D. VALIDITY OF RESTRICTIONS
43 OF THE CORPORATION
 LAMBERT V. FOX 26 PHIL 588
 FLEISHCHER V. BOTICA NOLASCO 47 PHIL 583
 PADGETT V. BABCOCK AND TEMPLETON 59 PHIL 232
E. FORGED TRANSFERS
 STA. MARIA V. HONGKONG AND SHANGHAI 89 PHIL 780
 DE LOS SANTOS V. REPUBLIC 96 PHIL 577
F. NON-TRANSFERABILITY OF MEMBERSHIP IN A NON-STOCK CORPORATION
(SEC. 90 OF THE CORPORATION CODE)
III. MANAGEMENT STRUCTURE
A. CORPORATE GOVERNANCE
1. POWERS OF THE BOARD OR TRUSTEES
(SEC. 23 OF THE CORPORATION CODE)
 GAMBOA V. VICTORIANO 90 SCRA 40, 1979
 GOKONGWEI V. SEC 89 SCRA 336, 1979
a. MUST ACT AS A BODY
(SEC. 25 OF THE CORPORATION CODE)
 ISLAMIC DIRECTORATE V. CA, GR NO. 117897, MAY 14 1997)
 RAMIREZ V. ORIENTALIST 38 PHIL 634, 1918
 BOARD OF LIQUIDATORS V. KALAW, 20 SCRA 987, 1967
 ACUNA V. BATAC PRODUCERS 20 SCRA 562, 1967
 HARDEN V. BENGUET CONSOLIDATED, 58 PHIL 1140, 1948
b. EXECUTIVE COMMITTEE
(SEC. 35 OF THE COROPORATION CODE)
B. ROLE SHAREHOLDERS
RIGHT TO VOTE AND ATTEND MEETINGS (SEC. 89 CORPORATION CODE)
 PRICE V. MARTIN 58 PHIL 707
a. INSTANCES
 ELECTION OF DIRECTORS AND TRUSTEES
(SEC. 24 OF THE CORPORATION CODE)
 AMENDMENT OF ARTICLES OF INCORPORATION
(SECTION 16 OF THE CORPORATION CODE)
 INVESTMENT IN ANOTHER BUSINESS
(SECTION 42 OF THE CORPORATION CODE)
 DELA RAMA V. MA-A0 SUGAR 27 SCRA 247
 GOKONGWEI V. SEC 89 SCRA 336, 1979
 MERGER AND CONSOLIDATION
(SECTION 77 OF THE CORPORATION CODE)
 INCREASE AND DECREASE OF CAPITAL STOCK (SECTION 38 OF THE
CORPORATION CODE)
 ADOPTION, AMENDMENT AND REPEAL OF BY LAWS (SEC. 48 OF THE
CORPORATION CODE)
 DECLARATION OF STOCK DIVIDENDS (SEC.
CODE)
 MANAGEMENT CONTRACTS (SEC. 44 OF THE CORPORATION CODE)
 FIXING OF CONSIDERATION OF PAR VALUE SHARES (SEC. 62 OF THE
CORPORATION CODE)
b. TREASURY SHARES (SEC. 57 OF THE CORPORATION CODE)
c. CONDUCT OF STOCKHOLDER’S OR MEMBERS’ MEETINGS
 KINDS AND REQUIREMENTS OF MEETINGS (SEC. 49 AND 50 OF THE
CORPORATION CODE)
 PLACE AND TIME OF MEETING (SEC. 51 AND SEC. 93 OF THE
CORPORATION CODE)
 QUORUM (SEC. 52 OF THE CORPORATION CODE)
 LANUZA V. COURT OF APPEALS GR NO. 131394, 2005
d. CONTRACTS AND AGREEMENTS AFFECTING STOCKHOLDERS
a. PROXY (SEC. 58 OF THE CORPORATION CODE)
b. VTA (SEC. 59 OF THE CORPORATION CODE)
 LEE V. COURT OF APPEALS 205 SCRA 752, 1992
 NIDC V. AQUINO, 163 SCRA 153
c. POOLING AGREEMENTS (SEC. 100 OF THE CORPORATION
CODE)
C. ENFORCEMENT OF RIGHTS OF SHAREHOLDERS
a. RIGHT TO INSPECT
1. SPECIFIED RECORDS (SECS. 74 AND 75 OF THE CORPORATION CODE)
2. REMEDIES
 PHILPOTS V. PHIL MANUFACTURING, 40 PHIL 471
 PARDO V. HERCULES, 46 PHIL 964
 VERAGUTH V. ISABELA SUGAR 57 SCRA 266
 GONZALES V. PNB 122 SCRA 489
3. CONFIDENTIAL NATURE OF SEC EXAMINATIONS
(SEC. 142 OF THE CORPORATION CODE)
b. APPRAISAL RIGHT (SEC. 81 TO 86 OF THE CORPORATION CODE)
c. DERIVATIVE SUITS
 RICHARDSON V. ARIZONA FUELS CORP. 614 P 2D 636
 BITONG V. CA GR NO. 123553, 1998
 SMC V. KHAN 176 SCRA 447
 PASCUAL V. OROSCO 19 PHIL 387
 EVANGELISTA V. SANTOS 86 PHIL 387
 REPUBLIC BANK V. CUADERO, 19 SCRA 671
 REYES V. TAN, 3 SCRA 198
1
 D. VALIDITY OF RESTRICTIONS holdings of stock in said John R. Edgar & Co., Inc., till after one
year from the date hereof.”
Notwithstanding this contract the defendant Fox sold his stock in the said corporation to
M NOTES:
E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor
LAMBERT v FOX of the said John,R. Edgar & Co., Inc. This sale was made by the defendant against the
protest of the plaintiff and with the warning that he would be held liable under the contract
***as a rule free transferability is a feature of corporation; but there hereinabove set forth and in accordance with its terms.
exist an exception where you can restrict:(when restricted is a
retrain in trade)
The learned TC decided the case in favor of the defendant upon the ground that the
- Suspension of free transferability, as an exception: intention of the parties as it appeared from the contract in question was to the effect
- XPN to free transferability applies: that the agreement should be good and continue only until the corporation reached a
1. Reasonable PURPOSE sound financial basis, and that that event having occurred sometime before the
2. Reasonable PERIOD expiration of the year mentioned in the contract, the purpose for which the contract
was made had been fulfilled and the defendant accordingly discharged of his
3. Reasonable PENALTIES obligation thereunder. The complaint was dismissed upon the merits. Lambert
appealed urging that the TC erred in its construction of the contract.

Other notes: ISSUE:

WON Fox can sell his stocks before the period stated in the agreement expires? (NO)
Transferability of interest or membership

Stock - Transferable. HELD:

Non – stock - Generally non-transferable since membership and all rights arising
therefrom are personal. However, the AOI or by-laws can provide
otherwise. (Sec. 90)
 LAMBERT V. FOX 26 PHIL 588
LAMBERT v FOX
This is an action brought to recover a penalty prescribed in a contract as punishment for
the breach thereof.
Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book
and stationery business, found itself in such condition financially that its creditors,
including the plaintiff and the defendant, together with many others, agreed to take
over the business, incorporate it and accept stock therein in payment of their respective
credits. This was done, the plaintiff and the defendant becoming the two largest
stockholders in the new corporation called John R. Edgar & Co., Incorporated. A few
days after the incorporation was completed plaintiff and defendant entered into an
agreement stating that:
No, Fox cannot sell his stocks. The intention of parties to a contract must be
determined, in the first instance, from the words of the contract itself. It is to be presumed
that persons mean what they say when they speak plain English. Interpretation and
construction should be the instruments last resorted to by a court in determining what
the parties agreed to. Where the language used by the parties is plain, then
construction and interpretation are unnecessary and, if used, result in making a
contract for the parties.
In the case at bar the parties expressly stipulated that the contract should last one year.
No reason is shown for saying that it shall last only nine months. Whatever the object
was in specifying the year, it was their agreement that the contract should last a year
and it was their judgment and conviction that their purposes would not be subserved in
any less time.
Note that Fox said, that the stipulation in the contract suspending the power to sell the
stock referred to therein is an illegal stipulation, is in restraint of trade and,
therefore, offends public policy. However, the SC said that where the suspension
of the right to sell stock in a corporation has a beneficial purpose and results in the
protection of the corporation as well as of the individual parties to the contract and is
reasonable as to time, the suspension is legal.

"Therefore, the undersigned mutually and reciprocally agree not to The judgment is reversed.
sell, transfer, or otherwise dispose of any part of their present
2
  FLEISHCHER V. BOTICA NOLASCO 47 PHIL 583
M NOTES:
FLEISCHER v BOTICA NOLASCO
***reinforces Lambert v Fox case
- The restriction was invalid because, the party (3rd) is not a privy to
the contract
- Cannot restrict free transferability thru the by laws- because it
only binds people within the corporation
***how to make the 3rd party privy to the contract?
- Make him part of the corporation
If not part of the corp; the restriction shall be embodied in the
corporation code: Sec. 15: in the ARTICLES OF INCORPORATION,
provided that the restriction must conform the reqs. Provided in
the case of Lambert v Fox
- ARTICLES OF INCORPORATION
is public document which binds everybody (which can bind
3rd paties)
Fleischer bought from Gonzales 5 shares of stock in Botica Nolasco Inc. Gonzales
indorsed the said transaction to the corp. but the corp. refused to register the shares
of stock in the name of Fleischer. The corp. invoked its by-laws which stated that they
had the preferential option to buy the shares of stock at P100.
ISSUE:
Was the by-law provision valid?
NO
HELD:
The SC held that although a corporation is granted by law to formulate its own by-
laws, the same shall remain valid and binding as long as it does not conflict the
Corporation Code. Since, the Code provides that shares of stock may be transferred
from one person to another by virtue of a valid transaction, there shall be no restriction
to trade or unreasonable limitation on ownership.
Moreover, a by-law provision may not bind an innocent third person.
Therefore, the by-law provision is invalid because it is not in consonance with the
law.
The only limitation imposed by Sec. 63 is when the corporation holds any unpaid
claim against the shares intended to be transferred. A corporation, either by its board,
its by-laws, or the act of its officers, cannot create restrictions in stock transfers,
because “Restrictions in the traffic of stock must have their source in legislative
enactment, as the corporation itself cannot create such impediment. By-laws are
intended merely for the protection of the corporation, and prescribe relation, not
restriction; they are always subject to the charter of the corporation.” Rural Bank of
Salinas v. CA, 210 SCRA 510 (1992).
Restraint of Trade: An agreement by which a person obliges himself not to engage
in competitive trade for five years is valid and reasonable and not an undue
or unreasonable restraint of trade and is obligatory on the parties who voluntarily
enter into such agreement. xOllendorf v. Abrahamson, 38 Phil. 585 (1918).
NOTES:
▪ The underlying test on whether the restrictions are valid is whether the
restriction is sufficiently reasonable as to justify the restriction overriding
the general policy against restraint on alienation of personal property. It
must also be limited to a certain time and a certain place.
▪ SEC GUIDELINES: (1) the restriction shall not be more onerous
than granting the existing stockholders of the corporation the option
to purchase the shares of the transferring stockholders with such
reasonable terms, conditions or periods stated (2) not valid – if
it absolutely prohibits the sale or transfer without the consent of
the existing stockholders (3) reasonable option period may range from
30-60 days (4) after the option period has expires, the stockholder is
free to sell his property to anyone.
3
 Section 63 contemplates no restriction as to whom the stocks may be transferred. It
 PADGETT V. BABCOCK AND TEMPLETON 59 does not suggest that any discrimination may be created by the corporation in favor of,
PHIL 232 or against a certain purchaser. The owner of shares, as owner of personal property, is at
liberty, under said section to dispose them in favor of whomever he pleases, without
M NOTES: limitation in this respect, than the general provisions of law. aFleishcher v.
Botica Nolasco, 47 Phil. 583 (1925).
PADGETT v BABCOCK
- A certificate that says NON- TRANSFERABLE is
TRANSFERABLE E. FORGED TRANSFERS
- The restriction on free transferability must contain in the ARTICLES
OF INCORP not in the certificate
- IF IN THE ARICLES OF Other notes:
INCORP: it should still comply with the 3
REASONABLE P’s as NOTE: This case held that a bona fide pledgee or transferee of a stock
from the apparent owner is not chargeable with knowledge of the limitations
provided in Lambert v Fox*** (and should be placed on said certificates by the real owner, or by any secret agreement
relating to the use which might be made of the stock by the holder. It further
included in the ARTICELS AND THE CERTIFICATE) held that when a stock certificate is indorsed in blank it constitutes a street
certificate so that upon its face, the holder is entitled to demand its transfer
into his name from the issuing corporation. In this case, Mrs. Santamaria’s
negligence is the immediate cause of the damage.
PADGETT v BABCOCK & TEMPLETON, INC

FACTS:
Padget was an employee of Babcock and Templeton Inc. from 1923-1929. Padget
bought 35 shares of the corp. at P100 at the suggestion of the President of the corp.
Padget was also a recipient of 9 shares by bonus given during the Christmas season.
Hence, he was the owner of a total of 44 shares, with the label “non-transferable” on
each and every certificate.

Before severing his ties with with the corp. he offered the corp. to buy back his shares at
par value or sell it to another person.
The President bargained for P85 then P80 but Padget did not agree with the price.

ISSUE:
Was the labeling of “non-transferable” on each certificate valid? NO

HELD:
The court held that the notation should be considered null and void because such is a
limitation on the right of ownership and a restraint on trade. Hence, the SC ruled that
the label “non-transferable” is void.

4
 STA. MARIA V. HONGKONG AND SHANGHAI 89 ISSUE:

PHIL 780 Whether or not the obligation of the defendant Bank to have inquired into the ownership of
the certificate when it received it from R.J. Campos & Co., Inc. and not conclude that the Bank was
M NOTES: negligent for not having done so, contrary to the claim of the plaintiff that defendant Bank acted
negligently, if not in bad faith, in accepting delivery of said certificate from RJ. Campos & Co., Inc.

Forged Transfers RULING:

STA MARIA V HONGKONG
***street certificate: is transferred by mere endorsement coupled YES.
with authority Certificate No. 517 came into the possession of the defendant Bank because R.J. Campos
- BLANK cert & Co., Inc. had opened an overdraft account with said Bank and to this effect it had executed on April
- Whoever holds it, owns it for it contains TRANSFER and 16, 1946, a letter of hypothecation by the terms of which R.J. Campos & Co., Inc. pledged to the said
Bank "all Stocks, Shares and Securities which I/we may hereafter come into their possession on my/our
AUTHORITY to effect the transfer
account and whether originally deposited for safe custody only or for any other purpose whatever or
- A stock cert: QUASI NEGO: subject to the defense of the original which may hereafter be deposited by me/us in lieu of or in addition to the Stocks, Shares, and Securities
owner now deposited or for any other purpose whatsoever."
It should be noted that the certificate of stock in question was issued in the name of the
brokerage firm-Woo, Uy-Tioco & Naftaly and that it was duly indorsed in blank by said firm, and that
said indorsement was guaranteed by R.J. Campos & Co., Inc., which in turn indorsed it in blank. This
certificate is what it is known as street certificate. Upon its face, the holder was entitled to demand its
JOSEFA SANTAMARIA, assisted by her husband, FRANCISCO SANTAMARIA, Jr. vs. transfer into his name from the issuing corporation. The Bank was not obligated to look beyond the
THE HONGKONG AND SHANGHAI BANKING CORPORATION and R. W. TAPLIN. certificate to ascertain the ownership of the stock at the time it received the same from R.J. Campos
G.R. No. L-2808 August 31, 1951 & Co., Inc., for it was given to the Bank pursuant to their letter of hypothecation. Even if said
certificate had been in the name of the plaintiff but indorsed in blank, the Bank would still have been
FACTS: justified in believing that R.J. Campos & Co., Inc. had title thereto for the reason that it is a well-
known practice that a certificate of stock, indorsed in blank, is deemed quasi negotiable, and as such
Mrs. Josefa T. Santamaria bought 10,000 shares of the Batangas Minerals, Inc., through the
the transferee thereof is justified in believing that it belongs to the holder and transferor.
offices of Woo, Uy-Tioco & Naftaly, a stock brokerage firm and pay therefore the sum of P8,041.20 as
shown by receipt Exh. B. The buyer received Stock Certificate No. 517 issued in the name of Woo, Uy-
Tioco & Naftaly and indorsed in bank by this firm.
On March 9, 1937, Mrs. Santamaria placed an order for the purchase of 10,000 shares of
the Crown Mines, Inc. with R.J. Campos & Co., a brokerage firm, and delivered Certificate No. 517 to
the latter as security therefor with the understanding that said certificate would be returned to her upon
payment of the 10,000 Crown Mines, Inc. shares. Exh. D. is the receipt of the certificate in question
signed by one Mr. Cosculluela, Manager of the R.J. Campos & Co., Inc. According to certificate Exh.
E, R. J. Campos & Co., Inc. bought for Mrs. Josefa Santamaria 10,000 shares of the Crown Mines,
Inc. at .225 a share, or the total amount of P2,250. Two days later, on March 11, Mrs. Santamaria went
to R.J. Campos & Co., Inc. to pay for her order of 10,000 Crown Mines shares and to get back
Certificate No. 517. Cosculluela then informed her that R.J. Campos & Co., Inc. was no longer allowed
to transact business due to a prohibition order from Securities and Exchange Commission. She was
also inform that her Stock certificate was in the possession of the Hongkong and Shanghai Banking
Corporation.

