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, ***" (67 C. J., pp. 123-124.) A man
can have but one domicile at a time (Alcantara vs. Secretary of Interior, 61 Phil., 459), and
residence is synonymous with domicile under section 1 of Rule 5 (Moran's Comments,
supra, p. 104).
In view of the foregoing, we hold that the objection to the venue was correctly
sustained by the lower court.
As to the second question, the complaint shows that the action is for damages
resulting from mismanagement of the affairs and assets of the corporation by its principal
officer, it being alleged that defendant's maladministration has brought about the ruin of the
corporation and the consequent loss of value of its stocks. The injury complained of is thus
primarily to the corporation, so that the suit for the damages claimed should be by the
corporation rather than by the stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977980). The stockholders may not directly claim those damages for themselves for that would
result in the appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section 16 of the Corporation Law, which
provides:.
"No corporation shall make or declare any stock or bond dividend or any dividend
whatsoever except from the surplus profits arising from its business, or divide or distribute
its capital stock or property other than actual profits among its members or stockholders
until after the payment of its debts and the termination of its existence by limitation or lawful
dissolution.".
But while it is to the corporation that the action should pertain in cases of this
nature, however, if the officers of the corporation, who are the ones called upon to protect
their rights, refuse to sue, or where a demand upon them to file the necessary suit would be
futile because they are the very ones to be sued or because they hold the controlling
65

interest in the corporation, then in that case any one of the stockholders is allowed to bring
suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is the
corporation itself and not the plaintiff stockholder that is the real party in interest, so that
such damages as may be recovered shall pertain to the corporation (Pascual vs. Del Saz
Orosco, 19 Phil. 82, 85). In other words, it is a derivative suit brought by a stockholder as
the nominal party plaintiff for the benefit of the corporation, which is the real party in interest
(13 Fletcher, Cyclopedia of Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the action not for the
benefit of the corporation but for their own benefit, since they ask that the defendant make
good the losses occasioned by his mismanagement and pay to them the value of their
respective participation in the corporate assets on the basis of their respective holdings.
Clearly, this cannot be done until all corporate debts, if there be any, are paid and the
existence of the corporation terminated by the limitation of its charter or by lawful
dissolution in view of the provisions of section 16 of the Corporation Law.It results that
plaintiffs' complaint shows no cause of action in their favor so that the lower court did not
err in dismissing the complaint on that ground.
While plaintiffs ask for a remedy to which they are not entitled unless the
requirement of section 16 of the Corporation Law be first complied with, we note that the
action stated in their complaint is susceptible of being converted into a derivative suit for the
benefit of the corporation by a mere change in the prayer. Such amendment, however, is
not possible now, since the complaint has been filed in the wrong court, so that the same
has to be dismissed.
The order appealed from is therefore affirmed, but without prejudice to the filing
of the proper action in which the venue shall be laid in the proper province. Appellants shall
pay costs. So ordered.

to be sued or hold the control of the corporation, an individual stockholder is permitted to institute
a derivative or representative suit on behalf of the corporation wherein he holds stock, in order to
protect or vindicate corporate rights. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest.
2. ID.; MOTION TO DISMISS; ON THE GROUND OF FAILURE TO STATE CAUSE OF
ACTIONS; EFFECT. Facts pleaded in the complaint are deemed accepted by the defendants
who file a motion to dismiss the complaint on the ground that the came does not state a cause of
action. And the test of sufficiency of the facts alleged is whether or not the Court could render a
valid judgment as prayed for, accepting as true the facts set forth therein. If the Court should
doubt the truth of the facts averred, it must not dismiss the complaint but require an answer and
proceed to trial on the merits.
3. ID.; CORPORATE DERIVATIVE SUITS; VALID CAUSE OF ACTION. The complaint
expressly pleads that the appointments of Cuaderno as technical consultant, and Bienvenido
Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo
Roman from criminal prosecution and not to further the interests of the Bank, and avers that both
men are Roman's alter ego. There is no denying that the facts thus pleaded in the complaint
constitute a cause of action for the bank. The Bank, therefore, could sue to nullify the
appointments, enjoin disbursements of its funds to pay them, and recover those paid for the
purpose as prayed for in the complaint (Angeles vs. Santos, 64 Phil., 697).
4. ID.; ID.; CORPORATIONS SHOULD BE MADE PARTY IN THE SUIT. In corporate
derivative suits it is not important whether the corporation is made party plaintiff or party
defendant as practiced either in England or in the United States respectively, because the trial
court has the power to direct amendments of the pleadings, by adding or dropping parties, as
may be required in the interest of justice (Revised Rules of Court, Rule 3, Sec 11). It is enough
that the corporation is made a party to the suit so that judgment will be binding upon it to bar
future relitigation of issues.

Moran, C. J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ., concur.
5. ID.; ID.; MISJOINDER OF PARTIES; MOTION TO DISMISS. Misjoinder of parties is not a
ground to dismiss an action.

Order affirmed.

DECISION

||| (Evangelista v. Santos, G.R. No. L-1721, [May 19, 1950], 86 PHIL 387-395)
EN BANC
[G.R. No. L-22399. March 30, 1967.]
REPUBLIC BANK, represented in this action by DAMASO P. PEREZ,
etc., plaintiff-appellant, vs. MIGUEL CUADERNO, BIENVENIDO DIZON,
PABLO ROMAN, THE BOARD OF DIRECTORS OF THE REPUBLIC
BANK and THE MONETARY BOARD OF THE CENTRAL BANK OF
THE PHILIPPINES, defendants-appellees.

REYES, J.B.L., J p:
Direct appeal from an order of the Court of First Instance of Manila, in its civil
case No. 53936, dismissing the petitioner's complaint on the ground of failure to state a
cause of action.
In the Court below, Damaso Perez, a stockholder of the Republic Bank, a
Philippine banking corporation domiciled in Manila, instituted a derivative suit for and in
behalf of said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of
the Republic Bank, and the Monetary Board of the Central Bank of the Philippines.
Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following:

SYLLABUS
1. PLEADING AND PRACTICE; CORPORATIONS; STOCKHOLDERS; RIGHT OF ACTION;
DERIVATIVE SUITS. Whenever the officials of the corporation refuse to sue, or are the ones

"6. That the relator herein filed the present derivative suit without any
further demand on the Board of Directors of the Republic Bank for the
reason that such formal demand to institute the present complaint would
66

be a futile formality since the members of the board are personally

chosen by defendant Pablo Roman himself."
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the
Monetary Board of the Central Bank against certain frauds allegedly committed by
defendant Pablo Roman, in that being chairman of the Board of Directors of the Republic
Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of his
fiduciary duty and taking advantage of his said positions and in connivance with other
officials of the Republic Bank", Roman had fraudulently granted or caused to be granted
loans to fictitious and non-existing persons and to their close friends, relative and/or
employees, who were in reality their dummies, on the basis of fictitious and inflated
appraised values of real estate properties; that said loans amounted to almost 4 million
pesos; that acting upon the complaint, Miguel Cuaderno (then Governor of the Central
Bank) and the Monetary Board ordered an investigation, which was carried out by Bank
Examiners; that they and the Superintendent of Banks of the Central Bank reported that
certain mortgage loan amounting to P2,303,400.00 were granted in violation of sections 77,
78 and 83 of the General Banking Act; that acting on said reports, the Monetary Board, of
which defendant Cuaderno was a member, ordered a new Board of Directors of the
Republic Bank to be elected, which was done, and subsequently approved by the Monetary
Board; that on January 5, 1960, the latter accepted the offer of Pablo Roman to put up
adequate security for the questioned loans made by the Republic Bank, and such security
was made a condition for the resumption of the Bank's normal operations; that
subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to special
prosecutors of the Department of Justice on July 22, 1960, the banking frauds and
violations of the Banking Act, reported by the Superintendent of Banks, for investigation
and prosecution, but no information was filed up to the time of the retirement of Cuaderno in
1961; that other similar frauds were subsequently discovered; that to neutralize the
impending action against him, Pablo Roman engaged Miguel Cuaderno as technical
consultant at a compensation of P12,500.00 per month, and selected Bienvenido Dizon as
chairman of the Board of Directors of the Republic Bank; that the Board of Directors
composed of individuals personally selected and chosen by Roman, connived and
confederated in approving the appointment and selection of Cuaderno and Dizon; that such
action was motivated by bad faith and without intention to protect the interest of the
Republic Bank but were prompted to protect Pablo Roman from criminal prosecution; that
the appointment of Cuaderno and his acceptance of the position of technical consultant are
immoral, anomalous and illegal, and his compensation highly unconscionable, because
court actions involving the actuations of Cuaderno as Governor and Member or Chairman
of the Monetary Board are still pending in court; that as member of the Monetary Board
from 1961 to the end of 1962, Bienvenido Dizon exercised supervision over the Republic
Bank; that the selection of Dizon as chairman of the Board of the Republic Bank after he
was forced to resign from the presidency of the Philippine National Bank and from
membership of the Monetary Board and within one year thereafter is in violation of section
3, subparagraph (d) of the Anti-Graft and Corrupt Practices Act; that both Cuaderno and
Dizon were alter egos of Pablo Roman; that the Monetary Board was about to approve the
appointment of Cuaderno and Dizon and would do so unless enjoined.
The complaint, therefore, prayed for a writ of preliminary injunction against the
Monetary Board to prevent its confirmation of the appointments of Dizon and Cuaderno;
against the Board of Directors of the Republic Bank from recognizing Cuaderno as
technical consultant and Dizon as Chairman of the Board; and against Pablo Roman from
appointing or selecting officers or directors of the Republic Bank, and against the
recognition of any such appointees until final determination of the action. And concluded by
praying that after due hearing, judgment be rendered,

a) making the writ of injunction permanent;

b) declaring the appointment of defendant Miguel Cuaderno as technical
consultant with monthly compensation of P12,500.00 unconscionable,
immoral, illegal, and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman of
the Board of Directors of the Republic Bank violative of Section 3, subparagraph (d) of Republic Act No. 5019, otherwise known as the AntiGraft and Corrupt Practices Act, and therefore, illegal and null and void;
d) declaring that defendant Pablo Roman, in view of his criminal liability
for the fraudulent real estate mortgage loans in the Republic Bank
amounting to P4 million, has no right to select or to be allowed to select
person or persons who are his alter egos to manage the Republic Bank,
and enjoining the defendant Board of Directors of the Republic Bank from
recognizing any officers or directors appointed or selected by defendant
Pablo Roman;
e) ordering defendant Miguel Cuaderno and Bienvenido Dizon to return to
the Republic Bank all amounts they may have receive either in the form
of compensation, remuneration or emolument, with an interest thereon at
the rate of 6%; or to order defendant Pablo Roman to refund the amounts
paid to said defendant Miguel Cuaderno and defendant Bienvenido
Dizon, end to pay such reasonable damages to the plaintiff Republic
Bank;
f) ordering all the defendants to pay the sum of P25,000.00 as attorney's
fees, including all expenses of litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and affirmative
defenses; but the other defendants filed separate motions to dismiss on practically the
same grounds; no valid cause of action against the individual movants; lack of legal
capacity of plaintiff- relator to sue; and non-exhaustion of intra-corporate remedies. These
motions were duly opposed by plaintiff Damaso Perez
On October 24, 1963, the court, "taking into consideration the grounds alleged in
the motions to dismiss and the opposition for the issuance of a writ of preliminary injunction
and the affirmative defenses filed by the defendants and the arguments in support thereof",
and "that there are already eight cases pending in the different branches of this court
between practically the same parties", denied the petition for a writ of preliminary injunction
and dismissed the case. The court in effect suggested that the matter at issue in the case
may be presented in any of the pending eight cases by means of amended and
supplemental pleadings.
Plaintiff Damaso Perez thereupon appealed to this Court.
The issue in this appeal, then, is whether or not the Court below erred in
dismissing the complaint. In this connection, it should be remembered that the defenses of
the Monetary Board of the Central Bank, being interposed in an answer and not in a motion
67

to dismiss, are not here at issue. Our sole concern is with the motions to dismiss of the
other defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the Republic
Bank.
They mainly controvert the right of plaintiff to question the appointment and
selection of defendants Cuaderno and Dizon, which they contend to be the result of
corporate acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct,
but Philippine jurisprudence is settled that an individual stockholder is permitted to institute
a derivative or representative suit on behalf of the corporation wherein he holds stock, in
order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the
real party in interest (Pascual vs.Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking
Corp., 45 Phil. 512; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388.)
Plaintiff-appellant's action here is precisely in conformity with these principles. He is neither
alleging nor vindicating his own individual interest or prejudice, but the interest of the
Republic Bank and the damage caused to it. The action he has brought is a derivative one,
expressly manifested to be for and in behalf of the Republic Bank, because it was futile to
demand action by the corporation, since its Directors were nominees and creatures of
defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds
against the Bank that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as technical
consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic Bank,
were made only to shield Pablo Roman from criminal prosecution and not to further the
interests of the Bank, and avers that both men are Roman's alter egos. There is no denying
that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the
questioned appointments were made solely to protect Roman from criminal prosecution, by
a Board composed by Roman's creatures and nominees, then the moneys disbursed in
favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds,
since the Republic Bank would have no interest in shielding Roman, and the directors in
approving the appointments would be committing a breach of trust; the Bank, therefore,
could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and
recover those paid out for the purpose, as prayed for in the complaint in this case (Angeles
vs. Santos, supra.).
Facts pleaded in the complaint are to be deemed accepted by the defendants
who file a motion to dismiss the complaint for failure to state a cause of action. This is the
cardinal principle in the matter. And, it has been ruled that the test of sufficiency of the facts
alleged is whether or not the Court could render a valid judgment as prayed for, accepting
as true the exclusive facts set forth in the complaint. 1 So rigid is the norm prescribed that if
the Court should doubt the truth of the facts averred, it must not dismiss the complaint but
require an answer and proceed to trial on the merits. 2
Defendants urge that the action is improper because the plaintiff was not
authorized by the corporation to bring suit in its behalf. Any such authority could not be
expected as the suit is aimed to nullify the action taken by the manager and the board of
directors of the Republic Bank; and any demand for intra-corporate remedy would be futile,
as expressly pleaded in the complaint. These circumstances permit a stockholder to bring a
derivative suit (Evangelista vs. Santos, 86 Phil, 394). That no other stockholder has chosen
to make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's
holdings is no ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any

rate, it is yet too early in the proceedings for the absence of other stockholders to be of any
significance, no issues having been joined.
There remains the procedural question whether the corporation itself must be
made party defendant. The English practice is to make the corporation a party plaintiff,
while in the United States, the usage leans in favor of its being joined as party defendant
(see Editorial Note, 51 LRC [NS] p. 123). Objections can be raised against either method.
Absence of corporate authority would seem to militate against making the corporation a
party plaintiff, while joining it as defendant places the entity in the awkward position of
resisting an action instituted for its benefit. What is important is that the corporation should
be made a party, in order to make the Court's judgment binding upon it, and thus bar future
relitigation of the issues. On what side the corporation appears loses importance when it is
considered that it lay within the power of the trial court to direct the making of such
amendments of the pleadings, by adding or dropping parties, as may be required in the
interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss
on action. (Ibid.)
We see no reason to support the contention of defendant Bienvenido Dizon that
the action of plaintiff amounts to a quo warranto proceeding. Plaintiff Perez is not claiming
title to Dizon's position as head of the Republic Bank's board of directors. The suit is aimed
at preventing the waste or diversion of corporate funds in paying officers appointed solely to
protect Pablo Roman from criminal prosecution, and not to carry on the corporation's
banking business. Whether the complaint's allegations to such effect are true or not must
be determined after due hearing.
Independently of the grounds advanced by the defendants in their motions to
dismiss, the Court a quo gave as a further pretext for the dismissal of the action the
pendency of eight other lawsuits between practically the same parties, reasoning that the
question at issue in the present case could be incorporated in any one of the other actions
by amended or supplemental pleading. We fail to see that this justifies the dismissal of the
case under appeal. In the first place, there is no pretense that the cause of action here was
already included in any of the other pending cases. As a matter of fact, dismissal of the
present action was not sought on the ground of pendency of another action between the
same parties. Secondly, the amendment of a complaint after a responsive pleading is filed
would rest upon the discretion of the party and the Court. Hence, this case cannot be
dismissed simply because of the possibility that the cause of action here can be
incorporated or introduced in any of those other pending cases.
In view, of the foregoing, the order dismissing the complaint is reversed and set
aside. The case is remanded to the court of origin with instructions to overrule the motions
to dismiss and require the defendants to answer the complaint. Thereafter, the case shall
be tried and decided on its merits. Costs against defendants-appellees.
So ordered.
FIRST DIVISION
[G.R. No. 85339. August 11, 1989.]

68

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS

ANGELES,petitioners, vs. ERNEST KHAN, ANDRES SORIANO III, BENIGNO
TODA, JR. ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI,
JR., EDUARDO SORIANO, RALPH KARR And RAMON DEL ROSARIO,
JR., respondents.
Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for petitioner.
Roco & Bunag Law Offices for respondent Ernest Kahn.

NARVASA, J p:
On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the
San Miguel Corporation were acquired 1 by fourteen (14) other corporations, 2 and were
placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the
latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with
power to delegate the trusteeship in writing to Andres Soriano III. 3 Shortly after the
Revolution of February, 1986, Cojuangro left the country amid "persistent reports" that
"huge and unusual cash disbursements from the funds of SMC" had been irregularly made,
and the resources of the firm extensively used in support of the candidacy of Ferdinand
Marcos during the snap elections in February, 1986. 4

Siguion Reyna, Montecillo and Ongsiako for other respondents.

SYLLABUS
1. REMEDIAL LAW; SANDIGANBAYAN; WITHOUT JURISDICTION OVER ISSUE OF
VALIDITY OF ASSUMPTION BY THE CORPORATION UNDER SEQUESTRATION OF
ANOTHER CORPORATION'S INDEBTEDNESS. De los Angeles' complaint is confined to the
issue of the validity of the assumption by the corporation of the indebtedness of Neptunia Co.,
Ltd., allegedly for the benefit of certain of its officers and stockholders. De los Angeles' dispute,
as stockholder and director of SMC, with other SMC directors, an intra-corporate one, to be sure,
is of no concern to the Sandiganbayan, having no relevance whatever to the ownership of the
sequestered stock. The contention, therefore, that in view of this Court's ruling as regards the
sequestered SMC stock above adverted to, the SEC has no jurisdiction over the de los Angeles
complaint, cannot be sustained and must be rejected. The dispute concerns 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.
2. MERCANTILE LAW; CORPORATION CODE; CORPORATIONS; DERIVATIVE SUIT;
REQUISITES. The requisites for a derivative suit are as follows: a) the party bringing suit
should be a shareholder as of the time of the act or transaction complained of, the number of his
shares not being material; b) he has tried to exhaust intra-corporate remedies, i.e., 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 c) the cause of action actually devolves on the corporation, the wrongdoing or
harm having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.
3. ID.; ID.; ID.; ID.; NUMBER OF SHARES, IMMATERIAL. The bona fide ownership by a
stockholder of stock in his own right suffices to invest him with standing to bring a derivative
action for the benefit of the corporation. The number of his shares is immaterial since he is not
suing in his own behalf, or for the protection or vindication of his own particular right, or the
redress of a wrong committed against him, individually, but in behalf and for the benefit of the
corporation.
4. ID.; ID.; ID.; ID.; OFFICIAL STANDING IN THE CORPORATION, NOT RELEVANT. It was
not necessary for de los Angeles to be a director in order to bring a derivative action; all he had
to be was a stockholder, and that he was owning in his own right 20 shares of stock, a fact
not disputed by the respondents.

On March 26, 1986, an "Agreement" was executed between Andres Soriano III,
as "Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for himself
and as agent of several persons," of the 33,133,266 shares of stock at the price of P100.00
per share, or "an aggregate sum of Three Billion Three Hundred Thirteen Million Three
Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00) Pesos payable in
specified installments 5 The Agreement revoked the voting trust above mentioned, and
expressed the desire of the 14 corporations to sell the shares of stock "to pay certain
outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order to
institutionalize and stabilize the management of the COMPANY in . . . (himself) and the
professional officer corps mandated by the COMPANY's By-laws, and to direct the
COMPANY towards giving the highest priority to its principal products and extensive
support to agriculture program of the Government . . . 7 and it was Neptunia which on or
about April 1, 1986 had made the down payment of P500,000,000.00, "from the proceeds
of certain loans." 8
At this point the 33,133,266 SMC shares were sequestered by the Presidential
Commission on Good Government (PCGG), on the ground that the stock belonged to
Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President
Marcos, and the sale thereof was "in direct contravention of . . . Executive Orders
Numbered 1 and 2 (. . . dated February 28, 1986 and March 12, 1986, respectively) which
prohibit . . . the transfer, conveyance, encumbrance, concealment or liquidation of assets
and properties acquired by former President Ferdinand Marcos and/or his wife, Mrs. Imelda
Romualdez Marcos, their close relatives, subordinates, business associates." 9 "The
sequestration was subsequently lifted, and the sale allowed to proceed, on representations
by San Miguel Corporation . . . that the shares were 'owned by 1.3 million coconut farmers;'
the seller corporations were 'fully owned' by said farmers and Cojuangco owned only 2
shares in one of the companies, etc. However, the sequestration was soon re-imposed by
Order of the PCGG dated May 19, 1986 . . . The same order forbade the SMC corporate
Secretary to register any transfer or encumbrance of any of the stock without the PCGG's
prior written authority." 10
San Miguel promptly suspended payment of the other installments of the price to
the fourteen (14) seller corporations. The latter as promptly sued for rescission and
damages. 11
On June 4, 1986, the PCGG directed San Miguel Corporation "to issue qualifying
shares" in the corporation to seven (7) individuals, including Eduardo de los Angeles, "from
the sequestered shares registered as street certificates under the control of AnscorHagedorn Securities, Inc.," to "be held in trust by . . . (said seven [7] persons) for the benefit

DECISION
69

of Anscor-Hagedorn Securities, Inc. and/or whoever shall finally be determined to be the

owner/owners of said shares." 12
In December, 1986, the SMC Board, by Resolution No. 86-12-2, "decided to
assume the loans incurred by Neptunia for the down payment (P500M) on the 33,133,266
shares." The Board opined that there was "nothing illegal in this assumption (of liability for
the loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was
no additional expense or exposure for the SMC Group, and there were tax and other
benefits which would redound to the SMC group of companies." 13
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los
Angeles, one of the PCCG representatives in the SMC board, impugned said Resolution
No. 86-12-2, denying that it was ever adopted, and stating that what in truth was agreed
upon at the meeting of December 4, 1986 was merely a "further study" by Director Ramon
del Rosario of a plan presented by him for the assumption of the loan. De los Angeles also
pointed out certain "deleterious effects" thereof. He was however overruled by private
respondents. 14 When his efforts to obtain relief within the corporation and later the PCGG
proved futile, he repaired to the Securities and Exchange Commission (SEC).
He filed with the SEC in April, 1987, what he describes as a derivative suit in
behalf of San Miguel Corporation, against ten (10) of the fifteen-member Board of Directors
who had "either voted to approve and/or refused to reconsider and revoke Board
Resolution No. 86-12-2." 15 His Amended Petition in the SEC recited substantially the
foregoing antecedents and the following additional facts, to wit:
a) On April, 1 1986 Soriano, Kahn and Roxas, as directors of Neptunia
Corporation, Ltd., had met and passed a resolution authorizing the company to borrow up
to US $26,500,000.00 from the Hongkong & Shanghai Banking Corporation, Hongkong "to
enable the Soriano family to initiate steps and sign an agreement for the purchase of some
33,133,266 shares of San Miguel Corporation." 16

among other things: (1) agreeing to pay a higher price for the shares than was originally
covenanted in order to prevent a rescission of the purchase agreement by the sellers; (2)
urging UCPB to accept San Miguel Corporation and Neptunia as buyers of the shares,
thereby committing the former to the purchase of its own shares for at least 25% higher
than the price at which they were fairly traded in the stock exchanges, and shifting to said
corporations the personal obligations of Soriano III under the purchase agreement; and (3)
causing to be applied to the part payment of P1,800,000.00 on said purchase, various
assets and receivable of San Miguel Corporation.
The complaint closed with a prayer for injunctions against the execution or
consummation of any agreement causing San Miguel Corporation to purchase the shares
in question or entailing the use of its corporate funds or assets for said purchase, and
against Andrea Soriano III from further using or disposing of the funds or assets of the
corporation for his obligations; for the nullification of the SMC Board's resolution of April 2,
1987 making San Miguel Corporation a party to the purchase agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to
wit:
1. De los Angeles has no legal capacity to sue because
a) having been merely "imposed" by the PCCG as a
director on San Miguel, he has no standing to bring a minority
derivative suit;
b) he personally holds only 20 shares and hence
cannot fairly and adequately represent the minority
stockholders of the corporation;
c) he has not come to court with clean hands; and

b) The loan of $26,500,000.00 was obtained on the same day, the corresponding
loan agreement having been signed for Neptunia by Ralph Karr and Carl Ottiger. At the
latter's request, the proceeds of the loan were deposited in different banks 17 "for the
account of "Eduardo J. Soriano."
c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the
stockholders of San Miguel Corporation, 18 inter alia soliciting their proxies and announcing
that "the Soriano family, friends and affiliates acquired a considerable block of San Miguel
Corporation shares only a few days ago . . ., the transaction . . . (having been) made
through the facilities of the Manila Stock Exchange, and 33,133,266 shares . . . (having
thereby been) purchased for the aggregate price of P3,313,326,600.00." The letters also
stated that the purchase was "an exercise of the Sorianos' right to buy back the same
number of shares purchased in 1983 by the . . . (14 seller corporations)."
d) In implementing the assumption of the Neptunia loan and the purchase
agreement for which said loan was obtained, which assumption constituted an improper
use of corporate funds to pay personal obligations of Andrea Soriano III, enabling him; to
purchase stock of the corporation using funds of the corporation itself, the respondents,
through various subsequent machinations and manipulations, for ulterior motives and in
breach of fiduciary duty, compound the damages caused San Miguel Corporation by,

2. The Securities & Exchange Commission has no jurisdiction over the

controversy because the matters involved are exclusively within the
business judgment of the Board of Directors. 19
Kahn's motion to dismiss was subsequently adopted by his correspondents. 20
The motion to dismiss was denied by SEC Hearing Officer Josefina L. Pasay
Paz, by order dated September 4, 1987. 21 In her view
1) the fact that de los Angeles was a PCGG nominee was irrelevant because in
law, ownership of even one share only, sufficed to qualify a person to bring a derivative
suit;
2) it is indisputable that the action had been brought by de los Angeles for the
benefit of the corporation and all the other stockholders;

