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BUS.

ORG2 OUTLINE 3 (2016)


Prof. MIP Romero

Vll. INTERNAL ORGANIZATION OF CORPORATIONS

1) By-laws Sec. 36 (5); Secs. 46, 47, 48

TITLE IV. POWERS OF CORPORATIONS

Section 36. Corporate powers and capacity. Every corporation incorporated under this Code
has the power and capacity:
5.Toadoptbylaws,notcontrarytolaw,morals,orpublicpolicy,andtoamendorrepealthesamein
accordancewiththisCode;

TITLE V. BY LAWS

Section 46. Adoption of by-laws. Every corporation formed under this Code must, within one
(1) month after receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote
of the stockholders representing at least a majority of the outstanding capital stock, or of at
least a majority of the members in case of non-stock corporations, shall be necessary. The by-
laws shall be signed by the stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted
and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all
the incorporators and submitted to the Securities and Exchange Commission, together with the
articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments are in accordance with law. (20a)

Section 47. Contents of by-laws. Subject to the provisions of the Constitution, this Code,
other special laws, and the articles of incorporation, a private corporation may provide in its by-
laws for:

1. The time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the
stockholders or members;

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3. The required quorum in meetings of stockholders or members and the manner of voting
therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of
giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other than
directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs. (21a)

Section 48. Amendments to by-laws. The board of directors or trustees, by a majority vote
thereof, and the owners of at least a majority of the outstanding capital stock, or at least a
majority of the members of a non-stock corporation, at a regular or special meeting duly called
for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-
thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power to amend or repeal
any by-laws or adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered
as revoked whenever stockholders owning or representing a majority of the outstanding capital
stock or a majority of the members in non-stock corporations, shall so vote at a regular or
special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-
laws shall be attached to the original by-laws in the office of the corporation, and a copy
thereof, duly certified under oath by the corporate secretary and a majority of the directors or
trustees, shall be filed with the Securities and Exchange Commission the same to be attached
to the original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and
Exchange Commission of a certification that the same are not inconsistent with this Code. (22a
and 23a)

a) Concept of by-laws

Concept. The By-laws of a corporation are the rules and regulations or private laws enacted
by the corporation to regulate, govern and control its own actions, affairs and concerns and
of its stockholders or members and directors and officers in relation thereto and among
themselves in their relation to the corporation.

The By-laws are in effect written into the charter and in this sense, they become part of the
fundamental law of the corporation, and the corporation, its directors, officers and members
are bound by and must comply with them.

The provisions of the By-laws should be distinguished from resolutions of the Board. A
provision in the By-laws is a permanent rule of action and mode of conduct of corporate
affairs while a Resolution ordinarily applies only to a single act of a corporation. Where the
Resolution of the directors is inconsistent with the By-laws, the By-laws will prevail.

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b) By-laws vs. Articles of Incorporation

c) Contents of by-laws Sec. 47

Contents of by-laws:
a. The time, place and manner of calling and conducting regular or special meetings of
the directors or trustees;
b. The time and manner of calling and conducting regular or special meetings of the
stockholders or members;
(In default of provisions in the By-laws, the rules provided for in Sections 50 and 51
shall govern.)
c. The required quorum in meetings of stockholders or members and the manner of
voting therein;
(In the absence of a provision in the By-laws fixing a different quorum, the quorum
shall consist of the stockholders representing a majority of the outstanding capital
stock or a majority of the members in case of non-stock corporations.)
d. The form for proxies of stockholders and members and the manner of voting them;
(The mandatory formalities for proxies are provided for under Section 58 of the
corporation code and sections 20 to 20.5 of the securities regulation code.)
e. The qualifications, duties and compensation of directors or trustees, officers and
employees;
(The corporate officers, other than the President, Treasurer or Corporate Secretary,
may be specifically identified in the By-laws)
f. The time for holding the annual election of directors of trustees and the mode or manner
of giving notice thereof;
(In the absence of provisions in the By-laws, the rules provided for under section 53
apply.)
g. The manner of election or appointment and the term of office of all officers other than
directors or trustees;
(The manner of election of directors may not be provided for because the provision on
election of directors is mandatory.
h. The penalties for violation of the by-laws;
(If there is no penalty provided for in the By-laws, the corporation is not precluded from
using any other remedy provided by the law.)
i. In the case of stock corporations, the manner of issuing stock certificates; and
(However, the same cannot restrict or affect vested rights of stockholders. Thus,
stockholders may not be deprived of their right to transfer their shares)
j. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.

d) Procedure for adoption


(b.1) before incorporation
(b.2) after incorporation

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The By-laws may be adopted before or after incorporation. In all cases, the By-laws shall be
effective only upon the issuance by the SEC of a certification that the By-laws are not
inconsistent with the Corporation Code.