5
  DE LOS SANTOS V. REPUBLIC 96 PHIL 577
Other notes:
NOTE: This case held that a certificate of stock is not a negotiable instrument, but is
regarded as quasi-negotiable in the sense that it may be transferred by endorsement
coupled with delivery, but it is not negotiable because the holder thereof takes it without
prejudice to such rights or defenses as the registered owners thereof may have under
the law, except insofar as such rights or defenses are subject to the limitations imposed
by the principles governing estoppel.
NOTE: A transferee under a forged assignment acquires no title which can be
asserted against the true owner unless the true owner’s own negligence has been
such as to create an estoppel against him. This would mean that a bona fide
purchaser of shares under a forged or unauthorized transfer acquires no title as
against the true owner does not apply where the circumstances are such as to estop
the latter from asserting his title.
M NOTES:
Corporate Governance Powers of BOD & T
Sec 23
***what are the powers of the board
***all corporate powers is vested to the board
DELOS SANTOS v REPUBLIC
NOTE: This case held that a certificate of stock is not a negotiable instrument, but is
regarded as quasi-negotiable in the sense that it may be transferred by endorsement
coupled with delivery, but it is not negotiable because the holder thereof takes it without
prejudice to such rights or defenses as the registered owners thereof may have under
the law, except insofar as such rights or defenses are subject to the limitations imposed
by the principles governing estoppel.
NOTE: A transferee under a forged assignment acquires no title which can be
asserted against the true owner unless the true owner’s own negligence has been
such as to create an estoppel against him. This would mean that a bona fide
purchaser of shares under a forged or unauthorized transfer acquires no title as
against the true owner does not apply where the circumstances are such as to estop
the latter from asserting his title.
DELOS SANTOS v REPUBLIC
G.R. No. L-4818 February 28, 1955
Lessons Applicable: Nature of Certificate of Stock (Corporate Law)
FACTS:
 600,000 shares of stock of the Lepanto Consolidated Mining Co., Inc., (Lepanto), a corporation
duly organized and existing under the laws of the Philippines
 Originally, 1/2 shares of stock were claimed by Apolinario de los Santos, and the other half by
Isabelo Astraquillo. During the pendency of this case, the Astraquillo has allegedly conveyed
and assigned his interest in and to de los Santos.
 Vicente Madrigal is registered in the books of the Lepanto as owner of said stocks and whose
indorsement in blank appears on the back of said certificates
 contend that De los Santos bought:
 55,000 shares from Juan Campos
 300,000 shares from Carl Hess
 800,000 shares from Carl Hess for the benefit of Astraquillo
 delivered to stock broker Leonardo Recio stock certificate No. 2279 55,000 shares to see Mr.
DeWitt, who, probably, would be interested in purchasing the shares
 DeWitt retained the shares reasoning that it was blocked by the US and receipt was burned at
Recio's dwelling
 By virtue of vesting P-12, dated February 18, 1945, title to the 1,600,000 shares of stock in
dispute was, however, vested in the Alien Property Custodian of the U. S.
 Plaintiffs filed their respective claims with the Property Custodian
 Defendant Attorney General of the U. S., successor to the Administrator contends, substantially,
that, prior to the outbreak of the war in the Pacific, shares of stock were bought by Vicente
Madrigal, in trust for, and for the benefit of, the Mitsui Bussan Kaisha a corporation organized in
accordance with the laws of Japan, the true owner thereof, with branch office in the Philippines
 March, 1942: Madrigal delivered stock certificates, with his blank indorsement thereon, to the
Mitsuis, which kept said certificates, in the files of its office in Manila, until the liberation of the
latter by the American forces early in 1945; that the Mitsuis had never sold, or otherwise
disposed of, said shares of stock; and that the stock certificates aforementioned must have
been stolen or looted, therefore, during the emergency resulting from said liberation.
 CFI: favored plaintiffs
 Defendants Appealed
 Hess, during that period, operate as broker, for being American, he was under Japanese
surveillance, and that Hess had made, during the occupation, no transaction involving mining
shares, except when he sold 12,000 shares of the Benguet Consolidated, inherited from his
mother, sometime in 1943.
ISSUE: W/N the plaintiffs are entitled to the shares
HELD: NO. REVERSED
 burden of proof is upon the plaintiffs
6
 Section 35 of the Corporation Law reads: the certificate from the pledgee. And this has also been held to be true though the thief was an
The capital stock corporations shall be divided into shares for which certificates signed by the officer of the pledgee, since his act in wrongfully appropriating the certificate cannot be
president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of regarded as a misappropriation by the bank to whose custody the certificate was intrusted by
the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are the owner, even though the bank may be liable to the pledgor
personal property and may be transferred by delivery of the certificate endorsed by the owner or his  Hence, as the undisputed principal or beneficiary of the registered owner (Madrigal), the Mitsuis
attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be may claim his rights, which cannot be exercised by the plaintiffs, not only because their alleged
valid, except as between the parties, until the transfer is entered and noted upon the books of the title is not derived either from madrigal or from the Mitsuis, but, also, because it is in derogation,
corporation so as to show the names of the parties to the transaction, the date of the transfer, the of said rights. madrigal and the Mitsuis are notprivies to the alleged sales by Campos and Hess
number of the certificate, and the number of shares transferred. to the plaintiffs, contrary to the latter's pretense.
No shares of stock against which the corporation holds any unpaid claim shall be transferable on the
books of the corporation. (Emphasis supplied.)
 Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee
under a forged assignment acquires no title which can be asserted against the true owner,
unless his own negligence has been such as to create an estoppel against him (Clarke on
Corporations, Sec. Ed. p. 415). If the owner of the certificate has endorsed it in blank, and it is
stolen from him, no title is acquired by an innocent purchaser for value
 Neither the absence of blame on the part of the officers of the company in allowing an
unauthorized transfer of stock, nor the good faith of the purchaser of stolen property, will avail
as an answer to the demand of the true owner
 The doctrine that a bona fide purchaser of shares under a forged or unauthorized transfer
acquires no title as against the true owner does not apply where the circumstances are such as
to estop the latter from asserting his title. . . .
 one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss
must fall on the one who first trusted the wrongdoer and put in his hands the means of inflicting
such loss
 negligence which will work an estoppel of this kind must be a proximate cause of the purchase
or advancement of money by the holder of the property, and must enter into the transaction
itself
 the negligence must be in or immediately connected with the transfer itself
 to establish this estoppel it must appear that the true owner had conferred upon the person who
has diverted the security the indicia of ownership, or an apparent title or authority to transfer the
title
 So the owner is not guilty of negligence in merely entrusting another with the possession of his
certificate of stock, if he does not, by assignment or otherwise, clothe him with the apparent title.
 Nor is he deprived of his title or his remedy against the corporation because he intrusts a third
person with the key of a box in which the certificate are kept, where the latter takes them from
the box and by forging the owner's name to a power of attorney procures their transfer on the
corporate books.
 Nor is the mere indorsement of an assignment and power of attorney in blank on a certificate of
stock, which is afterwards lost or stolen, such negligence as will estop the owner from asserting
his title as against a bona fide purchaser from the finder or thief, or from holding the corporation
liable for allowing a transfer on its books, where the loss or theft of the certificate was not due to
any negligence on the part of the owner
 stock pledged to a bank is endorsed in blank by the owner does not estop him from asserting
title thereto as against a bona fide purchaser for value who derives his title from one who stole
7
F. NON-TRANSFERABILITY OF MEMBERSHIP IN A NON-STOCK
CORPORATION
(SEC. 90 OF THE CORPORATION CODE)
Other notes:
Sec.90. Non-transferability of membership.
– Membership in a non-stock corporation and all rights arising therefrom are personal and non-
transferable, unless the articles of incorporation or the by-laws otherwise provide.
III. MANAGEMENT STRUCTURE
F. CORPORATE GOVERNANCE
2. POWERS OF THE BOARD OR TRUSTEES
(SEC. 23 OF THE CORPORATION CODE)
Sec. 23. The board of directors or trustees.
Unless otherwise provided in this Code, the corporate powers of all
corporation formed under this Code shall be exercised , all business
conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the
holders of stock, or where there is no stock, from among the members
of the corporation, who shall hold office for one (1) year and until
their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director, which share shall stand in
his name on the books of the corporation. Any director who ceases to
be the owner of at least one (1) share of the capital stock of the
corporation of which he is the director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof.
A majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
Qualifications of directors
1. He must own at least one (1) share of the capital stock of the
corporation in his name.
2. Majority of the directors must be a resident citizen of the Philippines.
3. A director must not have been convicted by final judgement of an offense
punishable by imprisonment exceeding six (6) years or a violation of the
provisions of the Corporation Code committed within five (5) years prior
to the date of election or appointment.
The directors, once elected, become the representatives of the corporation itself,
not its stockholders. The directors of a non- stock corporation are required to be
members thereof and like stock corporations “majority of the directors and
trustees of all corporations organized under the Corporation Code must be residents
citizen of the Philippines”.
There are some special corporation not organized with the Corporation
Code where directors are required to be citizens of the Philippines.
They are as follows:
1. Bank and banking institution, at least 2/3 of the members of the board of
directors shall be citizen of the Philippines.
2. Rural banks, every member of the board of directors shall be citizens of
the Philippines.
3. Domestic air carrier, the directing head or 2/3 of the board of directors
and other managing officers shall be citizens of the Philippines.
4. Registered investments companies, the directors thereof must be Filipino
citizen.
5. Private development banks, all the members of the board of directors
shall be citizen of the Philippines.
6. In case of financing corporation, at least 2/3 of all members of the board
of directors shall be citizen of the Philippines.
8
  GAMBOA V. VICTORIANO 90 SCRA 40, 1979
M NOTES:
Gamboa v Victoriano
- The courts cannot intervene with the matters relating to the corp.
- The courts can only intervene on a specific act of the
corporation is oppressive and unconscionable; thereby,
deciding that the act of corporation is invalid
- The corporation provides under Sec. 23, giving the right to the
corporation through its directors or trustees to act on matters relating
to the corp.
GAMBOA1 v. VICTORIANO2
May 5, 1979 | Concepcion, Jr., J. | Derivative suits
SUMMARY: Gamboa et al. (de la Rama group) filed a civil case against the Lopue group to nullify
the issuance of 823 shares of stock of the Inocentes de la Rama, Inc. in favor of the Lopue group. In
the said civil case, the Lopue group alleged that upon their acquisition of shares of stock in the
corporation, the de la Rama group, in order to forestall their takeover of the corporation,
surreptitiously met and elected Gamboa and de la Rama as president and vice president of the
corporation, respectively, and thereafter passed a resolution authorizing the sale of the 823 unissued
shares of the corporation to Gamboa, et al., at par value, after which the rest of the de la Rama
group were elected to the board of the corporation, to the prejudice of the Lopue group. A
compromise agreement was entered into by other members of the de la Rama group and the Lopue
group. The de la Rama group sought to dismiss the complaint against them (on the allegation that
the Lopue group has waived its cause of action against them by virtue of the compromise
agreement), but this was denied by the CFI. In its petition for certiorari before SC, the de la Rama
group contends that the proper remedy of the Lopue group would be to institute a derivative suit
against the de la Rama group in the name of the corporation in order to secure a binding relief after
exhausting all the possible remedies available within the corporation. SC did not agree with them
because in the case at bar, the Lopue group is alleging and vindicating their members’ own individual
interests or prejudice, and not that of the corporation.
DOCTRINE: An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest.
FACTS:
 In a civil case filed with the CFI of Negros Occidental, Gamboa et al. (de la Rama group), now
represented by their heirs, were sued by herein private respondents Lopue et al., to nullify the
issuance of 823 shares of stock of the Inocentes de la Rama, Inc. in favor of Lopue et al. The
gist of the complaint is that:
o Lopue et al. are the owners of 1,328 shares of stock of the Inocentes de la
Rama, Inc., a domestic corporation, with an authorized capital stock of 3,000
shares with a par value of P100 per share, 2,177 of which were subscribed and
issued, thus leaving 823 shares unissued Upon Lopue et al.’s acquisition of the
shares of stock held by Ledesma and Siangco, then President and Vice
President of the corporation, Borromeo, de la Rama, and Gamboa, remaining
members of the board of directors of the corporation, in order to forestall the
takeover by Lopue et al. of the corporation, surreptitiously met and elected
Ricardo Gamboa and Honorio de la Rama as president and vice president of the
corporation, respectively, and thereafter passed a resolution authorizing the sale
of the 823 unissued shares of the corporation to Gamboa, et al., at par value,
after which the rest of the de la Rama group were elected to the board of the
corporation
o Lopue group alleged that the sale of the unissued 823 shares of stock of the
corporation was in violation of their pre-emptive rights and made without the
approval of the board of directors representing 2/3 of the outstanding capital
stock, and is in disregard of the strictest relation of trust existing between them,
as stockholders thereof
o They also alleged that the rest of the de la Rama group were not legally elected
to the board of directors of the said corporation and has unlawfully usurped or
intruded into said office to their prejudice
o Prayer:
 that a writ of preliminary injunction be issued restraining the de la
Rama group from committing, or continuing the performance of an act
tending to prejudice, diminish or otherwise injure their rights in the
corporate properties and funds of the corporation, and from disposing,
transferring, selling, or otherwise impairing the value of the 823 shares
of stock illegally issued by de la Rama et al.
 that a receiver be appointed to preserve and administer the property
and funds of the corporation
9
  that the rest of de la Rama group be declared as usurpers or intruders
into the office of director in the corporation and, consequently, ousting
them therefrom
 that the sale of 823 shares of stock of the corporation be declared null
and void
 that de la Rama et al. be ordered to pay damages and attorney’s fees,
as well as the costs of suit
 Acting upon the complaint, Judge Victoriano, after proper hearing, directed the Clerk of Court to
issue the writ of preliminary injunction prayed for by the Lopue group and and ordered the de la
Rama group to deposit with the Clerk of Court the corresponding certificates of stock for the 823
shares issued to de la Rama group, upon Lopue group’s posting of a bond to answer for any
damages and costs that may be sustained by the de la Rama group by reason of the issuance
of the writ.
 The Lopue group entered into a compromise agreement with the de la Rama group, whereby
the contracting parties withdrew their respective claims against each other and the de la Rama
group waived and transferred their rights and interests over the questioned 823 shares of stock
in favor of the Lopue group.
 This compromise agreement was approved by the trial court. As a result, the de la Rama group
filed a motion to dismiss the complaint filed by the Lopue group upon the grounds:
o that the Lopue group’s cause of action had been waived or abandoned
o that the Lopue group were estopped from further prosecuting the case and since
they have, in effect, acknowledged the validity of the issuance of the disputed
823 shares of stock
 The motion to dismiss was denied.
 The de la Rama group also filed a motion to declare the rest of their group (de la Rama, de la
Rama-Battistuzzi, Battistuzzi) in contempt of court, for having violated the writ of preliminary
injunction when they entered into the compromise agreement with the Lopue group. However,
Judge Victoriano denied the said motion for lack of merit.
 The de la Rama group filed an MR of the order denying the MTD, and subsequently, an
addendum thereto, claiming that the CFI has no jurisdiction to interfere with the management of
the corporation by the board of directors, and the enactment of a resolution by the de la Rama
group, as members of the board of directors of the corporation, allowing the sale of the 823
shares of stock was purely a management concern which the courts could not interfere with.
 When the trial court denied said motion and its addendum, the de la Rama and Gamboa group
filed the instant petition for certiorari for the review of said orders.
RULING: Petition dismissed.
Whether the CFI was correct in dismissing the MTD filed by the de la Rama group – YES.
 The questioned order denying the de la Rama group’s MTD is merely interlocutory and cannot
be the subject of a petition for certiorari. The proper procedure to be followed in such a case is
to continue with the trial of the case on the merits and, if the decision is adverse, to reiterate the
issue on appeal. It would be a breach of orderly procedure to allow a party to come before SC
every time an order is issued with which he does not agree.
 Besides, the order denying MTD was not capriciously, arbitrarily, or whimsically issued, or that
the CFI lacked jurisdiction over the cause as to warrant the issuance of the writ prayed for. As
found by Judge Victoriano, the Lopue group has not waived their cause of action against the de
la Rama and Gamboa group by entering into a compromise agreement with the other members
of the de la Rama group in view of the express provision of the compromise agreement that the
same “shall not in any way constitute or be considered a waiver or abandonment of any claim or
cause of action against the other defendants.”
 There is also no estoppel because there is nothing in the agreement which could be construed
as an affirmative admission by the Lopue group of the validity of the resolution of the de la
Rama group which is now sought to be judicially declared null and void. The foregoing
circumstances and the fact that no consideration was mentioned in the agreement for the
transfer of rights to the said shares of stock to the Lopue group are sufficient to show that the
agreement was merely an admission by the other members of the de la Rama group of the
validity of the claim of the Lopue group.
Whether the CFI has jurisdiction in the civil case filed by Lopue group against the de la Rama
group – YES.
 The claim of the de la Rama group, in their addendum to the MR of the order denying the
motion to dismiss the complaint, questioning the trial court’s jurisdiction on matters affecting the
management of the corporation, is without merit.
 The well-known rule is that courts cannot undertake to control the discretion of the board of
directors about administrative matters as to which they have legitimate power of action, and
contracts intra vires entered into by the board of directors are binding upon the corporation and
courts will not interfere unless such contracts are so unconscionable and oppressive as to
amount to a wanton destruction of the rights of the minority.
 In this case, the Lopue group aver that the de la Rama group has concluded a transaction
among themselves as will result to serious injury to the interests of the Lopue group, so that the
trial court has jurisdiction over the case.
[TOPIC] Whether the proper remedy of the Lopue group would be to institute a derivative suit
against the de la Rama group in the name of the corporation in order to secure a binding relief
after exhausting all the possible remedies available within the corporation (as argued by the
de la Rama group) – NO.
 An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation.
In such actions, the suing stockholder is regarded as a nominal party, with the corporation as
the real party in interest.
10
 In the case at bar, however, the Lopue group is alleging and vindicating their member’s own
individual interests or prejudice, and not that of the corporation.
At any rate, it is yet too early in the proceedings since the issues have not been joined. Besides, DETECTIVE & Protective BuREAU v
misjoinder of parties is not a ground to dismiss an action. - For a person to seat as a director; one must be ELECTED AND
QUALIFIED
- A person has been elected as a managing dir and turns
 GOKONGWEI V. SEC 89 SCRA 336, 1979 out that such person has no share.; therefore he is only
elected but not qualified
M NOTES:
Directors Sec 24
GOKONGWEI v SEC Sec 26
- It is the discretion of the corporation through its board and sh to
***BOD exercise corp powers
ammend their by-laws with regards to the qualifications of the
- When dir. Decides: may cause profit/losses= affects the shs
director;
- When a dir acts in a manner that prejudices a stock holder? May file
- So long as this qualifications are reasonable, the courts will
suit
not intervene
- Dir may abstain to prevent cause of action (a tendency
where a dir may not act so he will not be a part of the
NOTES:
quorum)

GOKONGWEI v SEC
- While sec 23 provides there is a specific quali at least owning one BJR: the courts cannot supplant the discretion of the dirs; because it
share of stock; is not the business of the courts
- that does not prohibit the board and the sh (NOTE: shall not Under BJR even if the act of the board has resulted to losses; the court cannot
be done only by the board:the disqualification shall be interfere.
contained at least in the bylaws)
Sec 25
- In this case they did not specifically say that Gokongwei is
***how are the powers will be exercised
disqualified; they only said through their bylaws that any
- Notice
officer or dir, of a competing corp of SMC cannot seat as a
- Meeting
member of the board
- Quorum 50% +1 =majority is a VALID corporate act
- REASON: a dir seats in fiduciary capacity vis
***to fully act on matters of the corp under Sec 23; Sec. 25
a vis the sh; the dirs. Under sec. 23 exercise corp
requires the quorum of the majority of director to have a valid act
powers, therefore given certain rights and privs.
***for the fact that BJR making the court cannot intervene; the BOD will then
Superior that of a sh (VERAGUTH
act and vote on a specific business matters
case: dir has an unqualified right to examine the
records of the corp)
11
 fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted
with the management of the corporation for the collective benefit of the stockholders, they occupy a
fiduciary relation, and in this sense the relation is one of trust. It springs from the fact that directors
have the control and guidance of corporate affairs and property; hence of the property interests of the
stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
JOHN GOKONGWEI Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the
vs. information which he acquires as director to promote his individual or corporate interests to the
SEC, ANDRES SORIANO, et al. prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-
GR L-45911, 11 April 1979 laws was made.
Certainly, where two corporations are competitive in a substantial sense, it would seem
FACTS: improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above his personal
Gokonwei alleged that on September 18, 1976, individual respondents amended by bylaws concerns.
of San Miguel Corporation, basing their authority to do so on a resolution of the stockholders adopted
on March 13, 1961, when the outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares
totalled 30,127,043, with a total par value of P301,270,430.00. It was contended that according to
section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative
vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961 authorization, petitioner contended that
the Board acted without authority and in usurpation of the power of the stockholders.
It was claimed that prior to the questioned amendment, petitioner had all the qualifications
to be a director of respondent corporation, being a substantial stockholder thereof; that as a
stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and
to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned, hence
the amended by-laws are null and void.

ISSUE:

Whether or not SMC’s BoD acted in bad faith in making the amendment which disqualified
Gokongwei from being elected as Director.

RULING:

NO.