70

3) he was a stockholder at the time of the commission of the acts complained of,
the number of shares owned by him being to repeat, immaterial;
4) there is no merit in the assertion that he had come to Court with unclean
hands, it not having been shown that he participated in the act complained of or ratified the
same; and
5) where business judgment transgresses the law, the Securities and Exchange
Commission always has competence to inquire there into.
Kahn filed a petition for certiorari and prohibition with the Court of Appeals,
seeking the annulment of this adverse resolution of the SEC Hearing Officer and her
perpetual inhibition from proceeding with SEC Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two. The
majority22 ruled that de los Angeles had no legal capacity to institute the derivative suit, a
conclusion founded on the following propositions:
1) a party "who files a derivative suit should adequately represent the interests of
the minority stockholders;" since "De los Angeles holds 20 shares of stock out of
121,645,860 or 0.00001644% (appearing to be undisputed), (he) cannot even be remotely
said to adequately represent the interests of the minority stockholders, (e)specially so when
. . . de los Angeles was put by the PCGG to vote the majority stock," a situation generating
"a genuine conflict of interest;"
2) de los Angeles has not met this conflict-of-interest argument, i.e., that his
position as PCGG-nominated director is inconsistent with his assumed role of
representative of minority stockholders; not having been elected by the minority, his voting
would expectedly consider the interest of the entity which placed him in the board of
directors;
3) Baseco v. PCGG, May 27, 1987, 23 has laid down the principle that the (a)
PCGG cannot exercise acts of dominion over sequestered property, (b) it has only powers
of administration, and (c) its voting of sequestered stock must be done only pursuant to its
power of administration; and
4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought
for the benefit of the corporation.
The dissenting Justices, 24 on the other hand, were of the opinion that the suit
had been properly brought by de los Angeles because
1) the number of shares owned by him was immaterial, he being a stockholder in
his own right;
2) he had not voted in favor of the resolution authorizing the purchase of the
shares; and

3) even if PCGG was not the owner of the sequestered shares, it had the right to
seek the protection of the interest of the corporation, it having been held that even an
unregistered shareholder or an equitable owner of shares and pledges of shares may be
deemed a shareholder for purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the judgment
of the Court of Appeals, imputing to the latter the following errors:
1) having granted the writ of certiorari despite the fact that Kahn had not first
resorted to the plain remedy available to him, i.e., appeal to the SEC en banc and despite
the fact that no question of jurisdiction was involved;
2) having ruled on Kahn's petition on the basis merely of his factual allegations,
although he (de los Angeles) had disputed them and there had been no trial in the SEC;
and
3) having held that he (de los Angeles) could not file derivative suit as
stockholder and/or director of the San Miguel Corporation.
For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the ownership
of the 33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos.
74910, 75075, 75094, 76397, 79459 and 79520, promulgated on August 10, 1988. 25
2) de los Angeles was beholden to the controlling stockholder in the corporation
(PCGG), which had "imposed" him on the corporation; since the PCGG had a clear conflict
of interest with the minority, de los Angeles, as director of the former, had no legal capacity
to sue on behalf of the latter;
3) even assuming absence of conflict of interest, de los Angeles does not fairly
and adequately represent the interest of the minority stockholders;
4) the respondents had properly applied for certiorari with the Court of Appeals
because
a) that Court had, by law, exclusive appellate jurisdiction over officers and
agencies exercising quasi-judicial functions, and hence had competence
to issue the writ ofcertiorari;
b) the principle of exhaustion of administrative remedies does not apply
since the issue involved is one of law;
c) said respondents had no plain, speedy and adequate remedy within
the SEC;

71

d) the Order of the SEC Investigating Officer denying the motion to

dismiss was issued without or in excess of jurisdiction, hence was
correctly nullified by the Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for
reconsideration by respondents in the SEC case; in any event, such a
motion was unnecessary in the premises.
De los Angeles' Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a derivative suit, viz:
a) the party bringing suit should be a shareholder as of the time of the act
or transaction complained of;
b) he has exhausted intra-corporate remedies, i.e., 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
c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been caused to the corporation and not to the
particular stockholder bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having
acquired those shares as early as 1977, (2) he had sought without success to have the
board of directors remedy the wrong, and (3) that wrong was in truth a wrong against the
stockholders of the corporation, generally, and not against him individually and it was the
corporation, and not he, particularly, that would be entitled to the appropriate relief the
propriety of his suit cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings in the
Court of Appeals and hence could not claim exclusion from the scope of the doctrine of
exhaustion of remedies; moreover, Rule 65, invoked by him, bars a resort
to certiorari where a plain, speedy and adequate remedy was available to him, as it had
been available to him in this case, to wit: a motion for reconsideration before the SEC en
banc and, contrary to respondents' claim, de los Angeles had in fact asserted these
propositions before the Appellate Tribunal; and
3) the respondents had not raised the issue of jurisdiction before the Court of
Appeals; indeed, they admit in their Comment that
"issue has not yet been resolved by the SEC," be this as it may, the
derivative suit does not fall within the BASECO doctrine since it does not
involve any question of ownership of the 33,133,266 sequestered SMC
shares but rather, the validity of the resolution of the board of directors for
the assumption by the corporation, for the benefits of certain of its officers
and stockholders, of liability for loans contracted by another corporation,
which is an intra-corporate dispute within the exclusive jurisdiction of the
SEC.

1. De los Angeles is not opposed to the asserted position of the PCGG that the
sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies and/or
cronies. His consent to sit in the board as nominee of PCGG unquestionably indicates his
advocacy of the PCGG position. He does not here seek, and his complaint in the SEC does
not pray for, the annulment of the purchase by SMC of the stock in question, or even the
subsequent purchase of the same stock by others 26 which proposition was challenged
by (1) one Evio, in SEC Case No. 3000; (2) by the 14 corporations which sold the stock to
SMC, in Civil Case No. 13865 of the Manila RTC, said cases having later become subject
of G.R. No. 74910 of this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of
this Court; and (4) by Eduardo Cojuangco and others in Civil Case No. 16371 of the RTC,
Makati, [on the theory that the sequestered stock in fact belonged to coconut planters and
oil millers], said case later having become subject of G.R. No. 79459 of this
Court. 27 Neither does de los Angeles impugn, obviously, the right of the PCGG to vote the
sequestered stock thru its nominee directors as was done by United Coconut Planters
Bank and the 14 seller corporations (in SEC Case No. 3005, later consolidated with SEC
Case No. 3000 above mentioned, these two (2) cases later having become subject of G.R.
No. 76397) as well as by one Clifton Ganay, a UCPB stockholder (in G.R. No. 75094 of this
Court). 28
The subject matter of his complaint in the SEC does not therefore fall within the
ambit of this Court's Resolution of August 10, 1988 on the cases just mentioned, to the
effect that, citing PCGG v. Pea, et al, 29 "all cases of the Commission regarding 'the
funds, moneys, assets, and properties illegally acquired or misappropriated by former
President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close relatives,
Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or
criminal, are lodged within the exclusive and original jurisdiction of, the Sandiganbayan,'
and all incidents arising from, incidental to, or related to, such cases necessarily fall
likewise under the Sandiganbayan's exclusive and original jurisdiction, subject to review on
certiorari exclusively by the Supreme Court." His complaint does not involve any property
illegally acquired or misappropriated by Marcos, et al., or "any incidents arising from,
incidental to, or related to" any case involving such property, but assets indisputably
belonging to San Miguel Corporation which were, in his (de los Angeles') view, being illicitly
committed by a majority of its board of directors to answer for loans assumed by a sister
corporation, Neptunia Co., Ltd.
De los Angeles' complaint, in fine, is confined to the issue of the validity of the
assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the
benefit of certain of its officers and stockholders, an issue evidently distinct from, and not
even remotely requiring inquiry into the matter of whether or not the 33,133,266 SMC
shares sequestered by the PCGG belong to Marcos and his cronies or dummies (on which
issue, as already pointed out, de los Angeles, in common with the PCGG, had in fact
espoused the affirmative). De los Angeles' dispute, as stockholder and director of SMC,
with other SMC directors, an intra-corporate one, to be sure, is of no concern to the
Sandiganbayan, having no relevance whatever to the ownership of the sequestered stock.
The contention, therefore, that in view of this Court's ruling as regards the sequestered
SMC stock above adverted to, the SEC has no jurisdiction over the de los Angeles
complaint, cannot be sustained and must be rejected. The dispute concerns 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
72

relations between and among stockholders, or between any or all of them and the
corporation of which they are stockholders. 30
2. The theory that de los Angeles has no personality to bring suit in behalf of the
corporation because his stockholding is minuscule, and there is a "conflict of interest"
between him and the PCGG cannot be sustained, either.
It is claimed that since de los Angeles' 20 shares (owned by him since 1977)
represent only .00001644% of the total number of outstanding shares (121,645,860), he
cannot be deemed to fairly and adequately represent the interests of the minority
stockholders. The implicit argument that stockholder, to be considered as qualified to
bring a derivative suit, must hold a substantial or significant block of stock finds no
support whatever in the law. The requisites for a derivative suit 31 are as follows:
a) the party bringing suit should be a shareholder as of the time of the act
or transaction complained of, the number of his shares not being
material; 32
b) he has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the latter
has failed or refused to heed his plea; 33 and
c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the corporation and
not to the particular stockholder bringing the suit. 34
The bona fide ownership by a stockholder of stock in his own right suffices to invest him
with standing to bring a derivative action for the benefit of the corporation. The number of
his shares is immaterial since he is not suing in his own behalf, or for the protection or
vindication of his own particular right, or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the corporation.

hence, the latter could not bring suit in the corporation's behalf. The argument is strained
and obviously of no merit. As already more than plainly indicated, it was not necessary for
de los Angeles to be a director in order to bring a derivative action; all he had to be was a
stockholder, and that he was owning in his own right 20 shares of stock, a fact not
disputed by the respondents.
Nor is there anything in the Baseco decision which can be interpreted as ruling
that sequestered stock may not under any circumstances be voted by the PCGG to elect a
director in the company in which such stock is held. On the contrary, that it held such act
permissible is evident from the context of its reference to the Presidential Memorandum of
June 26, 1986 authorizing the PCGG, "pending the outcome of proceedings to determine
the ownership of . . . sequestered shares of stock," "to vote such shares . . . at all
stockholders' meetings called for the election of directors . . . ," the only caveat being that
the stock is not to be voted simply because the power to do so exists, whether it be to oust
and replace directors or to effect substantial changes in corporate policy, programs or
practice, but only "for demonstrably weighty and defensible grounds" or "when essential to
prevent disappearance or wastage of corporate property."
The issues raised here do not peremptorily call for a determination of whether or
not in voting petitioner de los Angeles to the San Miguel Board, the PCGG kept within the
parameters announced in Baseco; and absent any showing to the contrary, consistently
with the presumption that official duty is regularly performed, it must be assumed to have
done so.
WHEREFORE, the petition is GRANTED. The appealed decision of the Court of
Appeals in CA-G.R. SP No. 12857 setting aside the order of September 4, 1987 issued
in SEC Case No. 3153 and dismissing said case is REVERSED AND SET ASIDE. The
further disposition in the appealed decision for the issuance of a writ of preliminary
injunction upon the filing and approval of a bond of P500,000.00 by respondent Ernest
Kahn (petitioner in the Appellate Court) is also SET ASIDE, and any writ of injunction
issued pursuant thereto is lifted. Costs against private respondents.
SO ORDERED.

3. Neither can the "conflict-of-interest" theory be upheld. From the conceded

premise that de los Angeles now sits in the SMC Board of Directors by the grace of the
PCGG, it does not follow that he is legally obliged to vote as the PCGG would have him do,
that he cannot legitimately take a position inconsistent with that of the PCGG, or that, not
having been elected by the minority stockholders, his vote would necessarily never
consider the latter's interests. The proposition is not only logically indefensible, non
sequitur, but also constitutes an erroneous conception of a director's role and function, it
being plainly a director's duty to vote according to his own independent judgment and his
own conscience as to what is in the best interests of the company. Moreover, 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 these shares being precisely what he invokes as
the source of his authority to bring the derivative suit.

Gancayco, Grio-Aquino and Medialdea, JJ., concur

Cruz J., no part. Related to one of the counsel.
||| (San Miguel Corp. v. Khan, G.R. No. 85339, [August 11, 1989], 257 PHIL 459-476)

4. It is also theorized, on the authority of the BASECO decision, that the PCGG
has no power to vote sequestered shares of stock as an act of dominion but only in
pursuance to its power of administration. The inference is that the PCGG's act of voting the
stock to elect de los Angeles to the SMC Board of Directors was unauthorized and void;
73

Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc.
(Winchester, Inc.), a domestic corporation engaged in the operation of a general hardware and
industrial supply and equipment business.
On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting,
Inspection of Corporate Books and Damages through Embezzlement and Falsification of
Corporate Records and Accounts 6 before the RTC of Cebu. The said Complaint was filed by
respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc., and was
docketed as SRC Case No. 022-CEB. The factual background of the Complaint was stated in
the attached Affidavit executed by respondent Joseph.

THIRD DIVISION
[G.R. No. 177549. June 18, 2009.]
ANTHONY S. YU, ROSITA G. YU and JASON G. YU, petitioners, vs.
JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD
NERWIN L. YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on
their own behalf and on behalf of] WINCHESTER INDUSTRIAL
SUPPLY, INC., respondents.
DECISION
CHICO-NAZARIO, J p:
Before Us is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court, which
seeks to reverse and set aside the Resolutions dated 18 July 2006 2 and 19 April 2007 3 of the
Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents' motion, the Court of
Appeals rendered the assailed Resolution dated 18 July 2006, reconsidering its Decision 4 dated
15 February 2006; and remanding the case to the Regional Trial Court (RTC) of Cebu City,
Branch 11, for necessary proceedings, in effect, reversing the Decision 5 dated 10 November
2004 of the RTC which dismissed respondents' Complaint in SRC Case No. 022-CEB. Herein
petitioners' Motion for Reconsideration of the Resolution dated 18 July 2006 was denied by the
appellate court in the other assailed Resolution dated 19 April 2007.
Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu
(Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan
(Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan
(Jerald) and Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.

According to respondents, 7 Winchester, Inc. was established and incorporated on 12

September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares of
stock worth P100,000.00. 8 Petitioner Anthony paid for the said shares of stock with respondent
Joseph's money, thus, making the former a mere trustee of the shares for the latter. On 14
November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in Winchester, Inc. to
respondent Joseph, as well as Yu Kay Guan, 9 Siao So Lan, and John S. Yu. 10 Petitioner
Anthony remained as trustee for respondent Joseph of the 200 shares of stock in Winchester,
Inc., still in petitioner Anthony's name. CaAIES
Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators,
excluding petitioner Anthony, their accumulated 8,500 shares in the
corporation. 11Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500
shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners
Rosita and Jason. 12
Respondents further averred that although respondent Joseph appeared as the Secretary and
Treasurer in the corporate records of Winchester, Inc., petitioners actually controlled and ran the
said corporation as if it were their own family business. Petitioner Rosita handled the money
market placements of the corporation to the exclusion of respondent Joseph, the designated
Treasurer of Winchester, Inc. Petitioners were also misappropriating the funds and properties of
Winchester, Inc. by understating the sales, charging their personal and family expenses to the
said corporation, and withdrawing stocks for their personal use without paying for the same.
Respondents attached to the Complaint various receipts 13 to prove the personal and family
expenses charged by petitioners to Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200
shares of stock in petitioner Anthony's name. Respondents also prayed that petitioners be
ordered to: (1) deposit the corporate books and records of Winchester, Inc. with the Branch
Clerk of Court of the RTC for respondents' inspection; (2) render an accounting of all the funds of
Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and family
expenses which petitioners charged to Winchester, Inc., as well as the properties of the
corporation which petitioners withheld without payment; and (4) pay respondents' attorney's fees
and litigation expenses. In the meantime, respondents sought the appointment of a Management
Committee and the freezing of all corporate funds by the trial court.
On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim, 14 attached
to which was petitioner Anthony's Affidavit. 15 Petitioners vehemently denied the allegation that
petitioner Anthony was a mere trustee for respondent Joseph of the 1,000 shares of stock in
Winchester, Inc. in petitioner Anthony's name. For the incorporation of Winchester, Inc.,
petitioner Anthony contributed P25,000.00 paid-up capital, representing 25% of the total par
74

value of the 1,000 shares he subscribed to, the said amount being paid out of petitioner
Anthony's personal savings and petitioners Anthony and Rosita's conjugal funds. Winchester,
Inc. was being co-managed by petitioners and respondents, and the attached receipts, allegedly
evidencing petitioners' use of corporate funds for personal and family expenses, were in fact
signed and approved by respondent Joseph.

On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on
the application for the appointment of a Management Committee, petitioners and respondents
agreed that the RTC may already render a judgment based on the pleadings. In accordance with
the agreement of the parties, the RTC issued, on even date, an Order 23 which stated: EScIAa
ORDER

By way of special and affirmative defenses, petitioners contended in their Answer with
Compulsory Counterclaim that respondents had no cause of action against them. Respondents'
Complaint was purely intended for harassment. It should be dismissed under Section 1 (j), Rule
16 16 of the Rules of Court for failure to comply with conditions precedent before its
filing. First,there was no allegation in respondents' Complaint that earnest efforts were exerted to
settle the dispute between the parties. Second, since respondents' Complaint purportedly
constituted a derivative suit, it noticeably failed to allege that respondents exerted effort to
exhaust all available remedies in the Articles of Incorporation and By-Laws of Winchester, Inc.,
as well as in the Corporation Code. And third, given that respondents' Complaint was also for
inspection of corporate books, it lacked the allegation that respondents made a previous
demand upon petitioners to inspect the corporate books but petitioners refused. Prayed for by
petitioners, in addition to the dismissal of respondents' Complaint, was payment of moral and
exemplary damages, attorney's fees, litigation expenses, and cost of suit.
On 30 October 2002, the hearing on the application for the appointment of a Management
Committee was commenced. Respondent Joseph submitted therein, as his direct testimony, the
same Affidavit that he executed, which was attached to the respondents' Complaint. On 4
November 2002, respondent Joseph was cross-examined by the counsel for petitioners.
Thereafter, the continuation of the hearing was set for 29 November 2002, in order for petitioners
to adduce evidence in support of their opposition to the application for the appointment of a
Management Committee. 17

During the pre-trial conference held on August 26, 2004, counsels of the
parties manifested, agreed and suggested that a judgment may be
rendered by the Court in this case based on the pleadings, affidavits, and
other evidences on record, or to be submitted by them, pursuant to the
provision of Rule 4, Section 4 of the Rule on Intra-Corporate
Controversies. The suggestion of counsels was approved by the Court.
Accordingly, the Court hereby orders the counsels of the parties to file
simultaneously their respective memoranda within a non-extendible
period of twenty (20) days from notice hereof. Thereafter, the instant case
will be deemed submitted for resolution.

xxx xxx xxx

Cebu City, August 26, 2004.
(signed)

During the hearing on 29 November 2002, the parties manifested before the RTC that there was
an ongoing mediation between them, and so the hearing on the appointment of a Management
Committee was reset to another date.
In amicable settlement of their dispute, the petitioners and respondents agreed to a division of
the stocks in trade, 18 the real properties, and the other assets of Winchester, Inc. In partial
implementation of the afore-mentioned amicable settlement, the stocks in trade and real
properties in the name of Winchester, Inc. were equally distributed among petitioners and
respondents. As a result, the stockholders and members of the Board of Directors of
Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution 19 dissolving the
corporation as of said date.
On 22 February 2004, respondents filed their pre-trial brief. 20
On 25 June 2004, petitioners filed a Manifestation 21 informing the RTC of the existence of their
amicable settlement with respondents. Respondents, however, made their own manifestation
before the RTC that they were repudiating said settlement, in view of the failure of the parties
thereto to divide the remaining assets of Winchester, Inc. Consequently, respondents moved to
have SRC Case No. 022-CEB set for pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief. 22

SILVESTRE A. MAAMO,
JR.
Acting Presiding Judge
Petitioners and respondents duly filed their respective Memoranda, 24 discussing the arguments
already set forth in the pleadings they had previously submitted to the RTC. Respondents,
though, attached to their Memorandum a Supplemental Affidavit 25 of respondent Joseph,
containing assertions that refuted the allegations in petitioner Anthony's Affidavit, which was
earlier submitted with petitioners' Answer with Compulsory Counterclaim. Respondents also
appended to their Memorandum additional documentary evidence, 26 consisting of original and
duplicate cash invoices and cash disbursement receipts issued by Winchester, Inc., to further
substantiate their claim that petitioners were understating sales and charging their personal
expenses to the corporate funds.
The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case
No. 022-CEB. The dispositive portion of said Decision reads:
WHEREFORE, in view of the foregoing premises and for lack of merit,
this Court hereby renders judgment in this case DISMISSING the
complaint filed by the [herein respondents].
75

The Court also hereby dismisses the [herein petitioners'] counterclaim

because it has not been indubitably shown that the filing by the
[respondents] of the latter's complaint was done in bad faith and with
malice. 27
The RTC declared that respondents failed to show that they had complied with the essential
requisites for filing a derivative suit as set forth in Rule 8 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies:
(1)He 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;
(2)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;
(3)No appraisal rights are available for the act or acts complained of; and
(4)The suit is not a nuisance or harassment suit.
As to respondents' prayer for the inspection of corporate books and records, the RTC adjudged
that they had likewise failed to comply with the requisites entitling them to the same. Section 2,
Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate Controversies requires that
the complaint for inspection of corporate books or records must state that:
(1)The case is for the enforcement of plaintiff's right of inspection of
corporate orders or records and/or to be furnished with financial
statements under Sections 74 and 75 of the Corporation Code
of the Philippines; cITCAa
(2)A demand for inspection and copying of books and records and/or to
be furnished with financial statements made by the plaintiff
upon defendant;

firm as competent and independent, and believed that the audited financial statements the said
audit firm prepared were true, faithful, and correct.
Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC
thereby dismissed the same.
Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition
for Review under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No. 00185.
On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December
2004 Decision of the RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of the case,
together with the applicable laws and jurisprudence, WE see no reason or
justification for granting the present appeal.
xxx xxx xxx
. . . [T]his Court sees that the instant petition would still fail taking into
consideration all the pleadings and evidence of the parties except the
supplemental affidavit of [herein respondent] Joseph and its
corresponding annexes appended in [respondents'] memorandum before
the Court a quo. The Court a quo have (sic) outrightly dismissed the
complaint for its failure to comply with the mandatory provisions of
the Interim Rules of Procedure for Intra-Corporate Controversies
particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule 7,
Section 2 thereof, which reads as follows:
RULE 2
Commencement of Action and Pleadings
Sec. 4.Complaint. The complaint shall state or contain:
xxx xxx xxx

(3)The refusal of defendant to grant the demands of the plaintiff and the
reasons given for such refusals, if any; and

(3)the law, rule, or regulation relied upon, violated, or sought to

be enforced; SCaITA

(4)The reasons why the refusal of defendant to grant the demands of the
plaintiff is unjustified and illegal, stating the law and
jurisprudence in support thereof.

xxx xxx xxx

The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc.
and, as such, he was supposed to be the custodian of the corporate books and records;
therefore, a court order for respondents' inspection of the same was no longer necessary. The
RTC similarly denied respondents' demand for accounting as it was clear that Winchester, Inc.
had been engaging the services of an audit firm. Respondent Joseph himself described the audit

RULE 8
Derivative Suits
Sec. 1.Derivative action. . . .
76

xxx xxx xxx

(2)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.

