VI. CLASSES OF CORPORATIONS UNDER THE CORP.
CODE considered a stock corporation, within the contemplation of the
Collector of Internal Revenue vs. Club Filipino
G.R. L-12719; May 31, 1962
FACTS:
Club Filipino is a civic organization organized under the
Philippine laws. However, neither in the articles or by-laws is there a
provision relative to dividends and their distribution, although it is
covenanted that upon its dissolution, the Clubs remaining assets, after
paying debts, shall be donated to a charitable Philippine institution in
Cebu. The Club owns a club house, a bowling alley, a golf course and a
bar restaurant. The Club is operated mainly with funds derived from
membership and dues. The Club declared stock dividends but no actual
cash dividends were distributed to stockholders.
ISSUE:
WON Club Filipino is a stock corporation.
HELD:
The facts that the capital stock of the respondent Club is
divided into shares, does not detract from the finding of the trial court
that it is not engaged in the business of operator of bar and restaurant.
What is determinative of whether or not the Club is engaged in such
business is its object or purpose, as stated in its articles and by-laws. It
is a familiar rule that the actual purpose is not controlled by the
corporate form or by the commercial aspect of the business prosecuted,
but may be shown by extrinsic evidence, including the by-laws and the
method of operation. From the extrinsic evidence adduced, the Tax
Court concluded that the Club is not engaged in the business as a
barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must
be complied with, to wit: (1) a capital stock divided into shares and (2)
an authority to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the shares held (sec. 3,
Act No. 1459). In the case at bar, nowhere in its articles of incorporation
or by-laws could be found an authority for the distribution of its
dividends or surplus profits. Strictly speaking, it cannot, therefore, be
corporation law.
VIII. INCORPORATION
Philippine Trust Co. vs. Rivera
G.R. No. L-19761; January 29, 1923
FACTS:
Cooperative Naval Filipinas was incorporated under the
Philippine laws. Mariano Rivera was one of the incorporators. The AOI
were registered in the Bureau of Commerce and Industry. In the course
of time, the corporation became insolvent and went into the hands of
Phil. Trust Co., as assignee in bankruptcy. The latter instituted an action
to recover unpaid stock subscription of defendant. Defendant insists
the resolution that has been made on the reduction of the capital, the
reason why he did not fully pay the entire subscription.
ISSUE:
WON the reduction of the corporate capital by releasing the
subscribers from payment of their subscription is valid and proper.
HELD:
It is established doctrine that subscription to the capital of a
corporation constitute a find to which creditors have a right to look for
satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil.,
802.) A corporation has no power to release an original subscriber to
its capital stock from the obligation of paying for his shares, without a
valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner an
under the conditions prescribed by the statute or the charter or the
articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary
In the case at bar, therefore held that the resolution relied upon
the defendant was without effect and that the defendant was still liable
for the unpaid balance of his subscription.
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Marcus vs. RH Macy
74 N.E. 2d 228; 1947
FACTS:
The Board of Directors gave notice to SH that among the
matters to be acted upon in its annual meeting would be a proposal to
amend certificate of incorporation to add to the rights of preferred
stockholders, voting rights equal to those of common stockholders.
Marcus objected and demanded payment for the common stock owned
by her.
ISSUE:
WON Marcus can exercise her appraisal right.
HELD:
The Court held that Marcus may invoke her appraisal right. The
aggregate number of shares having voting rights equal to those of
common shares was substantially increased and thereby the voting
power of each common share outstanding prior to the meeting was
altered or limited by the resulting pro rata diminution of its potential
worth as a factor in the management of the corporate affairs.
Considering that she held diminished voting power; that she notified
the corporation of her objection; that her shares were voted against the
amendmentthese were sufficient to qualify her to invoke her
statutory appraisal right.
Iglesia Evangelica Metodista En Las Islas Filipinas vs. Bishop Lazaro
G.R. No. 184088; July 6, 2010
FACTS;
IEMELIF is a corporation sole. It was registered and by-laws
were created which empowered the election of officers to manage the
affairs of the organization. Although, the petitioner remained a
corporation sole on paper, it had always acted like a corporation
aggregate. The Consistory, IEMELIFs BOD, together with the general
membership change the organizational structure from corporation sole
to corporation aggregate, which was approved by SEC. However, the
corporate papers remained unaltered as a corporation sole.
About 28 years later, the issue reemerge. The SEC answered,
this time, is that the conversion was not properly carried out and
documented and that it needed to amend its AOI for that purpose.
Acting on the advice, the Consistory resolved to convert but petitioner
Rev. Nestor Pineda in IEMELIFs name did not support the conversion.
Petitioners claim that a complete shift from IEMELIFs status as a
corporation sole to a corporation aggregate required, not just an
amendment of the IEMELIFs articles of incorporation, but a complete
dissolution of the existing corporation sole followed by a re-
incorporation.
ISSUE:
WON a corporation sole may be converted into a corporation
aggregate by mere amendment of its articles of incorporation.
HELD:
A corporation may change its character as a corporation sole
into a corporation aggregate by mere amendment of its articles of
incorporation without first going through the process of dissolution.
True, the Corporation Code provides no specific mechanism for
amending the articles of incorporation of a corporation sole. However,
Section 109 of the Corporation Code allows the application to religious
corporations of the general provisions governing non-stock
corporations.
For non-stock corporations, the power to amend its articles of
incorporation lies in its members. The code requires two-thirds of their
votes for the approval of such an amendment. So how will this
requirement apply to a corporation sole that has technically but one
member (the head of the religious organization) who holds in his hands
its broad corporate powers over the properties, rights, and interests of
his religious organization?
Although a non-stock corporation has a personality that is
distinct from those of its members who established it, its articles of
incorporation cannot be amended solely through the action of its board
of trustees. The amendment needs the concurrence of at least two-
thirds of its membership. If such approval mechanism is made to
operate in a corporation sole, its one member in whom all the powers
of the corporation technically belongs, needs to get the concurrence of
two-thirds of its membership. The one member, here the General
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Superintendent, is but a trustee, according to Section 110 of the
Corporation Code, of its membership.
There is no point to dissolving the corporation sole of one
member to enable the corporation aggregate to emerge from it.
Whether it is a non-stock corporation or a corporation sole, the
corporate being remains distinct from its members, whatever be their
number. The increase in the number of its corporate membership does
not change the complexion of its corporate responsibility to third
parties. The one member, with the concurrence of two-thirds of the
membership of the organization for whom he acts as trustee, can self-
will the amendment. He can, with membership concurrence, increase
the technical number of the members of the corporation from sole or
one to the greater number authorized by its amended articles.
Gamboa vs. Teves
G.R. No. 176579; June 28, 2011
This is a petition to nullify the sale of shares of stock of
Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines, acting through the Inter-
Agency Privatization Council (IPC), to Metro Pacific Assets Holdings,
Inc. (MPAH), an affiliate of First Pacific Company Limited (First
Pacific), a Hong Kong-based investment management and holding
company and a shareholder of the Philippine Long Distance Telephone
Company (PLDT).
The petitioner questioned the sale on the ground that it also
involved an indirect sale of 12 million shares (or about 6.3 percent of
the outstanding common shares) of PLDT owned by PTIC to First
Pacific. With this sale, First Pacifics common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby increasing the total
common shareholdings of foreigners in PLDT to about 81.47%. This,
according to the petitioner, violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign ownership of the capital of
a public utility to not more than 40%, thus:
Section 11. No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the
laws of the Philippines, at least sixty per centum of whose capital is
owned by such citizens; x x x
ISSUE:
Does the term capital in Section 11, Article XII of the
Constitution refer to the total common shares only, or to the total
outstanding capital stock (combined total of common and non-voting
preferred shares) of PLDT, a public utility?
HELD:
[The Court partly granted the petition and held that the term
capital in Section 11, Article XII of the Constitution refers only to shares
of stock entitled to vote in the election of directors of a public utility, i.e.,
to the total common shares in PLDT.]
Considering that common shares have voting rights which
translate to control, as opposed to preferred shares which usually have
no voting rights, the term capital in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred
shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to
participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short,
the term capital in Section 11, Article XII of the Constitution refers
only to shares of stock that can vote in the election of directors.
To construe broadly the term capital as the total outstanding
capital stock, including both common and non-voting preferred shares,
grossly contravenes the intent and letter of the Constitution that the
State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos. A broad definition
unjustifiably disregards who owns the all-important voting stock, which
necessarily equates to control of the public utility.
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Young Auto Supply vs. CA
G.R. No. 104175; June 25, 1993
FACTS:
YASCO sold all their shares of stock in CMDC to George Roxas.
The latter was able to make a 50% downpayment of the purchase price
in cash while the other half were made in post-dated checks.
Subsequently, the post-dated checks were dishonoured which
prompted YASCO to file an action for collection of sum of money in RTC
of Cebu. Roxas failed to answer hence he was declared in default.
Without waiting for the resolution of the motion for lifting the order of
default, he filed a petition for certiorari in CA on the ground of
improper venue.
ISSUE:
WON the venue was improperly laid.
HELD:
A corporation has no residence in the same sense in which this
term is applied to a natural person. But for practical purposes, a
corporation is in a metaphysical sense a resident of the place where its
principal office is located as stated in the articles of incorporation. The
Corporation Code precisely requires each corporation to specify in its
articles of incorporation the "place where the principal office of the
corporation is to be located which must be within the Philippines." The
purpose of this requirement is to fix the residence of a corporation in a
definite place, instead of allowing it to be ambulatory.
Actions cannot be filed against a corporation in any place
where the corporation maintains its branch offices. The Court ruled
that to allow an action to be instituted in any place where the
corporation has branch offices, would create confusion and
work untold inconvenience to said entity. By the same token, a
corporation cannot be allowed to file personal actions in a place other
than its principal place of business unless such a place is also the
residence of a co-plaintiff or a defendant.
With the finding that the residence of YASCO for purposes of
venue is in Cebu City, where its principal place of business is located, it
becomes unnecessary to decide whether Garcia is also a resident of
Cebu City and whether Roxas was in estoppel from questioning the
choice of Cebu City as the venue. The decision of the Court of Appeals
was set aside.
Philips Export B.V. vs. CA
G.R. No. 96161; February 21, 1992
FACTS:
Philips Export B.V. (PEBV) filed with the SEC for the
cancellation of the word Philips the corporate name of Standard
Philips Corporation in view of its prior registration with the Bureau of
Patents and the SEC. However, Standard Philips refused to amend its
Articles of Incorporation so PEBV filed with the SEC a petition for the
issuance of a Writ of Preliminary Injunction, however this was denied
ruling that it can only be done when the corporate names are identical
and they have at least two words different. This was affirmed by the
SEC en banc and the Court of Appeals thus the case at bar.
ISSUE:
WON Standard Philips can be enjoined from using Philips in its
corporate name.
HELD:
YES. A corporations right to use its corporate and trade name
is a property right, a right in rem, which it may assert and protect
against the whole world. According to Sec. 18 of the Corporation Code,
no corporate name may be allowed if the proposed name is identical or
deceptively confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive,
confusing or contrary to existing law.
For the prohibition to apply, two requisites must be present: (1)
the complainant corporation must have acquired a prior right over the
use of such corporate name and; (2) the proposed name is either
identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or patently
deceptive, confusing or contrary to existing law.
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Lyceum of the Phils. vs. CA
G.R. No. 101897; March 5, 1993
FACTS:
Petitioner is an educational institution duly registered with the
SEC since 1950. Before the case at bar, petitioner commenced a
proceeding against Lyceum of Baguio with the SEC to require it to
change its corporate name and adopt a new one not similar or identical
to the petitioner. SEC granted noting that there was substantial
similarity because of the dominant word Lyceum. CA and SC affirmed.
Petitioner filed similar complaint against other schools and obtains a
favorable decision from the hearing officer. On appeal, SEC en banc
reversed the decision and held that the word Lyceum has not become
so identified with the petitioner and that the use thereof will not cause
confusion to the general public.
ISSUES:
1. WON the corporate names of the private respondents are
identical with or deceptively similar to that of the petitioner.
2. WON the use by the petitioner of Lyceum in its corporate
name has been for such length of time and with such exclusivity as to
have become associated or identified with the petitioner institution in
the mind of the general public (Doctrine of Secondary meaning).
HELD:
NO, to both. True enough, the corporate names of the parties
carry the word Lyceum but confusion and deception are precluded by
the appending of geographic names. Lyceum generally refers to a school
or an institution of learning and it is natural to use this word to
designate an entity which is organized and operating as an educational
institution.
Doctrine of Secondary meaning is a word of phrase originally
incapable of exclusive appropriation, might nevertheless have been
used so long and so exclusively by one producer with reference to his
article that, in trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his product.
Lyceum of the Philippines has not gained exclusive use of
Lyceum by long passage of time. The number alone of the private
respondents suggests strongly that the use of Lyceum has not been
attended with the exclusivity essential for the applicability of the
doctrine. It may be noted that one of the respondents Western
Pangasinan Lyceum used such term 17 years before the petitioner
registered with the SEC. Moreover, there may be other schools using the
name but not registered with the SEC because they have not adopted
the corporate form of organization.
Armco Steel Corp. vs. SEC
G.R. No. L-54580; December 29, 1987
FACTS:
ARMCO Steel Corp. is a corporation organized in Ohio, USA,
hereinafter called ARMCO-OHIO. ARMCO Marsteel-Alloy Corporation
was incorporated in the Philippines under its original name Marsteel
Alloy Company, Inc. but its name was changed to ARMCO-Marsteel Alloy
Corporation hereinafter called ARMCO-Marsteel, by amendment of its
Articles of Incorporation after the ARMCO-Ohio purchased 40% of its
capital stock. Both said corporations are engaged in the manufacture of
steel products.
On the other hand, ARMCO Steel Corporation was incorporated
in the Philippines, hereinafter called ARMCO-Philippines. A pertinent
portion of its articles of incorporation provides as among its purposes:
"to contract, fabricate ... manufacture ... regarding pipelines, steel
frames ... ."
ARMCO-Ohio and ARMCO-Marsteel then filed a petition in the
SEC to compel ARMCO-Philippines to change its corporate name on the
ground that it is very similar, if not exactly the same as the name of one
of the petitioners. SEC granted the petition. Respondent amended its
articles of incorporation by changing its name to "ARMCO structures,
Inc." which was filed with and approved by the SEC. Petitioners filed a
comment alleging that the change of name of said respondent was not
done in good faith and is not in accordance with the order of the
Commission which was to take out ARMCO and substitute another
word in lieu thereof in its corporate name by amending the articles of
incorporation.
ISSUE:
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 WON ARMCO-Philippines had substantially complied in good
faith with said order and said compliance had achieved the purpose of
the order, by changing its corporate name with the approval of SEC.
HELD:
NO. The said amendment in the corporate name of petitioner is
not in substantial compliance with the order. To repeat, the order was
for the removal of the word "ARMCO" from the corporate name of the
petitioner which it failed to do. And even if this change of corporate
name was erroneously accepted and approved in the SEC it cannot
thereby legalize nor change what is clearly unauthorized if not
contemptuous act of petitioner in securing the registration of a new
corporate name against the very previous order of the SEC. Certainly
the said previous order is not rendered functus oficio thereby. Had
petitioner revealed at the time of the registration of its amended
corporate name that there was the said order, the registration of the
amended corporate name could not have been accepted and approved
by the persons in-charge of the registration. The actuations in this
respect of petitioner are far from regular much less in good faith.
Noted in fact, ARMCO STEEL-PHILIPPINES has not only an
identical name but also a similar line of business. People who are
buying and using products bearing the trademark "Armco" might be led
to believe that such products are manufactured by the respondent,
when in fact, they might actually be produced by the petitioners. Thus,
the goodwill that should grow and inure to the benefit of petitioners
could be impaired and prejudiced by the continued use of the same
term by the respondent.
P.C. Javier & Sons vs. CA
G.R. No. 129552; June 29, 2005
FACTS:
Petitioner applied with First Summa Bank for a loan
accommodation under the Industrial Guarantee Loan Fund (IGLF). The
corporation through Pablo Javier was advised that its loan application
was approved and that the same shall be forwarded to the Central Bank
for processing. The Central Bank released the loan. To secure the loan,
Javier executed chattel mortgage in favor of the bank. In the meantime,
the bank changed its named to PAIC Savings and Mortgage Bank Inc.
Thereafter, the corporation failed to pay; this prompted the bank to
move for the extrajudicial foreclosure of the mortgages. Petitioner filed
an action to restrain the extrajudicial foreclosure on the ground that
First Summa Bank and PAIC Bank are separate entities.
ISSUE:
WON the debtor should be formally notified of the corporate
creditors change of name.
HELD:
NO. There is no such requirement under the law or any
regulation ordering a bank that changes its corporate name to formally
notify all its debtors. This Court cannot impose on a bank that changes
its corporate name to notify a debtor of such change absent any law,
circular or regulation requiring it. Such act would be judicial
legislation. The formal notification is, therefore, discretionary on the
bank. Unless there is a law, regulation or circular from the SEC or BSP
requiring the formal notification of all debtors of banks of any change in
corporate name, such notification remains to be a mere internal policy
that banks may or may not adopt.
A change in the corporate name does not make a new
corporation, whether effected by a special act or under a general law. It
has no effect on the identity of the corporation, or on its property,
rights, or liabilities. The corporation, upon such change in its name, is in
no sense a new corporation, nor the successor of the original
corporation. It is the same corporation with a different name, and its
character is in no respect changed.
Pioneer Insurance vs. CA
G.R. No. 84197; July 28, 1989
FACTS:
Jacob S. Lim is an owner-operator of Southern Airlines (SAL), a
single proprietorship. Japan Domestic Airlines (JDA) and Lim entered
into a sales contract. Pioneer Insurance and Surety Corp. as surety
executed its surety bond in favor of JDA on behalf of its principal Lim.
Border Machinery and Heacy Equipment Co, Inc., Francisco and
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Modesto Cervantes, and Constancio Maglana contributed funds for the
transaction based on the misrepresentation of Lim that they will form a
new corporation to expand his business.
Lim as SAL executed in favor of Pioneer a deed of chattel
mortgage as security. Restructuring of obligation to change the
maturity was done twice without the knowledge of the other
defendants. Upon default on the payments, Pioneer paid for him and
filed a petition for the foreclosure of chattel mortgage as security.
Maglana, Bormaheco and the Cervantess filed cross-claims against Lim
alleging that they were not privies to the contracts signed by Lim and,
by way of counterclaim, sought for damages for being exposed to
litigation and for recovery of the sums of money they advanced to Lim
for the purchase of the aircrafts in question. After trial on the merits, a
decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.
ISSUE:
WON failure of the respondents to incorporate automatically
resulted to de facto partnership.
HELD:
NO. Partnership inter se does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of partners
as between themselves, when their purpose is that no partnership shall
exist and it should be implied only when necessary to do justice
between the parties; thus, one who takes no part except to subscribe
for stock in a proposed corporation which is never legally formed does
not become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as such
in an action for settlement of the alleged partnership and contribution.
The petitioner, in his answer, denied having received any
amount from respondents Bormaheco, the Cervantess and Maglana. It
is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them.
Applying therefore the principles of law, no de facto partnership was
created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation.
Municipality of Malabang vs. Benito
G.R. No. L-28113; March 28, 1969
FACTS:
Petitioner Balindong is the municipal mayor of Malabang,
Lanao del Sur while respondents are Mayor Benito and councilors
of Municipality of Balabagan of the same province. Balabagan (formerly
part of Malabang) was created by Executive Order 386 of the then
President Carlos P. Garcia, out of barrios and sitios of the Malabang.
Citing Pelaez ruling that Republic Act 2370 (Barrio Charter
Act), vested power to create barrios in the provincial board, and Section
68 of the Administrative Code, insofar as it gives the President the
power to create municipalities, is unconstitutional. Petitioner sought to
nullify E.O. 386 and restrain respondents from performing their official
functions. Respondents argued that Pelaez ruling did not apply because
unlike the municipalities involved therein, the municipality
of Balabagan is at least a de facto corporation, having been organized
under color of a statute before this was declared unconstitutional (by
Pelaez ruling), its officers having been either elected or appointed, and
the municipality itself having discharged its corporate functions for the
past five years preceding the institution of this action.
ISSUE:
WON a corporation organized under a statute subsequently
declared void acquires status as de facto corporation.
HELD:
NO. A corporation organized under a statute subsequently
declared invalid cannot acquire the status of a de facto corporation
unless there is some other statute under which the supposed
corporation may be validly organized. Hence, in the case at bar, the
mere fact that the municipality was organized before the statute had
been invalidated cannot conceivably make it a de facto corporation
since there is no other valid statute to give color of authority to its
creation.
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Hall vs. Piccio
G.R. No. L-2598; June 29, 1950
FACTS:
Petitioners Arnold Hall, Bradley Hall and private respondents
Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella
signed and acknowledged the AOI of the Far Eastern Lumber and
Commercial Co., Inc. organized to engage in a general lumber business
to carry on as general contractors, operators and managers.
Immediately after the execution of the articles of incorporation, the
corporation proceeded to do business with the adoption of by-laws and
the election of its officers. Then, the articles of incorporation were filed
in SEC for the issuance of the corresponding certificate of
incorporation.