SMC is merely protecting its interest from Gokongwei, who owns companies in direct
competition with SMC’s business. Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt that their character is that of a

12

c. MUST ACT AS A BODY
(SEC. 25 OF THE CORPORATION CODE)
NOTES:
(a) Minimum set of officers and their qualifications (Sec. 25)
The minimum set of officers are:
(1) president (who shall be a director);
(2) secretary (who shall be a resident and Filipino citizen); and
(3) treasurer (who may or may not be a director)
The by-laws, however, may provide for other officers.
Any 2 or more positions may be held concurrently by the same person, except
that no one shall act as (a) president and secretary, or (b) president and treasurer
at the same time.
It must be noted however that directors or trustees cannot vote by proxy at board
meetings. (Sec. 25)
QUORUM: Generally, a majority of the number of directors or trustees
as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business. (Sec. 25)
Exceptions:
(1) If the AOI or by-laws provide for a greater
majority;
(2) If the meeting is for the election of officers,
which requires the vote of a majority of all
the members of the Board
Sec. 25. Corporate officers, quorum. – Immediately after their
election, the directors of a corporation must formally organized by the
election of a president, who shall be a director, a treasurer who may
or may not be a director, a secretary who shall be a resident citizen
of the Philippines, and such other officers as may be provided for in
the by-laws. Any two (2) or more positions may be held concurrently by
the same person, except that no one shall act as president and secretary
or as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and by the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide form a greater majority, a majority
of the number of directors or trustees as fixed in the articles of incorporation
shall constitute a quorum for the transaction of corporate business, and every
decision of at least a majority of the directors or trustees present at a meeting
at which there is a quorum shall be valid as a corporate act , except for the
election of the officers which shall require the vote of a majority of all the
members of the board.
Qualification of corporate officer
1. President. He must be a director.
2. Treasurer. He may or may not be a director.
3. Secretary. He must be a resident and citizen of the Philippines
4. Other officers provided for in the by- laws.
Three levels of corporate control
1. The board of director which is responsible for the corporate policies
and the general management of the business affairs of the corporation.
2. The officers, who in theory execute the policies lay down by the board
, but in practice often have wide latitude in determining the course of
business operations.
3. Stockholders who like amendments of the articles of incorporation.
Teleconferencing of Board Members
In the Philippines, teleconferencing and videoconferencing of members of board of
directors of private corporation is a reality, in light of the Republic Act No. 8792.The
Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on
November 30, 2001, providing the guidelines to be complied with related to such
conferences. Thus, the court agrees with the RTC that persons in the Philippines
may have a teleconference with a group of persons in South Korea relating to
business transactions or corporate governance.
13
Directors and officers distinguished
The officers of a corporation, unlike the directors, are true agent of the corporation.
Each officer may bind the corporation by his individual acts within the actual or
apparent scope of authority. On the other hand, a director has no authority to act
for the corporation.
Authority of corporate officers
The corporation transact its business through its officers or agents. An officer’s
power as an agent of the corporation must be sought from the statute, charter,
and the by-laws or in a delegation of authority to such officers, from the acts
of board of directors, formally expressed or implied from a habit or custom of doing
business.
Chairman of the Board
A chairman of the board of directors must himself director be a director of the
corporation. His duty as presiding officer is not an executive one. It has been
suggested that he well be given advisory duties in determining executive salaries,
bonus plans and pensions, determining dividend policy, selecting auditors, and
dealing questions with labor and company policy.
of the corporation, and of all other matters required to be entered in the
records. The secretary is the ministerial officer who cannot bind the corporation
unless he is authorized to do so.
Treasurer
The treasurer of the corporation “may or may not be a director”. He is the
proper officer and the only proper officer in the absence of express provision to
the contrary, to receive and keep the money of the corporation and to disburse
them as he may be authorized.
Other officers
The by-laws of the corporation may provide for such other officers and agent
as may be necessary and convenient considering the nature and needs of the
business. Their compensation is provided for by the by-laws and the board of
directors in a suitable manner.
Quorum – signifies the number of persons belonging to a corporation required
to transact business.

President
The president must be a director of the corporation. The powers of the president
of a corporation are vested in him by law or the by-laws; otherwise, he has no
power over the corporate property and business than has any other director.
However, he may be given actual authority to make particular contracts, or to
execute conveyances, borrow money, execute mortgages, and do other acts, by
the charter, the by-laws, resolutions of directors or their informal acquiescence.
Section 25 of the Corporation Code requires more people than a simple majority
to form a quorum. If no such defining number is determined, a quorum is a
simple majority.
Directors cannot vote by proxy
The directors cannot vote by proxy but must personally present, and act by
themselves.

Vice- President
In the absence of the president, or if the office of the president becomes
vacant, as a rule, the vice president elected and appointed by the shareholders
or directors has authority to act in his stead, and to perform the duties of the
office.

Secretary
A secretary must be a resident citizen of the Philippines. It is generally its duty
to make and keep corporate records; to make proper entries of the votes,
resolution and proceedings of the shareholders and directors in the management

14
 According to the petitioner, in 1972, after the purchase of the land by the Libyan government
in the name of IDP, Martial Law was declared by the late President Ferdinand Marcos. Thereafter, two
Muslim groups sprung, the Carpizo Group and the Abbas Group, both groups claimed to be the
legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending
groups, came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo
 ISLAMIC DIRECTORATE V. CA, GR NO. Group and the Abbas Group as IDP board members to be null and void.
117897, MAY 14 1997) ISSUE:
M NOTES:

Must Act as a Body Whether or not the Deed of Sale executed by Carpizo Group is valid.
ISLAMIC DIRECTORATE v CA RULING:

RAMIREZ v ORIENTALIST
- There are series of corporate acts that did not go through NMQ;
only an informal conference
- The corp was liable; because they have ratified the act of the
treasurer; that the corp BENEFITED from the transaction
- They allowed through their several transaction
***RATIFICATION: receipt of BENEFTITS makes the corp
liable
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES &
EXCHANGE COMMISSION
vs.
COURT OF APPEALS and IGLESIA NI CRISTO
G.R. No. 117897. May 14, 1997
FACTS:
Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim
major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated
the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to
establish an Islamic Center in Quezon City for the construction of a "Mosque (prayer place), Madrasah
(Arabic School), and other religious infrastructures" so as to facilitate the effective practice of Islamic
faith in the area.
The Libyan government donated money to the IDP to purchase land at Culiat, Tandang Sora,
Quezon City, to be used as a Center for the Islamic populace. The land, with an area of 49,652 square
meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616) and RT-26521
(170567), both registered in the name of IDP.
NO.
This is precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of
the Carpizo Group to the IDP Board of Trustees to be null and void. Consequently, the Carpizo Group
is bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or
disposition of ID property.
Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private
respondent INC contracted is a fake Board. Premises considered, all acts carried out by the Carpizo
Board, particularly the sale of the Tandang Sora property, allegedly in the name of the IDP.
The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo
Group's failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or
substantially all assets of the corporation.
The Tandang Sora property, appears from the records, constitutes the only property of the
IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of
IDP falling squarely within the contemplation of the foregoing section. For the sale to be valid, the
majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona
fide members of the corporation should have been obtained.
These twin requirements were not met as the Carpizo Group which voted to sell the Tandang
Sora property was a fake Board of Trustees, and those whose names and signatures were affixed by
the Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale
were, from all indications, not bona fide members of the IDP as they were made to appear to be. All
told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent
INC was intrinsically void ab initio.

15
 without funds to meet these obligations. Action was instituted by the plaintiff to Orientalist Company,
and Ramon J. Fernandez for sum of money.

Issue: WON the Orientalist Co. is liable for the acts of its treasurer, Fernandez?

 RAMIREZ V. ORIENTALIST 38 PHIL 634, 1918 Held: Yes. It will be observed that Ramon J. Fernandez was the particular officer and member of the
board of directors who was most active in the effort to secure the films for the corporation. The
negotiations were conducted by him with the knowledge and consent of other members of the board;
M NOTES:
and the contract was made with their prior approval. In the light of all the circumstances of the case,
RAMIREZ VS. ORIENTALIST CO AND FERNANDEZ (38 Phil. 634; 1918) we are of the opinion that the contracts in question were thus inferentially approved by the company’s
board of directors and that the company is bound unless the subsequent failure of the stockholders to
In this case, the board of directors, before the financial inability of the corporation to proceed approve said contracts had the effect of abrogating the liability thus created.
with the project was revealed, had already recognized the contracts as being in existence and had
proceed with the necessary steps to utilize the films. The subsequent action by the stockholders in not
ratifying the contract must be ignored. The functions of the stockholders are limited of nature. The
theory of a corporation is that the stockholders may have all the profits but shall return over the
complete management of the enterprise to their representatives and agents, called directors.
Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and
exercising certain other special powers defined by law. In conformity with this idea, it is settled that
contracts between a corporation and a third person must be made by directors and not stockholders.

Ramirez vs Orientalist Co. (1918)

Facts: Orientalist Company was engaged in the business of maintaining and conducting a theatre in
the city of Manila for the exhibition of cinematographic films. engaged in the business of marketing
films for a
THE ORIENTALIST COMPANY,

By RJ Fernandez

Treasurer.

RJ Fernandez”
manufacturer or manufacturers, there engaged in the production or distribution of cinematographic
material. In this enterprise the plaintiff was represented in the city of Manila by his son, Jose Ramirez.
The directors of the Orientalist Company became apprised of the fact that the plaintiff in Paris had
control of the agencies for two different marks of films, namely, the “Eclair Films” and the
“Milano Films;” and negotiations were begun with said officials of the Orientalist Company by Jose
Ramirez, as agent of the plaintiff. The defendant Ramon J. Fernandez, one of the directors of the
Orientalist Company and also its treasure, was chiefly active in this matter. Ramon J. Fernandez had
an informal conference with all the members of the company’s board of directors except one, and with
approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in Manila,
accepting the offer contained in the memorandum the exclusive agency of the Eclair films and Milano
films. In due time the films began to arrive in Manila, it appears that the Orientalist Company was

16

Ramirez v. Orientalist Co. and Fernandez (1918) – Street, J.
Concept: Control and Management of Corporation
FACTS:
Orientalist Company (Orientalist for brevity) exhibited films in a theatre in Manila. Plaintiff JF Ramirez,
a resident of Paris and represented in Manila by his son Jose Ramirez, was engaged in business of
marketing films for manufacturers and in the production or distribution of cinematographic material. In
1913, there were negotiations between the officials of Orientalist and Jose Ramirez, as agent of JF
Ramirez, for the exclusive agency of two films in the hands of Orientalist. Jose Ramirez placed a formal
offer stating in detail the terms upon which Ramirez would undertake to supply from Paris the films.
The board of directors approved and accepted the offer. The most important portion of the two letters
of acceptance written by Fernandez to Ramirez is in the following terms: “These communications were
signed in the following form, in which it will be noted the separate signature of RJ Fernandez, as an
individual, is placed somewhat below and to the left of the signature of the Orientalist Company, as
signed by RJ Fernandez, in the capacity of treasurer:
The record showed that JF Ramirez himself procured the films upon his own responsibility. Thus, the
only contracting parties in this case are JF Ramirez (first party), and Orientalist with RJ Fernandez
(second party). The films arrived in Manila but Orientalist had no funds to meet its obligations. Hence,
the first few drafts were accepted in the name of Orientalist by its president B Hernandez, and were
taken up by him with his own funds. As the drafts had been paid by Hernandez, he treated the films as
his own property, and they never came into the actual possession of Orientalist as owner at all.
Hernandez rented the films to Orientalist and they were exhibited by it in the Oriental Theater under
an arrangement made between him and the theater’s manager. Several remittances of films from Paris
arrived. All of the drafts accompanying these films were drawn upon the Orientalist Company; and all
were accepted in the name of Orientalist by its president, B Hernandez, except the last which was
accepted by Hernandez individually. None of the drafts thus accepted were taken up by the drawee or
by Hernandez when they fell due; and it was finally necessary for Ramirez to take them up as
dishonoured by non-payment.
Ramirez instituted an action against Orientalist and RJ Fernandez. Upon application of Ramirez, the
films were sold and the amount realized from the sale was applied to the satisfaction of the plaintiff’s
claim. Judgment was given for the balance due to Ramiez. Orientalist was declared to be a principal
debtor and Fernandez was declared to be subsidiarily liable as guarantor. Defendants appealed. The
Court noted that the action is primarily founded upon the liability created by the two acceptance letters.
ISSUES:
1. WON Fernandez’s actions bound the company .
2. WON the company is still liable, assuming that the company was able to deny the authority
of Fernandez.
3. What is the character of liability assumed by Fernandez?
HELD:
1. YES. The corporation was not able to deny the genuineness and due execution of the contracts
in question and the authority of Fernandez to bind the Orientalist Company. Sec. 103 of the Code
of Civil Procedure requires that the Answer setting up the defense of lack of authority of an officer
of a corporation to bind it by a contract should be verified and the denial contemplated must be
specific. In this case, the failure of the corporation to make any issue in its answer with regard to
the authority of Fernandez to bind it, and particularly its failure to deny specifically under oath the
genuineness and due execution of the contracts sued upon, have the effect of eliminating the
question of his authority from the case.
Whether a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very, very few and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the ostensible authority exercised by some
of the corporate officers.
2. YES. If a corporation knowingly permits one of its officers, or any other agent, to do acts within
the scope of an apparent authority and thus holds him out to the public as possessing power to
do those acts, the corporation will, as against anyone who has in good faith dealt with the
corporation through such agent, be estopped from denying his authority; and where it is said “if
the corporation permits” this means the same as “if the thing is permitted by the directing power
of the corporation.”
The stockholders adopted a resolution to the effect that the agencies of the two films should be
accepted if the corporation could obtain the money with which to meet the expenditure involved,
and to this end appointed a committee to apply to the bank for a credit. An attempt to obtain credit
was made, but failed. Another special meeting of stockholders was held and a resolution was
passed to the effect that the company should pay to Hernandez, Fernandez, Monroy and Papa
an amount equal to 10% of their outlay in importing the films, said payment to be made in shares
of the company. At the time this meeting was held three shipments of the film had already been
received in Manila. Therefore, the body was then cognizant that the offer had already been
17
 accepted in the name of Orientalist Company and that the films which were then expected to
arrive were being imported by virtue of such acceptance.
3. In affixing his signature to the contracts, Fernandez was a guarantor. From the testimony of both
Ramirez and Fernandez, the Court was convinced that the responsibility of the later was that of a
guarantor. Fernandez said that his name was signed as a guaranty that the contract would be
approved by the corporation, while Ramirez said that the name was put on the contract for the
purpose of guaranteeing its performance. The Court believed that the latter was the real intention
of the parties.
There can be no doubt that under Secs. 77 and 78 of Corporation Law, the Legislature
intended to let the shareholders have the control of the assets of the corporation
upon dissolution in winding up its affairs. The normal method of procedure is for the
directors and executive officers to have charge of the winding up operations, though there
is the alternative method of assigning the property of the corporation to the trustees
for the benefit of its creditors and shareholders. “While the appointment of a
receiver rests within the sound judicial discretion of the court, such discretion must,
however, always be exercised with caution and governed by legal and equitable
principles, the violation of which will amount to its abuse, and in making such
appointment the court should take into consideration all the facts and weigh the relative
advantages and disadvantages of appointing a receiver to wind up the corporate
business.” China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933)

 BOARD OF LIQUIDATORS V. KALAW, 20 There is nothing in Sec. 122 which bars an action for the recovery of the debts of
SCRA 987, 1967 the corporation against the liquidator thereof, after the lapse of the said three-year
period. “It immaterial that the present action was filed after the expiration of the three
years . . . for at the very least, and assuming that judicial enforcement of taxes may not
M NOTES: be initiated after said three years despite the fact that actual liquidation has not
terminated and the one in charge thereof is still holding the assets of the
BOL v KALAW corporation, obviously for the benefit of all the creditors thereof, the assessment
- Kalaw has been given a general auth.; giving him an apparent aforementioned, made within the three years, definitely established the Government
authority as a creditor of the corporation for whom the liquidator is
- Made the corp gain and benefited from most of his supposed to hold assets of the corporation.” Republic v. Marsman Dev. Co., 44
SCRA 418 (1972).
actions
- It would be unfair to say that Kalaw is not auth, just because they
had losses
***APPARENT AUTHORITY makes the corp binded

BOARD OF LIQUIDATORS v. KALAW

The Court held that the placing of the affairs and assets of the NACOCO in the hands
of a Board of Liquidators upon dissolution, did not terminate the power of the
Board to continue with the liquidation process of NACOCO even after the lapse of
the three year period because the Board of Liquidators became the trustees; the Board
took the place of the corporation after the expiration of its affairs. Since no time limit
has been tacked to the existence of the Board and its functions of closing the affairs
of the corporation, it was held that the Board can still …cases pending even after the
three year period.
Liquidation, in corporation law, connotes a winding up or settling with creditors and
debtors. It is the winding up of a corporation so that assets are distributed to those entitled
to receive them. It is the process of reducing assets to cash, discharging liabilities and
dividing surplus or loss. PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA 33
(2001).
18
 Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or contract
ratified, and is equivalent to original authority;" and that "[t]he corporation and the other party to the
transaction are in precisely the same position as if the act or contract had been authorized at the
time." The language of one case is expressive: "The adoption or ratification of a contract by a
corporation is nothing more nor less than the making of an original contract. The theory of corporate
BOARD OF LIQUIDATORS ratification is predicated on the right of a corporation to contract, and any ratification or adoption is
vs. equivalent to a grant of prior authority.
HEIRS OF MAXIMO KALAW
GR L-18805, 14 August 1967

FACTS:

National Coconut Corporation (NACOCO) is with Maximo Kalaw as its General Manager and
Chairman of the BOD. Under his tenure NACOCO entered into different contracts involving the trade
of coconuts. It failed, however, due to natural calamities that greatly affected the production of
coconuts. This led to some customers of NACOCO suing the corporation for undelivered coconuts due
to them under the contracts that they signed. This was settled by NACOCO by paying the customers.
Thereafter, NACOCO seeks to recover the above sum of P1,343,274.52 from general
manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and
Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article
2176, new Civil Code); and defendant board members, including Kalaw, with bad faith and/or breach
trust for having approved the contracts.

ISSUE:

Whether or not Kalaw may be held liable by NACOCO for the debts the corporation incurred
under his administration.

RULING:

NO.

They were done with implied authority from the BOD. These previous contracts, it should be
stressed, were signed by Kalaw without prior authority from the board. Said contracts were known all
along to the board members. Nothing was said by them. The aforesaid contracts stand to prove one
thing. Obviously NACOCO board met the difficulties attendant to forward sales by leaving the adoption
of means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.
Settled jurisprudence has it that where similar acts have been approved by the directors as
a matter of general practice, custom, and policy, the general manager may bind the company without
formal authorization of the board of directors. In varying language, existence of such authority is
established, by proof of the course of business, the usages and practices of the company and by the
knowledge which the board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation.

19
 Acuña entered into a contract with Batac wherein he agreed to advance P20,000.00 to the
company for its tobacco planting and drying, provided that he shall be assigned as the company’s
representative in Manila and supervise the transport and delivery of the goods in the said place. Batac’s
Board of Directors are amenable with the idea and thereafter issued a resolution authorizing Manager
 ACUNA V. BATAC PRODUCERS 20 SCRA 562, Leon Verano to enter into the agreement on behalf of the corporation.
1967 The necessary contract between Acuña and Verano was entered into, with some of the
Board of Directors acting as witness. Acuña then inquired if the contract needs to be ratified by the
M NOTES:
Board, in which the counsel for Batac answered in the negative. Acuña thereafter proceeded to perform
his part of the contrac, including the advancement of the amount promised, which was accepted by
Batac.
ACUNA v BATAC PRODUCERS Batac’s BoD, however, disapproved the contract. Acuña insisted on its performance, but the
corporation refused, stating that the contract is not binding by reason that it was not ratified by the
- The actor had an IMPLIED AUTHORITY board.
***IMPLIED AUTHOPRITY makes the corp liable
ISSUE:

Whether or not the contract between Acuña and Verano is binding with the corporation.
***ALL THESE 3 PRECE CASES NO NOTICE, MEETING AND
QUORUM; RULING:

CORPS became liable because 3rd PARTIES ARE involved and
affects their rights (being not a corporate insider)
ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20 SCRA 526;
1967)
Acuna entered into an agreement with Verano, manager of PROCOMA, in which the former
would be constituted as the latter's agent in Manila. Acuna diligently went about his business and even
used personal funds for the benefit of the corporation. During the face-to-face meeting with the board,
Acuna was assured that there need not be any board approval for his constitution as agent for it would
only be a mere formality. Later on, the board disapproved the agency and did not pay him. The SC
ruled that the agreement was valid due to the ratification of the corp. proven by these acts:
1. He was assured by the board that no board approval was necessary.
2. He delivered P 20,000, performed his work with the knowledge of the board.
3. Due to acquiescence, the board cannot disown or disapprove the contract.
EMILIANO ACUÑA
vs.
BATAC PRODUCERS
GR L-20333, 30 June 1963
YES.
A perusal of the complaint reveals that it contains sufficient allegations indicating such
approval or at least subsequent ratification. On the first point note the following averments: that on May
9th the plaintiff met with each and all of the individual defendants (who constituted the entire Board of
Directors) and discussed with them extensively the tentative agreement and he was made to
understand that it was acceptable to them, except as to plaintiff's remuneration; that it was finally
agreed between plaintiff and all said Directors that his remuneration would be P0.30 per kilo (of
tobacco); and that after the agreement was formally executed he was assured by said Directors that
there would be no need of formal approval by the Board. It should be noted in this connection that
although the contract required such approval it did not specify just in what manner the same should be
given.
On the question of ratification the complaint alleges that plaintiff delivered to the defendant
corporation the sum of P20,000.00 as called for in the contract; that he rendered the services he was
required to do; that he furnished said defendant 3,000 sacks at a cost of P6,000.00 and advanced to
it the further sum of P5,000.00; and that he did all of these things with the full knowledge,
acquiescence and consent of each and all of the individual defendants who constitute the Board of
Directors of the defendant corporation. There is abundant authority in support of the proposition that
ratification may be expressed or implied, and that implied ratification may take diverse forms, such as
by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance
and retention of benefits flowing therefrom.