[respondents] failed to do. . . . The requirements laid down by

the Interim Rules of Procedure for Intra-Corporate Controversies are
mandatory which cannot be dispensed with by any stockholder of a
corporation before filing a derivative suit. 28 (Emphasis ours.) HCITDc
The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Joseph's
Supplemental Affidavit and other additional evidence, which respondents belatedly submitted
with their Memorandum to the said trial court. The appellate court ratiocinated that:

xxx xxx xxx

RULE 7
Inspection of Corporate Books and Records
Sec. 2.Complaint. In addition to the requirements in section
4, Rule 2 of these Rules, the complaint must state the following:
(1)The case is set (sic) for the enforcement of
plaintiff's right of inspection of corporate orders or
records and/or to be furnished with financial
statements under Section 74 and 75 of the
Corporation Code of the Philippines;
(2)A demand for inspection and copying of books
[and/or] to be furnished with financial statements
made by the plaintiffs upon defendant;
(3)The refusal of the defendant to grant the demands
of the plaintiff and the reasons given for such refusal,
if any; and
(4)The reasons why the refusal of defendant to grant
the demands of the plaintiff is unjustified and illegal,
stating the law and jurisprudence in support thereof.
xxx xxx xxx
A perusal of the extant record shows that [herein respondents] have not
complied with the above quoted provisions. [Respondents] should be
mindful that in filing their complaint which, as admitted by there, is a
derivative suit, should have first exhausted all available remedies under
its (sic) Articles of Incorporation, or its by-laws, or any laws or rules
governing the corporation. The contention of [respondent Joseph]
that he had indeed made several talks to (sic) his brother [herein
petitioner Anthony] to settle their differences is not tantamount to
exhaustion of remedies. What the law requires is to bring the
grievance to the Board of Directors or Stockholders for the latter to
take the opportunity to settle whatever problem in its regular
meeting or special meeting called for that purpose which

With regard to the claim of [herein respondents] that the supplemental

affidavit of [respondent] Joseph and its annexes appended to their
memorandum should have been taken into consideration by the Court a
quo to support the reliefs prayed [for] in their complaint. (sic) This Court
rules that said supplemental affidavit and its annexes
is (sic)inadmissible.
A second hard look of (sic) the extant records show that during the pretrial conference conducted on August 26, 2004, the parties through their
respective counsels had come up with an agreement that the lower court
would render judgment based on the pleadings and evidence submitted.
This agreement is in accordance with Rule 4, Sec. 4 of the Interim
Rules of Procedure for Intra-Corporate Controversies which explicitly
states:
SEC. 4.Judgment before pre-trial. If, after submission of the
pre-trial briefs, the court determines that, upon consideration
of the pleadings, the affidavits and other evidence
submitted by the parties, a judgment may be rendered, the
court may order the parties to file simultaneously their
respective memoranda within a non-extendible period of twenty
(20) days from receipt of the order. Thereafter, the court shall
render judgment, either full or otherwise, not later than ninety
(90) days from the expiration of the period to file the
memoranda.
xxx xxx xxx
Clearly, the supplemental affidavit and its appended documents which
were submitted only upon the filing of the memorandum for the
[respondents] were not submitted in the pre-trial briefs for the stipulation
of the parties during the pre-trial, hence, it cannot be accepted pursuant
to Rule 2, Sec. 8 of the same rules which reads as follows:
SEC. 8.Affidavits, documentary and other evidence.
Affidavits shall be based on personal knowledge, shall set forth
such facts as would be admissible in evidence, and shall show
affirmatively that the affiant is competent to testify on the
matters stated therein. The affidavits shall be in question and
answer form, and shall comply with the rules on admissibility of
evidence.
77

(1)The [herein respondents] have sufficiently exhausted all remedies

before filing the present action; and
Affidavits of witnesses as well as documentary and other
evidence shall be attached to the appropriate pleading;
Provided, however, that affidavits, documentary and other
evidence not so submitted may be attached to the pre-trial brief
required under these Rules. Affidavits and other evidence
not so submitted shall not be admitted in evidence, except
in the following cases:
(1)Testimony of unwilling, hostile, or adverse party witnesses.
A witness is presumed prima facie hostile if he fails or refuses
to execute an affidavit after a written request therefor;
(2)If the failure to submit the evidence is for meritorious and
compelling reasons; and
(3)Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be
submitted not later than five (5) days prior to its introduction in
evidence. DcITaC
There is no showing in the case at bench that the supplemental affidavit
and its annexes falls (sic) within one of the exceptions of the above
quoted proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil cases, "the
party making an allegation in a civil case has the burden of proving it by
preponderance of evidence". Differently stated, upon the plaintiff in [a]
civil case, the burden of proof never parts. That is, appellants must
adduce evidence that has greater weight or is more convincing
that(sic) which is offered to oppose it. In the case at bar, no one should
be blamed for the dismissal of the complaint but the [respondents]
themselves for their lackadaisical attitude in setting forth and appending
their defences belatedly. To admit them would be a denial of due process
for the opposite party which this Court cannot allow. 29
Ultimately, the Court of Appeals decreed:
WHEREFORE, judgment is hereby rendered DISMISSING the instant
petition and the assailed Decision of the Regional Trial Court (RTC), 7th
Judicial Region, Branch II, Cebu City, dated November 10, 2004,
in SRC Case No. 022-CEB is AFFIRMED in toto. Cost against the
[herein respondents]. 30
Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for
Reconsideration and Motion to Set for Oral Arguments the Motion for
Reconsideration, 31invoking the following grounds:

(2)[The] Honorable Court erred in holding that the supplemental affidavit

and its annexes is (sic) inadmissible because the rules and the
lower court expressly allowed the submission of the same in its
order dated August 26, 2004 . . . . 32
In a Resolution 33 dated 8 March 2006, the Court of Appeals granted respondents' Motion to Set
for Oral Arguments the Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution 34 setting forth the events that
transpired during the oral arguments, which took place on 30 March 2006. Counsels for the
parties manifested before the appellate court that they were submitting respondents' Motion for
Reconsideration for resolution. Justice Magpale, however, still called on the parties to talk about
the possible settlement of the case considering their familial relationship. Independent of the
resolution of respondents' Motion for Reconsideration, the parties were agreeable to pursue a
settlement for the dissolution of the corporation, which they had actually already started.
In a Resolution 35 dated 11 April 2006, the Court of Appeals ordered the parties to submit, within
10 days from notice, their intended amicable settlement, since the same would undeniably affect
the resolution of respondents' pending Motion for Reconsideration. If the said period should
lapse without the parties submitting an amicable settlement, then they were directed by the
appellate court to file within 10 days thereafter their position papers instead. DCTHaS
On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper, 36 stating
that the parties did not reach an amicable settlement. Respondents informed the appellate court
that prior to the filing with the Securities and Exchange Commission (SEC) of a petition for
dissolution of Winchester, Inc., the parties already divided the stocks in trade and the real assets
of the corporation among themselves. Respondents posited, though, that the afore-mentioned
distribution of the assets of Winchester, Inc. among the parties was null and void, as it violated
the last paragraph of Section 122 of the Corporation Code, which provides that, "[e]xcept by a
decrease of capital stock and as otherwise allowed by the Corporation Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after payment of
all its debts and liabilities". At the same time, however, respondents brought to the attention of
the Court of Appeals that the parties did eventually file with the SEC a petition for dissolution of
Winchester, Inc., which the SEC approved. 37
Respondents no longer discussed in their Position Paper the grounds they previously invoked in
their Motion for Reconsideration of the Court of Appeals Decision dated 15 February 2006,
affirming in toto the RTC Decision dated 10 November 2004. They instead argued that the RTC
Decision in question was null and void as it did not clearly state the facts and the law on which it
was based. Respondents sought the remand of the case to the RTC for further proceedings on
their derivative suit and completion of the dissolution of Winchester, Inc., including the
legalization of the prior partial distribution among the parties of the assets of said corporation.
Petitioners filed their Position Paper 38 on 23 May 2006, wherein they accused respondents of
attempting to incorporate extraneous matters into the latter's Motion for Reconsideration.
Petitioners pointed out that the issue before the Court of Appeals was not the dissolution and
division of assets of Winchester, Inc., thus, a remand of the case to the RTC was not necessary.
78

On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents'
Motion for Reconsideration. The Court of Appeals reasoned in this wise:
After a second look and appreciation of the facts of the case, vis- -vis
the issues raised by the [herein respondents'] motion for reconsideration
and in view of the formal dissolution of the corporation which leaves
unresolved up to the present the settlement of the properties and assets
which are now in danger of dissipation due to the unending litigation, this
Court finds the need to remand the instant case to the lower court
(commercial court) as the proper forum for the adjudication, disposition,
conveyance and distribution of said properties and assets between and
amongst its stockholders as final settlement pursuant to Sec. 122 of the
Corporation Code after payment of all its debts and liabilities as provided
for under the same proviso. This is in accord with the pronouncement of
the Supreme Court in the case of Clemente, et al. vs. Court of
Appeals, et al. where the high court ruled and which WE quote, viz.:
"the corporation continues to be a body corporate for three (3)
years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to settle
and close its affairs, culminating in the disposition and
distribution of its remaining assets. It may, during the threeyear term, appoint a trustee or a receiver who may act beyond
that period. The termination of the life of a juridical entity does
not by itself cause the extinction or diminution of the rights and
liabilities of such entity . . . nor those of its owners and
creditors. If the three-year extended life has expired without a
trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or
trustees) . . . may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation. Still in
the absence of a board of directors or trustees, those having
any pecuniary interest in the assets, including not only the
shareholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper
representation with the Securities and Exchange
Commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final
settlement of the corporate concerns."
In the absence of a trustee or board of director in the case at bar for
purposes above mentioned, the lower court under Republic Act No.
[8799] (otherwise known as the Securities and Exchange Commission) as
implemented by A.M. No. 00-8-10-SC (Transfer of Cases from the
Securities and Exchange Commission to the Regional Trial Courts) which
took effect on October 1, 2001, is the proper forum for working out the
final settlement of the corporate concern. 39
Hence, the Court of Appeals ruled:
WHEREFORE, premises considered, the motion for reconsideration
is GRANTED. The order dated February 15, 2006 is hereby SET

ASIDE and the instant case is REMANDED to the lower court to take the
necessary proceedings in resolving with deliberate dispatch any and all
corporate concerns towards final settlement. 40
Petitioners filed a Motion for Reconsideration 41 of the foregoing Resolution, but it was denied
by the Court of Appeals in its other assailed Resolution dated 19 April 2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH
VIOLATED THE CONSTITUTION OF THE PHILIPPINES,
JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.] ADaSET
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS
WAS (sic) ISSUED WITHOUT JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
SERIOUSLY ERRED IN REMANDING THIS CASE TO THE LOWER
COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS,
AND WITHOUT RESOLVING THE GROUNDS FOR THE
[RESPONDENTS'] MOTION FOR
RECONSIDERATION. (sic) INASMUCH AS [THE] REASON CITED WAS
A NON-ISSUE IN THE CASE.
IV.
WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL
TRIAL COURT VIOLATES THE SUMMARY PROCEDURE FOR INTRACORPORATE CASES. 42
The crux of petitioners' contention is that the Court of Appeals committed grievous error in
reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters, which
had not been previously raised in respondents' Complaint before the RTC, or in their Petition for
Review and Motion for Reconsideration before the appellate court; i.e., the adjudication,
disposition, conveyance, and distribution of the properties and assets of Winchester, Inc. among
its stockholders, allegedly pursuant to the amicable settlement of the parties. The fact that the
parties were able to agree before the Court of Appeals to submit for resolution respondents'
Motion for Reconsideration of the 15 February 2006 Decision of the same court, independently
of any intended settlement between the parties as regards the dissolution of the corporation and
distribution of its assets, only proves the distinction and independence of these matters from one
another. Petitioners also contend that the assailed Resolution dated 18 July 2006 of the Court of
Appeals, granting respondents' Motion for Reconsideration, failed to clearly and distinctly state
the facts and the law on which it was based. Remanding the case to the RTC, petitioners
79

maintain, will violate the very essence of the summary nature of the Interim Rules of Procedure
Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation, and
revert the case to square one.

asserting it, a stockholder may intervene and defend on behalf of the corporation. 43 By virtue
ofRepublic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over
intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts
designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

The Court finds the instant Petition meritorious.

To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative
suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to compel
petitioners to account for and reimburse to the said corporation the corporate assets and
funds which the latter allegedly misappropriated for their personal benefit. During the pendency
of the proceedings before the court a quo, the parties were able to reach an amicable
settlementwherein they agreed to divide the assets of Winchester, Inc. among themselves.
This amicable settlement was already partially implemented by the parties, when
respondents repudiated the same, for which reason the RTC proceeded with the case on its
merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents'
Complaint for failure to comply with essential pre-requisites before they could avail themselves
of the remedies under the Interim Rules of Procedure Governing Intra-Corporate Controversies;
and for inadequate substantiation of respondents' allegations in said Complaint after
consideration of the pleadings and evidence on record.
In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings
of the RTC that respondents did not abide by the requirements for a derivative suit, nor were
they able to prove their case by a preponderance of evidence. Respondents filed a Motion for
Reconsideration of said judgment of the appellate court, insisting that they were able to meet
all the conditions for filing a derivative suit. Pending resolution of respondents' Motion for
Reconsideration, the Court of Appeals urged the parties to again strive to reach an amicable
settlement of their dispute, but the parties were unable to do so. The parties were not able to
submit to the appellate court, within the given period, any amicable settlement; and filed, instead,
their Position Papers. This effectively meant that the parties opted to submit respondents'
Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, and
petitioners' opposition to the same, for resolution by the appellate court on the merits. aESTAI
It was at this point that the case took an unexpected turn.
In accordance with respondents' allegation in their Position Paper that the parties subsequently
filed with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc.,
the Court of Appeals remanded the case to the RTC so that all the corporate concerns between
the parties regarding Winchester, Inc. could be resolved towards final settlement.
In one stroke, with the use of sweeping language, which utterly lacked support, the Court of
Appeals converted the derivative suit between the parties into liquidation proceedings.
The general rule is that where a corporation is an injured party, its power to sue is lodged with its
board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute
aderivative suit on behalf of the corporation wherein he holds stocks in order to protect or
vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones
to be sued, or hold the control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real party in interest. A derivative action
is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary
party to the suit. And the relief which is granted is a judgment against a third person in favor of
the corporation. Similarly, if a corporation has a defense to an action against it and is not

In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is

specifically governed by Section 122 of the Corporation Code, which reads:
SEC. 122.Corporate liquidation. Every corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is terminated in any other
manner, shall nevertheless be continued as a body corporate for three (3)
years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling
it to settle and close its affairs, to dispose of and convey its property and
to distribute its assets, but not for the purpose of continuing the business
for which it was established.
At any time during said three (3) years, said corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From
and after any such conveyance by the corporation of its property in trust
for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates,
the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found
shall be escheated to the city or municipality where such assets are
located.
Except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property except
upon law dissolution and after payment of all its debts and liabilities.
Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of
settling the affairs of said corporation, which consists of adjusting the debts and claims, that is,
of collecting all that is due the corporation, the settlement and adjustment of claims against it
and the payment of its just debts. 44 More particularly, it entails the following:
Winding up the affairs of the corporation means the collection of all
assets, the payment of all its creditors, and the distribution of the
remaining assets, if any among the stockholders thereof in accordance
with their contracts, or if there be no special contract, on the basis of their
respective interests. The manner of liquidation or winding up may be
provided for in the corporate by-laws and this would prevail unless it is
inconsistent with law. 45

80

It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to
whom all corporate assets are conveyed for liquidation; or by a receiver appointed by the SEC
upon its decree dissolving the corporation. 46

Despite the foregoing, the Court still deems it appropriate to already look into the merits of
respondents' Motion for Reconsideration of the 15 February 2006 Decision of the Court of
Appeals, for the sake of finally putting an end to the case at bar.

Glaringly, a derivative suit is fundamentally distinct and independent from liquidation

proceedings. They are neither part of each other nor the necessary consequence of the other.
There is totally no justification for the Court of Appeals to convert what was supposedly a
derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc.
against petitioners, to a proceeding for the liquidation of Winchester, Inc.

In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently
exhausted all remedies before filing the derivative suit; and (2) respondent Joseph's
Supplemental Affidavit and its annexes should have been taken into consideration, since the
submission thereof was allowed by the rules of procedure, as well as by the RTC in its Order
dated 26 August 2004. HCaDIS

While it may be true that the parties earlier reached an amicable settlement, in which they
agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said
corporation, it must be pointed out that respondents themselves repudiated said amicable
settlement before the RTC, even after the same had been partially implemented; and moved that
their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties
before the Court of Appeals were unsuccessful.

As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a
derivative suit, the Court subscribes to the ruling to the contrary of the Court of Appeals in its
Decision dated 16 February 2006.

Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final
settlement of corporate concerns" was solely grounded on respondents' allegation in its Position
Paper that the parties had already filed before the SEC, and the SEC approved, the petition to
dissolve Winchester, Inc. The Court notes, however, that there is absolute lack of evidence on
record to prove said allegation. Respondents failed to submit copies of such petition for
dissolution of Winchester, Inc. and the SEC Certification approving the same. It is a basic rule in
evidence that each party must prove his affirmative allegation. Since it was respondents who
alleged the voluntary dissolution of Winchester, Inc., respondents must, therefore, prove
it. 47This respondents failed to do.

The Court has recognized that a stockholder's right to institute a derivative suit is not based on
any express provision of the Corporation Code, or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary duties. Hence, a
stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a
special injury to him for which he is otherwise without redress. In effect, the suit is an action
for specific performance of an obligation owed by the corporation to the stockholders to assist its
rights of action when the corporation has been put in default by the wrongful refusal of the
directors or management to make suitable measures for its protection. The basis of a
stockholder's suit is always one in equity. However, it cannot prosper without first complying with
the legal requisites for its institution. 48
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies
lays down the following requirements which a stockholder must comply with in filing a derivative
suit:

Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester,
Inc. and the same was approved by the SEC, the Court of Appeals was still without jurisdiction to
order the final settlement by the RTC of the remaining corporate concerns. It must be
remembered that the Complaint filed by respondents before the RTC essentially prayed for the
accounting and reimbursement by petitioners of the corporate funds and assets which they
purportedly misappropriated for their personal use; surrender by the petitioners of the corporate
books for the inspection of respondents; and payment by petitioners to respondents of damages.
There was nothing in respondents' Complaint which sought the dissolution and liquidation of
Winchester, Inc. Hence, the supposed dissolution of Winchester, Inc. could not have resulted in
the conversion of respondents' derivative suit to a proceeding for the liquidation of said
corporation, but only in the dismissal of the derivative suit based on either compromise
agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of
Appeals already went beyond the issues raised in respondents' Motion for Reconsideration.
Instead of focusing on whether it erred in affirming, in its 15 February 2006 Decision, the
dismissal by the RTC of respondents' Complaint due to respondents' failure to comply with the
requirements for a derivative suit and submit evidence to support their allegations, the Court of
Appeals unduly concentrated on respondents' unsubstantiated allegation that Winchester, Inc.
was already dissolved and speciously ordered the remand of the case to the RTC for
proceedings so vitally different from that originally instituted by respondents.

Sec. 1.Derivative action. A stockholder or member may bring an action

in the name of a corporation or association, as the case may be,
provided, that:
(1)He 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;
(2)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;
(3)No appraisal rights are available for the act or acts
complained of; and
(4)The suit is not a nuisance or harassment suit.

81

A perusal of respondents' Complaint before the RTC would reveal that the same did not allege
with particularity that respondents exerted all reasonable efforts to exhaust all remedies
available under the articles of incorporation, by-laws, laws or rules governing Winchester, Inc. to
obtain the relief they desire.
Respondents assert that their compliance with said requirement was contained in respondent
Joseph's Affidavit, which was attached to respondents' Complaint. Respondent Joseph averred
in his Affidavit that he tried for a number of times to talk to petitioner Anthony to settle their
differences, but the latter would not listen. Respondents additionally claimed that taking further
remedies within the corporation would have been idle ceremony, considering that Winchester,
Inc. was a family corporation and it was impossible to expect petitioners to take action against
themselves who were the ones accused of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction. The second
paragraph thereof requires that the stockholder filing a derivative suit should have exerted all
reasonable efforts to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he desires; and
to allege such fact with particularity in the complaint. The obvious intent behind the rule is to
make the derivative suit the final recourse of the stockholder, after all other remedies to obtain
the relief sought had failed. SECHIA
The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner
Anthony regarding their dispute hardly constitutes "all reasonable efforts to exhaust all remedies
available". Respondents did not refer to or mention at all any other remedy under the articles of
incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders,
which respondents unsuccessfully availed themselves of. And the Court is not prepared to
conclude that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed to
provide for such remedies.
Neither can this Court accept the reasons proffered by respondents to excuse themselves from
complying with the second requirement under Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies. They are flimsy and insufficient, compared
to the seriousness of respondents' accusations of fraud, misappropriation, and falsification of
corporate records against the petitioners. 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. There is nothing in the pertinent laws or rules
supporting the distinction between, and the difference in the requirements for, family
corporations vis- -vis other types of corporations, in the institution by a stockholder of a
derivative suit.
The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule
8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the respondents'
Complaint failed to allege, explicitly or otherwise, the fact that there were no appraisal rights
available for the acts of petitioners complained of, as well as a categorical statement that the suit
was not a nuisance or a harassment suit.
As to respondents' second ground in their Motion for Reconsideration, the Court agrees with the
ruling of the Court of Appeals, in its 15 February 2006 Decision, that respondent Joseph's

Supplemental Affidavit and additional evidence were inadmissible since they were only
appended by respondents to their Memorandum before the RTC. Section 8, Rule 2 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies is crystal clear that:
Sec. 8.Affidavits, documentary and other evidence. Affidavits shall be
based on personal knowledge, shall set forth such facts as would be
admissible in evidence, and shall show affirmatively that the affiant is
competent to testify on the matters stated therein. The affidavits shall be
in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence
shall be attached to the appropriate pleading, Provided, however,
that affidavits, documentary and other evidence not so submitted
may be attached to the pre-trial brief required under these Rules.
Affidavits and other evidence not so submitted shall not be
admitted in evidence, except in the following cases:
(1)Testimony of unwilling, hostile, or adverse party witnesses.
A witness is presumed prima facie hostile if he fails
or refuses to execute an affidavit after a written
request therefor;
(2)If the failure to submit the evidence is for meritorious and
compelling reasons; and
(3)Newly discovered evidence. HEcaIC
In case of (2) and (3) above, the affidavit and evidence must be submitted
not later than five (5) days prior to its introduction in evidence. (Emphasis
ours)
According to the afore-quoted provision, the parties should attach the affidavits of witnesses and
other documentary evidence to the appropriate pleading, which generally should mean the
complaint for the plaintiff and the answer for the respondent. Affidavits and documentary
evidence not so submitted must already be attached to the respective pre-trial briefs of the
parties. That the parties should have already identified and submitted to the trial court the
affidavits of their witnesses and documentary evidence by the time of pre-trial is strengthened by
the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies require that the following matters should already be set forth in the parties' pretrial briefs:

Section 1.Pre-trial conference, mandatory nature. Within five (5) days

after the period for availment of, and compliance with, the modes of
discovery prescribed in Rule 3 hereof, whichever comes later, the court
shall issue and serve an order immediately setting the case for pre-trial
conference, and directing the parties to submit their respective pre-trial
briefs. The parties shall file with the court and furnish each other copies of
82

their respective pre-trial brief in such manner as to ensure its receipt by

the court and the other party at least five (5) days before the date set for
the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the
following:

parties. Hence, cases wherein the court can render judgment prior to pre-trial, do not depart from
or constitute an exception to the requisite that affidavits of witnesses and documentary evidence
should be submitted, at the latest, with the parties' pre-trial briefs. Taking further into account
that under Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies parties are required to file their memoranda simultaneously, the same would
mean that a party would no longer have any opportunity to dispute or rebut any new affidavit or
evidence attached by the other party to its memorandum. To violate the above-quoted provision
would, thus, irrefragably run afoul the former party's constitutional right to due process.

xxx xxx xxx

(4)Documents not specifically denied under oath by either or
both parties;
xxx xxx xxx
(7)Names of witnesses to be presented and the summary of
their testimony as contained in their affidavits supporting their
positions on each of the issues;
(8)All other pieces of evidence, whether documentary or
otherwise and their respective purposes.
Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies, 49 it is the duty of the court to ensure during the pre-trial conference that the
parties consider in detail, among other things, objections to the admissibility of testimonial,
documentary, and other evidence, as well as objections to the form or substance of any affidavit,
or part thereof.
Obviously, affidavits of witnesses and other documentary evidence are required to be attached
to a party's pre-trial brief, at the very last instance, so that the opposite party is given the
opportunity to object to the form and substance, or the admissibility thereof. This is, of course, to
prevent unfair surprises and/or to avoid the granting of any undue advantage to the other party
to the case.

In the instant case, therefore, respondent Joseph's Supplemental Affidavit and the additional
documentary evidence, appended by respondents only to their Memorandum submitted to the
RTC, were correctly adjudged as inadmissible by the Court of Appeals in its 15 February 2006
Decision for having been belatedly submitted. Respondents neither alleged nor proved that the
documents in question fall under any of the three exceptions to the requirement that affidavits
and documentary evidence should be attached to the appropriate pleading or pre-trial brief of the
party, which is particularly recognized under Section 8, Rule 2 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court
is hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April 2007 of the
Court of Appeals in CA-G.R. SP No. 00185 are hereby REVERSED AND SET ASIDE. The
Decision dated 15 February 2006 of the Court of Appeals is hereby AFFIRMED. No
costs. aTcESI
SO ORDERED.
Ynares-Santiago, Velasco, Jr., Nachura and Peralta, JJ., concur.
||| (Spouses Yu v. Yukayguan, G.R. No. 177549, [June 18, 2009], 607 PHIL 581-616)

True, the parties in the present case agreed to submit the case for judgment by the RTC, even
before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies:

EN BANC
[G.R. No. L-5174. March 17, 1911.]

Sec. 4.Judgment before pre-trial. If after submission of the pre-trial

briefs, the court determines that, upon consideration of the pleadings,
the affidavits and other evidence submitted by the parties, a
judgment may be rendered, the court may order the parties to file
simultaneously their respective memoranda within a non-extendible
period of twenty (20) days from receipt of the order. Thereafter, the court
shall render judgment, either full or otherwise, not later than ninety (90)
days from the expiration of the period to file the memoranda.
Even then, the afore-quoted provision still requires, before the court makes a determination that
it can render judgment before pre-trial, that the parties had submitted their pre-trial briefs and the
court took into consideration the pleadings, affidavits and other evidence submitted by the

CANDIDO PASCUAL, plaintiff-appellant, vs.

OROZCO, ET AL,defendants-appellees.

EUGENIO

DEL

SAZ

C.W. Ney and O'Brien and De Witt, for appellant.

Ortigas and Fisher, for appellees.
SYLLABUS

83

1. BANKS AND BANKING; CORPORATIONS; RIGHTS OF STOCKHOLDERS.

A stockholder in a banking corporation had a right to maintain a suit for and on behalf of
the corporation, but the extent of such right depends upon when and for what purpose he
acquired the shares of stock of which he is the owner.
2. ID.; ID.; ID.; LIMITATION UPON RIGHTS OF ACTION. A stockholder in a
corporation who was not such at the time when alleged objectionable transactions took
place, or whose shares of stock have not since devolved upon him by operation of law, can
not maintain suits of this character, unless such transactions continue and are injurious to
such stockholder or affect him especially or specifically in some other way.
3. PLEADING AND PRACTICE; GENERAL DEMURRER. Where the matter in
a single count is divisible in its nature, the demurrer should be confined to those parts
which are different, as the same general rule which applies to different counts applies also
to divisible matter in the same count constituting different causes of action; and where one
count, containing distinct averments, discloses a good cause of action in one of such
averments, as when several breaches are assigned, some well and others ill, a general
demurrer will be overruled. (6 Ency. Pl. and Pr., 303.)
DECISION

That during the years 1903, 1904, 1905, and 1907 the defendants and appellees,
without the knowledge, consent, or acquiescence of the stockholders, deducted their
respective compensation from the gross income instead of from the net profits of the bank,
thereby defrauding the bank and its stockholders of approximately P20,000 per annum; that
though due demands has been made upon them therefor, defendants refuse to refund to
the bank the sums so misappropriated, or any part thereof; that defendants constitute a
majority of the present board of directors of the bank, who alone can authorize an action
against them in the name of the corporation, and that prior to the filing of the present suit
plaintiff exhausted every remedy in the premises within this banking corporation.
The second cause of action sets forth that defendants' and appellees' immediate
predecessors in office in this bank during the years 1899, 1900, 1901, and 1902, committed
the same illegality as to their compensation as is charged against the defendants
themselves; that in the four years immediately following the year 1902, the defendants and
appellees were the only officials or representatives of the bank who could and should
investigate and take action in regard to the sums of money thus fraudulently appropriated
by their predecessors; that they were the only persons interested in the bank who knew of
the fraudulent appropriation by their predecessors; that they wholly neglected to take any
action in the premises or inform the stockholders thereof; that due demand has been made
upon defendants to reimburse the bank for this loss; that the bank itself can not bring an
action in its own name against the defendants and appellees, for the reason already stated,
and that there remains no remedy within the corporation itself.