Pending action on the AOI, private respondents filed a civil case
against the Halls alleging among other things that Far Eastern Lumber
and Commercial Co, was an unregistered partnership and that they
wished to have it dissolved because of bitter dissension among the
members, mismanagement and fraud by the managers and heavy
financial losses. The petitioners filed a Motion to Dismiss contesting the
courts jurisdiction and the sufficiency of the cause of action but Judge
Piccio ordered the dissolution of the company and appointed a receiver.
ISSUE:
WON the court had jurisdiction to decree the dissolution of the
company because it being a de facto corporation, dissolution may only
be ordered in a quo warranto proceeding in accordance with Section
19.
HELD:
YES. The court had jurisdiction but Section 19 does not apply. It
held that there was no de facto corporation on the ground that the
corporation cannot claim to be in good faith to be a corporation when
it has not yet obtained its certificate of incorporation.
The immunity of collateral attack is granted to corporations
claiming in good faith to be corporation under this act. Such a claim is
compatible with the existence of errors and irregularities but not with a
total or substantial disregard of the law. Unless there has been an
evident attempt to comply with the law, the claim to be a corporation
under this act could not be made in good faith.
Moreover, this is not a suit in which the corporation is a party.
This is litigation between stockholders of the alleged corporation for
the purpose of obtaining its dissolution. Even the existence of a de jure
corporation may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the state.
Cagayan Fishing vs. Sandiko
G.R. No. L-43350; December 23, 1937
FACTS:
Manuel Tabora is the registered owner of four parcels of land.
The four parcels were mortgaged for loans and indebtedness. However,
Tabora executed a public document (Exhibit A) by virtue of which the
four parcels of land owned by him was sold to the plaintiff company,
which at that time is still under the process of incorporation.
A year later, the BOD of said company adopted a resolution
authorizing its president to sell the four parcels of lands in question to
Teodoro Sandiko. Exhibits B, C and D were thereafter made and
executed. Exhibit B is a deed of sale where the plaintiff sold, ceded and
transferred to the defendant the four parcels of land. Exhibit C is a
promissory note drawn by the defendant in favor of the plaintiff.
Exhibit D is a deed of mortgage executed where the four parcels of land
were given a security for the payment of the promissory note.
Defendant failed to pay thus plaintiff filed a collection of sum of money
in the Court of First Instance in Manila. The latter rendered judgment
absolving the defendant. Plaintiff has appealed to this court and makes
an assignment of various errors.
ISSUE:
WON the sale made by the plaintiff corporation is valid.
HELD:
NO. The transfer was made almost five months before the
incorporation of the company. Although, a duly organized corporation
has the power to purchase and hold such real property as the purposes
for which such corporation was formed may permit and for this
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purpose may enter into such contracts as may be necessary. However
before a corporation may be said to be lawfully organized, many things
have to be done. Among other things, the law requires the filing of
articles of incorporation.
Although there is a presumption that all the requirements of
law have been complied with, in the case before us it can not be denied
that the plaintiff was not yet incorporated when it entered into a
contract of sale. It was not even a de facto corporation at the time. Not
being in legal existence then, it did not possess juridical capacity to
enter into the contract.
Corporations are creatures of the law, and can only come into
existence in the manner prescribed by law. It should have a full and
complete organization and existence as an entity before it can enter
into any kind of a contract or transact any business.
Harill vs. Davis
168 F. 187; 1909
FACTS:
The constitutive documents were filed with the clerk of the
Court of Appeals but not with the clerk of court in the judicial district
where the business was located. Arkansas law requires filing in both
offices.
ISSUE:
Was there colorable compliance enough to give the supposed
corporation at least the status of a de facto corporation?
HELD:
NO. Neither the hope, the belief, nor the statement by parties
that they are incorporated, nor the signing of the articles of
incorporation which are not filed, where filing is requisite to create the
corporation, nor the use of the pretended franchise of the nonexistent
corporation, will constitute such a corporation de facto as will exempt
those who actively and knowingly use s name to incur legal obligations
from their individual liability to pay them. There could be no
incorporation or color of it under the law until the articles were filed
(requisites for valid incorporation).
Asia Banking Corp. vs. Standard Products Co.
G.R. No. 22106; September 11, 1924
FACTS:
The plaintiff corporation sued defendant corporation for failure
to pay the promissory note. Trial court rendered judgment in favor of
plaintiff. Defendant appealed and its defense was that the plaintiff failed
to prove affirmatively the corporate existence of the parties and the
appellant insists that under these circumstances the court erred in
finding that the parties were corporations with juridical personality
and assigns same as reversible error.
ISSUE:
WON plaintiff was unable to prove its corporate existence.
HELD:
NO. The general rule is that in the absence of fraud a person
who has contracted or otherwise dealt with an association in such a
way as to recognize and in effect admit its legal existence as a corporate
body is thereby estopped to deny its corporate existence in any action
leading out of or involving such contract or dealing, unless its existence
is attacked for cause which have arisen since making the contract or
other dealing relied on as an estoppel and this applies to foreign as well
as to domestic corporations.
Hence, the defendant is estopped from denying its own
corporate existence. It is also estopped from denying the others
corporate existence.
Cranson vs. International Business Machines Corp.
234 MD. 477, 200 A. 2D 33; 1964
FACTS:
Cranson was asked to be an investor in a new business
corporation and after he acceded, there are other people who had
formed the corporation with him. A stock certificate evidencing his
ownership of shares in the corporation was given to him. The
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transactions were done as if it were a corporation and eventually
Cranson was elected president and all the dealings with IBM were
conducted by him for the corporation. At no time did he assume
personal obligation or pledge his individual credit to IBM. But the
lawyers of the corporation made an oversight of not filing the certificate
of incorporation and when claim for payment were charged against the
Real Estate Service Bureau, IBM charged Cranson in his personal
capacity.
ISSUE:
WON a defectively incorporated association would warrant a
charge against officers in their personal capacity.
HELD:
NO. Traditionally, two doctrines have been used by the courts to
clothe an officer of a defectively incorporated association with the
corporate attribute of limited liability. The first, often referred to as the
doctrine of de facto corporations, has been applied in those cases
where there are elements showing: (1) the existence of law authorizing
incorporation: (2) an effort in good faith to incorporate under the
existing law; and (3) actual user or exercise of corporate powers. The
second, doctrine of estoppel: employed when the person seeking to
hold the officer personally liable has contracted or otherwise dealt with
the association in such a manner as to recognize and in effect admit its
existence as a corporate body.
When there is a concurrence of the three elements necessary
for the application of the de facto corporation doctrine, there exists an
entity which is a corporation de jure against all persons BUT THE
STATE. On the other hand, the estoppel theory is applied only to the
facts of each particular case and may be invoked even when there is no
corporation de facto.
IBM, having dealt with the Bureau as if it were a corporation
and relied on its credit rather than that of Cranson, is estopped to assert
that the Bureau was not incorporated at the time the typewriters were
franchised.
Where one has recognized the corporate existence of an
association, he is estopped to assert the contrary with respect to claim
arising out of such dealings.
Salvatierra vs. Garlitos et. al.
G.R. No. L-11442; May 23, 1958
FACTS:
Salvatierra leased his land to the corporation. He filed a suit for
accounting, rescission and damages against the corporation and its
president for his share of the produce. Judgment against both was
obtained. The president of the corporation complains for being held
personally liable.
ISSUE:
WON the president can be personally held liable to plaintiff.
HELD:
YES. He is liable. The general rule is that a person who has
contracted or dealt with an association in such a way as to recognize its
existence as a corporate body is ESTOPPED from denying the same in
an action arising out of such transaction or dealing, unless there is
fraud in the transaction.
A person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights
and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed
as such agent.
Albert vs. University Publishing Co.
G.R. No. L-19118; January 30, 1965
FACTS:
Mariano Albert entered into a contract with University
Publishing Co., Inc. through Jose M. Aruego, its President, whereby
University would pay plaintiff for the exclusive right to publish his
revised Commentaries on the Revised Penal Code. The contract
stipulated that failure to pay one installment would render the rest of
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the payments due. When University failed to pay the second
installment, Albert sued for collection and won. However, upon
execution, it was found that University was not registered with the SEC.
Albert petitioned for a writ of execution against Jose M. Aruego as the
real defendant. University opposed, on the ground that Aruego was not
a party to the case.
ISSUE:
WON Aruego can be held personally liable to the plaintiff.
HELD:
YES. The Supreme Court found that Aruego represented a non-
existent entity and induced not only Albert but the court to believe in
such representation. Aruego, acting as representative of such non-
existent principal, was the real party to the contract sued upon, and
thus assumed such privileges and obligations and became personally
liable for the contract entered into or for other acts performed as such
agent. One who has induced another to act upon his wilful
misrepresentation that a corporation was duly organized and existing
under the law, cannot thereafter set up against his victim the principle
of corporation by estoppel
The Supreme Court likewise held that the doctrine of
corporation by estoppel cannot be set up against Albert since it was
Aruego who had induced him to act upon his (Aruego's) willful
representation that University had been duly organized and was
existing under the law.
Chiang Kai Shek School vs. CA
G.R. No. L-58028; April 18, 1989
FACTS:
Fausta F. Oh reported for work at the Chiang Kai Shek School in
Sorsogon on the first week of July, 1968. She was told she had no
assignment for the next semester. Oh was shocked for she had been
teaching in the school since1932 for a continuous period of almost 33
years. And now, for no apparent or given reason, this abrupt dismissal.
She demanded separation pay, social security benefits, salary
differentials, maternity benefits and moral and exemplary damages.
The original defendant was the Chiang Kai Shek School but
when it filed a motion to dismiss on the ground that it could not be
sued, the complaint was amended. Certain officials of the school were
also impleaded to make them solidarily liable with the school. Court of
First Instance of Sorsogon dismissed the complaint. On appeal, its
decision was set aside by the respondent court, which held the school
suable and liable while absolving the other defendants.
ISSUE:
WON a school that has not been incorporated may be sued by
reason alone of its long continued existence and recognition by the
government.
HELD:
YES. Having been recognized by the government, it was under
obligation to incorporate under the Corporation Law within 90 days
from such recognition. It appears that it had not done so at the time the
complaint was filed notwithstanding that it had been in existence even
earlier than 1932. The petitioner cannot now invoke its own non-
compliance with the law to immunize it from the private respondent's
complaint.
There should also be no question that having contracted with
the private respondent every year for thirty two years and thus
represented itself as possessed of juridical personality to do so, the
petitioner is now estopped from denying such personality to defeat her
claim against it. According to Article 1431 of the Civil Code, "through
estoppel an admission or representation is rendered conclusive upon
the person making it and cannot be denied or disproved as against the
person relying on it."
Lim Tong Lim vs. Phil. Fishing Gear Industries
G.R. No. 136448; November 3, 1999
FACTS:
Chua and Yao entered into a contract for the purchase of fishing
nets on behalf of Ocean Quest Fishing Corp. from Phil Fishing Gear
Industries. Chua and Yao claimed that they were engaged in a business
with Lim Tong Lim but who was not a signatory to the agreement. They
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failed to pay thus PFGI filed collection suit against the three: Chua, Yao
and Lim as general partners because Ocean Quest is a non-existing
corporation as shown by a certificate from SEC. Lim filed for the lift of
the Writ of Attachment but RTC maintained the writ and ordered the
sale of the nets. RTC maintains that there is partnership because of the
Compromise Agreement entered by them, although silent as to the
nature of their obligations but presumes that there is equal distribution
of the profit and loss. CA affirmed.
ISSUE:
WON Lim may be regarded as a partner when the sole basis is
the Compromise Agreement and not considering the fact that he has
not signed any transaction nor met any of the representatives of the
Phil. Fishing Gears.
HELD:
YES. There is partnership. It is clear in the factual findings that
they have decided to engage in a fishing business where they bought
boats from the loan they got from J. Lim, who is Lims brother. The
partnership extended not only to the boats but also to the nets and the
floats.
In their Compromise Agreement, they subsequently revealed
their intention to pay the loan with the proceeds of the sale of the boats,
and to divide equally among them the excess of loss. These boats, the
purchase and the repair of which were financed with borrowed money,
fell under the term common fund under Article 1767. The
contribution to such fund need not be case of fixed assets; it could be an
intangible like credit or industry. That the parties agreed that any loss
or profits from the sale and operation of the boats would be divided
early among them also shows that they had indeed formed a
partnership.
Technically, it is true that petitioner did not directly act on
behalf of the corporation. However, having reaped the benefits of the
contract entered into by person with whom he previously had an
existing relationship, he is deemed to be part of said association and is
covered by the scope of the doctrine of corporation by estoppel.
International Express Travel vs. CA
G.R. No. 119002; October 19, 2000
FACTS:
Express Travel wrote a letter to the Phil. Football Federation
thru the president Henry Kahn offering its services to the latter and
Kahn accepted this. The federation consisting of athletes and officials,
went to the South East Asian Games in Malaysia and other trips to other
countries. Federation incurred expenses and made two partial
payments. Kahn issued a personal check as a partial payment then
failed to pay thereafter. Express Travel sued Henry Kahn in his personal
capacity and as president and impleaded the federation as an
alternative defendant. Henry Kahn allege that there is no cause of
action against him in his personal capacity or official capacity and that
he did not guarantee the payment and merely acted as an agent. RTC
ruled that Henry Kahn is personally liable and that there is no proof
that the federation has a corporate existence. CA reversed on the
ground that Federation has juridical existence.
ISSUE:
WON Federation has a juridical existence.
HELD:
NO. The basis of CA that RA 3135 Revised Charter of the Phil.
Amateur Athletic Federation and PD 604 that recognizes the juridical
existence of National Sports Association is not correct. Mere passage of
these laws DOES NOT AUTOMATICALLY vest the associations a
CORPORATE STATUS. The State must give its consent: in the form of a
special law of a general enabling act. These laws merely recognized the
existence of national sports associations.
Henry Kahn shall be held liable for the unpaid obligations of the
unincorporated Federation. It is a settled rule that any person acting or
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed
as such agent.
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 Petitioner cannot be held estopped because the doctrine of
corporation by estoppel is mistakenly applied by the respondent court
to the petitioner. The application of the doctrine applies to a third party
only when he tries to escape liability on a contract from which he has
benefited on the irrelevant ground of defective corporation. Petitioner
is not trying to escape liability but is the one claiming from the contract.
IX. INTERNAL ORGANIZATION OF CORPORATIONS
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 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.
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
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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 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.
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.
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.
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 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.
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 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
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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.
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 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."
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.
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 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.
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.
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.
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.
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.
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X. CAPITAL STRUCTURE OF CORPORATIONS
Republic Planters Bank vs. Agana
G.R. No. 51765; March 3, 1997
FACTS:
Private respondent Robes Francisco Realty & Development
Corp. secured a loan from petitioner. As part of the proceeds of the loan,
preferred shares of stocks were issued to private respondent
corporation. In other words, instead of giving the legal tender totalling
to the full amount of the loan, petitioner lent such amount partially in
the form of money and of stock certificates. Said stock certificates were
in the name of private respondent Adalia Robes and Carlos Robes, later
on, subsequently endorsed his shares in favor of Adalia Robes.
Said certificates of stock bear the following terms and
conditions: (1) the right to receive a quarterly dividend of 1%,
cumulative and participating; (2) that such preferred shares may be
redeemed, by the system of drawing lots, at any time after 2 years from
the date of issue at the option of the corporation.
Private respondents proceeded against petitioner and filed a
complaint anchored on private respondents alleged rights to collect
dividends under the preferred shares in question and to have petitioner
redeem the same under the terms and conditions of the stock
certificates. The trial court ordered the petitioner to pay private
respondents the face value of the stock certificates as redemption price,
plus 1% quarterly interest. Hence this petition.
ISSUE:
WON the bank can be compelled to redeem the preferred
shares issued to RFRDC and Robes.
HELD:
NO. While the stock certificate does allow redemption, the
option to do so was clearly vested in the bank. The redemption
therefore is clearly the type known as "optional". Thus, except as
otherwise provided in the stock certificate, the redemption rests
entirely with the corporation and the stockholder is without right to
either compel or refuse the redemption of its stock.
Furthermore, the terms and conditions set forth therein use the
word "may". It is a settled doctrine in statutory construction that the
word "may" denotes discretion, and cannot be construed as having a
mandatory effect. The redemption of said shares cannot be allowed.
The Central Bank made a finding that the Bank has been suffering from
chronic reserve deficiency, and that such finding resulted in a directive
to the President and Acting Chairman of the Board of the bank
prohibiting the latter from redeeming any preferred share, on the
ground that said redemption would reduce the assets of the Bank to the
prejudice of its depositors and creditors. Redemption of preferred
shares was prohibited for a just and valid reason. The directive issued
by the Central Bank Governor was obviously meant to preserve the
status quo, and to prevent the financial ruin of a banking institution
that would have resulted in adverse repercussions, not only to its
depositors and creditors, but also to the banking industry as a whole.
The directive, in limiting the exercise of a right granted by law to a
corporate entity, may thus be considered as an exercise of police power.
NOTE: This case gave a comprehensive overview of the nature of
preferred shares and redeemable shares.
Preferred share of stock, on one hand, is one which entitles the
holder thereof to certain preferences over the holders of common stock.
The preferences are designed to induce persons to subscribe for shares
of a corporation. Preferred shares take a multiplicity of forms. The most
common forms may be classified into two: (1) preferred shares as to
assets; and (2) preferred shares as to dividends. The former is a share
which gives the holder thereof preference in the distribution of the
assets of the corporation in case of liquidation; the latter is a share the
holder of which is entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to the holders of
common stock. There is no guaranty, however, that the share will
receive any dividends. The declaration of dividends is dependent upon
the availability of surplus profit or unrestricted retained earnings, as
the case may be. Preferences granted to preferred stockholders,
moreover, do not give them a lien upon the property of the corporation
nor make them creditors of the corporation, the right of the former
compiled/edited/digest: KWYB - 19 -
being always subordinate to the latter. Dividends are thus payable only
when there are profits earned by the corporation and as a general rule,
even if there are existing profits, the board of directors has the
discretion to determine whether or not dividends are to be declared.
Redeemable shares, on the other hand, are shares usually
preferred, which by their terms are redeemable at a fixed date, or at the
option of either issuing corporation, or the stockholder, or both at a
certain redemption price. Redemption by the corporation of its stock is,
in a sense, a repurchase of it for cancellation. The present Code allows
redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation. This is a new provision which
in effect qualifies the general rule that the corporation cannot purchase
its own shares except out of current retained earnings. However, while
redeemable shares may be redeemed regardless of the existence of
unrestricted retained earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books to cover
debts and liabilities inclusive of capital stock. Redemption, therefore,
may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet
its debts as they mature.
COCOFED vs. Republic of the Philippines
G.R. No. 177857-58; September 17, 2009
FACTS:
COCOFED seeks the Courts approval of the conversion of Class
A and Class B common shares of San Miguel Corporation (SMC) eliminate the market volatility risks on the side of the share owners.
registered in the names of Coconut Industry Investment Fund and the
so-called 14 Holding Companies (collectively known as CIIF share owners who, on one hand, prefer a stable dividend yield on their
companies) into SMC Series 1 Preferred Shares.
COCOFED proposes to constitute a trust fund to be known as
the Coconut Industry Trust Fund (CITF) for the Benefit of the Coconut
Farmers, with respondent Republic, acting through the Philippine
Coconut Authority (PCA), as trustee. Respondent Republic filed its
Comment questioning COCOFEDs personality to seek the Courts
approval of the desired conversion. Respondent Republic also disputes
COCOFEDs right to impose and prescribe terms and conditions on the
proposed conversion, maintaining that the CIIF SMC common shares
are sequestered assets and are in custodia legis under PCGGs
administration. It postulates that, owing to the sequestrated status of
the said common shares, only PCGG has the authority to approve the
proposed conversion and seek the necessary Court approval.
ISSUE:
Conversion of Shares.
HELD:
The court resolved to approve the conversion, taking into
account certain circumstances and hard economic realities as discussed
below:
No doubt shares of stock are not the safest of investments,
moored as they are on the ever changing worldwide and local financial
conditions. The proposed conversion would provide better protection
either to the government or to the eventually declared real stock
owners, depending on the final ruling on the ownership issue. In the
event SMC suffers serious financial reverses in the short or long term
and seeks insolvency protection, the owners of the preferred shares,
being considered creditors, shall have, vis-a -vis common stock
shareholders, preference in the corporate assets of the insolvent or
dissolved corporation. In the case of the SMC Series 1 Preferred Shares,
these preferential features are made available to buyers of said shares
and are amply protected in the investment.
The redemption value of the preferred shares depends upon
and is actually tied up with the issue price plus all the cumulated and
unpaid dividends. This redemption feature is envisaged to effectively
Undoubtedly, these are clear advantages and benefits that inure to the
investments and, on the other hand, want security from the uncertainty
of market forces over which they do not have control.
The proposed conversion will address the concerns and allay
the fears of well meaning sectors, and insulate and protect the
sequestered CIIF SMC shares from potential damage or loss. Moreover,
the conversion may be viewed as a sound business strategy to preserve
and conserve the value of the governments interests in CIIF SMC
shares. Preservation is attained by fixing the value today at a
significant premium over the market price and ensuring that such value
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is not going to decline despite negative market conditions.