FACTS:
20
 may be delegated to it in the by-laws or on a majority vote of the board,
except with respect to: (1) approval of any action for which shareholders’
approval is also required; (2) the filling of vacancies in the board; (3) the
 HARDEN V. BENGUET CONSOLIDATED, 58 amendment or repeal of by- laws or the adoption of new by-laws; (4) the
PHIL 1140, 1948 amendment or repeal of any resolution of the board which by it express
terms is not so amenable or repealable; and (5) a distribution of cash dividends
M NOTES: to the shareholders.

HARDEN v BENGUET Board Committees

- JV expressly prohibited by the mining act
- Actions cannot be undone; concluded a contract
Executive Committee Sec 35
- Acts as a mini board; delegated t the exec com
- If decides; comprising no. of officers from the exec com,
may be a part of the quorum
- Consti of the exec com; may be in the bylaws
If created by bylaws: Execom: not subject to the discretionary powers of
the board
The By-laws of the corporation may create an executive committee,
composed of not less than 3 members of the Board, to be appointed by the
Board. The executive committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may be delegated to
it in either (1) the By-laws, or (2) on a majority vote of the board.
However, the following acts may never be delegated to an executive committee:
(1) approval of any action for which shareholders' approval is also required;
(2) the filling of vacancies in the board (refer to Sec. 29);
(3) the amendment or repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.

- If the board wishes to amend the powers of execom; they must pass
a reso; with confirmatory votes of the sh; to amend the bylaws
If created by Board Reso: subject to the discretionary powers of the
board

Role of SH
Right to Vote and Attend Meeting Sec 89

d. EXECUTIVE COMMITTEE
(SEC. 35 OF THE COROPORATION CODE)

Sec. 35. Executive Committee. – The by- laws of a corporation may create an
executive committee, composed of not less than three members of the board, to
be appointed by the board. Said committee may act, by majority vote of all its
members, on such specific matters within the competence of the board, as
21
 G. ROLE SHAREHOLDERS  PRICE V. MARTIN 58 PHIL 707
RIGHT TO VOTE AND ATTEND MEETINGS (SEC. 89
CORPORATION CODE) M NOTES:

Sec. 89. Right to vote. – The right of the members of any class or PRICE v MARTIN
classes to vote may be limited, broadened or denied to the extent - have the qualified right to attend and participate to be
specified in the articles of incorporation or the by-laws. Unless so
recognized a sh;may be compelled
limited, broadened or denied, each member, regardless of class, shall
be entitled to one vote.

Unless otherwise provided by the articles of incorporation or the by-

laws, a member may vote by proxy in accordance with the provisions
of this Code.

Voting by mail or other similar means by members of non-stock

corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions
which may be, prescribed by, the Securities and Exchange
Commission.

Voting by proxy may be denied in articles or by-laws

The law makes voting by proxy merely directory in the case of non-stock
corporations and even allows the articles of incorporation or by-laws thereof to
deny proxy voting.

If proxy voting may be denied outrightly in the articles or by-laws of non-stock

corporations, it necessarily follows that the qualifications or limitations on who
should be appointed proxies may also be made therein.

- Note that in Sec. 89, non-stock corporations are permitted to waive the right to
use proxies via their AOI or by-laws.

22

e. INSTANCES
 ELECTION OF DIRECTORS AND TRUSTEES
(SEC. 24 OF THE CORPORATION CODE)
Sec. 24. Election of directors or trustees. – At all elections of directors or
trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of the majority of the
outstanding capital stock, or if there be no capital stock, a majority of
the members entitled to vote. The election must be by ballot if
requested by any voting stockholder or member. In stock corporations,
every stockholder entitled to vote shall have the right to vote in
person or by proxy the number of shares of stock standing, at the
time fixed in the by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time of the election;
and said shareholder may vote such number of shares for as many
persons as there are directors to be elected or he may cumulate said
shares and give one candidate as many votes as the number of directors
to be elected multiplied by the number of his shares shall equal, or he
may distribute them on the same principle among as many candidate
as he shall see fit; Provided, That the total number of votes cast by him
shall not exceed the numbers of shares owned by him as shown in
the books of the corporation multiplied by the whole number of
directors to be elected: Provided, however, that no delinquent stocks shall
be voted. Unless otherwise provided in the articles of incorporation, or
in the by- laws, members of corporation which have no capital stock
may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate. Candidates receiving the
highest number of votes shall be declared elected. Any meeting of the
stockholders or members called for an election may adjourn from day
to day or from time to time but not sine die or definitely if, for any
reason, no election is held, or if there are not present or represented
by proxy, at the meeting, the owners of the majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members
entitled to vote.
Methods of voting
The voting methods which may be resorted to by a voting stockholder are as follows:
1. Straight voting.
2. Cumulative voting for one candidate.
3. Cumulative voting by distribution.
Example of Straight Voting
A owns 100 shares of stock in X corporation. During the meeting for the purpose
of electing five directors, he may cast his vote by giving each of the five
candidates 100 votes, hence, he distribute equally his vote without preference or
discrimination.
Example of Cumulative voting for one candidate
In the preceding illustration, if A owns 100 voting shares and there are five
directors to be elected, A is entitled to 500 votes which he may “cumulate” by
giving it to candidate Z alone.
Example of Cumulative voting by distribution
As in the same example above, if A owns
100 voting shares, and there are five directors to be elected, A is entitled to 500
votes which he may distribute to candidate Y and Z giving the former 300 and the
latter
200 provided that the total number of votes cast by him does not exceed 500
votes.
Voting of sequestered shares of stock
It has been held that the “Presidential Commission on Good Government may
properly exercise the prerogative to vote sequestered stock of corporation,
granted to it by the President of the Philippines xxx pending the outcome of
proceeding to determine the ownership of sequestered shares of stock. xxx
Substitution of directors is not be done without reason or rhyme, and
undertaken only when essential to prevent disappearance or wastage of
corporate property, and always under such circumstance as assure that
replacements are truly processed of competence, experience and probity.
23

 AMENDMENT OF ARTICLES OF
INCORPORATION
(SECTION 16 OF THE CORPORATION
CODE)
Sec. 16. Amendment of Articles of Incorporation. – Unless
otherwise prescribed by this Code or by special law, and for legitimate
purposes, any provision or matter stated in the articles of incorporation
may be amended by a majority vote of the board of directors or
trustees and the vote or written assent of the stockholders
representing at least two- thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal rights of dissenting stockholders in
accordance with the provision of this Code, or the vote or written
assent of two-thirds (2/3) of the members if it be a non-stock
corporation.
The original and amended articles altogether shall contain all provision
required by law to be set out in the articles of incorporation. Such
articles, as amended shall be indicated by underscoring the change or
changes made, and the copy thereof duly certified under oath by the
corporate secretary and the majority of the directors or trustees stating
the fact that said amendments have been duly approved by the required
vote of the stockholders or members, shall be submitted to the
Securities and Exchange Commission.
The amendment shall take effect upon its approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if
not acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.
Law reserves the rights to modify the charter
The constitution and the Corporation Code reserved the right to amend the
charter of a private corporation. The constitution provides that “no franchise or
right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the National Assembly when public interest
so requires.
Amendment of Articles of Incorporation The articles of incorporation
may be amended for legitimate purposes that refer to any matter stated
in the articles of incorporation. It may refer to:
1. Change of corporate name;
2. Extension of term of corporation;
3. Change in classes or series of shares;
4. Change in rights, privileges or restrictions in share
ownership;
5. Increase or decrease in the number of directors; and
6. Change in purpose or purposes and other necessary changes.
Vote or recent assent required in amendment of the articles of
incorporation shall be as follows:
Stock Corporation – A majority vote of the directors or trustees and
the vote or written assent of the stockholders representing at least
two- thirds (2/3) of the outstanding capital stock. Under section 81 of
the Code, a dissenting stockholder may exercise his appraisal right if
he is against the amendment to be made and demand payment of
the fair value of his shares.
Non-stock Corporation – A majority vote of board of directors and
the vote or written assent of 2/3 of the members.
The amendments to the articles of incorporation shall take effect upon its
approval by the Securities and Exchange Commission or from the filing with the
said Commission if not acted upon within six months from the date of filing for
a cause not attributable to the corporation.
24

 INVESTMENT IN ANOTHER BUSINESS
(SECTION 42 OF THE CORPORATION
CODE)
Sec. 42. Power to invest corporate funds in another corporation or business or
for any other purpose. – Subject to the provisions of this code, a private
corporation may invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two- thirds (2/3) of the outstanding capital
stock, or by at least two-thirds (2/3) of the members in the case of non-
stock corporations, at a stockholders’ or members’ meeting duly called for the
purpose. Written notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally;
Provided, That any dissenting stockholder shall have appraisal right as provided
in this Code: Provided, however, That were the investment by the corporation
is reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall not
be necessary.
 DELA RAMA V. MA-A0 SUGAR 27
SCRA 247
 Sec 42
 DELA RAMA v MA-AO SUGAR
 ***investment sec 22
 ***if its Control: must be within corporate
powers
DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. (27 SCRA 247; 1969)
A corporation may use its funds to invest in another corporation without the approval of the
stockholders if done in pursuance of a corporate purpose. However, if it is purely for investment, the
vote of the stockholders is necessary.
- CASE LAW/ DOCTRINE: An investment of corporate funds in another corporation, if done
in pursuance of the corporate purpose, does not need the approval of the stockholders.
- But when the purchase of shares of another corporation is done solely for investment and
not to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary.
- Further, when the purpose is as stated in its articles of incorporation, the approval of the
stockholders is not necessary.
The Corporation Law allows a corporation to invest its funds in any other corporation or
business, or for any purpose other than the main purpose for which it was organized,
provided that its board of directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at lease 2/3 of the voting power.
FACTS:
- This case was filed by four minority stockholders against the Ma-ao Sugar Central and
four of its directors.
- It is alleged that Ma-ao Sugar Central, through its President (Araneta), subscribed for
Php 300K worth of capital stock of the Philippine Fiber Processing Co.
- At that at the time the first two payments were made, there was no board resolution
authorizing such investment. It was only a few months after that Araneta was authorized
by the Board of Directors.
- It was also alleged that 355,000 shares of stock of Philippine Fiber, owned by Luzon
Industrial, were transferred to Ma-ao without prior board resolution. Such transfer
however was subsequently approved.
- The lower court held that the investment of corporate funds was not a violation of the
Corporation Law. It considered the defendants correct in contending that since the
company was engaged in the manufacture of sugar bags it was legitimate for Ma-ao to
either manufacture sugar bags or invest in another corporation engaged in said
manufacture.
However, the lower court ordered Ma-ao to refrain from making investments in any other
companied whose purpose is not connected with sugar central business.
ISSUE:
- Whether the investment of the corporate funds by Ma-ao in Philippine Fiber constitutes
a violation of the Corporation Law.
25
- Whether Ma-ao may make investments in any other company whose purpose is not
connected with the sugar central business.
 GOKONGWEI V. SEC 89 SCRA 336,
HELD: 1979
M NOTES:
- NO. The SC agreed with the finding of the lower court that the investment in question
does not fall under the purview of the Section 17 ½ of the Corporation Law.
- The SC quoted Prof. Guevara in explaining the said provision. “Such an act, if done in GOKONGWEI v SEC
pursuance of the corporate purpose, does not need the approval of the stockholders. But Difference when voting
when the purchase of shares of another corporation is done solely for investment and not SH: when votes as sh: motive is investment DIR: votes as dir:
to accomplish the purpose of its incorporation, the vote of approval of the stockholders
is necessary.” motive acting for the corp and the rest of sh (sec 23)
- Also, “when the investment is necessary to accomplish its purpose or purposes as stated ***a dir. May acquire confidential information; trade
in the articles of incorporation, the approval of stockholders is not necessary. secrets
- YES. The SC reversed the order of the lower court refraining Ma-ao from making
- Reason why SMC amended the bylaws to prevent Gokongwei to seat
investments in other company whose purpose not connected with the sugar central
business. as a director
It reasoned that the Corporation Law allows a corporation to invest its funds in any other
corporation or business, or for any purpose other than the main purpose for which it was
organized, provided that its board of directors has been so authorized by the affirmative vote Derivative Suit
of stockholders holding shares entitling them to exercise at lease 2/3 of the voting power. Right of the minority stockholder to sue an officer on behalf of the corp

CASE LAW/ DOCTRINE: If the investment is made in the pursuance of the corporate
purpose, it does not need the approval of the stockholders.
But when the purchase of shares is done solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of the stockholders is needed. At least 2/3
of the outstanding stock is needed.

FACTS:

- Gokongwei Jr. is a stockholder of San Miguel Corporation (SMC). He seeks to have the
court nullify the amended by-laws which disqualifies any person for nomination or
election to the Board of Directors (BOD) if he is engaged in any business whose
interests are adverse to the SMC.
- It was enacted by the majority of the BOD.
- Gokongwei is also owner/stockholder of Universal Robina Corp. and CFC. Both
businesses are engaged in agriculture, ice cream, coffee which are also businesses
engaged in by SMC.
- As one of his causes of action, Gokongwei, questions the investment of SMC corporate
funds without prior authority of the stockholders.
- The transaction that he questions is the purchase of beer manufacturing facilities.
This purchase was later ratified by the stockholders.

ISSUE:

26
WON the purchase was ultra vires

HELD:

- NO. The law allows a corporation to invest its funds in any other corporation or business
or for any other purpose other than the main purpose for which it was organized.
- The purchase of the beer manufacturing facilities was in furtherance of the corporate
purpose and as such, no prior approval of the stockholders was necessary.
NO. The mere fact that SMC submitted the investment for ratification at the annual
meeting cannot be construed as an admission that SMC committed an ultra vires act.

Gokongwei v. SEC (MR)

FACTS:

- Petitioner seeks to nullify the en banc decision of the SEC upholding the findings of the
San Miguel Corporation (SMC) BOD that Gokongwei is engaged in a business
competitive to that of SMC.
- Thus, he is ineligible to run for election as director, pursuant to the by-laws.
- Petitioner contends that the matter of his disqualification has not yet been heard since an
MR is pending before the SC.
- According to the petitioner, SEC failed to consider that SMC cannot disqualify Gokongwei
because they were in pari delicto since some of the board members were also disqualified being
similarly situated like the petitioner.
Also, petitioner claims that the BOD of SMC over exerted its corporate power for them to remain in
position.

ISSUE:

WON the petition for review should be granted

HELD:

- NO.
- SC already ruled on the validity of the by-laws and such cannot be re-litigated being the law of the
case.
- The alleged disqualification of some of the board members was not an issue during the hearing;
nor has petitioner submitted evidence to prove this contention.
The basis of the SEC’s order was based on several testimonial evidence as well as documentary
evidence submitted showing that petitioner is engaged in agricultural and poultry business competitive
with that of SMC. No evidence was offered by the petitioner to rebut such evidence.

27
 made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is
only when the purchase of shares is done solely for investment and not to accomplish the purpose of
JOHN GOKONGWEI, JR. its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise
vs. at least two-thirds of the voting power is necessary.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, As stated by Respondent Corporation, the purchase of beer manufacturing facilities by SMC was an
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL investment in the same business stated as its main purpose in its Articles of Incorporation, which is to
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and manufacture and market beer. It appears that the original investment was made in 1947-1948, when
EDUARDO R. VISAYA SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
G.R. No. L-45911. April 11, 1979 Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free
FACTS:
reorganization.
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed
with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended
by-laws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer
for a preliminary injunction" against the majority of the members of the Board of Directors and San
Miguel Corporation as an unwilling petitioner.
Petitioner alleged that on September 18, 1976, individual respondents amended by bylaws
of the corporation, basing their authority to do so on a resolution of the stockholders adopted on March
13, 1961, when the outstanding capital stock of respondent corporation was only P70,139.740.00,
divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00
per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,047 with
a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation
Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new
by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3
should have been computed on the basis of the capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, petitioner contended that the Board acted without
authority and in usurpation of the power of the stockholders.

ISSUES:

Whether or not respondent SEC committed grave abuse of discretion in allowing discussion
of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of
the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2
of the Corporation Law.

RULING:

NO.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was organized"
provided that its Board of Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is
28
 business. The parties to a combination by consolidation or merger are
called the “constituent” corporations.
 MERGER AND CONSOLIDATION
(SECTION 77 OF THE CORPORATION
CODE)
Sec. 77. Stockholders’ or members’ approval. – Upon approval
by majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation, the
same shall be submitted for approval by the stockholders or members
of each of such corporations at separate corporate meetings duly
called for stockholders or members of the respective corporations, at
least two (2) weeks prior to the date of meeting, either personally or
by registered mail. Said notice shall state the purpose of the meeting
and shall include a copy or a summary of the plan of merger or
consolidation as the case may be. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock of
each corporations in case of stock corporations or at least two-thirds
of the members in case of non-stock corporations, shall be necessary
for the approval of such plan. Any dissenting stockholder in stock
corporations may exercise his appraisal right in accordance with this
Code; Provided, That if after the approval by the stockholders of such
plan, the board of directors should decide to abandon the plan, the
appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made,
provided such amendment is approved by majority vote of the
respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders
representing at least two- thirds (2/3) of the members of each of the
constituent corporations. Such plan, together with any amendment,
shall be considered as the agreement of merger or consolidation.
Definition
Consolidation – the uniting or amalgamation of two or more existing corporations
to form a new corporation. The united concern resulting from the union is called
the consolidated corporation.
Merger – a union effected by the absorbing of one or more existing
corporations by another which survives and continues the combined
 INCREASE AND DECREASE OF CAPITAL
STOCK (SECTION 38 OF THE
CORPORATION CODE)
Sec. 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. – No corporation shall increase or decrease its
capital stock or incur, create or increase any bonded indebtedness
unless approved by a majority vote of the board of directors and, at a
stockholders’ meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of and bonded
indebtedness. Written notice of the proposed increase or diminution
of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholders’
meeting at which the proposed increase or diminution of the capital
stock or the incurring or increasing of any bonded indebtedness is to
be considered, must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and deposited
to the addressee in the post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a majority of the directors
of the corporation and countersigned by the chairman and secretary
of the stockholders’ meeting, setting forth:
1. That the requirements of this section have been complied with.
2. The amount of the increase or diminution of the capital stock.
3. If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the names,
nationalities and residences of the persons subscribing, the amount of
capital stock or number of shares of no-par stock subscribed by each,
and the amount paid by each on his subscription in cash or property, or
the amount of capital stock or number of shares of no-par stock allotted
to each stockholder if such increase is for the purpose of making
29
 effective stock dividend therefor authorized. meeting duly called for the purpose.

4. Any bonded indebtedness to be incurred, created, or increased. Bonds issued by a corporation shall be registered with the Securities
and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof.
5. The actual indebtedness of the corporation on the day of the meeting.

Bonds – Bonds are in form and effect similar to promissory notes,

6. The amount of the stock represented at the meeting. secured by mortgage or trust deed upon specified property of the
debtor corporation.