TRENT, J p:
This is an appeal by the plaintiff from a judgment sustaining a demurrer to the
first and second causes of action set forth in the amended complaint. The demurrer as to
both causes of action was based upon the following grounds:
(a) Lack of legal capacity to use on part of plaintiff;
(b) Failure to state facts constituting a cause of action;
(c) Defect of parties plaintiff; and,
(d) Uncertainty.
The lower court sustained the demurrer as to both causes of action upon the
second ground above-mentioned.
The following errors have been assigned:
The court a quo erred in sustaining the demurrer to the first cause of action and
dismissing the same because (a) the facts alleged constitute a cause of action, and (b) the
remedy sought by the plaintiff is the only one available.
The same errors are assigned as to the second cause of action.
The gist of the first and second causes of action is as follows:

The questions raised in third cause of action are not before us at this as the
demurrer to that cause of action was overruled.
The court below sustained the demurrer as to the first and second causes of
action on the ground that in actions of this character the plaintiff must aver in his complaint
that he was the owner of stock in the corporation at the time of the occurrences complained
of, or else that the stock has since devolved upon him by operation of law.
This action was brought by the plaintiff Pascual, in his own right as a stockholder
of the bank, for the benefit of the bank, and all the other stockholders thereof. The plaintiff
sues on behalf of the corporation, which, even though nominally a defendant, is to all
intents and purposes the real plaintiff in this case. That such is the case is shown by the
prayer of the complaint which is that judgment be entered in favor of the bank.
According to the pleadings, the Banco Espaol-Filipino is a banking corporation,
constituted as such by royal decree of the Crown of Spain in the year 1854, the original
grant having been subsequently extended and modified by royal decree of July 14, 1897,
and by Act No. 1790 of the Philippine Commission. From the first it has been a bank of
issue, and under the Spanish regime was regarded as a quasi-public institution, its full title
having been originally "Banco Espaol-Filipino de Isabel II." The Captain-General of the
Philippine Islands was its protector and supreme head. To him belonged the power to
appoint its directors and other managing officers, remove them from office for cause, fix the
rate of interest demandable by the bank, resolve all doubts and controversies relating to its
management, "and finally, exercise, as representative of Her Majesty's Government, the
powers that the laws give him respecting public establishments protected and privileged."
It is alleged in the amended complaint that the only compensation contemplated
or provided for the managing officers of the bank was a certain per cent of the net profits
84

resulting from the bank's operations, as set forth in article 30 of its reformed charter or
statutes, which article is as follows:
"Of the profits or gains which may result from the bank's
operations, after deducting all the expenses of its administration and the
part, if any, which corresponds to the legal reserve fund, there shall be
set apart ten per cent for the directors and five per cent for the board of
government, the distribution of which shall be made as provided in the
regulations. The eighty-five per cent remaining shall belong integrally to
the shareholders pro rata the number of shares owned by each."
Before proceeding to the determination of the real questions involved in this case
it might be well to note briefly the origin and history of the right of a stockholder in a
corporation to maintain a suit of this kind.
"A corporation is an artificial being, invisible, intangible, and
existing only in contemplation of law. (Chief Justice Marshall in Trustees
of Dartmouth College vs. Woodward, 4 Wheat., 636.)
"The word "corporation" is but a collective name for the
corporators or members who compose an incorporated association; and
where it is said that a corporation is itself a person, or being, or creature,
this must be understood in a figurative sense only. (Morawetz on Private
Corporations, 2nd ed., sec. 1.)
"A corporation is "an artificial person created by the sovereign
from natural persons and in which artificial person the natural persons of
which it is composed become merged and nonexistent." (Quoted with
approval in case of The People, ex rel. Winchester, etc., respondent, vs.
Coleman, et al., commissioners of taxes etc., appellants, 133 N.Y. Appls.,
279.)
In suits of this character the corporation itself and not the plaintiff stockholder is
the real party in interest. The rights of the individual stockholder are merged into that of the
corporation. It is a universally recognized doctrine that a stockholder in a corporation has
no title legal or equitable to the corporate property; that both of these are in the corporation
itself for the benefit of all the stockholders. Text writers illustrate this rule by the familiar
example of one person or entity owning all the stock and still having no greater or
essentially different title than if he owned but one single share. Since, therefore, the
stockholder has no title, it is evident that what he does have, with respect to the corporation
and his fellow stockholder, are certain rights sui generis. These rights are generally
enumerated as being, first, to have a certificate or other evidence of his status as
stockholder issued to him; second, to vote at meetings of the corporation; third, to receive
his proportionate share of the profits of the corporation; and lastly, to participate
proportionately in the distribution of the corporate assets upon the dissolution or winding
up. (Purdy's Beach on Private Corporations, sec. 554.)
The right of individual stockholders to maintain suits for and on behalf of the
corporation was denied until within a comparatively short time, but his right is now no longer
doubted. On this point Cook on Corporations, 5th ed. (1903), secs. 644, 645, and 646,
says:

"Notwithstanding this fact, however, that it was the duty and

right of the corporation to bring suit remedy these wrongs, it gradually
became apparent that frequently the corporation was helpless and unable
to institute the suit. It was found, where the guilty parties themselves
controlled the directors and also a majority of the stock, that the
corporation was in their power, was unable to institute suit, and that the
minority of the stockholders were being defrauded of their rights and were
without remedy. The time came when the minority of the stockholders of
the defrauded corporation the corporation itself being controlled by the
guilty parties were given a standing in court for the purpose of taking
up the cause of the corporation, and, in its name and stead, of bringing
the guilty parties to an account. Accordingly, in 1843, in the leading case
of Foss vs. Harbottle, a stockholder brought suit in the name of himself
and other defrauded stockholders, and for the benefit of the corporation,
against the directors, for a breach of their duty to the corporation. This
case was decided against the complaining stockholder, on the ground
that the complainant had not proved that the corporation itself was under
the control of the guilty parties, and had not proved that it was unable to
institute suit. The court, however, broadly intimated that a
case might arise when a suit instituted by defrauded stockholders would
be entertained by the court and redress given. Acting upon this
suggestion, and impelled by the utter inadequacy of suits instituted by the
corporation, defrauded stockholders continued to institute these suits and
to urge the courts of equity to grant relief. These efforts were
unsuccessful in clearly establishing the right of stockholders herein until
the cases of Atwol against Merriwether, in England, 1867, and of
Dodge vs. Woolsey, in this country, in 1855. These two great and leading
cases have firmly established the law for England and America, that
where corporate directors have committed a breach of trust either by their
frauds, ultra viresacts, or negligence, and the corporation is unable or
unwilling to institute suit to remedy the wrong, a single stockholder may
institute that suit, suing on behalf of himself and other stockholders and
for the benefit of the corporation, to bring about a redress of the wrong
done directly to the corporation and indirectly to the stockholders.

"It is now no longer doubted, said Mr. Justice Wayne, in the

case of Dodge vs. Woolsey, 18 How. (U.S.), 331 either in England or
the United States, that courts of equity, in both, have a jurisdiction over
corporations, at the instance of one or more of their members; to apply
preventive remedies by injunction, to restrain those who administer them
from doing acts which would amount to a violation of charters, or to
prevent any misapplication of their capitals or profits, which might result in
lessening the dividends of stockholders, or the value of their shares, as
either may be protected by the franchises of a corporation, if the acts
intended to be done create what is in the law denominated a breach of
trust. And the jurisdiction extends to inquire into, and to enjoin, as the
case may require that to be done, any proceedings by individuals, in
whatever character they may profess to act, if the subject of complaint is
an imputed violation of a corporate franchise, or the denial of a right
growing out of it, for which there is not an adequate remedy at law."
85

So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the
bank (corporation) has a right to maintain a suit for and on behalf of the bank, but the extent
of such a right must depend upon when, how, and for what purpose he acquired the shares
which he now owns. In the determination of these questions we can not see how, if it be
true that the bank is a quasi-public institution, it can affect in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of November,
1903; that the defendants, as members of the board of directors and board of government,
respectively, during each and all the years 1903, 1904, 1905, 1906, and 1907, did
fraudulently, and to the great prejudice of the bank and its stockholders, appropriate to their
own use from the profits of the bank sums of money amounting approximately to P20,000
per annum.
Article 31 of the bank's charter provides that dividends shall be declared
each semestre. The stockholders meet once a year, in February, to receive and consider
the report of the bank's operations contained in the annual balance and memorial. Beyond
this they have no direct voice in the affairs of the bank, but all who are then stockholders
and have a right to vote must clearly have a right to vote upon all the business proceedings
of the year, irrespective of the date upon which they may have become stockholders. They
are entitled to all the dividends that have been earned by their stock during the year which
has not been earned by their stock during the year which has not been already declared
and paid, regardless of the precise period of the year in which it may have accrued. So, in
the general meeting of the stockholders on February 3, 1904, the plaintiff had a right to
participate.
Neither the charter, the by-laws, nor the regulations prescribe when, within
thesemestre, the dividends shall be declared; but it may be presumed that such dividends
are declared at the end of the semestre and that the first semestre begins with the first day
of January of each year. On this basis the owner of stock from whom the plaintiff purchased
his ten shares might have received the dividends corresponding to these ten shares for the
firstsemestre (six months) of the year 1903. The dividends were declared twice a year,
every six months. The times for declaring the dividends are specifically and distinctly
pointed out one period is separated from the other. Every six months forms a period. So
if the plaintiff was not entitled to the dividends for the first period (from January to July,
1903), he having become a stockholder in September of that year, he would have been
entitled to the dividends on his stock for the second period, or semestre. The plaintiff was,
therefore, a stockholder during all the time for which he seeks recovery in his first cause of
action, except the first six months of the year 1903. Then again, as a matter of fact (which
we do not now decide), if the defendants had taken their salaries for the year 1903 at the
close of that year or at any time after September 13, the plaintiff would then have had an
interest and, on the theory that he was a stockholder, could have questioned the legality of
the defendants' right to take such salary, inasmuch as his dividends would be directly
affected, in that, if the defendants took 10 per cent of the gross instead of the net earnings
of the bank, his dividend on his ten shares for the second period (from July to December,
1903) would be less.
Conceding that this cause of action is demurrable on the grounds that the plaintiff
was not a stockholder during the first six months of the year 1903, should the demurrer
have been sustained as to the whole cause of action when the time for which recovery is
sought is clearly divisible?

Section 90 of the Code of Civil Procedure in force in the Philippine Islands

provides, in part, as follows:
"2. . . . If the complaint contains more than one cause of action,
each distinct cause of action must be set forth in a separate paragraph
containing all the facts constituting the particular cause of action.
"Where the matter in a single count is divisible in its nature, the
demurrer should be confined to those parts which are defective, as the
same general rule which applies to different counts applies also to
divisible matter in the same count constituting different causes of action;
and where one count, containing distinct averments, discloses a good
cause of action in one of such averments, as when several breaches are
assigned, some well and others ill, a general demurrer will be overruled."
(6 Ency. Plead. & Prac., 303, 304.)
The complaint contains three causes of action, each set forth in a separate
paragraph. The matter in the first cause is, as we have said, divisible in its nature. The rule
above quoted is, therefore, perfectly applicable.
The most important question to be decided is, did the lower court err in sustaining
the demurrer to the second cause of action? If this question be decided in the negative,
then it will not be necessary to determine whether or not the allegations in this part of the
complaint are sufficient to hold the defendants liable for the acts of their predecessors.
It affirmatively appears from the complaint that the plaintiff was not a stockholder
during any of the time in question in this second cause of action. Upon the question
whether or not a stockholder can maintain a suit of this character upon a cause of action
pertaining to the corporation when it appears that he was not a stockholder at the time of
the occurrence of the acts complained of and upon which the action is based, the
authorities do not agree.
In the case of Hawes vs. Oakland (14 Otto [104 U.S.], 450, 456), the plaintiff, a
shareholder in the Contra Costa Waterworks Company, brought a bill in equity against the
company and the city of Oakland in the Circuit Court of the United States for California, on
the ground that he was a citizen of New York and the defendant citizens of California,
alleging that the company was furnishing the city of Oakland with water free charge beyond
what the law required it to do, and that, although he had required them to desist, the
directors had failed to heed his protest and that unless enjoined they would continue to
furnish water to the city in excess of their legal obligations in this particular, to the damage
of plaintiff and the shareholders.
To this complaint the city of Oakland demurred upon the ground that the
appellant had shown no capacity in himself to maintain the suit, the injury, if any, being to
the corporation and the right to sue pertaining to it solely. The demurrer was sustained and
the bill dismissed, whereupon the plaintiff carried the case to the Supreme Court of the
United States.
The decision of the court, which was written by Mr. Justice Miller and concurred
in by all the other justices, contains a review of the earlier decisions of the English and
86

American courts with respect to the right of stockholders of corporations to maintain suits of
this character. In concluding, the court, after enumerating a number of circumstances in
which a stockholder might be permitted to sue upon a cause of action pertaining to the
corporation, said:
"But in addition to the existence of grievances which call for this
kind of relief, it is equally important that before the shareholder is
permitted, in his own name to institute and conduct a litigation which
usually belongs to the corporation, he should show to the satisfaction of
the court that he has exhausted all the means within his reach to attain
within the corporation itself, the redress of his grievances, or action in
conformity to his wishes. He must make an earnest, not a simulated
effort, with the managing body of the corporation, to induce remedial
action on their part, and this must be made apparent to the court. If the
time permits, or has permitted, he must show, if he fails with the directors,
that he has made an honest effort to obtain action by the stockholders as
a body, in the matter of which he complains. And he must show a case, if
this is not done, where it could not be done, or it was not reasonable to
require it.
"The effort to induce such action as plaintiff desires on the part
of the directors, or of the stockholders when that is necessary, and the
cause of failure in these efforts, and all allegation that plaintiff was a
shareholder at the time of the transactions of which he complains, or that
the shares have devolved on him since by operation of law and that the
suit is not a collusive one to confer on a court otherwise have no
cognizance, should be in the bill, which should be verified by affidavit."
This case was decided January 16, 1882. More than a year afterward the
Supreme Court embodied the procedural part of this decision in the 94th Equity Rule,
adopted January 23, 1883. The rule reads as follows:
"Every bill brought by one or more stockholders in a corporation
against the corporation and other parties, founded on rights which may
properly be asserted by the corporation, must be verified by oath, and
must contain an allegation that the plaintiff was a shareholder at the time
of the transaction of which he complains, or that his shares had devolved
on him since by operation of law, and that the suit is not a collusive one to
confer on a court of the United States jurisdiction of a case of which it
would not otherwise have cognizance. It must also set forth with
particularity the efforts of the plaintiff to secure such action as he desires
on the part of the managing directors or trustees, and, if necessary, of the
shareholders, and the causes of his failure to obtain such action."
January 21, 1884, the Supreme Court decided the case of Dimpfel vs. Ohio, etc.,
R.R. Co. (110 U.S., 212; 28 Law Ed., 121, 122), which was similar to the Hawes case,
above cited. Mr. Justice Field, by whom the opinion of the court was written, says (p. 122):
"The suit was brought to set aside a contract by which the Ohio
and Mississippi Railway Company became the owner of a portion of its
road known as the Springfield Division, and to obtain a decree from the

court declaring that the bonds, issued by the company and secured by a
mortgage upon that division, are null and void. It was commenced by
Dimpfel, and individual stockholder in the company, who stated in his bill,
that it was filed on behalf of himself and such other stockholders as might
join him in the suit. Callaghan, another stockholder, is the only one who
joined him. The two claim to be owners of fifteen hundred shares of the
stock of the company. The whole number of shares is 240,000. The
owners of the balance of this large number make no complaint of the
transactions which the complainants seek to annul. And it does not
appear that the complainant owned their shares when these transactions
took place. For aught we can see to the contrary, they may have
purchased the shares long afterwards, expressly to annoy and vex the
company, in the hope that they might thereby extort, from its fears, a
larger benefit than the other stockholders have received or may
reasonably expect from the purchase, or compel the company to buy their
shares at prices above the market value. Unfortunately, litigation against
large companies is often instituted by individual stockholders from no
higher motive."
The bill in this case was also open to the objection that the plaintiff had not
exhausted the means of redress available within the corporation. The next proceeds to
consider this point, but prefaces its remarks with the following significant phrase:
"But assuming that the complainants were the owners of the
shares held by them when the transactions of which they complain took
place, it does not appear that they made any attempt, etc."
Counsel for the plaintiff in a very able and exhaustive brief sought to show that
the doctrine laid down in these two cases is not applicable to the case at bar, first, because
the Supreme Court in these cases merely established a rule of practice, designed to
prevent collusive suits in the Federal court; and, second, that if such rule is to be regarded
as a declaration of substantive law, it is wrong on principle and should be disregarded.
Many of the authorities cited by the plaintiff to the effect that the rule is merely one of
practice, peculiar to the Federal court, base that conclusion upon the fact that the
requirement of the inclusion of the averments in question in the bill to be found in the 94th
Equity Rule. Some of the authorities cited, which hold this view, are: Pomeroy, Eq. Jur.,
sec. 1096; Thompson, Corporations, sec. 4570; Cook, Corporations vol. 3, secs. 736, 737;
Morawetz, Corporations, sec. 209; Forrester vs. Mining Co., 55 Pac. Rep., 229.
In the first place the doctrine was announced in Hawes vs. Oakland, supra, more
than a year before the 94th Equity Rule was promulgated, so that it can admit of no dispute
that in the opinion of the Supreme Court, as least, the ownership of stock at the time of the
transaction complained of was essential to the right to maintain such an action as a matter
of substantive law, prior to and independent of the Equity Rule.
It is true that the court in writing the decision in the Hawes case, had in mind the
prevalence of the practice of bringing suits in the Federal courts, by collusion between the
parties, which should property be tried in the State court. It is equally true that the court was
desirous of preventing a continuance of these fraudulent practices, by establishing a test
which should prevent them. The basis of the right to sue in the Federal courts being
diversity of citizenship, the usual method employed to enable parties to suits of this kind to
invoke the jurisdiction of these courts was to have a few shares of stock transferred to
87

some person who was a citizen of a State other than that of which the proposed defendants
were citizens. In a case of this kind the transfer of the stock would be, of necessity, merely
nominal, and the plaintiff, under such circumstances, would not be a bona fide stockholder,
and would not be entitled to maintain the suit. Of necessity, in cases of this kind, of genuine
collusion to create a fictitious diversity of citizenship the nominal transfer of the stock is
made at a date subsequent to that of the occurrence of the acts or omissions complained
of. Although the court was lawfully entitled to protect itself against such frauds as those of
which it complains in this case, and to refuse to take cognizance of cases in which, owing
to the purely fictitious nature of the simulated diversity of citizenship, the proper tribunals
were the State courts, on the other hand, in cases of genuine diversity of citizenship, it
could not lawfully refuse to exercise the jurisdiction vested in it. No citation of authority is
needed to support the proposition that it is the duty of courts to exercise the jurisdiction
properly conferred upon them. It is elementary that where there is a higher tribunal
authorized to issue the writ, mandamus will lie to put the judicial machinery in motion.
(Spelling, Extraordinary Relief, sec. 1394.) This being the case, the conclusion is obvious
that the mere fact that in some cases persons suing as stockholders for the redress of
grievances anterior to the transfer of the stock held by the plaintiff are not acting in good
faith would not justify or authorize a refusal to take jurisdiction in any case in which the
plaintiff's stock was acquired after the occurrence of the facts supposed to constitute the
cause of action, unless the court were of the opinion, as a matter of substantive law, that in
no event would a stockholder so situated be entitled to maintain such an action.

If the Supreme Court had been of the opinion, as are some of the State courts
and text writers cited in plaintiff's brief, that the transferee of shares of stock in a
corporation acquires the right to sue upon the causes of action which accrued before he
acquired such shares, it surely would not have attempted to deprive him of the right to
exercise in the Federal court an action which, were it not for diversity of citizenship, he
might exercise in a State court. If the court had believed that the transferee of stock could,
under any circumstances, sue upon a cause of action accruing to the corporation prior to
such transfer, the rule instead of requiring the plaintiff to allege unconditionally that he was
a stockholder at the time of the transaction complained of and that the suit is not collusive,
would have provided that the plaintiff should be required to aver in his sworn bill the date
upon which he acquired his stock, and if it appeared that it was acquired after the
occurrence of the acts complained of, then that he should also required to aver under oath
that the suit was not collusive.
"Sound reason and good authority sustain the rule that a purchaser of stock can
not complain of the prior acts and management of the corporation." (Home Fire Ins. Co. vs.
Baker, 60 L.R.A., 927, 933, citing Hawes vs. Oakland, supra; Dimpfel vs. Ohio & M.R.
Co., supra; Taylorvs. Fayette Fuel Gas Co., 146 Pa., 13; Alexander vs. Searcy, 81 Ga.,
536; Clark vs. American Coal Co., 86 Iowa, 436; United Electric Securities Co., vs.
Louisiana Electric Light Co., 68 Fed., 673; Venner vs. Atchison T. & S.F.R. Co., 28 Fed.,
581; Heath vs. Erie R. Co., 8 Blachf., 347; Dannmeyer vs. Coleman, 8 Sawy., 51;
Works vs. Sowers, 2 Walk (Pa.), 416; 4 Thompson Corp., 4569.)

It is only upon this assumption that the correctness of the decision in Hawes vs.
Oakland and the legality of the 94th Equity Rule can be maintained. The court had no
authority to change the substantive law either by its decision or the rule, and it is not to be
presumed that it intended to do so. A careful examination of the Hawes case and of the rule
will show that no such change was in fact made. The decision is merely declaratory of the
preexisting law, as the court understood it to be, and the rule merely provides a rule of
pleading.
The decision in the Hawes case it that among other necessary averments, the bill
should contain "an allegation that the plaintiff was a shareholder at the time of the
transaction of which he complains . . . and that the suit is not a collusive one to confer
jurisdiction on a court of the United States in a case in which it would otherwise have no
cognizance . . . ." The language of the 94th Equity Rule is practically identical with this. It
provides, in terms that a stockholder's bill in cases of this character "must contain an
allegation that the plaintiff was a stockholder at the time of the transaction of which he
complains . . . and that the suit is not a collusive one to confer jurisdiction . . . ."
This is, obviously, a mere rule of pleading it requires averments of facts upon
which the plaintiff's cause of action and the jurisdiction of the court rest. It assumes, as the
court had already decided, that the ownership of the stock at the time of the transaction is a
fact essential to the maintenance of the suit in any event. Unless that fact exists no cause
of action exists, whether the suit is collusive or not. Even if the stock was owned prior to the
transaction complained of, if the suit is collusive as it would be, for instance if one of the
defendants had acquired a merely colorable domicile in another State to support the
allegation of diversity of citizenship the plaintiff has no right to maintain the action in a
Federal court. Consequently, the rule requires that these two facts be distinctly averred.
The requirement that they be pleaded is procedural. The necessity of the existence of the
facts in order to give rise to the right of action is substantive.

In Alexander vs. Searcy, supra, the court said (p. 550):

"The weight of authority seems to be that a person who did not
own stock at the time of the transactions complained of can not complain
or bring a suit to have them declared illegal."
In the United Electric Securities Co. vs. Louisiana Electric Light Co., supra, it is
said:
"As a general proposition, the purchaser of stock in a
corporation is not allowed to attack the acts and management of the
company prior to the acquisition of his stock; otherwise we might have a
case where stock duly represented in a corporation consented to and
participated in bad management and waste, and after reaping the
benefits from such transaction, could be easily passed into the hands of a
subsequent purchaser, who could make his harvest by appearing and
contesting the very acts and conducts which his vendor had consented
to."
Where stock is required for the purpose of bringing suit it has been held that the
complainant is a mere interloper and entitled to no consideration. And stockholder suits not
brought in good faith in the interest of the corporation have been dismissed on the ground.
(Home Fire Ins. Co. vs. Baker, supra, and cases cited therein.) Some of the State courts
hold that a purchaser of shares in a corporation acquires all the rights of the vendor. The
Alabama Supreme Court has gone so far as to hold that a purchaser in good faith is not
necessarily disqualified as a suitor in all cases because the prior holder was personally
disqualified. (Parsons vs. Joseph, 92 Ala., 403.) From the pleadings in this case (it having
been decided by the Supreme Court upon a demurrer) it appears that Joseph sought to
88

have cancelled certain certificates of stock issued by the Street Railway Company to
Parsons, on the ground that said stock was fictitious and was issued in violation of the
constitution and statute law of the State. It was alleged, as a special defense, that if the
transactions, which form the basis of the issuance of the stock to Parsons, were illegal, and
fraudulent, and not done in good faith, the complainant, Joseph, was estopped from setting
up fraud in such transactions or, seeking to cancel the stock, because one E. Lesser, who
was complainant's transferrer, participated in all of said transactions. In this case the court,
speaking through Mr. Justice Coleman, said:
"If the transferee purchased the shares in good faith, and
without notice of the fact that the prior holder had precluded himself from
suing, he would have as just a title to relief as if he had purchased from a
shareholder who was under no disability; but if the purchaser was aware
that the prior holder had barred his right to relief, neither justice nor public
policy would require that the transferee, under these circumstances,
should be accorded any greater rights than his transferrer.
xxx xxx xxx
"If a stockholder participates in a wrongful or fraudulent
contract, or silently acquiesces until the contract becomes executed, he
can not then come into a court of equity to cancel the contract, and more
especially if the company, or himself, as a stockholder, has reaped a
benefit from the contract; and this rule holds good, although the
consideration of the contract may be one expressly prohibited by statute.
The same disability would attach to the transferee of his stock who
bought with notice."
This rule, in the main, is correctly stated, but we think that the latter part of the
same should be modified so as to read: "The same disability would attach to the transferee
of his stock who bought with or without notice." We base our modification of this rule upon
the ground that a transferee could not sue as being a bona fide purchaser in ignorance of
the disability attaching to his vendor, because shares of stock, strictly speaking, are not
negotiable, and the sale can not pass greater rights than those possessed by the vendor.
(Clark vs. American Coal Co., 86 Iowa, 436; 4 Thomp. Corp., 3410.)