Conservation is realized thru an improvement in the earnings value via
the 8% per annum dividends versus the uncertain and most likely
lower dividends on common shares.
NOTE: This case discussed the classification of shares, its voting and
non-voting rights and instances of appraisal right. Treasury stocks was
emphasized -
The common shares after conversion and release from
sequestration become treasury stocks or shares. Treasury shares are
shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the board of
directors.
A treasury share or stock, which may be common or preferred,
may be used for a variety of corporate purposes, such as for a stock
bonus plan for management and employees or for acquiring another
company. It may be held indefinitely, resold or retired. While held in the
companys treasury, the stock earns no dividends and has no vote in
company affairs.
F. STOCKS & STOCKHOLDERS
1.) CONSIDERATION FOR SHARES
Garcia vs. Lim Chu Sing
G.R. No. L-39427; February 24, 1934
FACTS:
Lim Cuan Sy had an account with the Mercantile Bank of China
(plaintiff bank) in the form of "trust receipts" guaranteed by Lim Chu
Sing (respondent) as surety & with chattel mortgage securities. Lim
Cuan Sy failed to comply with his obligations. The plaintiff bank
required Lim Chu Sing, as surety, to deliver a promissory note. The
plaintiff bank, without the knowledge & consent of the defendant,
foreclosed the chattel mortgage and privately sold the property covered
thereby. The defendant is an owner of shares of stock in the plaintiff
bank.
Meanwhile, plaintiff bank was subsequently placed under
liquidation. The defendant filed a motion for the inclusion of the
principal debtor Lim Cuan Sy as party defendant with the CFI-Manila so
that he could avail himself of the benefit of the exhaustion of the
property of said Lim Cuan Sy. The motion was denied. The proceeds of
the sale of the mortgaged chattels together with other payments made
were applied to the amount of the promissory note in question, leaving
the balance which the plaintiff now seeks to collect.
ISSUE:
WON it is proper to COMPENSATE the respondents
indebtedness to the value of his shares of stock with the Mercantile
Bank of China.
HELD:
NO. A share of stock or the certificate thereof is not
indebtedness to the owner nor evidence of indebtedness and therefore,
it is not a credit. Stockholders as such are not creditors of the
corporation.
The capital stock of a corporation is a trust fund to be used
more particularly for the security of the creditors of the corporation
who presumably deal with it on the credit of its capital.
Apodaca vs. NLRC
G.R. No. 80039; April 18, 1989
FACTS:
Petitioner was employed in respondent corporation. He was
persuaded by respondent Mirasol to subscribe to 1,500 shares which he
paid partially. Petitioner was appointed President and General Manager
of the respondent corporation but later on he resigned. Petitioner
instituted with the NLRC a complaint against private respondents for
the payment of his unpaid wages, his cost of living allowance, the
balance of his gasoline and representation expenses and his bonus
compensation. Private respondents admitted that there is due to
petitioner but this was applied to the unpaid balance of his
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subscription. Petitioner questioned the set-off alleging that there was
no call or notice for the payment of the unpaid subscription and that,
accordingly, the alleged obligation is not enforceable.
ISSUE;
(1) Whether or not NLRC has jurisdiction to resolve a claim for
non-payment of stock subscriptions to a corporation.
(2) If so, whether or not an obligation arising therefrom be
offset against a money claim of an employee against the employer.
HELD:
(1) NLRC has no jurisdiction to determine such intra-corporate
dispute between the stockholder and the corporation as in the matter
of unpaid subscriptions. This controversy is within the exclusive
jurisdiction of the Securities and Exchange Commission (now RTC).
(2) No. The unpaid subscriptions are not due and payable until
a call is made by the corporation for payment. Private respondents have
not presented a resolution of the board of directors of respondent
corporation calling for the payment of the unpaid subscriptions. It does
not even appear that a notice of such call has been sent to petitioner by
the respondent corporation. As there was no notice or call for the
payment of unpaid subscriptions, the same is not yet due and payable.
Even if there was a call for payment, an obligation arising from
non-payment of stock subscriptions to a corporation cannot be offset
against a money claim of an employee against the employer.
National Exchange vs. Dexter
G.R. No. L-27872; February 25, 1928
FACTS:
Dexter subscribed to 300 shares. The subscription contract
provided that the shares will be paid solely from the dividends.
Company became insolvent. Assignee in insolvency sued Dexter for the
balance. Dexter's defense was that under the contract, payment would
come from the dividends. Without dividends, he cannot be obligated to
pay.
ISSUE:
WON the stipulation contained in the subscription to the effect
that the subscription is payable from the first dividends declared on the
shares has the effect of relieving the subscriber from personal liability
in an action to recover the value of the shares.
HELD:
The Court held that the subscription contract was void since it
works a fraud on creditors who rely on the theoretical capital of the
company (subscribed shares). Under the contract, this theoretical
value will never be realized since if there are no dividends,
stockholders will not be compelled to pay the balance of their
subscriptions.
2.) UNPAID SUBSCRIPTIONS
Velasco vs. Poizat
G.R. No. L-11528; March 15, 1918
FACTS:
Poizat subscribed to 20 shares but only paid for 5. Board made
a call for payment through a resolution. Poizat refused to pay.
Corporation became insolvent. Assignee in insolvency sued Poizat
whose defense was that the call was invalid for lack of publication.
ISSUE:
WON Poizat is liable to the unpaid subscription.
HELD:
YES. A stock subscription is subsisting liability from the time
the subscription is made, since it requires the subscriber to pay interest
quarterly from that date unless he is relieved from such liability by the
by-laws of the corporation. The subscriber is as much bound to pay the
amount of the share subscribed by him as he would be to pay any other
debt, and the right of the company to demand payment is no less
incontestable.
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 The Board call became immaterial when insolvency
supervenes, all unpaid subscriptions become at once due and
enforceable.
Lingayen Gulf Electric vs. Baltazar
G.R. No. L-4824; June 30, 1953
FACTS:
Companys president subscribed to shares and paid partially.
The Board made a call for payment through a resolution. However, the
president refused to pay, prompting the corporation to sue. The defense
was that the call was invalid for lack of publication.
ISSUE:
WON the petitioner company is liable for unpaid subscription
despite the lack of publication.
HELD:
NO. Notice of any call for the payment of unpaid subscription
should be made not only personally but also by publication once a
week, for four consecutive weeks in some newspapers.
In a solvent corporation, there must be a published call for the
payment of unpaid subscriptions before payment could be demanded.
The ruling in Poizat does not apply since the company here is solvent.
No cancellation or release from obligation can be valid without the
consent of the stockholder.
De Silva vs. Aboitiz
G.R. No. L-19893; March 31, 1923
FACTS:
De Silva subscribed to 650 shares and paid for 200. The
company notified him that his shares will be declared delinquent and
sold in a public auction if he does not pay the balance. De Silva did not
pay. The company advertised a notice of delinquency sale. De Silva
sought an injunction because the by-laws allegedly provide that unpaid
subscriptions will be paid from the dividends allotted to stockholders.
ISSUE:
WON De Silva is liable despite the provision in the by-laws
regarding dividends as payment for unpaid subscriptions.
HELD:
YES. Although, the by-laws provide that unpaid subscriptions
may be paid from such dividends The defendant corporation, through
its board of directors, made use of its discretionary power, taking
advantage of the first of the two remedies: delinquency sale or specific
performance.
Settled is the rule that nothing in this act shall prevent the
directors from collecting, by action in any court of proper jurisdiction,
the amount due on any unpaid subscription, together with accrued
interest and costs and expenses incurred.
Lumanlan vs. Cura
G.R. No. L-39861; March 21, 1934
FACTS:
Lumanlan had unpaid subscriptions. Companys receiver sued
him for the balance and won. While the case was on appeal, the
company and petitioner entered into a compromise whereby he would
directly pay a creditor of the company. In exchange, the company
would forego whatever balance remained on the unpaid subscription.
He agreed since he would be paying less than his unpaid subscription.
Afterwards, the corporation still sued him for the balance because the
company still has unpaid creditors. His defense was the compromise
agreement.
ISSUE:
WON Lumanlan is still liable despite the compromise
agreement.
HELD:
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 YES. The Court held that the agreement cannot prejudice
creditors. The subscriptions constitute a fund to which they have a
right to look to for satisfaction of their claims. Therefore, the
corporation has a right to collect all unpaid stock subscriptions and any
other amounts which may be due it, notwithstanding the compromise
agreement.
China Banking Corp. vs. CA (supra)
G.R. No. 117604; March 26, 1997
ISSUE:
Unpaid Claim with regards to unpaid subscription.
HELD:
Sec. 63 of the Corporation Code which provides that "no shares
of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation" cannot be utilized by
VGCCI. The term "unpaid claim" refers to "any unpaid claim arising
from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising from any
other transaction.
In the case at bar, the subscription for the share in question has
been fully paid as evidenced by the issuance of Membership Certificate
No. 1219. What Calapatia owed the corporation were merely the
monthly dues. Hence, the aforequoted provision does not apply.
3.) RIGHTS OF UNPAID SHARES
NOTE: The three cases thereunder are correlated, read and
comprehend thoroughly.
Fua Cun vs. Summers
G.R. No. L-19441; March 27, 1923
FACTS:
Chua Soco bought 500 shares of China Banking Corp. at par
value of P100.00, paying the sum of P25,000.00, 50% of the
subscription price. Chua mortgaged the said shares in favor of plaintiff
Fua Cun to secure a promissory note for the sum of P25,000.00. In the
meantime, Chua Soco's interest in the 500 shares were attached and
levied upon to satisfy his debt with China Banking Corp. Fua Cun
brought an action to have himself declared to hold priority over the
claim of China Bank, to have the receipt for the shares delivered to him,
and to be awarded damages for wrongful attachment, on the ground
that he was owner of 250 shares by virtue of Chua Soco's payment of
half of the subscription price.
ISSUE:
WON petitioner is entitled to issuance of stock certificate.
HELD:
NO. A subscriber does not become the owner of a particular
number of shares corresponding to the amount he already paid but
merely holds a right of equity in the total number of shares subscribed.
Complete ownership over the total number of shares subscribed will
only vest with the stockholder upon payment of the whole subscription
price.
In the absence of special agreement to the contrary, a
subscriber for a certain number of shares of stock does not, upon
payment of one-half of the subscription price become entitled to the
issuance of certificates for one-half of the number of shares subscribed
for; the subscriber's right consists only in equity entitling him to a
certificate for the total number of shares subscribed for by him upon
payment of the remaining portion of the subscription price.
Baltazar vs. Lingayen Gulf
G.R. No. L-16236; June 30, 1965
FACTS:
Baltazar, et al. subscribed to a certain number of shares of
Lingayen Gulf Electric Power. They had made only partial payment of
the subscription but the corporation issued them certificates
corresponding to shares covered by the partial payments. Corporation
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wanted to deny voting rights to all subscribed shares until total
subscription is paid.
ISSUE:
WON petitioner is entitled to issuance of stock certificate.
HELD:
YES. The Court held that shares of stock covered by fully paid
capital stock shares certificates are entitled to vote. Where the
corporation has issued certificate of stock of a definite number
corresponding to the initial payment made on the subscription, said
shares may validly be voted at all meetings and only the remaining
number of shares in the unpaid subscription will be affected by the call
and subsequent declaration of delinquency in case of non-payment of
the subscription balance.
Corporation may choose to apply payments to subscription
either as: (a) full payment for corresponding number of stock the par
value of which is covered by such payment; or (b) as payment pro-rata
to each subscribed share. The corporation chose the first option, and,
having done so, it cannot unilaterally nullify the certificates issued.
Nava vs. Peers Marketing Corp.
G.R. No. L-28120; November 25, 1976
FACTS:
Teofilo Co subscribed to 80 shares of Peers Marketing Corp. at
P100.00 a share for a total of P8,000.00. He, however, paid only
P2,000.00 corresponding to 20 shares or 25% of total subscription.
Nava bought 20 shares from Co and sought its transfer in the books of
the corporation. The corporation refused to transfer said shares in its
books.
ISSUE:
WON the shares may be transferred in the books of the
corporation and may stock certificate be issued.
HELD:
NO. It was held that the transfer is effective only between Co
and Nava and does not affect the corporation. The Fua Cun ruling
applies. Lingayen Gulf does not apply because, unlike in Lingayen Gulf,
no certificate of stock was issued to Co.
No shares of stock against which the corporation holds an
unpaid claim are transferable in the books of the corporation.
Mandamus will not lie to compel corporate officers to record the
transfer of shares in its books where no shares of stocks were issued for
the unpaid subscription. The issuance of the certificate of stock, its
indorsement and delivery to the transferee, and the surrender thereof
to the corporation are requisites for the recording of the transfer in the
corporate books.
CAMPOS NOTES: The Nava case reinforced the ruling in the Fua Cun
case, making it clear that the decision in Lingayen Gulf case should be
applicable only to the special circumstances appearing there.
Section 64 of the Code clearly supports the Fua Cun case and its
prohibitory language seems to rule out an agreement contrary to its
provisions. The rule applies to par and no par stocks leaving no room for
the application of the Lingayen Gulf case.
4.) NATURE & FUNCTION OF STOCK CERTIFICATES
Tan vs. SEC
G.R. No. 95696; March 3, 1992
FACTS:
Petitioner is the incorporator of the respondent corporation.
Stock Certificate No. 2 was given to him as evidenced of his shares. He
was elected president and thereafter in order to complete the
membership of the five (5) directors in the Board, he sold 50 shares out
400 shares of capital stock to his brother. Stock Certificate No. 2 was
cancelled and the corresponding Certificates Nos. 6 and 8 were issued.
Petitioner did not endorse and instead kept the cancelled certificate.
Later on, petitioner was dislodged from the position and thereafter
withdrew from the corporation.
Years later, petitioner filed a case against respondent
corporation before the Cebu SEC Extension Office, questioning for the
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first time, the cancellation of his aforesaid Stock Certificates Nos. 2 and
8. The bone of contention raised by the petitioner is that the
deprivation of his shares despite the non-endorsement or surrender of
his Stock Certificate Nos. 2 and 8, was without the process contrary to
the provision of Section 63 of the Corporation Code.
ISSUE:
Nature and function of stock certificates.
HELD:
A certificate of stock is the paper representative or tangible
evidence of the stock itself and of the various interests therein. The
certificate is not stock in the corporation but is merely evidence of the
holder's interest and status in the corporation, his ownership of the
share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the
stockholder, but is not essential to the existence of a share in stock or
the nation of the relation of shareholder to the corporation.
A certificate of stock is not a negotiable instrument. "Although it
is sometime regarded as quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery, it is well-settled
that it is non-negotiable, because the holder thereof takes it without
prejudice to such rights or defenses as the registered owner/s or
transferors creditor may have under the law, except insofar as such
rights or defenses are subject to the limitations imposed by the
principles governing estoppel."
In the case at bar, a by-law which prohibits a transfer of stock
without the consent or approval of all the stockholders or of the
President or Board of Directors is illegal as constituting undue
limitation on the right of ownership and in restraint of trade.
While Sec. 47 (9) of the Corporation Code grants to stock
corporations the authority to determine in the by-laws the "manner of
issuing certificates" of shares of stock, however, the power to regulate is
not the power to prohibit, or to impose unreasonable restrictions of the
right of stockholders to transfer their shares. To uphold the
cancellation of a stock certification as null and void for lack of delivery
of the cancelled "mother" certificate whose endorsement was
deliberately withheld by petitioner, is to prescribe certain restrictions
on the transfer of stock in violation of the Corporation Code as the only
law governing transfer of stocks.
5.) PROOF OF OWNERSHIP OF SHARES
Nautica Canning Corp. vs. Yumul
G.R. No. 164588; October 19, 2005
FACTS:
Yumul was appointed Chief Operating Officer/General Manager
of Nautica. First Dominion Prime Holdings, Inc., Nauticas parent
company, through its Chairman Alvin Y. Dee, granted Yumul an Option
to Purchase up to 15% of the total stocks it subscribed from Nautica. A
Deed of Trust and Assignment was executed between First Dominion
Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of
its subscribed shares in Nautica to the latter.
After Yumuls resignation from Nautica, he wrote a letter to Dee
requesting the latter to formalize his offer to buy Yumuls 15% share in
Nautica and demanding the issuance of the corresponding certificate of
shares in his name should Dee refuse to buy the same. Dee denied the
request claiming that Yumul was not a stockholder of Nautica. Yumul
requested that the Deed of Trust and Assignment be recorded in the
Stock and Transfer Book of Nautica, and that he, as a stockholder, be
allowed to inspect its books and records. Yumuls requests were denied.
Yumul filed a petition for mandamus praying that the Deed of Trust and
Assignment be recorded in the Stock and Transfer Book of Nautica and
that the certificate of stocks corresponding thereto be issued in his
name.
ISSUE:
WON Yumul is a stockholder. (Proof of Ownership of Shares)
HELD:
YES. Indeed, it is possible for a business to be wholly owned by
one individual. The validity of its incorporation is not affected when
such individual gives nominal ownership of only one share of stock to
each of the other four incorporators. This is not necessarily illegal. But,
this is valid only between or among the incorporators privy to the
compiled/edited/digest: KWYB - 26 -
agreement. It does bind the corporation which, at the time the
agreement is made, was non-existent. Thus, incorporators continue to
be stockholders of a corporation unless, subsequent to the
incorporation, they have validly transferred their subscriptions to the
real parties in interest.
A transfer of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent as far as the
corporation is concerned. As between the corporation on one hand,
and its shareholders and third persons on the other, the corporation
looks only to its books for the purpose of determining who its
shareholders are. It is only when the transfer has been recorded in the
stock and transfer book that a corporation may rightfully regard the
transferee as one of its stockholders. From this time, the consequent
obligation on the part of the corporation to recognize such rights as it is
mandated by law to recognize arises.
Lao vs. Lao
G.R. No. 170585; October 6, 2008
FACTS:
Petitioners David and Jose Lao filed a petition with the SEC
against respondent Dionisio Lao, president of Pacific Foundry Shop
Corporation (PFSC). Petitioners prayed for a declaration as
stockholders and directors of PFSC, issuance of certificates of shares in
their name and to be allowed to examine the corporate books of PFSC.
Petitioners claimed that they are stockholders of PFSC based on
the General Information Sheet filed with the SEC, in which they are
named as stockholders and directors of the corporation. David Lao
acquired his shares from his father and Jose Lao from respondent
himself. Respondent denied petitioners' claim. He also claimed that
petitioners did not acquire any shares in PFSC by any of the modes
recognized by law, namely subscription, purchase, or transfer.
Meanwhile, R.A. 8799, otherwise known as the Securities
Regulation Code, was enacted, transferring jurisdiction over all intra-
corporate disputes from the SEC to the RTC. RTC denied their petition
on the ground that they have no stock certificates in their names.
ISSUE:
Is the mere inclusion as shareholder in the General Information
Sheet of a corporation sufficient proof that one is a shareholder in such
corporation?
HELD:
NO. The mere inclusion as shareholder of petitioners in the
General Information Sheet of PFSC is insufficient proof that they are
shareholders of the company. The information in the document will still
have to be correlated with the corporate books of PFSC.
A certificate of stock is the evidence of a holder's interest and
status in a corporation. It is a written instrument signed by the proper
officer of a corporation stating or acknowledging that the person
named in the document is the owner of a designated number of shares
of its stock. It is prima facie evidence that the holder is a shareholder of
a corporation.
6.) RESTRICTIONS ON TRANSFER OF SHARES
Fleischer vs. Botica Nolasco (supra)
G.R. No. L-23241; March 14, 1925
ISSUE:
Is a by-law restricting a transfer of shares valid?
HELD:
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.
Moreover, a by-law which prohibits a transfer of stock without
the consent or approval of all the stockholders or of the President or
Board of Directors is illegal as constituting undue limitation on the right
of ownership and in restraint of trade.
The only restraint imposed by the Corporation Law upon
transfer of shares is found in Section 35 of Act No. 1459 (now Section
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63): "No transfer, however, shall be valid, except as between the parties,
until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate, and the number of
shares transferred." This restriction is necessary in order that the
officers of the corporation may know who are the stockholders, which
is essential in conducting elections of officers, in calling meeting of
stockholders, and for other purposes. but any restriction of the nature
of that imposed in the by-law now in question, is ultra vires, violative of
the property rights of shareholders, and in restraint of trade.
Thomson vs. CA (supra)
G.R. No. 116631; October 28, 1998
ISSUE:
Restrictions on Transfer of Shares.
HELD:
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.
Rural Bank of Salinas Inc. vs. CA
G.R. No. 96674; June 26, 1992
FACTS:
Clemente Guerrero, President of the petitioner-bank, executed
a SPA in favor of his wife, private respondent Melania Guerrero, giving
and granting the latter full power and authority to sell or otherwise
dispose of and/or mortgage his 473 shares of stock of the Bank
registered in his name. First deed of assignment was made on the 472
out of 473 shares, in favor of private respondents Luz Andico,
Wilhelmina Rosales and Francisco Guerrero, Jr. Months later, second
deed of assignment was executed for the remaining one share of stock
in favor of private respondent Francisco Guerrero, Sr.