7. The vote authorizing the increase or diminution of the capital stock, or

the incurring, creating or increasing of any bonded indebtedness. Properties to a bond
Every bond issue usually involve three parties: (1) the debtor – corporation; (2)
the creditor – bondholder; and (3) the trustee.
Any increase or decrease in the capital stock or the incurring, creating
or increasing of any bonded indebtedness shall require prior approval
of the Securities and Exchange Commission. Bonds classified
Bonds are classified into: coupon or registered bonds, mortgage bonds,
debentures, convertible bonds, participating bonds, collateral trust
One of the duplicate certificate shall be kept on file in the office of bands, and guaranteed bonds.
the corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles
Coupon or registered bonds
of incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its Coupon bonds are payable to bearer or to the order of a person, and have attached
certificate of filing, the capital stock shall stand increased or decreased to them coupon notes for each instalment of interest as it falls due.
and the incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That Mortgage bond
the Securities and Exchange Commission shall not accept for filing
A mortgage bond is one secured by a mortgage on corporate property.
any certificate of increase of capital stock unless accompanied by the
sworn statement of the Treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least Debenture bonds
twenty-five percent (25%) of such increased capital stock has been Debenture bonds are not secured by specific corporate property but rather solely
subscribed and that at least twenty-five percent (25%) of the amount on the issuer’s ability to pay the indebtedness.
subscribed has been paid either in actual cash to the corporation
or that there has been transferred to the corporation property the
valuation of which is equal to twenty-five percent (25%) of the Convertible bonds
subscription: Provided, further, That no decrease of the capital stock Convertible bonds are those which includes a provision which permits the holder
shall be approved by the Commission, if its effect shall prejudice the of the bond to convert the bond into a specified number of shares of stock of
rise of corporate creditors. the corporation at his option within a period fixed therein.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board
of trustees and of at least two- thirds (2/3) of the members in a
30
Participating bonds
The owners or holders of participating bonds entitle them to participate in earnings
of the corporation above the specified rates of interest fixed.
Collateral trust bonds
Collateral trust bonds are secured by a lien on securities deposited with a named
trustee constituting the collateral.
this code.
The authority to make or adopt the original by-laws of a corporation
cannot be given to the board of directors or trustees. The
stockholders of a stock corporation or the members of the non-stick
corporation adopt or make the original by-laws.

An amendment of by-law renders stockholder ineligible as director

Guaranteed bonds
Guaranteed bonds are guaranteed or secured by another corporation other than
the issuing corporation.
 ADOPTION, AMENDMENT AND REPEAL
OF BY LAWS (SEC. 48 OF THE
CORPORATION CODE)
Sec. 48. Amendments to by-laws. – The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non- stock corporation,
at a regular or special meeting duly called for the purpose, may amend or
repeal any by-laws or adopt new by-laws. The owners of 2/3 of the outstanding
capital stock or 2/3 of the members in a non-stick corporation may delegate to
the repeal any by-laws or adopt new by-laws: provided, that any power
delegated to the board of directors or trustees shall be considered as revoked
whenever stockholders owning or representing a majority of the outstanding
capital stock or a majority of the members in non-stock corporations, shall so
vote at a regular or special meeting.
It is well-settled xxx that corporations have the power to make by-laws declaring
a person employed in the service of a rival company to be ineligible for the
corporation’s Board of Directors. An amendment which renders ineligible, or
if elected, subjects to removal, a director if he be also a director in a corporation
whose business is in competition with or is antagonistic to the other corporation
is valid. This is based upon the principle that where the director is so employed
in the service of a rival company, he cannot serve both, but must betray one or
the other. Such an amendment advances the benefit of the corporation and is
good.
Meetings Necessity
A majority of the stockholders or members can bind the corporation only at a
meeting regularly held and conducted. To constitute a legal meeting, so as to
render the acts and vote of the majority binding the meeting must be regularly
called by one having authority. In the absence of provision to the contrary such
authority exists in the directors or managing agents.

Whenever any amendment or new by-laws are adopted, such

amendment or new by- laws shall be attached to the original by-
laws in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities and Exchange
Commission, the same to be attached to the original articles of
incorporation and original by- laws.

Amender or new by-laws shall only be effective upon the issuance

by the SEC of a certification that the same are not inconsistent with

31

 DECLARATION OF STOCK DIVIDENDS
(SEC. 43 OF THE CORPORATION CODE)
Sec. 43. Power to declare dividends. – The board of directors of
a stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3)
of the outstanding capital stock at a regular or special meeting
duly called for the purposes.
Stock corporation are prohibited from retaining surplus profits in
excess of one hundred percent (100%) of their paid-in capital stock,
except: (1) when justified approved by the Board of Directors; or
(2) when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) when it can be clearly shown that
such retention is necessary under special circumstance obtaining in
the corporation, such as when there is a need for special reserve
for probable contingencies.
Concept of dividends
A dividend is a corporate profit set aside, declared and ordered by the directors
to be paid to the stockholders on demand or at a fixed time.
Dividends distinguished from profits “Dividends” means the profits or
that portion of the profits of the corporation which its board of directors,
by proper resolution, sets apart for rotable distribution among the
stockholders. It is distinguished from “profits” for the profits in the hands
of a corporation do not become dividends until they have been set apart,
or at least declared, as dividends and transferred to the separate property of the
individual stockholders.
Surplus profits – Surplus or net profits of a corporation is the difference between
the total present value of its assets, after deducting losses and liabilities, and the
amount of its capital stock. (11 Fletcher, Sec. 5335)
Basis of dividend declaration
The board of directors of a stock corporation may declare dividends on the basis
of outstanding stock held by the stockholders. The basis therefore is the
stockholder’s total subscription and not on the amount paid by him on the
subscription. This is for the reason that his entire subscription represents his
holding in the corporation for which he pays interests on any unpaid portion. (SEC
Opinion, Dec. 17, 1973)
Classes of dividends
Dividends which a corporation may declare and distribute to its stockholders may
be classified into: cash dividend, stock dividend, property dividend, scrip dividend,
and liquidating dividend.
Cash dividend
Cash dividend is one payable in money.
Stock dividend
Stock dividend is a dividend payable in stock instead of cash or property.
Property dividend
The directors in their discretion may authorize distributions in bonds or in
property, such as warehouse receipts for whiskey or shares of stock of a
subsidiary corporation.
Scrip dividend
Scrip dividend is a writing or a certificate issued to a stockholder entitling him
to the payment of money or the like at some future time inasmuch as the
company, at the time the scrip dividends are declared, has profits not in cash.
Liquidating dividend
32
Liquidating dividend involves the distribution of assets by a corporation to its for a period of time provided for in the agreement.
stockholders upon dissolution.

 MANAGEMENT CONTRACTS (SEC. 44 OF

Effects of Management contracts
THE CORPORATION CODE) Contracts by which the board of directors delegates the power of supervision
and management to another person or corporation for a specified period are
Sec. 44. Power to enter into a management contract. – No invalid if they involve a surrender by the board of its power and duty of supervision
corporation shall conclude a management contract with another and control.
corporation unless such contract shall have been approved by the
Board of Directors and by stockholders owning at least the majority Management prerogatives
of the outstanding capital stock, or by at least majority of the An owner of a business enterprise is given considerable margin in managing his
members in the case of a non-stock corporation, of both the business because it is deemed important to society as a whole that he should
managing and the managed corporation, at a meeting duly called for succeed.
the purpose: Provided, That (a) where a stockholder or stockholders
representing the same interest of both the managing and the
managed corporations own and control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the managing
corporation; or (b) where the majority of the members of the Board
of Directors of the managing corporation also constitute a majority
of the members of the Board of Directors of the managed
corporation, then the management contract must be approved by the
stockholders of the managed corporation owning of at least two-
thirds (2/3) of the total outstanding capital stock entitled to vote, or
by at least two-thirds (2/3) of the members in case of a non-stock
corporation. No management contract shall be entered into for a
period longer than five years for any one term.

The provisions of the next preceding paragraph shall apply to any

contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of the other corporation, whether such
contracts are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation
or utilization of natural resources may be entered into for such periods
as may be provided by the pertinent laws or regulations.

Concept of management contract

A management contract is an agreement under which the board of directors of a
corporation delegates the powers of management to another person or corporation
33
 Consideration for issuance of stock may be any or any combination
 FIXING OF CONSIDERATION OF PAR of any two or more of the ff:
VALUE SHARES (SEC. 62 OF THE 1. Cash
CORPORATION CODE) 2. Property – tangible or intangible Labor performed or services actually
rendered
3. Previously incurred indebtedness by the corporation
Sec. 62. Considering for stocks. – Stocks shall not be issued for a 4. Amounts transferred from unrestricted retained earnings to stated capital
consideration less than the par or issued price thereof. Consideration for the 5. Outstanding shares exchanged for stock in the event of reclassification
issuance of stock may be any or a combination of any two or more of the following: or conversion
6.
Sources of corporate capital
1. Actual cash paid to the corporation. 1. Funds furnished by shareholders
2. Property, tangible or intangible, actually received by the corporation and 2. Borrowings
necessary or convenient for its use and lawful purposes at a fair valuation 3. Profits and stock dividends
equal to the par or issued value of the stock issued.
3. Labor performed for or services actually rendered to the corporation.
4. Previously incurred indebtedness of the corporation. Different modes by which a corporation may issue shares of
5. Amounts transferred from unrestricted retained earnings to stated stock
capital. 1. By subscription before and after incorporation, to original, unissued
6. Outstanding shares exchanged for stocks in the event of reclassification stocks.
or conversion. 2. By sale of treasury stock after incorporation for money property, or
service.
3. By subscription to new stocks, when all the original stocks have been
Where the consideration is other than actual cash, or consists of intangible issued and the amount of the capital stock increased.
property such as patents of copyrights, the valuation thereof shall initially be 4. By making a stock dividend.
determined by the incorporators or the board of directors, subject to approval
by the Securities and Exchange Commission.
Limitations in the issuance of stocks
1. Shall not be issued for a consideration less than the par or issued price
Shares of stock shall not be issued in exchange for promissory notes or future thereof except treasury shares so long as the price is reasonable.
service. The same considerations provided for in this section, insofar as they 2. Shall not be issued in exchange of promissory notes or future services.
may be applicable, may be used for the issuance of bonds by the corporation.
3. When the consideration is other than actual cash or consists of intangible
The issued price of no-par value shares may be fixed in the articles of
property, the value thereof shall be initially determined by the
incorporation or by the board of directors pursuant to authority conferred upon
incorporators or the board of directors, subject to the approval of the SEC.
it by the articles of incorporation or the by-laws, or in the absence thereof,
4. The issued price of no par value shares must be fixed as provided in Sec.
by the stockholders representing at least a majority of the outstanding capital
62.
stock at a meeting duly called for the purpose.
7. issued price may vary from time to time but value may not be less than
P5.

34
 Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws: Provided, however, that at least 1 week
written notice shall be sent to all stock holders or members, unless otherwise
f. TREASURY SHARES (SEC. 57 OF THE provided in the by-laws.
CORPORATION CODE)
Notice of any meeting may be waived, expressly or impliedly, by
Sec. 57. Voting right for treasury share. – Treasury shares shall have no voting any stockholder or member.
right as long as such stock remains in the treasury.
Whenever, for any cause, there is no person authorized to call a
Treasury shares have no voting rights.
meeting, the SEC, upon petition of a stockholder or member, and
on the showing of good cause there for, may issue an order to the
Treasury shares (Sec. 57) petitioning stockholder or member directing him to call a meeting of
the corporation by giving proper notice required by this Code or by
- Treasury shares have no voting right for as long as such shares remain in
the by-laws. The petitioning stockholder or member shall preside
the Treasury.
thereat until at least a majority of the stockholders or members
present have chosen one of their numbers as presiding officer.

g. CONDUCT OF STOCKHOLDER’S OR MEMBERS’ Corporate decisions; rationale of meetings As a rule, a majority

MEETINGS
 KINDS AND REQUIREMENTS OF
MEETINGS (SEC. 49 AND 50 OF THE
CORPORATION CODE)
Sec. 49. Kinds of Meeting. – Meetings of directors, trustees, stockholders,
or members may be regular or special.
Sec. 50. Regular and special meetings of stock holders or members.
– Regular meetings of stockholders or members shall be held annually on a
date fixed in the by- laws, or if not so fixed, on any date in April of every
year as determined by the board of directors or trustees: Provided, that written
notice of regular meetings shall be sent to all stockholders or members of
record at least 2 weeks prior to the meeting, unless a different period is
required by the by-laws.
of the shareholders or members have no power to vote or act for
the corporation as to matters on which shareholders have
authority, except at a meeting called and conducted according to
law. Written or oral consent to a corporate act by the
shareholders or members individually, even though a majority
may agree, is not binding on the corporation.
When there is no person authorized to call a meeting
A stockholder or member may petition the SEC upon showing of good cause,
to call a meeting and directing the petitioner (stockholder or member) to give
notice required by the Code and the by-laws. The petitioning stockholder or
member shall preside at such meeting until at least a majority of the
stockholders or members present have chosen one of their numbers as
presiding officer.

35
  PLACE AND TIME OF MEETING (SEC. 51
AND SEC. 93 OF THE CORPORATION Supporting papers required to be submitted to the Securities and
Exchange Commission:
CODE)

Sec. 51. Place and time of meetings of stockholders or
members. – Stockholders’ or members’ meetings, whether regular
or special, shall be held in the city or municipality where the principal
office of the corporation is located, and if practicable in the principal
office of the corporation: Provided, that Metro Manila shall, for the
purposes of his section, be considered a city or municipality
Notice of meetings shall be in writing, and the time and place thereof stated
therein.
1. LETTER OF UNDERTAKING addressed to the Commission signed by at
least a majority of the incorporators or by a duly authorized
representative, to the effect that the association will change its corporate
name in the event another person, firm or entity has acquired a prior right
to use the same name or similar to it. (3 copies)
2. MODUS OPERANDI or a detailed explanation as to how the association
shall carry out its objectives signed by atleast a majority of the
incorporators or by a duly authorized representative. (3 Copies)

All proceedings had and any business transacted at any meeting of the stockholders
or members, if within the powers or authority of the corporation, shall be
valid even of the meeting be improperly held or called, provided all the
stockholders or members of the corporation are present or duly represented at the
meeting.
Place of meetings
(Regular or special) meetings shall be held in the city or municipality where the
principal office of the corp. is located.
If the meeting be improperly held or called (as when there was a defective notice)
the same shall still be valid provided that
3. RESOLUTION of the Board signed by atleast a majority of the Directors
or certified under oath by the Secretary in the following tenor to wit: (3
Copies)
“RESOLVED, that the corporation or associatin will comply with the S.E.C.
REQUIREMENTS FOR NON-STOCK
CORPORATION dated May 24, 1963 , in the course of its operation.”
4. LIST OF MEMBERS of the association containing their manual signature
and attested by the Acting Secretary, if the incorporators are the present
members so far, state such fact in writing and further state that the list
of additional members who will be admitted in accordance with the by-
laws of the association shall e submitted to the Commission from time
to time. (3 Copies)

1. The act done was within the powers of the corporation.

2. All the stockholders or members were present or duly represented.

Sec.93. Place of meetings. – The by-laws may provide that the

members of a non- stock corporation may hold their regular or special
meetings at any place even outside the place where the principal office
of the corporation is located: Provided, That proper notice is sent to
all members indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting shall be within the
Philippines.
36
  QUORUM (SEC. 52 OF THE
CORPORATION CODE)
Sec 52. Quorum in meetings. – Unless otherwise provided for in this Code or
in the by-laws, a quorum shall consist of the stockholders representing a majority
of the outstanding capital stock or a majority of the members in the case of
non-stock corporations.
Quorum – Signifies the number of persons belonging to a corporation required
to transact business. Within the meaning of section 52 above, a quorum shall
consist of the stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock corporations.
 LANUZA V. COURT OF APPEALS GR
NO. 131394, 2005
M NOTES:
LANUZA v
- The outstanding stock, should be what is provided in the articles
- Because stock and transfer book (consists of the details of sh)
therefore, it shall not supersede the articles
- articles: subscribe and paid up
- Stock and transfer: only paid up
EQUITY SECURITIES: participate exercise of control
- Issues arise how to assign
1. PROXY; goverened by laws on agency
- even there is proxy, when the principal is present,: the
principal has the right to exercise whatever corporate powers it has
2. VOTING TRUST AGREEMENT: goverened by laws on trust
- all shares are transfered; for a specific period (5 yrs);
lapse of period, the trustee is obligated to return the shares
-the obligation under VTA is the assets, not the
shares
if the transferor is a director; the transferor ceases to be the dir. Upon
transfer of shares (to be a dir: must own at least one shares of stock
standing in his name)
- not a benficial ownership; but a legal title
3. POOLING AGREEMENTS: goverened by laws on obli contracts
LANUZA vs. CA
FACTS: Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with 776 capital stock
subscription reflected in the articles of incorporation. However, private respondents and their
predecessors who were in control of PMMSI registered the company’s stock and transfer book for
the first time, recording thirty-three (33) common shares as the only issued and outstanding shares of
PMMSI. A special stockholders’ meeting was called and held on the basis of what was considered
as a quorum of twenty-seven (27) common shares, representing more than two-thirds (2/3) of the
common shares issued and outstanding.
A special stockholders’ meeting was held to elect a new set of directors. Private respondents thereafter
filed a petition with the SEC questioning the validity of the stockholders’ meeting, alleging that the
quorum for the said meeting should not be based on the issued and outstanding shares as per the
stock and transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776)
shares, as reflected in the Articles of Incorporation.
ISSUE: What should be the basis of quorum for a stockholders’ meeting—the outstanding capital
stock as indicated in the articles of incorporation or that contained in the company’s stock and transfer
book?
HELD: It should be the outstanding capital stock as indicated in the articles of incorporation.
An article of incorporation defines the charter of the corporation and the contractual
relationships between the State and the corporation, the stockholders and the State, and between the
corporation and its stockholders.
To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and
transfer book, and completely disregarding the issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the owners and/or successors in interest of the said
shares. The stock and transfer book of PMMSI cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares which have been subscribed, more so when the
articles of incorporation show a significantly larger amount of shares issued and outstanding as
compared to that listed in the stock and transfer book.
37
 h. CONTRACTS AND AGREEMENTS AFFECTING
STOCKHOLDERS
d. PROXY (SEC. 58 OF THE
CORPORATION CODE)
Sec. 58. Proxies. – Stockholders and members may vote in person or
by proxy in all meetings of stock holders or members. Proxies shall be
in writing, signed by the stock holder or member and filed before the
scheduled meeting with the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for the meeting for which
it is intended. No proxy shall be valid and effective for a period longer
than five years at any one time.
Proxy – In corporate law, is a person who votes for and this represents the
stockholders or members.
Voting by proxy
Ordinarily the right to vote shall be exercised by the stockholders themselves or
by their duly authorized representatives. Proxy to be valid must be:
1. In writing, signed by the stockholder or member giving it.
2. Filed with the corporate secretary before the scheduled meeting.
3. It is valid only for the meeting for which it is intended unless otherwise
stipulated.
Even if the proxy is a continuing one it shall not be longer than 5 year at any one
time.
e. VTA (SEC. 59 OF THE
CORPORATION CODE)
Sec 59. Voting trusts. – One or more stockholders of a stock
corporation may be create a voting trust for the purpose of conferring
upon a trustee or trustees the right to vote and other rights
pertaining to the share for a period not exceeding 5 years at any one
time: Provided, that in the case of a voting trust specifically required
as a condition in a loan agreement, said voting trust may be for a
period exceeding 5 years but shall automatically expire upon full
payment of the loan. A voting trust agreement must be in writing
and notarized, and shall specify the terms and conditions thereof.
A certified copy of such agreement shall be filed with the corporation
and with the SEC: otherwise, said agreement is ineffective and
unenforceable. The certificate or of stock covered by the voting trust
agreement shall be cancelled and new one shall be issued in the name
of the trustee or trustees stating that they are issued pursuant to
said agreement. In the books of the corporation, it shall be noted that
the transfer in the name of the trustee or trustees is made pursuant
to said voting trust agreement.
The Trustee or trustees shall be execute and deliver to the transferors
voting trust certificates, which shall be transferable in the same
manner and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject
to examination by any stockholder of the corporation in the same
manner as any other corporate book or record: Provided, That both
the transferor and the trustee or trustees may exercise the right of
inspection of all corporate books and records in accordance with the
provisions of this code.
Any other stock holder may transfer his shares to the same trustee
or trustees upon the terms and conditions stated in the voting trust
agreement, and there upon shall be bound by all the provisions of
said agreement.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations
in restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement
shall automatically expire at the end of the agreed period, and the
voting trust certificates as well as the certificates of stick in the name
of the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the agreement
provides otherswise.
38
Concept of voting trusts
 LEE V. COURT OF APPEALS
A voting trust is an agreement by which stockholders surrender their voting power
and place it irrevocably in the hands of others for a definite period of time. In 205 SCRA 752, 1992
exchange for the certificates of stock the trustee delivers to the stockholder voting NOTES:
trust certificates.
LEE v CA
- If dir entered into VTA transfers the entirety of his shares; he ceases
Limitations on voting trust agreement to own one share of stock
1. It shall be for a period not exceeding 5 years but if required under a loan
- The req. Of the code, is that the share of stock must be LEGAL
agreement, the period may be for more than 5 years but shall
automatically cease upon full payment of the loan. TITLE to the share; not beneficial ownership of the share( it does
2. It must be in writing and notarized. not comply with the req of owning at least one share of stock
3. It shall not be entered into to circumvent laws on monopolies and
restraint of trade, nor shall it be entered into purposes of fraud.
RAMON C. LEE and ANTONIO DM. LACDAO vs. THE HON. COURT OF APPEALS, SACOBA
4. It shall be filed with the corporation and with SEC otherwise it shall be
MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS GONZALES
ineffective and unenforceable.
5. It shall be subject to examinations by any stockholder in the same FACTS:
manner as any other corporate book or record.
Parties to the voting trust agreement shall be bound by all the provisions of A complaint for a sum of money was filed by the International Corporate Bank, Inc. against the private
said agreement. respondents who, in turn, filed a third party complaint against ALFA and the petitioners.

