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Chapter VII – Control/Management — primary obligation of directors is to seek the maximum amount of profits

for the corporation, and characterized the position as a position of trust

o fiduciary or trust relationship is not a matter of statutory or technical
Allocation of power and control: three levels of control: law, but springs from the control and guidance of corporate affairs
and property and hence the property interest of the SHs
(1) board of directors or trustees= formulate the corporate policies
(2) corporate officers= execute the policies — 23: Powers of a corporation shall be exercise, all business conducted, and
(3) stockholders or members= have residual powers over fundamental all property of such corporation controlled and held by the board of
corporate changes directors or trustees to be elected from among the holders of stocks or
among the members, unless otherwise provided in the Code.
Rationale of centralized management — 35: Board may delegate to an executive committee or officials or
contracted managers, which must be specific purposes, through the by-
— one of the advantageous features of the corporation—acting through laws
centralized management o Delegation makes the execom agents of the corporation, and the rules
— the congruence of authority and responsibility in the same person, committee, on agency apply
or board always promote efficiency o Not less than 3 members
o Can act on specific matters except:
 Action where SHs approval is required
Who exercises corporate powers?  Filing of vacancies in the board
 Amendment of repeal of by-laws or adoption of new by-laws
1. board of directors (for stock corporations) or trustees (for non-stock  Amendment or repeal of any board resolution which is
corporations) expressly unamendable
 Distribution of cash dividends
— governing body — Term of office of directors: 1 year
— sole authority to determine the policy and conduct the ordinary business of — stockholders or members elect the members, but once elected they have
the corporation within the scope of the charter no right to interfere with the board’s exercise of powers
— so long as the board acts honestly, in GF, and not in defraud of creditors or — 138: non-stock corps may designate governing boards
abusive of the rights of minority SHs
— GR: in the absence of an authority from the board of directors, no person, not
even the officers of the corporation, can validly bind the corporation Peculiar Agency Role of the board
— Exception: with respect to 3rd persons, actions of the corporation even
without formal board approval may still bind! (ex. Proof of usage, acquiescence — in a manner of speaking, the board acts as an agent of the corporation, and
of the board despite knowledge of the act, receipt of benefits, implied is bound by the rules applying to agency relationship
ratification, estoppel o although the board is an agent of the corporation, since the principal is
a mere juridical concept, it realistically is not in a position to
countermand the decisions of its agent
Primary objective of the Board

o unlike in an ordinary principal-agent relationship, the corporate principal o Corporate SHs cannot also designate an individual representative to be
does not really have its own mind to allow it to decide matters for itself vote into the board
o the board stands both as an agent of the corporation, and the very o Their representation in the board can be achieved by making their
personification of the corporation in the commercial and legal world individual representatives trustees of the shares or membership,
which would then make them SHs of record
— board has sole power to decide whether a corporation could sue, purchase or
sell property, enter into a contract, or perform any other act (1) board must act as a body in a meeting
— SH resolutions on matters other than the exceptions= not legally effective
nor binding on the board; may be treated as merely advisory (Ramirez case) — directors/trustees must act not individually but as a body in a lawful
— GR: to the SH go the profits, to the board goes the management meeting
— for educational institutions: — 25: majority of the board shall constitute a quorum
o as fixed in the AOI
— where the board of directors fails to observe reasonable degree of care and o a decision of at least majority of directors present at a valid meeting
diligence, the corporation may be held liable on a tort and may be liable to pay shall be valid as a corporate act
damages — grant of corporate power is to the board as a body, and not to the
individual members thereof, and the corporation can be bound only by the
collective act of the board
Directors; qualifications — as a general rule, a third person who acts in GF cannot be prejudiced by
the fact that the directors did not act in accordance with the requirement
— FOR STOCK CORP: every director must own at least one (1) share of the of law, if such third person was led to believe or had the right to presume,
capital stock of the corporation of which he is a director under the circumstances, that the act involved was duly authorized by the
— FOR NON-STOCK: no person shall be elected as trustee unless he is a board, without prejudice to the right of any stockholder to question the
member validity of the act
o ceases to own one share= ceases to be a director — GR: the corporation can be bound only by the collective act or will of the
o the fact that a director is only holding the share as nominee of another board
person does not qualify him as a director—law merely requires that he has — Exception: can be bound even by the act of its officers, but always
legal title to the shares because of the act or default of the board
o 23: the share of a director shall stand in his name on the books of the — An act by the board during the meeting, which was illegal for lack of
corporation notice, may be ratified either expressly by the action of the directors in a
— majority must be residents of RP subsequent legal meeting, or impliedly, by the corporation’s subsequent
— nominal SHs can be directors; law requires legal title conduct
— Gokongwei v SEC: SH has no vested right to be elected to the board o Ramirez v Orientalist: the fact that the power to make corporate
o SH is considered to have parted with his personal right or privilege to contracts is vested in the board does not signify that a formal vote of
regulate the disposition of his property which he invested in the capital the board must always be taken before contractual liability can be
stock of the corporation fixed upon a corporation; for the board can create liability, like an
— Rule on Corporate SHs: individual, by other means than by a formal expression of its will
o Such entities cannot be qualified to be elected to the board o In reference to outsiders dealing with the corporation, not all
corporate actions need formal board approval.

o The fact that the directors know of a particular corporate act or o only for the unexpired term
contract, and they stayed silent about it, or worse, allowed the o if vacancy is due to increase in membership: election by SH only!
corporation to gain by the transaction or contract, would already bind the
o If a corporation knowingly permits one of its officers or any other agent, (2) requirements of meeting
to do acts within the scope of an apparent authority, and thus holds him — meetings: regular or special
out to the public as possessing power to do those acts, the corporation — requirements for board meetings must be complied with otherwise it will
will, as against any one who has in GF dealt with the corporation through be invalid and any action taken may be questioned by an objecting director
such agents, be estopped from denying his authority or stockholder
— two types of meeting of the board: — requisites for a valid board meeting:
o regular meeting held monthly unless the by-laws provide otherwise o meeting of director/trustees duly assembled as a board
o special meeting or those held by the board at any time upon the call of o at a place time and manner provided in the by-laws
the president o presence of the required quorum
 may be held at any time upon call o decision of the majority of the quorum or in some cases majority of
 may be held anywhere in and outside the RP unless the by-laws the entire board
provide otherwise — directors or trustees cannot validly act by proxy
— president of the corporation presides at board meetings — directors/trustees cannot delegate their powers or assign duties
— in abstentions:
o GR: abstention is counted in favor of the issue that won the majority
Election of the board of directors vote, since by their abstaining, the directors are deemed to abide by
the rule of the majority (Lopez v Ericta)
— 24: requisites for all elections of directors or trustees *Metro Manila (for purposes of stockholder meeting) – deemed to be a city or
o majority of OCS, either in person or by written proxy municipality
o by ballot if requested *Why in the city/municipality? – To make sure SHs are able to attend the
o mandatory cumulative voting—a SH may vote such number of shares for meetings
as many persons as there are directors to be elected or…
o … he may cumulate said shares and give one candidate as many votes as a notice
the number of directors to be elected
— by-laws can provide for different or additional requirements regarding
notice, date, place
Vacancies in the board (for reasons other than removal or expiration of term) — board must meet once a month
— by-laws cannot do away completely with notice requirement
— 29: any vacancy in the board other than by removal by the SHs or expiration — no notice= a director may question the validity of the meeting and of any
may be filled by the vote of at least a majority of the remaining directors, matter taken up therein
provided there is a quorum
o vote of majority of remaining directors or trustees, provided there is a b place of meeting
o no quorum, SHs fill vacancy by vote in a regular or special meeting — if by-laws are silent= board may meet anywhere it pleases

— Code allows close corps to do away with the board entirely; the SHs shall
c quorum and vote be treated as or shall become the directors
— abstention? Ifo majority position
— Where innocent third persons are concerned, the corporation—close or
For a valid corporate act: otherwise—should be bound in instances where estoppel or ratification is
— Quorum: (Sec 25) majority of directors/trustees is required for a quorum in shown (Zamboanga case)
directors meetings as fixed in the AOI — If SHs as directors in a close corp with no board= provisions on meetings
— Vote: at least a majority of directors present at a meeting where there is a of directors would apply to SHs
Ramirez v Orientalist Co & Fernandez.
For the election of officers: Fernandez had no authority to bind the corporation. Corporate powers is
— Quorum: presence of ALL directors/trustees exercised by the board of directors, and is recognized in the bylaws of
— Vote: majority of ALL members of the board Orientalist. The fact that the power to make contracts is thus vested in the
— Director must be personally present and cannot be represented by proxy borad does not always signify that a formal vote of the board must always be
taken before contractual liability can be fixed; the board can create liability,
d Agenda like an individual, by other means than by formal expression of its will. It may
be established without reference to official records of the proceedings of the
— Notice of meeting must contain purpose board, by proof of the usage to which the company had permitted to grow up in
— Extraordinary matters not mentioned in the notice cannot be validly acted the business, and of the acquiescence of the board charged with the duty of
upon against the objection of a director supervising and controlling the company’s business.
— “Other matters”= only that which are routine and ordinary; significant
matters must be expressly stated in the agenda Fernandez was the most active in the effort to secure the films. The
o Exception: if all directors are present and agree to take extraordinary negotiations were conducted by him with the knowledge and consent of the
matters up other members of the board. The board, before the financial inability of the
corporation was revealed, had already recognized the contracts as being in
e Presiding officer existence and had proceeded to take the steps necessary to utilize the films,
particularly the publication of announcements in the papers. In light of this,
— President (sec 54)= all directors/trustees meetings and SHs/members the contracts in question were thus inferentially approved by the board and
meetings that the company is bound unless the subsequent failure of the stockholders to
— But the by-laws may provide for a Chairman of the Board who will preside over approve the same had the effect of abrogating the liability created.
the board meeting
The action of the stockholders, whatever its character, must be ignored.
(3) close corporations Stockholders or members resolutions dealing with matters other than the
exceptions are not legally effective nor binding on the board, and may be
— stock ownership = management treated as merely advisory or may even be completely disregarded. The
— composed of a smaller number of persons: functions of the stockholders of a corporation are, of a limited nature. The
o closely related to each other by blood or other common interests, theory is that the stockholders may have all the profits but shall turn over the
o all or most of whom directly participate in the management complete management of the enterprise to their representatives or agents,