Subsequently, private respondent Melania Guerrero presented
to petitioner-bank the two Deeds of Assignment for registration with a
request for the transfer in the Bank's stock and transfer book of the
shares of stock so assigned, the cancellation of stock certificates and the
issuance of new stock certificates covering the transferred shares of
stocks in the name of the new owners thereof. However, petitioner-
bank denied the request.
Private respondent filed a mandamus against petitioner-bank
in the SEC. The latter alleged in their answer that upon the death of
Clemente Guerrero, his shares of stock became the property of his
estate, and his property and that of his widow should first be settled
and liquidated in accordance with law before any distribution can be
effected so that petitioners may not be a party to any scheme to evade
payment of estate or inheritance tax and in order to avoid liability to
any third persons or creditors. SEC granted the writ of mandamus. SEC
en banc and CA likewise affirmed the decision of SEC.
ISSUES:
(1) WON SEC has jurisdiction.
(2) Restrictions on Transfer of Shares.
HELD:
(1) YES. Section 5 (b) of P.D. No. 902-A grants to the SEC the
original and exclusive jurisdiction to hear and decide cases involving
intra-corporate controversies. An intra-corporate controversy has been
defined as one which arises between a stockholder and the corporation.
There is no distinction, qualification, nor any exception whatsoever
(Rivera vs. Florendo, 144 SCRA 643 [1986]). The case at bar involves
compiled/edited/digest: KWYB - 28 -
shares of stock, their registration, cancellation and issuances thereof by
petitioner Rural Bank of Salinas. It is therefore within the power of
respondent SEC to adjudicate.
(2) Respondent SEC correctly ruled in favor of the registering of
the shares of stock in question in private respondent's names. Such
ruling finds support under Section 63 of the Corporation Code. The only
limitation imposed by Section 63 of the Corporation Code is when the
corporation holds any unpaid claim against the shares intended to be
transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its
officers, cannot create restrictions in stock transfers. Restrictions in the
traffic of stock must have their source in legislative enactment, as the
corporation itself cannot create such impediment. By-laws are intended
merely for the protection of the corporation, and prescribe regulation,
not restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such power, cannot
ordinarily inquire into or pass upon the legality of the transactions by
which its stock passes from one person to another, nor can it question
the consideration upon which a sale is based. The right of a
transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks.
7.) VALIDITY OF TRANSFERS/ REGISTRATION OF SHARES
Razon vs. IAC
G.R. No. 74306; March 16, 1992
FACTS:
Petitions centers on the ownership of 1,500 shares of stock in
E. Razon, Inc. covered by Stock Certificate No. 003 issued and registered
under the name of Juan T. Chuidian in the books of the corporation. The
then Court of First Instance of Manila, now Regional Trial Court of
Manila, declared that Enrique Razon, the petitioner is the owner of the
said shares of stock. The then Intermediate Appellate Court, now Court
of Appeals, however, reversed the trial court's decision and ruled that
Juan T. Chuidian, the deceased father of petitioner Vicente B. Chuidian is
the owner of the shares of stock. Both parties filed separate motions for
reconsideration. Enrique Razon wanted the appellate court's decision
reversed and the trial court's decision affirmed while Vicente Chuidian
asked that all cash and stock dividends and all the pre-emptive rights
accruing to the 1,500 shares of stock be ordered delivered to him. The
appellate court denied both motions. Hence, these petitions.
ISSUE:
When there is an effective transfer of shares of stock?
HELD:
The law is clear that in order for a transfer of stock certificate to
be effective, the certificate must be properly indorsed and that title to
such certificate of stock is vested in the transferee by the delivery of the
duly indorsed certificate of stock. (Section 35, Corporation Code)
Since the certificate of stock covering the questioned 1,500
shares of stock registered in the name of the late Juan Chuidian was
never indorsed to the petitioner, the inevitable conclusion is that the
questioned shares of stock belong to Chuidian. The petitioner's
asseveration that he did not require an indorsement of the certificate of
stock in view of his intimate friendship with the late Juan Chuidian can
not overcome the failure to follow the procedure required by law or the
proper conduct of business even among friends. To reiterate,
indorsement of the certificate of stock is a mandatory requirement of
law for an effective transfer of a certificate of stock.
Torres vs. CA
G.R. No. 120138; September 5, 1997
FACTS:
The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the
majority stockholder of Tormil Realty & Development Corporation
while private respondents who are the children of Judge Torres,
deceased brother Antonio A. Torres, constituted the minority
stockholders.
The 1987 annual stockholders meeting and election of
directors of Tormil corporation was scheduled in compliance with the
provisions of its by-laws. Judge Torres assigned from his own shares,
one (1) share each to petitioners Tobias, Jocson, Jurisprudencia, Azura
and Pabalan. These assigned shares were in the nature of qualifying
compiled/edited/digest: KWYB - 29 -
shares, for the sole purpose of meeting the legal requirement to be able
to elect them (Tobias and company) to the Board of Directors as Torres
nominees.
The annual stockholders meeting was held as scheduled. Two
representatives of the SEC were present in the meeting. Antonio Torres
Jr. questioned the presence of the SEC representatives holding that the
subject meeting is for the family corporation and private firm. The SEC
representatives explained that it was merely in response to the request
of Manuel Torres, Jr. and that SEC has jurisdiction over all registered
corporations. The meeting resulted into chaos which in effect ousted
Manuel Torres and his group but nevertheless were able to elect the
officers.
Consequently, private respondents instituted a complaint with
the SEC praying in the main, that the election of petitioners to the Board
of Directors be annulled. Private respondents alleged that the
petitioners-nominees were not legitimate stockholders of Tormil
because the assignment of shares to them violated the minority
stockholders right of pre-emption as provided in the corporations
articles and by-laws.
ISSUE:
WON the assignment of shares made by Judge Torres is valid
despite being only the signatory to the certificates issued.
HELD:
NO. It is the corporate secretarys duty and obligation to
register valid transfers of stocks and if said corporate officer refuses to
comply, the transferor-stockholder may rightfully bring suit to compel
performance. In the absence of any provision to the contrary, the
corporate secretary is the custodian of corporate records. Corollarily, he
keeps the stock and transfer book and makes proper and necessary
entries therein.
In the case at bar, the stock and transfer book of TORMIL was
not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by
respondent Torres, the President and Chairman of the Board of
Directors of TORMIL. In contravention to the above cited provision, the
stock and transfer book was not kept at the principal office of the
corporation either but at the place of respondent Torres.
These being the obtaining circumstances, any entries made in
the stock and transfer book on March 8, 1987 by respondent Torres of
an alleged transfer of nominal shares to Pabalan and Co. cannot
therefore be given any valid effect. Where the entries made are not
valid, Pabalan and Co. cannot therefore be considered stockholders of
record of TORMIL. Because they are not stockholders, they cannot
therefore be elected as directors of TORMIL.
Rivera vs. Florendo
G.R. No. L-57586; October 8, 1986
FACTS:
Isamu Akasako, a Japanese national who was allegedly the real
owner of the shares of stock in the name of one Aquilino Rivera, a
registered stockholder of Fujuyama Hotel and Restaurant, Inc., sold
2,550 shares of the same to Milagros Tsuchiya along with the assurance
that Tsuchiya would be made President of the corporation after the
purchase. Rivera assured her that he would sign the stock certificates
because Akasako was the real owner. However, after the sale was
consummated and the consideration paid, Rivera refused to make the
indorsement unless he is also paid.
Tsuchiya, et al. attempted several times to have the shares
registered but were refused compliance by the corp. They filed a
special action for mandamus and damages.
ISSUES:
WON Rivera had the right to refuse the indorsement of the
shares of stock in question.
WON the Corporation had the right to refuse the registration of
the respondents shares.
HELD:
The Supreme Court denied the writ of preliminary mandatory
injunction and remanded the case to the lower court for a trial on the
merits. As found in Sec. 63 of the Corporation Code, shares of stock
may be transferred by delivery of the certificate after indorsement by
the owner or his attorney-in-fact or other person legally authorized to
make the transfer. By this provision it is evident that Riveras
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indorsement must be obtained before any transfer of the questioned
shares is effected.
On the matter of jurisdiction, the SEC does not have jurisdiction
of the case since the dispute is not an intra-corporate controversy.
What it simply involves is a conflict on the ownership of a group of
shares between the registered owner and an outside party. Hence,
because of this conflict in ownership rights, a mandatory injunction
can not lie.
Lim Tay vs. CA
G.R. No. 126891; August 5, 1998
FACTS:
Sy Guiok and Sy Lim secured a loan from Lim Tay. This was
secured by a contract of pledge whereby the former pledged their 300
shares of stock each in Go Fay & Company to the latter. However, they
failed to pay their respective loans. Hence, Lim Tay filed a petition for
mandamus against Go Fay & Company with the SEC praying that an
order be issued directing the corporate secretary of the said
corporation to register the stock transfers and issue new certificates in
favor of Lim Tay.
Go Fay & Company filed its answer contending that SEC had no
jurisdiction to entertain the complaint on the ground that since Lim Tay
was not a stockholder of the company, no intra corporate controversy
took place; and furthermore, that the default of payment of Sy Guiok
and Sy Lim did not automatically vest in Lim Tay the ownership of the
pledged shares.
SEC dismissed the complaint. On appeal to the CA, it affirmed SECs
decision.
ISSUE:
WON Lim Tay is the owner of the shares previously subjected to
pledge, for him to cause the registration of said shares in his own name.
HELD:
Lim Tay's ownership over the shares was not yet perfected
when the Complaint was filed. The contract of pledge certainly does not
make him the owner of the shares pledged. When shares of stocks are
pledged by means of endorsement in blank and delivery of the covering
certificates to secure a mortgage loan, the pledgee does not become the
owner of the shares simply by the failure of the registered stockholder
to pay his loan. Consequently, without proper foreclosure, the lender
cannot demand that the shares be registered in his name. A contract of
pledge of shares does not make the pledgee the owners of the shares
pledged.
Ponce vs. Alsons Cement
G.R. No. 139802; December 10, 2002
FACTS:
Vicente C. Ponce and Fausto Gaid, incorporator of Victory
Cement Corporation (VCC), executed a Deed of Undertaking and
Indorsement whereby Gaid acknowledges that Ponce is the owner of
the shares and he was therefore assigning/endorsing it to Ponce. VCC
was renamed Floro Cement Corporation (FCC) and then to Alsons
Cement Corporation (ACC). Up to the present, no certificates of stock
corresponding to the 239,500 subscribed and fully paid shares of Gaid
were issued in the name of Fausto G. Gaid and/or the plaintiff. Despite
repeated demands, the ACC refused to issue the certificates of stocks.
Ponce, filed a complaint with the SEC for mandamus and
damages against Alsons Cement Corporation and its corporate
secretary Francisco M. Giron, Jr. ACC and Giron moved to dismiss. SEC
Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss.
Ponce appealed the Order of dismissal. The Commission En Banc
reversed the appealed Order and directed the Hearing Officer to
proceed with the case. In ruling that a transfer or assignment of stocks
need not be registered first before it can take cognizance of the case to
enforce Ponce's rights as a stockholder, the Commission En Banc cited
the Supreme Court's ruling in Abejo vs. De la Cruz. ACC and Giron
appealed the decision of the SEC En Banc to CA. The latter ruled that
mandamus should be dismissed for failure to state a cause of action.
ISSUE:
WON the certificate of stocks of Gaid can be transferred to
Ponce.
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HELD:
NO. Pursuant to Section 63 of the Corporation Code, a transfer
of shares of stock not recorded in the stock and transfer book of the
corporation is non-existent as far as the corporation is concerned. As
between the corporation on the one hand, and its shareholders and
third persons on the other, the corporation looks only to its books for
the purpose of determining who its shareholders are. It is only when
the transfer has been recorded in the stock and transfer book that a
corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part of
the corporation to recognize such rights as it is mandated by law to
recognize arises. Hence, without such recording, the transferee may not
be regarded by the corporation as one among its stockholders and the
corporation may legally refuse the issuance of stock certificates in the
name of the transferee even when there has been compliance with the
requirements of Section 64 of the Corporation Code. The stock and
transfer book is the basis for ascertaining the persons entitled to the
rights and subject to the liabilities of a stockholder. Where a transferee
is not yet recognized as a stockholder, the corporation is under no
specific legal duty to issue stock certificates in the transferee's name.
Even if a certificate is indorsed and delivered to a third person
it does not automatically entitle such person to register such certificate
in his name, or compel the corporation to register the certificate in his
name even. An indorsed and delivered certificate does not create a clear
right with respect to the possession of such certificate by the third
person, as the same mode (indorsement and delivery) applies to sale,
pledge and mortgage. This is where the registered owner must come in;
he must inform the corporation whether the disposition was a pledge,
or mortgage or sale, which would determine whether or not the third
person is entitled registration. Since almost all dealings comprise of the
same mode, the owner must apprise the corporation with the necessary
information and instructions.
Rural Bank of Salinas Inc. vs. CA (supra)
G.R. No. 96674; June 26, 1992
ISSUE:
WON the corporate secretary is compelled to register the said
transfer of shares.
HELD:
YES. Based on those circumstances, there was a clear duty on
the part of the corporate secretary to register the 473 shares in favor of
the new owners, since the person who sought the transfer of shares had
express instructions from and specific authority given by the registered
stockholder to cause the disposition of stocks registered in his name.
The right of a transferee/assignee to have stocks transferred to
his name is an inherent right flowing from his ownership of the stocks.
Thus, whenever a corporation refuses to transfer and register stock,
mandamus will lie to compel the officers of the corporation to transfer
said stock in the books of the corporation. This is because the
corporation's obligation to register is ministerial. (Note, however, that
in such cases, the person requesting the registration must be the prima
facie owner of the shares. Cf. Lim Tay v. CA, 293 SCRA 634)
Hager vs. Bryan
G.R. No. 6230; January 18, 1911
FACTS:
Petitioner filed an original action to secure a writ of mandamus
against the respondent, to compel him, as secretary of the Visayan
Electric Company, to transfer upon the books of the company certain
shares of stock. He based the urgency of his action on a supposed
agreement to sell the said shares to a Mr. Levering. Furthermore, he
also stated that the issuing company holds no unpaid claims against the
shares of stock. However, on the books of the company, it turns out that
petitioner is not the registered owner of the stock which he seeks to
have transferred. His only claim as owner is based on his averment
that such were indorsed to him on February 5 by the Bryan-Landon
Company, in whose name it is registered on the books of the Visayan
Electric Company. There was no allegation that the petitioner holds
any power of attorney from the Bryan-Landon Company authorizing
him to make demand on the secretary of the Visayan Electric Company
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to make the transfer which petitioner seeks to have made through the
medium of the mandamus of this court.
ISSUE:
WON a writ of mandamus will lie under the circumstances of
the case to allow the transfer of shares as being requested by the
petitioner.
HELD:
The Supreme Court denied the writ. Petitioner did not have the
right to demand the transfer since he was not the stockholder of
record. This was proven by the fact that the said shares were still
registered under the name of Bryan-Landon Company. Furthermore,
even the latter did not demand from the company the transfer of said
shares. Neither did it give by way of a special power of attorney to
petitioner the authority to effect such a transfer. Hence, there is no
clear and legal obligation upon the respondent that will justify the
issuance of a writ to compel the latter to perform a transfer.
As a general rule, as between the corporation on the one hand,
and its shareholders and third persons on the other, the corporation
looks only to its books for the purpose of determining who its
shareholders are, so that a mere indorsee of a stock certificate, claiming
to be the owner, will not necessarily be recognized as such by the
corporation and its officers, in the absence of express instructions of
the registered owner to make such transfer to the indorsee, or a power
of attorney authorizing such transfer.
Bitong vs. CA
G.R. No. 123553; July 13, 1998
FACTS:
Bitong was the treasurer and member of the BOD of Mr. & Mrs.
Publishing Co. She filed a complaint with the SEC to hold respondent
spouses Apostol liable for fraud, misrepresentation, disloyalty, evident
bad faith, conflict of interest and mismanagement in directing the
affairs of the corporation to the prejudice of the stockholders. She
alleges that certain transactions entered into by the corporation were
not supported by any stockholders resolution.
The complaint sought to enjoin Apostol from further acting as
president-director of the corporation and from disbursing any money
or funds. Apostol contends that Bitong was merely a holder-in-trust of
the JAKA shares of the corporation, hence, not entitled to the relief she
prays for. SEC Hearing Panel issued a writ enjoining Apostol.
After hearing the evidence, SEC Hearing Panel dissolved the
writ and dismissed the complaint filed by Bitong. Bitong appealed to
the SEC en banc which the latter reversed SEC Hearing Panel decision.
Apostol filed petition for review with the CA. CA reversed SEC en banc
ruling holding that Bitong was not the owner of any share of stock in
the corporation and therefore, not a real party in interest to prosecute
the complaint.
ISSUE:
WON Bitong is the real party-in-interest.
HELD:
NO. Based on the evidence presented, it could be gleaned that
Bitong was not a bona fide stockholder of the corporation. Several
corporate documents disclose that the true party in interest was JAKA.
Section 63 of the Corporation Code envisions a formal
certificate of stock which can be issued only upon compliance with
certain requisites. First, the certificate must be signed by the president
or vice-president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation. A mere typewritten
statement advising a stockholder of the extent of his ownership is a
corporation without qualification and/or authentication cannot be
considered as a formal certificate of stock. Second, delivery of the
certificate is an essential element of its issuance. Hence, there is no
issuance of a stock certificate where it is never detached from the stock
books although blanks therein are properly filled up if the person
whose name is inserted therein has no control over the books of the
company. Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth,
the original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from a
stockholder.
Stock issued without authority and in violation of law is void
and confers no rights on the person to whom it is issued and subjects
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him to no liabilities. Where there is an inherent lack of power in the
corporation to issue the stock, neither the corporation nor the person
to whom the stock is issued is estopped to question its validity since an
estoppel cannot operate to create stock which under the law cannot
have existence.
Abejo vs. De la Cruz
G.R. No. L-63558; May 19, 1987
FACTS:
Case involves a dispute between the principal stockholders of
the corporation Pocket Bell Philippines, Inc. (Pocket Bell) namely
spouses Abejos and the purchaser, Telectronic Systems, Inc.
(Telectronics) of their minority shareholdings and of shares registered
in the name of spouses Bragas. With the said purchases, Telectronics
would become the majority stockholder, holding 56% of the
outstanding stock and voting power of the corporation Pocket Bell.
Telectronics requested the corporate secretary of the
corporation, Norberto Braga, to register and transfer to its name, and
those of its nominees the total 196,000 Pocket Bell shares in the
corporation's transfer book, cancel the surrendered certificates of stock
and issue the corresponding new certificates of stock in its name and
those of its nominees. The latter refused to register the aforesaid
transfer of shares in the corporate books, asserting that the Bragas
claim pre-emptive rights over the Abejo shares and that Virginia Braga
never transferred her shares to Telectronics but had lost the five stock
certificates representing those shares. This triggered off the series of
intertwined actions between the protagonists, all centered on the
question of jurisdiction over the dispute. The Bragas assert that the
regular civil court has original and exclusive jurisdiction as against the
SEC, while the Abejos and Telectronics, as new majority shareholders,
claim the contrary. Respondent Judge de la Cruz issued an order
rescinding the order which dismissed the complaint of the Bragas in the
RTC, thus holding that the RTC and not the SEC had jurisdiction.
Respondent judge also revived the TRO previously issued restraining
Telectronics' agents or representatives from enforcing their resolution
constituting themselves as the new set of officers of Pocket Bell and
from assuming control of the corporation and discharging their
functions. The Abejos filed a MR, which motion was duly opposed by
the Bragas, which was denied by respondent Judge.
ISSUE:
(1) Who has jurisdiction?
(2) WON the corporate secretary may refuse to register the
transfer of shares in the corporate books.
HELD:
(1) The Court ruled that the SEC has original and exclusive
jurisdiction and that the SEC correctly ruled in dismissing the Bragas'
petition questioning its jurisdiction, that "the issue is not the ownership
of shares but rather the non-performance by the Corporate Secretary of
the ministerial duty of recording transfers of shares of stock of the
Corporation of which he is secretary."
The dispute at bar, as held by the SEC, is an intra-corporate
dispute that has arisen between and among the principal stockholders
of the corporation Pocket Bell due to the refusal of the corporate
secretary, backed up by his parents as erstwhile majority shareholders,
to perform his "ministerial duty" to record the transfers of the
corporation's controlling (56%) shares of stock, covered by duly
endorsed certificates of stock, in favor of Telectronics as the purchaser
thereof.
(2) NO. As pointed out by the Abejos, Pocket Bell is not a close
corporation, and no restriction over the free transferability of the
shares appears in the Articles of Incorporation, as well as in the bylaws
and the certificates of stock themselves, as required by law for the
enforcement of such restriction. As the SEC maintains, "There is no
requirement that a stockholder of a corporation must be a registered
one in order that the Securities and Exchange Commission may take
cognizance of a suit seeking to enforce his rights as such stockholder."
This is because the SEC by express mandate has "absolute jurisdiction,
supervision and control over all corporations" and is called upon to
enforce the provisions of the Corporation Code, among which is the
stock purchaser's right to secure the corresponding certificate in his
name under the provisions of Section 63 of the Code.