Time of filing:
1. Prior to incorporation must be approved and signed by all the incorporators, and
must be filed to the SEC together with the articles of incorporation
2. After incorporation approval of at least a majority of the outstanding capital stock. In
a non-stock corporation, the affirmative vote of at least a majority of the members shall
be necessary.

e) Effect of non-adoption

Section 46 provides that Every Corporation formed under this Code must, within one (1)
month after receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws for its government. The
Corporation is not automatically dissolved if no By-laws are adopted within such period.

The SC explained that the law itself reflects the intent to attach a directory, and not
mandatory, meaning for the word must in the first sentence of Section 46. The second
paragraph likewise rule out mandatory compliance with the requirement of filing the by-laws
within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission. It necessarily follows that failure
to file the by-laws within that period does not imply the demise of the corporation.

f) Requisites for validity

The following requisites must concur for the validity of the By-laws:
1. It must be consistent with the Corporation Code, other pertinent laws and regulations.
2. It must be consistent with the Articles of Incorporation
3. It must not be contrary to morals or public policy
4. It must not disturb vested rights, impair contract or property rights of stockholders or
members or create obligations not sanctioned by law.

g) Binding effect of by-laws

The provisions of the By-laws are binding not only upon the corporation but also on its
stockholder, members and those having direction, management and control of its affairs.

The provisions of the By-laws are not binding on subordinate employees having no actual
knowledge of the provisions thereof.

As to third persons, the By-laws provisions are also not binding unless there is actual
knowledge. (Third persons are not even bound to investigate the contents of the By-laws
because they are not bound to know that By-laws are merely provisions for the government
of a corporation.) . Notice to third persons will not be presumed.

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h) Amendment of by-laws and effectivity date

Two modes of amending or repealing by laws or adopting a new one:


1. By a majority vote of the directors or trustees and the majority vote of the outstanding
capital stock or members, at a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by 2/3 of the outstanding capital stock or
members

i) Delegation of power to amend B/L

The board alone can amend the By-laws if there was prior delegation of such power by the
stockholders. The owners of 2/3 of the outstanding capital stock or 2/3 of the members on a
non-stock corporation may delegate to the board of directors or trustees the power to amend
or repeal the by-laws or to adopt ne By-laws.

j) Revocation of delegated power

The Delegated power to amend, repeal or adopt by-laws may be revoked whenever
stockholders owning or representing a majority of the outstanding capital stock or a majority
of the members in a non-stock corporation, shall so vote at a regular or special meeting.

Cases:
1. Loyola Grand Villas v. CA (1997) 276 SCRA 681
2. Fleischer v. Botica Nolasco 47 Phil. 583 (1925)
3. Govt. of P. I. v. El Hogar Filipino 50 Phil. 399 (1927)
4. Gokongwei Jr. v. SEC, et al. 89 SCRA 336 (1979)
5. Christian HS v. CA (GR 108905; Oct. 23, 1997)
6. Thomson v. CA (298 SCRA 280)
7. Salafranca v. Philamlife Homeowners Asso. 300 SCRA 469
8. China Banking Corp. v. CA (270 SCRA 503)
9. Valley Golf Club v. Vda. De Caram 585 SCRA 218 (2009)
10. PMI Colleges v. NLRC 277 SCRA 462 (1997)
11. Sawadjaan v. CA 459 SCRA 516 (2005)
12. SMC v. Mandaue Packing Products 467 SCRA 107 (2005)

1. Loyola Grand Villas Homeowners vs. CA


G.R. No. 117188; August 7, 1997

FACTS:
HIGC (Guaranty Corp), a quasi-judicial body, recognized LGVHAI as the sole
homeowners association in Loyola Grand Villas in Marikina and QC. HIGC revoked the
certificate of North Association and South Association. North is registered with HIGC and
has submitted its by-laws.
When Soliven inquired about the status of the LGVHAI, he was told by the legal counsel
of HIGC that LGV has been AUTOMATICALLY dissolved because it did not submit its by-
laws and that it has been a non-user of the corporate charter because HIGC did not

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receive any report on the association activities. Apparently, this information resulted in the
registration of South Association with HIGC and subsequently filed its by-laws. These
developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC.
They questioned the revocation of LGVHAIs certificate of registration without due notice
and hearing and concomitantly prayed for the cancellation of the certificates of registration
of the North and South Associations by reason of the earlier issuance of a certificate of
registration in favor of LGVHAI.

ISSUE: WON the failure of a corporation to file its by-laws within one (1) month from the date of its
incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's
automatic dissolution.

HELD:
No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It
only constitutes a ground for such dissolution.
Incorporators must be given the chance to explain their neglect or omission and remedy
the same. Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. There must be a hearing to determine the
existence of the ground and assuming that there is such finding, the penalty is not
revocation but may be only suspension of the charter.
Although, the code is silent on the result of the failure to adopt and file the by-laws within
the required period. PD 902-A provides, it is clear that the failure to file by-laws within the
required period is only a ground for suspension or revocation of the certificate of
registration of corporations.