called the directors, making by-laws, and exercising special powers defined by law. Since the by-laws are a source of authority for corporate officers and agents
Thus contracts between a corporation and third persons must be made by the of the corporation, a resolution of the Board of Directors of Citibank
directors and not by the stockholders. The corporation is represented by the appointing an attorney in fact to represent and bind it during the pre-trial
directors and not the stockholders. Third persons can have little or no information conference of the case at bar is not necessary because its by-laws allow its
as to what occurs in corporate meetings, and must necessarily rely on external officers, the Executing Officer and the Secretary Pro-Tem, * to execute a
manifestations of corporate consent. power of attorney to a designated bank officer, William W. Ferguson in this
case, clothing him with authority to direct and manage corporate affairs.
The integrity of commercial transactions can only be maintained by holding the
corporation strictly to the liability fixed upon in by its agents in accordance with
law. If a corporation knowingly permits one of its officers or any other person to Prime White Cement v IAC.
do acts within the scope of an apparent authority, and thus hold him out to the GR: All corporate powers are exercised by the Board. It may also delegate
public as possessing the power to do these acts, the corporation will be estopped specific powers to its President or other officers.
from denying such authority as against anyone who has dealt with the corporation Exception:
in GF. (1) In the absence of express delegation, a contract entered into by the
Citibank NA v Chua. President in behalf of the corporation, may still bind the latter if the board
In the corporate hierarchy, there are three levels of control: (1) the board of should ratify expressly or impliedly.
directors, which is responsible for corporate policies and the general management (2) In the absence of express or implied ratification, the President may as a
of the business affairs of the corporation; (2) the officers, who in theory execute general rule bind the corporation through a contract in the ordinary course
the policies laid down by the board, but in practice often have wide latitude in of business, provided the same is reasonable under the circumstances.
determining the course of business operations; and (3) the stockholders who have Note: These rules are applicable where the President or other officer acting
the residual power over fundamental corporate changes, like amendments of the for the corporation is dealing with a third person.
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 The situation is different where a director or officer is dealing with his own
validly delegate some of its functions to individual officers or agents appointed by corporation. Te was not an ordinary stockholder; he was a member of the
it. 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
It is clear that corporate powers may be directly conferred upon corporate loyalty to his corporation. In case his interests conflict with those of the
officers or agents by statute, the articles of incorporation, the by-laws or by corporation, he cannot sacrifice the latter to his own advantage and benefit.
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 GR: A director’s contract with his corporation is not in all instances void or
by the board of directors. Such are referred to as express powers. There are also voidable.
powers incidental to express powers conferred. It is a fundamental principle in the Exception: If the contract is fair and reasonable under the circumstances, it
law of agency that every delegation of authority, whether general or special, may be ratified by the stockholders provided a full disclosure of his adverse
carries with it, unless the contrary be express, implied authority to do all of those interest is made.
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. The contract in this case is neither fair nor reasonable. At the time of the
contract, the corporation had not yet even started producing the cement.
Prices of cement, just like any other commodity, are not stable and expected

to rise. Within a period of six years from the date of dealership agreement the which it may be related. Mere ownership by a since SH or by another
prices were certain to rise, and yet the contract pegged the rate to P9.70 per bag. corporation of all or nearly all of the capital stock of a corporation is not of
This according to the Court was not fair and reasonable at all, and unduly itself sufficient ground for disregarding the separate personality.
prejudiced the corporation. The contracts he entered into after the dealership
agreement were such as to completely shield him from any increase in the price of GR: The GM of a corporation cannot be made personally liable for his official
cement. The contracts were only for two years at a time, even if the dealership acts in behalf of the corporation.
was good for 5. He was attempting to enrich himself at the expense of the Exception: If the official had acted maliciously or in BF, this would make him
corporation. There is no showing that the stockholders ratified the dealership liable personally.
agreement. Thus the same was not valid and he cannot be allowed to reap the
fruits of his disloyalty. Since it was not proven that Guzman acted maliciously or in BF, whatever
damage was caused to UP as a result of his acts is the sole responsibility of
Boyer-Roxas v CA. (Hidden Valley Apocalypse Now case). EPG even though Guzman is the principal officer and controlling SH.

Regarding properties owned by the corporation, the SH of Guanzon case says that Benguet Electric Cooperative v NLRC.
“properties registered in the name of the corporation are owned by it as an entity GR: The Board members and officers of a corporation who purport to act for
separate and distinct from its members. While shares of stock constitute personal and in behalf of the corporation, keep within the lawful scope of their
property, they do not represent property of the corporation. A share of stock only authority in so acting, and act in GF, do not become liable, civilly or otherwise,
typifies an aliquot part of the corporation’s property, or the right to share in its for the consequences of their acts. Those acts are properly attributed to the
proceeds to that extent when distributed according to law and equity, but its corporation alone and no personal liability is incurred.
holder is not the owner of any part of the capital of the corporation, nor is he Exception: They become personally liable.
entitled to the possession of any definite portion of its property or assets. The
SH is not a co-owner or tenant in common of the corporate property. 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
Whatever authority these officers or agents may have derived from the board or strong indications that the members of the board had illegally suspended and
other governing body, unless conferred by the charter of the corporation itself. dismissed him precisely because he was trying the rectify the financial
In this case the elder Roxas who then controlled the management of the irregularities.
corporation, being the majority SH, consented to the petitioner’s use and stay
within the properties. The Board did not object and were allowed to stay until it The Board members are also guilty of gross negligence and BF in directing the
adopted a resolution to the effect of authorizing moves to eject them. Since their affairs of the corporation in enacting the said resolutions, and in doing so,
stay was merely by tolerance, in deference to the wishes of the majority SH who acted beyond the scope of their authority.
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 Woodchild Holdings Inc v Roxas Electric and Construction Co. GR: The acts
their continued stay. of the corporate officers within the scope of their authority are binding on
the corporation.
Exception: Acts done by such officers beyond the scope of their authority
EPG Construction v CA. cannot bind the corporation.
A corporation is invested by law with a personality separate and distinct from Exception to the exception: The board has ratified such acts expressly or
those of the persons composing it as well as from that of any other entity to tacitly, or is estopped from denying them.

o President
Thus, contracts entered into by corporate officers beyond the scope of authority o Treasurer
are unenforceable against the corporation unless ratified by the corporation. o Secretary
— By-laws may provide for other officers
Evidently, Roxas was not specifically authorized under the said resolution to grant — GM: may be appointed from any of the officer positions
a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to o By express provision of the by-laws
agree to sell to the petitioner a portion thereof. The authority of Roxas, under — Officer need not be a director; thus, a non-SH can be an officer
the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not o Exception: President. He must be a director (co-terminous with his
include the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or position as director)
to create or convey real rights thereon. Neither may such authority be implied — No citizenship requirement
from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner o Exception:
“on such terms and conditions which he deems most reasonable and  Corporate secretary
advantageous.” The general rule is that the power of attorney must be pursued  Industries partially or totally reserved for Filipinos
within legal strictures, and the agent can neither go beyond it; nor beside it. The  No alien may be an officer…
act done must be legally identical with that authorized to be done. In sum, then,  …but may be a director; proportional to alien
the consent of the respondent to the assailed provisions in the deed of absolute equity
sale was not obtained; hence, the assailed provisions are not binding on it. — In close corporations:
o May be managed by SHs directly, so long as it is in the AOI
 No directors
2. corporate officers and agents  SHs appoint or elect the officers
o AOI may provide that all or some officers are elected or
— 23: the Board may validly delegate some of its functions and powers to appointed by the SHs instead of the board
individual officers, committees, or agents it appoints — In non-stock corporations:
— Corporate officers are within the business judgment of the board to o Members are allowed to directly elect the officers
terminate or delegate or appoint  Exception: contrary provision in AOI or BLs
— general principles of agency govern the relation between the corporation
and its officers or agents — Officers’ authority to bind NOT inherent in their office, but derived
— a corporate officer or agent may represent and bind the corporation in from:
transactions with third person to the extent that the authority to do so o law
has been conferred upon him, and this includes: o the by-laws
o powers which have been intentionally conferred o delegation by the Board (express through BoardRes, or impliedly
o such powers as in the usual course of business are incidental or through custom or acquiescence)
implied from the powers conferred — Corporate Officers are AGENTS of the corporation
o powers added by custom or usage, and o GRs on AGENCY as to the binding effect apply
o such apparent powers as the corporation has caused persons dealing o Acts which are within the authority BIND
with the officer or agent o Acts beyond authority CANNOT BIND
 Except:
— Three (3) officers which a corporation must have:  Subsequent ratification
Elected by majority of
ALL board members
 Estoppel
 Lack of authority to bind is a defense which must be (4) treasurer
specially pleaded (Ramirez case)
o GR: person dealing with a corporate officer is put on inquiry as to the — appointed at the time of drafting the AOI
scope of his authority o Code requires Treasurer’s affidavit to attest to the fact of
 Exception: Innocent 3rd person cannot be prejudiced if he compliance with the required incorporation subscription
had the right to presume under the circumstances the — Receive and keep the corporate funds
authority of the officer — Disburse in accordance with the authority given by the board
— Cannot bind the corporation unless authorized
(1) President
(5) general manager
— Presides over all meetings of the board and SHs
o By-laws may delegated that function to Chairman — takes care of day-to-day affairs of the corporation
— Act of president done in the ordinary course of business is — powers are limited to implementing policies laid down by the board
presumably within the scope of his authority — GR: can only perform such acts and enter into such contracts as
— Impliedly vested with broad powers are usual in the ordinary course of business of the corporation (Yu
o Burden of proof that an act of the president cannot bind= Chuck case)
corporation o exception: (deemed within his implied authority—Kalaw case)
— Power to sign and execute corporate contracts  where the board gives him broader authority
o He is authorized to sign in the name of the corporation…  where the board had acquiesced in the past or had
o …but does not include the power to enter into contracts with 3 rd never prevented or prohibited the GM from
persons (that’s the Board’s function) performing extraordinary acts
— Capacity to negotiate…  where the board ratifies (express or implied) after
o …but cannot perfect the contract without board authorization — can contract for purchase of ordinary supplies necessary for
— cannot also be concurrent Treasurer and Secretary corporate functions…
— must be a director and SH o …but no implied power to borrow money even for legitimate
purposes without prior approval by the board
(2) vice-president — 3rd person has right to presume that a GM has authority to
perform acts or enter into ordinary contracts in the usual course
— no inherent power to bind of business
— takes over when president is absent or position becomes vacant o innocent 3rd persons cannot be prejudiced

(3) secretary — any officer cannot be held personally liable for the consequences of their
— keeps corporate records and is the custodian o except: BF, negligence
— duties are ministerial and cannot bind the corporation without board o in personal capacity= personal liability
authorization or appointment as GM
— must be a resident and a Phil citizen (Sec 25) (6) other agents