"But it is contended that this is a case in which the debtor

corporation was defrauded of its property, and that as the company had a
right of proceeding for its recovery, any of its judgment and execution
creditors have an equal right; that it is a property right, and one that
inures to the benefit of creditors.
Conceding that creditors who were such when the fraudulent
procurement of the debtor's property occurred and cases to that effect
have been cited the question still remains, whether, the debtor being
unwilling to disturb the transaction, subsequent creditors have such an
interest that they can reach the property for the satisfaction of their debts.
We doubt whether any case, going as far as this, can be found. No such
case has been cited in the argument. Dicta of judges to that effect may
undoubtedly be produced, but they are not supported by the facts of the
cases under consideration.
"It seems clear that subsequent creditors have no better right
than subsequent purchasers, to question a previous transaction in which
the debtor's property was obtained from him by fraud, which he has
acquiesced in, and which he has manifested no desire to disturb. Yet, in
such a case, subsequent purchasers have no such right." (Id.)
So it seems to be settled by the Supreme Court of the United States, as a matter
of substantive law, that a stockholder in a corporation who was not such at the time of the
transactions complained of, or whose shares had not devolved upon him since by operation
of law, can not maintain suits of this character, unless such transactions continue and are
injurious to the stockholder, or affect him especially and specifically in some other way.
We are, therefore of the opinion, and so hold, that the judgment appealed from,
sustaining the demurrer to the first cause of action should be, and the same is hereby
reversed; and the judgment sustaining the demurrer to the second cause of action should
be, and is hereby affirmed, without any special ruling as to costs. The record will be
returned to the court whence it came for further proceedings in accordance with this
decision. So ordered.
Arellano, C.J., Torres, Mapa and Johnson, JJ., concur.

It is self-evident that the plaintiff in the case at bar was not, before he acquired in
September, 1903, the shares which he now owns, injured or affected in any manner by the
transactions set forth in the second cause of action. His vendor could have complained of
these transactions, but he did not choose to do so. The discretion whether to sue to set
them aside, or to acquiesce in and agree to them, is, in our opinion, incapable of transfer. If
the plaintiff himself had been injured by the acts of defendants' predecessors that is
another matter. He ought to take things as he found them when he voluntarily acquired his
ten shares. If he was defrauded in the purchase of these shares he should sue his vendor.

||| (Pascual v. Del Saz Orozco, G.R. No. L-5174, [March 17, 1911], 19 PHIL 82-102)

"If the party himself, who is the victim of fraud or usury,

chooses to waive his remedy and release the party, it does not belong to
a subsequent purchaser under him to recall and assume the remedy for
him." (Quoted with approval in the case of the Grahamvs. La Crosse and
Milwaukee R.R. Co., 102., U.S., 148.)
89

failure to seek leave of court for its filing and admittance. Petitioners would have wanted to
challenge in their Supplemental Petitions the Resolution 6 dated 8 October 2007 of the RTC in
Civil Case No. 07-610 granting the issuance of a "permanent injunction" against petitioners and
the other PRCI directors until the said case was resolved.
I
THIRD DIVISION
[G.R. No. 181455-56. December 4, 2009.]
SANTIAGO CUA, JR., SOLOMON S. CUA and EXEQUIEL D. ROBLES,
in their capacity as Directors of PHILIPPINE RACING CLUB,
INC., petitioners, vs. MIGUEL OCAMPO TAN, JEMIE U. TAN and
ATTY. BRIGIDO J. DULAY, respondents.
[G.R. No. 182008. December 4, 2009.]
SANTIAGO CUA, SR., in his capacity as Director of PHILIPPINE
RACING CLUB, INC., petitioners, vs. COURT OF APPEALS, MIGUEL
OCAMPO TAN, JEMIE U. TAN, ATTY. BRIGIDO J. DULAY, and HON.
CESAR UNTALAN, Presiding Judge, Makati Regional Trial Court, Br.
149, respondents.
DECISION
CHICO-NAZARIO, J p:
Before this Court are two Petitions: (1) a Petition for Review on Certiorari 1 under Rule 45 of the
Rules of Court filed by petitioners Santiago Cua, Jr. (Santiago Jr.), Solomon S. Cua (Solomon),
and Exequiel D. Robles (Robles), in their capacity as directors of the Philippine Racing Club, Inc.
(PRCI), with Miguel Ocampo Tan (Miguel), Jemie U. Tan (Jemie) and Atty. Brigido J. Dulay
(Dulay) as respondents, docketed as G.R. No. 181455-56; and (2) a Petition for Certiorari and
Prohibition 2under Rule 65 of the Rules of Court filed by petitioner Santiago Cua, Sr. (Santiago
Sr.), also in his capacity as PRCI director, likewise naming Miguel, Jemie, and Dulay as
respondents, together with the Court of Appeals and Presiding Judge Cesar Untalan (Judge
Untalan) of the Regional Trial Court (RTC), Branch 149 of Makati City, docketed as G.R. No.
182008.
Both Petitions assail the Decision 3 dated 6 September 2007 and Resolution 4 dated 22 January
2008 of the Court of Appeals in the consolidated cases CA-G.R. SP No. 99769 and No. 99780.
In its 6 September 2007 Decision, the Court of Appeals dismissed for lack of merit, mootness,
and prematurity, the Petition for Certiorari of petitioners Santiago Jr., Solomon, and Robles
(Santiago Jr., et al.); and the Petition for Certiorari and Prohibition of petitioner Santiago Sr.,
which sought the nullification of the Resolution 5 dated 16 July 2007 of the RTC in Civil Case No.
07-610 granting the Temporary Restraining Order (TRO) prayed for by respondents Miguel,
Jemie, and Dulay (Miguel, et al.). In its 22 January 2008 Resolution, the appellate court denied
the Motions for Reconsideration of petitioners and the Motion to Admit Supplemental Petition
for Certiorari of petitioner Santiago Jr., et al. The same Resolution did not consider the
Supplemental Petition forCertiorari and Prohibition filed by petitioner Santiago Sr. for the latter's

FACTUAL AND PROCEDURAL ANTECEDENTS

PRCI is a corporation organized and established under Philippine laws to: (1) carry on the
business of a race course in all its branches and, in particular, to conduct horse races or races of
any kind, to accept bets on the results of the races, and to construct grand or other stands,
booths, stablings, paddocks, clubhouses, refreshment rooms and other erections, buildings, and
conveniences, and to conduct, hold and promote race meetings and other shows and
exhibitions; and (2) promote the breeding of better horses in the Philippines, lend all possible aid
in the development of sports, and uphold the principles of good sportsmanship and fair play. 7To
pursue its avowed purposes, PRCI holds a franchise granted under Republic Act No. 6632, as
amended by Republic Act No. 7953, to operate a horse racetrack and manage betting stations.
Under its franchise, PRCI may operate only one racetrack.
In 1999, the Articles of Incorporation of PRCI was amended to include a secondary
purpose, viz.:
To acquire real properties and/or develop real properties into mix-use
realty projects including but not limited to leisure, recreational and
memorial parks and to own, operate, manage and/or sell these real
estate projects. 8
PRCI is publicly listed with the Philippine Stock Exchange (PSE). In 2006, PRCI had an
authorized capital stock of P1,000,000,000.00 divided into 1,000,000,000 shares, with a par
value of P1.00 each; of which a total of P569,857,749.00, representing 569,857,749 shares, had
been subscribed and paid up. 9
PRCI owns only two real properties, each covered by several transfer certificates of title. One is
known as the Sta. Ana Racetrack, located along A. P. Reyes Avenue, Makati City (Makati
property), measuring around 21.2 hectares; and the other is located in the towns of Naic and
Tanza in the province of Cavite (Cavite property).
Following the trend in the development of properties in the same area, 10 PRCI wished to
convert its Makati property from a racetrack to urban residential and commercial use. Given the
location and size of its Makati property, PRCI believed that said property was severely underutilized. Hence, PRCI management decided to transfer its racetrack from Makati to Cavite. PRCI
began developing its Cavite property as a racetrack, scheduled to be completed by April 2008.
Now as to its Makati property, PRCI management decided that it was best to spin off the
management and development of the same to a wholly owned subsidiary, so that PRCI could
continue to focus its efforts on pursuing its core business competence of horse racing. Instead of
organizing and establishing a new corporation for the said purpose, PRCI management opted to
acquire another domestic corporation, JTH Davies Holdings, Inc. (JTH). 11
90

JTH was then owned by Jardine Matheson Europe B.V. (JME). 12 It had an authorized capital
stock of P25,000,000.00, divided into 50,000,000 common shares with a par value of P0.50
each. JTH was publicly listed with the PSE. Its tangible assets substantially consisted of cash.
To determine the value of JTH, PRCI engaged the services of the accounting firm Sycip Gorres
Velayo & Co. (SGV) to conduct a due diligence study. 13

agreements, memoranda, and such other deeds, and to deliver any

documents and papers, perform any acts, necessary and incidental to
implement the foregoing, as well as to source the funds to implement the
same.
2. Special Stockholders' Meeting

Using the results of the SGV study, PRCI management determined that PRCI could initially
acquire 41,928,290 shares, or 95.55% of the outstanding capital stock of JTH, for the price of
P10.71 per share, or for a total of P449,250,000.00; in this case, PRCI would be paying a
premium of P42,410,450.00 for the said JTH shares, computed as follows:
Total
price
for
all
of
the
issued
shares (at P10.71/share) P470,418,848.00

and

subscribed

RESOLVED, That a Special Stockholders' Meeting of PRCI shall be held

on October 26, 2006 at 10:00 A.M., or at such later date as may be
practicable under the circumstances, in the principal place of business of
PRCI at Santa Ana Park, A.P. Reyes Avenue, Makati City;

JTH
RESOLVED FURTHER, That only those stockholders of record as of end
of business day of October 11, 2006 shall be entitled to notice, to vote
and/or to be voted upon, in accordance with the laws, regulations and bylaws of PRCI;

Less: Unaudited net worth of JTH (purely cash) - 426,010,000.00

Total premium for 100% of JTH 44,408,848.00

Multiply:
Interest
PRCI (95.5%) x 0.955

in

JTH

to

be

initially

acquired

by

Premium for the 95.5% interest in JTH to be acquired

by PRCI P42,410,450.00
=============
The PRCI Board of Directors held a meeting on 26 September 2006. Among the directors
present were petitioners Santiago Sr., Santiago Jr., and Solomon, as well as respondent Dulay.
After discussing and deliberating on the matter of the acquisition of JTH by PRCI, all the
directors present, except respondent Dulay, voted affirmatively to pass and approve the
following resolutions:
1. Declaration of Intention to Acquire and Purchase Shares of Stock
of Another Company
RESOLVED, as it is hereby resolved, that the Corporation intends to
acquire up to one hundred percent (100%) of the common shares of
stock of JTH Davies Holdings, Inc. by way of negotiated sale;
RESOLVED FURTHER, That Management and the Corporate Secretary
shall prepare and submit the Tender Offer, as well as, to file all the
necessary disclosures and notices in compliance with the Securities
Regulation Code, its implementing rules, and other prevailing regulations;
RESOLVED FURTHERMORE, That the Corporation authorizes its
President, Mr. Solomon S. Cua, to sign and execute any purchase

RESOLVED FURTHERMORE, That the Corporate Secretary shall be

authorized to issue the required notices, set the time for the submission
of, and to receive and validate proxies, as well as, to order publication of
notices and undertake such appropriate and necessary steps, including
the filing of the required disclosures to the regulating agencies, to effect
the foregoing.
3. Authorized Attorney-In-Fact and Proxy
In the event of a successful acquisition of the shares of JTH Davies
Holdings, Inc., the Board passed and approved the following resolutions:
RESOLVED, that the Corporation shall hereby authorize SANTIAGO
CUA, or in his absence,EXEQUIEL ROBLES, or in his
absence, SOLOMON S. CUA, or in his absence, SANTIAGO CUA, JR.,
or in his absence, DATUK SURIN UPATKOON, or in his absence,
Laurence Lim Swee Lim, or in his absence, LIM TEONG LEONG, to act
as its attorney-in-fact/proxy and to vote all shares as may be registered in
the name of the Corporation/lodged with the PCD System, and to
exercise all rights appurtenant thereto during the Annual Stockholders'
Meeting/s and all regular/special meeting/s of JTH DAVIES HOLDINGS,
INC. (formerly JARDINE DAVIES, INC.);
RESOLVED FURTHER, That these Directors, in the said order of priority,
shall have full power and authority and discretion to nominate, appoint,
and/or vote into office such directors and/or officers during the said
Annual Stockholders' Meeting/s and regular/special meeting/s of JTH
HOLDINGS, INC. (formerly JARDINE DAVIES, INC.);
RESOLVED FINALLY, That these Directors be, as they are hereby
granted full power and authority whatsoever requisite or necessary or
proper to be done in these matters. 14
91

The next day, 27 September 2006, PRCI entered into a Sale and Purchase Agreement for the
acquisition from JME of 41,928,290 common shares or 95.55% of the outstanding capital stock
of JTH. Among the principal terms of the Sale and Purchase Agreement were:
(a) The consideration for the acquisition was P10.71 per share or
P449,250,000.00;
(b) Upon the signing of the [A]greement, the [PRCI] shall pay P20 Million
to an Escrow Agent as deposit; and
(c) The sale and purchase transaction contemplated in the Agreement
shall be consummated at a closing not later than November 30,
2006 or the 50th day from the start of the JTH Offer or such
date which shall in no case be later than December 11,
2006. 15
PRCI also made a tender offer for the remaining 4.45% or 1,954,883 issued and outstanding
common shares of JTH at P10.71 each.
In the Special Stockholders' Meeting held on 7 November 2006, attended by stockholders with
481,045,887 shares or 84.42% of the outstanding capital stock of PRCI, the acquisition by PRCI
of JTH was presented for approval. The events during said meeting were duly recorded in the
Minutes, to wit:
V. APPROVAL OF THE ACQUISITION OF THE SHARES OF STOCK
OF JTH DAVIES HOLDINGS, INC.
Thereafter, the Corporate Secretary informed that the President
will present to the stockholders the rationale for the acquisition
of the shares of JTH Davies Holdings, Inc.
According to the President PRCI is intending to acquire up to
100% of the shares of JTH Davies Holdings, Inc. another listed
company in the PSE. For reference, the President informed that
the latest Annual Report of JTH has been appended to the
Information Statement for guidance. Also copies of the Board's
resolution presented for approval and ratification by the
stockholders has been posted in the room for convenient
reading of the stockholders.
The President explained that JTH is one of the oldest holdings
company and the name JTH Davies is an internationally
acclaimed name with a reputation for solid and sound financial
standing. With PRCI's acquisition of JTH, it gives PRCI the
necessary vehicle within which to enlarge and broaden the
business and operational alternatives or options of our
company. PRCI believes that this JTH will complement the
direction of PRCI in fast tracking the development of PRCI's
plans and provide it investment opportunities. It is for this
reason that we call this special meeting so you may know

soonest the present opportunity faced by PRCI without need for

you to wait until next year's annual meeting.
The Vice-Chairman then informed that the resolution approving
the purchase of JTH Davies Holdings, Inc. as presented in the
Information Statement which were furnished to the
stockholders is presented for approval to the body. A
stockholder thereafter moved that the the (sic) resolution be
approved which was duly seconded by another stockholder.
The Vice-Chairman declared the resolution approved.
Thereafter, Atty. Pagunsan took the floor and informed that he
is the proxy of various stockholders (10%) and would like to
manifest his vote as "NO" which the Vice-Chairman duly noted.
Notwithstanding the objection of Atty. Pagunsan, considering
the more than 2/3 of the outstanding capital stock of PRCI has
approved and ratified the resolution, (74%) the Corporate
Secretary declared the resolution as duly approved and ratified.
Thereafter, another stockholder, Mr. Ngo, asked the President
what are the plans of PRCI on the assets of JTH. The
President informed that as of now, JTH has no material hard
assets other than its retained earnings. Mr. Ngo asked again
what will be the direction of PRCI on the substantial retained
earnings of JTH to which the President replied that there are
several options being considered once the purchase is
complete one of which is the declaration of cash dividend.
Another stockholder took the floor and informed the
Management that he is happy with the transaction of PRCI and
the purchase by PRCI of the JTH shares is a good deal since
the value of the goodwill of JTH is substantial by his estimate.
He proceeded to thank the President and shook hands with
him. 16
By 22 November 2006, PRCI was able to additionally acquire 1,160,137 common shares of JTH
from the minority stockholders of the latter, giving PRCI ownership of 98.19% of the outstanding
capital stock of JTH.
PRCI prepared consolidated financial statements for itself and for JTH for the fiscal year ending
31 December 2006. The financial statements were audited by the accounting firm Punongbayan
& Araullo which gave the following unqualified opinion of the same: "In our opinion, based on our
audit and the report of other auditors, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Philippine Racing Club, Inc. and
Subsidiary as of December 31, 2006, and their consolidated financial performance and their
cash flows for the year then ended in accordance with Philippine Financial Reporting
Standards." The audited financial statements of PRCI and JTH for 2006 were presented to the
stockholders of PRCI and submitted to the Securities and Exchange Commission (SEC), the
Bureau of Internal Revenue (BIR), and the Philippine Stock Exchange (PSE).
Thereafter, PRCI again engaged the assistance of SGV in executing its intended spin-off to JTH
of the management and development of PRCI's Makati property. It was then determined that the
92

Makati property, with a total zonal value of P3,817,242,000.00, could be transferred to JTH in
exchange for the unissued portion of the latter's recently increase authorized capital
stock, 17amounting to P397,908,894.50, divided into 795,817,789 shares with a par value of
P0.50 per share. The difference of P3,419,333,105.50 between the total zonal value of the
Makati property and the aggregate par value of the JTH shares to be issued in exchange for the
same, would be reflected as additional paid-in capital of PRCI in JTH.
The matter of the proposed exchange was taken up and approved by the PRCI Board of
Directors in its meeting held on 11 May 2007, again with the lone dissent of respondent Dulay.
According to the Minutes of the said meeting, the following occurred:

II. Proof of Notice;

III. Certification of Quorum;
IV. Approval of the Minutes of the Annual Stockholders' Meeting held last
June 19, 2006 and of the Special Stockholders' Meeting held
last November 7, 2006;
V. Report of the President;

A. Exchange of the Corporation's Makati Property with Shares of

JTH Davies Holdings, Inc.

VI. Approval of the Audited Financial Statement for the year ended
December 31, 2006;

President Cua reported on certain essential matters regarding the

Corporation's Makati Property. After doing so, President Cua proposed
the exchange of this Property with shares of JTH Davies Holdings, Inc.
He then presented to the Board financial facts and figures heavily
favoring the transaction.

VII. Approval and Ratification of the acts of the Board of Directors, the
Executive Committee and the Management of the Corporation
for the Fiscal Year 2006;

After due discussion and deliberation, all the Directors present approved
and passed the following resolution, except Director Brigido Dulay who
registered a negative vote:
RESOLVED, That the Corporation hereby approves and
authorizes the exchange of its Makati property with shares of
JTH Davies Holdings, Inc.;
RESOLVED FURTHER, That, for this purpose, the Corporation
hereby authorizes its Executive Committee to determine and
approve the terms and conditions governing the exchange as it
shall consider for the best interest of the Corporation subject to
approval by the stockholders in compliance with the
Corporation Code;
RESOLVED FURTHER, That the Executive Committee, be, as
it is hereby granted full power and authority whatsoever
requisite or necessary or proper to accomplish these;
RESOLVED FINALLY, That SOLOMON CUA, President &
CEO, be, as he is hereby authorized to negotiate with JTH
Davies Holdings, Inc. and to execute, sign, and/or deliver any
and all documents covering the exchange in accordance with
the terms and conditions of the Executive Committee. 18
Subsequently, the Annual Stockholders' Meeting of PRCI was scheduled on 17 July 2007, the
Agenda for which is reproduced below:
I. Call to Order;

VIII. Approval of the Planned Exchange of PRCI's Makati property for

shares of stock;
IX. Approval of the Amendments of the By-Laws to conform with the
Manual of Corporate Governance;
X. Election of the members of the Board of Directors;
XI. Appointment of Independent External Auditors;
XII. Other Matters;
XIII. Adjournment. 19
The 11 May 2007 Resolution of the PRCI Board of Directors on the property-for-shares
exchange between PRCI and JTH was supposed to be presented for approval by the
stockholders under the afore-quoted Items No. VII and No. VIII of the Agenda.
However, on 10 July 2007, respondents Miguel, et al., as minority stockholders of PRCI, with the
following shareholdings:
Stockholder No. of Shares Percentage
Miguel Ocampo-Tan 16,380,000 2.87
Jemie U. Tan 15,972,720 2.80
Atty. Brigido J. Dulay 20 1 0.00
93


Total 32,352,721 5.67
======== ====
filed before the RTC a Complaint, denominated as a Derivative Suit with prayer for
Issuance of TRO/Preliminary Injunction, against the rest of the directors of PRCI and/or
JTH. The Complaint was docketed as Civil Case No. 07-610.
The Complaint was based on three causes of action: (1) the approval by the majority directors of
PRCI of the Board Resolutions dated 26 September 2006 and 11 May 2007 with undue haste
and deliberate speed, despite the absence of any disclosure and information was not only
anomalous and fraudulent, but also extremely prejudicial and inimical to interest of PRCI,
committed in violation of their fiduciary duty as directors of the said corporation; (2) respondent
Solomon, as PRCI President, with the acquiescence of the majority directors of PRCI,
maliciously refused and resisted the request of respondents Miguel, et al., for complete and
adequate information relative to the disputed Board Resolutions, brazenly and unlawfully
violating the rights of the minority stockholders to information and to inspect corporate books and
records; and (3) without being officially and formally nominated, the majority directors of PRCI
illegally and unlawfully constituted themselves as members of the Board of Directors and/or
Executive Officers of JTH, rendering all the actions they have taken as such null and void ab
initio. In the end, respondents Miguel, et al., prayed to the RTC, after notice and hearing, that:

(a) Permanently enjoining and prohibiting defendants from enforcing,

implementing, or taking any action in reliance upon the Disputed
Resolutions.
(b) Declaring the Disputed Resolutions dated 26 September 2006 and 11
May 2007 and the approval by the Executive Committee of the exchange
of the Corporation's Makati Property for JTH shares, as well as any and
all actions taken in reliance upon or pursuant to or in furtherance of the
Disputed Resolutions and/or approval of the Executive Committee, as null
and void ab initio.
(c) Declaring the assumption by defendant Majority Directors as Directors
and/or officers of JTH, including all acts done by defendant Majority
Directors as such Directors and/or officers of JTH, as null and void ab
initio.
(d) Ordering defendants to pay plaintiffs the sum of P500,000.00, and by
way of attorney's fees, plus P10,000.00 per court appearance, plus costs
of suit.
Other reliefs just and equitable under the premises are likewise prayed
for. 21
After conducting hearings on the prayer for the issuance of a TRO, RTC Judge Untalan issued a
Resolution on 16 July 2007, the dispositive portion of which reads:

1. A temporary restraining order and/or writ of preliminary injunction be

issued restraining and enjoining the holding of the Annual Stockholders'
Meeting scheduled on 17 July 2007 and restraining and enjoining the
defendants [PRCI directors] from enforcing, implementing, "railroading",
or taking any further action in reliance upon or in substitution or in
furtherance of the Disputed Resolutions, which would inflict grave and
irreparable injury in fraud of the Corporation.
2. A receiver and/or management committee be constituted and
appointed to undertake the management and operations of the
Corporation and to take over its assets to prevent its further loss, wastage
and dissipation.
3. To compel the defendant Majority Directors to render a complete and
adequate disclosure of all documents and information relating to the
subject matter of the Disputed Resolutions as well as the business and
affairs of the Corporation and its wholly-owned subsidiary from the time of
the latter's acquisition until final judgment.
4. After trial on the merits, that judgment be rendered in favor of the
plaintiffs and against the defendants, as follows:

WHEREFORE, premises considered, this court hereby partially grants

the prayer of PRCI for the issuance of Temporary Restraining Order upon
the herein defendants subject to the posting of Php100,000.00 bond on
condition that such bond shall answer to any damage that the Defendants
may sustain by reason of this TRO if the court should finally decide that
the applicants are not entitled thereto. This TRO shall be effective for
TWENTY (20) DAYS only from service of the same upon the Defendants
after posting of the bond.
Therefore, the Defendants, their agents, proxies and representatives are
hereby enjoined, prohibited and forbidden to present to, discuss, much
more to approve the same, at the 2007 Annual Stockholders' Meeting of
PRCI to be held on July 17, 2007 at 8:00 A.M. at the VIP Room, Santa
Ana Park, A.P. Reyes Ave., Makati City, the following Agenda included in
the Notice of said stockholders' meeting:
1. Agenda Roman No. IV Approval of the Minutes of the
Annual Stockholders' Meeting held last June 19,
2006 and the Special Stockholders' meeting held last
November 7, 2006.
2. Agenda Roman No. VII Approval and Ratification of the
acts of the Board of Directors, the Executive
94

Committee and the Management of the Corporation

for the Fiscal Year 2006.

said restraining order expired on 5 August 2007, even before the Petitions were submitted for
resolution.

3. Agenda Roman No. VIII Approval of the Planned

Exchange of PRCI's Makati property for shares of
stock.

Lastly, the Court of Appeals held that the issues raised by petitioners were factual and
evidentiary in nature which must be threshed out before the RTC as the designated commercial
court in Makati. The appellate court would not interfere with the proceedings a quo considering
that Civil Case No. 07-610 had not yet gone to trial and had not yet been resolved or terminated
by the RTC. Therefore, for being premature, the Court of Appeals could not prohibit the
continuance of the RTC proceedings in Civil Case No. 07-610.

