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FILIPINAS PORT SERVICES, INC vs.

GO

G.R. No. 161886 March 16, 2007

FACTS: FilPort is a domestic corporation engaged in stevedoring services with principal office in Davao City. On
4 September 1992, petitioner Eliodoro Cruz, Filports president from 1968 until he lost his bid for re-election as
Filports president during the general stockholders meeting in 1991, wrote a letter to the corporations Board of
Directors questioning the boards creation of the positions of Assistant Vice-Presidents for Corporate Planning,
Operations, Finance and Administration, and the creation of the additional positions of Special Assistants to the
President and the Board Chairman with a monthly remuneration of P13,050.00 each, and the election thereto of
certain members of the board. In his aforesaid letter, Cruz requested the board to take necessary action/s to
recover from those elected the salaries they have received. However, it was not shown on the records that action
was taken. On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is
herein co-petitioner Mindanao Terminal and Brokerage Services, Inc., filed with the SEC a petition which he
describes as a derivative suit against the herein respondents who were then the incumbent members of Filports
Board of Directors, for alleged acts of mismanagement detrimental to the interest of the corporation and its
shareholders at large. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila,
Branch 14, sitting as a corporate court. Thereafter, on respondents motion, it was eventually transferred to the
RTC of Davao City. On 10 December 2001, RTC-Davao City rendered its decision in the case. Even as it found
that (1) Filports Board of Directors has the power to create positions not provided for in the by-laws of the
corporation since the board is the governing body; and (2) the increases in the salaries of the board chairman,
vice-president, treasurer and assistant general manager are reasonable, the trial court nonetheless rendered
judgment against the respondents by ordering the directors holding the positions of Assistant Vice President for
Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman to refund to
the corporation the salaries they have received as such officers "considering that Filipinas Port Services is not a
big corporation requiring multiple executive positions" and that said positions "were just created for
accommodation." On appeal, the CA taking exceptions to the findings of the trial court that the creation of the
positions of Assistant Vice President for Corporate Planning, Special Assistant to the President and Special
Assistant to the Board Chairman was merely for accommodation purposes, granted the respondents appeal,
reversed and set aside the appealed decision of the trial court and accordingly dismissed the so-called derivative
suit filed by Cruz, et al. Hence this petition for review on certiorari.

ISSUE: Whether or not Filports Board of Directors has the power to create positions not provided for in the by-
laws of the corporation.

RULING: The governing body of a corporation is its board of directors. Section 23 of the Corporation Code
explicitly provides that unless otherwise provided therein, the corporate powers of all corporations formed under
the Code shall be exercised, all business conducted and all property of the corporation shall be controlled and
held by a board of directors. Thus, with the exception only of some powers expressly granted by law to
stockholders (or members, in case of non-stock corporations), the board of directors (or trustees, in case of non-
stock corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary
business of the corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant
provisions of law. Verily, the authority of the board of directors is restricted to the management of the regular
business affairs of the corporation, unless more extensive power is expressly conferred.The raison detre behind
the conferment of corporate powers on the board of directors is not lost on the Court. Indeed, 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.

In the present case, the boards creation of the positions of Assistant Vice Presidents for Corporate Planning,
Operations, Finance and Administration, and those of the Special Assistants to the President and the Board
Chairman, was in accordance with the regular business operations of Filport as it is authorized to do so by the
corporations by-laws, pursuant to the Corporation Code.
Amended Bylaws of Filport provides the following:

Officers of the corporation, as provided for by the by-laws, shall be elected by the board of directors at
their first meeting after the election of Directors. Xxx

The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a
Secretary, a Treasurer, a General Manager and such other officers as the Board of Directors may from
time to time provide, and these officers shall be elected to hold office until their successors are elected
and qualified. (Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by its board of directors of an executive
committee. Under Section 35 of the Corporation Code, the creation of an executive committee must be provided
for in the bylaws of the corporation. Notwithstanding the silence of Filports bylaws on the matter, the creation of
the executive committee by the board of directors cannot be ruled as illegal or unlawful. One reason is the
absence of a showing as to the true nature and functions of said executive committee considering that the
"executive committee," referred to in Section 35 of the Corporation Code which is as powerful as the board of
directors and in effect acting for the board itself, should be distinguished from other committees which are within
the competency of the board to create at anytime and whose actions require ratification and confirmation by the
board. Another reason is that, ratiocinated by both the 2 courts below, the Board of Directors has the power to
create positions not provided for in Filports bylaws since the board is the corporations governing body, clearly
upholding the power of its board to exercise its prerogatives in managing the business affairs of the corporation.