2. Fleischer vs. Botica Nolasco Inc.


G.R. No. L-23241; March 14, 1925

FACTS:
Manuel Gonzales made a written statement to the respondent, requesting that 5 shares of
stock sold by him to Henry Fleischer be noted transferred to Fleischer's name. He also
acknowledged in said written statement the preferential right of the corporation to buy said
five shares but later withdrew and cancelled his written statement. However, the
respondent replied that his letter was of no effect, and that the shares in question had
been registered in the name of the Botica Nolasco, Inc.
Fleischer filed an amended complaint against the respondent, alleging that he became the
owner of 5 shares of fully paid stock purchase by him from the original owner, Manuel
Gonzalez. Despite repeated demands, respondent refused to register said shares in his
name in the books of the corporation. Respondents defense is that it has preferential right
to buy the shares at the par value based on their Art. 12 of the by-laws. Trial court favored
petitioner and ordered the shares be registered. Hence, this appeal.

ISSUE: WON respondents Art. 12 of the by-laws is in conflict with the Corporation Law (now
Corporation Code).

HELD:
YES. Although the corporation is empowered to make by-laws, the same must not be
inconsistent with any existing law, for the transferring of its stocks. By-law should be in

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harmony with the law on the subject of transfer of stock. By-laws are intended for the
protection and regulation of the corporation and not for restriction.
As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objective of the corporation and are not contradictory to
the general policy of the laws of the land. Under a statute authorizing by-laws for the
transfer of stock, a corporation can do no more than prescribe a general mode of transfer
on the corporation books and cannot justify an restriction upon the right of sale.

NOTE: The Corporation Code allows reasonable transfer restriction in close corporations.

3. Government of Philippine Islands vs. El Hogar Filipino


G.R. No. L-26649; July 13, 1927

FACTS:
The plaintiff instituted a quo warranto proceeding against respondent for the purpose of
depriving it of its corporate franchise, excluding from it all corporate rights and privileges
and effecting a final dissolution of the corporation.
The by-laws of the corporation states a provision that: the BOD, by vote of an absolute
majority of its members, is empowered to CANCEL SHARES AND RETURN TO THE
OWNER thereof the balance resulting from the liquidation thereof, whenever, by reason of
their conduct of any other motive, the continuation as members of the owners of such
shares is not desirable. The plaintiff questioned the validity because it conflicts with the
Corporation Law which declares that the BOARD SHALL NOT HAVE THE POWER TO
FORCE THE SURRENDER AND WITHRAWAL OF UNMATURED STOCK EXCEPT IN
CASE OF LIQUIDATION OF THECORPORATION OR OF FORFEITURE OF THE STOCK
FOR DELINQUENCY.
Second cause of action of the plaintiff was based on the BODs failure to hold annual
meetings and fill vacancies. There is also a provision in the by-laws that the directors shall
elect from among the shareholder members to fill the vacancies that may occur in the BOD
until the election at the general meeting.
Third cause of action is the fact the directors of El Hogar have been receiving large
compensation because the by-laws provide a 5% of the net profit shown by the annual
balance sheet to be distributed to the directors in proportion to their attendance at
meetings of the board.
Fourth cause of action, procedures to adopt when one is elected as a BOD must own at
least P5000 pay-up of shares as security.

ISSUES: First, is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel
shares valid?
Second, is mere failure to elect officers terminates the term of existing officers?
Third, is a provision in the by-laws fixing the salary of directors valid?
Fourth, is a provision requiring persons elected to the Board of Directors to own at least P
5,000 shares valid?

HELD:
First. No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corporation Law
which prohibits forced surrender of unmatured stocks except in case of dissolution.

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Second. No. Unless the law or the charter of the corporation expressly provides that an
office shall become at the expiration of the term of office for which the officer was elected,
the general rule is to allow the officer to hold over until his successor is duly qualified.
MERE FAILURE OF A CORPORATION TO ELECT OFFICERS DOES NOT TERMINATE
THE TERM OF EXISTINGOFFICERS AND DISSOLVE THE CORPORATION.
Third. Yes. Since the Corporation Law does not prescribe the rate of compensation, the
power to fix compensation lies with the corporation. The remedy is in the hands of the
stockholders.
Fourth. Yes. The Corporation Law gives the corporation the power to provide
qualifications of its directors and the requirement of security from them for the proper
discharge of the duties of their office.