Thus, in order that these subject matters and items of the Agenda of the
aforesaid Stockholders' Meeting shall not be taken up, the herein
Defendants, their agents, proxies and representatives, jointly and
severally, are hereby ordered to delete and remove from the Agenda said
three (3) above stated items of the Agenda before the start and conduct
of the said stockholders' meeting. Therefore, in case herein Defendants,
their agents, proxies and representatives defy and disobey this mandate,
they have committed already four (4) distinct contemptuous acts: delete,
present, discuss and approve.
This Court appealed to the Corporate Secretary as Officer of the Court, to
please make sure that this mandate is obeyed and observed by the
Defendants, their agents, proxies and representatives, before and during
the conduct of said stockholders' meeting.
Let the hearing of the main injunction be set on July 23 and 24, 2007 and
August 2, 2007, all at two o'clock in the afternoon. 22
The Annual Stockholders' Meeting of PRCI scheduled the next day, 17 July 2007, failed to push
through for lack of quorum.
On 19 July 2007, petitioners Santiago Jr., et al., as PRCI directors filed a Petition
for Certiorari with the Court of Appeals, docketed as CA-G.R. SP No. 99769. On 20 July 2007,
Santiago Sr., also as PRCI director, filed his own Petition for Certiorari and Prohibition, docketed
as CA-G.R. SP No. 99780. Both Petitions assailed the RTC Resolution dated 16 July 2007,
granting the issuance of a TRO, for being rendered with grave abuse of discretion amounting to
lack or excess of jurisdiction. CA-G.R. SP No. 99769 and No. 99780 were subsequently
consolidated.
The Court of Appeals promulgated its Decision on 6 September 2007 dismissing the Petitions in
CA-G.R. SP No. 99769 and No. 99780 for lack of merit, mootness, and prematurity.
According to the Court of Appeals, the TRO issued by the RTC enjoined the presentation,
discussion, and approval of only three of the 13 items on the Agenda of the 2007 Annual
Stockholders' Meeting. There is no evidence that the TRO issued by the RTC legally impaired
the holding of the scheduled stockholders' meeting. Indeed, the lack of quorum during the said
meeting was due to the absence of petitioners themselves who comprised the majority interest
in PRCI. Consequently, the appellate court found no grave abuse of discretion in the issuance by
the RTC of the TRO.
The Court of Appeals also noted that the Petitions in CA-G.R. SP No. 99769 and No. 99780 as
regards the issuance of the TRO already became moot when the 20-day period of effectivity of

The Court of Appeals ruled that there was no reason to dismiss the Complaint in Civil Case No.
07-610. Although the Complaint contained mere allegations, which had yet to be supported by
evidence, it was sufficient in form and substance, and the RTC properly took cognizance of the
same. The Court of Appeals reasoned that:
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate
Controversies(Interim Rules) provides:
"SECTION 1. Derivative action. A stockholder or member
may bring an action in the name of a corporation or
association, as the case may be, provided, that:
(1) He 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;
(2) 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;
(3) No appraisal rights are available for the act or acts
complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith
dismiss the case."
A reading of the Complaint reveals that the same sufficiently alleges the
foregoing requirements. Complainants essentially allege that they are
PRCI stockholders, that they have opposed the issuance and approval of
the questioned resolutions during the board stockholders' (sic) meetings,
that prior resort to intra-corporate remedies are futile, that nevertheless,
they have asked for copies of the pertinent documents pertaining to the
questioned transactions which the board has declined to furnish, that they
have instituted the derivative suit in the name of the corporation, that they
are questioning the acts of the majority of the board of directors believing
95

that the herein petitioners have committed a wrong against the

corporation and seeking a nullification of the questioned board resolutions
on the ground of wastage of the corporate assets.

Prohibition,26 to be followed shortly thereafter by a Motion to Admit (Supplemental

Petition). 27 Petitioners intended to additionally assail in their Supplemental Petitions the 8
October 2007 Resolution of the RTC granting the issuance of the permanent injunction.

Thus, contrary to petitioners' averment, the Complaint does state a cause

of action. 23

In its Resolution dated 22 January 2008, the Court of Appeals denied the Motions for
Reconsideration of petitioners and the Motion to Admit Supplemental Petition for Certiorari of
petitioners Santiago Jr., et al.

Petitioners in CA-G.R. SP No. 99769 and No. 99780 filed their respective Motions for
Reconsideration of the foregoing Decision of the Court of Appeals.
In the meantime, upon the expiration of the TRO issued by RTC Judge Untalan in Civil Case No.
07-610, the Annual Stockholders' Meeting of PRCI was again scheduled on 10 October 2007.
However, Judge Untalan issued on 8 October 2007 a Resolution with the following decree:
WHEREFORE, premises considered, this court hereby GRANTS the
issuance ofPERMANENT INJUNCTION against the defendants until the
instant case is finally resolved, subject to the posting by plaintiffs of a
Php100,000.00 bond, on condition that such bond shall answer to any
damage that the Defendants may sustain by reason of this injunction if
the court should finally decide that the applicants are not entitled thereto.
This injunction shall be effective from service of the same upon the
Defendants after posting of the bond.
Therefore, the Defendants, their agents, proxies and representatives are
hereby enjoined, prohibited and forbidden to present to, discuss, much
more to approve the same, at any stockholders' meeting, whatsoever kind
and nature, of PRCI of the following Agenda:
1. Approval of the Minutes of the Annual Stockholders' Meeting
held last June 19, 2006 and the Special
Stockholders' meeting held last November 7, 2006 of
PRCI.
2. Approval and Ratification of the acts of the Board of
Directors, the Executive Committee and the
Management of PRCI for the Fiscal Year 2006, as far
as the acquisition of JTH and the planned exchange
of PRCI's Makati property for shares of stock of JTH
are concerned.
3. Approval of the Planned Exchange of PRCI's Makati property
for shares of stock of JTH. 24
As a result, the Annual Stockholders' Meeting of PRCI proceeded as scheduled on 10 October
2007 without taking up the matters covered by the permanent injunction issued by the RTC.
Petitioners Santiago Jr., et al. filed in CA-G.R. SP No. 99769 their Motion to Admit Supplemental
Petition for Certiorari with the attached Supplemental Petition for Certiorari; 25 and petitioner
Santiago Sr. filed in CA-G.R. SP No. 99780 a Supplemental Petition for Certiorari and

The Court of Appeals found that petitioners' Motions for Reconsideration merely reiterated the
issues and arguments which were raised in the Petitions and/or which the appellate court
already discussed and passed upon. The Court of Appeals reiterated its ruling that it was
premature to prohibit the continuance of the proceedings in Civil Case No. 07-610 before the
RTC; and that the Complaint therein sufficiently stated a cause of action.
The Court of Appeals likewise refused to admit petitioners' Supplemental Petitions
for Certiorari.It noted that Santiago Sr. filed his Supplemental Petition without asking for leave to
file the same. Apparently, the appellate court disregarded the Motion to Admit (Supplemental
Petition) which petitioner Santiago filed separately from and at a later date than his
Supplemental Petition. In addition, the Court of Appeals adjudged that the Supplemental
Petitions which petitioners hoped to be admitted involved a subject matter not covered in their
original Petitions. Although the TRO and the permanent injunction were both issued by the RTC
in Civil Case No. 07-610, the two issuances were independent of each other, and only the TRO
was the subject of the original Petitions. Hence, the Supplemental Petitions assailing the
permanent injunction granted by the RTC could not be considered as merely augmenting the
matters, issues, and causes of action of the original Petitions; and should be challenged in a
separate petition for certiorari.
Failing to obtain any relief from the Court of Appeals, petitioners turned to this Court.
Petitioners Santiago Jr., et al., filed a Petition for Review on Certiorari under Rule 45 of the Rules
of Court, docketed as G.R. No. 181455-56; while petitioner Santiago Sr. filed a Petition
forCertiorari under Rule 65 of the Rules of Court, docketed as G.R. No. 182008. According to
petitioners, the appellate court committed reversible errors of law and grave abuse of discretion
in its Decision dated 6 September 2007 and Resolution dated 22 January 2008 in CA-G.R. SP
No. 99769 and No. 99780.
Petitioners insisted that Civil Case No. 07-610 pending before the RTC did not constitute a valid
derivative suit. Respondents Miguel, et al., failed to allege in their Complaint that they had no
appraisal rights for the acts they were complaining of. In fact, the very allegations made by
respondents Miguel, et al. in their Complaint supported the availability of appraisal rights to
them. The Complaint in Civil Case No. 07-610 was nothing more than a nuisance or harassment
suit against petitioners and the other PRCI directors.
Petitioners averred that, by finding no grave abuse of discretion on the part of the RTC in issuing
the TRO against petitioners and the other PRCI directors, the Court of Appeals substituted its
own judgment for that of the PRCI Board of Directors, arbitrarily and capriciously disregarding
the business judgment made by the said Board and approved by PRCI stockholders. The TRO
issued by the RTC was not for the benefit of the PRCI stockholders. Furthermore, the expiration
of the 20-day TRO did not make their Petitions for Certiorari in CA-G.R. SP No. 99769 and No.
99780 moot. Said Petitions included the prayer that the RTC be restrained from proceeding with
96

Civil Case No. 07-610 in view of the fatally defective Complaint, the grant or denial of which the
appellate court should have still determined despite the expiration of the TRO.

WHEREFORE, premises considered, it is respectfully prayed that the

petition be given due course, and that:

Petitioners also challenged the refusal by the Court of Appeals to admit their Supplemental
Petitions in CA-G.R. SP No. 99769 and No. 99780. They asserted that the issues in their
Supplemental Petitions were closely intertwined with those in their original Petitions.

1. Upon the filing of this petition, a temporary restraining order and/or writ
of preliminary injunction be immediately issued restraining and enjoining
the enforcement or execution of the assailed Court of Appeals' Decision
and Resolution, and the assailed trial court's resolutions, particularly that
which mandates the continued enforcement of the Writ of PERMANENT
Injunction issued by the trial, which prevents the stockholders of the
corporation from acting on matters that have to be submitted to them for
approval and/ratification at the regular annual stockholders' meetings.

The prayer of petitioners Santiago Jr., et al., in their Petition in G.R. No. 181455-56 reads:
PRAYER
WHEREFORE, in view of the foregoing and in the interest of justice, it is
most respectfully prayed of the Honorable Supreme Court that:
A. The Decision of the Court of Appeals dated 06 September
2007 (Annex "I") and the Resolution of the Court of Appeals
dated 22 January 2008 (Annex "M") be NULLIFIED,
REVERSED and SET ASIDE for having been issued on the
basis of reversible error of law and with grave abuse of
discretion amounting to lack of jurisdiction.
B. The Resolutions of Judge Cesar Untalan of Makati Regional Trial
Court, Branch 149 dated 16 July 2007 (Annex "F") and 08
October 2007 (Annex "G") be accordingly NULLIFIED,
REVERSED and SET ASIDE for having been issued with grave
abuse of discretion amounting to lack of jurisdiction.
C. The complaint of Respondents be DISMISSED outright for lack of
jurisdiction and cause of action.
D. Such further reliefs just and equitable under the circumstances be
GRANTED. 28
Petitioners Santiago Jr., et al., subsequently filed in G.R. No. 181455-56 an Urgent Motion for
Issuance of a Temporary Restraining Order (Status Quo Ante) and/or Writ of Preliminary
Injunction, in which they additionally asked the Court that "a Temporary Restraining Order
(Status Quo Ante) and/or Writ of Preliminary Injunction be immediately issued restraining the
implementation (sic) Judge Cesar Untalan's Resolutions dated 16 July 2007 and 08 October
2007 so as not to render inutile this Most Honorable Court's exercise of jurisdiction over this
action and to prevent the decision on this case from being rendered ineffectual and
academic." 29
Meanwhile, petitioner Santiago Sr. sought the following reliefs from this Court in his Petition in
G.R. No. 182008:
PRAYER

2. Thereafter, a writ of prohibition be issued and/or the preliminary

injunction be made permanent and continuing, during the pendency of the
instant case before the Honorable court.
3. After due hearing, that the Honorable Court:
(a) Declare null and void the Honorable Court of Appeals' 06
September 2007 Decision and 22 January 2008 Resolution, in
CA-G.R. SP No. 99780, as well as the Trial Court's 16 July
2007 and 8 October 2007 Resolutions in Civil Case No. 07-610
of the Makati Regional Trial Court, and
(b) Order the dismissal of the Complaint filed by the private
respondents against petitioner, et al., docketed as Civil Case
No. 07-610 of the RTC of Makati City.
Other reliefs just and equitable in the premises are likewise prayed for. 30
In a Resolution dated 9 April 2008 in G.R. No. 182008, the Court granted petitioner Santiago
Sr.'s prayer for the issuance of a TRO, to wit:
Acting on the prayer for the issuance of a temporary restraining order
and/or a writ of preliminary injunction dated 24 March 2008, the Court
likewise
resolves
to ISSUE aTEMPORARY
RESTRAINING
ORDER enjoining respondents from enforcing or executing the assailed
Court of Appeals' decision and resolution and the assailed trial court's
resolutions particularly that which mandates the continued enforcement of
the writ of permanent injunction issued by the trial court, until further
orders from this Court, and to require petitioner to POST a CASH
BOND or a SURETY BOND from a reputable bonding company of
indubitable solvency with terms and conditions acceptable to the Court, in
the amount of TWO HUNDRED THOUSAND PESOS (P200,000.00),
within five (5) days from notice, otherwise, the temporary restraining
order herein issued shall automatically be lifted. Unless and until the
Court directs otherwise, the bond shall be effective from its approval by
the Court until this case is finally decided, resolved or terminated. 31

97

Accordingly, the Court issued the TRO 32 on even date, directed against the respondents
of G.R. No. 182008, namely, respondents Miguel, et al., and Judge Untalan.

CO-MAJORITY DIRECTORS TO SCHEDULE A STOCKHOLDERS'

MEETING WITH THE VIEW TO RENDER MOOT AND ACADEMIC THE
ACTION AND PROCEEDINGS BEFORE THE REGIONAL TRIAL
COURT OF MAKATI, BRANCH 149.
II

On 21 April 2008, respondents Miguel, et al. filed with the Court their Comment with Prayer for
the Immediate Lifting or Dissolution of the Temporary Restraining Order in G.R. No. 182008.
Respondents Miguel, et al., argued that the Petition for Certiorari in G.R. No. 182008 was
dismissible due to several procedural errors. Petitioner Solomon, who signed the Petition in G.R.
No. 182008 on behalf of Santiago Sr., was guilty of forum shopping for failing to inform the Court
of the Petition for Review in G.R. No. 181455-56, of which he was one of the petitioners. Both
Petitions involved the same transactions, essential facts, and circumstances, as well as identical
causes of action, subject matter, and issues. The Petition for Certiorari in G.R. No. 182008 was
also not personally verified by petitioner Santiago Sr. as required by rules and jurisprudence.
Moreover, the Petition for Certiorari was not a proper remedy, since it was only proper when
there was no other plain, speedy, and adequate remedy in the ordinary course of law. Petitioner
Cua himself admitted the availability of other remedies, except that he was "avoiding the
tortuous manner offered by other remedies." In fact, petitioners Santiago Jr., et al., filed a
Petition for Review in G.R. No. 181455-56. Lastly, errors of judgment could not be remedied by a
Petition for Certiorari. Petitioner Santiago Sr.'s Petition in G.R. No. 182008 raised issues that
were factual and evidentiary in nature, on which the RTC has yet to make finding.
On substantial grounds, respondents Miguel, et al., explained that their Complaint in Civil Case
No. 07-610 was comprised of several causes of action. It was not merely a derivative suit, but
was also an intra-corporate action arising from devices or schemes employed by the PRCI
Board of Directors amounting to fraud or misrepresentation and were detrimental to the interest
of the PRCI stockholders. Additionally, the fraudulent acts and breach of fiduciary duties by the
PRCI directors had already been established by prima facie factual evidence, which warranted
the continuation of the proceedings in Civil Case No. 07-610 before the RTC for adjudication on
the merits. It was also established that there were no appraisal rights available for the acts
complained of, since (1) the PRCI directors were being charged with mismanagement,
misrepresentation, fraud, and breach of fiduciary duties, which were not subject to appraisal
rights; (2) appraisal rights would only obtain for acts of the Board of Directors in good faith; and
(3) appraisal rights may be exercised by a stockholder who had voted against the proposed
corporate action, and no corporate action had yet been taken herein by PRCI stockholders, who
still had not voted on the intended property-for-shares exchange between PRCI and JTH.
Furthermore, the Court of Appeals correctly denied admission of the Supplemental Petitions in
CA-G.R. SP No. 99769 and No. 99780. A new and independent cause of action could not be set
by supplemental complaint. The issues raised in the original Petitions pertain to the grave abuse
of discretion committed by the RTC in issuing the TRO and in taking cognizance of Civil Case
No. 07-610, by setting the same for hearing on the main injunction; in contrast, the issues in the
Supplemental Petitions referred to the issuance of the Writ of Preliminary Injunction.
In support of their prayer for the immediate lifting or dissolution of the TRO issued by this Court,
respondents Miguel, et al., contended that:
I

THE PETITIONER HEREIN, HAVING BEEN IMPLEADED AS

DIRECTOR AND FIDUCIARY OF PRCI, DOES NOT STAND TO
SUFFER ANY IRREPARABLE INJURY.
III
TO THE CONTRARY, IT IS PRCI WHO STAND TO SUFFER GRAVE
AND IRREPARABLE INJURY IF THE TRO IS NOT LIFTED AND/OR
DISSOLVED.
IV
THE PETITIONER HEREIN HAS FAILED TO ESTABLISH ANY CLEAR
LEGAL RIGHT THAT ENTITLES HIM TO THE ISSUANCE OF A TRO
AND/OR WRIT OF PRELIMINARY INJUNCTION.
V
THE TRO WAS IMPROPERLY ISSUED AS PETITIONER HAS FAILED
TO SHOW ANY EXTREME URGENCY TO NECESSITATE THE
ISSUANCE THEREOF. 33
In the end, respondents Miguel, et al., prayed:
PRAYER
WHEREFORE, premises considered, it is respectfully prayed of this
Honorable Supreme Court that the Temporary Restraining Order be
LIFTED or DISSOLVED IMMEDIATELY, and that the instant Petition be
DISMISSED.
Other just and equitable reliefs are likewise prayed for. 34
Only two days later, on 23 April 2008, respondents Miguel, et al., again urgently moved 35 for
the lifting and/or dissolution of the TRO issued by this Court. They informed the Court that the
PRCI Board of Directors passed and approved on 22 April 2008 a Resolution setting the Annual
Stockholders' Meeting of PRCI on 18 June 2008, including in the proposed Agenda therefor the
following items:

THE TEMPORARY RESTRAINING ORDER ISSUED BY THIS

HONORABLE COURT HAS IMPELLED HEREIN PETITIONER AND HIS
98

(d) Approval of the Minutes of the Special Stockholders' Meeting held on

7 November 2006, and the Minutes of the Annual Stockholders'
Meeting held on 10 October 2007;
xxx xxx xxx
(g) Approval and ratification of the acts of the Board of Directors, the
Executive Committee, and Management of the Corporation for
Fiscal Years 2006 and 2007;

Stockholder No. of Shares Percentage

Jalane Christie U. Tan 16,927,560 2.97
Marilou U. Pua 3,884,400 0.68
Artisteo G. Puyat 1,633,666 0.29
Ricardo S. Pareo 5,850 0.00

(h) Approval of the Planned Exchange of PRCI's Makati Property for

shares of stock of JTH Davies Holdings, Inc. 36
On the same day, 23 April 2008, the Court issued a Resolution 37 consolidating G.R.
No. 181455-56 and No. 182008.

Total 22,451,476 3.94
========= =====

Thereafter, on 16 June 2008, Aris Prime Resources, Inc. (APRI), a minority stockholder of PRCI
with 5,000,000.00 shares or 0.88% of the outstanding capital stock of PRCI filed a Very
Respectful Motion for Leave to Intervene as Co-Respondent in the Petition with the attached
Very Respectful Urgent Motion to Lift Restraining Order. 38 It relayed to the Court that it
received Notice of the Annual Stockholders' Meeting of PRCI set on 18 June 2008, where the
items on the property-for-shares exchange between PRCI and JTH were included in the Agenda.
Considering that the validity of the acts of the PRCI Board of Directors concerning the propertyfor-shares exchange are the very issues raised in the Petitions presently before the Court, while
the factual issues relating to the same are still being litigated before the RTC in Civil Case No.
07-610, the submission of the exchange to the PRCI stockholders for their approval will render
the aforementioned proceedings before this Court and the RTC moot and academic. It will
amount to a denial of the right of APRI and of respondents Miguel, et al., to be heard before the
RTC where they are still to present their evidence on the factual issues. It will likewise unduly
pave the way for the validation of the abuse committed by the majority directors of PRCI in
denying the right of the minority directors and stockholders of the corporation to information, and
for the sanction of the blatant disregard by the majority directors of their duties of fidelity and
transparency. Unless the TRO is lifted forthwith, APRI, respondents Miguel, et al., and all other
minority stockholders stand to suffer prejudice. Expectedly, petitioners seek the dismissal, while
respondents Miguel, et al., pray for the grant of the motion to intervene of APRI.
Pending action on the foregoing incidents, petitioners Santiago Jr., et al., filed before the Court a
Manifestation and Motion to Set Case for Oral Arguments. 39
In their Manifestation, petitioners Santiago Jr., et al., admitted that the PRCI Board of Directors
had already called and set the Annual Stockholders' Meeting on 18 June 2008, and among the
items on the Agenda for confirmation and approval by the stockholders was the property-forshares exchange between PRCI and JTH.
Petitioners Santiago Jr., et al., brought to the attention of the Court the fact that on 5 June 2008,
another set of minority stockholders of PRCI, namely, Jalane Christie U. Tan, Marilou U. Pua,
Aristeo G. Puyat, and Ricardo S. Parreno (Jalane, et al.) filed with the RTC of Makati a
Complaint against petitioners and the other directors of PRCI and/or JTH, docketed as Civil
Case No. 08-458. Jalane, et al., have the following shareholdings in PRCI:

Jalane, et al., claimed in their Complaint in Civil Case No. 08-458 that "[a]part from being a
derivative suit, this suit is also filed based on devices or schemes employed by the Board of
Directors amounting to fraud or misrepresentation which is detrimental to the interest of the
corporation, the public and/or stockholders as provided for under Section 1 (a) (1) of the Interim
Rules of Procedure for Intra-Corporate Controversies (A.M. No. 01-2-04-SC)." 40 The Complaint
was based on four causes of action: (1) the acquisition of JTH by PRCI; (2) sale of 29.92% of
JTH shares by PRCI; 41 (3) exchange of the Makati property of PRCI for JTH shares; and (4)
interlocking of Directors of PRCI and JTH. The Complaint of Jalane, et al., contained the
following prayer:
PRAYER
WHEREFORE, it is respectfully prayed of this Honorable Court, after due
notice and hearing, that:
1. A Temporary Restraining Order and/or Writ of Preliminary Mandatory
Injunction be issued enjoining the presentation, discussion and
ratification of portions of the Agenda of the Annual
Stockholders Meeting of PRCI scheduled on June 18, 2008,
particularly items IV, VII and VIII;
2. An order be issued nullifying the Sale and Purchase Agreement dated
September 27, 2006 for the acquisition of JTH Davies
Holdings, Inc.
3. An order be issued nullifying the sale of PRCI shares in JTH in April
2007 and May 7, 2007;
[Paragraph crossed-out.]

99

5. An order be issued directing defendants to pay plaintiffs the sum of

P500,000.00 as and by way of attorney's fees, plus cost of suit.
Other reliefs, just and equitable under the premises are likewise prayed
for. 42
Acting on the Complaint of Jalane, et al. in Civil Case No. 08-458, Executive Judge Winlove
Dumayas (Executive Judge Dumayas) of the Makati City RTC issued a 72-hour TRO, enjoining
PRCI directors from presenting, discussing, and ratifying the items in the Agenda for the Annual
Stockholders' Meeting set on 18 June 2008 related to the property-for-shares exchange between
PRCI and JTH. However, upon being apprised of the TRO issued by this Court on 9 April 2008
in G.R. No. 182008, in relation to Civil Case No. 07-610 pending before the Makati City RTC,
Branch 149, Executive Judge Dumayas gave verbal advice that the Annual Stockholders'
Meeting of PRCI should proceed on 18 June 2008 as if the 72-hour TRO had not been issued.
Consequently, the Annual Stockholders' Meeting of PRCI proceeded on 18 June 2008.
The Annual Stockholders' Meeting of PRCI, held on 18 June 2008, was attended by
stockholders with a total of 493,017,509 shares or 86.52% of the outstanding capital stock of
PRCI, more than the necessary 2/3 to constitute a quorum. Discussed in the meeting were the
same items, whose presentation to the stockholders was sought to be enjoined by respondents
Miguel, et al., in Civil Case No. 07-610 and by Jalane, et al., in Civil Case No. 08-458. The
actions taken by the stockholders on the controversial items were duly recorded in the Minutes
of the meeting, as follows:
IV. APPROVAL
OF
THE
MINUTES
STOCKHOLDERS' MEETINGS

OF

THE

PREVIOUS

Before the next agenda was tackled in the meeting, a

stockholder, Atty. Benjamin Santos asked to be recognized on
the floor. The Chairman gave Atty. Santos permission to speak.
Atty. Santos inquired from the Corporate Secretary if there has
already been official notice of service on him regarding a 72hour temporary restraining order which was issued by the
Executive Judge of the Makati Regional Trial Court (RTC).
The Corporation (sic) Secretary answered in the negative.
For the information of the stockholders present, Atty. Santos
mentioned that a case has been filed by certain minority
shareholders, namely, Jalane Christie U. Tan, Marilou U. Pua,
Aristeo G. Puyat and Ricardo S. Parreno, against the Board of
Directors of PRCI (Civil Case No. 08-458, Makati RTC), and a
72-hour TRO was issued on 17 June 2008 "enjoining
defendants (directors of PRCI), their representatives,
employees and/or all those acting for and in their behalf to
refrain from the presentation, discussion and ratification of
portions of the Agenda of the Annual Stockholders' Meeting of
PRCI scheduled on June 18, 2008 particularly items IV, VII and
VIII." . . . .
xxx xxx xxx

According to Atty. Santos, the TRO enjoins them in their

capacity as Directors of PRCI. He further stated that the
attendance of all the directors present in the stockholders'
meeting, is in their capacity as stockholders of PRCI and not as
directors of PRCI. The Chairman is present merely to preside
over the meeting, and the Corporate Secretary is not a member
of the Board of Directors. Atty. Santos likewise informed the
stockholders present of the existence of a temporary
restraining order issued by the Supreme Court dated 09
April 2008 (in SC G.R. No. 182008) which "enjoin(ed)
respondents from enforcing or executing the assailed Court of
Appeals' decision and resolution, and the assailed trial court's
resolutions particularly that which mandates the continued
enforcement of the writ of permanent injunction issued by the
trial court, until further orders from this Court."Thereafter, Atty.
Santos moved that Agenda Item IV as well as the rest of the
items to be taken up since the TRO of the Makati RTC is
defective and should not prevail over the TRO of the Supreme
Court.
Atty. Santos added that the case recently filed by the
abovementioned minority shareholders is a duplicate of another
pending case filed by other minority shareholders also in the
Makati RTC. It was pointed out that the shareholders in the
recent case are guilty of forum shopping since they primarily
have the same interests as those who had earlier filed a suit
against PRCI. Atty. Santos clarified that the pending case is
currently the subject of a Petition to the Supreme Court wherein
the aforementioned TRO was issued. With this Comment, the
Corporate Secretary took note of the Petition filed with the
Supreme Court and the TRO issued by the Supreme Court.
xxx xxx xxx
. . . With all the foregoing comments, Atty. Santos moved that
the stockholders proceed with the meeting and that the item
under Agenda IV be approved, which are the following: the
Minutes of the Annual Stockholders' Meeting held on June 19,
2006, the Minutes of the Special Stockholders' Meeting held on
November 7, 2006 and the Minutes of the Annual Stockholders'
Meeting held on October 10, 2007.
Thereafter, Atty. Alexander Carandang asked to be given
permission to speak. The Chairman asked Atty. Carandang his
name and authority to speak, to which, he answered his name
and said he was stockholder of record and a proxy of Aristeo
Puyat and Jose L. Santos. After Atty. Carandang was
recognized, he stated that, contrary to Atty. Santos' earlier
actuations, the recent complaint filed is different from the
complaint earlier filed by the Dulay group. He also mentioned
that the case which Puyat earlier filed is different because it is a
100

case for inspection and photocopying of PRCI documents. He

thereafter warned against the tackling of Agenda Item No. 4.
Atty. Brigido Dulay, as a stockholder and proxy to the Tan
group (Miguel Ocampo Tan, Jemie U. Tan, JUT Holdings, Inc.,
Jalane Christie U. Tan, etc.) likewise took the floor to manifest
his continuing objection to the proceedings.
Atty. Amado Paolo Dimayuga also took the floor as a proxy to
Marilou Pua and manifested that the complainants in the recent
case filed are not guilty of forum shopping and also manifested
his objection to the taking up of Item IV in the agenda and the
continuance of the proceedings in the stockholders' meeting.
Atty. Pelagio Ricalde also took the floor as proxy for Aries
Prime Resources, Inc. and also manifested objection to the
proceedings. Both Atty. Dimayuga and Atty. Ricalde manifested
continuing objections.
Atty. Dimayuga also mentioned that he received word that a
Motion to Lift was just filed by the PRCI Directors regarding the
recent TRO issued by the Makati RTC. As a reply, the
Corporate Secretary asked that the counsel for the PRCI
directors be allowed to explain such allegations. Atty. Garbriel
Q. Enriquez, the counsel for PRCI Directors Cua, Cua, Jr., De
Villa and Robles informed the stockholders of the wrong
information being given by Atty. Dimayuga. They had filed a
manifestation before the Executive Judge of the RTC which
issued the TRO and informed him of the facts mentioned by
Atty. Santos. The Executive Judge said that today's meeting
should proceed because the plaintiffs therein suppressed the
existing TRO in the Supreme Court, and the TRO of the RTC
cannot rise above the Supreme Court TRO. There is therefore
no legal obstacle to holding the Annual Stockholders' Meeting,
which should proceed so as not to prejudice the stockholders.
The Corporate Secretary stated that all the objections are duly
noted. There being an earlier motion for the approval of the
Minutes, a stockholder seconded said motion. The motion
having been duly seconded, the Chairman declared all the
minutes for approval as duly approved.