As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz himself, it was during
his incumbency as Filport president that the executive committee in question was created, and that he was even
the one who moved for the creation of the positions of the AVPs for Operations, Finance and Administration. By
his acquiescence and/or ratification of the creation of the aforesaid offices, Cruz is virtually precluded from suing
to declare such acts of the board as invalid or illegal. And it makes no difference that he sues in behalf of himself
and of the other stockholders. Indeed, as his voice was not heard in protest when he was still Filports president,
raising a hue and cry only now leads to the inevitable conclusion that he did so out of spite and resentment for
his non-reelection as president of the corporation.
The Government of the Philippine Islands vs. El Hogar Filipino
G.R. No. L-26649 July 13, 1917

FACTS: The Philippine Commission enacted Act No. 1459, also known as the Corporation Law, on March 1,
1906. El Hogar Filipino, organized in 1911 under the laws of the Philippine Islands, was the first corporation
organized under Sec. 171-190 Act No. 1459, devoted to the subject of building and loan associations, their
organization and administration. In the said law, the capital of the corporation was not permitted to exceed P3M,
but Act No. 2092 amended the statute, permitting capitalization to the amount of ten millions.
El Hogar took advantage of the amendment of Act No. 1459 and amended its AOI as a result thereof,
stating that the amount of capital must not exceed what has been stated in Act No. 2092. This resulted to El
Hogar having 5,826 shareholders, 125,750 shares with paid-up value of P8.7M. The corporation paid P7.16M to
its withdrawing stockholders.
The Government of the Philippine Islands filed an action against El Hogar due to the alleged illegal
holding title to real property for a period exceeding five (5) years after the same was bought in a foreclosure sale.
Sec. 13(5) of the Corporation Law states that corporations must dispose of real estate obtained within 5 years
from receiving the title. The Philippine Government also prays that El Hogar be excluded from all corporate
rights and privileges and effecting a final dissolution of said corporation.
It appears from the records that El Hogar was the holder of a recorded mortgage on the San Clemente
land as security for a P24K loan to El Hogar. However, shareholders and borrowers defaulted in payment so El
Hogar foreclosed the mortgage and purchased the land during the auction sale. A deed of conveyance in favor of
El Hogar was executed and sent to the Register of Deeds of Tralac with a request that the certificate of title be
cancelled and a new one be issued in favor of El Hogar from the Register of Deeds of Tarlac. However, no reply
was received. El Hogar filed a complaint with the Chief of the General Land Registration Office. The certificate of
title to the San Clemente land was received by El Hogar and a board resolution authorizing Benzon to find a
buyer was issued. Alcantara, the buyer of the land, was given extension of time to make payment but defaulted
so the contract treated rescinded. Efforts were made to find another buyer. Respondent acquired title in
December 1920 until the property was finally sold to Felipa Alberto in July 1926. The interval exceeded 5 years
but the period did not commence to run until May 7, 1921 when the register of deeds delivered the new
certificate of title. It has been held that a purchaser of land registered under the Torrens system cannot acquire
the status of an innocent purchaser for value unless the vendor is able to place the owners duplicate in his
hands showing the title to be in the vendor. During the period before May 1921, El Hogar was not in a position to
pass an indefeasible title to any purchaser. Therefore, El Hogar cannot be held accountable for this delay which
was not due to its fault. Likewise, the period from March 25, 1926 to April 20, 1926 must not be part of the five-
year period because this was the period where respondent was under the obligation to sell the property to
Alcantara prior to the contracts rescission due to Alcantaras non-payment.
Another circumstance causing the delay is the fact that El Hogar purchased the property in the full
amount of the loan made by the former owner which is nearly P24K when it was subsequently found that the
property was not salable and later sold for P6K notwithstanding El Hogars efforts to find a purchaser upon better
terms.

ISSUE: Whether or not the acts of respondent corporation merit its dissolution or deprivation of its corporate
franchise and to exclude it from all corporate rights and privileges

HELD: SUSTAINED only as to administering of real property not owned by it and when permitted by contract.

