DUTIES OF DIRECTORS & CONTROLLING STOCKHOLDERS

PNB VS. CA
Unused sugar export quota

HELD:
While petitioner had the ultimate authority of approving or disapproving the proposed lease since the quota was
mortgaged to the Bank, the latter certainly cannot escape its responsibility of observing, for the protection of the
interest of private respondents, that degree of care, precaution and vigilance which the circumstances justly demand
in approving or disapproving the lease of said sugar quota. The law makes it imperative that every person "must in
the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith, 4 This petitioner failed to do. Certainly, it knew that the agricultural year was about to expire,
that by its disapproval of the lease private respondents would be unable to utilize the sugar quota in question. In
failing to observe the reasonable degree of care and vigilance which the surrounding circumstances reasonably
impose, petitioner is consequently liable for the damages caused on private respondents. Under Article 21 of the
New Civil Code, "any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for the damage." The afore-cited provisions on human relations
were intended to expand the concept of torts in this jurisdiction by granting adequate legal remedy for the untold
number of moral wrongs which is impossible for human foresight to specifically provide in the statutes. A corporation
is civilly liable in the same manner as natural persons for torts, because "generally speaking, the rules governing the
liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or
master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. All of
the authorities agree that a principal or master is liable for every tort which he expressly directs or authorizes, and
this is just as true of a corporation as of a natural person, A corporation is liable, therefore, whenever a tortious act is
committed by an officer or agent under express direction or authority from the stockholders or members acting as a
body, or, generally, from the directors as the governing body."

MONTELIBANO VS. BACOLOD MURCIA

Milling contract and a resolution was passed in effect of amending the former.

HELD:
As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether
or not it will cause losses or decrease the profits of the central, the court has no authority to review them. They hold
such office charged with the duty to act for the corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and
economic problem to be determined by the directors of the corporation and not by the court. It is a well-known rule of
law that questions of policy or of management are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment of the board of directors; the board is the
business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts.

LITWIN VS. ALLEN

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

HELD:
It is against public policy for a bank purchase securities and give the seller the option to buy them back at the same
price thereby incurring the entire risk of loss with no possibility of gain other than the interest derived from the
securities in the interim. Any benefit of a rise in price is assured to the seller and any risk of heavy loss s inevitably
assumed by the bank. A director is not liable for loss or damage other than what was proximately caused by his own
acts or omissions in breach of his duty. Once the option had expired, there was nothing to prevent the directors of the
Company that had taken over the bonds in accordance with its agreement from selling them. Any loss that incurred
after the option had expired was a result of the directors‘ independent business judgment in holding them. The further
loss should not be laid at the door of the improper but expired repurchase option. The ratification by the directors is
equivalent to prior acquiescence and should result in liability. The ratification prevented a possible later rescission on
the ground that the directors did not authorize it.

WALKER VS. MAN

Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a promissory note executed by Avram and
endorsed by Lacey. The loan was not authorized by any meeting of the board of directors and was not for the benefit
of the corporation. The note was dishonored but defendant-directors did not protest the note for non-payment; thus,
Lacey, the indorser who was financially capable of meeting the obligation, was subsequently discharged.

HELD:
Directors are charged not with misfeasance, but with non-feasance, not only with doing wrongful acts and committing
waste, but with acquiescing and confirming the wrongdoing of others, and with doing nothing to retrieve the waste.
Directors have the duty to attempt to prevent wrongdoing by their co-directors, and if wrong is committed, to rectify it.
If the defendant knew that an unauthorized loan was made and did not take steps to salvage the loan, he is
chargeable with negligence and is accountable for his conduct

BATES VS. DRESSER

Did the failure to take affirmative action to discover the thief amount to a breach of duty to the corporation?

HELD:
Yes, as far as the president is concerned, but not regarding the directors. The directors acted reasonably by relying
on the information given to them. They had no reason to believe that there were any irregularities in the bank
records. Dresser‘s position was different. He was in the bank daily. He had access to the books at all times. He
knew of shortages and apparent unexplained declines in deposits, yet he failed to make any attempt to discover the
reasons behind these peculiar events. The continued losses were his fault b/c the warnings that he had should have
led him to investigate. Had he investigated, the losses may have been eliminated b/c he may have discovered the
reason behind them. Dresser, as president, was much closer to the operation of the bank than the directors. He was
there every day, and he supervised the actual operation of the bank. This the directors didn‘t do; therefore, Dresser‘s
position exposed him to the warning signs, while the directors were not exposed and, therefore, he was personally
liable while the directors were not.