4. Gokongwei Jr. vs. SEC et. al.


G.R. No. L-45911; April 11, 1979

FACTS:
Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for the declaration
of nullity of the by-laws etc. against the majority members of the BOD and San Miguel. It is
stated in the by-laws that the amendment or modification of the by-laws may only be
delegated to the BODs upon an affirmative vote of stockholders representing not less than
2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 could have
been computed on the basis of the capitalization at the time of the amendment. Petitioner
contends that the amendment was based on the 1961 authorization, the Board acted
without authority and in usurpation of the power of the stockholders in amending the by-
laws in 1976. He also contends that the 1961 authorization was already used in 1962 and
1963. He also contends that the amendment deprived him of his right to vote and be voted
upon as a stockholder (because it disqualified competitors from nomination and election in
the BOD of SMC), thus the amended by-laws were null and void.
While this was pending, the corporation called for a stockholders meeting for the
ratification of the amendment to the by-laws. This prompted petitioner to seek for summary
judgment. This was denied by the SEC. In another case filed by petitioner, he alleged that
the corporation had been using corporate funds in other corporations and businesses
outside the primary purpose clause of the corporation in violation of the Corporation Code.

ISSUE: Are the amendments in the by-laws are valid?

HELD:
YES. The validity and reasonableness of a by-law is purely a question of law. Whether the
by-law is in conflict with the law of the land, or with the charter of the corporation or is in
legal sense unreasonable and therefore unlawful is a question of law. However, this is
limited where the reasonableness of a by-law is a mere matter of judgment, and one upon
which reasonable minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are authorized to make by-
laws and who have exercised authority.
The Court held that a corporation has authority prescribed by law to prescribe the
qualifications of directors. It has the inherent power to adopt by-laws for its internal
government, and to regulate the conduct and prescribe the rights and duties of its

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members towards itself and among themselves in reference to the management of its
affairs.
A corporation, under the Corporation law, may prescribe in its by-laws the qualifications,
duties and compensation of directors, officers, and employees. Any person who buys stock
in a corporation does so with the knowledge that its affairs are dominated by a majority of
the stockholders and he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the acts of incorporation and lawfully enacted by-laws and not
forbidden by law.
Any corporation may amend its by-laws by the owners of the majority of the subscribed
stock. It cannot thus be said that petitioners has the vested right, as a stock holder, to be
elected director, in the face of the fact that the law at the time such stockholder's right was
acquired contained the prescription that the corporate charter and the by-laws shall be
subject to amendment, alteration and modification.
A Director stands in a fiduciary relation to the corporation and its shareholders, which is
characterized as a trust relationship. An amendment to the corporate by-laws which
renders a stockholder ineligible to be director, if he be also director in a corporation whose
business is in competition with that of the other corporation, has been sustained as valid.
This is based upon the principle that where the director is employed in the service of a rival
company, he cannot serve both, but must betray one or the other. The amendment in this
case serves to advance the benefit of the corporation and is good. Corporate officers are
also not permitted to use their position of trust and confidence to further their private
needs, and the act done in furtherance of private needs is deemed to be for the benefit of
the corporation. This is called the doctrine of corporate opportunity.

5. Grace Christian High School vs. CA


G.R. No. 108905; October 23, 1997

FACTS:
Grace Christian High School is an educational institution at the Grace Village in Quezon
City. Grace Village Association, Inc., on the other hand, is an organization of lot and/or
building owners, lessees and residents at Grace Village.
In 1968, the by-laws of the association provide that the annual meeting of the members
shall be held per calendar year and that the election of the BOD shall be by plurality of
votes.
In 1975, a committee of the BOD prepared a draft of an amendment to the by-laws a
substantial addition was made wherein GRACE CHRISTIAN HIGH SCHOOL
representative is a permanent Director of the ASSOCIATION. However, said draft was
never presented to the general membership for approval. Nevertheless, Grace Christian
High School was given a permanent seat in the board of directors of the association.
On 1990, the association's committee decided to re-examine the 1975 by-laws for the
reason that there was deprivation on the part of the voters to vote for 15 directors
(because of a reserved permanent seat for GCHS). Hence, notices were sent to the
members of the association that the provision on election of directors of the 1968 by-laws
of the association would be observed.
The school requested the chairman of the election committee to change the notice of
election claiming that it was in violation of the 1975 by-laws and unlawfully deprived Grace
Christian High School of its vested right to a permanent seat in the board. The GVA denied
their request. The school brought suit for mandamus in the HIGC. The association, on the
other hand, sought the opinion of the SEC on the validity of this provision and rendered

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that the practice of allowing unelected members in the board was contrary to the existing
by-laws of the association and to 92 of the Corporation Code.
The case was set for hearing and HIGC rendered a decision dismissing the school's
action. The appeals board of the HIGC affirmed the decision of the hearing officer.
Petitioner appealed to the CA but again lost.

ISSUE: WON the amendments made in the by-laws in 1975 was valid.

HELD:
NO. A by-law provision granting to a stockholder a permanent representation in the Board
of Directors is contrary to the Corporation Code requiring all members of the Board to be
elected by the stockholders or members. Even when the members of the association may
have formally adopted the provision, their action would be of no avail because no provision
of the by-laws can be adopted if it is contrary to law.
Hence, the school cannot claim a vested right to sit in the board on the basis of "practice."
Practice, no matter how long continued, cannot give rise to any vested right if it is contrary
to law. Even less tenable is the school's claim that its right is "coterminus with the
existence of the association."