Causes of action:
1 Alleged illegal holding of real property for a period exceeding five years from receipt of title-Cause of
delay is not respondents fault

1) That respondent is owning and holding a business lot with the structure thereon in excess of its
reasonable requirements and in contravention of Sec. 13(5) of Corpo. Law- WITHOUT MERIT
Every corporation has the power to purchase, hold and lease such real property as the
transaction would of the lawful business may reasonably and necessarily require.

2) That respondent is engaged in activities foreign to the purposes for which the corporation was created
and not reasonably necessary to its legitimate ends-VALID
The administration of property, payment of real estate taxes, causing necessary repairs,
managing real properties of non-borrowing shareholders is more befitting to the business of a
real estate agent or a trust company than a building and loan association.
3) That the by-laws of the association stating that, the board of directors by the vote of an absolute
majority of its members is empowered to cancel shares and to return the balance to the owner by reason
of their conduct or any other motive or liquidation is in direct conflict with Sec. 187 of the Corporation
Law which provides that the board of directors shall not have the power to force the surrender and
withdrawal of unmatured stock except in case of liquidation or forfeiture of stock for delinquency-
WITHOUT MERIT
There is no provision of law making it a misdemeanor to incorporate an invalid provision in the
by-laws of a corporation; and if there were such, the hazards incident to corporate effort would
be largely increased.

4) Art. 61 of El Hogars by-laws which states that attendance in person or by proxy by shareholders
owning one-half plus one of the shareholders shall be necessary to constitute a quorum for the election
of directors is contrary to Sec. 31 of the Corpo Law which provides that owners of the majority of the
subscribed capital stock entitled to vote must be present either in person or by proxy at all elections of
directors- WITHOUT MERIT
No fault can be imputed to the corporation on account of the failure of the shareholders to attend
the annual meetings and their non-attendance in meetings is doubtless to be interpreted in part
as expressing their satisfaction of the way in which things have been conducted. Mere failure of
a corporation to elect officers does not terminate the terms of existing officers nor dissolve the
corporation. The general rule is to allow the officer to holdover until his successor is duly
qualified.

5) That the directors of El Hogar, instead of receiving nominal pay or serving without pay, have been
receiving large compensation, varying in amount from time to time, out of respondents profits-
WITHOUT MERIT
With the growth of the corporation, the amount paid as compensation to the directors has
increased beyond what would probably be necessary is a matter that cannot be corrected in this
action. Nor can it properly be made a basis for depriving respondent of its franchise or enjoining
it from compliance with the provisions of its own by-laws. If a mistake has been made, the
remedy is to lie rather in publicity and competition.

6) That Art. 70 of El Hogars by-laws, requiring persons elected as board of directors to be holders of
shares of the paid up value of P5,000 which shall be held as security, is objectionable since a poor
member or wage earner cannot serve as a director irrespective of other qualifications- NOT SUSTAINED
Corpo. Law expressly gives the power to the corporation to provide in its by-laws for the
qualification of its directors and the requirement of security from them for the proper discharge of
the duties of their pffice in the manner prescribed in Art. 70 is highly prudent and in conformity
with good practice.

7) That in making purchases at foreclosure sales constituting as security for 54 of the loans, El Hogar bids
the full amount after deducting the withdrawal value, alleged to be pusuing a policy of depreciating at the
rate of 10 percent per annum, the value of the real properties it acquired and that this rate is excessive-
UNSUSTAINABLE
The board of directors possess discretion in this matter. There is no provision of law prohibiting
the association from writing off a reasonable amount for depreciation on its assets for the
purpose of determining its real profits. Art. 74 of its by-laws expressly authorizes the board of
directors to determine each year the amount to be written down upon the expenses for the
installation and the property of the corporation. The court cannot control the discretion of the
board of directors about an administrative matter as to which they have no legitimate power of
action.

9. That the board of directors has settled upon the unlawful policy of paying a straight annual dividend of
10 percent per centum regardless of losses suffered and profits made by the corporation, in contravention
with the requirements of Sec. 188 of the Corpo law- UNFOUNDED
As provided in the previous cause of action, the profits and losses shall be determined by the
board of directors and this means that they shall exercise the usual discretion of good
businessmen in allocating a portion of the annual profits to purposes needful of the welfare of
the association. The law contemplates distribution of earnings and losses after legitimate
obligations have been met.

11. That El Hogar has made loans to the knowledge of its officers which were intended to be used by the
borrowers for other purposes than the building of homes and no attempt has been made to control the
borrowers with respect to the use made of the borrowed funds- UNFOUNDED
There is no statute expressly declaring that loans may be made by these associations SOLELY
for the purpose of building homes. The building of himes in Sec. 171 of Corpo Law is only one
among several ends which building and loan associations are designed to promote and Sec.
181 authorizes the board of directors of the association to fix the premium to be charged.