WESTERN INSTITUTE OF TECHNOLOGY VS. SALAS

Salas et al are the majority and controlling members of the Board of Trustee of Petitioner stock corporation engaged
in educational institution. They amended their By Laws by giving members of board of directors compensation

HELD:
There is no argument that directors or trustees, as the case may be, are not entitled to salary or other compensation
when they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a
presumption that directors/trustees render service gratuitously, and that the return upon their shares adequately
furnishes the motives for service, without compensation. Under the foregoing section, there are only two (2) ways by
which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a
provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the
outstanding capital stock at a regular or special stockholders‘ meeting agree to give it to them. In the case at bench,
Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity as members of
the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and
Secretary of Western Institute of Technology. Clearly, therefore, the prohibition with respect to granting
compensation to corporate directors/trustees as such under Section 30 is not violated in this particular case.

BOARD OF LIQUIDATORS VS. KALAW

National Coconut Corporation (NACOCO) is with Maximo Kalaw as its General Manager and Chairman of the BOD.
Under his tenure NACOCO entered into different contracts involving the trade of coconuts. It failed, however, due to
natural calamities that greatly affected the production of coconuts. This led to some customers of NACOCO suing the
corporation for undelivered coconuts due to them under the contracts that they signed. This was settled by NACOCO
by paying the customers. Thereafter, NACOCO seeks to recover the above sum of P1,343,274.52 from general
manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll.

HELD:
Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or
interest or ill will; it partakes of the nature of fraud.34 Applying this precept to the given facts herein, we find that there
was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or
"Some motive or interest or ill will" that "partakes of the nature of fraud."

BENGUET ELECTRIC COOP VS. NLRC

HELD:
The applicable general rule is clear enough. The Board members and officers of a corporation who purport to act for
and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in good faith,
do not become liable, whether civilly or otherwise, for the consequences of their acts, those acts, when they are such
a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal
liability is incurred by such officers and Board members. 9

PRIME WHITE CEMENT VS. IAC

Self-dealing directors

HELD:
The requisites for the approval of a contract with a ‗self dealing director‘ was not satisfied. A director of a corporation
holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with
those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers,
directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a
matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate
affairs and property and hence of the property interests of the stockholders." A director's contract with his corporation
is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be
ratified by the stockholders provided a full disclosure of his adverse interest is made. Granting arguendo that the
"dealership agreement" involved here would be valid and enforceable if entered into with a person other than a
director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the
petitioner corporation changes the whole situation. First of all, the contract was neither fair nor reasonable. The
"dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white
cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a
businessman himself and must have known, or at least must be presumed to know, that at that time, prices of
commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the
contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery
was not to begin until 14 months later. He must have known that within that period of six years, there would be a
considerable rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in September,
1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no
provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties.
Instead, the price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a
director of the corporation from whom he was to buy the cement, would require such a provision.

Sec. 32. Dealings of directors, trustees or officers with the corporation. — A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following
conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of
Directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided,
That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the circumstances.

GOKONGWEI VS. SEC

Interlocking directors

HELD:
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of
petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the
Corporation Law. Said section provides in part that "any stockholder of more than one corporation organized for the
purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the
purpose of bringing about or attempting to bring about a combination to exercise control of incorporations ... ."

STRONG VS. REPIDE

The question in this case, therefore, is whether, under the circumstances above set forth, it was the duty of the
defendant, acting in good faith, to disclose to the agent of the plaintiff [213 U.S. 419, 431] the facts bearing upon or
which might affect the value of the stock.