He submitted a notarized Secretary’s Certificate from the corporation,
— may appoint agents for specific purposes attesting that he has been authorized, inter alia, to sign for and in behalf of
o last say will have to be with the board the Lapulapu Foundation any and all checks, drafts or other orders with
respect to the bank; to transact business with the Bank, negotiate loans,
Yu Chuck v Kong Li Po. agreements, obligations, promissory notes and other commercial documents;
GR: The power to bind a corporation by contract lies with its board of directors or and to initially obtain a loan for P100,000.00 from any bank. Under these
trustees, but this power may either be expressly or impliedly delegated to other circumstances, the defendant corporation is liable for the transactions entered
officers or agents of the corporation. into by Tan on its behalf.
Exception: 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 Per its Secretary’s Certificate, the petitioner Foundation had given its
employment of such agents and employees as are usual and necessary in the President, petitioner Tan, ostensible and apparent authority to inter alia deal
conduct of such business. Exception to exception: Where the authority is vested with the respondent Bank. Accordingly, the petitioner Foundation is estopped
expressly in the BOD. from questioning petitioner Tan’s authority to obtain the subject loans from
the respondent Bank. It is a familiar doctrine that if a corporation knowingly
As to the term of employment, a manager has authority to hire an employee for permits one of its officers, or any other agent, to act within the scope of an
such a period as is customary or proper under the circumstances, but unless he is apparent authority, it holds him out to the public as possessing the power to do
expressly authorized or held out to have such authority, he cannot make a those acts; and thus, the corporation will, as against anyone who has in good
contract of employment for a long future period, such as for 3 years. faith dealt with it through such agent, be estopped from denying the agent’s
There can be no doubt that CC Chen as general manager of the Kong Li Po, had
implied authority to bind the defendant corporation by a reasonable and usual Board of Liquidators v Kalaw.
contract of employment with the plaintiffs. But the term of employment is Ratification by a corporation of an unauthorized act or contract by its officers
unusually long, and the conditions are otherwise so onerous to the defendant relates back to the time of the act or contract ratified and is equivalent to
corporation that the possibility of the corporation being thrown into insolvency original authority. The theory of corporate ratfication is predicated upon the
thereby is expressly contemplated in the same contract. 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
The corporation also did not impliedly ratify the contract, just because the defects from the moment it was constituted. By corporate confirmation of the
president of Kong Li Po saw the plaintiffs work as printers in the office one day. contracts in dispute on 20 Jan, the Kalaw contracts are thus purged of
Before a contract can be ratified, knowledge of its existence must, of course, be whatever vice or defects they may have. Thus even in the face of an express
brought home to the parties who have authority to ratify it or circumstances must by-law requirement of prior approval, the law on corporations is not to be held
be shown from which such knowledge may be presumed. No such knowledge or so rigid and inflexible as to fail to recognize equitable considerations.
circumstances indicating knowledge is shown or proven in the case. Moreover, a
ratification by him would have been to no avail; in order to validate a contract, a There was no BF or breach of trust on the part of Kalaw. The board knew, and
ratification by the BOD was necessary. The fact that the president was Kalaw had so informed it, that the contracts would cause heavy losses. The
authorized by the by-laws to sign documents evidencing contracts doesn’t Court found no trace of any dishonest purpose or moral obliquity or ill will that
mean that he had power to make the contracts. partakes of the nature of fraud which would consitute BF on the part of Kalaw.
The Board did not eventhink of raising their voice in protest against past
Lapulapu Foundation Inc v CA. contracts which brought enormous profits to NACOCO. The ratification was an

act of simple justice and fairness to the GM and to the best interest of the o Implies that the board or by-laws may specifically authorize the
corporation whose prestige would have been seriously impaired by a rejection of executive committee to study and review a board resolution not
the board of those contracts which proved disadvantageous. expressly unamendable or unrepealable
o The delegation cannot go so far as to render the board powerless and
Zamboanga Transportation v Bachrach Motor. free from all responsibility
In his manifold capacity as President, GM, legal counsel, auditor, and majority
stockholder, Erquiaga entered into the Chattel Mortgage (CM) contract with
Bachrach by virtue of which Zamboanga obtained greater advantages. While it is 4. stockholders or members (Sec 23)
true that the last CM contract was not approved by the board, whose approval was
needed in order to validate it according to the by-laws, the broad powers vested in — GR: all corporate powers vested in the board of directors
Erquiaga, the approval of his acts with the other CMs, the approval of the other — Exceptions: otherwise provided in the Code
directors, and the payments made to Bachrach are equivalent to a tacit approval o Where the Code expressly requires the stockholders or members
by the BoD of the CM contract and binds Zamboanga Transport. consent to certain matters before any action may be taken
o Usually involves the major changes in the corporation
In truth and in fact Erquiaga was and is the factotum of the corporation and may o Stockholders or members approval usually expressed during a meeting,
be said to be the corporation itself. While the chief officers of the corporation which may be regular or special
are in reality its owners and are permitted to manage the business by the
directors, the acts of such officers are binding on the corporation, which cannot o Sec. 50: Regular meeting: annually on a date fixed by the by-laws, or…
escape liability as to third persons dealing with it in GF. Thus when the president  Anytime in April as determined by the board
of a corporation, who is one of the principal stockholders and at the same time its o Meeting not required in case of amendment to the AOI, when written
general manager, auditor, legal counsel, is empowered by the by-laws to enter into assent of ALL the stockholders is sufficient
CM contracts, subject to the approval of the board, one of whom is also a principal o Exceptions:
shareholder, and both of whom, together with the president, form a majority and  amendment to shorten or extend corporate term or
said corporation takes advantage of the benefits afforded by said contract, such  amendment to increase capital stock
acts are equivalent to an implied ratification of said contract by the board and
binds the corporation even if not formally approved by the board. (1) requirements of stockholders or members meetings and of
voting Jack: Publish notice when it is not
sure that there will be a quorum
3. board committees a notice

— BOD can create committees for the performance of certain functions, so long — By-laws may shorten or extend the time required by the Code for
as the board clearly specifies and limits the functions delegated, and the giving notice
delegation does not in effect constitute an abdication of its powers vested by — Board of SMB Workers: Failure to give notice would, as a rule,
law render any resolution made therein voidable at the instance of an
— S35 of Corpo Code allows delegation to an Executive Committee of any act absent stockholder who was not notified of the meeting
within the contemplation of the board with exceptions: — Attendance by a stockholder despite want of notice operates as a
o Provided that the delegation is on specific matters and is not a blanket or waiver of the requirement
general one

— If all stockholders are present or duly represented, it will be valid — to constitute a quorum, stockholders need not be present
even if no notice at all was sent personally but may be represented by proxies whose vote will be
as effective as if they were personally present:
— Requisites of notice:
o Specify time and place of meeting — stockholders cannot unjustifiably walk-out, thereby breaking the
o Purpose quorum and defeating the validity of any act proposed and
o Only matters reasonably related to the purpose must be taken up approved by the majority
o Sent to last known address — if justified, the meeting cannot be validly continued if the
— Attendance of stockholder is an exercise of his personal right as remaining stockholders present do not constitute a quorum
owner of the stocks of the corporation

Board of SMB Workers v Tan. d vote

It appears that the notice was posted on 26 March and 28 March was the date for
the election. Therefore the five days previous notice required by the by-laws was — vote required to carry a resolution of the stockholders or
not complied with. members depends on:
o the nature of the resolution, and
As regards the creation of a committee of three vested with the authority to call o corresponding rule as required by the code
conduct and supervise the election, and the appointment of Viernes as chairman of — GR: majority vote of the shares or members present or
the Committee, the court in the exercise of its equity jurisdiction may appoint represented, provided that there is a quorum
such committee, it having been shown that the Election Committee provided for in — Stock corps: vote is based on number of outstanding shares
the by-laws has been annulled by the TC and would jeopardize the rights of represented and not on number of stockholders present
respondents if allowed to act. — Non-stock: vote based number of members

b place of meeting — Close corps: AOI can provide for a quorum and voting
requirements in stockholders meetings than that provided in Sec
— by-laws cannot fix a place of meeting other than that fixed in Sec 51 52
— for non-stock corporations: Sec 93 o Each member has only one vote unless the by-laws or AOI
limit the right or broaden it
o By-laws may provide for voting by mail
c quorum

— GR: quorum is a majority of outstanding capital stock or majority of e non-voting stocks or members
members of non-stock corporations
— Exception: — can still vote/are required to vote in the ff:
o special rules in the Code (1) amendment to the AOI
o by-laws may provide for greater or lesser number (2) adoption/amendment to the BLs
(3) sale, lease, mortgage, etc of all or substantially all corporate assets
(4) bonded indebtedness

(5) increase/decrease in capital stock meeting did not amount to an election cannot be sustained. It must be
(6) merger/consolidation remembered that the Logan group held the majority of stocks when they cast
(7) investment in another corporation their votes ifo the nominees. The inaction of the Louis faction, did not have the
(8) dissolution effect of defeating or invalidating the election. It is the essence of all
elections that the will of the majority, properly expressed, shall govern. A
where all stockholders present majority of votes cast will decide, although some SHs who are present may
refuse to vote, and thus the majority of the votes cast may be less than a
— GR: Meeting VOID If no notice or defective notice, or venue in majority of the persons or stocks present or represented.
another place other than in BLs or AOi,
— Any matter taken up will be voidable at the instance of an objecting Neither may the second election be assailed on the ground that notice did not
SH specifically include the election of the new board on the agenda. The notice
— But presence of ALL SHs, personally or thru representatives, provided that matters not taken up or finished during the first meeting will be
constitutes a waiver of any irregularity or defect part of the agenda, therefore the SHs knew that Logan would press for the
new board and they were prepared for it, having attended the first meeting.
Johnston v Johnston. Furthermore, all SHs were present either in person or by proxy during the 1 st
meeting and whatever defect in the notice was cured b their presence and
The SHs who remained after the group representing the majority walked out acquiescence.
without a quorum being declared represented the minority and did no constitute a
quorum, and it is clear that they could not have validly transacted further business (2) where no meeting called
much less have elected a new set of directors. It follows that if the election of
the directors after the withdrawal of Logan was null and void, then the subsequent — Sec 50 and 6 of PD 902-A are intended to protect the SHs from a
meeting of the board at which the Louis group was elected was likewise null and situation where no meeting is called due to the absence of any person
void. authorized to call it or fraudulent or unjustified refusal to call it
— 50: limited to a situation where there is no person authorized to call a
If the purpose in bolting the meeting was to deliberately defeat the existence of meeting
a quorum, the absence of a quorum, then it would produce the effect of nullifying
the proceedings that follows. It is to be noted that a SH can, for justifiable — transfers power to authorize the calling of a meeting from the
reasons, break the quorum by w/drawing from the meeting. Logan walked out courts to the SEC, and only when NO person is authorized to call a
because Louis persistently and with reason overruled Logan on his requests to vote meeting
the shares of the Silos family, which he validly purchased. That Logan did — intended to protect stockholders/members from a situation where
everything possible to register the stocks in order to vote them was substantial no meeting is called due to the absence of any person authorized
compliance with the charter and the by-laws. The denial by Louis to vote the to call the same or due to the neglect of fraudulent refusal o
shares of the minor children of Albert Johnston was likewise unreasonable. The directors to call a meeting for the election of new directors or
withdrawal of Logan, although it actually defeated the existence of a quorum, was whenever it is necessary to act on certain matters
neither unreasonable nor unjustifiable.
Ponce et al v Encarnacion.
The second meeting of SH was properly convened. All parties were present. The The by-laws of the corporation provide in part that its board shall be elected
roll was called and a quorum was declared. The contention of Louis that the 2 nd by the stockholders every even year during the month of January. The

requirement in the Corp Code that “on the showing of good cause therefor” does — right to vote can be waived in exchange for preferences and
not mean that the petition must be set for hearing with notice served upon the privileges, such as the issuance of preferred and redeemable
board. shares as non-voting shares
— right to vote in certain areas cannot be denied (Sec 6)
The TC was satisfied that there was good cause considering that the chairman had
failed, neglected, or refused to perform his duty to call a meeting of the — rules to be followed in the election of directors/trustees:
stockholders to elect new sets of directors, in accordance with the by-laws. They
had no right to continue as directors unless reelected by the stockholders in a — the above provision requires presence either in person or proxy,
meeting called for that purpose every even year. They had no right to hold-over implying that a stockholders meeting is required
brought about by the failure to perform the duty incumbent upon any of them. The
alleged illegality of the election of one members of the board at the meeting
called by Gapol was authorized by the court being subsequent to the order a quorum required
complained of and cannot affect the validity and legality of that order. If it be
true that the director elected at the meeting authorized by the court was not — for a valid election of directors/trustees= majority of outstanding
qualified in accordance with the by-laws the remedy for the aggrieved party would capital stock or members entitled to vote
be a quo warranto. — Campos: quorum also based on the number of outstanding voting
stocks or members entitled to vote
5. instances when stockholder or members action is necessary—where
board action is insufficient, which includes election of directors/trustees b manner of voting; cumulative voting
but also major changes in the corporation
— viva voce is sufficient, unless ballot voting is requested
— most significant rights of a stockholder: — in stock corporations, cumulative voting in the election of
o right to vote directors is mandatory
o right to share in the profits — right to cumulative voting cannot be curtailed by the by-laws
o right to participate proportionately, upon dissolution and after — number of voting stockholder votes = product of number of shares
payment to creditors, in the distribution of the corporate assets owned and the number of directors to be elected
o stockholder may distribute them any way he pleases
(1) election of directors or trustees
c in close corporations
— 24: at all elections of directors or trustees, there must present,
either in person or by proxy, the owners of the majority of OCS — special privilege in sec 97
— right to vote is a right emanating from ownership
— this is the only way a stockholder can have a voice in the management d qualifications and disqualifications of directors
of corporate affairs
— it is the only way members can have a say as to how the purposes of — no one can be elected director unless he owns at least one share in
the corporation should be achieved the corporation, registered in his name on the books
— once elected, stockholders relinquish all corporate powers to the
board S23