8.) UNAUTHORIZED TRANSFERS
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Santamaria vs. Hongkong and Shanghai Bank
G.R. No. L-2808; August 31, 1951
FACTS:
Santamaria secured her order for a number of shares with RJ
Campos & Co. with her stock certificate representing her shares with
Batangas Minerals. The said certificate was originally issued in the
name of her broker and endorsed in blank by the latter. As Campos
failed to make good on the order, Santamaria demanded the return of
the certificate. However, she was informed that Hongkong Bank had
acquired possession of it inasmuch as it was covered by the pledge
made by Campos with the bank. Thereafter, she instituted an action
against Hongkong Bank for the recovery of the certificate. Trial court
decided in her favor. The bank appealed.
ISSUES:
(1) WON Santamaria was chargeable with negligence which
gave rise to the case.
(2) WON the Bank was obligated to inquire into the ownership
of the certificate.
HELD:
(1) The facts of the case justify the conclusion that she was
negligent. She delivered the certificate, which was endorsed in blank, to
Campos without having taken any precaution. She did not ask the
Batangas Minerals to cancel it and instead, issue another in her name.
In failing to do so, she clothed Campos with apparent title to the shares
represented by the certificate. By her misplaced confidence in Campos,
she made possible the wrong done. She was therefore estopped from
asserting title thereto for it is well-settled that where one of the
innocent parties must suffer by reason of a wrongful or unauthorized
act, the loss must fall on the one who first trusted the wrongdoer.
(2) The subject certificate is what is known as a street
certificate. Upon its face, the holder is entitled to demand its transfer
into his name from the issuing corporation. The bank is not obligated to
look beyond the certificate to ascertain the ownership of the stock. A
certificate of stock, endorsed in blank, is deemed quasi-negotiable, and
as such, the transferee thereof is justified in believing that it belongs to
the transferor.
De los Santos vs. McGrath
G.R. No. L-4818; February 28, 1955
FACTS:
De los Santos filed a claim with the Alien Property Custodian
for a number of shares of the Lepanto Corporation. He contended that
said shares were bought from one Campos and Hess, both of them dead.
The Philippine Alien Property Administrator rejected the claim. He
instituted the present action to establish title to the aforementioned
shares of stock.
The US Attorney General, the successor of the Alien Property
Administrator, opposed the action on the ground that the said shares of
stock were bought by one Madrigal, in trust for the true owner, Matsui,
and then delivered to the latter indorsed in blank.
ISSUE:
Had de los Santos in fact purchased the shares of stock?
HELD:
De los Santos sole evidence that he purchased the said shares
was his own unverified testimony. The alleged vendors of the shares of
stock, who could have verified the allegation, were already dead.
Further, the receipt that might have proven the sale was said to have
been lost in a fire. On the other hand, it was shown that the shares of
stock were registered in the records of Lepanto in the name of
Madrigal, the trustee of Matsui; that Matsui was subsequently given
possession of the corresponding stock certificates, though endorsed in
blank; and, that Matsui had neither sold, conveyed nor alienated these
to anybody.
It is the rule that if the owner of the certificate has endorsed it
in blank, and is stolen, no title is acquired by an innocent purchaser of
value. This is so because even though a stock certificate is regarded as
quasi-negotiable, in the sense that it may be transferred by
endorsement, coupled with delivery, the holder thereof takes it without
prejudice to such rights or defenses as the registered owner or credit
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may have under the law, except in so far as such rights or defenses are
subject to the limitations imposed by the principles governing estoppel.
COMPARISON of Santamaria case and De los Santos case:
In Santamaria case, a certificate of stock, indorsed in blank, is
deemed quasi-negotiable, and as such the transferee thereof is justified
in believing that it belongs to the holder and transferor.
In De los Santos case, although a stock certificate is sometimes
regarded as quasi-negotiable, in the sense that it may be transferred by
endorsement, coupled with delivery it is well settled that the
instrument is non-negotiable, because the holder thereof takes it
without prejudice to such rights or defense as the registered owner or
credit may have under the law, except in so far as such rights or
defenses are subject tot eh limitations imposed by the principles
governing estoppel.
9.) COLLATERAL TRANSFERS
Uson vs. Diosomito
G.R. No. L-42135; June 17, 1935
FACTS:
Toribia Uson filed a civil action for debt against Vicente
Diosomito. Upon institution of said action, an attachment was duly
issued and respondents property was levied upon, including 75 shares
of the North Electric Co., which stood in his name on the books of the
company when the attachment was levied. The sheriff sold said shares
at a public auction with Uson being the highest bidder. Jollye claims to
be the owner of said certificate of stock issued to him by the North
Electric Co.
There is no dispute that Diosomito was the original owner of
said shares, which he sold to Barcelon. However, Barcelon did not
present these certificates to the corporation for registration until 19
months after the delivery thereof by Barcelon, and 9 months after the
attachment and levy on said shares. The transfer to Jollye was made 5
months after the issuance of a certificate of stock in Barcelon's name.
ISSUE:
Is a bona fide transfer of the shares of corp., not registered or
noted on the books of the corp., valid as against a subsequent lawful
attachment of said shares, regardless of whether the attaching creditor
had actual notice of said transfer or not?
HELD:
NO, it is not valid. The transfer of the 75 shares in the North
Electric Co., Inc made by the defendant Diosomito as to the defendant
Barcelon was not valid as to the plaintiff. Toribia Uson, on 18 Jan. 1932,
the date on which she obtained her attachment lien on said shares of
stock will still stood in the name of Diosomito on the books of the corp.
Sec. 35 provides that No transfer, however, is valid, except as between
the parties, until the transfer is entered and noted upon the books of
the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and
the number of shares transferred.
All transfers of shares not so entered are invalid as to attaching
or execution creditors of the assignors, as well as to the corporation
and to subsequent purchasers in good faith, and indeed, as to all
persons interested, except the parties to such transfers.
Chua Guan vs. Samahang Magsasaka
G.R. No. L-42091; November 2, 1935
FACTS:
A certain Co Toco was the owner of 5,894 shares of Samahang
Magsasaka, Inc. which he mortgaged to Chua Chiu to guarantee the
payment of debt. The corresponding certificates were delivered to
Chua Chiu and were duly registered in the office of the register of deeds
of Manila and in the office of the said corporation. About five months
after, Chua Chui assigned all his rights and interest in said mortgage to
the plaintiff, Chua Gan which was also duly recorded. Co Toco
defaulted. The plaintiff foreclosed on the mortgage. In the public
auction he won as the highest bidder. However, upon presenting the
certificates to the corporation for registration, the officers refused
because they and the plaintiff could not agree on the noting of
nine other attachments that had been issued, served and noted on the
books of the corporation against the shares of Co Toco.
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ISSUE:
WON the said mortgage takes priority over the already noted
writs of attachment.
HELD:
The Supreme Court ruled that the attaching creditors are
entitled to priority over the defectively registered mortgage of the
appellant. The court argues that the registration in the register of
deeds must be done both at the place where the owner is domiciled and
at the place where the principal office of the corporation is located. The
purpose of this is to give sufficient constructive of any claim or
encumbrance over the recorded shares to third persons. Furthermore,
any share still standing in the name of the debtor on the books of the
corporation will be liable to seizure by attachment or levy on execution
at the instance of other creditors. Thus, the game here is to have the
highest or most preferred priority over any pledged or mortgaged
shares.
NOTE: The provision of the Chattel Mortgage Law (Act No. 1508)
providing for delivery of mortgaged property to the mortgagee as a
mode of constituting a chattel mortgage is no longer valid in view of the
Civil Code provision defining such as a pledge.
Chemphil Export & Import vs. CA
G.R. Nos. 112438-39; December 12, 1995
FACTS:
This case involved a consortium of banks which obtained a writ
of preliminary attachment in a civil case ("consortium case") over
shares of stock belonging to Mr. Antonio Garcia in the Chemical
Industries of the Philippines ("Chemphil"). The attachment, which was
served on the secretary to the President of Chemphil, was not
registered in the stock and transfer book of Chemphil. A few years
thereafter, Mr. Garcia sold the same shares of stock to the Ferro
Chemicals, Inc. ("FCI"). FCI subsequently assigned the shares to the
Chemphil Export and Import Corporation ("CEIC"). The shares were
registered and recorded in the corporate books of Chemphil in CEICs
name and the corresponding stock certificates were issued to it.
The consortium case was appealed to the CA. While the appeal
was pending, Mr. Garcia and the bank consortium amicably settled the
case. The CA rendered a judgment by compromise. Unfortunately, Mr.
Garcia failed to comply with the compromise agreement. The
consortium of banks caused to be sold on execution the shares of stock
(earlier attached by them), which were the same shares subsequently
sold by Mr. Garcia to CEIC. A certificate of sale covering the shares was
issued in the name of the bank consortium.
ISSUE:
Who has priority to the shares of stock an attaching creditor
or the subsequent buyer?
HELD:
The Supreme Court ruled that the attachment lien acquired by
the bank consortium is valid and effective even as against the buyer
(FCI) and its assignee (CEIC), notwithstanding the fact that said
attachment lien was not registered in the corporate books of Chemphil.
"Both the Revised Rules of Court and the Corporation Code", according
to the Court, "do not require annotation in the corporations stock and
transfer book for the attachment of shares of stock to be valid and
binding on the corporation and third party."
Consequently, when FCI purchased the shares of stock from Mr.
Garcia, it purchased them subject to the attachment lien of the bank
consortium. In this regard, the High Court explained that a preliminary
attachment is a security for the satisfaction of whatever judgment may
be obtained by the attaching creditor in a court action, which continues
until the judgment debt is fully satisfied.
COMPARISON of the abovementioned three cases:
Among the three cases mentioned, settled is the rule that the
attaching creditor enjoys priority to the shares of stock as against a
subsequent lawful buyer.
XII. CORPORATE POWERS
Republic of the Philippines vs. Acoje Mining Co.
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G.R. No. L-18062; February 28, 1963
FACTS:
Acoje Mining requested to the Director of Posts for opening of a
post, telegraph and money order offices at its mining camp. The latter
signify its willingness but requested that a board resolution be passed
upon regarding assumption of direct responsibility in case of pecuniary
loss. The board resolution was approved and thereafter a post office
branch was opened.
A postmaster was hired to conduct the operations of post office.
The postmaster that was hired went on a leave but never returned. The
company immediately informed the officials of the Manila Post Office
and the provincial auditor of Zambales of postmasters disappearance
with the result that the accounts of the postmaster were checked and a
shortage was found. Several demands were made upon the company for
the payment of the shortage, having failed; the petitioner commenced
the present action. The company in its answer denied liability
contending that the resolution of the board of directors wherein it
assumed responsibility for the act of the postmaster is ultra vires, and
in any event its liability under said resolution is only that of a guarantor
who answers only after the exhaustion of the properties of the
principal, aside from the fact that the loss claimed by the plaintiff is not
supported by the office record.
ISSUE:
Is the board resolution for the approval of post office branch
ultra vires?
HELD:
Resolution adopted by the company to open a post office
branch at the mining camp and to assume sole and direct responsibility
for any dishonest, careless or negligent act of its appointed postmaster
is NOT ULTRA VIRES because the act covers a subject which concerns
the benefit, convenience, and welfare of the companys employees and
their families.
While as a rule an ultra vires act is one committed outside the
object for which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it by law,
there are however certain corporate acts that may be performed
outside of the scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the corporation.
National Power Corp. vs. Vera
G.R. No. 83558; February 27, 1989
FACTS:
Sea Lion International Port Services, private respondent, filed a
complaint for prohibition and mandamus against petitioner NPC
alleging that it had acted in bad faith in not renewing its contract for
stevedoring services for its plant and in taking over its stevedoring
services. Respondent judge issued a restraining order against NPC
enjoining the latter from undertaking stevedoring services at its pier.
Consequently, NPC filed an "Urgent Motion" to dissolve the restraining
order, asserting that respondent judge had no jurisdiction to issue the
order and private respondent, whose contract with NPC had expired
prior to the commencement of the suit, failed to establish a cause of
action for a writ of preliminary injunction. The respondent judge
denied the NPCs motion and issued a TRO after finding that NPC was
not empowered by its Charter to engage in stevedoring and arrastre
services.
ISSUE:
WON the undertaking of stevedoring services is empowered by
the NPCs charter powers.
HELD:
YES. To carry out the national policy of total electrification of
the country, the NPC was created and empowered not only to construct,
operate and maintain power plants, reservoirs, transmission lines, and
other works, but also to exercise such powers and do such things as
may be reasonably necessary to carry out the business and purposes
for which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or auxiliary to
accomplish said purpose.
In determining whether or not an NPC act falls within the
purview of the above provision, the Court must decide whether or not a
logical and necessary relation exists between the act questioned and
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the corporate purpose expressed in the NPC charter. For if that act is
one which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably contributes
to the promotion of those ends in a substantial and not in a remote and
fanciful sense, it may be fairly considered within the corporation's
charter powers.
Government of Phil. Islands vs. El Hogar Filipino (supra)
G.R. No. L-26649; July 13, 1927
NOTE: This case is an example of how the implied powers concept may
be used to justify certain acts of a corporation.
A quo warranto proceeding instituted by the Government
against El Hogar, a building and loan association, to deprive it of its
corporate franchise.
1. El Hogar held title to real property for a period in excess of 5
years in good faith; hence this cause will not prosper.
2. El Hogar owned a lot and bldg. at a business district in Manila
allegedly in excess of its reasonable requirements, held valid
because, it was found to be necessary and legally acquired and
developed.
3. El Hogar leased some office space in its bldg.; it administered
and managed properties belonging to delinquent stockholders;
and managed properties of its stockholders even if such were
not mortgaged to them.
Held: first two valid, but the third is ultra vires because
the administration of property in that manner is more befitting
of the business of a real estate agent or trust company and not
of a building and loan association.
4. Compensation to the promoter and organizer allegedly
excessive and unconscionable.
Held: Court cannot dwell on the issue since the
promoter is not a party in the proceeding and it is the corp. or
its stockholders who may bring a complaint on such.
5. Issuance of special shares did not affect El Hogar's character as
a building and loan association nor make its loans usurious.
6. Corporate policy of using a depreciation rate of 10 % per
annum is not excessive, because according to the SC, the by-
laws expressly authorizes the BOD to determine each year the
amount to be written down upon the expenses of installation
and the property of the corp.
7. The Corp. Law does not expressly grant the power of
maintaining reserve funds but such power is implied. All
business enterprises encounter periods of gains and losses, and
its officers would usually provide for the creation of a reserve
to act as a buffer for such circumstances.
8. That loans issued to member borrowers are being used for
purposes other than the bldg. of homes not invalid because
there is no statute which expressly declares that loans may be
made by these associations solely for the purpose of bldg.
homes.
9. Sec. 173 of the Corp. Law provides that "any person" may
become a stockholder on a bldg. and loan association. The
word "person" is used on a broad sense including not only
natural persons but also artificial persons.
Pirovano, et. al. vs. De la Rama
G.R. No. L-5377; December 29, 1954
FACTS:
Enrico Pirovano, president of the defendant company, managed
the company until it became a multi-million corporation by the time
Pirovano was executed by the Japanese during the occupation.
BOD Resolution: Out of the proceeds, the sum of P400,000 be
set aside for equal division among the 4 minor children, convertible
into shares of stock of the De la Rama Steamship Company, at par and,
for that purpose, that the present registered stockholders of the
corporation be requested to waive their pre-emptive right to 4,000
shares of the unissued stock of the company in order to enable each of
the 4 minor heirs to obtain 1,000 shares at par.
Plaintiffs herein are the minor children of the late Enrico
Pirovano represented by their mother and judicial guardian Estefania
Pirovano. They seek to enforce certain resolutions adopted by the
Board of Directors and stockholders of the defendant company giving to
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said minor children of the proceeds of the insurance policies taken on
the life of their deceased father Enrico Pirovano with the company as
beneficiary. Defendant's main defense is: that said resolutions and the
contract executed pursuant thereto are ultra vires, and, if valid, the
obligation to pay the amount given is not yet due and demandable.
RTC ruled that contract or donation is not ultra vires.
ISSUE:
WON corporation donation of the proceeds of the insurance
policies is an ultra vires act.
HELD:
NO. The AOI of the corporation provided two relevant items:
(1) to invest and deal with moneys of the company not immediately
required, in such manner as from time to time may be determined; and
(2) to aid in any other manner any person, association or corporation of
which any obligation or in which any interest is held by this corporation
or in the affairs of prosperity of which this corporation has a lawful
interest.
From this, it is obvious that the corporation properly exercised
within its chartered powers the act of availing of insurance proceeds to
the heirs of the insured and deceased officer.
NOTE: Ultra vires act vs. Illegal Acts
A distinction should be made between corporate acts or
contracts which are illegal and those which are merely ultra vires. The
former contemplates the doing of an act which is contrary to law,
morals, or public policy or public duty, and are, like similar transactions
between the individuals void. They cannot serve as basis of a court
action, nor require validity ultra vires acts on the other hand, or those
which are not illegal and void ab initio, but are merely within are not
illegal and void ab initio, but are not merely within the scope of the
articles of incorporation, are merely voidable and may become binding
and enforceable when ratified by the stockholders.
Harden, et. al. vs. Benguet
G.R. No. L-37331; March 18, 1933
FACTS:
A contract between Benguet Consolidated Mining and Balatoc
Mining Co. provided that Benguet will bring in capital, equipment. and
technical expertise in exchange for capital shares in Balatoc. Harden
was a stockholder of Balatoc and he contends that this contract violated
the Corporation Law which restricts the acquisition of interest by a
mining corporation in another mining corporation.
ISSUE:
WON the plaintiff can maintain an action based upon the
violation of the law supposedly committed by respondent company.
HELD:
NO. The provision was adopted by the lawmakers with a sole
view to the public policy that should control in the granting of mining
rights. Furthermore, the penalties imposed in what is now section 190
(A) of the Corporation Law for the violation of the prohibition in
question are of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. but these proceedings can
be maintained only by the Attorney-General in representation of the
Government.
Bissell vs. Michigan Southern
22 NY 258; 1860
FACTS:
Two railroad corporations contend that they transcended their
own powers and violated their own organic laws. Hence, they should
not be held liable for the injury of the plaintiff who was a passenger in
one of their trains.
ISSUE:
WON the contract made between the two railroad corporations
is valid and as such can be use a defense to evade the liability against
the passenger.
HELD:
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 NO. The contract between the two corporations was an ultra
vires act. However, it is not one tainted with illegality, therefore, the
accompanying rights and obligations based on the contract of carriage
between them and the plaintiff cannot be avoided by raising such a
defense.
XIII. CONTROL AND MANAGEMENT
1.) BOARD OF DIRECTORS/TRUSTEES
Ramirez vs. Orientalist Co.
G.R. No. 11897; September 24, 1918
FACTS:
Orientalist Co. engaged in the theatre business, desired to be
the exclusive agent of Ramirez, who is based in Paris, for two film
outfitsE clair Films and Milano films. Through the active involvement
and negotiations of Ramon El Presidente Fernandez, a director
of Orientalist and also its treasurer, Orientalist was able to secure an
offer, the terms of which were acceptable to the Board as well as to the
stockholders. It appears that this acceptance of the terms of the offer
was decided during an informal meeting of the board, and conveyed to
Ramirez in two letters signed only by Fernandez, both in his individual
and his capacity as treasurer of Orientalist. It turns out that the
company was not financially capable to comply with the obligations set
forth in the agency contract, and about this time films had already been
delivered to the company. Two stockholders meetings were organized,
the first adopted a resolution approving the action of the board on the
offer, the second raising the contingency of the lack of funds and the
proviso that the four officers involved, including Fernandez would
continue importing the films using their own funds. Ramirez sues
Orientalist and Fernandez for what is due on the contract. RTC ruled
Oriental as the principal debtor while Fernandez is subsidiarily liable.
ISSUE:
(1) WON the treasurer has an independent authority to bind
the respondent company by signing its name to the letters in
questioned.
(2) Can stockholders ratify the abovementioned contract?
HELD:
(1) NO. It is declared in section 28 of the Corporation Law that
corporate power shall be exercised, and all corporate business
conducted by the board of directors; and this principle is recognized in
the by-laws of the corporation in question which contain a provision
declaring that the power to make contracts shall be vested in the board
of directors. It is true that it is also declared in the same by-laws that
the president shall have the power, and it shall be his duty, to sign
contract; but this has reference rather to the formality of reducing to
proper form the contract which are authorized by the board and is not
intended to confer an independent power to make contract binding on
the corporation.
(2) NO. The subsequent action by the stockholders in not
ratifying the contract must be ignored. The functions of the
stockholders are limited of nature. The theory of a corporation is that
the stockholders may have all the profits but shall return over the
complete management of the enterprise to their representatives and
agents, called directors. Accordingly, there is little for the stockholders
to do beyond electing directors, making by-laws, and exercising certain
other special powers defined by law. In conformity with this idea, it is
settled that contracts between a corporation and a third person must
be made by directors and not stockholders. It results that where a
meeting of the stockholders is called for the purpose of passing on the
propriety of making a corporate contract, its resolutions are at most
advisory and not in any wise binding on the board.