HELD:
If it were conceded, for the purpose of the argument, that the ordinary relations between directors and shareholders
in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a
shareholder the general knowledge which he may possess regarding the value of the shares of the company before
he purchases any from a shareholder, yet there are cases where, by reason of the special facts, such duty exists.
The supreme courts of Kansas and of Georgia have held the relationship existed in the cases before those courts
because of the special facts which took them out of the general rule, and that, under those facts, the director could
not purchase from the shareholder his shares without informing him of the facts which affected their value. Stewart v.
Harris, 69 Kan. 498, 66 L.R.A. 261, 105 Am. St. Rep. 178, 77 Pac. 277, 2 A. & E. Ann. Cas. 873; Oliver v. Oliver, 118
Ga. 362, 45 S. E. 232. The case before us is of the same general character. On the other hand, there is the case of
Tippecanoe County v. Reynolds, 44 Ind. 509-515, 15 Am. Rep. 245, where it was held (after referring to cases) that
no relationship of a fiduciary nature exists between a director and a shareholder in a business corporation. Other
cases are cited to that effect by counsel for defendant in error. These cases involved only the bare relationship
between director and shareholder. It is here sought to make defendant responsible for his actions, not alone and
simply in his character as a director, but because, in consideration of all the existing circumstances above detailed, it
became the duty of the defendant, acting in good faith, to state the facts before making the purchase. That the
defendant was a director of the corporation is but one of the facts upon which the liability is asserted, the existence of
all the others in addition making such a combination as rendered it the plain duty of the defendant to speak. He was
not only a director, but he owned three fourths of the shares of its stock, and was, at the time of the purchase of the
stock, administrator general of the company, with large [213 U.S. 419, 432] powers, and engaged in the
negotiations which finally led to the sale of the company's lands (together with all the other friar lands) to the
government at a price which very greatly enhanced the value of the stock. He was the chief negotiator for the sale of
all the lands, and was acting substantially as the agent of the shareholders of his company by reason of his
ownership of the shares of stock in the corporation and by the acquiescence of all the other shareholders, and the
negotiations were for the sale of the whole of the property of the company. By reason of such ownership and agency,
and his participation as such owner and agent in the negotiations then going on, no one knew as well as he the exact
condition of such negotiations. No one knew as well as he the probability of the sale of the lands to the government.
No one knew as well as he the probable price that might be obtained on such sale. The lands were the only valuable
asset owned by the company. Under these circumstances, and before the negotiations for the sale were completed,
the defendant employs an agent to purchase the stock, and conceals from the plaintiff's agent his own identity and
his knowledge of the state of the negotiations and their probable result, with which he was familiar as the agent of the
shareholders, and much of which knowledge he obtained while acting as such agent, and by reason thereof. The
inference is inevitable that, at this time, he had concluded to press the negotiations for a sale of the lands to a
successful conclusion; else, why would he desire to purchase more shares which, if no sale went through, were, in
his opinion, worthless because of the failure of the government to properly protect the lands in the hands of their then
owners? The agent of the plaintiff was ignorant in regard to the state of the negotiations for the sale of the land,
which negotiations and their probable result were a most material fact affecting the value of the shares of stock of the
company, and he would not have sold them at the price he did had he known the actual state of the negotiations as
to the lands, and that it was the defendant who was seeking to purchase the stock. Concealing his identity when [213
U.S. 419, 433] procuring the purchase of the stock, by his agent, was in itself strong evidence of fraud on the part of
the defendant. Why did he not ask Jones, who occupied an adjoining office, if he would sell? But, by concealing his
identity, he could, by such means, the more easily avoid any questions relative to the negotiations for the sale of the
lands and their probable result, and could also avoid any actual misrepresentations on that subject, which he
evidently thought were necessary in his case to constitute a fraud. He kept up the concealment as long as he could,
by giving the check of a third person for the purchase money. Evidence that he did so was objected to on the ground
that it could not possibly even tend to prove that the prior consent to sell had been procured by the subsequent check
given in payment. That was not its purpose. Of course, the giving of the check could not have induced the prior
consent, but it was proper evidence as tending to show that the concealment of identity was not a mere inadvertent
omission, an omission without any fraudulent or deceitful intent, but was a studied and intentional omission, to be
characterized as part of the deceitful machinations to obtain the purchase without giving any information whatever as
to the state and probable result of the negotiations, to the vendor of the stock, and to, in that way, obtain the same at
a lower price. After the purchase of the stock he continued his negotiations for the sale of the lands, and finally, he
says, as administrator general of the company, under the special authority of the shareholders, and as attorney in
fact, he entered into the contract of sale December 21, 1903. The whole transaction gives conclusive evidence of the
overwhelming influence defendant had in the course of the negotiations as owner of a majority of the stock and as
agent for the other owners, and it is clear that the final consummation was in his hands at all times. If, under all these
facts, he purchased the stock from the plaintiff, the law would indeed be impotent if the sale could not be set aside or
the defendant cast in damages for his fraud.