12) That the loans made by defendant for purposes other than building or acquiring homes have been
extended in extremely large amounts and to wealthy persons and large companies- WITHOUT MERIT
The question of whether the making of large loans constitutes a misuser of the franchise as
would justify the court in depriving the association of its corporate life is a matter confided to the
discretion of the board of directors. The law states no limit as to the size of the loans to be made
by the association. Resort should be had to the legislature because it is not a matter amenable
to judicial control

13) That when the franchise expires, supposing the corporation is not reorganized, upon final liquidation of
the corporation, a reserve fund may exist which is out of all proportion to the requirements that may fall upon
it in the liquidation of the company-NO MERIT
This matter may be left to the discretion of the board of directors or to legislative action if it
should be deemed expedient to require the gradual suppression of reserve funds as the time for
dissolution approaches. It is no matter for judicial interference and much less could the
resumption of the franchise be justified on this ground.

14) That various outstanding loans have been made by the respondent to corporations and partnerships and
such entities subscribed to respondents shares for the sole purpose of obtaining such loans-NO MERIT
Sec. 173 of Corpo Law declares that any person may become a stockholder in building and
loan associations. The phrase ANY PERSON does not prevent a finding that the phrase may not
be taken in its proper and broad sense of either a natural or artificial person.

15) That in disposing real estate purchased by it, some of the properties were sold on credit and the persons
and entities to which it was sold are not members nor shareholders nor were they made members or
shareholders, contrary to the provision of Corpo Law requiring requiring loans to be stockholders only- NOT
SUSTAINED
The law does not prescribe that the property must be sold for cash or that the purchaser shall be
a shareholder in the corporation. Such sales can be made upon the terms and conditions
approved by the parties.

Respondent is enjoined in the future from administering real property not owned by itself, except as may
be permitted to it by contract when a borrowing shareholder defaults in his obligation. In all other respects, the
complaint is DISMISSED.
DEVELOPMENT BANK OF THE PHILIPPINES
vs.
COURT OF APPEALS, REMINGTON INDUSTRIAL SALES
GR 126200, 16 August 2001

FACTS:

Between July 1981 and April 1984, Marinduque Mining entered into 3 mortgage agreements with PNB
and DBP involving its real properties located in Surigao del Norte, Negros Occidental, and Rizal, as well as its
equipments located therein. Marinduque failed to pay its loans, causing the foreclosure of the said mortgages.
PNB and DBP thereafter gained control of the said properties.
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused
to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation. The
purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money and
damages against Marinduque Mining for the value of the unpaid construction materials and other merchandise
purchased by Marinduque Mining, as well as interest, attorneys fees and the costs of suit.
Remingtons original complaint was amended to include PNB, DBP, Maricalum Mining Corporation and
Island Cement Corporation as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc
Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding
the veil of corporate fiction since the personnel, key officers and rank-and-file workers and employees of co-
defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel
of co-defendant MMIC such that practically there has only been a change of name for all legal purpose and
intents.

ISSUE:

Whether or not the take over of PNB and DBP over Marinduque Mining is in bad faith.

RULING:

NO.

Their actions are mandated under the law. Where the corporations have directors and officers in
common, there may be circumstances under which their interest as officers in one company may disqualify them
in equity from representing both corporations in transactions between the two. Thus, where one corporation was
insolvent and indebted to another, it has been held that the directors of the creditor corporation were
disqualified, by reason of self-interest, from acting as directors of the debtor corporation in the authorization of a
mortgage or deed of trust to the former to secure such indebtedness In the same manner that when the
corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantage or
preference over other creditors. They cannot thus take advantage of their fiduciary relation and deal directly with
themselves, to the injury of others in equal right.
Directors of insolvent corporation, who are creditors of the company, can not secure to themselves any
preference or advantage over other creditors in the payment of their claims. It is not good morals or good law.
The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of
its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members
any advantage over any other creditors in securing the payment of his debts in preference to all others. When
validity of these mortgages, to secure debts upon which the directors were indorsers, was questioned by other
creditors of the corporation, they should have been classed as instruments rendered void by the legal principle
which prevents directors of an insolvent corporation from giving themselves a preference over outside creditors.