Expert Travel & Tours vs. CA
G.R. No. 152392; May 26, 2005
FACTS:
Korean Airlines (KAL) is a corporation established and
registered in the Republic of South Korea and licensed to do business in
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the Philippines. Its general manager in the Philippines is Suk Kyoo Kim,
while its appointed counsel was Atty. Mario Aguinaldo and his law firm.
KAL, through appointed counsel, filed a complaint against
Expert Travel with the RTC for the collection of sum of money. The
verification and certification against forum shopping was signed by the
same appointed counsel, who indicated therein that he was the resident
agent and legal counsel of KAL and had caused the preparation of the
complaint. Expert Travel filed a motion to dismiss the complaint on the
ground that the appointed counsel was not authorized to execute the
verification and certificate of non-forum shopping as required by the
Rules of Court. KAL opposed the motion, contending that he is a
resident agent and was registered as such with the SEC as required by
the Corporation Code. He also claimed that he had been authorized to
file the complaint through a resolution of the KAL Board of Directors
approved during a special meeting, wherein the board of directors
conducted a special teleconference which he attended. It was also
averred that in the same teleconference, the board of directors
approved a resolution authorizing him to execute the certificate of non-
forum shopping and to file the complaint. Suk Kyoo Kim alleged,
however, that the corporation had no written copy of the aforesaid
resolution. TC denied motion to dismiss. CA affirms.
ISSUE:
Can a special teleconference be recognized as legitimate means
to approved a board resolution and authorize an agent to execute an act
in favor of the corporation?
HELD:
YES. In this age of modern technology, the courts may take
judicial notice that business transactions may be made by individuals
through teleconferencing. teleconferencing and videoconferencing of
members of board of directors of private corporations is a reality, in
light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November
30, 2001, providing the guidelines to be complied with related to such
conferences.
HOWEVER, in the case at bar, even given the possibility that
Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference
along with the respondents Board of Directors, the Court is not
convinced that one was conducted; even if there had been one, the
Court is not inclined to believe that a board resolution was duly passed
specifically authorizing Atty. Aguinaldo to file the complaint and
execute the required certification against forum shopping. Facts and
circumstances show that there was gross failure on the part of company
to prove that there was indeed a special teleconference such as failure
to produce a written copy of the board resolution via teleconference.
NOTE: Read SEC Memo Circular No. 15-2001, the guidelines for the
conduct of teleconferencing and videoconferencing.
Citibank, N.A. vs. Chua
G.R. No. 102300; March 17, 1993
FACTS:
Petitioner is a foreign commercial banking corporation duly
licensed to do business in the Philippines. Private respondents, spouses
Cresencio and Zenaida Velez, were good clients of petitioner bank's
branch in Cebu until when they filed a complaint for specific
performance and damages against the former for violation of BP 22 and
several count of estafa cases in RTC of Cebu.
On the date of pre-trial conference, counsel for petitioner bank
appeared, presenting a special power of attorney executed by Citibank
officer in favor of petitioner bank's counsel, the J.P. Garcia & Associates,
to represent and bind petitioner bank at the pre-trial conference of the
case at bar. Inspite of this special power of attorney, counsel for private
respondents orally moved to declare petitioner bank as in default on
the ground that the special power of attorney was not executed by the
Board of Directors of Citibank. Respondent judge denied private
respondents' oral motion to declare petitioner bank as in default and
set the continuation of the pre-trial conference. The private
respondents filed for reconsideration, and this time the respondent
holds the petitioner bank in default for failure to have a proper
representation. CA affirms.
ISSUE:
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 WON a resolution of the board of directors of a corporation is
always necessary for granting authority to an agent to represent the
corporation in court cases.
HELD:
In the corporate hierarchy, there are three levels of control:
(1) the board of directors, which is responsible for corporate policies
and the general management of the business affairs of the corporation;
(2) the officers, who in theory execute the policies laid down by the
board, but in practice often have wide latitude in determining the
course of business operations; and (3) the stockholders who have the
residual power over fundamental corporate changes, like amendments
of the articles of incorporation. However, just as a natural person may
authorize another to do certain acts in his behalf, so may the board
of directors of a corporation validly delegate some of its functions to
individual officers or agents appointed by it.
Although as a general rule, all corporate powers are to be
exercised by the board of directors, exceptions are made where the
Code provides otherwise under Sec. 25 and 47. It is clear that corporate
powers may be directly conferred upon corporate officers or agents by
statute, the articles of incorporation, by-laws or by resolution or other
act of the board of directors. In addition, an officer who is not a director
may also appoint other agents when so authorized by the by-laws or by
the board of directors. Such are referred to as express powers. There
are also powers incidental to express powers conferred. It is a
fundamental principle in the law of agency that every delegation of
authority, whether general or special, carries with it, unless the
contrary be expressed, implied authority to do all of those acts,
naturally and ordinarily done in such cases, which are reasonably
necessary and proper to be done in order to carry into effect the main
authority conferred.
Since the by-laws are a source of authority for corporate
officers and agents of the corporation, a resolution of the Board of
Directors of Citibank appointing an attorney in fact to represent and
bind it during the pre-trial conference of the case at bar is not
necessary because its by-laws allow its officers, the Executing Officer
and the Secretary Pro-Tem, to execute a power of attorney to a
designated bank officer, clothing him with authority to direct and
manage corporate affairs.
Boyer-Roxas vs. CA
G.R. No. 100866; July 14, 1992
FACTS:
The corporation, Heirs of Eugenia Roxas Inc, was established to
engage in agriculture to develop the properties inherited from Eugenia
Roxas and Eufroncio Roxas, which includes the land upon which the
Hidden Valley Springs Resort was put up, including various
improvements thereon, using corporate funds. The AOI of Heirs Inc.
was amended for this purpose. Heirs Inc. claims that Boyer-Roxas and
Guillermo Roxas had been in possession of the various properties and
improvements in the resort and only upon the tolerance of the
corporation. It was alleged that they committed acts that impeded the
corporations expansion and normal operation of the resort. They also
did not comply with court and regulatory orders, and thus the
corporation adopted a resolution authorizing the ejectment of the
defendants. TC grants. CA affirms. Boyer and Roxas contend that, being
stockholders, their possession of the properties of the corporation must
be respected in view of their ownership of an aliquot portion of all
properties of the corporation.
ISSUE:
WON the possession of the properties in question must be
respected in view of being a stockholder.
HELD:
NO. Regarding properties owned by the corporation, under the
doctrine of corporate entity properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its
members. While shares of stock constitute personal property, they do
not represent property of the corporation. A share of stock only typifies
an aliquot part of the corporations property, or the right to share in its
proceeds to that extent when distributed according to law and equity,
but its holder is not the owner of any part of the capital of the
corporation, nor is he entitled to the possession of any definite portion
of its property or assets. The stockholder is not a co-owner or tenant in
common of the corporate property.
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 The corporation has a personality distinct and separate from its
members and transacts business only through its officers or agents.
Whatever authority these officers or agents may have is derived from
the board or other governing body, unless conferred by the charter of
the corporation itself. An officer's power as an agent of the corporation
must be sought from the statute, charter, the by-laws or in a delegation
of authority to such officer, from the acts of the board of directors,
formally expressed or implied from a habit or custom of doing business.
In this case the elder Roxas who then controlled the
management of the corporation, being the majority stockholder,
consented to the petitioners use and stay within the properties. The
Board did not object and were allowed to stay until it adopted a
resolution to the effect of authorizing to eject them. Since their stay was
merely by tolerance, in deference to the wishes of the majority
stockholder who controlled the corporation, when Roxas died his
actions cannot bind the company forever. There is no provision in the
by-laws or any other resolution authorizing their continued stay.
Valle Verde Country Club vs. Africa
G.R. No. 151969; September 4, 2009
FACTS:
Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo
Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M.
Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa were
elected as BOD during the Annual Stockholders Meeting of petitioner
Valle Verde Country Club, Inc. (VVCC). Requisite quorum could not be
obtained so they continued in a hold-over capacity.
First resignation: Dinglasan, BOD still constituting a
quorum elected Eric Roxas (Roxas). Second resignation: Makalintal,
Jose Ramirez (Ramirez) was elected by the remaining BOD.
Respondent Africa (Africa), a member of VVCC, questioned the
election of Roxas and Ramirez as members of the petitioners Board
with the SEC and the RTC as contrary to Sec. 23 and 29 of the
Corporation Code. He claimed that a year after Makalintals election as
member of the petitioners Board in 1996, his term as well as those of
the other members should be considered to have already expired.
Thus, according to him, the resulting vacancy should have been filled by
the stockholders in a regular or special meeting called for that purpose,
and not by the remaining members of the petitioners Board. RTC
favored respondent. SEC ruled on the same ground as RTC. Petitioner
appealed in SC for certiorari being partially contrary to law and
jurisprudence.
ISSUE:
Can the members of a corporations board of directors elect
another director to fill in a vacancy caused by the resignation of a hold-
over director?
HELD:
NO. The holdover period is not part of the term of office of a
member of the board of directors. When Section 23 of the Corporation
Code declares that the board of directorsshall hold office for one (1)
year until their successors are elected and qualified, we construe the
provision to mean that the term of the members of the board of
directors shall be only for one year; their term expires one year after
election to the office. The holdover period that time from the lapse of
one year from a members election to the Board and until his
successors election and qualification is not part of the directors
original term of office, nor is it a new term; the holdover period,
however, constitutes part of his tenure. Corollary, when an incumbent
member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired,
and the incumbent is holding the succeeding term.
The powers of the corporations board of directors emanate
from its stockholders. This theory of delegated power of the board of
directors similarly explains why, under Section 29 of the Corporation
Code, in cases where the vacancy in the corporations board of directors
is caused not by the expiration of a members term, the successor so
elected to fill in a vacancy shall be elected only for the unexpired term
of the his predecessor in office. The law has authorized the remaining
members of the board to fill in a vacancy only in specified instances, so
as not to retard or impair the corporations operations; yet, in
recognition of the stockholders right to elect the members of the board,
it limited the period during which the successor shall serve only to the
unexpired term of his predecessor in office.
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 It also bears noting that the vacancy referred to in Section 29
contemplates a vacancy occurring within the directors term of
office. When a vacancy is created by the expiration of a term, logically,
there is no more unexpired term to speak of. Hence, Section 29
declares that it shall be the corporations stockholders who shall
possess the authority to fill in a vacancy caused by the expiration of a
members term.
NOTE: The court distinguished term and tenure.
Term is the time during which the officer may claim to hold the
office as of right, and fixes the interval after which the several
incumbents shall succeed one another. The term of office is not affected
by the holdover. The term is fixed by statute and it does not change
simply because the office may have become vacant, nor because the
incumbent holds over in office beyond the end of the term due to the
fact that a successor has not been elected and has failed to qualify.
Tenure represents the term during which the incumbent
actually holds office. The tenure may be shorter (or, in case of holdover,
longer) than the term for reasons within or beyond the power of the
incumbent.
2.) OFFICERS
Yu Chuck vs. Kong Li Po
G.R. No. L-22450; December 3, 1924
FACTS:
Kong Li Po is a corporation engaged in the publication of a
Chinese newspaper. Its AOI provide for a president who shall sign all
contracts and other instruments of writing, but does not provide for a
business or general manager. CC Chen or TC Chen was appointed
general business manager of the paper. He then entered into an
agreement with Yu Chuck for the printing of the newspaper for P580
per month. Yu Chuck worked for a year until they were discharged by
the new manager Tan Tian Hong because CC Chen had left for China. Yu
Chuck sues the paper, claiming the contract was for a period of 3 years,
and that discharge without just cause before the expiration of this term
entitles them to receive full pay for the remainder of the term. Kong Li
Po counters that CC Chen was not authorized to enter into the contract
with Yu Chuck. TC ruled in favor of Yu Chuck, concluding that the
contract had been impliedly ratified by Kong Li Po and that although he
had no express authority to enter into the contract; since he was
general business manager in charge of the printing of the paper he had
implied authority to employ the petitioners.
ISSUE:
WON CC Chen had the power to bind the corporation through
the contract mentioned.
HELD:
The general rule is that the power to bind a corporation by
contract lies with its board of directors or trustees, but this power may
either expressly or impliedly be delegated to other officers or agents of
the corporation, and it is well settled that except where the authority of
employing servants and agent is expressly vested in the board of
directors or trustees, an officer or agent who has general control and
management of the corporation's business, or a specific part thereof,
may bind the corporation by the employment of such agent and
employees as are usual and necessary in the conduct of such business.
But the contracts of employment must be reasonable.
In the case at bar, although the court affirmed the power to
bind the corporation may be made by an officer or agent, the contract
of employment in the printing business is not reasonable for it was too
long and onerous to the business.
Woodchild Holdings vs. Roxas Electric
G.R. No. 140667; August 12, 2004
FACTS:
The respondent was the owner of two parcels of land located
along the Sumulong Highway. Petitioner wanted to buy the one parcel
on which it planned to construct its warehouse building. Roxas, as the
president of respondent company, accepted the offer through the BOD
resolution issued by the latter. However, the respondent posits that
Roxas was not so authorized under the May 17, 1991 Resolution of its
Board of Directors to impose a burden or to grant a right of way in favor
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of the petitioner on Lot No.491-A-3-B-1, much less convey a portion
thereof to the petitioner. Hence, the respondent was not bound by such
provisions contained in the deed of absolute sale.
ISSUE:
WON whether the respondent is bound by the provisions in the
deed of absolute sale granting to the petitioner beneficial use and a
right of way over a portion of Lot No. 491-A-3-B-1 accessing to the
Sumulong Highway.
HELD:
NO. Generally, the acts of the corporate officers within the
scope of their authority are binding on the corporation. However, under
Article 1910 of the New Civil Code, acts done by such officers beyond
the scope of their authority cannot bind the corporation unless it has
ratified such acts expressly or tacitly, or is estopped from denying them.
Thus, contracts entered into by corporate officers beyond the scope of
authority are unenforceable against the corporation unless ratified by
the corporation.
Evidently, Roxas was not specifically authorized under the said
resolution to grant a right of way in favor of the petitioner on a portion
of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion
thereof. The authority of Roxas, under the resolution, to sell Lot No.
491-A-3-B-2 covered by TCT No. 78086 did not include the authority to
sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or
convey real rights thereon. Neither may such authority be implied from
the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the
petitioner on such terms and conditions which he deems most
reasonable and advantageous. The general rule is that the power of
attorney must be pursued within legal strictures, and the agent can
neither go beyond it; nor beside it. The act done must be legally
identical with that authorized to be done. In sum, then, the consent of
the respondent to the assailed provisions in the deed of absolute sale
was not obtained; hence, the assailed provisions are not binding on it.
The doctrine of apparent authority was not applicable in this
case because the president of the company was given a specific
authority by virtue of a board resolution to sell a particular land. Any
actions of the president outside such vested authority shall not bind the
corporation with third party. The apparent power of an agent is to be
determined by the acts of the principal and not by the acts of the agent.
Board of Liquidators vs. Heirs of Kalaw
G.R. No. L-18805; August 14, 1967
FACTS:
Maximo Kalaw is chairman of the board and general manager
of the National Coconut Corporation (NACOCO), a non-profit GOCC
empowered by its charter to buy sell barter export and deal in coconut,
copra, and desiccated coconut. Bocar, Garcia and Moll were directors. It
entered into contracts for the trading and delivery of copra. Nature
intervened4 typhoons devastated agriculture and copra production.
NACOCO was on the verge of sustaining losses and could not be able to
make good on the contracts. Sensing this, Kalaw submitted the
contracts to the board for approval and made a full disclosure of the
situation. No action was taken, and no vote was taken on the matter. On
20 Jan 1947 the board met again with Kalaw, Bocar, Garcia, and Moll in
attendance, and approved the contracts. NACOCO however only
partially performed the contracts. One of the contracts concerns the
Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-court
and paid Drayfus P567,024.52 representing 70% of total claims. The
total settlements sum up to P1.3M. NACOCO sues Kalaw, and his
directors Bocar, Moll and Garcia to recover this sum, alleging
negligence, bad faith and breach of trust in approving the contracts, by
not having them approved by the board. TC dismisses complaint.
NACOCO claims that the by-laws provide that prior board approval is
required before the GM can perform or execute in behalf of NACOCO all
contracts necessary to accomplish its purpose.
ISSUE:
WON the Kalaw contracts are valid despite its lack of prior
board approval as required by the NACOCO by-laws.
HELD:
The contracts in question are forward sales contractsa
sales agreement entered into, even though the goods are not yet in the
hands of the seller. Given the peculiar nature of copra trading, i.e. copra
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must be disposed of as soon as possible else it would lose weight and
would decrease its value, it necessitates a quick turnover and execution
of the contract on short notice (w/in 24 hours). It would be difficult if
not impractical to call a formal meeting of the board each time a
contract is to be executed.
Kalaw was a corporate officer entrusted with general
management and control of NACOCO. He had implied authority to
make any contract or do any act which is necessary for the conduct of
the business. He may, without authority from the board, perform acts
of ordinary nature for as long as these redound to the interest of the
corporation. Particularly, he contracted forward sales with business
entities. Long before some of these contracts were disputed, he
contracted by himself alone, without board approval. All of the
members of the board knew about this practice and have entrusted
fully such decisions with Kalaw. He was never questioned nor
reprimanded nor prevented from this practice. In fact, the board itself,
through its acts and by acquiescence, have laid aside the by-law
requirement of prior board approval. Thus, it cannot now declare that
these contracts (failures) are not binding on NACOCO.
Ratification by a corporation of an unauthorized act or contract
by its officers relates back to the time of the act or contract ratified and
is equivalent to original authority. The theory of corporate ratification
is predicated upon the right of a corporation to contract, and any
ratification or adoption is equivalent to a grant of prior authority.
Ratification cleanses the contract from all its defects from the moment
it was constituted. Thus, even in the face of an express by-law
requirement of prior approval, the law on corporations is not to be held
too rigid and inflexible as to fail to recognize equitable considerations.
Matling Industrial vs. Coros
G.R. No. 157802; October 13, 2010
FACTS:
This case involves the dismissal of Coros who held the position
of vice president for finance and administration of the company. He was
at the same time a member of its board of directors.
Coros filed a complaint for illegal dismissal with the Labor
Arbiter. The company sought the dismissal of the case on the ground
that, since he is a corporate officer and director, his complaint is an
intra-corporate dispute which, at that time, was under the jurisdiction
of the Securities and Exchange Commission (now RTC) . The Labor
Arbiter, NLRC and CA denied the companys plea and ruled that Coros is
not a corporate officer and therefore his complaint falls within the
Labor Arbiters jurisdiction. The company elevated the matter to the
tribunal for final resolution.
The company argued that Coros was appointed to his position
by its president pursuant to the authority given to him by the board of
directors in its by-laws. On the basis of that grant of power, it was as if
Coros was directly appointed by the board, thus making him a
corporate officer. Coros countered that inasmuch as his position does
not appear in the companys by-laws and he was not directly appointed
by the board, he should be classified as an ordinary or non-corporate
officer.
ISSUES:
WON respondent is a corporate officer?
Who is a corporate officer?
HELD:
NO. Central to the issue is Section 25 of the Corporation Code,
which states that immediately after their election, the directors of a
corporation must formally organize by the election of a president, a
treasurer, a secretary, and such other officers as may be provided for in
the by-laws.
The tribunal stated that for a position to be considered a
corporate office, it is essential that it is one of those expressly
mentioned in the Corporation Code or in the companys by-laws. Thus,
the creation of an office pursuant to or under a by-law enabling
provision is NOT enough to make a position a corporate office.
The companys argument that its by-laws made a valid
delegation of the boards appointing power to the president was
rejected by the tribunal. It pointed out that the delegation is invalid
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because the law requires the board itself to elect the corporate officers.
That power is exclusively vested in the board of directors and could
not be delegated to subordinate officers or agents. Moreover, the
tribunal explained, the appointment authority granted to the president
was limited to the creation of non-corporate offices to be occupied by
ordinary employees. Their appointment is incidental to the presidents
duty as executive to assist him in running the company.
3.) BOARD COMMITTEES
Hayes vs. Canada Atlantic & Plant Steamship Co.
181 F. 289; 1910
FACTS:
Petitioner is one of the executive committee of respondent
company. In this case, the Executive Committee: (a) removed the
Treasurer and appointed a new one; (b) fixed the annual salary of the
members of the Executive Committee; (c) amended the by-laws by
giving the President the sole authority to call a stockholder's meeting
and a board of directors meeting; and (d) amended the composition of
the Executive Committee by limiting it to just 2 persons.
ISSUE:
Were these actions valid?
HELD:
No, because the Executive Committee usurped the powers
vested in the board and the stockholders. If their actions were valid, it
would put the corporation in a situation wherein only two men, acting
in their own pecuniary interests, would have absorbed the powers of
the entire corporation.
"Full powers" should be interpreted only in the ordinary
conduct of business and not total abdication of board and stockholders'
powers to the Executive Committee. "FULL POWERS" does not mean
unlimited or absolute power.