Management during the last fiscal years 2006 and 2007.

The Chairman then explained that as to all other matters and
action affecting the operations, financial performance and
strategic posture of the Corporation, all have been subsumed
and discussed in the Annual Report of the President and
likewise reflected in the Information Statement sent to all
stockholders of record and to the SEC.
Once more, Atty. Dulay, Atty. Carandang, Atty. Dimayuga and
Atty. Ricalde all took the floor successively and objected to this
item in the agenda and the Corporate Secretary duly noted
these objections.
A stockholder later moved that all the acts of the Board of
Directors, the Executive Committee, and the corporate
management be confirmed, ratified and approved by the
stockholders. The said motion was duly seconded, thus, the
stockholders thereafter approved and ratified all the said acts.
At this juncture, Atty. Dulay requested that the stockholders
who moved and seconded the aforementioned acts be named
and their authority to speak be made known. Atty. Carandang
likewise inquired about the same information about a lady
stockholder who earlier seconded the motion. With this, Atty.
Jose Miguel Manalo stated his name and said he was a
stockholder of record. The other stockholders stated that they
were proxies of Mr. Santiago Cualoping III.
VII. APPROVAL OF THE EXCHANGE OF PRCI'S MAKATI PROPERTY
FOR SHARES OF STOCK OF JTH DAVIES HOLDINGS, INC.
When asked by the Chairman as to the next item in the
agenda, the Corporate Secretary informed all present that the
next item is the approval of the exchange of PRCI's Makati
property for shares of stock of JTH Davies Holdings which
was duly approved by the Board of Directors during its 11 May
2007 meeting. The exchange was duly reported and disclosed
to the SEC and the information thereof was included in the
Information Statements mailed to all stockholders of PRCI.

xxx xxx xxx

VI. RATIFICATION OF THE ACTS OF THE BOARD OF DIRECTORS,
THE EXECUTIVE COMMITTEE AND THE MANAGEMENT
OF THE CORPORATION FOR FISCAL YEARS 2006 AND
2007
The Chairman then proceeded by stating that the next item on
the agenda is the ratification by the Stockholders of the acts of
the Board of Directors, the Executive Committee, and the

Yet again, Atty. Dulay, Atty. Carandang, Atty. Dimayuga and

Atty. Ricalde all took the floor successively and objected to this
item in the agenda which were duly noted by the Corporate
Secretary.
The Chairman then called the President of PRCI, Mr. Solomon
Cua to officiate on this matter. At this point, one stockholder
moved that the exchange of PRCI's Makati property for JTH
101

shares be approved by the stockholders, which was duly

seconded by another stockholder. President Cua then asked
that the total percentage of those who are in favor of the
exchange be taken. Mr. Santiago Cua, Jr., a stockholder and a
proxy of approximately 31.39% of the shareholdings voted in
favor of the exchange. Then, Mr. Lawrence Lim Swee Lin,
representing Magnum Investment Ltd. and Leisure
Management Ltd. who own 39.15% of the shareholdings, also
voted in favor of the exchange. Mr. Exequiel D. Robles also
voted in favor of the exchange, as proxy of Sta. Lucia Realty &
Development, Inc. owning 4.19% of the shares. Lastly, Atty.
Santos also wanted his vote of approval be counted whi his
shares of stock of 117 shares.
With 75.23% of the outstanding capital stock of PRCI voting in
favor of the exchange of its Makati property for shares of stock
of JTH Davies, the Chairman then declared said motion as
carried and approved. 43
Hence, at their annual meeting on 18 June 2008, the PRCI stockholders had already confirmed
and approved the actions and resolutions of the PRCI Board of Directors, which were to subject
matters of Civil Cases No. 07-610 and No. 08-458. Resultantly, on 7 July 2008, PRCI and JTH
duly signed and executed a Deed of Transfer with Subscription Agreement, covering the
exchange of the Makati property of PRCI for shares of stock of JTH. Paragraph 4 of said Deed
expressly provides:
4. The parties understand, acknowledge and agree that this Deed
is executed with the intention of availing of the benefits of Sections
40(C)(2) of the National Internal Revenue Code of 1997 (NIRC), as
amended, where, upon subscription of shares hereunder, the Subscriber
shall gain further control of the Company. The parties obtained a ruling
from the Bureau of Internal Revenue to the effect that no gain or loss
will be recognized on the part of each of the parties, pursuant to this
Deed, in accordance with Sections 40(C)(2) of the NIRC, as amended.
The ruling confirmed that the transfer of the Subscriber's parcels of land
to the Company in exchange for the shares of stock of the latter is not
subject to income tax, capital gains tax, donor's tax, value-added
tax and documentary stamp tax, except for documentary stamp tax on
the original issuance of the Company's shares of stock to the
Subscriber. 44 (Emphases ours.)
However, in a letter dated 15 July 2008, the BIR reversed/revoked its earlier ruling that the
property-for-shares exchange between PRCI and JTH was a tax-free transaction under Section
40 (C) (2) of the National Internal Revenue Code of 1997; and subjected the exchange to valueadded tax. As a result, PRCI and JTH executed on 22 August 2008 a Disengagement
Agreement, 45by virtue of which, effective immediately, PRCI and JTH would disengaged and
would no longer implement the Deed of Transfer with Subscription Agreement dated 7 July
2008. For all intents and purposes, the said Deed of Transfer with Subscription Agreement was
rescinded. PRCI disclosed the Disengagement Agreement to the SEC on 26 August 2008.

al. averred that Judge Untalan refused to dismiss Civil Case No. 08-458 on the ground of forum
shopping, even when it was no different from Civil Case No. 07-610. They further asserted that
Judge Untalan showed evident partiality in favor of Jalane, et al., during the hearings in Civil
Case No. 08-458, openly making hasty conclusions as to certain marked exhibits and
demonstrating his pre-judgment of the case. On 25 September 2008 and 30 September 2008,
the PRCI directors filed before the RTC a Motion to Inhibit 46 and a Supplemental Motion to
Inhibit, 47 respectively, urging Judge Untalan to inhibit himself from Civil Case No. 08-458, since
he had revealed in several instances his utter bias and prejudice against the PRCI directors and
admitted his being a relative by affinity of Atty. Amado Paulo Dimayuga, 48 the initial counsel of
Jalane, et al. Judge Untalan has yet to act on such motions.
At the end of their Manifestation, petitioners Santiago Jr., et al., asked that this Court grant them
the following reliefs:
PRAYER
WHEREFORE, it is respectfully prayed that the foregoing Manifestation
be noted, and that the First Suit [Civil Case No. 07-610] as well as the
Second Suit [Civil Case No. 08-458] should now be dismissed for being
moot and academic, without need of remand to the trial (sic) Court for
further proceedings.
It is further respectfully prayed that should the Honorable Court find it
proper and necessary, the instant cases be set for oral arguments on
such date and time as it may deem convenient to its calendar.
Herein petitioners furthermore pray for such other reliefs as may be just
and equitable in the premises. 49
Petitioner Santiago Sr. also filed his own Manifestation (To Update the Honorable Court on
Relevant Supervening Proceedings and Incidents) with Motion to Resolve Merits of Petition and
of the Case in the Lower Court (In View of Supervening Proceedings and
Incidents), 50 essentially recounting the same events in the Manifestation of petitioners Santiago
Jr., et al. The prayer of Santiago Sr. in his Manifestation and Motion reads:
PRAYER
WHEREFORE, it is respectfully prayed that the Honorable Court:
1. TAKE COGNIZANCE of the instant Manifestation on relevant
supervening proceedings and incidents in this case, especially and
specifically, after the issuance by the Honorable Court on 09 April 2008 of
a temporary restraining order, addressed to the Court of Appeals, the
presiding judge of the Regional Trial Court, Branch 149, Makati City, and
the private respondents, and their agents, representatives and/or any
person or persons acting upon their orders or in their place of stead, who
are:

Civil Case No. 08-458 was eventually also assigned to the only commercial court of Makati
City,i.e., RTC, Branch 149, presided over by Judge Untalan. Petitioners Santiago Jr., et
102

"ENJOINED from enforcing or executing the assailed Court of

Appeals' decision and resolution, and the assailed trial court's
resolutions particularly that which mandates the continued
enforcement of the writ of permanent injunction issued by the
trial court, until further orders from this Court."
2. ORDER the dismissal of the complaint below on the ground that the
same is not a legitimate and valid derivative suit.
3. ORDER the dismissal of the complaint below, in any case, on the
ground that the issues raised in the complaint, specifically with respect to
the so-called "disputed" resolutions, have been mooted and/or no longer
subsist.
4. ORDER the private respondents to explain why they should not be
cited for contempt of court for violation of the temporary restraining order
issued by the Court on 09 April 2008.
5. ORDER the private respondents to explain why they should not be
cited for contempt of court for engaging in forum-shopping.
6. ORDER that the temporary restraining order issued by the Court on 09
April 2008 be made PERMANENT.
Other reliefs just and equitable in the premises are likewise prayed for. 51
II
ISSUES
The Court identifies the following fundamental issues for its resolution in the Petitions at bar:
(1) Whether the Petition of Santiago Sr. in G.R. No. 180028 should be
dismissed for its procedural infirmities?
(2) Whether Civil Case No. 07-610 instituted by respondents Miguel, et
al. before the RTC should be ordered dismissed?
(3) Whether Civil Case No. 08-458 instituted by Jalane, et al., before the
RTC should be ordered dismissed?
(4) Whether APRI should be allowed to intervene in the instant Petitions?
III
RULING OF THE COURT

Procedural infirmities of Petition in G.R. No. 180028

Respondents Miguel, et al., call attention to two procedural infirmities of the Petition
forCertiorari of petitioner Santiago Sr. in G.R. No. 180028: (1) the failure to inform the Court of
the pendency of the Petition in G.R. No. 181455-56, thus, violating the rule against forumshopping; and (2) its being the wrong mode of appeal.
The Verification and Certification of Non-Forum Shopping attached to the Petition for Certiorariof
petitioner Santiago Sr. in G.R. No. 180028 was actually signed by his attorney-in-fact,
Solomon,52 who is also a petitioner in G.R. No. 181455-56. It contains the following paragraph:
4. In compliance with the 1997 Rules of Civil Procedure, I hereby certify
that the petitioner, by himself personally and/or acting through his
attorneys-in fact, has not heretofore commenced any other action or
proceeding involving the same issues in the Supreme Court, the Court of
Appeals, or different Divisions thereof, or any other tribunal or agency,
and that to the best of my knowledge, no such action or proceeding is
pending in the Supreme Court, the Court of Appeals, or different Divisions
thereof, or any other tribunal or agency. If I should learn that a similar
action or proceeding has been filed or is pending before the Supreme
Court, Court of Appeals, or different Divisions thereof, or any other
tribunal or agency, I undertake to promptly inform this Honorable Court,
the aforesaid courts and other tribunal or agency within five (5) days
therefrom. 53
Respondents Miguel, et al., maintain that the failure of Solomon, as petitioner Santiago Sr.'s
attorney-in-fact, to inform the Court as regards the pendency of the Petition for Review in G.R.
No. 181455-56, of which Solomon is one of the petitioners, is in violation of the rule against
forum-shopping and warrants the summary dismissal of the Petition in G.R. No. 182008.
Forum shopping is the institution of two or more actions or proceedings grounded on the same
cause on the supposition that one or the other court would make a favorable disposition. It is an
act of malpractice and is prohibited and condemned as trifling with courts and abusing their
processes. In determining whether or not there is forum shopping, what is important is the
vexation caused the courts and parties-litigants by a party who asks different courts and/or
administrative bodies to rule on the same or related causes and/or grant the same or
substantially the same reliefs and in the process creates the possibility of conflicting decisions
being rendered by the different bodies upon the same issues. 54

Forum shopping is present when, in two or more cases pending, there is identity of (1) parties
(2) rights or causes of action and reliefs prayed for, and (3) the two preceding particulars, such
that any judgment rendered in the other action will, regardless of which party is successful,
amount to res judicata in the action under consideration. 55
It is evident that Santiago Sr., the petitioner in G.R. No. 182008, is not a party to G.R.
No. 181455-56. Even though Solomon is admittedly a petitioner in G.R. No. 181455-56, he is
only acting in G.R. No. 182008 as the attorney-in-fact of Santiago Sr., the actual petitioner in the
latter case. Thus, the very first element for forum shopping, identity of parties, is lacking.
103

Respondents Miguel, et al., cannot insist on identity of interests between petitioner Santiago Sr.
in G.R. No. 182008 and petitioners Santiago Jr., et al., in G.R. No. 181455-56, when the
Complaint itself of respondents Miguel, et al., before the RTC, docketed as Civil Case No. 07610, impleads the petitioners Santiago Sr. and Santiago Jr., et al., as defendants a quo in
their individual capacities as PRCI directors, and not collectively as the PRCI Board of
Directors. Each individual PRCI director, therefore, is not precluded from hiring his own counsel,
presenting his own arguments and defenses, and resorting to his own procedural remedies,
apart and independent from the other PRCI directors. In addition, the consolidation of G.R.
No. 181455-56 and G.R. No. 182008 has already eliminated the danger of conflicting decisions
being issued in said cases.
Assuming arguendo that Solomon did have the legal obligation to inform the Court in G.R. No.
182008 of the pendency of G.R. No. 181455-56, his failure to do so does not necessarily result
in the dismissal of the former. Although the submission of a certificate against forum shopping is
deemed obligatory, it is not jurisdictional. 56 Hence, in this case in which such a certification was
in fact submitted only, it was defective the Court may still refuse to dismiss and may,
instead, give due course to the Petition in light of attendant exceptional circumstances. 57
Santiago Sr. committed another procedural faux pas by filing before this Court a Petition
forCertiorari under Rule 65 of the Rules of Court to assail the Decision dated 6 September 2007
and Resolution dated 22 January 2008 of the Court of Appeals in CA-G.R. SP No. 99769 and
No. 99780.
The proper remedy of a party aggrieved by a decision of the Court of Appeals is a petition for
review under Rule 45, which is not similar to a petition for certiorari under Rule 65 of the Rules of
Court. As provided in Rule 45 of the Rules of Court, decisions, final orders or resolutions of the
Court of Appeals in any case, i.e., regardless of the nature of the action or proceedings involved,
may be appealed to this Court by filing a petition for review, which would be but a continuation of
the appellate process over the original case. On the other hand, a special civil action under Rule
65 is an independent action based on the specific grounds therein provided and, as a general
rule, cannot be availed of as a substitute for the lost remedy of an ordinary appeal, including that
under Rule 45. 58
Accordingly, when a party adopts an improper remedy, as in this case, his Petition may be
dismissed outright. However, in the interest of substantial justice, the strict application of
procedural technicalities should not hinder the speedy disposition of this case on the merits.
Thus, while the instant Petition is one for certiorari under Rule 65 of the Rules of Court, the
assigned errors are more properly addressed in a petition for review under Rule 45. 59
The merits of the Petitions in both G.R. No. 181455-56 and No. 182008 compel this Court to give
more weight to substantive justice, instead of technical rules. Indeed, where, as here, there is a
strong showing that a grave miscarriage of justice would result from the strict application of the
Rules, the Court will not hesitate to relax the same in the interest of substantial justice. It bears
stressing that the rules of procedure are merely tools designed to facilitate the attainment of
justice. They were conceived and promulgated to effectively aid the court in the dispensation of
justice. Courts are not slaves to or robots of technical rules, shorn of judicial discretion. In
rendering justice, courts have always been, as they ought to be, conscientiously guided by the
norm that, on the balance, technicalities take a backseat against substantive rights, and not the
other way around. Thus, if the application of the Rules would tend to frustrate rather than
promote justice, it is always within the power of the Court to suspend the Rules, or except a
particular case from its operation. 60

Derivative suits, in general

A corporation, such as PRCI, is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites appropriate to such body. As to its
corporate and management decisions, therefore, the State will generally not interfere with the
same. Questions of policy and of management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for the
judgment of the board of directors. 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. 61
The governing body of a corporation is its board of directors. Section 23 of the Corporation Code
provides that "[u]nless otherwise provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees . . . ." The concentration in
the board of the powers of control of corporate business and of appointment of corporate officers
and managers is necessary for efficiency in any large organization. Stockholders are too
numerous, scattered and unfamiliar with the business of a corporation to conduct its business
directly. And so the plan of corporate organization is for the stockholders to choose the directors
who shall control and supervise the conduct of corporate business. 62
The following discourse on the corporate powers of the board of directors under Section 23 of
the Corporation Code establishes the extent thereof:
Under the above provision, it is quite clear that, except in the instances
where the Code expressly grants a specific power to the stockholders or
member, the board has the sole power and responsibility to decide
whether a corporation should sue, purchase and sell property, enter into
any contract, or perform any act. Stockholders' or members' resolutions
dealing with matters other than the exceptions are not legally effective nor
binding on the board, and may be treated by it as merely advisory, or may
even be completely disregarded. Since the law has vested the
responsibility of managing the corporate affairs on the board, the
stockholders must abide by its decisions. If they do not agree with the
policies of the board, their remedy is to wait for the next election of the
directors and choose new ones to take their place. The theory of the law
is that although stockholders are to have all the profit, the complete
management of the enterprise shall be with the board. 63
The board of directors of a corporation is a creation of the stockholders. The board of directors,
or the majority thereof, controls and directs the affairs of the corporation; but in drawing to itself
the power of the corporation, it occupies a position of trusteeship in relation to the minority of the
stock. The board shall exercise good faith, care, and diligence in the administration of the affairs
of the corporation, and protect not only the interest of the majority but also that of the minority of
the stock. Where the majority of the board of directors wastes or dissipates the funds of the
corporation or fraudulently disposes of its properties, or performs ultra vires acts, the court, in
the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is unavailing,
will entertain a suit filed by the minority members of the board of directors, for and in behalf of
the corporation, to prevent waste and dissipation and the commission of illegal acts and
otherwise redress the injuries of the minority stockholders against the wrongdoing of the
majority. The action in such a case is said to be brought derivatively in behalf of the corporation
to protect the rights of the minority stockholders thereof. 64
104

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust
not of mere error of judgment or abuse of discretion and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. 65
A derivative suit must be differentiated from individual and representative or class suits, thus:
Suits by stockholders or members of a corporation based on wrongful or
fraudulent acts of directors or other persons may be classified into
individual suits, class suits, and derivative suits. Where a stockholder or
member is denied the right of inspection, his suit would
be individual because the wrong is done to him personally and not to the
other stockholders or the corporation. Where the wrong is done to a
group of stockholders, as where preferred stockholders' rights are
violated, a class or representative suit will be proper for the protection
of all stockholders belonging to the same group. But where the acts
complained of constitute a wrong to the corporation itself, the cause of
action belongs to the corporation and not to the individual stockholder or
member. Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest
therein would be impaired, this fact of itself is not sufficient to give him an
individual cause of action since the corporation is a person distinct and
separate from him, and can and should itself sue the wrongdoer.
Otherwise, not only would the theory of separate entity be violated, but
there would be multiplicity of suits as well as a violation of the priority
rights of creditors. Furthermore, there is the difficulty of determining the
amount of damages that should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are
committed by the directors or trustees themselves, a stockholder or
member may find that he has no redress because the former are vested
by law with the right to decide whether or not the corporation should sue,
and they will never be willing to sue themselves. The corporation would
thus be helpless to seek remedy. Because of the frequent occurrence of
such a situation, the common law gradually recognized the right of a
stockholder to sue on behalf of a corporation in what eventually became
known as a "derivative suit." It has been proven to be an effective
remedy of the minority against the abuses of management. Thus, an
individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are
the ones to be sued or hold the control of the corporation. In such actions,
the suing stockholder is regarded as the nominal party, with the
corporation as the party in interest. 66
The afore-quoted exposition is relevant considering the claim of respondents Miguel, et al., that
its Complaint in Civil Case No. 07-610 is not just a derivative suit, but also an intracorporate
action arising from devices or schemes employed by the PRCI Board of Directors amounting to
fraud or misrepresentation. 67 A thorough study of the said Complaint, however, reveals that the
distinction is deceptive. The supposed devices and schemes employed by the PRCI Board of
Directors amounting to fraud or misrepresentation are the very same bases for the derivative

suit. They are the very same acts of the PRCI Board of Directors that have supposedly caused
injury to the corporation. From the very beginning of their Complaint, respondents have alleged
that they are filing the same "as shareholders, for and in behalf of the Corporation, in order to
redress the wrongs committed against the Corporation and to protect or vindicate corporate
rights, and to prevent wastage and dissipation of corporate funds and assets and the further
commission of illegal acts by the Board of Directors." Although respondents Miguel, et al., also
aver that they are seeking "redress for the injuries of the minority stockholders against the
wrongdoings of the majority," the rest of the Complaint does not bear this out, and is utterly
lacking any allegation of injury personal to them or a certain class of stockholders to which they
belong. 68
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand,
and individual and class suits, on the other, are mutually exclusive, viz.:
As the Supreme Court has explained: "A shareholder's derivative suit
seeks to recover for the benefit of the corporation and its whole body of
shareholders when injury is caused to the corporation that may not
otherwise be redressed because of failure of the corporation to act. Thus,
'the action is derivative, i.e., in the corporate right, if the gravamen of the
complaint is injury to the corporation, or to the whole body of its stock and
property without any severance or distribution among individual holders,
or it seeks to recover assets for the corporation or to prevent the
dissipation of its assets.' [Citations.]" (Jones, supra, 1 Cal.3d 93, 106, 81
Cal.Rptr. 592, 460 P.2d 464.) In contrast, "a direct action [is one] filed by
the shareholder individually (or on behalf of a class of shareholders to
which he or she belongs) for injury to his or her interest as
a shareholder. . . . [] . . . [T]he two actions are mutually
exclusive: i.e., the right of action and recovery belongs to either
theshareholders (direct action) *651 or the corporation (derivative
action)." (Friedman, Cal. Practice Guide: Corporations, supra, 6:598, p.
6-127.)
Thus, in Nelson v. Anderson (1999) 72 Cal.App.4th 111, 84 Cal.Rptr.2d
753, the **289 minority shareholder alleged that the other shareholder of
the corporation negligently managed the business, resulting in its total
failure. (Id. at p. 125, 84 Cal.Rptr.2d 753) The appellate court concluded
that the plaintiff could not maintain the suit as a direct action: "Because
the gravamen of the complaint is injury to the whole body of its
stockholders, it was for the corporation to institute and maintain a
remedial action. [Citation.] A derivative action would have been
appropriate if its responsible officials had refused or failed to act."(Id. at
pp. 125-126, 84 Cal.Rptr.2d 753) The court went on to note that the
damages shown at trial were the loss of corporate profits. (Id. at p. 126,
84 Cal.Rptr.2d 753) Since "[s]hareholders own neither the property nor
the earnings of the corporation," any damages that the plaintiff alleged
that resulted from such loss of corporate profits "were incidental to the
injury to the corporation." 69
Based on allegations in the Complaint of Miguel, et al., in Civil Case No. 07-610, the Court
determines that there is only a derivative suit, based on the devices and schemes employed by
the PRCI Board of Directors that amounts to mismanagement, misrepresentation, fraud, and bad
faith.
105

At the crux of the Complaint of respondents Miguel, et al., in Civil Case No. 07-610 is their
dissent from the passage by the majority of the PRCI Board of Directors of the "disputed
resolutions," particularly: (1) the Resolution dated 26 September 2006, authorizing the
acquisition by PRCI of up to 100% of the common shares of JTH; and (2) the Resolution dated
11 May 2007, approving the property-for-shares exchange between PRCI and JTH.
Derivative suit (re: acquisition of JTH)
It is important for the Court to mention that the 26 September 2006 Resolution of the PRCI Board
of Directors not only authorized the acquisition by PRCI of up to 100% of the common stock of
JTH, but it also specifically appointed petitioner Santiago Sr. 70 to act as attorney-in-fact and
proxy who could vote all the shares of PRCI in JTH, as well as nominate, appoint, and vote into
office directors and/or officers during regular and special stockholders' meetings of JTH. It was
by this authority that PRCI directors were able to constitute the JTH Board of Directors. Thus,
the protest of respondents Miguel, et al., against the interlocking directors of PRCI and JTH is
also rooted in the 26 September 2006 Resolution of the PRCI Board of Directors.
After a careful study of the allegations concerning this derivative suit, the Court rules that it is
dismissible for being moot and academic.
That a court will not sit for the purpose of trying moot cases and spend its time in deciding
questions, the resolution of which cannot in any way affect the rights of the person or persons
presenting them, is well settled. Where the issues have become moot and academic, there is no
justiciable controversy, thereby rendering the resolution of the same of no practical use or
value.71
The Resolution dated 26 September 2006 of the PRCI Board of Directors was approved and
ratified by the stockholders, holding 74% of the outstanding capital stock in PRCI, during the
Special Stockholders' Meeting held on 7 November 2006. 72
Respondents Miguel, et al., instituted Civil Case No. 07-610 only on 10 July 2007, against
herein petitioners Santiago Sr., Santiago Jr., Solomon, and Robles, together with Renato de
Villa, Lim Teong Leong, Lawrence Lim Swee Lin, Tham Ka Hon, and Dato Surin Upatkoon, in
their capacity as directors of PRCI and/or JTH. Clearly, the acquisition by PRCI of JTH
and the constitution of the JTH Board of Directors are no longer just the acts of the majority of
the PRCI Board of Directors, but also of the majority of the PRCI stockholders. By ratification,
even an unauthorized act of an agent becomes the authorized act of the principal. 73 To declare
the Resolution dated 26 September 2006 of the PRCI Board of Directors null and void will serve
no practical use or value, or affect any of the rights of the parties, because the Resolution dated
7 November 2006 of the PRCI stockholders approving and ratifying said acquisition and the
manner in which PRCI shall constitute the JTH Board of Directors will still remain valid and
binding.
In fact, if the derivative suit, insofar as it concerns the Resolution dated 26 September 2006 of
the PRCI Board of Directors, is not dismissible for mootness, it is still vulnerable to dismissal for
failure to implead indispensable parties, namely, the majority of the PRCI stockholders.
Under Rule 3, Section 7 of the Rules of Court, an indispensable party is a party-in-interest,
without whom there can be no final determination of an action. The interests of such
indispensable party in the subject matter of the suit and the relief are so bound with those of the

other parties that his legal presence as a party to the proceeding is an absolute necessity. As a
rule, an indispensable party's interest in the subject matter is such that a complete and efficient
determination of the equities and rights of the parties is not possible if he is not joined. 74
The majority of the stockholders of PRCI are indispensable parties to Civil Case No. 07-610, for
they have approved and ratified, during the Special Stockholders' Meeting on 7 November 2006,
the Resolution dated 26 September 2006 of the PRCI Board of Directors. Obviously, no final
determination of the validity of the acquisition by PRCI of JTH or of the constitution of the JTH
Board of Directors can be had without consideration of the effect of the approval and ratification
thereof by the majority stockholders.
Respondents Miguel, et al., cannot simply assert that the majority of the PRCI Board of Directors
named as defendants in Civil Case No. 07-610 are also the PRCI majority stockholders,
because respondents Miguel, et al., explicitly impleaded said defendants in their capacity as
directors of PRCI and/or JTH, not as stockholders.