The petitioners filed a motion to dismiss the third party complaint which the Regional Trial Court of
Makati denied. The petitioners filed their answer to the third party complaint.

Meanwhile, the trial court issued an order requiring the issuance of an alias summons upon ALFA
through the DBP as a consequence of the petitioner's letter informing the court that the summons for
ALFA was erroneously served upon them considering that the management of ALFA had been
transferred to the DBP.

The DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had
not taken over the company which has a separate and distinct corporate personality and existence.

The trial court issued an order advising the private respondents to take the appropriate steps to serve
the summons to ALFA.

The private respondents filed a Manifestation and Motion for the Declaration of Proper Service of
Summons which the trial court granted.

Petitioners filed a motion for reconsideration submitting that Rule 14, section 13 of the Revised Rules
of Court is not applicable since they were no longer officers of ALFA and that the private respondents
should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e.,
through publication to effect proper service upon ALFA.

39
Private respondents argued that the voting trust agreement did not divest the petitioners of their
positions as president and executive vice-president of ALFA so that service of summons upon ALFA
through the petitioners as corporate officers was proper.
The trial court upheld the validity of the service of summons on ALFA through the petitioners, thus,
denying the latter's motion for reconsideration and requiring ALFA to filed its answer through the
petitioners as its corporate officers.
Second motion for reconsideration was filed by the petitioners reiterating their stand that by virtue of
the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no
longer receive summons or any court processes for or on behalf of ALFA. In support of their second
motion for reconsideration, the petitioners attached thereto a copy of the voting trust agreement
between all the stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the
other hand, whereby the management and control of ALFA became vested upon the DBP.
Trial court reversed itself by setting aside its previous Order and declared that service upon the
petitioners who were no longer corporate officers of ALFA cannot be considered as proper service of
summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was
affirmed by the court in its Order dated August 14, 1989 denying the private respondent's motion for
reconsideration.
Petition for certiorari was belatedly submitted by the private respondent before the public respondent
which, nonetheless, resolved to give due course thereto on September 21, 1989.
Trial court, not having been notified of the pending petition for certiorari with public respondent issued
an Order declaring it as final.
After the petitioners filed their answer to the private respondents' petition for certiorari, the public
respondent CA rendered its decision, setting aside of the lower court and ordered respondent
corporation to file its answer within the reglementary period.
The petitioners moved for a reconsideration of the decision of the public respondent which resolved to
deny the same. Hence, the petitioners filed this certiorari petition imputing grave abuse of discretion
amounting to lack of jurisdiction on the part of the public respondent in holding that there was proper
service of summons on ALFA through the petitioners.
ISSUE:
W/N there was proper service of summons on Alfa Integrated Textile Mills (ALFA, for short) through
the petitioners as president and vice-president, allegedly, of the subject corporation after the execution
of a voting trust agreement between ALFA and the DBP.
HELD:
Petitioners' position meritorious. Under section 59 of the Corporation Code, supra, a voting trust
agreement may confer upon a trustee not only the stockholder's voting rights but also other rights
pertaining to his shares as long as the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations in restraint of trade or used for
purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the traditional concept
of a voting trust agreement primarily intended to single out a stockholder's right to vote from his other
rights as such and made irrevocable for a limited duration may in practice become a legal device
whereby a transfer of the stockholder's shares is effected subject to the specific provision of the voting
trust agreement.
The law simply provides that a voting trust agreement is an agreement in writing whereby one or more
stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the
latter voting or other rights pertaining to said shares for a period not exceeding five years upon the
fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The
five year-period may be extended in cases where the voting trust is executed pursuant to a loan
agreement whereby the period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the creation of the voting trust
agreement. The petitioners maintain that with the execution of the voting trust agreement between
them and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former
assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of
the voting trust agreement the petitioners can no longer be considered directors of ALFA. In support
of their contention, the petitioners invoke section 23 of the Corporation Code which provides, in
part, that:
Every director must own at least one (1) share of the capital stock of the corporation of which he is a
director which share shall stand in his name on the books of the corporation. Any director who ceases
to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director
shall thereby cease to be director . . . (Rollo, p. 270)
The facts of this case show that the petitioners, by virtue of the voting trust agreement executed
in 1981 disposed of all their shares through assignment and delivery in favor of the DBP, as
trustee. Consequently, the petitioners ceased to own at least one share standing in their names
on the books of ALFA as required under Section 23 of the new Corporation Code. They also
ceased to have anything to do with the management of the enterprise. The petitioners ceased to be
directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective
positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is the
essence of the subject voting trust agreement, “stipulation No. 4. The TRUSTEE may cause to be
transferred to any person one share of stock for the purpose of qualifying such person as director of
ALFA, and cause a certificate of stock evidencing the share so transferred to be issued in the name of
such person”
In the light of the express terms of Stipulation No. 4 of the subject voting trust agreement. Both
parties, ALFA and the DBP, were aware at the time of the execution of the agreement that by
40
virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA were stripped of
their positions as such.
The petitioners in this case do not fall under any of the enumerated officers. The service of
summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as
correctly argued by the petitioners, will contravene the general principle that a corporation can only be
bound by such acts which are within the scope of the officer's or agent's authority.
accounting of assets. What Badjak seeks to recover is title to, possession of the 3 oil mills which the
records shows already belong to NIDC. It is not disputed that the mortgages on the 3 oil mills were
foreclosed by PNB and NIDC. The Court said that the writ of mandamus will not issue to give to the
applicant anything to which he is not entitled by law. After NIDC acquired ownership of the 3 oil mills
there is no doubt, that NICD not only has possession of, but also tile to the 3 oil mills.
The PNB-NIDC of the properties in question was not made or affected under the capacity was not
made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of
recovering on a just and valid obligation of Batjak.

 NIDC V. AQUINO, 163 SCRA

153

NIDC VS. AQUINO

Facts:
Badjak ( Basic Agricultural Traders Jointly Administered Kasamahan) is a corporation engaged in the
manufacture of coconut oil and copra cake for export. When the corporation’s financial condition
deteriorated to the point of bankruptcy they mortgaged the 3 coco processing mills to different banks.
In need of additional operating capital, Badjak applied to PNB for additional financial assistance, it was
approved and they entered into a Financial Agreement which includes the investment of PNB to the
corporation in the form of preferred stock convertible within 5 years to common stock. Then, a Voting
Trust Agreement was executed in favor of the NIDC (a wholly-owned subsidiary of PNB) by the
stockholders representing 60% of the outstanding paid-up and subscribed shares of Badjak.

Due to the insolvency of Badjak, PNB instituted extrajudicial foreclosure proceedings against the oil
mills, which were sold to the PNB as the highest bidder and the latter failed to exercise the right of
redemption. Subsequently, PNB transferred the ownership of oil mills to NIDC. After 3 years, Badjak
asked the NIDC if they are still interested to the renewal of the Voting Trust Agreement and requested
the latter to account the assets, properties, management and operation of Badjak which the latter
refused to comply. Then, Badjak filed a civil action for mandamus with preliminary injunction which was
favored by the respondent judge who issued a restraining order against the petitioner. Hence, the
consolidate petitions seeking to annul and set aside the decision of the respondent judge.

Issue: Whether or not the order of the respondent judge in granting the petition for mandamus of Badjak
should be annulled and set aside?

Ruling:

The petitions are granted and the order of the respondent judge was annulled and set aside.
The Court finds no clear right in Badjak to be entitled to the writ prayed for. It should be noted that the
petition for mandamus filed by it prayed that NIDC and PNB be ordered to surrender, relinquish and
turn-over to them the assets, management and operation of Badjak and particularly to submit complete
41
 f. POOLING AGREEMENTS (SEC. 100 5. Effect of the Stockholders’ agreement before and after formation of
corporation Stockholders’ agreements before and after formation and
OF THE CORPORATION CODE) organization of the corporation survive
incorporation and shall be valid and binding for as long as they are not
Sec. 100. Agreements by stockholders. – inconsistent with the articles of incorporation.
Agreements made prior to incorporation require fairly
1. Agreements by and among stockholders executed before the formation literal performance. There must be an actual contractual relation. Given
and organization of a close corporation, signed by all stockholders, shall such relation, the pre-incorporators are promoters and may arrange
survive the incorporation of such corporation and shall continue to be agreements to form and manage the corporation.
valid and binding between and among such stockholders, if such be
their intent, to the extent that such agreements are not inconsistent with
the articles of incorporation, irrespective of where the provisions of such
agreements are contained, except those required by this Title to be
embodied in said articles of incorporation.

2. An agreement between two or more stockholders, if in writing and signed

by the parties thereto, may provide that in exercising any voting rights,
the shares held by them shall be voted as therein provided, or as they
may agree, or as determined in accordance with a procedure agreed
upon by them.
3. No provision in any written agreement signed by the stockholders,
relating to any phase of the corporate affairs, shall be invalidated as
between the parties on the ground that its effect is to make them partners
among themselves.

4. A written agreement among some or all of the stockholders in a close

corporation shall not be invalidated on the ground that it so relates to
the conduct of the business and affairs of the corporation as to restrict
or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are
parties thereto the liabilities for managerial acts imposed by this Code on
directors.

To the extent that the stockholders are actively engaged in the

management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally
liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance.

42
H. ENFORCEMENT OF RIGHTS OF SHAREHOLDERS
d. RIGHT TO INSPECT
4. SPECIFIED RECORDS (SECS. 74 AND 75 OF THE
CORPORATION CODE)
Sec. 74. Books to be kept; stock transfer agent. – Every corporation
shall keep and carefully preserve at its principal office a record of all
business transactions and minutes of all meetings of stockholders or
members, or of the board of directors or trustees, in which shall be
set forth in detail the time and place of holding the meeting, how
authorized, the notice given, whether the meeting was regular or
special, if special its object, those present and absent, and every
act done or ordered done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas
and nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be
recorded in full on his demand. The records of all business
transactions of the corporation and the minutes of any meetings shall
be open to inspection by any director, trustee, stockholder or member
of the corporation at reasonable hours on business days and he may
demand, writing, for a copy of excerpts from said records or minutes,
at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such
director, trustee, stockholder or member for damages, and in addition,
shall be guilty of an offense which shall be punishable under Section
144 of this Code: Provided, That if such refusal is made pursuant to
a resolution or order of the board of directors or trustees, the liability
under this section for such action shall be imposed upon the directors
or trustees who voted for such refusal: and Provided, further, That
it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporation's
records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting in good
faith or for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock and
transfer book", in which must be kept a record of all stocks in the names
of the stockholders alphabetically arranged; the installments paid and
unpaid on all stock for which subscription has been made, and the
date of payment of any installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, and by and to
whom made; and such other entries as the by-laws may prescribe. The
stock and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be
open for inspection by any director or stockholder of the corporation
at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall
be allowed to operate in the Philippines unless he secures a license
from the Securities and Exchange Commission and pays a fee as may
be fixed by the Commission, which shall be renewable annually:
Provided, That a stock corporation is not precluded from performing
or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of
a license fee herein provided, shall be applicable.
Books and records to be kept by Corporation
1. Record of all business transactions
2. Minutes of all meetings of stockholders or members, or of board of
directors or trustees
3. Stock and transfer books
4. Optional records and supplementary books as many be necessary or
required by special laws
SEC Rules requiring filing of documents. The SEC requires all corporations
whose securities are listed in any stock exchange or with permits to sell
shares to the public or with twenty or more stockholders shall hereafter
submit to this Commission within thirty (30) days after approval of the
corporate action, certified true copies of the following documents evidencing
the same, to wit:
43
 a. Minute of meetings SEC REPORTORIAL REQUIREMENTS
1. Calling for payment of unpaid subscriptions
2. Increasing or decreasing the capital stock Period Requirements
3. Changing the nomenclature of shares of stock or certificates of Within 30 days from registration a) Set up books of accounts duly
of articlesincorporation registered with the BIR wherein receipts
indebtedness
and disbursements made are
4. Authorizing the borrowing of material sums of money immediately recorded.
Other documents, such as: b) Set up and register with the SEC its
stock and transfer book.
c) File its by-laws with the Commission.
1. Certificated changing the composition of the board of
Within 15 days from end of 3 months Submit a statement of sources and application of
directors and officers from registration funds certified by an independent CPA.
2. Certificates changing the ownership of the controlling interest in a) Within 105 days after the end of its i) If paid-up capital > P50,000, file a copy of BS
the corporation fiscal year and P&L statement.

ii) If paid-up capital

Management contracts duly approved by the stockholders.
< P50,000, same as
(i) and certified under oath by the Treasurer or any
responsible officer.
Sec. 75. Right to financial statements. – Within ten (10) days from b) Within 45 days Certified under oath by the Treasurer or any
receipt of a written request of any stockholder or member, the responsible officer.
corporation shall furnish to him its most recent financial statement, which Within 30 days from the date of annual Submit:
shall include a balance sheet as of the end of the last taxable year and a meeting
1) General
profit or loss statement for said taxable year, showing in reasonable Information sheet for the fiscal year.
detail its assets and liabilities and the result of its operations. 2) Minutes of Meeting of
stockholders/members electing the BoD certified
by the Secretary and
At the regular meeting of stockholders or members, the board of subscribed and sworn to before a notary public.
directors or trustees shall present to such stockholders or members a 3) Minutes of meeting of BoD electing the
financial report of the operations of the corporation for the preceding officers, certified by the secretary and
subscribed and sworn to before a notary public
year, which shall include financial statements, duly signed and certified by
Within 5 days from Submit list of stockholders/members as of
an independent certified public accountant. stockholders/members meeting the date of annual or special
stockholders/members’ meeting, showing:
Name of the stockholder
However, if the paid-up capital of the corporation is less than P50,000.00,  Address
the financial statements may be certified under oath by the treasurer or
 Nationality
any responsible officer of the corporation.
 No. of shares subscribed
 Amt. subscribed by each
Stockholder’s rights to financial statements and reports Shall be made for inspection.
1. Balance sheet as of the end of the last taxable year. Within 5 days before the date of annual Submit list of stockholders/members
2. A profit and loss statement for said taxable year. meeting entitled to vote as of a date prior to the meeting.
The board of directors or trustees shall present “a financial report” to
stockholders or members.

44
 The SEC must be notified of any:
1. Change or transfer of address. ISSUE
2. Any investment of corporate funds in any of the Whether the right which the law concedes to a stockholder to inspect the records can be exercised
secondary purposes of the corporation by filing a by a proper agent or attorney of the stockholder as well as by the stockholder in person.
copy of the resolution approved by 2/3 of the
HELD
subscribed capital stock entitled to vote authorizing
- There is no pretense that the respondent corporation or any of its officials has refused to allow the
the BoD to invest in any of the secondary purposes.
petitioner himself to examine anything relating to the affairs of the company, and prays for order
commanding the respondents to place the records of all business transactions of the company,
5. REMEDIES during a specified period, at the disposal of the plaintiff or his duly authorized agent or attorney, it
being evident that the petitioner desires to exercise said right through an agent or attorney.
- It is advisable to say that there are some things which a corporation may undoubtedly keep secret,
 PHILPOTS V. PHIL MANUFACTURING, 40 notwithstanding the right of inspection given by law to the stockholder; as for instance, where a
PHIL 471 corporation, engaged in the business of manufacture, has acquired a formula or process, not
generally known, which has proved of utility to it in the manufacture of its products.
M NOTES: - It is not our intention to declare that the authorities of the corporation, and more particularly the
Board of Directors, might not adopt measures for the protection of such process form publicity.
PHILPOTS v
But there nothing in the petition which would indicate that the petitioner in this case is seeking to
- The right to inspect records is a personal right, therefore cannot be discover anything which the corporation is entitled to keep secret; and if anything of the sort is
delegated involved in the case it may be brought out at a more advanced stage of the proceedings.

Philpotts v. PMC

DOCTRINE:
- The pertinent provision of our law is found in the second paragraph of section 51 of Act No. 1459,
which reads as follows: "The record of all business transactions of the corporation and the minutes
of any meeting shall be open to the inspection of any director, member or stockholder of the
corporation at reasonable hours."
- The right of inspection given to a stockholder in the provision above quoted can be exercised
either by himself or by any proper representative or attorney in fact, and either with or without the
attendance of the stockholder. This is in conformity with the general rule that what a man may do
in person he may do through another; and we find nothing in the statute that would justify us in
qualifying the right in the manner suggested by the respondents.
The right of inspection to stockholders of corporations are to be liberally construed and that said right
may be exercised through any other properly authorized person.