valid." This is based upon the principle that where the director is so employed
— if a director disposes all his shares, he ipso facto ceases to be a in the service of a rival company, he cannot serve both, but must betray one or
director and a vacancy is created the other. Such an amendment "advances the benefit of the corporation and is
— majority of directors/trustees must be residents of RP good." In the Philippines, section 21 of the Corporation Law expressly provides
— citizenship requirements: subject to Constitutional limitations that a corporation may make by-laws for the qualifications of directors. Thus,
— by-laws may not do away with the qualifications required by law, buy it has been held that an officer of a corporation cannot engage in a business in
may add qualifications or provide for disqualifications 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
Detective & Protective Bureau v Cloribel. enterprise which cripples or injures the business of the corporation of which
Since de la Rosa did not own a share of stock of the corporation, he cannot he is an officer or director.”
become a director in accordance with the Corpo Code. If he could not be director,
then it follows that he cannot be managing director. Since he is not qualified, then It is also well established that corporate officers "are not permitted to use
Alberto cannot be compelled to vacate his office because the by-laws itself their position of trust and confidence to further their private interests." In a
provide that directors shall serve until the election and qualification of duly case where directors of a corporation cancelled a contract of the corporation
qualified successor. 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
Gokongwei v SEC. foreign firm for exclusive sale of its products, the court held that equity would
In the case at bar, there are facts which cannot be denied, viz.: that the amended regard the new contract as an offshoot of the old contract and, therefore, for
by-laws were adopted by the Board of Directors of the San Miguel Corporation in the benefit of the corporation, as a "faultless fiduciary may not reap the fruits
the exercise of the power delegated by the stockholders ostensibly pursuant to of his misconduct to the exclusion of his principal.”
section 22 of the Corporation Law; that in a special meeting on February 10, 1977
held specially for that purpose, the amended by-laws were ratified by more than Although in the strict and technical sense, directors of a private corporation
80% of the stockholders of record; that the foreign investment in the Hongkong are not regarded as trustees, there cannot be any doubt that their character
Brewery and Distellery, a beer manufacturing company in Hongkong, was made by is that of a fiduciary insofar as the corporation and the stockholders as a body
the San Miguel Corporation in 1948; and that in the stockholders' annual meeting are concerned. As agents entrusted with the management of the corporation
held in 1972 and 1977, all foreign investments and operations of San Miguel for the collective benefit of the stockholders, "they occupy a fiduciary
Corporation were ratified by the stockholders. relation, and in this sense the relation is one of trust." “The ordinary trust
relationship of directors of a corporation and stockholders", according to
I: Whether or not the amended by-laws of SMC of disqualifying a competitor Ashaman v. Miller," is not a matter of statutory or technical law. It springs
from nomination or election to the Board of Directors of SMC are valid and from the fact that directors have the control and guidance of corporate
reasonable affairs and property and hence of the property interests of the stockholders.
Equity recognizes that stockholders are the proprietors of the corporate
Under US corporate law, corporations have the power to make by-laws declaring a interests and are ultimately the only beneficiaries thereof.
person employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... [A]n amendment which renders ineligible, or if In this jurisdiction, under section 21 of the Corporation Law, a corporation may
elected, subjects to removal, a director if he be also a director in a corporation prescribe in its by-laws "the qualifications, duties and compensation of
whose business is in competition with or is antagonistic to the other corporation is directors, officers and employees ... " This must necessarily refer to a

qualification in addition to that specified by section 30 of the Corporation Law, where he sits as director.
which provides that "every director must own in his right at least one share of the
capital stock of the stock corporation of which he is a director ... " Any person Indeed, access by a competitor to confidential information regarding marketing
"who buys stock in a corporation does so with the knowledge that its affairs are strategies and pricing policies of San Miguel Corporation would subject the
dominated by a majority of the stockholders and that he impliedly contracts that latter to a competitive disadvantage and unjustly enrich the competitor, for
the will of the majority shall govern in all matters within the limits of the act of advance knowledge by the competitor of the strategies for the development of
incorporation and lawfully enacted by-laws and not forbidden by law." To this existing or new markets of existing or new products could enable said
extent, therefore, the stockholder may be considered to have "parted with his competitor to utilize such knowledge to his advantage.
personal right or privilege to regulate the disposition of his property which he has
invested in the capital stock of the corporation, and surrendered it to the will of e term of director or trustee
the majority of his fellow incorporators. ... It cannot therefore be justly said that
the contract, express or implied, between the corporation and the stockholders is — 23: in stock corporations= 1 year…
infringed ... by any act of the former which is authorized by a majority..." — … but directors may hold-over as directors until the annual
election is held
It is not denied that a member of the Board of Directors of the San Miguel — 92 and 108: in non-stock corps, unless AOI provide otherwise, the
Corporation has access to sensitive and highly confidential information, such as: (a) term of trustee is 3 years except education corporations (5 years)
marketing strategies and pricing structure; (b) budget for expansion and
diversification; (c) research and development; and (d) sources of funding, f vacancies in the board
availability of personnel, proposals of mergers or tie-ups with other firms.
— 29: vacancies in the board are to be filled by the SHs in a
It is obviously to prevent the creation of an opportunity for an officer or director meeting:
of San Miguel Corporation, who is also the officer or owner of a competing — no quorum
corporation, from taking advantage of the information which he acquires as — removal
director to promote his individual or corporate interests to the prejudice of San — expiration of term
Miguel Corporation and its stockholders, that the questioned amendment of the — increase in number of directors
by-laws was made. Certainly, where two corporations are competitive in a — may occur by reason of death, resignation, removal, expiration of
substantial sense, it would seem improbable, if not impossible, for the director, if term, or abandonment
he were to discharge effectively his duty, to satisfy his loyalty to both — mere withdrawal insufficient—there must be clear intention to
corporations and place the performance of his corporation duties above his resign
personal concerns. — Mead: abandonment of office may be implied when the director
has accepted a position outside of the RP where his work would
Sound principles of corporate management counsel against sharing sensitive require his continuous presence, making it incompatible with his
information with a director whose fiduciary duty of loyalty may well require that position as director of corporation
he disclose this information to a competitive arrival. These dangers are enhanced — if thru removal or expiration of term: majority of remaining
considerably where the common director such as the petitioner is a controlling directors
stockholder of two of the competing corporations. It would seem manifest that in
such situations, the director has an economic incentive to appropriate for the (2) removal of directors
benefit of his own corporation the corporate plans and policies of the corporation

— only SHs have the power to remove directors under the procedures in remedy is unavailing, will entertain a suit for and in behalf of the corporation
28 to redress the injuries of the minority SHs against wrong by the majority.
— removal of director before expiry of his term, even without cause, is
a right granted to the SHs for their protection against fraud, Where corporate directors are guilty of a breach of trust—not of mere error
incompetence or abuse of judgment or abuse of discretion—and intracorporate remedy is futile or
— NOTE: no cumulative voting in the removal of directors—as fast as useless, a SH may institute a suit in behalf of himself and other SH and for
the minority elects a director by exercising their right to cumulate the benefit of the corporation.
their votes, the latter can be removed by 2/3 vote OCS
— Vacancy can be filled in the same meeting where the removal is GR: SH cannot ordinarily sue in equity to redress wrongs done to the
effected; NO need for notice corporation, but the action must be brought by the board
— Vote required: 2/3 OCS in stock corps; 2/3 members entitled to vote Exception: If the corporation is under the complete control of the wrongful
in non-stock corps members of the board, or where a demand or suit would be useless and futile

Roxas v Dela Rosa. The appointment of a receiver upon application of the minority SH is a power to
Under the law the directors of a corporation can only be removed from office by a be exercised with great caution. This does not mean that the rights of the
vote of the SH representing 2/3 of the subscribed capital stock entitled to vote, minority SH may be entirely disregarded, and that where necessity has arisen,
while vacanies in the board can only be filled by mere majority vote. While the the appointment of a receiver for a corporation is a matter resting largely in
trust controls a majority of the stock, it does not have a clear 2/3 majority. It the sound discretion of the court.
was therefore impolitic for the trust, in forcing the call for the meeting, to come
out frankly and say in the notice that one of the purposes of the meeting was to As to the contention that it was wrong for the TC to order the removal of the
remove the directors of the corporation. Instead the call was limited to the directors and members of the board upon application by the minority SHs, the
election of the board, it being the evident intention to elect a new board as if the law does no confer expressly upon the courts the power to remove a director.
directorate had been then vacant. Since the present directors were regularly But if the court has acquired jurisdiction to appoint a receiver because of the
elected, the proposal to elect another directorate, if carried into effect, would mismanagement and resulting injury caused by the members of the board,
result in the election of a rival set of directors, who would need a court order of these may thereafter be removed and others appointed in their place by the
quo warranto to install them in office. Thus the TC was correct in forestalling that same court in the exercise of its equity jurisdiction. In the present case, the
eventuality and to enjoin the second election. properties and assets of the corporation are amply protected by the
appointment of a receiver and thus the removal of the directors is unnecessary
Angeles v Santos. and unwarranted.
There is ample evidence to show that Santos et al have been guilty of breach of
trust as directors of the corporation. The Board is a creation of the SH by Campbell v Leow Inc.
delegation of the SH. But the board, or the majority thereof, occupies a position Vogel as president had authority to call the special meeting of SH, although
of trusteeship in relation to the minority of stock in the sense that the board the purposes of the meeting were not in furtherance of the routine
should exercise GF, care, and diligence in the administration of the affairs of the business of the corporation, because it is expressly granted by the by-laws.
corporation. And should protect not only the interests of the majority but also
those of the minority of the stock. Where the majority of the board performs Nonetheless, the SH, by permitting the by-laws to stand, have given the
ultra vires acts or commits fraud or wrongful harm to the corporation, the court, president power to state these broad purposes in his call for a meeting. The
in its exercise of equity jurisdiction, and upon showing that an intracorporate call of the Sh meeting is not of the character that would impinge on the power

given directors by the statute. A by-law giving the president power to submit  Unanimous vote never required
matters for SH action presumably only embraced matters which are appropriate
for SH action. So construed the by-laws do not impinge on the statutory right and a amendment of AOI
duty of the board to manage the business of the corporation.
— AOI embodies the basic agreement of the SHs; thus any change requires
As to the enlargement of the board, although a radical change in corporate their consent
management and could be determinative of control, the wording of the by-law — Note: no requirement of SH or members meeting; “written assent” is
authorizes such action. sufficient
As to the call of meeting for filing newly created directorships, which plaintiff o Secs 37 38 39 40 42 43 and 44 however require a meeting first
claims is invalid, the SHs have the inherent right between annual meetings to fill — Extension (or shortening) of term and increase (or decrease) of capital
newly created directorships. It would take strong by-law language to warrant the stock also involve an amendment of the AOI but are covered by Sec 37 and
conclusion that those adopting the by-laws intended to prohibit the SHs from 38
filing new directorships. — Amendment of “certain matters”:

As to the removal of directors by the SH even for cause, which is not authorized — Note that such an amendment in sec 103 would make a corporation a close
by state law, the court ruled that the SH have such power. This power must be one. Any amendment to these would in effect change the status of the
implied when we consider that otherwise a director who is guilty of the worst sort corporation as a close one, and will deprive it of special privileges accorded
of violation of his duty would nevertheless remain on the board. Considering the by the Code to ordinary corporations
damage a director might be able to inflict upon his corporation, the doubt must be — This must prevail over the general provision of Sec 16 which does not
resolved by construing the statute and by-laws as leaving untouched the question require a SH meeting
of director removal for cause. This power exists even where there is a provision
for cumulative voting. If a director’s presence or action is clearly damaging the b sale or other disposition of substantially all assets
corporation and its SH in a substantial way, it is difficult to see why that director
should be free to continue such damage merely because he was elected under a — sale of all or substantially all assets is not just an act of mgt—it is
cumulative voting system. However, a SH has standing and the right to challenge an act of ownership, and therefore SH approval is necessary
the legal propriety of action proposed to remove a member of the board, and can — requires a meeting duly called and notice to SHs
attack procedures adopted to remove directors for cause where the procedure is
invalid in its face. c investment in another business or corporation
(compare with 36)
(3) fundamental changes
— 42 adopts the ruling in Dela Rama that where the investment by
— in the following basic changes in the corporation, although usually initiated by the corporation is reasonably necessary to accomplish its primary
the board, its decision is not final, and therefore approval of the SH would be purpose in the AOI, the approval of SHs is NOT necessary.
necessary. However…
o Non-voting stocks or non-voting members will be entitled to vote (Sec 6) — … In 36: expressly limits such investment to one which may be
o Vote required: 2/3 of outstanding capital stock or 2/3 of members reasonable and necessarily required by the lawful business of the
entitled to vote corporation, which would make any other kind of investment ultra
 For amendment of by-laws: simple majority vires!

— Campos: The power to invest in another business other than its — merger: the union of two or more corporations by virtue of which
primary purpose must therefore be expressly allowed by the AOI! If one of them absorbs all the others
not, and the corporation wants to make such an investment, it should o juridical personalities are extinguished, except only that of
amend its AOI. the absorbing corporation
— In either case: SHs approval is mandatory — consolidation: union of two or more corporations with the
— 42 and 36 are based on the principle that the SHs have a right to formation of a new corporation, extinguishing all the constituent
decide how their funds will be invested corporations in the process

Dela Rama et al v Ma-ao Sugar.

A private corporation, in order to accomplish its purpose as state in its AOI, and e APPRAISAL RIGHT (cf Appraisal Right sidebar in
subject to the limitations of the Code, has to power to acquire, hold, mortgage… Amendments to Charter)
shares, bonds, and other debt instruments of any domestic corporation. Such an
act, if done in pursuance of the corporate purpose, does not need the approval of — appraisal right: a SH who dissented and voted against the
the Shs, but when the purchase of shares of another corporation is done solely proposed corporate action may choose to get out of the
for investment and not to accomplish its purpose, the vote of approval of the SH corporation by demanding payment of the fair value of his shares
is necessary. When the investment is necessary to accomplish its purpose in the — the SH is granted by law the appraisal right in any of the four
AOI, the approval of SHs is not necessary. fundamental changes (amendment of AOI; sale or other
disposition of substantially all assets; investment in another
Gokongwei v SEC. business/corporation; merger/consolidation)
If the investment is made in pursuance of the corporate purpose, it does not need — GR: a SH cannot just pull out his investment, other than selling his
approval of the SH. It is only when the purchase of shares in another corporation shares to a willing buyer, which he subjects to all the risks of the
is done sholey for investment and not to accomplish the purpose of the business of the corporation, and will have to wait until dissolution
corporation that the vote of approval of 2/3 of SH is necessary. of the corporation.
o Exception: in specified and specific major changes in his
In this case, the purchase of beer manufacturing facilities by SMC was an contract of investment
investment in the same business as stated in its AOI, which is to manufacture or o The law presumes that the SH did not foresee the changes
market beer. Even assuming that the board of SMC had no authority to make the when he bought the shares or made the investment
investment, there is no question that a corporation, like an individual, may ratify
and render binding upon it the originally unauthorized acts of its officers or other — all instances of amendment of the AOI gives rise to a SH’s
agents. It is a corporate transaction or contract which is within the corporate appraisal right
powers, but which is defective from a purported failure to observe the o changes that affect or restrict the rights of any SH gives
requirement of law that a vote of 2/3 of SH holding voting stock. This rise to his appraisal right
requirement is for the benefit of the SHs. Thus only they may ratify the o ex. Mere change in name or principal office not sufficient to
investment, and such ratification obliterates any defect which it may have had at invoke the appraisal right
the time of investment.
— if SH was absent during the meeting or if present, abstained in
d merger and consolidation (cf Mergers and Combinations) the voting on the approval of a corporate action, then he does not
have the appraisal right

— one very important condition: the corporation must have unrestricted f increase and decrease of capital stock; creation or
retained earnings. This is intended to protect both corporate increase of bonded indebtedness (cf Financing…)
creditors and the remaining SHs
— costs and expenses of appraisal are borne by the corporation, unless (Sec 38 supra)
the fair value ascertained by the corporation is approximately the
same as the price which the corporation may have offered to pay the g adoption, amendment, and repeal of by-laws (cf
SH Amendments of Charter)

— Code does not consider amendment of BLs as a major change in

Effect of the demand for the fair value: the corporation, therefore SHs have NO appraisal right
— Vote required: majority OCS
— if the corporation refuses or fails to pay the fair value w/in 30 days — Power to amend BLs can be delegated to the board by 2/3 vote
of the award, SH is restored to all his rights ipso facto OCS
o even if the inability to pay is due to insufficient unrestricted — Q: Will delegation continue to be effective even if the capital
retained earnings stock has been greatly increased thereafter? (Gokongwei)
— same effect: — Campos: YES. Under 48, if the present SHs wish to revoke the
o corporate action is abandoned or rescinded board delegated authority, they can do so in a meeting called for
o necessary approval of SEC cannot be obtained the purpose, thru a majority vote
o SEC decides that SH is not entitled to appraisal right — Non-voting stocks cannot vote here
o SH withdraws demand for fair value of shares with consent of — Amendments effective only after SEC issuance of certification

— If dissenting SH sells his shares before getting paid, his right to payment (4) other instances requiring stockholders action
ceases, and transferee acquires all rights of a regular SH
a declaration of stock dividends (cf Dividends)
— A situation where the SH can still get back his investment from the
corporation before dissolution — 43: no stock dividend may be issued without the approval of at
— Refers only to SHs of close corporations least 2/3 OCS
— Sec 105 makes the close corporation very much like a partnership where a — stock dividends deprive the SHs of the right to participate in the
partner, even without just cause, can leave the business at any time and current profits of the corporation
effect a dissolution — stock dividends are ploughed back into the capital and made part
— Withdrawal of SH does not cause the dissolution of the corporation of the capital stock, exposing it to risk
— Corporate creditors are protected—the code requires that the assets of the
corporation be sufficient to cover its debts and liabilities exclusive of capital b management contracts (cf Corporate Powers)
o Note difference between the above condition and the requirement in Sec — defn of mgt contract: one entered into between 2 corporations by
82 (i.e. existence of unrestricted retained earnings) virtue of which one agrees that its corporate affairs will be
managed by the other

— 44: SHs of BOTH corporations must give their consent—majority — SEC can also appoint a provisional director
vote at a meeting duly called
— NOTE: non-voting stocks have no say in the approval of mgt contracts Right to vote

c fixing consideration for no-par shares (cf — Sec 6: no share may be deprived of voting rights except those classified
Consideration for Shares) and issued as “preferred” or “redeemable” shares, and there shall
ALWAYS be a class of shares which have complete voting rights
— vote: majority OCS — Non-voting shares are entitled to vote in certain matters enumerated in
— right to vote the fixing of consideration arises only when the AOI Sec 6
does not fix it and the board is not authorized by the AOI or BLs
— non-voting stocks have no right to participate in the voting under Sec Devices affecting control
— GR: extent of control would be proportional to the number of shares a
d fixing compensation of directors stockholder owns i.e. the more shares, the greater the possibility of
— 30: In the absence of any provision in the by-laws fixing their control
compensation, the directors shall not receive any compensation, as — Except, that it is possible for a person or group owning only a minority of
such directors, except for reasonable per diems: Provided, however, shares can obtain control by successfully electing the majority of
That any such compensation other than per diems may be granted to directors, through devises
directors by the vote of the stockholders representing at least a — Common problem in devises: effect of transfer of some or all stocks by one
majority of the outstanding capital stock at a regular or special of the parties to the voting agreement
stockholders' meeting. In no case shall the total yearly compensation
of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding 1. the proxy device
— Corpo Code expressly allows voting by proxy in all stockholders
e deadlocks in close corporations and members meetings

— AOI of a close corporation may provide for a greater quorum and — two meanings of proxy:
voting requirement in board and SH meetings o person duly authorized by the stockholder to vote in his
— AOI of a close corporation may provide that the mgt of the behalf at a stockholder’s meeting
corporation shall be done by the SHs, which shall be deemed  is actually an agent for a special purpose
directors  rules on agency apply to the relationship
— This makes chances of deadlock greater and balance of control more o the actual document evidencing this authority
precarious — types of proxy:
— SEC may intervene, even on the action of only one SH regardless of o general proxy—gives the power to vote for directors and on
the number of his shares, with the power to prohibit the directors or all ordinary matters which may be properly be taken in an SH
SHs from performing any corporate act and even to dissolve the meeting

 does not include the power to vote for an amendment to o management usually sends a proxy form with notice of the
the AOI or other unusual transactions annual stockholders meeting
o limited proxy—restricts the authority to vote to specified o persons suggested as proxies have been selected by the
matters only and may direct the vote to be case in a certain way incumbent directors and are sometimes referred to as the
— Nature of proxy: a special form of agency governed by the laws on proxy committee
agency o the existing management who may own only a small portion of
o Strictly fiduciary relation, and therefore as a GR, revocable in the corporation’s shares can retain its control over corporate
nature despite contrary stipulations affairs for as long as they can obtain the necessary number of
o Exception: coupled with an interest proxies from absentee stockholders
 Includes where the proxy has parted with the value or o proxies may not be appointed orally and the written proxy
incurred liability at the SHs request… should be filed with the corporate secretary before the
 … which would mean to it is NOT the giving of onerous meeting
consideration that makes a proxy one that is coupled  failure to comply will render the proxy void and
with an interest, but that the proxy is an integral part of ineffective
the security by which a loan is to be paid  vote or presence counted on the basis of a void proxy
— requisites for valid proxy (58) may result in the invalidation of any action, unless the
o in writing number of shares required for quorum or voting is
o signed by SH or member present
o filed before the scheduled meeting o when a group of SH feel dissatisfied with management, they
— term of proxy: may seek control to correct such mismanagement by soliciting
o proxy may fix the period it may be used, but cannot exceed 5 proxies for the next election of directors
years, renewable for not more than 5 years per renewal o each block of SH will seek proxies of absentee SHs
o no period specified: expires after the meeting for which it was o since management has the right to defend its present policies,
given and cannot be used for another meeting unless it is renewed it can as a rule, use corporate funds and facilities in
— who may be appointed proxy? solicitation, as long as:
o Stock: no limitation, and BL restrictions on SH right to appoint a  it acts in GF,
proxy will be VOID  the expenses are reasonable under the circumstances
o Non-stock: 89: AOI or BL may restrict right to appoint proxy and
— revocability:  the proxy war is not a personal one
o GR revocable even before the period has expired and even if it — GR: when the right to vote by proxy is given by statute, a
expressly provides for irrevocability stockholder cannot be deprived of it by any by-law
o Exception: coupled with an interest — Exception: non-stock corps—Code allows for a waiver of the right
 Irrevocable for the period fixed provided this is made in the AOI or by-laws
 Upon expiry, proxy automatically ceases to be effective — By-laws may also impose reasonable conditions as to the form and
unless renewed manner of voting by proxy
 What constitutes sufficient interest? Depends from
case to case In re Giant Portland Cement.
— Procedure/practice:

Stock transferred on the books of the corporation within 20 days prior to a ordinarily has the right to vote the stock standing in his name. In cases of this
stockholders meeting, for the election of directors, is temporarily nature, when nothing more than a mere dry trust is involved the owners of the
disenfranchised, and cannot be voted either by the transferor or by the certificates can usually protect their rights by recording the transfers and
transferee. having the new certificates issued; but even though that could not be done in
this case because the corporate transfer books were closed at the time of the
The persons on whose proxies the SH meeting were the SH of record within the assignments, they could have compelled the record owners to give them proxies
provision of the statute, although they were not real beneficial or equitable to vote the stock standing in their names. A mere nominal owner naturally owes
owners of the stock. The right to vote shares of corporate stock, having voting some duties to the real beneficial owner or equitable owner of the stock, and
powers, has always been incident to its legal ownership. even if the right to demand a proxy is not exercised, if the vendor exercises
his legal right to vote in such a manner as to materially and injuriously affect
Whatever the rights of the mere unrecorded assignee of the stock certificate the rights of the vendee, he is perhaps answerable in damages in some cases. It
might be in the absence of a by-law or other contract provision requiring all can hardly be contended that the actual consent of the holder of the
transfers of shares to be recorded on the books of the corporation, it is not certificate is ordinarily essential to the right of the record owners to vote
contended that such a provision is not authorized or is not binding as between SHs stock standing in their names.
and the corporation.
When the right and power of a mere record owner to vote is questioned, some
As between the transferor and the unrecorded transferee to the stock ultra vires, negligent, or improper willful act or omission on the part of the
certificate, the legal title passes to the latter. A very different rule applies corporation or its agents is relied upon and must appear. In some cases the
between the corporation and the mere unrecorded assignee of the certificate of court may also reject votes cast by the record owners, which are regarded as
stock. That is because limited contract restrictions relating to stock transfers, improper, solely because of some peculiar inequitable circumstances affecting
are for the benefit of the corporation, and to enable it to ascertain from its the relation between such apparent owners and the transferee of the
records who its members of SHs are. certificates. Conceding that as between a transferor who has parted will all
the beneficial interest in stock and his transferee, the board equities are all in
So far as the corporation is concerned, until such a by-law is complied with, the favor of the latter in the matter of its voting.
record owner must therefore be regarded as the real owner of the stock, with the
consequent general right to vote it by proxy or otherwise. When considered from State ex rel Everett Trust v Pacific Wax.
a legal standpoint, there is no privity of contract between the mere holder of the
certificate and the corporation, and he is not a real member of that organization GR: A proxy given by a SH to vote his corporate stock at a meeting of the SHs
until the transfer is recorded. Until that time, the possible legal rights of the of a corporation is revocable by him even though the proxy by its terms is
holder of the certificate are of an inchoate nature. In other words, a real expressly made irrevocable.
novation, whereby a new contract between the mere holder of the certificate and Exceptions:
the corporation is substituted for the prior contract of the record owner, can only (1) where authority or power is coupled with an interest—a power coupled with
be brought about by complying with the corporate regulation relating to transfers an interest is a power or authority to do an act, accompanied by or connected
of stock. with an interest in the subject or thing itself upon which the power is to be
exercised, the power and interest being united in the same person. The
The record owner may, therefore, be the mere nominal owner, or technically a interest is not limited to the thing itself upon which the power is to be
trustee for the holder of the certificate, but legally he is still a stockholder in exercised, but is also included the subject upon which the power is to be
the corporation, and so far as the corporation is concerned, like the usual trustee, exercised. It is however sufficient that the proxy holder have an interest in

the subject matter upon which the power is to be exercised. The “thing itself” The allegations of monopoly positions in a corporation, without any allegation of
may refer to tangible shares or certificates of stock, but the subject matter may fraud or irregularity resulting therefrom to the prejudice of any stockholder,
refer to the intangible voting right and the incidental control of the corporation. is not actionable per se. The SH owning 30% of the outstanding stock of a
(2) where authority is given as part of a security or is necessary to effectuate a corporation cannot secure its control without the willingness, adherence,
security—in such a case the interest of an agent is something more than an cooperation, or support of other SHs. Assuming that the two families owning
interest in being permitted to exercise the power, yet something less than an 30% of the capital stock have been able to procure such support by organizing
estate in the subject matter or thing upon which the power is to be exercised. Pambul for the purposes above indicated, it would be admitted that the
organization of Pambul was accomplished by vote of the majority and not of
It is clear from the proxy agreement that the parties agreed that Paine Mitchell only 30% of capital stock of Pampanga Sugar. It cannot be assumed that the
stock should be used in conjunction with the stock owned by Engle so that the meeting in which the organization of Pambul was agreed upon the SHs other
policies of the respondent should be thus controlled. In this situation, Engle was than the two families referred to were deprived of their vote by means of the
more than a mere agent. In voting stock he served purposes of his own in proxies now assailed, because said proxies could not have existed before
maintaining control of the corporation by his choice of directors and the Pambul was organized. Even now the SHs of Pambul are also the SHs of
determination of policies and business affairs of the corporation. This voting of Pampanga Sugar, the former cannot be said to be under the control of the said
the stock for these purposes was the subject matter of the agency. Engle two families because the latter are not alleged from the facts. In other words,
acquired an interest in the subject matter of the power given to him and this Pambul SHs are free to vote their stock and elect the directors they want; and
interest was coupled with such power. The power to vote the stock was necessary the board of directors of Pambul is at liberty to change any or all of the
in order to make Engle’s control of the corporation secure. The mutual agreement onditions of the contract of pledge in question. Even assuming that respondent
as a whole created something like a community of interest in the stockholdings of de Leon controls Pampanga Sugar, it would not necessarily follow that he or the
the parties having for its purpose the use of their stock as a unit and the effect company also hold voting proxies on the shares of stock of Pambul. Therefore
of which was to give both parties an interest in the voting of the stock, although the SHs of Pambul are free to vote their shares at the election of its
the power to vote was to be exercised by Engle after the death of Jordan or by directors. It is thus clear that if the alleged minority SHs of Pampanga Sugar
Paine-Mitchell after the death of Engle. cannot or do not elect even one candidate to represent them in its BOD,
nothing appears to prevent them from doing so except their own volition.
A proxy in favor of the pledgee of the shares subject of the proxy is sufficient Nobody forces them to pledge their stock to Pambul. They must either be
interest to render the proxy irrevocable satisfied with the management or indifferent with regard to voting. Only
Alejandrino, as one of the minority SHs, owning 112 shares, has come before
Alejandrino v de Leon. the court to assail the contracts of pledged entered into by 18 other SHs and
The desire and design of a majority of SHs of a corporation to control its in which he is not even a party.
management and operation is legitimate per se, and is in fact the universal practice
in the business world. The SH who own a majority of the stock of a corporation To vote at a meeting of the SHs of a corporation is, unlike a political franchise,
may elect themselves directors or appoint themselves its agents, or form and but an exercise of the right of ownership involving no public interest. To call
carry into effect policies of management as freely as if the business were their the transfer of such right bribery is to distort the meaning of the word; it can
own, so long as they act honestly and do not devote the corporate assets or no more be called bribery than the payment by the purchaser of the price of
business to their own private gain or to the prejudice of other stockholders, and goods bought by him may be considered a bribe to the seller
no one can question their acts, which are surely intra vires.
Would it not, rather, be morally wrong to permit a SH to obtain a liberal loan of
pledging and transferring his stock and the right to vote it and then repudiate

the proxy to vote without paying the loan? Would it be fair to convert the pledgee both factions where only one group (Vogel) is in control of the physical
or its representative into a mere voting puppet of the pledgor when the former facilities, Vogel should thus by enjoined from using corporate facilities and
accepted the pledge from the latter in GF and in the belief that the security for personnel in soliciting proxies.
its investment could be protected by it by exercising the right to manage the
property through the voting proxy. On the issue of w/n Vogel, in soliciting proxies, misrepresented himself as
management and thus the proxies should not be voted, the evidence presented
Campbell v Leows Inc. by Tomlinson Group are not so misleading as to void the proxies. Since the
The BOD acting as a board must be recognized as the only group authorized to meeting was validly called by the president, there was nothing misleading in the
speak for management in the sense that under the statute they are responsible creation of the impression that the meeting and the material were initiated by
for the management of the corporation. Since the Vogel Group, being in physical the company. The whole impact of the proxy material conveyed to the average
possession of the records and facilities of the corporation, treated the request of reader the impression that there is a bitter fight between the president and
the directors for a stockholders list as though it were to be judged by standards his faction and another faction on the board. The overall result is no so
applicable to a mere SH’s request, they violated the duty owed such directors as misleading as to justify the nullification of the proxies for any purpose.
directors. The fact the Vogel, as president, had the power to call a SH meeting to
elect directors and is so to speak, in physical control of the corporation, cannot 2. voting trust agreement
obscure the fact that the possible proxy fight is between two sets of directors.
Vogel has no legal standing to make his faction the exclusive voice of Loew’s in the — Def’n: a trust agreement whereby a stockholder transfers his shares
forthcoming election. to a trustee who will exercise his voting rights. Under this
arrangement, the stockholder remains the beneficial or equitable
On the issue of how the two groups should be classified for purposes of owner of the shares, but legal ownership is transferred to the trustee.
determining the rights of the Vogel Group in connection with the use of corporate — Essence of voting trust: real ownership is separated from the voting
money and facilities for proxy solicitation at the SH meeting—w/n the SH approve rights
of a record made by one group and opposed by another group. While the — Involves the complete surrender by the SH of his voting rights to a
Tomlinson Group has 5 of 9 directors, it would be most misleading to have them trustee or trustees
represent to the SH that they are management in the sense that they have been — Voting trustee is only a share owner vested with colorable and
responsible for corporate policy and administration. It is apparent that the Vogel fictitious title for the sole purpose of voting upon stocks that he does
Group is entitled to solicit proxies, not as representing a majority of the board, not own
but as representing those who have been and are now responsible for corporate — Transferring SH ceases to become SH of record but retains the right
policy and administration. Whereas the Tomlinson Group, while not management in of inspection of corporate books
the sense that it is able to take effective director action, is representative of the — During the period of the agreement, it is irrevocable for as long as the
majority of the incumbent directors and is entitled to so represent to the SHs if trustee has not violated the trust by his misconduct or fraud.
it decides to solicit proxies. Since Vogel is entitled to expend reasonable sums of — Conditions for the use of voting trusts—Sec 59:
corporate funds in the solicitation of proxies, it follows that the request for an
injunction against such us will be denied.
— Requisites of a valid voting trust: (59)
On the issue of the entitlement of the Vogel group to use corporate facilities and o In writing and notarized
employees, because such action would carry the intracorporate strife even deeper o Certified copy filed with the corporation and the SEC
within the corporation and there is no practical way to ensure equal treatment for