6. Thomson vs. CA
G.R. No. 116631; October 28, 1998

FACTS:
Petitioner was the EVP and later on the Management Consultant of the private
respondent, American Chamber of Commerce in the Philippines (AmCham).
While petitioner was still working with private respondent, his superior, Burridge, retired as
AmCham's President. Burridge wanted to transfer his proprietary share in the Manila Polo
Club (MPC) to petitioner. However, through the intercession of Burridge, private
respondent paid for the share but had it listed in petitioner's name. Upon his admission as
a new member of the MPC, petitioner paid the transfer fee from his own funds; but private
respondent subsequently reimbursed this amount. Thereafter, MPC issued Proprietary
Membership Certificate but petitioner failed to execute a document recognizing private
respondent's beneficial ownership over said share.
When petitioner's contract of employment was up for renewal, he notified private
respondent that he would no longer be available as EVP, but the latter insisted that he stay
for 6 months. Petitioner indicated his acceptance of the consultancy arrangement with a
counter-proposal among others is the retention of the Polo Club share. Private respondent
rejected the counter-proposal. Pending the negotiation for consultancy arrangement,
private respondent executed a release and quitclaim against petitioner.
Private respondent sent a letter to the petitioner demanding the return and delivery of the
MPC share but failed to get a response. Hence, the former filed a complaint against
petitioner for the return of MPC share. The trial court awarded the MPC share to petitioner
on the ground that the AOI and By-laws of Manila Polo Club prohibit artificial persons, such
as corporations, to be club members. CA reversed the decision of the trial court.

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ISSUE: WON the CA erred in ordering petitioner to transfer the contested MPC share to a nominee
of private respondent notwithstanding MPCs AOI and By-laws prohibition for being a club
member.

HELD:
NO. Private respondent does not insist nor intend to transfer the club membership in its
name but rather to its designated nominee. The Manila Polo Club does not necessarily
prohibit the transfer of proprietary shares by its members. The Club only restricts
membership to deserving applicants in accordance with its rules, when the amended
Articles of Incorporation states that: "No transfer shall be valid except between the parties,
and shall be registered in the Membership Book unless made in accordance with these
Articles and the By-Laws". Thus, as between parties herein, there is no question that a
transfer is feasible.
Moreover, authority granted to a corporation to regulate the transfer of its stock does not
empower it to restrict the right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the formalities and procedure to be followed in
effecting transfer.
In this case, the petitioner was the nominee of the private respondent to hold the share
and enjoy the privileges of the club. But upon the expiration of petitioner's employment as
officer and consultant of AmCham, the incentives that go with the position, including use of
the MPC share, also ceased to exist. It now behooves petitioner to surrender said share to
private respondent's next nominee, another natural person.

7. Salafranca vs. Philamlife (Pamplona) Homeowners Association


G.R. No. 121791; December 23, 1998

FACTS:
Petitioner Enrique Salafranca started working with private respondent as administrative
officer for a period of 6 months. He was re-appointed to his position three more times. After
petitioners term of employment expired on, he still continued to work in the same capacity,
albeit, without the benefit of a renewed contract.
Sometime in 1987, private respondent decided to amend its by-laws. Included therein was
a provision regarding officers, specifically, the position of administrative officer under which
said officer shall hold office at the pleasure of the Board of Directors.
In view of the development, private respondent informed the petitioner that his term of
office shall be co-terminus with the Board of Directors which appointed him to his position.
Furthermore, until he submits a medical certificate his employment shall be on a month to
month basis. Notwithstanding the failure of petitioner to submit his medical certificate, he
continued to work until his termination.
Petitioner filed a complaint for illegal dismissal, money claims and for damages. The Labor
Arbiter rendered decision in favor of petitioner on the ground that the amendment would
not be applicable to complainant who had become a regular employee long time before
the amendment took place. The NLRC reversed the decision of the Labor Arbiter.

ISSUE: WON the dismissal of petitioner was valid by virtue of the amendment in the by-laws
making petitioners position co-terminus with that of the BOD.

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HELD:
NO. Although the right to amend by-laws lies solely in the discretion of the employer, this
being in the exercise of management prerogative or business judgment, however such
right cannot impair the obligation of existing contracts or rights or undermine the right to
security of tenure of a regular employee. Otherwise, it would enable an employer to
remove any employee from employment by the simple expediency of amending its by-laws
and providing the position shall cease to exist upon occurrence of a specified event.
If private respondent wanted to make the petitioners position co-terminus with that of the
Board of Directors, then the amendment must be effective after petitioners stay with the
private respondent, not during his term. Obviously, the measure taken by the private
respondent in amending its by-laws is nothing but a devious, but crude, attempt to
circumvent petitioners right to security of tenure as a regular employee guaranteed under
the Labor Code.