FACTS
- W. G. Philpotts, a stockholder in the Philippine Manufacturing Company, seeks to obtain a writ of
mandamus to compel the Phil Manufacturing to permit the Philpotts , in person or by some
authorized agent or attorney, to inspect and examine the records of the business transacted by
said company since January 1, 1918.
- In the argument in support of the demurrer it is conceded by counsel for the respondents that
there is a right of examination in the stockholder granted under section 51 of the Corporation Law,
but it is insisted that this right must be exercised in person.
45
PHILPOTTS VS PHILIPPINE MANUFACTURING CO. (Right to inspect by stockholders; remedies)
Facts:
Petitioner as stockholder of respondent prayed for a writ of mandamus to compel the Board of Directors
of respondent corporation to permit the petitioner or his authorized agent or attorney the records of the
transactions of respondent. Respondent refused on the grounds that, the secretary as custodian of the
records must be impleaded along with the corporation as a proper party and, that an agent or attorney
of a stockholder do not have the right to inspect the records of respondent.
Issue:
1. Is the corporate secretary a proper party that should be impleaded in this case?
2. Can an agent or attorney of a stockholder inspect the records of the corporation?
Held:
1. The propriety of naming the secretary of the corporation as a codefendant cannot be
questioned, since such official is customarily charged with the custody of all documents,
correspondence, and records of a corporation, and he is presumably the person against
whom the personal orders of the court would be made effective in case the relief sought
should be granted.
2. The right of inspection given can be exercised either by himself or by any proper
representative or attorney in fact, and either with or without the attendance of the stockholder.
This is in conformity with the general rule that what a man may do in person he may do
through another. However, there are some things which a corporation may undoubtedly keep
secret, notwithstanding the right of inspection given by law to the stockholder like a secret
formula or process (trade secrets). But since the petitioner is not seeking to discover any
trade secret of the corporation, the writ of mandamus was ordered to be issued.
 PARDO V. HERCULES, 46 PHIL 964
M NOTES:
PARDO v
- Time of inspection of docs may be exercised at a reasonable hours
and business days; the provision of the bylaws cannot supersede the
prov. Of the corporation code
Pardo vs. Hercules Lumber Co. (Right to Inspect)
CASE LAW/ DOCTRINE: Right to inspect- open to any director, trustee or stockholder or member of
the corporation at reasonable hours on business days. He may demand in writing a copy of excerpts
at his expense.
FACTS:
- Pardo is a stockholder of Hercules Lumber and Ferrer is the acting secretary of the said company.
The latter refused to permit the former to inspect the records and business transactions of the
company.
- There was no question regarding the right to inspect as it is guaranteed in the Corp. Law.
- The main consideration in this case has reference to the time, or times, within which the right of
inspection may be exercised.
- The company, through various resolutions, had designated certain times to which the stockholders
can inspect the books. Allegedly, Pardo didn’t get permission to inspect thus was denied such.
Hence this petition.
ISSUE:
WON, the company can validly restrict the frequency to which shareholders can inspect its books.
HELD:
- No. Such restriction made by the company is invalid.
- Inspection at unusual hours or under improper conditions may be denied, otherwise it cannot be
denied.
- Neither the executive officers nor board of directors have the power to deny a stockholder of the
right all together.
- It will be noted that such right can be exercised “at reasonable hours”, meaning reasonable hours
on business days through out the year; not merely during some arbitrary period chosen by the
officers.
- Also, generally speaking, the motive of the shareholder exercising the right is immaterial.
Therefore, Pardo is granted the relief to inspect.
46
Pardo vs. Hercules Lumber Co. (Right to Inspect)
 VERAGUTH V. ISABELA SUGAR 57 SCRA
46 Phil 964 266
Facts:
M NOTES:
The petitioner is in fact a stockholder in the Hercules Lumber Company, Inc., and that the
respondent, Ignacio Ferrer, as acting secretary of the said company, has refused to permit the VERAGUTH v
petitioner or his agent to inspect the records and business transactions of the said Hercules Lumber - The right of inspection cannot be exercised by the sh without the approval
Company, Inc., at times desired by the petitioner. The basis of the refusal was the provision in the and authority of the board
company’s by-laws which declared that every stockholder may examine the books of the company - When signed it becomes an official document
and other documents pertaining to the same upon the days which the board of directors shall
annually fix.
Sec 74 & 75
Issue: Whether or not the resolution of the board constitutes a lawful restriction on the right Directors have an unqualified right to inspect the records and books
conferred by statute.
of the corporation
Ruling: - May acquire confidential information

The court held that the resolution of the board of directors of a corporation limiting the rights of
stockholders to inspect its records to a period of ten (10) days shortly prior to the annual stockholders RIGHT TO INSPECT=RIGHT TO BE INFORMED
meeting is an unreasonable restriction given by Section 51 of the Corporation Law, which declares SH have a qualified right
that the right to inspection can be exercised “at reasonable hours.” This was interpreted to mean that Why allowed to be exercised through an agent(accountant)?
the right of inspection may be exercised at reasonable hours on business days throughout the year, - Sh right to information
and not merely during an arbitrary period of a few days chosen by the directors. ***there is a mutual obligation bet. Sh and corp: Corp: to send notice; and sh to exercise right
to vote (qualified right to attend and participate)- to enable a sh to vote wisely

May the sh inspect the books at anytime? Does he need to show

that he is in GF and with legitimate business purpose? Sec 74:
AS A RULE:
- May exercise his right to inspect at anytime, without proving that he is in
GF and with legitimate business purpose
***only as a defense that the records has been used improperly;Sh
must show a legitimate purpose as to why is going to inspect (if denied
of the right)
***If in bad faith: the corp has to prove; the corp cannot deny the right
to inspect

Limitations of sh to right to inspect

1. If the motive of the is to get the trade secrets; and to acquire confidential
information

47
 Veraguth v. Isabela Sugar Co. HELD:

CASE LAW/ DOCTRINE: Paragraph 2 and 3 of Section 74 of BP 68 – Corporation Code of the
Philippines The records of all business transactions of the corporation and the minutes of any meetings
shall be open to inspection by any director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, writing, for a copy of excerpts from said
records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow
any director, trustees, stockholder or member of the corporation to examine and copy excerpts from
its records or minutes, in accordance with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall
be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a
resolution or order of the board of directors or trustees, the liability under this section for such action
shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That
it shall be a defense to any action under this section that the person demanding to examine and copy
excerpts from the corporation's records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such corporation or of any other corporation,
or was not acting in good faith or for a legitimate purpose in making his demand
DOCTRINE: All business corporations shall keep and carefully preserve a record of all business
transactions, and a minute of all meetings of directors, members, or stockholders, in which shall be set
forth in detain the time and place of holding the meeting, how authorized, the notice given, whether the
meeting was regular or special, if special its object, those present and absent, and every act done or
ordered done at the meeting. . . .
"The record of all business transactions of the corporation and the minutes of any meeting shall be
open to the inspection of any director, member, or stockholder of the corporation at reasonable hours."
- YES.
- As to the first issue, the SC held: “no damage was caused to Veraguth by the action taken at the
special meeting which he did not attend, since his interests were fully protected by the Philippine
National Bank; and that as to meetings in the future it is to be presumed that the secretary of the
company will fulfill the requirements of the resolutions of the company pertaining to regular and
special meetings. It will, of course, be incumbent upon Veraguth to give formal notice to the
secretary of his post-office address if he desires notice sent to a particular residence.”
- Directors of a corporation have the unqualified right to inspect the books and records of the
corporation at all reasonable times. Pretexts may not be put forward by officers of corporations to
keep a director or shareholder from inspecting the books and minutes of the corporation, and the
right of inspection is not to be denied on the ground that the director or shareholder is on unfriendly
terms with the officers of the corporation whose records are sought to be inspected. A director or
stockholder can of course make copies, abstracts, and memoranda of documents, books, and
papers as an incident to the right of inspection, but cannot, without an order of a court, be permitted
to take books from the office of the corporation. We do not conceive, however, that a director or
stockholder has any absolute right to secure certified copies of the minutes of the corporation until
these minutes have been written up and approved by the directors.

FACTS:

- Veraguth, a director and stockholder of the Isabela Sugar Company, Inc., filed a petition with the
lower court praying that : a final and absolute writ of mandamus be issued to each and all of the
respondent directors to notify him within the reglementary period, of all regular and special meetings
of the board of directors of the Company, and to place at his disposal at reasonable hours the
minutes, documents, and books of said corporation for his inspection as director and stockholder
- It appears that Veraguth has not been informed of previous meetings.

He likewise contends that when asked that he be permitted to inspect the books of the Cop, he was
denied access on the ground that the board of directors adopted a resolution providing for inspection
of the books and the taking of copies only "by authority of the President of the corporation previously
obtained in each case."

ISSUE:

Is Veraguth entitled to 1) receive notification before meetings are held 2) inspect the books of the
corporation
48
  GONZALES V. PNB 122 SCRA 489 for a legitimate purpose. Thus, Gonzalez contention that he has an unqualified right to inspection
no longer stands.
M NOTES: - Second, the Court found Gonzalez to be in bad faith and that his purpose was not germane to the
to his interest as a stockholder. The fact that Gonzalez procured a share of stock purposely to
PNB v GONZALES
exercise the right of inspection belies his claim of good faith.
With regards to confidential information: - Finally, the inspection would run counter to the express mandate of PNB’s charter. Its charter
- It is expressly required, that the one examining; shall be acting in limits the inspection of the bank’s records to certain qualified officials.
gf and for a legit purpose in making his demand Having its own charter, PNB is not governed by the Corp Code and the right of inspection could not be
made to apply given the express restriction in its charter.

CASE LAW/ DOCTRINE: The right of a stockholder to inspect the record of a business transactions
of a corporation is not absolute but is limited to purposes reasonably related to the interest of the
stockholder, must be asked fro in goodfaith for a specific and honest purpose and not to gratify
curiosity or for speculative or vicious purposes.
(See Sec 74)

FACTS:

- Ramon A. Gonzalez bought a share of stock from the PNB, and as a stockholder, Gonzalez
sought to look over the books and records of PNB.
- It was admitted that Gonzalez’s purpose in doing so was to verify the truth on certain transactions
which the bank entered into as well as to inquire into the validity of said transactions. These
include the undertaking of the bank to finance Southern Negros Devt Bank in the latter’s purchase
of a sugar mill, thefinsncing of the Cebu-Mactan Bridge and he construction of Passi Sugar Mill at
Ilo-ilo
- In fact, Gonzalez previously instituted several cases against the bank questioning the propriety of
these transactions. It was also found that Gonzalez procured a share from the bank precisely to
pry into its records and use the information against the latter.
- Thus, Gonzalez was subsequently denied by the officers of the bank in its attempt to be furnished
once gain of its records. The bank contended that his request was not germane to his interest as
one-stock shareholder.
Thus, Gonzalez instituted an action for mandamus against PNB.

ISSUE:

Whether or not the officers of PNB can be compelled to allow Gonzalez to inspect the records of the
former

HELD:

- The SC held in the negative,

- First and foremost, the new Corporation Code amended the provision of the Corporation law
pertaining to the rights of directors and stockholders to inspect corporate books . The Corporatio
Code has prescribed a limitationto the same by requiring as a condition precedent that the one
requesting the information must not have used improperly any information secured through pior
examination. Furthermore, the Code also required that the request must be in good faith and and
49
Gonzales vs. PNB
Facts: Petitioner Ramon A. Gonzales filed a case against PNB for its refusal to
allow him to look into the books and records of the respondent bank in order to
satisfy himself as to the truth of the published reports that the respondent has
guaranteed the obligation of Southern Negros Development Corporation in the
purchase of a US$ 23 million sugar-mill to be financed by Japanese suppliers and
financiers; that the respondent is financing the construction of the P 21
million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the
construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as
well as to inquire into the validity of Id transactions. The trial court having
dismissed the petition for mandamus, the instant appeal to review the said
dismissal was filed.
Prior to Gonzales' acquisition of 1 share of stock of PNB he already filed a
case against the said company.
The lower court held that the inspection of corporate records may be denied on
the ground that it is intended for an improper motive or purpose, the law having
granted such right to a stockholder in clear and unconditional terms. Petitioner
however uses as its defense Section 51 of Act No. 1459 stating that: Sec. 51.
... The record of all business transactions of the corporation and the minutes
of any meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours.
Issue: Whether or not Gonzales has a right to inspect the books and records of
PNB pursuant to Sec. 51?
Held:
The inspection sought to be exercised by the petitioner would be violative of
the provisions of its charter. (Republic Act No. 1300, as amended.) Sections 15,
16 and 30 of the said charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and Examination of the Central
Bank. — The National Bank shall be subject to inspection by the Department of
Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor
General, or other officers designated by law to inspect or investigate the
condition of the National Bank, shall not reveal to any person other than the
President of the Philippines, the Secretary of Finance, and the Board of
Directors the details of the inspection or investigation, nor shall they give
any information relative to the funds in its custody, its current accounts or
deposits belonging to private individuals, corporations, or any other entity,
except by order of a Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.— Any director,
officer, employee, or agent of the Bank, who violates or permits the violation
of any of the provisions of this Act, or any person aiding or abetting the
violations of any of the provisions of this Act, shall be punished by a fine not
to exceed ten thousand pesos or by imprisonment of not more than five years, or
both such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter of
its own, it is not governed, as a rule, by the Corporation Code of the
Philippines. Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters. — Corporations created
by special laws or charters shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them. supplemented by the
provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation
Code with respect to the right of a stockholder to demand an inspection or
examination of the books of the corporation may not be reconciled with the
abovequoted provisions of the charter of the respondent bank. It is not correct
to claim, therefore, that the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity to the charter of the
respondent bank.
Petitioner may no longer insist on his interpretation of Section 51 of Act No.
1459, as amended, regarding the right of a stockholder to inspect and examine
the books and records of a corporation. The former Corporation Law (Act No.
1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise known
as the "Corporation Code of the Philippines."
50
 6. CONFIDENTIAL NATURE OF SEC EXAMINATIONS
(SEC. 142 OF THE CORPORATION CODE)
Sec. 142. Confidential nature of examination results. – All interrogatories
propounded by the Securities and Exchange Commission and the answers
thereto, as well as the results of any examination made by the Commission or
by any other official authorized by law to make an examination of the
operations, books and records of any corporation, shall be kept strictly
confidential, except insofar as the law may require the same to be made public
or where such interrogatories, answers or results are necessary to be presented
as evidence before any court.
e. APPRAISAL RIGHT (SEC. 81 TO 86 OF THE
CORPORATION CODE)
Sec. 81. Instances of appraisal right. – Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of his
shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholders or class of
shares, or of authorizing preferences in any respect superior to those
of outstanding shares of any class, or of extending or shortening the
term of corporate existence.
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
assets as provided in this Code.
3. In case of merger or consolidation.
Sec. 81, not exclusive.
Such appraisal right may also be exercised when a stockholder
dissents when a corporation or business or for a purpose other than its
main purpose. (Sec. 42)
When a stockholder of a close corporation may for any reason compel
the corporation to purchase his shares from the par or issued value,
when the corporation has sufficient assets in its books to cover its
debts and liabilities, exclusive of capital stock. (Sec. 105)
Sec. 82. How right is exercised. – The appraisal right may be
exercised by any stockholder who shall have voted against the proposed
corporate action, by making a written demand on the corporation
within thirty (30) days after the date on which the vote was taken for
payment of the fair value of his shares: Provided, That failure to make
the demand within such period shall be deemed a waiver of the
appraisal right. If the proposed corporate action is implemented or
effected, the corporation shall pay to such stockholder, upon surrender
of the certificate(s) of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in anticipation of such
corporate action.
If within a period of sixty (60) days from the date the corporate action
was approved by the stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the shares, it shall be
determined and appraised by three (3) disinterested persons, one of
whom shall be named by the stockholder, another by the corporate
and the third by the two (2) thus chosen. The findings of the majority
of the appraisers shall be final, and their award shall be paid by the
corporation within thirty (30) days after such award is made: Provided,
That no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retain earnings in its books to cover such
payment: and Provided, further, That upon payment by the corporation
of the agreed or awarded price, the stockholder shall forthwith transfer
his shares to the corporation.
Exercising the appraisal right
By one who has voted against the proposed corporate action, by
making a written demand on the corporation within thirty
(30) days after the date on which the vote was taken for payment of the
fair value of his shares. Those who are absent and present abstained their
vote cannot exercise the appraisal right.
51
 Sec. 83. Effect of demand and termination of right. – From the Sec. 85. Who bears costs of appraisal. – The costs and expenses
time of demand for payment of the fair value of a stockholder’s of appraisal shall be borne by the corporation, unless the fair value
shares until either the abandonment of the corporate action involved ascertained by the appraisers is approximately the same as the price
or the purchase of the said shares by the corporation, all rights which the corporation may have offered to pay the stockholder, in
accruing to such shares, including voting and dividend rights, shall which case they shall be borne by the latter. In case of an action to
be suspended in accordance with the provisions of this Code, except recover such fair value, all costs and expenses shall be assessed against
the right of such stockholder to receive payment of the fair value the corporation, unless the refusal of the stockholder to receive
thereof: Provided, That if the dissenting stockholder is not paid the payment was unjustified.
value of his shares within 30 days after the award, his voting and
dividend rights shall be immediately be restored.
Consideration of the costs of appraisal
Expenses of appraisal:
Sec. 84. When right to payment ceases. – No demand for  Appraisers’ fees
payment under this Title may be withdrawn unless the corporation  Attorneys’ fees
consents thereto. If, however, such demand for payment is withdrawn  Expert accountants’ fees
with the consent of the corporation, or if the proposed corporate
 Witnesses before the appraisers’ fees
action is abandoned or rescinded by the corporation or disapproved
Thus, clarifies an otherwise delicate aspect of appraisal proceeding.
by the Securities and Exchange Commission where such approval is
necessary, or if the Securities and Exchange Commission determines
that such stockholder is not entitled to the appraisal right, then the Sec. 86. Notation on certificate(s); right of transferee. – Within
right of said stockholder to be paid the fair value of his shares shall ten (10) days after demanding payment for his shares, a dissenting
cease, his status as a stockholder shall thereupon be restored, and stockholder shall submit the certificate(s) of stock representing his
all dividend distributions which would have accrued on his shares shares to the corporation for notation thereon that such shares are
shall be paid to him. dissenting shares. His failure to do so shall, at the option of the
corporation, terminate his rights under this Title. If shares represented
by the certificate(s) bearing such notation are transferred, and the
Effect of refusal of corporation to certificate(s) consequently cancelled, the rights of the transferor as a
dissenting stockholder under this Title shall cease and the transferee
shall have all the rights of a regular stockholder; and all dividend
If... Then... distributions which would have accrued on such shares shall be paid
to the transferee.
FV of the shares within thirty Restore all his rights
(30) days from the award automatically.
Insufficiency of the unrestricted Restore by Valuation of shares of dissenting shareholders
RE reacquiring his former Appraisers should consider the elements that tend to affect market quotations:
status as a stockholder.
Abandoned; Rescinded; Unsecured Same effects as above. • rate of dividends
approval of the SEC; Stockholder • The regularity with which they have been paid
is not entitled; Withdrawal • The management and reputation of the company
(dissenting stockholder with • Its prospects for the future
• All other circumstances which will aid them in estimating the future
consent of the corp)
course of the stock in the market

52
 The important thing to consider in arriving at the appraisal value is
whether the valuation arrived at is fair, just and reasonable to
all parties concerned.

Other instances when appraisal right may be granted

1. Amendment of “any provision or matter stated in the articles of
incorporation.”
2. When the corporate term is extended.
3. Any purpose other than the primary purpose.
4. Close corporation – a stockholder may compel the corporation to
purchase FV “for any reasons.”
Exercise of appraisal right provided compensatory alternative to
investor Appraisal statutes extending to corporate purpose or
duration amendments would seem to be of limited value.

Appraisal rights cannot challenge this power but they can provide a
compensatory alternative to an investor faced with a loss of existing
stock rights and should be so employed.

When right of stockholder to payment ceases

1. The demand for payment is withdrawn with the consent of the
corporation.
2. The proposed corporate action is abandoned or rescinded by the
corporation.
3. Proposed action is disapproved by the SEC where such approval is
necessary.
Such stockholder is not entitled to exercise his appraisal right.

53
 f. DERIVATIVE SUITS A class action and a derivative action rest upon fundamentally different principles of substantive law.
A derivative action must necessarily be based on a claim for relief which is owned by the stockholders’
 RICHARDSON V. ARIZONA FUELS corporation. Indeed, a prerequisite for filing a derivative action is the failure of the corporation to initiate
CORP. 614 P 2D 636 the action in its own name. The stockholder, as a nominal party, has no right, title or interest whatsoever
in the claim itself – whether the action is brought by the corporation or by the stockholder on behalf of
the corporation.
M NOTES:
A class action, on the other hand, is predicated on ownership of the claim for relief sued upon in the
RICHARDSON v representative of the class and all other class members in their capacity as individuals, Shareholders
Derivative Suit of the corporation may, of course, have claims for relief directly against their corporation because the
corporation itself has violated rights possessed by the shareholders, and class action would be an
Class Action appropriate means for enforcing their claim.
Same ***they are A recovery in a class action is a recovery which belongs directly to the shareholders. However, in a
both representative suits derivative action, the plaintiff shareholder recovers nothing and the judgment run in favor of the
Cause of Action is for the corp corporation.
as an individual capacity
The difference in the two procedures and their relationship to underlying substantive law has been
Relief: benefits the corp benefits individual capacity stated as follows:
Sh on behalf of the
Suits which are said to be derivative and therefore come within the rule, are those which seek to enforce
corp stockholder as an individual
any right which belongs to the corporation and is not being enforced, such as the liability of corporate
officers or majority shareholders for mismanagement, to recover corporate assets and related claims,
RICHARDSON V. ARIZONA FUELS CORP, 614 p.2d 636 to enforce rights of the corporation by virtue of its contract with a third person and to enjoin those in
charge of the corporation from causing it to commit an ultra vires act.
Facts: Plaintiffs are stockholders of Major Oil Corporation. The defendants are the legal or beneficial
owners of 47% of the issued and outstanding shares of stock of Major. Plaintiffs, in an amended On the other hand, if the injury is one to the plaintiff as a stockholder and to him individually, and not
complaint moved for an order certifying this suit as a class action, which the court granted. to the corporation, as where the action is based on a contract to which he is a party, or on a right
belonging severally to him, or on a fraud affecting him directly, it is an individual action.
The amended complaint states 12 causes of actions, the first eight of which allege some fraudulent
appropriation of or scheme to appropriate Major’s assets by defendants. These causes of action seek
to require the defendants to disgorge and return to Major the assets wrongfully obtained. Of the
remaining 4 causes, 3 seek compensatory or punitive damages for injury attributable to alleged
breaches of fiduciary duty implicit in the fraudulent acts as enumerated in the first eight causes. The
final cause of action seeks appointment of a receiver.

Issue: WON the court erred in certifying the suit as a class action.

Ruling: Yes. In this case, neither the memorandum decision nor the order of the district court does
any more than recite that the suit may be maintained as a class action. Furthermore, the complaint in
alleging the action should be maintained as a class action, does no more than mimic the Rules of
Court.