o Period not longer than 5 years, but renewable each time for not more than
5 years Definition of voting trust: a device whereby two or more persons owning stock
 Exception: where the voting trust is a condition of a loan with voting powers, divorce the voting rights thereof from the ownership,
agreement, in which case it may be for a longer period but not retaining to all intents and purposes the latter in themselves and transferring
beyond the time when the loan is fully paid the former to trustees in whom the voting rights of all depositors in the trust
o Certificates of stock is to be cancelled, and new ones issued to the are pooled. The principal object of such trust is voting control.
trustee stating that it is issued in pursuance of a voting trust agreement
o Transfer must be entered in the corporate books The agent’s agreement effectively divorces the voting rights of the pooled
o Trustee should issue voting trust certificates in favor of transferring stock from its beneficial ownership, transfers the rights to the agents through
SHs irrevocable proxies for 10 years, pools the stocks in the agents as a group
o Not for an illegal purpose, or for the benefit only of the trustee without through the proxy devise with no SH retaining the right to vote, and its
any obligation to perform any useful service for the protection of the principal object is the voting control of the company. These elements are
stockholders or creditors of the corporation elements of a voting trust. The provision in the agreement which gives the
 it must have a legitimate business purpose to promote the best agents the power to withdraw the stock from escrow and transform the
interest of the corporation or even to protect the legitimate agreement into a voting trust merely added only the special mechanics of a
interests of others in the corporation voting trust that the statute requires, the substance of the voting trust having
— creation of voting trust: already existed in the agreement. Since the voting trust statute was not
o transferring SHs receive transferable voting trust certificates as complied with i.e. shares were not transferred in the books and a copy not
evidence of their rights furnished to corporation, it effectively created a secret voting trust. The
 rights other than voting rights may also be transferred to the statutory requirement is for the benefit of all SHs and all beneficiaries of the
trustee trust, who are entitled to know where voting control of the corporation
o but the SH ceases to be a SH and his rights are now against the trustee resides.
in accordance with the agreement
o SH has the express right to inspect corporate books and records This failure to transfer stock on the books is not a sufficient reason for
o Trustee is also qualified to become a director, since he is the registered holding the agent’s agreement not a voting trust. The stock here was endorsed
owner of the shares and fulfills the qualifications of the Code that at in blank and delivered to the agents for deposit in escrow with irrevocable
least one share is owned to become qualified as director proxies. Transfer on the books is not essential to effect an irrevocable
o No voting trust agreement may be kept secret among the parties thereto; transfer of voting rights to fiduciaries. It is such a transfer which is
it must be open to examination characteristic of a voting trust.
o No voting trust agreement may be exclusive, since the law gives a SH the
right to transfer his shares to the trustee upon the same terms and The fact that the agents are subject to control by their respective principals
conditions in the agreement does not prevent the agreement from constituting a voting trust. The stock is
voted by the agents as a group. No one SH retains complete control over the
Abercrombie v Davis. voting. It cannot vote its own stock directly; all it can do is direct its agent how
The agreement is a voting trust. If any SH agreement provided for joint or to vote on a decision to be made by the agents as a group/ in effect, each SH
concerted voting is so drawn as in effect to occupy the field reserved for the participating in the agreement reserves the right to name and remove the
voting trust, it is illegal, whatever the mechanics may be devised to attain the fiduciary representing him. Such a provision is not inconsistent with a voting
result. trust.

constituted as trustee of the assets, management, and operations of Batjak,
Davies cites the ruling in Ringling Bros v Ringling in arguing that their agreement is and that due to expiration of the agreement, NIDC should turn over the assets
only a pooling agreement. As a pooling agreement in substance and purpose to Batjak. What was assigned to NIDC was the power to vote the shares of
approaches more and more nearly the substance and purpose of the voting trust stock representing 60% of SHs, who are signatories to the agreement.
statute, there comes a point which if the statute is not complied with, it is illegal. Nowhere in the agreement is mention made of any transfer or assignment to
A pooling agreement may not escape the statutory controls by calling the trustees NIDC of Batjak’s assets operations and management. NIDC was constituted as
agents and giving to the SH receipts instead of voting trust certificates. trustee only of the voting rights of 60% of outstanding shares. What was to be
returned by NIDC as trustee to Batjak’s SHs upon termination of the
Everett v Asia Banking. agreement, was the certificates of stock, not the properties or assets which
Right of transferring SHs to set aside the trust agreement when their rights are were never delivered to NIDC in the first place. The acquisition of PNB and
trampled upon by the trustee. Corpo Code now provides that no VTA will be used NIDC of the properties was not in its capacity as trustee but as a creditor in
for purposes of fraud. accordance with the financing agreement.

Mackin v Nicollete Hotel. — SC failed to appreciate the fact that the voting trust was obtained from
Voting trusts are not illegal per se. In the instances where the voting trust has the SHs of the borrowing corporation precisely to allow PNB-NIDC to have
been held void, there existed invalidating circumstances such as want of management and undertake control in the operations of the borrowing
consideration, voting power not coupled with an interest, fraud, illegal purpose, and corporation
so on. In this case there was no charge of illegality or fraud, nor of any — In this case, the VTA was part and parcel of the loan arrangement, and
invalidating circumstance. The voting power of the three trustees is coupled with should have been considered by the Court as a means by which the lending
an interest because of one of the trustees is a substantial owner of the common institution obtains control over the management or operation of the
stock, and all are charged with the duty of protecting and conserving property for borrowing corporation, and not merely as a transfer only of voting or other
the benefit of those who became purchasers of preferred stock and bonds. The rights pertaining to the shares
whole purpose of the agreement is legitimate and wholesome. It was a matter of
civic pride and to make this possible, it involved the invitation of combinations of VTA as part of Loan Agreement
capital in substantial amounts, which could only be secured by having those who — VTA as part of loan agreement can exceed 5 years as an exception to the
invested their money assured of the fact that there would be a continuity of rule that VTAs cannot be for more than 5 years
management during a period of years until such time that the new enterprise would — VTA as part of loan agreement ensures that the lending institution would
have an opportunity to justify a successful financial future. It would be a manifest have a controlling interest in corporate votes
injustice to the large number of holders of bonds and preferred stocks, not to the — Constitutes further security to the lending institution
parties to the suit, to adjudge and hold illegal a trust agreement upon the — In reality, the lending institution would have very little interest in the
strength of which they had invested their money in the enterprise. It also appears operations of the corporation as to require a voting trust
that Mackin purchase the certificates of trust after the creation of the trust
agreement and are presumed to have full knowledge of the limitation of their

NIDC v Aquino. 3. pooling and voting agreements

Batjak premises its right to possession through the receivership of the 3 oil mills
in the voting trust agreement, claiming that under said agreement, NIDC was

— Definition: an agreement between two or more SHs to vote their shares therefore has provisions which are capable of being enforced with respect to
the same way. particular facts. The very nature and object of the agreement render it
— Through this kind of agreement, SHs who individually own only a minority impossible to do more than agree to agree, and is sufficiently definite in terms
of the shares but together represent the majority, can obtain control of of the duties and obligations imposed on the parties to be legally enforceable.
the management of the corporation.
— Usually relates to the election of directors, which may either specify the The SHs under the present agreement vote their own stock at all times, which
name of the nominees to be voted for, or the number shares to be voted is the antithesis of a voting trust because the latter has for its chief attribute
as a unit the severance of the voting rights from the other attributes of ownership. In
— In case of disagreement: arbitration cases where the parties cannot reach an accord as to how they will vote, and
— Since pooling agreements personal obligations to do, then although valid it are directed by the arbitrator to vote in a certain way, the substance of the
cannot be enforced by action for specific performance matter may be said not to differ in effect from a voting trust agreement,
— These agreements have been upheld as valid provided they do not limit however, there is this substantial distinction—the right of the arbitrator to
the discretion of the board or work fraud against the other SHs direct the vote is limited to those particular cases where a SHs vote is called
o Ex. An agreement that directors once elected must vote for certain for and the parties cannot agree. In a voting trust, the trustees in the first
persons as officers would be void, since the choice of officers is instance determine policy and implement it by their votes, and have continuous
vested in law in the board voting control for the period stipulated in the voting trust. The agreement in
— Voting agreement vs. voting trust: VA does not involve a transfer of question is actually a variation of the stock pooling agreement and the voting
stocks but is merely a private agreement between and among SHs to vote trust.
the same way. Breach would therefore give rise to liability for damages.
— In close corporations: Sec 100: Generally agreements and combinations to vote stock or control corporate
action and policy are valid, if they seek without fraud to accomplish only what
— Para 1: SH agreements in general. Pre-incorporation agreements among SHs the parties might do as SHs and do not attempt it by illegal proxies, trust, or
remains effective even after incorporation if so intended and even if not other means. The objects and purposes in the agreement are lawful and
reflected in AOI, except matters required by the Code to appear in AOI constitute no constitutional or public policy infirmity, and thus the stock held
— Para 2: refers to pooling and voting agreements in particular. There is no thereunder should have been voted pursuant to the direction of the arbitrator.
reason for denying SHs other than those in close corporations the right to When a party refuse to comply with the arbitrator, then the agreement
enter into voting or pooling agreements to protect their interest, as long as no constitutes the willing party to the agreement an implied agent possessing the
wrong or fraud is committed or intended to be committed on other SHs not irrevocable proxy of the recalcitrant party for the purpose of casting the
parties particular vote. Here an implied agency based on an irrevocable proxy is fully
— Para 3: gives close corps freedom to operate as a partnership between and justified to implement the agreement without doing violence to its terms. The
among the SHs, but remaining a corp with respect to 3 rd persons. Note: SHs provisions make it clear that the proxy may be treated as one coupled with an
who are parties assume liabilities of directors interest so as to render it irrevocable under the circumstances.

Ringling v Ringling Bros. The nature of the Agreement also does not preclude the granting of specific
The mutual promises in the agreement certainly constitute sufficient performance, because to deny it would be tantamount to declaring the
consideration to support it. But did the parties agree to agree? Certainly the agreement invalid.
parties agree as to how they would vote their stock, but they also provided that
they shall be bound by the decision of the arbitrator. The agreement to agree E K Buck Retail Store v Harkert.