8. China Banking Corp. vs. CA


G.R. No. 117604; March 26, 1997

FACTS:
Galicano Calapatia, stockholder of Valley Golf and Country Club Inc. (VGCCI), pledged his
stock certificate to petitioner as a security for the loan. Petitioner requested VGCCI that the
pledge agreement be recorded in their books. Due to Calapatia failure to pay, petitioner
filed a petition for extrajudicial foreclosure of pledged stock; notified and ordered VGCCI to
transfer the pledged stock in its name and in the corporate books. VGCCI refused in view
of Calapatias unsettled accounts with the club.
Despite the refusal, the foreclosure ensued and petitioner emerged the highest bidder and
a certificate of sale was issued. Meanwhile, VGCCI sent a notice of demand to Calapatia
for the full payment of his overdue account. For failure to pay, the delinquent stock was
published and auctioned.
Petitioner advised VGCCI that it is the new owner of Calapatias stock certificate and
requested that a new certificate of stock be issued in its name. VGCCI replied that by
reason of delinquency, Calapatias stock was sold at public auction. Petitioner protested
the sale and filed a complaint for the nullification of auction made by VGCCI in the RTC of
Makati. The trial court dismissed the complaint on the ground of intra-corporate
controversy.
Thereafter, petitioner filed a complaint in SEC on the same grounds. SEC ruled in favor of
VGCCI. Petitioner appealed to SEC en banc and the latter reversed the decision. VGCCI
appealed to CA and the latter set aside the orders of SEC on the ground of lack of
jurisdiction because it does not involve intra-corporate controversy.

ISSUE: WON the petitioner is bound by the VGCCIs by-laws.

HELD:
NO. In order to be bound, the third party must have acquired knowledge, either actual or
constructive, of the pertinent by-laws at the time the transaction or agreement between
said third party and the shareholder was entered into, in this case, at the time the pledge
agreement was executed. VGCCI could have easily informed petitioner of its by-laws when
it sent notice formally recognizing petitioner as pledgee of one of its shares registered in
Calapatia's name.

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By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their
relation to it. In other words, by-laws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and that of the individuals
composing it and having the direction, management and control of its affairs, in whole or in
part, in the management and control of its affairs and activities. The purpose of a by-law is
to regulate the conduct and define the duties of the members towards the corporation and
among themselves. They are self-imposed and, although adopted pursuant to statutory
authority, have no status as public law.

9. VALLEY GOLF & COUNTRY CLUB, INC., Petitioner, vs. ROSA O. VDA. DE
CARAM, Respondent.
G.R. No. 158805 | April 16, 2009
FACTS:
Petitioner is a duly constituted non-stock, non-profit corporation which operates a
golf course. The members and their guests are entitled to play golf on the said course
and avail of the facilities and privilege. The shareholders are likewise assessed monthly
membership dues.
Cong. Fermin Z. Caram, Jr., respondents husband, subscribed and paid in full 1
Golf Share of the petitioner and was subsequently issued with a stock certificate which
indicated a par value of P9,000.00. It was alleged by the petitioner that Caram stopped
paying his monthly dues and that it has sent 5 letters to Caram concerning his
delinquent account. The Golf Share was subsequently sold at public auction for
P25,000.00 after the BOD had authorized the sale and the Notice of Auction Sale was
published in the Philippine Daily Inquirer.
Caram thereafter died and hiis wife initiated intestate proceedings before the RTC
of IloIlo. Unaware of the pending controversy over the Golf Share, the Caram family and
the RTC included the Golf Share as part of Carams estate. The RTC approved a project of
partition of Carams estate and the Golf Share was adjudicated to the wife, who paid the
corresponding estate tax due, including that on the golf Share.
It was only through a letter that the heirs of Caram learned of the sale of the Golf Share
following their inquiry with Valley Golf about the Golf Share. After a series of
correspondence, the Caram heirs were subsequently informed in a letter that they were
entitled to the refund of P11,066.52 out of the proceeds of the sale of the Golf Share,
which amount had been in the custody of the petitioner.
Carams wife filed an action for reconveyance of the Golf Share with damages
before the SEC against Valley Golf. The SEC Hearing Officer rendered a decision in favor
of the wife, ordering Valley Golf to convey ownership of the Golf Share, or in the
alternative. to issue one fully paid share of stock of Valley Golf of the same class as the
Golf Share to the wife. Damages totaling P90,000.00 were also awarded to the wife.
The SEC hearing officer ruled that under Section 67, paragraph 2 of the
Corporation Code, a share stock could only be deemed delinquent and sold in an
extrajudicial sale at public auction only upon the failure of the stockholder to pay the
unpaid subscription or balance for the share. However, the section could not have
applied in Carams case since he had fully paid for the Golf Share and he had been
assessed not for the share itself but for his delinquent club dues. Proceeding from the
foregoing premises, the SEC hearing officer concluded that the auction sale had no basis

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in law and was thus a nullity. The SEC en banc and the Court of Appeals affirmed the
hearing officers decision, and so the petitioner appealed before SC.