XIV. DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS
Benguet Electric Cooperative vs. NLRC
G.R. No. 89070; May 18, 1992
FACTS:
Cosalan, GM of the Benguet Electric Cooperative, was informed
by COA that cash advances received by officers and employees of
Benguet Electric had been virtually written off the books, that per
diems and allowances showed substantial inconsistencies with the
directives of the National Electrification Administration, and that
several irregularities in the utilization of funds released by NEA to
Benguet. Cosalan then implemented the remedial measures
recommended by COA. Board members of Benguet responded by
abolishing the housing allowance of Cosalan, reduced his salary,
representation and other allowances, and directed him to hold in
abeyance all disciplinary actions, and struck his name out as principal
signatory of Benguet Electric. The Board adopted another series of
resolutions which resulted in the ouster of Cosalan as GM. Cosalan
nonetheless continued to work as GM, contending that only the NEA
can suspend and remove him. The Board then refused to act on Cosalan
request to release compensation due him. Cosalan files a complaint
with the NLRC against the Board of Benguet Electric, and impleaded
Benguet Electric itself as well as the individual members of the board in
their official and private capacities. Labor Arbiter rules in favor of
Cosalan, holding both the company and the board solidarily liable to
Cosalan. NLRC modifies award to Cosalan by declaring Benguet alone,
and not the Board members, was liable to Cosalan. Benguet appeals.
ISSUE:
WON both the corporation and board members are liable to
Cosalan.
HELD:
YES. 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, civilly or otherwise, for the consequences of their acts.
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Those acts are properly attributed to the corporation alone and no
personal liability is incurred. In this case, the board members obviously
wanted to get rid of Cosalan and acted with indecent haste in removing
him from his GM position. This shows strong indications that the
members of the board had illegally suspended and dismissed him
precisely because he was trying to rectify the financial irregularities.
The Board members are also liable for damages under Sec. 31
of the Corporation Code, which by virtue of Sec. 4 thereof, makes it
applicable in a supplementary manner to all corporations, including
those with special or individual charters so long as these are not
inconsistent therewith.
The Board members are also guilty of gross negligence and bad
faith in directing the affairs of the corporation in enacting the said
resolutions, and in doing so, acted beyond the scope of their authority.
Prime White Cement vs. IAC
G.R. No. L-68555; March 19, 1993
FACTS:
Prime White Cement entered into a dealership agreement with
one of its directors, Alejandro Te, for the latter to be the exclusive
distributor of 20,000 bags of Prime White cement per month @ P9.70
per bag for the entire Mindanao area for 5 years, and that a letter of
credit be opened to secure payment. Te advertised his dealership and
was able to obtain possible clients, and entered into agreements with
several hardware stores for the purchase of the cement. Te then
informed Prime White of the orders, but the latter imposed additional
conditions, which effectively delayed the delivery of the cement,
lowered the number of bags to be delivered, and increased the price per
bag. It also made the prices subject to change unilaterally and
additional conditions on the manner of payment. Te refused to comply
and Prime White cancelled the dealership agreement. Te sued for
specific performance and damages. TC ruled in favor of Te.
ISSUE:
WON the dealership agreement is a valid and enforceable
contract binding on the corporation.
HELD:
NO. It is not valid and enforceable. All corporate powers are
exercised by the Board. It may also delegate specific powers to its
President or other officers. In the absence of express delegation, a
contract entered into by the President in behalf of the corporation, may
still bind the latter if the board should ratify expressly or impliedly. In
the absence of express or implied ratification, the President may as a
general rule bind the corporation through a contract in the ordinary
course of business, provided the same is reasonable under the
circumstances. These rules are applicable where the President or other
officer acting for the corporation is dealing with a third person.
The situation is different where a director or officer is dealing
with his own corporation. Te was not an ordinary stockholder; he was a
member of the Board and Auditor of the corporation. He is what is often
called a self-dealing director. As a director, he holds a position of
trust and 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. The trust relationship springs from the
control and guidance of the corporate affairs and property interests of
the stockholders. A directors 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.
Gokongwei Jr. vs. SEC et. al. (supra)
G.R. No. L-45911; April 11, 1979
ISSUE:
WON the amended by-laws of SMC of disqualifying a
competitor (Interlocking director) from nomination or election to the
Board of Directors of SMC are valid and reasonable.
HELD:
Under US corporate law, corporations have the power to make
by-laws declaring a person employed in the service of a rival company
to be ineligible for the corporation's Board of Directors. ... An
amendment which renders ineligible, or if elected, subjects to removal,
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a director if he be also a director in a corporation whose business is in
competition with or is antagonistic to the other corporation is valid."
This is based upon the principle that where the director is so employed
in the service of a rival company, he cannot serve both, but must betray
one or the other. Such an amendment "advances the benefit of the
corporation and is good." In the Philippines, section 21 of the
Corporation Law expressly provides that a corporation may make by-
laws for the qualifications of directors. Thus, it has been held that an
officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by
utilizing information he has received as such officer, under "the
established law that a director or officer of a corporation may not enter
into a competing enterprise which cripples or injures the business of
the corporation of which he is an officer or director.
It is also well established that corporate officers "are not
permitted to use their position of trust and confidence to further their
private interests." In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered
into a new contract themselves with the foreign firm for exclusive sale
of its products, the court held that equity would regard the new
contract as an offshoot of the old contract and, therefore, for the benefit
of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal.
Strong vs. Repide
G.R. No. L-2101; November 15, 1906
FACTS:
This action was brought to recover 800 shares of the capital
stock of the Philippine Sugar Estates Development Company, Limited,
an anonymous society formed to hold the Dominican friar lands.
The shares were the property of one of the plaintiffs, Mrs.
Strong, as part of the estate of her first husband. They were purchased
by the defendant through a broker who dealt with her agent, one Jones,
who had the script in her possession and who had made the sale
without the knowledge of the plaintiff. The defendant was a director,
was the managing agent, and was in his own right the majority
stockholder of the society.
ISSUE:
WON a director and majority stockholder must disclose his
information to another stockholder before buying stock from him.
HELD:
YES. The director and controlling stockholder who purchased
the shares of another stockholder through an agent was held to be
guilty of concealing the impending purchase of the friar lands they own
by the government, a significant fact which would affect the price of the
shares.
Although ordinarily, the relationship between directors and
stockholders of a corporation is not of a fiduciary character as to oblige
the director to disclose to a stockholder the general knowledge which
he may possess regarding the value of the shares of the company before
he purchases any form a shareholder, there are cases when such duty
and obligation upon the director is present. Being the chief negotiator
for the sale of the lands, the director was the only person who knew of
the advantages and the impending increase in the value of the shares
such that he is precluded from acquiring stocks from other
shareholders without first informing them of the pertinent facts
affecting the value of the shares being bought. It is fraudulent for a
stockholder to buy from a shareholder without disclosing his identity.
NOTE: Special Facts Doctrine: a doctrine holding that a corporate
officer with superior knowledge gained by virtue of being an insider
owes a limited fiduciary duty to a shareholder in transactions involving
transfer of stock.
Steinberg vs. Velasco
G.R. No. L-30460; March 12, 1929
FACTS:
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 The board of the corporation authorized the purchase of
330shares of capital stock of the corporation and the declaration of
dividends at a time when the corporation was indebted and in such a
bad financial condition. The directors relied on the face value on the
books of its A/R, which had little or no value. Furthermore it appears
that two of the directors were permitted to resign so that they could
sell their stock to the corporation. The corporation became insolvent,
and the receiver Steinberg sues the directors.
ISSUE:
Duty to creditors.
HELD:
Creditors of a corporation have the right to assume that so long
as there are outstanding debts and liabilities, the BOD will not use the
assets of the corporation to buy its own stock, and will not declare
dividends to stockholders when the corporation is insolvent.
In this case, it was found that the corporation did not have an
actual bona fide surplus from which dividends could be paid. Moreover,
the Court noted that the Board of Directors purchased the stock from
the corporation and declared the dividends on the stock at the same
Board meeting, and that the directors were permitted to resign so that
they could sell their stock to the corporation. Given all of this, it was
apparent that the directors did not act in good faith or were grossly
ignorant of their duties. Either way, they are liable for their actions
which affected the financial condition of the corporation and prejudiced
creditors.
XV. DEVICES AFFECTING CONTROL
Everett vs. Asia Banking
G.R. No. L-25241; November 3, 1926
FACTS:
Teal & Company is indebted to HW Peabody & Co. for P300K for
tractors, plows, and parts delivered, of which it has paid P150K. Asia
Banking Corp held drafts accepted by Teal under the HW Peabodys
guarantee. Tractors were returned to HW Peabody due to its being
unsellable due to financial and agricultural depression in the RP. Teal
ordered another lot of tractors from Smith Kirkpatrick, but shipment
was delayed until the rescission of the credit of Teal with Asia Bank. Yet
Smith still delivered the order, and Teal at the request and advice of the
Bank accepted the drafts and stored the same. Asia Banking persuaded
Teal, Peabody, and Smith Kirkpatrick to enter into a creditors
agreement wherein it was mutually agreed that neither of the parties
should take action to collect its debts from Teal for 2 years. Teal soon
became indebted to Asia Bank for P750,000, secured by mortgage. The
Bank then suggested that, for the mutual protection of Teal and itself, it
was advisable that the Bank should temporarily obtain control of the
management and affairs of the company.
To this end, it was necessary for the stockholders to place their
shares in a voting trust to be held by the Bank, and then the Bank would
finance Teal under its own supervision. The Teal stockholders were
thus induced to enter into the Voting Trust Agreement, with the
purpose that the agreement will be intended for the protection of all
parties from outside creditors. Shortly after the execution and delivery
of the voting trust and the MOA, Mullen as GM of the Bank, caused the
displacement and removal stockholder representatives in the Board
and the substitution in their place of the Banks employees or
representatives. The new Board, who have not purchased any share of
stock of Teal, proceeded to remove the Corporate Secretary, discharge
all the old managers and displace them with creatures of their own
choosing whose interest consisted wholly in pleasing themselves and
the Bank, and who were wholly foreign to the stockholders.
ISSUE:
WON the action should have been brought by Teal and Co., and
not the majority stockholders thereof.
HELD:
NO. Teal and Co., including its Board, was already under the
control of Asia Banking. Thus, it would have been useless to ask the
Board to institute the present suit, and the law does not require
litigants to perform useless acts. The court held that the stockholders
could bring the said action (in the nature of a derivative suit) on behalf
of Teal and Co.
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 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. The Court however, did not rule on the propriety or
impropriety of the Voting Trust Agreement between the Bank and the
Company.
NOTE: However, it may be inferred that the stockholders may bring suit
against the trustees if the voting trust agreement is being used by the
said Trustees to perpetuate fraud against the corporation, as is present
in this case. The stockholders would still have legal standing to institute
the suit in behalf of the corporation for acts done by the trustees to
defraud the corporation, when the said trustees already have control of
the Board of the said corporation. A derivative suit is still proper.
NIDC vs. Aquino
G.R. No. L-34192; June 30, 1988
FACTS:
Batjak, a manufacturer of coco oil and copra cake for export, is
on the brink of bankruptcy. It entered in to a Financial Agreement with
PNB for additional operating capital for its 3 processing mills and to
pay its other debts to other banks. Under the agreement with PNB,
NIDC, a wholly-owned subsidiary of PNB, would invest P6.7M worth of
preferred shares convertible within 5 years into common stock to pay
off the other debts and the balance to pay off its own due with PNB.
PNB also granted various credit accommodations. Batjak as part of the
deal mortgaged all its properties in the province. A 5-year voting trust
agreement was executed in favor of NIDC by the stockholders
representing 60% outstanding stock of Batjak. Years later, PNB
instituted foreclosure proceedings against the mortgaged properties
due to Batjaks insolvency, and soon became owner of the properties.
Batjak failed to exercise its right to redeem within the period allowed
and PNB transferred ownership of the 2 oil mills to NIDC. Three years
later, Batjak represented by majority stockholders, inquired with NIDC
if it was still interested in negotiating the renewal of the voting trust
agreement. NIDC replied that it was no longer interested and requested
turn-over of all Batjak assets and properties. Batjak demanded an
accounting of all assets and properties and operations but NIDC refused
to comply. Batjak then filed an action for mandamus. CFI Judge Aquino
issued a TRO prohibiting NIDC from removing any record, report, or
document or disposing all of the properties of Batjak, and allowed
Batjak to inspect the same. Batjak then moved for the appointment of a
receiver. NIDC and PNB opposes, but overruled by CFI. MRs denied.
ISSUE:
WON NIDC was constituted as trustee of the assets,
management and operations of Batjak due to the expiration of the
Voting Trust Agreement.
HELD:
NO. A Voting Trust Agreement only transfers voting or other
rights pertaining to the shares subject of the agreement, or control over
the stock. Stockholders of a corporation that lost all its assets through
foreclosures cannot go after those properties.
However, 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.
XVI. RIGHT OF INSPECTION
Pardo vs. Hercules Lumber
G.R. No. L-22442; August 1, 1924
FACTS:
Corporate secretary of Hercules Lumber refused to permit
Pardo, a stockholder, or his agent to inspect the records and business
transactions of the company at the times desired by Pardo. Basis of the
refusal was the provision in the companys by-laws which stipulated
that every stockholder may examine the books of the company and
other documents upon the days which the board annually fixes.
ISSUE:
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 When is the time or times within which the right of inspection
may be exercised?
HELD:
The resolution of the board limiting the rights of stockholders
to inspect its records to a period of 10 days prior to the annual SH
meeting is an unreasonable restriction in accordance with the
Corporation Code which provides that the right to inspect can be
exercised at reasonable hours. The right of inspection was interpreted
to mean that the right 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.
Gonzales vs. PNB
G.R. No. L-24850; March 1, 1926
FACTS:
Gonzales instituted a suit, as a taxpayer, against Sec. of Public
Works and Communications, the Commissioner of Public Highways, and
PNB for alleged anomalies committed regarding the banks extension of
credit to import public works equipment intended for the massive
development program. The petitioners standing was questioned
because he did not own any share in PNB. Consequently,
Petitioner bought 1 share of PNB stocks in order to gain standing as a
stockholder.
Petitioner thereafter sought to inquire and ordered PNB to
produce its books and records which the Bank refused, invoking the
provisions from its charter created by Congress. The petitioner filed
petition for mandamus to compel PNB to produce its books and
records. The RTC dismissed the petition and it ruled that the right to
examine and inspect corporate books 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.
ISSUE:
WON the right of inspection may be compelled by Gonzales.
HELD:
NO. The Code has prescribed limitations to the right of
inspection, requiring as a condition for examination that the person
requesting must not have been guilty of using improperly any
information secured through a prior examination, and that the person
asking for such must be acting in good faith and for a legitimate
purpose. It is the stockholder seeking to exercise the right of inspection
to set forth the reasons and purposes for which he desires such
inspection. SC held that the purpose of Gonzales, which was to arm
himself with evidence which he can use against the bank for acts done
by the latter when he was still a total stranger (i.e. not a SH), were not
deemed proper motives and his request was denied.
Veraguth vs. Isabela Sugar Co.
G.R. No. L-37064; October 4, 1932
FACTS:
Veraguth, a director and stockholder of the Isabela Sugar
Company, Inc., filed a petition with the lower court praying that: a final
and absolute writ of mandamus be issued to each and all of the
respondent directors to notify him within the reglementary period, of
all regular and special meetings of the board of directors of the
Company, and to place at his disposal at reasonable hours the minutes,
documents, and books of said corporation for his inspection as director
and stockholder. He likewise contends that when asked that he be
permitted to inspect the books of the corporation, he was denied access
on the ground that the board of directors adopted a resolution
providing for inspection of the books and the taking of copies only by
authority of the President of the corporation previously obtained in
each case.
ISSUE:
WON Veraguth can exercise the right of inspection of the books
prior to the approval of the Board.
HELD:
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 NO. Directors have the unqualified right to inspect the books
and records of a corporation at all reasonable times. Pretexts may not
be put forward by the officers to keep a director or stockholder from
inspecting the books and minutes of the corporation, and the right to
inspect cannot be denied on the grounds that the director or
stockholders are on unfriendly terms with the officers. A director or
stockholder has no absolute right to secure certified copies of the
minutes until these minutes have been written up and approved by the
directors.
Gokongwei Jr. vs. SEC et. al. (supra)
G.R. No. L-45911; April 11, 1979
ISSUE:
WON Gokongwei may be allowed to inspect the books of the
corporation.
HELD:
YES. Where the right to inspect is granted by statute to the
stockholder, it is given to him as such and must be exercised by him
with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. The inspection
has to be germane to the petitioners interest as a stockholder and has
to be proper and lawful in character and not inimical to the interest of
the corporation.
The stockholders right to inspect is based on his ownership of
the assets and property of the corporation. It is therefore an incident of
ownership of the corporate property, whether this ownership or
interest be termed an equitable ownership, beneficial ownership, or
quasi-ownership, and is predicated upon the necessity of self-
protection. On application for mandamus to enforce the right, it is
proper for the court to inquire into and consider the stockholders good
faith and his purpose and motives in seeking inspection. But the
impropriety of purpose such as will defeat enforcement must be set up
by the corporation defensively if the Court is to take cognizance of it as
a qualification. In other words, the law take from the stockholder the
burden of showing the propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive.
The foreign subsidiary is wholly-owned by SMC and therefore
under its control, and would be more in accord with equity, good faith,
and fair dealing to construe the statutory right of Gokongwei as
stockholder to inspect the books of the parent as extending to the
books of the subsidiary in its control.
XVII. DERIVATIVE SUIT
Evangelista vs. Santos
G.R. No. L-1721; May 19, 1950
FACTS:
Plaintiffs, minority stockholders of Vitali Lumber Company,
alleges in their complaint that defendant as president, manager and
treasurer of their company, through fault, neglect and abandonment
allowed it lumber concession to lapse and its properties and assets to
disappear causing the complete ruin of the corporations operation and
total depreciation of its stocks.
They pray for an accounting from the defendant of the
corporate affairs and assets, payment to them of the value of their
respective participation in said assets on the basis of the value of the
stocks held by each of them and to pay the cost of the suit.
ISSUE:
WON the plaintiff-stockholders has the right to bring suit in
their benefit.
HELD:
NO. 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.
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
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corporation and the liquidation of its debts and liabilities something
which cannot be legally done.
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
interest in the corporation, then in that case any of the stockholders is
allowed to bring suit. But in that case, the corporation is the real party
in interest.
Republic Bank vs. Cuaderno
G.R. No. L-22399; March 30, 1967
FACTS:
A derivative suit was brought against the officers and the board.
Complaint alleged that the directors approved a resolution granting
excessive compensation to the corporate officers. Suit was filed in order
to prevent dissipation of the corporate funds for the payment of
salaries of the said officers. Board claims the action cannot prosper for
failure to compel the board to file the suit for and in behalf of the
corporation.
ISSUE:
WON the action cannot prosper for failure to compel the board
to file suit in behalf of the corporation.
HELD:
NO. It 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. Normally, it is the corporation through the
board of directors which should bring the suit. But as in this case, the
members of the board of directors of the bank were the nominees and
creatures of respondent Roman and thus, any demand for an intra-
corporate remedy would be futile, the stockholder is permitted to bring
a derivative suit.
Should the corporation be made a party? The English
practice is to make the corporation a party plaintiff while the US
practice is to make it a party defendant. What is important though is
that the corporation should be made a party in order to make the
court's ruling binding upon it and thus bar any future re-litigation of
the issues.
San Miguel Corporation vs. Khan
G.R. No. 85339; August 11, 1989
FACTS:
Fourteen corporations initially acquired shares of outstanding
capital stock of SMC and constituted a Voting Trust thereon in favor of
Andres Soriano, Jr. When the latter died Eduardo Cojuanco was elected
as the substitute trustee. However, after the EDSA revolution, Cojuanco
fled out of the country, and subsequently an agreement was entered
into between the 14 corporations and Andres Soriano III (as an agent of
several persons) for the purchase of the shares held by the former.
Actually the buyer of the shares was Neptunia Corporation, a
foreign corporation and wholly-owned subsidiary of another subsidiary
wholly owned by SMC. Neptunia paid the downpayment from the
proceeds of certain loans. PCGG then sequestered the shares subject of
the sale so SMC suspended all the other installments of the price to the
sellers. The 14 corporations then sued for rescission and damages.
Meanwhile, PCGG directed SMC to issue qualifying shares to
seven (7) individuals including Eduardo de los Angeles from the
sequestered shares for them to hold in trust. Then, the SMCs board of
directors passed a resolution assuming the loans incurred by Neptunia
for the downpayment. De los Angeles assailed the resolution alleging
that it was not passed by the board aside from its deleterious effects on
the corporations interest. When his efforts to obtain relief within the
corporation proved futile, he filed this action with the SEC. Respondent
directors alleged that de los Angeles has no legal standing having been
merely imposed by the PCGG and that the twenty (20) shares owned
by him personally cannot fairly and adequately represent the interest of
the minority.
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ISSUE:
WON de los Angeles have the legal standing to sue. (Derivative
suit)
HELD:
YES. The bona fide ownership by a stockholder in his own right
suffices to invest him with the standing to bring a derivative suit for the
benefit of the corporation. The number of his shares is immaterial since
he is not suing in his own behalf, or for the protection or vindication of
his own particular right, or the redress of a wrong committed against
him individually but in behalf and for the benefit of the corporation.