Derivative suit (re: property-for-shares exchange)

The derivative suit, with respect to the Resolution dated 11 May 2007 of the PRCI Board of
Directors, is similarly dismissible for lack of cause of action.
The Court has recognized that a stockholder's right to institute a derivative suit is not based on
any express provision of the Corporation Code, or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary duties. In effect, the
suit is an action for specific performance of an obligation, owed by the corporation to the
stockholders, to assist its rights of action when the corporation has been put in default by the
wrongful refusal of the directors or management to adopt suitable measures for its protection.
The basis of a stockholder's suit is always one of equity. However, it cannot prosper without
first complying with the legal requisites for its institution. 75
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (IRPICC)
lays down the following requirements which a stockholder must comply with in filing a derivative
suit:
Sec. 1. Derivative action. A stockholder or member may bring an
action in the name of a corporation or association, as the case may be,
provided, that:
(1) He 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;
(2) 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;
106

(3) No appraisal rights are available for the act or acts complained
of; and

(5) Prejudice or damage to the corporation, partnership, or association in

relation to the relief sought. [Emphasis ours.]

(4) The suit is not a nuisance or harassment suit. (Emphasis ours.)

In case of nuisance or harassment suits, the court may, motu proprio or

upon motion, forthwith dismiss the case.

In their Complaint before the RTC in Civil Case No. 07-610, respondents Miguel, et al., made no
mention at all of appraisal rights, which could or could not have been available to them. In their
Comment on the Petitions at bar, respondents Miguel, et al., contend that there are no appraisal
rights available for the acts complained of, since (1) the PRCI directors are being charged with
mismanagement, misrepresentation, fraud, and breach of fiduciary duties, which are not subject
to appraisal rights; (2) appraisal rights will only obtain for acts of the Board of Directors in good
faith; and (3) appraisal rights may be exercised by a stockholder who shall have voted against
the proposed corporate action, and no corporate action has yet been taken herein by PRCI
stockholders, who still have not voted on the intended property-for-shares exchange between
PRCI and JTH.
The Court disagrees.
It bears to point out that every derivative suit is necessarily grounded on an alleged violation by
the board of directors of its fiduciary duties, committed by mismanagement, misrepresentation,
or fraud, with the latter two situations already implying bad faith. If the Court upholds the position
of respondents Miguel, et al. that the existence of mismanagement, misrepresentation, fraud,
and/or bad faith renders the right of appraisal unavailable it would give rise to an absurd
situation. Inevitably, appraisal rights would be unavailable in any derivative suit. This renders the
requirement in Rule 8, Section 1 (3) of the IPRICC superfluous and effectively inoperative; and in
contravention of an elementary rule of legal hermeneutics that effect must be given to every
word, clause, and sentence of the statute, and that a statute should be so interpreted that no
part thereof becomes inoperative or superfluous. 76
The import of establishing the availability or unavailability of appraisal rights to the minority
stockholder is further highlighted by the fact that it is one of the factors in determining whether or
not a complaint involving an intra-corporate controversy is a nuisance and harassment suit.
Section 1 (b), Rule 1 of IRPICC provides:
(b) Prohibition against nuisance and harassment suits. Nuisance and
harassment suits are prohibited. In determining whether a suit is a
nuisance or harassment suit, the court shall consider, among others, the
following:
(1) The extent of the shareholding or interest of the initiating stockholder
or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained
of; and

The availability or unavailability of appraisal rights should be objectively based on the subject
matter of the complaint, i.e., the specific act or acts performed by the board of directors, without
regard to the subjective conclusion of the minority stockholder instituting the derivative suit that
such act constituted mismanagement, misrepresentation, fraud, or bad faith.
The raison d'etre for the grant of appraisal rights to minority stockholders has been explained
thus:
. . . [Appraisal right] means that a stockholder who dissented and voted
against the proposed corporate action, may choose to get out of the
corporation by demanding payment of the fair market value of his shares.
When a person invests in the stocks of a corporation, he subjects his
investment to all the risks of the business and cannot just pull out such
investment should the business not come out as he expected. He will
have to wait until the corporation is finally dissolved before he can get
back his investment, and even then, only if sufficient assets are left after
paying all corporate creditors. His only way out before dissolution is to
sell his shares should he find a willing buyer. If there is no buyer, then he
has no recourse but to stay with the corporation. However, in certain
specified instances, the Code grants the stockholder the right to get
out of the corporation even before its dissolution because there has
been a major change in his contract of investment with which he
does not agree and which the law presumes he did not foresee
when he bought his shares. Since the will of two-thirds of the
stocks will have to prevail over his objections, the law considers it
only fair to allow him to get back his investment and withdraw from
the corporation. . . . , 77(Emphasis ours.)
The Corporation Code expressly made appraisal rights available to the dissenting stockholder in
the following instances:
Sec. 42. Power to invest corporate funds in another corporation or
business or for any other purpose. Subject to the provisions of this
Code, a private corporation may invest its funds in any other corporation
or business or for any purpose other than the primary purpose for which it
was organized when approved by a majority of the board of directors or
trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the
members in case of non-stock corporations, at a stockholders' or
members' meeting duly called for the purpose. Written notice of the
proposed investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally; Provided, That
any dissenting stockholder shall have appraisal right as provided in
107

this Code: Provided, however, That where the investment by the

corporation is reasonably necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary.
Sec. 81. Instances of appraisal right. Any stockholder of a corporation
shall have theright to dissent and demand payment of the fair value
of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholders or class of shares,
or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in this Code; and

anything, the argument of respondents Miguel, et al., raises questions of whether their derivative
suit was prematurely filed for they had failed to exert all reasonable efforts to exhaust all other
remedies available under the articles of incorporation, by-laws, laws, or rules governing the
corporation or partnership, as required by Rule 8, Section 1 (2) of the IRPICC. The obvious
intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all
other remedies to obtain the relief sought have failed. 78
Personal action for inspection of corporate books and records
Respondents Miguel, et al., allege another cause of action, other than the derivative suit the
violation of their right to information relative to the disputed Resolutions, i.e., the Resolutions
dated 16 September 2006 and 11 May 2007 of the PRCI Board of Directors.
Rule 7 of the IRPICC shall apply to disputes exclusively involving the rights of stockholders or
members to inspect the books and records and/or to be furnished with the financial statements
of a corporation, under Sections 74 79 and 75 80 of the Corporation Code. 81
Rule 7, Section 2 of IRPICC enumerates the requirements particular to a complaint for inspection
of corporate books and records:

3. In case of merger or consolidation. (Emphasis ours.)

Respondents Miguel, et al., themselves admitted that the property-for-shares exchange between
PRCI and JTH, approved by majority of the PRCI Board of Directors in the Resolution dated 11
May 2007, involved all or substantially all of the properties and assets of PRCI. They alleged in
their Complaint in Civil Case No. 07-610 that:
49. The Corporation's Makati Property, consisting of prime property in the
heart of Makati City worth billions of pesos in its current
value constitutes substantially all of the assets of the
Corporation and is the sole and exclusive location on which it conducts
its business of a race course.
50. The exchange of the Corporation's property for JTH shares would
thereforeconstitute a sale of substantially all of the assets of the
corporation. (Emphasis ours.)
Irrefragably, the property-for-shares exchange between PRCI and JTH, involving as it did
substantially all of the properties and assets of PRCI, qualified as one of the instances when
dissenting stockholders, such as respondents Miguel, et al., could have exercised their appraisal
rights.
The Court finds specious the averment of respondents Miguel, et al., that appraisal rights were
not available to them, because appraisal rights may only be exercised by stockholders who had
voted against the proposed corporate action; and that at the time respondents Miguel, et al.,
instituted Civil Case No. 07-610, PRCI stockholders had yet to vote on the intended property-forshares exchange between PRCI and JTH. Respondents Miguel, et al., themselves caused the
unavailability of appraisal rights by filing the Complaint in Civil Case No. 07-610, in which they
prayed that the 11 May 2007 Resolution of the Board of Directors approving the property-forshares exchange between PRCI and JTH be declared null and void, even before the said
Resolution could be presented to the PRCI stockholders for approval or rejection. More than

Sec. 2. Complaint. In addition to the requirements in section 4, Rule 2

of these Rules, the complaint must state the following:
(1) The case is for the enforcement of plaintiff's right of inspection of
corporate orders or records and/or to be furnished with financial
statements under Sections 74 and 75 of the Corporation Code of the
Philippines;
(2) A demand for inspection and copying of books and records
and/or to be furnished with financial statements made by the
plaintiff upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the
reasons given for such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the
plaintiff is unjustified and illegal, stating the law and jurisprudence in
support thereof. (Emphasis ours.)
As has already been previously established herein, the right to information, which includes the
right to inspect corporate books and records, is a right personal to each stockholder. After a
closer reading of the Complaint in Civil Case No. 07-610, the Court observes that only
respondent Dulay actually made a demand for a copy of "all the records, documents, contracts,
and agreements, emails, letters, correspondences, relative to the acquisition of JTH . . . ." There
is no allegation that his co-respondents (who are his co-plaintiffs in Civil Case No. 07-610) made
similar demands for the inspection or copying of corporate books and records. Only respondent
Dulay complied then with the requirement under Rule 7, Section 2 (2) of IRPICC.

108

Even so, respondent Dulay's Complaint should be dismissed for lack of cause of action, for his
demand for copies of pertinent documents relative to the acquisition of JTH shares was not
denied by any of the defendants named in the Complaint in Civil Case No. 07-610, but by Atty.
Jesulito A. Manalo (Manalo), the Corporate Secretary of PRCI, in a letter dated 17 January
2006. Section 74 of the Corporation Code, the substantive law on which respondent Dulay's
Complaint for inspection and copying of corporate books and records is based, states that:
Sec. 74. Books to be kept; stock transfer agent.

acts assailed by private respondents would have already been

consummated by such approval and/or ratification.
13. In the same vein, such approval and/or ratification during the
forthcoming PRCI stockholder's (sic) meeting would likewise render moot
and academic the proceedings before this Honorable Court in that it
would have effectively granted the reliefs sought by herein petitioner even
before this Honorable Court could finally rule on the propriety of the Court
of Appeals' Decision/Resolution by herein petitioners. 82

xxx xxx xxx

Any officer or agent of the corporation who shall refuse to allow any
director, trustees, stockholder or member of the corporation to examine
and copy excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is pursuant to a resolution or order of the
Board of Directors or Trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for such
refusal: . . . (Emphasis ours.)
Based on the foregoing, it is Corporate Secretary Manalo who should be held liable for the
supposedly wrongful and unreasonable denial of respondent Dulay's demand for inspection and
copying of corporate books and records; but, as previously mentioned, Corporate Secretary
Manalo is not among the defendants named in the Complaint in Civil Case No. 07-610. There is
also utter lack of any allegation in the Complaint that Corporate Secretary Manalo denied
respondent Dulay's demand pursuant to a resolution or order of the PRCI Directors, so that the
latter (who are actually named defendants in the Complaint) could also be held liable for the
denial.
Supervening events
During the pendency of the cases at bar, supervening events took place that further justified the
dismissal of Civil Case No. 07-610 for already being moot and academic.
First, during the 2008 Annual Stockholders' Meeting of PRCI, held on 18 June 2008, the
following agenda items were finally presented to the stockholders, who approved and ratified the
same by a majority vote: (1) the Minutes of the Special Stockholders' Meeting dated 7 November
2006, during which the majority of the stockholders approved and ratified the acquisition of JTH
by PRCI; (2) the acts of the Board of Directors, the Executive Committee, and the Management
of PRCI for 2006, which included the acquisition of JTH by PRCI; and (3) the planned propertyfor-shares exchange between PRCI and JTH. Even respondents Miguel, et al., themselves
admitted in their Comment with Prayer for the Immediate Lifting or Dissolution of the Temporary
Restraining Order in G.R. No. 182008 that:
12. Indeed, the approval and/or ratification of the transfer of PRCI's Sta.
Ana racetrack property to JTH during the upcoming stockholders' meeting
would render nugatory, moot and academic the action and proceedings
before the Regional Trial Court of Makati, Branch 149, inasmuch as the

Second, although already approved and ratified by majority vote of the PRCI stockholders, and
PRCI and JTH executed a Deed of Transfer with Subscription Agreement on 7 July 2008 to
effect the property-for-shares exchange between the two corporations, the controversial
transaction will no longer push through. A major consideration for the exchange is that it will be
tax-free; but the BIR ruled that such transaction shall be subject to VAT. Resultantly, PRCI and
JTH executed on 22 August 2008 a Disengagement Agreement, by virtue of which, both
corporations rescinded the Deed of Transfer with Subscription Agreement dated 7 July 2008 and
immediately disengaged from implementing the said Deed.
Civil Case No. 08-458
The very nature of Civil Case No. 07-610 as a derivative suit bars Civil Case No. 08-458 and
warrants the latter's dismissal.
In Chua v. Court of Appeals, 83 the Court stresses that the corporation is the real party in
interest in a derivative suit, and the suing stockholder is only a nominal party:
An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stocks in order to protect or
vindicate corporate rights, whenever the officials of the corporation refuse
to sue, or are the ones to be sued, or hold the control of the corporation.
In such actions, the suing stockholder is regarded as a nominal
party, with the corporation as the real party in interest.
xxx xxx xxx
. . . For a derivative suit to prosper, it is required that the minority
stockholder suing for and on behalf of the corporation must allege in his
complaint that he is suing on a derivative cause of action on behalf
of the corporation and all other stockholders similarly situated who
may wish to join him in the suit. It is a condition sine qua nonthat the
corporation be impleaded as a party because not only is the corporation
an indispensable party, but it is also the present rule that it must be
served with process. The judgment must be made binding upon the
corporation in order that the corporation may get the benefit of the suit
and may not bring subsequent suit against the same defendants for
the same cause of action. In other words, the corporation must be
joined as party because it is its cause of action that is being litigated
and because judgment must be a res adjudicata against it.
(Emphases ours.)
109

The more extensive discussion by the Court of the nature of a derivative suit in Asset
Privatization Trust v. Court of Appeals 84 is presented below:
Settled is the doctrine that in a derivative suit, the corporation is the real
party in interest while the stockholder filing suit for the corporation's
behalf is only a nominal party. The corporation should be included as a
party in the suit.
An individual stockholder is permitted to institute a derivative
suit on behalf of the corporation wherein he holds stock in order
to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation
as the real party in interest. . . . .
It is a condition sine qua non that the corporation be impleaded as a party
because
. . . . Not only is the corporation an indispensable party, but it is
also the present rule that it must be served with process. The
reason given is that the judgment must be made binding upon
the corporation and in order that the corporation may get the
benefit of the suit and may not bring a subsequent suit against
the same defendants for the same cause of action. In other
words the corporations must be joined as party because it is its
cause of action that is being litigated and because judgment
must be a res ajudicata against it.
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in
a corporation has no title legal or equitable to the corporate
property; that both of these are in the corporation itself for the
benefit of the stockholders." In other words, to allow
shareholders to sue separately would conflict with the
separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced.
Thus, our Supreme Court held in the case of Evangelista v.
Santos, that "the stockholders may not directly claim those
damages for themselves for that would result in the
appropriation by, and the distribution among them of part of the
corporate assets before the dissolution of the corporation and
the liquidation of its debts and liabilities, something which
cannot be legally done in view of Section 16 of the Corporation
Law . . .;"
(3) the filing of such suits would conflict with the duty of the
management to sue for the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial
recovery by an individual on the damages recoverable by the
corporation for the same act.
As established in the foregoing jurisprudence, in a derivative suit, it is the corporation that is the
indispensable party, while the suing stockholder is just a nominal party. Under Rule 7, Section 3
of the Rules of Court, an indispensable party is a party-in-interest, without whom no final
determination can be had of an action without that party being impleaded. Indispensable parties
are those with such an interest in the controversy that a final decree would necessarily affect
their rights, so that the court cannot proceed without their presence. "Interest," within the
meaning of this rule, should be material, directly in issue, and to be affected by the decree, as
distinguished from a mere incidental interest in the question involved. On the other hand, a
nominal or pro forma party is one who is joined as a plaintiff or defendant, not because such
party has any real interest in the subject matter or because any relief is demanded, but merely
because the technical rules of pleadings require the presence of such party on the record. 85
With the corporation as the real party-in-interest and the indispensable party, any ruling in one of
the derivative suits should already bind the corporation as res judicata in the other. Allowing two
different minority stockholders to institute separate derivative suits arising from the same factual
background, alleging the same causes of action, and praying for the same reliefs, is tantamount
to allowing the corporation, the real party-in-interest, to file the same suit twice, resulting in the
violation of the rules against a multiplicity of suits and even forum-shopping. It is also in
disregard of the separate-corporate-entity principle, because it is to look beyond the corporation
and to give recognition to the different identities of the stockholders instituting the derivative
suits.
It is for these reasons that the derivative suit, Civil Case No. 08-458, although filed by a different
set of minority stockholders from those in Civil Case No. 07-610, should still not be allowed to
proceed.
Furthermore, the highly suspicious circumstances surrounding the institution of Civil Case No.
08-458 are not lost upon the Court. To recall, on 9 April 2008, the Court already issued in G.R.
No. 182008 a TRO enjoining the execution and enforcement of the writ of permanent injunction
issued by the RTC in Civil Case No. 07-610, which prevented the PRCI Board of Directors from
presenting to the PRCI stockholders at the Annual Stockholders' Meeting, for approval and
ratification, the agenda items on the acquisition by PRCI of JTH shares and the property-forshares exchange between PRCI and JTH. The Complaint in Civil Case No. 08-458 was filed with
the RTC on 16 June 2008, just two days before the scheduled Annual Stockholders' Meeting on
18 June 2008, where the items subject of the permanent injunction were again included in the
agenda. The 72-hour TRO issued by the RTC in Civil Case No. 08-458 enjoined the very same
acts covered by the writ of permanent injunction issued by the RTC in Civil Case No. 07-610, the
execution and enforcement of which, in turn, was already enjoined by the TRO dated 9 April
2008 of this Court. Considering that it is PRCI which is the real party-in-interest in both Civil
Cases No. 07-610 and No. 08-458, then its acquisition in the latter of a TRO exactly similar to
the writ of permanent injunction in the former is but an obvious attempt to circumvent the TRO of
this Court enjoining the execution and enforcement of the permanent injunction.
Intervention of APRI
110

It is also the nature of a derivative suit that prompts the Court to deny the intervention by APRI in
Civil Case No. 07-610. Once more, the Court emphasizes that PRCI is the real party-in-interest
in Civil Case No. 07-610, not respondents Miguel, et al., whose participation therein is deemed
nominal. APRI, moreover, merely echoes the position of respondents Miguel, et al., and, hence,
renders the participation of APRI in Civil Case No. 07-610 redundant.

which the TRO dated 9 April 2008 of this Court enjoins, has
been rendered moot, since the agenda items subject of said
permanent injunction were already presented to, and approved
and ratified by a majority of the PRCI stockholders at the
Annual Stockholders' Meeting held on 18 June 2008;

Also, the main concern of APRI was the lifting of the TRO issued by this Court on 9 April 2008
and the execution and enforcement of the permanent injunction issued by the RTC, enjoining the
presentation by the PRCI Board of Directors at the Annual Stockholders' Meeting scheduled
on 18 June 2008, for approval and ratification by the stockholders of the agenda items on the
acquisition by PRCI of JTH shares and the property-for-shares exchange between PRCI and
JTH. Given that the Annual Stockholders' Meeting already took place on 18 June 2008, during
which the subject agenda items were presented to and approved and ratified by the
stockholders, the intervention of APRI is already moot.

(3) The Court ORDERS the DISMISSAL of the Complaint of respondents

Miguel,et al., in Civil Case No. 07-610 before the RTC for lack
of cause of action, failure to implead indispensable parties, and
mootness;
(4) The Court ORDERS the DISMISSAL of the Complaint of Jalane, et
al., in Civil Case No. 08-458, for being in violation of the rules
on the multiplicity of suits and forum shopping; and

As a final note, respondent Miguel, et al. made repeated allegations that foreigners were taking
over PRCI, and that this must be stopped to protect the Filipino stockholders. They even invoked
the ruling of this Court in Manila Prince Hotel v. Government Service Insurance System
(GSIS). 86
Respondents Miguel, et al., however, cannot rely on Manila Prince Hotel as judicial precedent,
for the facts therein are far different from those in the cases at bar. The Government, through
GSIS, owned Manila Hotel Corporation (MHC), which, in turn, owned the historic Manila Hotel.
The case arose from the efforts of GSIS at privatizing MHC by holding a public bidding for 3051% of the issued and outstanding shares of MHC. The Court ruled that since the Filipino
corporation was able to match the higher bid made by a foreign corporation, then preference
should be given to the former, considering that Manila Hotel had become a landmark, a living
testimonial to Philippine heritage, and part of Philippine economy and patrimony. This was in
accord with the Filipino-first policy in the 1987 Constitution.

(5) The Court DENIES the Very Respectful Motion for Leave to Intervene
as Co-Respondent in the Petition with the attached Very
Respectful Urgent Motion to Lift Restraining Order of APRI, for
redundancy and mootness.
No costs.
SO ORDERED.
Corona, Velasco, Jr., Nachura and Peralta, JJ., concur.
||| (Cua, Jr. v. Tan, G.R. No. 181455-56, 182008, [December 4, 2009], 622 PHIL 661-737)

In contrast, PRCI is a publicly listed corporation. Its shares can be freely sold and traded to the
public, subject to regulation by the PSE and the SEC. Without any legal basis therefor, the Court
cannot be expected to allocate or impose limitations on ownership of PRCI shares by foreigners.
What is more, PRCI, which operates and maintains a horse racetrack and conducts horse racing
and betting, can hardly claim to be "a living testimonial of Philippine heritage," like Manila Hotel,
that would justify judicial intervention to protect the interests of Filipino stockholders as against
foreign stockholders.
WHEREFORE, the Court renders the following judgment:
(1) The Court GRANTS the Petitions of petitioners Santiago, et al., and
petitioner Santiago Sr. in G.R. No. 181455-56 and G.R. No.
182008, respectively. ItREVERSES and SETS ASIDE the
Decision dated 6 September 2007 and Resolution dated 22
January 2008 of the Court of Appeals in CA-G.R. SP No. 99769
and No. 99780;
(2) The Court LIFTS the TRO issued on 9 April 2008 in G.R. No. 180028
andCANCELS and RETURNS the cash bond posted by
petitioner Santiago Sr. The permanent injunction issued by the
RTC on 8 October 2007, the execution and enforcement of
111