ISSUE: WON a non-stock corporation seize and dispose of the membership


share of a fully-paid member on account of its unpaid debts to the corporation
when it is authorized to do so under the corporate by-laws but not by the
Articles of Incorporation?

RULING:
The Supreme Court ruled that there is a specific provision under Title XI on Non-Stock
Corporations of the Corporation Code dealing with the termination of membership in a
non-stock corporation such as Valley Golf.
Section 91 of the Corporation Code provides:
SEC. 91. Termination of membership.Membership shall be terminated in the
manner and for the causes provided in the articles of incorporation or the by-laws.
Termination of membership shall have the effect of extinguishing all rights of a
member in the corporation or in its property, unless otherwise provided in the
articles of incorporation or the by-laws. (Emphasis supplied)
A share can only be deemed delinquent and sold at public auction only upon the failure
of the stockholder to pay the unpaid subscription. Delinquency in monthly club dues was
merely an ordinary debt enforceable by judicial action in a civil case. A provision creating
a lien upon shares of stock for unpaid debts, liabilities, or assessments of stockholders to
the corporation, should be embodied in the Articles of Incorporation, and not merely in
the by-laws. Moreover, the by-laws of petitioner should have provided formal
notice and hearing procedure before a members share may be seized and
sold.
The procedure for stock corporations recourse on unpaid subscription is
not applicable in members shares in a non-stock corporation.
SC proceeded to declare the sale as invalid. SC found that Valley Golf acted in bad
faith when it sent the final notice to Caram under the pretense they believed him to be
still alive, when in fact they had very well known that he had already died. The Court
stated:
Whatever the reason Caram was unable to respond to the earlier notices, the fact
remains that at the time of the final notice, Valley Golf knew that Caram, having
died and gone, would not be able to settle the obligation himself, yet they
persisted in sending him notice to provide a color of regularity to the resulting sale.
That reason alone, evocative as it is of the absence of substantial justice in the
sale of the Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC
and the Court of Appeals.
Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the
final notice to Caram on the deliberate pretense that he was still alive could bring into
operation Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code.
These provisions enunciate a general obligation under law for every person to act fairly
and in good faith towards one another. Non-stock corporations and its officers are not
exempt from that obligation.

10. PMICollegesv.NLRC277SCRA462(1997)

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FACTS: In 1991, PMI Colleges hired the services of Alejandro Galvan for the latter to
teach in said institution. However, for unknown reasons, PMI defaulted from paying the
remunerations due to Galvan. Galvan made demands but were ignored by PMI.
Eventually, Galvan filed a labor case against PMI. Galvan got a favorable judgment from
the Labor Arbiter; this was affirmed by the National Labor Relations Commission. On
appeal, PMI reiterated, among others, that the employment of Galvan is void because it
did not comply with its by-laws. Apparently, the by-laws require that an employment
contract must be signed by the Chairman of the Board of PMI. PMI asserts that Galvans
employment contract was not signed by the Chairman of the Board.
ISSUE: Whether or not Galvans employment contract is void.
HELD: No. PMI Colleges never even presented a copy of the by-laws to prove the
existence of such provision. But even if it did, the employment contract cannot be
rendered invalid just because it does not bear the signature of the Chairman of the Board
of PMI. By-Laws operate merely as internal rules among the stockholders, they cannot
affect or prejudice third persons who deal with the corporation, unless they have
knowledge of the same. In this case, PMI was not able to prove that Galvan knew of said
provision in the by-laws when he was employed by PMI.

11. Sawadjaan v. CA
GR NO. 141735 June 8, 2005
Chico- Nazario, J.:

Facts:
Sappari K. Sawadjaan was among the first employees of the Philippine Amanah Bank
(PAB) when it was created. He rose through the ranks, working his way up from his initial
designation as security guard.
In February 1988, while still designated as appraiser/investigator, Sawadjaan was
assigned to inspect the properties offered as collaterals by Compressed Air Machineries
and Equipment Corporation (CAMEC) for a credit line of Five Million Pesos secure by REM
over the latters poperties. On the basis of his Inspection and Appraisal Report, the PAB
granted the loan application.
In the meantime, Sawadjaan was promoted to Loans Analyst I.
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing
P.D. No. 264 (which created the PAB). By virtue of which all assets, liabilities and capital
accounts of the PAB were transferred to the AIIBP, and the existing personnel of the PAB
were to continue to discharge their functions unless discharged. In the ensuing
reorganization, Sawadjaan was among the personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred to as the
AIIBP, discovered that TCT No. N-130671 was spurious, the property described therein
non-existent, and that the property covered by TCT No. C-52576 had a prior existing
mortgage in favor of one Divina Pablico.
The Board of Directors of the AIIBP created an Investigating Committee to look into the
CAMEC transaction. They found petitioner guilty of conduct prejudicial to the best
interest of the service. The board suspended the petitioner, prompting the latter to
appeal the decision citing AIIBPs lack of legal standing to sue since it was not able to file
its by-laws within the prescribed period.