STEINBERG VS. VELASCO

Duty to the Creditors
HELD:
In other words, the directors were permitted to resign so that they could sell their stock to the corporation. As stated,
the authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030
was subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid
up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation and upon this
state of facts, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their
duties. Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities,
the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
SEC VS. CA
Proxies
HELD:
All matters affecting the manner and conduct of the election of directors are properly cognizable by the regular
courts. Otherwise, these matters may be brought before the SEC for resolution based on the regulatory powers it
exercises over corporations, partnerships and associations. Astra endeavors to remove the instant case from the
ambit of GSIS v. CAby arguing that 1) the validation of proxies in this case relates to the determination of the
existence of a quorum; and 2) no actual voting for the members of the board of directors was conducted, as the
directors were merely elected by motion. Indeed, the validation of proxies in this case relates to the determination of
the existence of a quorum. Nonetheless, it is a quorum for the election of the directors, and, assuch, which requires
the presence – in person or by proxy – of the owners of the majority of the outstanding capital stock of Omico.36 Also,
the fact that there was no actual voting did not make the election any less so, especially since Astra had never
denied that an election of directors took place.

EVERETT VS. ASIA BANKING

Teal and Company is indebted to Asia banking due to several transaction made by Teal. For their mutual protection,
it was suggested by Asia Banking for it to obtain control of the management and affairs of Teal. Upon assumption by
virtue of voting trust agreement, Asia Banking removed all stockholder representation in the Board of Directors of the
Teal.

HELD:
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 graud 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

HELD:
Batjak premises its right to the possession of the three (3) off mills on the Voting Trust Agreement, claiming that
under saidagreement, NIDC was constituted as trustee of the assets, management and operations of Batjak, that due
to the expiration of the VotingTrust Agreement, on 26 October 1970, NIDC should turn over the assets of the three
(3) oil mills to Batjak. As borne out by the records ofthe case, PNB acquired ownership of two (2) of the three (3) oil
mills by virtue of mortgage foreclosure sales. NIDC acquired ownership ofthe third oil mill also under a mortgage
foreclosure sale. Certificates of title were issued to PNB and NIDC after the lapse of the one (1)year redemption
period. Subsequently, PNB transferred the ownership of the two (2) oil mills to NIDC. There can be no doubt,
therefore,that NIDC not only has possession of, but also title to the three (3) oil mills formerly owned by Batjak. The
interest of Batjak over the three(3) oil mills ceased upon the issuance of the certificates of title to PNB and NIDC
confirming their ownership over the said properties. Moreso, where Batjak does not impugn the validity of the
foreclosure proceedings. Neither Batjak nor its stockholders have instituted any legal proceedings to annul the
mortgage foreclosure aforementioned. However, the Batjak argues that the Voting Trust Agreement states that:
―Upon termination of this Agreement as heretofore provided, the certificates delivered to the TRUSTEE by virtue
hereof shall be returned and delivered to the undersigned stockholders as the absolute owners thereof, upon
surrender of their respective voting trust certificates, and the duties of the TRUSTEE shall cease and terminate.‖
Under the aforecited provision, what was to be returned by NIDC as trustee to Batjak's stockholders, upon the
termination of the agreement, are the certificates of shares of stock belonging to Batjak's stockholders, not the
properties or assets of Batjak itself which were never delivered, in the first place to NIDC, under the terms of said
Voting Trust Agreement. In any event, a voting trust transfers only voting or other rights pertaining to the shares
subject of the agreement or control over the stock. The 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.

LEE VS. CA