54
  BITONG V. CA GR NO. 123553, 1998

Bitong Vs C.A

Facts:

Nora Bitong instituted an action before the SEC against the officers of Mr. And Ms. Publishing
Corporation. She alleged that the private respondents is liable for fraud, misrepresentation, disloyalty,
evident bad faith, conflict of interest and mismanagement. This arose from the fact that the said officers
extended a loan to Philippine Daily Inquirer without resolution of the shareholders and without interest.
On the other hand, the respondent alleged that Bitong is not a real party in interest since she is only a
holder in trust of the shares of JAKA Investment Corporation in the Mr. and Ms. Publishing corporation.

Issue:

Whether or not Bitong can institute a derivative suit in behalf of JAKA against the officers of
Mr. and Ms. Publishing corporation.

Held:

A derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a

third party. In the case at hand there is no doubt that petitioner Bitong was an employee of JAKA as
its managing officer, as testified to by Senator Enrile. However, in the absence of a Special Authority
from the board of directors of JAKA to institute a derivative suit and in its behalf, petitioner is
disqualified by law to sue in her own name. the power to sue and be sued in any court by a
corporation even as a stockholder is lodged in the board of directors that exercises its corporate
powers and not in the president or officer thereof. Petition is denied.

55
  SMC V. KHAN 176 SCRA 447
M NOTES:
SMC v
Reqs. of derivative suit
Sh at the time of transaction complained
1.
Exhausted intracorp remedies
2.
Made a demand to the BOD but has been refused
3.
Relief prayed for is for the corporation
4.
***it does not matter as to how much is the share of a sh; what
matters is that the person is a sh at the time he has filed a
complaint
SAN MIGUEL CORPORATION vs. KAHN
FACTS: 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation were
acquired by 14 other corporations, and were placed under a Voting Trust Agreement in favor of the
late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute
Trustee with power to delegate the trusteeship in writing to Andres Soriano III. Shortly after the
Revolution of February, 1986, Cojuangco left the country.
An "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14 corporations, as
"Sellers," for the purchase by Soriano, "for himself and as agent of several persons," of the 33,133,266
shares of stock.
Actually, according to Soriano and the other private respondents, the buyer of the shares was a foreign
company, Neptunia Corporation Limited (of Hongkong), a wholly owned subsidiary of San Miguel
International which is, in turn, a wholly owned subsidiary of San Miguel Corporation; and it was
Neptunia which on or about April 1, 1986 had made the down payment of P500,000,000.00, "from the
proceeds of certain loans".
At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good
Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a
close associate and dummy of former President Marcos.
In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred
by Neptunia for the down payment ((P500M)) on the 33,133,266 shares.
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the
PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was
ever adopted, and stating that what in truth was agreed upon at the meeting of December 4, 1986 was
merely a "further study" by Director Ramon del Rosario of a plan presented by him for the assumption
of the loan. De los Angeles also pointed out certain "deleterious effects" thereof. He was however
overruled by private respondents. 14 When his efforts to obtain relief within the corporation and later
the PCGG proved futile, he repaired to the Securities and Exchange Commission.
De los Angeles filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San
Miguel Corporation, against ten (10) of the fifteen-member Board of Directors who had "either voted to
approve and/or refused to reconsider and revoke Board Resolution No. 86-12-2." The respondents
filed motion to dismiss.
ISSUE: W/N de los Angeles has the personality to bring suit in behalf of the corporation.
HELD: The theory that de los Angeles has no personality to bring suit in behalf of the corporation
because his stockholding is minuscule cannot be sustained.
It is claimed that since de los Angeles 20 shares represent only .00001644% of the total number of
outstanding shares, he cannot be deemed to fairly and adequately represent the interests of the
minority stockholders. The implicit argument — that a stockholder, to be considered as qualified to
bring a derivative suit, must hold a substantial or significant block of stock — finds no support whatever
in the law. The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or transaction complained
of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors
for the appropriate relief but the latter has failed or refused to heed his plea; 33 and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit.
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing
to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial
since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or
the redress of a wrong committed against him, individually, but in behalf and for the benefit of the
corporation.
56
  PASCUAL V. OROSCO 19 PHIL 387 It is self-evident that the plaintiff in the case at bar was not, before he acquired in September,
1903, the shares which he now owns, injured or affected in any manner by the transactions set forth
in the second cause of action. His vendor could have complained of these transactions, but he did not
M NOTES: choose to do so. The discretion whether to sue to set them aside, or to acquiesce in and agree to them,
is, in our opinion, incapable of transfer. If the plaintiff himself had been injured by the acts of defendants'
predecessors that is another matter. He ought to take things as he found them when he voluntarily
PASCUAL v acquired his ten shares. If he was defrauded in the purchase of these shares he should sue his vendor.

Why should the person at the filing of the derivative suit, needs to be sh?
- If the original sh to whom a person has acquired its sh, did not
question the specific transaction complained of (when the transaction
existed during the original owner); that new owner is estopped in
questioning the transaction.
If the party himself, who is the victim of fraud or usury, chooses to waive his remedy and release the
party, it does not belong to a subsequent purchaser under him to recall and assume the remedy for
him. (Quoted with approval in the case of the Graham vs. La Crosse and Milwaukee R.R. Co., 102.,
U.S., 148.)

EXCEPTION: a person may file a derivative suit even not a sh at
the time of transaction
- When a transfer is by operation of law e.g, succession
So it seems to be settled by the Supreme Court of the United States, as a matter of substantive
law, that a stockholder in a corporation who was not such at the time of the transactions complained
of, or whose shares had not devolved upon him since by operation of law, can not maintain suits of
this character, unless such transactions continue and are injurious to the stockholder, or affect him
especially and specifically in some other way.

PASCUAL V OROSCO

FACTS: Petitioner Candido Pascual is a stockholder of Banco Espanol-Filipino. Petitioner contends

that during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without the
knowledge, consent, or acquiescence of the stockholders, deducted their respective compensation
from the gross income instead of from the net profits of the bank, thereby defrauding the bank and its
stockholders of approximately P20,000 per annum; that though due demands has been made upon
them therefor, defendants refuse to refund to the bank the sums so misappropriated, or any part
thereof; that defendants constitute a majority of the present board of directors of the bank, who alone
can authorize an action against them in the name of the corporation, and that prior to the filing of the
present suit plaintiff exhausted every remedy in the premises within this banking corporation.

ISSUE: WON petitioner is the proper party to the case at bar and WON the court has jurisdiction.

RULING: The SC held that the plaintiff, by reason of the fact that he is a stockholder in the bank
(corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of such a right
must depend upon when, how, and for what purpose he acquired the shares which he now owns.

57
  EVANGELISTA V. SANTOS 86 PHIL 387 debts and liabilities, something which cannot be legally done in view of section 16 of the Corporation
Law, which provides that "No shall corporation shall make or declare any stock or bond dividend or
any dividend whatsoever from the profits arising from its business, or divide or distribute its capital
NOTES: stock or property other than actual profits among its members or stockholders until after the payment
of its debts and the termination of its existence by limitation or lawful dissolution." But while it is to the
EVANGELISTA v SANTOS corporation that the action should pertain in cases of this nature, however, if the officers of the
corporation, who are the ones called upon to protect their rights, refuse to sue, or where a demand
Derivative suit shall not be for the benefit of individual upon them to file the necessary suit would be futile because they are the very ones to be sued or
person; but for the corporation EXCEPTION: when the benefit because they hold the controlling interest in the corporation, then in that case any one of the
may be for an individual not to the corp stockholders is allowed to bring suit. But in that case it is the corporation itself and not the plaintiff
stockholder that is the real property in interest, so that such damages as may be recovered shall pertain
Equity security: right to residual assets; when the corp is in dissolution stage; to the corporation. In other words, it is a derivative suit brought by a stockholder as the nominal party
pending derivative suit; the relief can go directly to the individual sh plaintiff for the benefit of the corporation, which is the real property in interest. Herein, Evangelista, et.
al. have brought the action not for the benefit of the corporation but for their own benefit, since they
ask that Santos make good the losses occasioned by his mismanagement and pay to them the value
of their respective participation in the corporate assets on the basis of their respective holdings. Clearly,
Evangelista v Santos this cannot be done until all corporate debts, if there be any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions
Facts: Juan D. Evangelista, et. al. are minority stockholders of the Vitali Lumber Company, Inc., a of section 16 of the Corporation Law. It results that Evangelista, et. al.'s complaint shows no cause of
Philippine corporation organized for the exploitation of a lumber concession in Zamboanga, action in their favor.
Philippines, while Rafael Santos holds more than 50% of the stocks of said corporation and also is and
always has been the president, manager, and treasurer thereof. Santos, in such triple capacity, through
fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets,
among them machineries, buildings, warehouses, trucks, etc., to disappear, thus causing the complete
ruin of the corporation and total depreciation of its stocks. Evangelista, et. al. therefore prays for
judgment requiring Santos: (1) to render an account of his administration of the corporate affairs and
assets: (2) to pay plaintiffs the value of t heir respective participation in said assets on the basis of the
value of the stocks held by each of them; and (3) to pay the costs of suit. Evangelista, et. al. also ask
for such other remedy as may be and equitable. The complaint does not give Evangelista, et. al.'s
residence, but, but purposes of venue, alleges that Santos resides at 2112 Dewey Boulevard, corner
Libertad Street, Pasay, province of Rizal. Having been served with summons at that place, Santos filed
a motion for the dismissal of the complaint on the ground of improper venue and also on the ground
that the complaint did not state a cause of action in favor of Evangelista, et. al. After hearing, the lower
court rendered its order, granting the motion for dismissal. Reconsideration of the order was denied.
Evangelista, et. al. appealed to the Supreme Court.

Issue: Whether Evangelista, et. al. had the right to bring the action for damages resulting from
mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that
Santos' maladministration has brought about the ruin of the corporation and the consequent loss of
value of its stocks.

Held: The injury complained of is primarily to the corporation, so that the suit for the damages claimed
should be by the corporation rather than by the stockholders. The stockholders may not directly claim
those damages for themselves for that would result in the appropriation by, and the distribution among
them of part of the corporate assets before the dissolution of the corporation and the liquidation of its
58
  REPUBLIC BANK V. CUADERO, 19 Directors. His action is designed to prevent diversion of the corporate funds for the payment of the
salary of said Chairman.
SCRA 671
NOTES: Same; Stockholder’s suit to annul actions of bank’s Board of Directors.—A stockholder has a cause of
action to annul certain actions of the Board of Directors of a bank, which actions were considered
REPUBLIC v CUADERNO anomalous and a breach of trust prejudicial to the bank.
***exhaustion of corporate remedies is material: as a rep (Sh)
Pleadings; Motion to dismiss; Hypothetical admission of facts alleged in the complaint.—The facts
only enforcing derivative suit because the officers under their
pleaded in the complaint are deemed hypothetically admitted by the defendants who file a motion to
corp powers (sec 23) has failed to properly exercise those dismiss the complaint for failure to state a cause of action.
powers; therefore it is incumbent upon the sh to remind those
directors/ officers of such wrong action. Same; Actions; Sufficiency of cause of action.—The test of sufficiency of the facts alleged in the
complaint is whether or not the court could render a valid judgment as prayed for, accepting as true
the exclusive facts set forth in the complaint. If the court should doubt the truth of the facts averred, it
must not dismiss the complaint but should require an answer and proceed to trial on the merits.
EXCEPTION: intracorporate remedies
- If the exhaustion would be futile; intracorp remedies not Same; Pendency of other cases.—A case should not be dismissed due to the pendency of other
needed litigations between the same parties if said ground was not invoked in the motion to dismiss, The .fact
- Ex: when dirs unanimously acted/voted on that specific that said case may be incorporated, by amendment, in any one of the other pending actions does not
justify its dismissal since the amendment of the complaint in the other cases rests on the discretion of
transaction complained of the court. It is possible that the amendment would not be allowed. [Republic Bank vs. Cuaderno, 19
SCRA 671(1967)]
Republic Bank vs. Cuaderno, 19 SCRA 671 , March 30, 1967

Corporation; Banks; Derivative suit by stockholder.—An individual stockholder may institute a

derivative or representative suit on behalf of the corporation, wherein he holds stock, in order to protect
or vindicate corporate rights, whenever the of f icials of the corporation refuse to sue, or are the ones
to be sued or hold control of the corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest.

Same; When authority of corporation to bring suit is not required.—Such a suit need not be authorized
by the corporation where its objective is to nullify the action taken by its manager and the board of
directors, in which case any demand for intra-corporate remedy would be futile.

Same; Nonjoinder of other stockholders.—The fact that no other stockholder has made common cause
with the plaintiff is irrelevant since the smallness of plaintiff’s holding is no ground for denying him relief.

Same; Joinder of corporation.—Whether in a derivative suit filed by a stockholder, the corporation

should be joined as a plaintiff or a defendant is not important. What is important is that the corporation
should be made a party in order to make the court’s judgment binding upon it and thus bar future
relitigations of the issues. Misjoinder of parties is not a ground for dismissing an action.

Same; Derivative suit is not a quo warranto proceeding.—A derivative suit by a stockholder for the
purpose of annulling the appointment of a defendant as Chairman of the Board of Directors is not a
quo warranto proceeding. The plaintiff is not claiming title to the position of Chairman of the Board of

59
 REPUBLIC BANK vs. CUADERNO  REYES V. TAN, 3 SCRA 198

NOTES:

REYES v TAN
FACTS: Damaso Perez had complained to the Monetary Board of the Central Bank certain frauds
allegedly committed by defendant Pablo Roman, as chairman of the Board of Directors of the Republic - When questioning the entire BOD: it should be prudent to ask a
Bank, and of its Executive Loan Committee. RECEIVER; for and in behalf of the corp pending suit.

Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an
investigation. Bank Examiners reported that certain mortgage loans were granted in violation of Function of BOD Role od Dir, OFF, T RURAL
sections 77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary Board, of BANK v
which defendant Cuaderno was a member, ordered a new Board of Directors of the Republic Bank to - May the BOD be compelled to confirm a deed of absolute sale,
be elected, which was done, and subsequently approved by the Monetary Board. The latter accepted executed by the bank manager without authority?
the offer of Pablo Roman to put up adequate security for the questioned loans made by the Republic - BOD may be compelled; since the bank acknowled
Bank, and such security was made a condition for the resumption of the Bank's normal operations; that
subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to special prosecutors the authority of the manager to enter and bind contracts
of the Department of Justice the banking frauds and violations of the Banking Act, reported for
investigation and prosecution, but no information was filed up to the time of the retirement of Cuaderno.
Election and Tenure of D&T Qualifications of D & T
To neutralize the impending action against him, Pablo Roman engaged Miguel Cuaderno as technical Sec. 44
consultant and selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank. ***at least 1 share of stock
The Board of Directors composed of individuals personally selected and chosen by Roman, allegedly
connived and confederated in approving the appointment and selection of Cuaderno and Dizon to
protect Pablo Roman from criminal prosecution. DETECTIVE & Protective BuREAU v
- For a person to seat as a director; one must be ELECTED AND
ISSUE: W/N appellant Perez can question the appointment and selection of defendants Cuaderno QUALIFIED
and Dizon. - A person has been elected as a managing dir and turns out that
such person has no share.; therefore he is only elected but not
HELD: Yes, Perez can question the appointment
qualified
The Defendants mainly controvert the right of plaintiff to question the appointment and selection of
defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with which Directors Sec 24
plaintiff, as stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is Sec 26
settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf
of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever
the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the
corporation.

The action he has brought is a derivative one, expressly manifested to be for and in behalf of
the Republic Bank, because it was futile to demand action by the corporation, since its Directors were
nominees and creatures of defendant Pablo Roman. The frauds charged by plaintiff are frauds against
the Bank that redounded to its prejudice.

60
 CATALINA R. REYES vs. HON. BIENVENIDO A. TAN
FACTS:
The corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June 5, 1954 by defendants Cesar
K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson; that the
plaintiff holds both Class A and Class B shares; , the Board of Directors approved a resolution
designating one Dayaram as co-manager with the specific understanding that he was to act as
defendant Wadhumal Dalamal's designee, Morris Wilson was likewise designated as co-manager with
responsibilities for the management of the factory only, that an office in New York was opened for the
purpose of supervising purchases, which purchases must have the unanimous agreement of Cesar K.
Roxas, New York resident member of the board of directors, Robert Born and Wadhumal Dalamal or
their respective representatives; that several purchases aggregating $289,678.86 were made in New
York for raw materials such as greige cloth, rayon and grey goods for the textile mill and shipped to
the Philippines, which shipment were found out to consist not of raw materials but already finished
products ., for which reasons the Central Bank of the Philippines stopped all dollar allocations for raw
materials for the corporation which necessarily led to the paralyzation of the operation of the textile mill
and its business; that the supplier of the aforesaid finished goods was the United Commercial Company
of New York in which defendant Dalamal had interests and the letter of credit for said goods were
guaranteed by the Indian Commercial Company and the Indian Traders in which firms defendant
Dalamal likewise held interests; that the resale of the finished goods was the business of the Indian
Commercial Company of Manila, which company could not obtain dollar allocations for importations of
finished goods under the Central Bank regulations; that plaintiff and some members of the board of
directors urged defendants to proceed against Dalamal, exposing his offense to the Central Bank, and
to initiate suit against Dalamal for his fraud against the corporation; that defendants refused to proceed
against Dalamal and instead continued to deal with the Indian Commercial Company to the damage
and prejudice of the corporation. The prayer asks for the appointment of a receiver and a judgment
marking defendants jointly and severally liable for the damages. The motion for the appointment of a
receiver was set for hearing and subsequently the court entered the order for the appointment of a
receiver.
This is a petition for certiorari to review and set aside an order of the Manila, Hon. Bienvenido A. Tan,
presiding, in Civil Case No. 42375, entitled "Francisca R. Justiniani vs. Wadhumal Dalamal, et al.",
appointing a receiver of the corporation Roxas-Kalaw Textile Mills, Inc. In said action, plaintiff Justiniani
asks the court to order the directors of the corporation, jointly and severally, to repair the damage
caused to the corporation, of which all the plaintiff and defendants are members.
ISSUE:
W/N the court committed an abuse of discretion in appointing a receiver for the corporation,
(considering the petitioner claims that respondent Justiniani neither alleged nor proved the existence
of an emergency requiring the immediate appoinment of a receiver of the Roxas-Kalaw Textile Mill,
Inc.)
HELD:
This contention is not well founded. The importation of textiles instead of raw materials, as well as the
failure of the Board of Directors to take action against those directly responsible for the misuse of dollar
allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust
was committed which justified the derivative suit by a minority stockholder on behalf of the corporation.
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not
of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly
upon the stockholders.
The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of
two years is also without merit. During that period of time respondent had the right to assume and
expect that the directors would remedy the anomalous situation of the corporation brought about by
their own wrong doing. Only after such period of time had elapsed could respondent conclude that the
directors were remiss in their duty to protect the corporation property and business.
Counsel for petitioner claims that respondent Justiniani was treasurer of the corporation for
sometime and had control of funds and this notwithstanding, she had not taken the steps to remedy
the situation. In answer we state that the fraud consisted in importing finished textile instead of raw
cotton for the textile mill; the fraud, therefore, was committed by the manager of the business and was
consented to by the directors, evidently beyond reach of respondent.
The directors permitted the fraudulent transaction to go unpunished and nothing appears to have
been done to remove the erring purchasing managers. In a way the appointment of a receiver may
have been thought of by the court below so that the dollar allocation for raw material may be revived
and the textile mill placed on an operating basis. It is possible that if a receiver in which the Central
Bank may have confidence is appointed, the dollar allocation for raw material may be restored. Claim
is made that if a receiver is appointed, the Philippine National Bank to which the corporation owes
considerable sums of money might be led to foreclose the mortgage. Precisely the appointment of a
receiver in whom the bank may have had confidence might rehabilitate the business and bring a
restoration of the dollar allocation much needed for raw material and an improvement in the business
and assets the corporation, thus insuring the collection of the bank's loan.
Considering the above circumstances we are led to agree with the judge below that the
appointment of a receiver was not only expedient but also necessary to restore the faith and confidence
of the Central Bank authorities in the administration of the affairs of the corporation, thus ultimately
leading to a restoration of the dollar allocation so essential to the operation of the textile mills. The
assignment of error is, therefore, overruled.
61