The requisites of a derivative suit are: (1) the party bringing
the suit should be a stockholder as of the time of the act or transactions
complained of, the number of shares not being material; (2) exhaustion
of intra-corporate remedies (has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to
heed his plea); and (3) the cause of action actually devolves on the
corporation and not to the particular stockholder bringing the suit.
Yu vs. Yukayguan
G.R. No. 177549; June 18, 2009
FACTS:
The case stemmed from the petition of Anthony Yu et. al.
against his younger half-brother Joseph Yukayguan et. al., who were all
shareholders of Winchester Industrial Supply Inc., a company engaged
in hardware and industrial equipment business.
Accusing his older brothers family of misappropriating funds
and assets of the company, Yukayguan filed a derivative suit. After trial,
the Cebu Regional Trial Court dismissed the case, saying Yukayguan
failed to follow and observe the essentials for filing of a derivative suit
or action. The ruling was upheld but later reversed by the Court of
Appeals, prompting Yu to elevate the matter to the SC.
ISSUE:
Mandatory requirements before courts can give due course to
derivative suits or legal actions that may be taken by a stockholders
on behalf of a corporation or association.
HELD:
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.
A stockholders right to institute a derivative suit is not based
on any express provision of the Corporation Code, or even the
Securities Regulation Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for damages suffered by
the corporation and its stockholders for violation of their fiduciary
duties.
However, there are mandatory requirements before a derivative
suit can be given due course by the Court. Citing Section 1, Rule 8 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies,
the SC said derivative actions may be filed provided that the suing party
was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed; and
he exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under
the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires. As
additional requirements, the SC said there must be no appraisal
rights which would allow a stockholder to sell his holdings back to
the company available and the suit is not a nuisance or harassment
suit.
XVIII. MERGERS AND CONSOLIDATION
Global Business Holdings vs. Surecomp Software
G.R. No. 173463; October 13, 2010
FACTS:
Respondent Surecomp Software, a foreign corporation duly organized
and existing under the laws of the Netherlands, entered into a software
license agreement with Asian Bank Corporation (ABC), a domestic
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corporation, for the use of its IMEX Software System (System) in the
banks computer system.
ABC merged with petitioner Global Business Holdings with
Global as the surviving corporation. When Global took over the
operations of ABC, it found the System unworkable for its operations,
and informed Surecomp of its decision to discontinue with the
agreement and to stop further payments thereon. Consequently, for
failure of Global to pay its obligations under the agreement despite
demands, Surecomp filed a complaint for breach of contract.
ISSUE:
WON Global shall be responsible for all the liabilities and
obligations of ABC after having merged with the latter.
HELD:
YES. It cannot be denied that there is indeed a contract entered
into between Surecomp and Global, the latter as a successor-in-interest
of the merging, Global is estopped from denying Surecomps capacity to
sue it for alleged breach of that contract with damages.
In the merger of two existing corporations, one of the
corporations survives and continues the business, while the other is
dissolved, and all its rights, properties, and liabilities are acquired by
the surviving corporation.
Edward Nell Company vs. Pacific Farms
G.R. No. L-20850; November 29, 1965
FACTS:
The Edward Nell Co. secured a judgment representing the
unpaid balance of the price of a pump sold to Insular Farms. Pacific
Farms then purchased all or substantially all of shares of stock as well
as real and personal property of Insular, selling the shares to certain
individuals who reorganized Insular. The board of the reorganized
Insular then sold its assets to be sold to Pacific for P10000. The writ of
execution was returned, stating that Insular had no leviable property.
Nell Co sued Pacific Farms, on the ground as a result of the purchase of
all or substantially all assets of Insular, Pacific became the alter ego of
Insular Farms.
ISSUE:
WON a corporation who sells or otherwise transfers all of its
assets to another corporation is liable for debts and liabilities of the
transferor.
HELD:
NO. Generally where one corporation sells or otherwise
transfers all of its assets to another corporation, the latter is not liable
for the debts and liabilities of the transferor, except: (1) where the
purchaser expressly or impliedly agrees to assume such debts; (2)
where the transaction amounts to a consolidation or merger of the
corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is
entered into fraudulently in order to escape liability for such debts.
In the case at bar, there is neither proof nor allegation that
appellee had made any of the above exceptions. Hence, Pacific Farms
cannot assume the debts and liabilities of Insular Farms.
Laguna Transportation vs. SSS
G.R. No. L-14606; April 28, 1960
FACTS:
Petitioner Laguna Transportation Co., Inc. filed with the Court
of First Instance of Laguna petition praying that an order be issued by
the court declaring that it is not bound to register as a member of
respondent Social Security System and, therefore, not obliged to pay to
the latter the contributions required under the Social Security Act. To
this petition, respondent filed its answer praying for its dismissal due to
petitioner's failure to exhaust administrative remedies, and for a
declaration that petitioner is covered by said Act, since the latter's
business has been in operation for at least 2 years prior to the
enactment of the Social Security Act.
ISSUE:
WON a partnership later converted to a corporation, which
continued the same line of business, is still liable to the debts and
liabilities of the partnership.
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HELD:
YES. Although, a corporation will be looked upon as a legal
entity as a general rule, and until sufficient reason to the contrary
appears; but, when the motion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons.
However, where a corporation was formed by, and consisted of
members of a partnership whose business and property was conveyed
and transferred to the corporation for the purpose of continuing its
business, in payment for which corporate capital stock was issued, such
corporation is presumed to have assumed partnership debts, and is
prima facie liable therefore.
Lozano vs. De los Santos
G.R. No. 125221; June 19, 1997
FACTS:
Petitioner was the president of the Kapatirang Mabalacat-
Angeles Jeepney Drivers' Association, Inc. (KAMAJDA) while private
respondent Anda was the president of the Samahang Angeles-
Mabalacat Jeepney Operators' and Drivers' Association, Inc.
(SAMAJODA).
Upon the request of the Sangguniang Bayan of Mabalacat,
Pampanga, petitioner and private respondent agreed to consolidate
their respective associations and form the Unified Mabalacat-Angeles
Jeepney Operators' and Drivers' Association, Inc. (UMAJODA).
Petitioner and private respondent also agreed to elect one set of
officers who shall be given the sole authority to collect the daily dues
from the members of the consolidated association; elections were held
and both petitioner and private respondent ran for president;
petitioner won; private respondent protested and, alleging fraud,
refused to recognize the results of the election. Petitioner filed a case
for damages against private respondent in MCTC. The latter moved to
dismiss the complaint for lack of jurisdiction, claiming that jurisdiction
was lodged with the SEC. MCTC denied. Appealed to the RTC, the latter
reversed MCTCs ruling.
ISSUE:
Is there consolidation between petitioner and private
respondent?
When do consolidation becomes effective?
HELD:
NO. There is no intracorporate nor partnership relation
between petitioner and private respondent. The controversy between
them arose out of their plan to consolidate their respective jeepney
drivers' and operators' associations into a single common association.
This unified association was, however, still a proposal. It had not been
approved by the SEC, neither had its officers and members submitted
their articles of consolidation in accordance with Sections 78 and 79 of
the Corporation Code.
Consolidation becomes effective not upon mere agreement of
the members but only upon issuance of the certificate of consolidation
by the SEC. When the SEC, upon processing and examining the articles
of consolidation, is satisfied that the consolidation of the corporations
is not inconsistent with the provisions of the Corporation Code and
existing laws, it issues a certificate of consolidation which makes the
reorganization official. The new consolidated corporation comes into
existence and the constituent corporations dissolve and cease to exist.
Reyes et. al. vs. Blouse et. al.
G.R. No. L-4420; May 19, 1952
FACTS:
Minority stockholders of the Laguna Tayabas Bus Co. file an
action to enjoin Blouse et. al. from executing its resolution approved by
99 % of stockholders to consolidate the properties and franchises of
Laguna Tayabas with Batangas Transport. Blouse believes it is merely
an exchange of properties and not a consolidation.
ISSUE:
WON the real purpose of the resolution is merger or
consolidation, and if so, whether it can be carried out under the old
Corporation Law.
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HELD:
The questioned resolution charges the board of Laguna to
consolidate properties and franchises thereof with that of Batangas
Transport. Both corporations have passed similar resolutions to take
steps to effect the consolidation. It is apparent that the purpose of the
resolution is not to dissolve but to merely transfer its assets to a new
corporation in exchange for its shares. This comes within the purview
of the old corporation law, which provides that a corporation may sell,
exchange, lease or otherwise dispose of all its property and assets when
authorized by affirmative vote of 2/3 of stockholders. The words "or
other wise disposed of" is very broad and in a sense covers a merger or
consolidation. However, the transaction in this case cannot be
considered as a merger or consolidation because a merger implies the
termination or cessation of the merged corporations and not merely a
merger of assets and properties. The two companies will not lose their
corporate existence but will continue to exist even after the
consolidation. What is intended by the resolution is merely a
consolidation of properties and assets, to be managed and operated by
a new corporation, and not a merger of the corporations themselves.
XIX. DISSOLUTION
National Abaca vs. Pore
G.R. No. L-16779; August 16, 1961
FACTS:
Plaintiff National Abaca Corporation filed a complaint against
Pore for the recovery of a sum of money advanced to her for the
purchase of hemp. She moved to dismiss the complaint by citing the
fact that National Abaca had been abolished by EO 372 dated Nov. 24,
1950. Plaintiff objected to such by saying that it shall nevertheless be
continued as a corporate body for a period of 3 years from the effective
date of said order for the purpose of prosecuting and defending suits by
or against it and to enable the Board of Liquidators to close its affairs.
ISSUE:
Can an action commenced within 3 years after the abolition of
plaintiff corporation be continued by the same after the expiration of
said period?
HELD:
The Corporation Law allows a corporation to continue as a
body for 3 years after the time when it would have been dissolved for
the purposes of prosecuting and defending suits by or against it. But at
any time during the 3 years, the corporation should convey all its
property to trustees so that the latter may be the ones to continue on
with such prosecution, with no time limit on its hands. Since the case
against Pore was strong, the corporations amended complaint was
admitted and the case was remanded to the lower court.
Clemente vs. CA
G.R. No. 82407; March 27, 1995
FACTS:
Plaintiffs sought to be declared owners of a parcel of land
owned by Sociedad Popular Calambena, a Sociedad Anonima. Plaintiffs
are stockholders of the latter corporation. However, there was no proof
that taxes were paid by the Sociedad and neither were there efforts
exerted by the latter to consolidate title over the property. No
explanation was offered as to how and when the property came into the
possession of the defendants. Plaintiffs were not able to come up with
any evidence to substantiate their claim of ownership of the assets.
The trial court dismissed the complaint not merely on what it
apparently perceived to be an insufficiency of the evidence that firmly
could establish plaintiffs' claim of ownership over the property in
dispute but also on its thesis that, absent a corporate liquidation, it is
the corporation, not the stockholders, which can assert, if at all, any
title to the corporate assets. The court, even then, expressed some
reservations on the corporation's being able to still validly pursue such
a claim.
ISSUE:
Effect of Dissolution.
HELD:
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 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 three-year 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 right
and liabilities of such entity nor those of its owners and creditors.
If the 3-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation itself
within that period, the board of directors or trustees itself may be
permitted to so continue as "trustees" by legal implication to complete
the corporate liquidation. 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 representations with the
SEC, which has primary and sufficiently broad jurisdiction in matters of
this nature, for working out a final settlement of the corporate
concerns.
XX. LIQUIDATION
China Banking vs. Michelin
58 Phil. 261
FACTS:
George OFarrel & Cie Inc. is a domestic corporation acting as
agent and representative of the Michelin & Cie, a foreign corporation
engaged in the sale and distribution of Michelin tires. Michelin decided
to discontinue their business relations, and it was discovered that
OFarrel failed to account for an amount representing the price of tires
sold by the latter. Michelin claims the money was disposed by OFarrel
for its own use and benefit and without the authority or consent of
Michelin. Gaston OFarrel (the person) and Sanchez executed a
mortgage on the house of OFarrel and shares owned by both to
guarantee payment of the amount to the Michelin, but left a balance
which the latter seeks to recover. The board of OFarrel filed a petition
for its dissolution and sought the appointment of Gaston as receiver
and liquidator, which was granted by TC. Michelin filed its claim against
OFarrel Corp with a prayer that its claim be allowed as a preferred one
against the latter. TC grants motion of Michelin. Nobody except Michelin
and Gaston was notified of the order. China Bank intervened and moved
that Michelins claim be allowed as an ordinary one under the
Insolvency Law and sought the nullification of the TC orders.
ISSUE:
Liquidation.
HELD:
The appointment of a receiver by the court to wind up the
affairs of the corporation upon petition of voluntary dissolution does
not empower the court to hear and pass on the claims of the creditors
of the corporation at first hand. In such cases, the receiver does not act
as a receiver of an insolvent corporation. Since "liquidation" as applied
to the settlement of the affairs of a corporation 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, all claims must be presented for allowance to the receiver or
trustees or other proper persons during the winding-up proceedings
within the 3 years provided by the Corporation Law as the term for the
corporate existence of the corporation, and if a claim is disputed so that
the receiver cannot safely allow the same, it should be transferred to
the proper court for trial and allowance, and the amount so allowed
then presented to the receiver or trustee for payment. The rulings of
the receiver on the validity of claims submitted are subject to review by
the court appointing such receiver though no appeal is taken to the
latter ruling, and during the winding-up proceedings after dissolution,
no creditor will be permitted by legal process or otherwise to acquire
priority, or to enforce his claim against the property held for
distribution as against the rights of other creditors.
NOTE: Under the Corporation Code, it is the SEC which may appoint
the receiver.
Republic of the Philippines vs. Marsman Development Corp.
G.R. No. L-18956; April 27, 1972
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FACTS:
Defendant corporation was a timber license holder with
concessions in Camarines Norte. Investigations led to the discovery
that certain taxes were due on it. BIR assessed Marsman 3 times for
unpaid taxes. Atty. Moya, in behalf of the corporation, received the first
2 assessments. He requested for reinvestigations. As a result,
corporation failed to pay within the prescribed period. Numerous BIR
warnings were given. After 3 years of futile notifications, BIR sued the
corporation.
ISSUE:
WON present action is barred by prescription, in light of the
fact that the corporation law allows corporations to continue only for 3
years after its dissolution, for the purpose of presenting or defending
suits by or against it, and to settle its affairs.
HELD:
NO. Although Marsman was extra-judicially dissolved, with the
3-year rule, nothing however bars an action for recovery of corporate
debts against the liquidators. In fact, the 1st assessment was given
before dissolution, while the 2nd and 3rd assessments were given just 6
months after dissolution (within the 3-year rule). Such facts definitely
established that the Government was a creditor of the corporation for
whom the liquidator was supposed to hold assets of the corporation.
NOTE: Code provides for a 3-year period for continuation of the
corporate existence for purposes of liquidation, BUT there is nothing in
the provision which bars an action for recovery of debts of the
corporation against the liquidator himself, after the lapse of the 3-year
period.
Tan Tiong Bio vs. CIR
G.R. No. L-15778; April 23, 1962
FACTS:
Tan Tiong Bio et. al. are incorporators and directors of the
Central Syndicate. The company realized a net profit of close to P300K,
and sale of goods was the only transaction undertaken by it. BIR sues
the Tan Tiong et. al. for deficiency sales taxes and surcharges on surplus
goods purchased by the corporation from the Foreign Liquidation
Commission. Corporation was dissolved, and Tan Tiong and company
substituted themselves as parties, thereby becoming successors-in-
interests in the corporate assets after liquidation. TC rules in favor of
BIR, and Tan Tiong et. al. appeals, claiming that they cannot be held
liable for tax liability there being no law authorizing the government to
proceed against stockholders of a defunct corporation as transferees of
the corporate assets upon liquidation. If they were liable, it is only to
the extent of the benefits derived by them, and that the action is barred
by prescription due to the 3-year limit in the corporation law.
ISSUE:
WON the sales tax can be enforced against the corporations
successors-in-interest, even if corporation has been dissolved by
expiration of corporate existence.
HELD:
The creditor of a dissolved corporation may follow its assets, as
in the nature of a trust fund, once they pass into the hands of the
stockholders. The dissolution of a corporation does not extinguish the
debts due or owing to it.
An indebtedness of a corporation to the government for income
and excess profit taxes is not extinguished by the dissolution of the
corporation. The hands of government cannot, of course, collect taxes
from a defunct corporation, it loses thereby none of its rights to assess
taxes which had been due from the corporation, and to collect them
from persons, who by reason of transactions with the corporation hold
property against which the tax can be enforced and that the legal death
of the corporation no more prevents such action than would the
physical death of an individual prevent the government from assessing
taxes against him and collecting them from his administrator, who
holds the property which the decedent had formerly possessed. Thus,
petitioners can be held personally liable for the corporation's taxes,
being successors-in-interest of the defunct corporation.
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XXII. SECURITIES REGULATION CODE
CEMCO vs. National Life Insurance Co.
G.R. No. 171815; August 7, 2007
FACTS:
Union Cement Corporation (UCC), a publicly listed company,
has two principal stockholders UCHC, a non listed company, and
petitioner CEMCO. A majority of UCHCs stocks were owned by
Bacnotan Consolidated Industries (BCI) and Atlas Cement Corporations
(ACC). CEMCO holds 9% of UCHCs stocks. BCI informed the Philippine
Stock Exchange that its subsidiary ACC had passed resolutions to sell to
CEMCO all their stocks in UCHC. PSE sent a letter to SEC to inquire as to
whether the Tender Offer Rule under the Securities Regulation Code
would apply. The SEC replied that the transaction is not covered by the
tender offer rule.
On August 12, 2004, the sale of the stocks was consummated
and closed. National Life Insurance Co. of the Philippines, a minority
stockholder in UCC filed a complaint with the SEC asking the latter to
declare the purchase agreement void for being violative of the tender
offer rule. CEMCO filed a comment to the complaint. The SEC ruled in
favor of National Life Insurance and declared the transaction to be void
for being in violation of the tender offer rule. CEMCO filed a petition
with the Court of Appeals challenging the SECs jurisdiction on the
ground that the SECs authority is purely administrative and does not
extend to adjudication. The CA upheld the SECs ruling. It ruled that
CEMCO is estopped in questioning the jurisdiction of the SEC. Hence,
this present petition.
ISSUE:
(1) WON SEC has jurisdiction.
(2) WON mandatory tender offer rule applies only to direct
acquisition of shares in the public company.
HELD:
(1) YES. SEC was acting pursuant to Rule 19(13) of the
Amended Implementing Rules and Regulations of the Securities
Regulation Code. The foregoing rule emanates from the SECs power
and authority to regulate, investigate or supervise the activities of
persons to ensure compliance with the Securities Regulation Code,
more specifically the provision on mandatory tender offer under
Section 19 thereof.
(2) NO. Tender offer is a publicly announced intention by a
person acting alone or in concert with other persons to acquire equity
securities of a public company. A public company is defined as a
corporation which is listed on an exchange, or a corporation with assets
exceeding P50,000,000.00 and with 200 or more stockholders, at least
200 of them holding not less than 100 shares of such company. Stated
differently, a tender offer is an offer by the acquiring person to
stockholders of a public company for them to tender their shares
therein on the terms specified in the offer.
Under existing SEC Rules, the 15% and 30% threshold
acquisition of shares under the foregoing provision was increased to
thirty-five percent (35%). It is further provided therein that mandatory
tender offer is still applicable even if the acquisition is less than 35%
when the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company.
The SEC and the Court of Appeals ruled that the indirect
acquisition by petitioner of 36% of UCC shares through the acquisition
of the non-listed UCHC shares is covered by the mandatory tender offer
rule. It accurately pointed out that the coverage of the mandatory
tender offer rule covers not only direct acquisition but also indirect
acquisition or any type of acquisition.
Philippine Veterans Bank vs. Callangan
G.R. No. 191995; August 3, 2011
FACTS:
Respondent Callangan, the Director of the Corporation Finance
Department of the SEC, sent the Bank a letter, informing it that it
qualifies as a "public company" under Section 17.2 of the Securities
Regulation Code (SRC) in relation with Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the SRC. The Bank is thus
required to comply with the reportorial requirements set forth in
Section 17.1 of the SRC. The Bank responded by explaining that it
should not be considered a "public company" because it is a private
company whose shares of stock are available only to a limited class or
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sector, i.e., to World War II veterans, and not to the general public.
Respondent rejected the Bank's explanation and assessed it a penalty
for failing to comply with the SRC reportorial requirements from 2001
to 2003. The Bank moved for the reconsideration of the assessment,
but respondent denied the motion. SEC en banc and CA affirmed the
SECs ruling. Hence, this petition for review on certiorari.

ISSUE:
WON petitioner-bank is a public company under the provisions
of SRC.

HELD:
YES. A public company is defined as a corporation which is
listed on an exchange, or a corporation with assets exceeding
P50,000,000.00 and with 200 or more stockholders, at least 200 of
them holding not less than 100 shares of such company.
From these provisions, it is clear that a "public company," as
contemplated by the SRC, is not limited to a company whose shares of
stock are publicly listed; even companies like the Bank, whose shares
are offered only to a specific group of people, are considered a public
company, provided they meet the requirements enumerated above.

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