GR: An agreement purporting to control the actions of directors after they are concerns and assets, provided the interests of creditors are not affected,
elected, in handling the ordinary business of the corporation, is void. This is because they are the complete owners of the corporation, cannot apply in a
because the law imposes the business management of the corporation on its case where the SHs are not parties to the agreement in question. So when the
directors, who represent all the SHs and creditors, and they cannot enter into public is not affected, the parties in interest might, by their original
agreements among themselves to abdicate their independent judgment. But the agreement of incorporation, limit their respective rights and powers. As the
correct rule is that SH control agreements are valid where it is for the benefit of parties are the complete owners of the corporation, there is no reason why the
the corporation, where it works no fraud upon creditors or other SHs, and where exercise of power and discretion of the directors cannot be controlled by valid
it violates no statute or recognized public policy. agreement between themselves, provided that the interests of creditors are
not affected.
The court upheld the validity of a SH agreement for voting trust, applying as a
test the conclusion that there was no wrong to the corporation or no special The agreement here in question was legal and that the complaint states a cause
benefit to the parties to the contract and no turning over of management to of action. The only restrictions on Dodge were that he should vote for Clark as
strangers. Applied in the present case, the agreement would be valid. director, and that as director he should continue Clark as GM, so long he
“proved faithful, efficient and competent, and entitlement to ¼ of the income.
Furthermore, the agreement does not place Buck Retail, as the owner of 40% of These are all perfectly legal contractual stipulations. If there was an invasion
stock, in control of the corporation. It does give him veto power. But Buck would of powers of the board, it is so slight as to be negligible; and certainly there is
not have cancelled the gross indebtedness of $55K and paid in fresh money no damage suffered or threatened to anybody.
without the stock agreement being made. It must be assumed that the purpose of
the agreement was to prevent the corporation from getting into financial distress. NOTE: Although the GR is that pooling or voting agreement cannot limit the
The difficulties of Harkert and Buck only arose after 11 years of successful discretion of directors, this principle has not been applied strictly to close
operations on the very policy which Buck sought to have maintained when he corporations, as illustrated by the Clark case. This variation is incorporated in
brought in the fresh capital into the business by purchasing 40% of the stock. sec 100. The Clark case also illustrates that the remedy of specific
performance is available in case of violation of a voting agreement.
SH control agreements are not invalid per se. If they are based on a sufficient
consideration between contracting SH they are valid and binding if they do not
contravene any express constitutional or statutory provision or contemplate any 4. cumulative voting
fraud, oppression, or wrong against creditors or other SHs. It is not illegal or
against public policy for 2 or more SH owning majority shares to unity upon a — the system of cumulative voting gives the minority an opportunity to
course of corporate policy, or upon the officers or directors whom they will elect. elect a representative to the board
— it is vital to both the majority and the minority to cumulate their
Clark v Dodge. votes so that they can get as many seats as possible
GR: the business of the corporation shall be managed by its board. If the
enforcement of a particular contract damages nobody—not even the public—one 5. classification of shares (Sec 6 supra; cf Financing Corporate Capital
sees no reason for holding it illegal, even though it impinges on the general rule Structure)
stated above. Damage suffered or threatened is a logical and practical test.
Where the directors are the sole SHs, there seems to be no objection to — device of classification of shares can be used to achieve the allocation
enforcing an agreement among them to vote for certain people as officers. The of control desired by the parties
rule that all SHs by their universal consent may do as they choose with corporate

— if shares are classified into common voting and preferred non-voting
shares, the management of corporate affairs will be controlled by — examples:
whoever owns the majority of the common voting, even though it may only o a by-law provision that only SHs with a stated minimum number of
be a minority of the total number of shares (voting and non-voting) shares fully paid up may be elected as directors is valid (Govt v El
— control would depend not on the amount of investment, but on the number Hogar)
of voting shares acquired o a by-law that disqualify a SH who is competing with the corporation, as
— if non-voting shares are non-redeemable, the prospect that the investor the corporation has the right to protect itself from persons who may
may get back his investment at some future time before dissolution would use inside information to its prejudice (Gokongwei v SEC)
be a compensating factor o a by-law that only holders of “founders shares” may qualify for
— SEC: to prevent abuses, it requires where no dividends are declared for 3 directorship (Sec 7)
consecutive years despite available profits, that preferred stocks be  exception to Sec 6 that non-voting shares shall be limited to
given the right to vote for directors until dividends are declared preferred and redeemable shares
 5 year period non-extendible
— In a close corporation, it is allowed to classify its directors into one or more  SEC approval
classes, each of whom may be voted for and elected solely by a particular
class of stock 8. management contracts

Gottschalk v Avalon Realty. — BOD may decide to enter into mgt contracts with another corporation
The AOI deny the right to vote of the first and second preferred SHs. The — The managing corporation will then perform all the managerial functions
provision that such stock may vote upon the happening of such contingencies usually pertaining to a GM
clearly implies that it may not until such contingencies occur. The right to vote — BOD must still retain control of the basic corporate policies and power to
may be denied by implication, such as a provision that “sole voting power shall recall the contract where the corporation’s interest would greatly suffer
reside in the holders of common stock.” Such a denial may exist expressly or by from its continuance
necessary implication. A denial may exist under an express provision even though
the denial may not be expressed. Unless a denial is clearly manifested, it should — Not an exception to Sec 23 which lays down the fundamental
not be given effect, but in this case, it should be given effect even though it is not principle that all corporate powers shall be exercised by the BOD
express. — BOD cannot abdicate its responsibility to act as a governing body
by giving absolute powers to offices or others by way of
6. restriction on transfer of shares (cf Transfer of Shares) management contracts
— The management contract is therefore a mere contract to manage
— common example: a restriction which gives a first option to other SHs and/or the day-to-day affairs of the corporation just like a GM
the corporation to acquire the shares of a SH who wishes to sell — It is one for lease of services and is not of agency
o peculiar to close corps
Sherman & Ellis v Indiana Mutual Casualty Co.
7. prescribing qualifications for directors; founders’ shares The contract provides that the underwriting and executive management for
Indiana Mutual will be performed by Ellis, president of Sherman Ellis, and may
— definition of the qualifications of directors or trustees may be provided in appoint another officer to be the chief executive head and underwriting
the by-laws manager of the company. It also provides that the managing company (Sherman

Ellis) shall have general supervision and charge of underwriting affairs and shall be The by-law which requires unanimous action of SHs to pass any resolution or
entitled to 10% of the net earned premiums collected from all policyholders. The take action of any kind, is equally obnoxious to the statutory scheme of stock
grant of corporate power by a state is upon the hypothesis that these powers shall corporation management. The whole concept of a representative government in
be exercised by the corporation’s officers, annually elected by the SHs and not by a corporation, with voting conducted conformably to statute, and with the
the officers of another corporation. Although generally corporations may for a power of decision lodged in certain fractions of the stock, is destroyed when
limited period delegate to a stranger certain duties performed by the officers, the SHs by agreement or by-law or AOI provision as to unanimous action, give
there are duties the performance of which may not be delegated to outsiders. In the minority interest an absolute, permanent and all-inclusive power of veto.
this case the period of control of the managing corporation is 20 years. Nothing of
importance was left for the BOD but the mere ministerial duties. The agreement The last by-law makes it impossible for the directors to act on any matter
contemplated the substitution of Sherman Ells for the officers of Indiana Mutual. except by unanimous vote of all of them. Such a by-law is almost unworkable
The principal business of Indiana was write casualty insurance, which is now solely and unenforceable because, prima facie in all acts done by a corporation, the
exercised by Sherman Ellis. No other conclusion can be drawn other than that major number must bind the lesser, or else differences could never be
Indiana Mutual was to be an instrumentality through which Sherman Ellis was to determined. Every corporation is given the privilege of enacting a by-law fixing
conduct a casualty business in the state of Indiana. its own quorum requirement at a fraction not less than that mandated by law.
But the very idea of a quorum is that when that required number of persons
9. unusual voting and quorum requirements goes into session as a body, the votes of a majority thereof are sufficient of
binding action.
— a device which in effect increases the veto power of the minority
— usually involves the formation of a corporation which has clearly efined Dissent: While the 2 by-laws are indeed invalid because it is violative of the
majority and minority blocks. statutes, the courts should nonetheless enforce against either SH the
o In exchange for the numerical majority in the board, the minority might agreement made by both of them which finds expression in those by-laws.
bargain for a provision in the AOI giving them strong veto power in mjor
corporate decisions
— In close corps, a requirement in the AOI that unanimous vote of all SHs is
— Majority to convene mtg
necessary would only have the effect of maintaining the status quo. — Majority of majority to vote for binding corporate act
— SHs ratification
— 97: A provision requiring a higher quorum or voting requirement cannot be o GR: 2/3 vote; Exceptions: 50%+1
amended except by the vote of SHs representing such higher voting Removal of directors: difficult to remove, SHs limited right to vote,
requirement, whether voting or non-voting difficult to personally sue, therefore law grants protection for SHs
— Holdover of directors occurs when you cannot convene a meeting
for want of quorum
— In Roxas: election as mode of removal
Benintendi v Kenton Hotel. — Angeles: appointment of receiver as mode of removal
The device is intrinsically unlawful because it contravenes an essential part of — Campbell: outright removal, then elect new directors
State policy. But a requirement, that there shall be no election of directors unless — Personal action may also be instituted, but difficult
every single vote be cast for the same nominees is in direct opposition to the rule
that the receipt of plurality of votes entitles a nominee to election.

o Only binding arrangement would be the fiduciary arrangement
 In proxies without an interest and pooing agreements, NO
fiduciary nature!
o Key to determining w/n VTAs exist:
Devices affecting control—common denominator is the contractual obligation  trustee exercises DISCRETION as to the vote, but it may
— SHs NOT of record: CANNOT vote, CANNOT be vote for also be consensual, i.e. trustees can agree among themselves
— Once voting rights are exercised by another, voting rights of the owner of who to vote
shares are already impaired  There is also delegation of authority; It is not the corporation
— Proxies: proxy holder is an agent constituting the VTA, it is the SHs!
o Does it affect ownership rights? No. Registration of shares? No — Pooling agreements: reciprocal arrangement of those who reach a
o Why do I need them? consensus to exercise right to vote separately, but shares remain with SHs
 No distinct and clear majority to collate enough votes to form — Consideration for voting devices
majority o sufficient consideration: In Clark, IPR, services, “secret formula”; In
 Biggest SHs; Shares are so widely held/dispersed Harkert, loan/investment; In Ringling, RFR; in Avalon, PS with econ
o 5-year term of proxies only applies to revocable proxies rights
o voting trusts and proxies coupled with an interest (security for o So long as consideration is in place, obligation satisfactorily
obligations) performed, voting agreement is justified, enforceability should be
o in Alejandrino: “deemed” to have sufficient interest there!
 pledgor-pledgee: interest of pledgee in ensuring that the value of — Management contracts: Is the manager/managing corp a trustee? NO…
stock used as security may not be impaired, and may be sold at a covered by contract
premium to 3rd parties at public auction in case obligors/debtors — Effect of higher quorum or voting requirements
default… o Controlling interest of the corporation can be vetoed by the minority
— Voting trust: beneficial owner is SH; legal ownership is trustee o Would affect disposition of corporate assets
o Registration with SEC and corporation of stock certificate (effect is o Controlling interest has the authority to formulate the policies
constructive notice to 3rd parties) o Anarchy/tyranny of the majority
o All stock certificates issued in name of participating SHs are presented
for cancellation and issuance of new ones; voting trust certificates are
issued by the trustee
o Orig SHs are delisted; replaced by trustees with notation that it holds
stocks of orig SHs
o “walang pakialam and korporasyon sa relasyon ng SH at ng trustee ”
o SH still has naked title; he can still sell the shares by selling the VTC. But
trustee is now SH of record!
o Total divorce of voting rights
 Voting rights: trustee; Economic rights: SH
o VTA is binding on participants even if there is disposition of the VTC
 Can trustee sell shares? NO! it holds it in trust
 Can transferee of VTC vote the shares? NO! only the trustee