Issue:

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Whether a corporation which failed to file its by-laws within the prescribed period ipso
facto lose its power as such

Held:
NO. At the very least, by its failure to submit its by-laws on time, the AIIBP may be
considered a de facto corporation whose right to exercise corporate powers may not be
inquired into collaterally in any private suit to which such corporations may be a party.
Moreover, a corporation which has failed to file its by-laws within the prescribed period
does not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of
the Certificate of Registration of Corporations, details the procedures and remedies that
may be availed of before an order of revocation can be issued. There is no showing that
such a procedure has been initiated in this case.

12. SMC v. Mandaue Packing Products


467 SCRA 107 (2005)

Facts: On 15 June 1998, respondent, identifying itself as an affiliate of Federation of Free Workers
(FFW), filed a petition for certification election with the DOLE Regional Office. In the petition,
respondent stated that it sought to be certified and to represent the permanent rank-and-file monthly
paid employees of the petitioner. A set ofdocuments were attached to the petition, including a (1)
Charter Certificate issued by FFW certifying that respondent was a duly certified local chapter of
FFW, (2) copy of the constitution of respondent, (3) a list of respondents officers, (4) a certification
signifying that respondent had just been organized and no amount had yet been collected from its
members and (5) a list of all the rank-and-file monthly paid employees of the Mandaue
PackagingProducts Plants and Mandaue Glass Plant

On 27 July 1998, petitioner filed a motion to dismiss the petition for certification election on the sole
ground that herein respondent is not listed or included in the roster of legitimate labor organizations
based on the certification issued by the Officer-In-Charge, Regional Director of the DOLE Regional
Office.

Undersecretary Baldoz concluded that respondent acquired legal personality as early as 15 June
1998, the date it submitted the required documents, citing Section 3, Rule VI of the New Rules
Implementing the Labor Code (Implementing Rules) which deems that a local/chapter acquires legal
personality from the date of filing of the complete documentary requirements as mandated in the
Implementing Rules.

These two conclusions of the DOLE were affirmed in the assailed Decision of the Court of Appeals

Issue: Whether or not respondent has acquired legal personality

Held: YES. It could be properly said that at the exact moment respondent was filing the petition for
certification, it did not yet possess any legal personality, since the requisites for acquisition of legal
personality under Section 3, Rule VI of Department Order No. 9 had not yet been complied with. It
could also be discerned that the intention of the Labor Code and its Implementing Rules that only
those labor organizations that have acquired legal personality are capacitated to file petitions for
certification elections. Such is the general rule. Yet there are peculiar circumstances in this case that
allow the Court to rule that respondent acquired the requisite legal personality at the same time it filed
the petition for certification election. In doing so, the Court acknowledges that the strict letter of the

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procedural rule was not complied with. However, labor laws are generally construed liberally in favor
of labor, especially if doing so affirms the constitutionally guaranteed right to self-organization.

Under Section 3, Rule VI of Department Order No. 9, it is the submission of these same documents to
the Regional Office or Bureau that operates to vest legal personality on the local/chapter. There is no
doubt that on 15 June 1998, or the date respondent filed its petition for certification election, attached
thereto were respondents constitution, the names and addresses of its officers, and the charter
certificate issued by the national union FFW.

However, respondent never submitted a separate by-laws, nor does it appear that respondent ever
intended to prepare a set thereof. Section 1(c), Rule VI, Book V of Department Order No. 9 provides
that the submission of both a constitution and a set of by-laws is required, or at least an indication
that the local/chapter is adopting the constitution and by-laws of the federation or national union. A
literal reading of the provision might indicate that the failure to submit a specific set of by-laws is fatal
to the recognition of the local/chapter. However, a critical examination of respondents constitution
reveals that it is sufficiently comprehensive in establishing the necessary rules for its operation. These
premises considered, there is clearly no need for a separate set of by-laws to be submitted by
respondent.

2) Commencement of Business ---- Sec. 22

TITLE II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS


Section 22. Effects on non-use of corporate charter and continuous inoperation of a
corporation. If a corporation does not formally organize and commence the transaction of its
business or the construction of its works within two (2) years from the date of its incorporation,
its corporate powers cease and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall be a ground for
the suspension or revocation of its corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes beyond
the control of the corporation as may be determined by the Securities and Exchange
Commission.

3) Election of Directors & Officers --- Sec. 23 and 25

TITLE III. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified. (28a)

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

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corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or trustees of all
corporations organized under this Code must be residents of the Philippines.

Section 25. Corporate officers, quorum. Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-
laws provide for a greater majority, a majority of the number of directors or trustees as fixed in
the articles of incorporation shall constitute a quorum for the transaction of corporate business,
and every decision of at least a majority of the directors or trustees present at a meeting at
which there is a quorum shall be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.

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