Corporation Code Outline 6 (Atty. M.I.P Romero) 2013400036

CORPORATION CODE OUTLINE 6 (ATTY. M.I.
P ROMERO) 2013400036
BUSORG2 - OUTLINE 6 (2016) 1936, the milling company's Board of Directors adopted a resolution granting
Prof. M.I.P. Romero further concessions to the planters over and above those contained in the
Xlll. DUTIES OF DIRECTORS &CONTROLLING STOCKHOLDERS amended milling contract. Subsequently, the Montelibanos sued the milling
3-fold duty of directors --- Hustle, Diligence, Loyalty, Obedience company alleging that the three other centrals in the province were granting
Sec. 21 of NCC increased participation to their planters;; therefore, pursuant to paragraph 9 of the
CHAPTER 2:HUMAN RELATIONS (n) August 20, 1936 Resolution, Bacolod-Murcia Milling Co., Inc. was obligated to
grant similar concessions to the Montelibanos.
Art. 21. Any person who wilfully causes loss or injury to another in a manner that is The milling company opposed the claim on the ground that, among
contrary to morals, good customs or public policy shall compensate the latter for the others, it was a donation which was not within the power of the Board of Directors
damage. to grant. The trial court dismissed the action, but on appeal to the Supreme Court
reversed the lower court.

ISSUE:
Diligence

- The directors and officers are required to exercise due care in the performance
Whether or not the reversal was proper.
of their functions.

- Negligence on their part proximately causing damage to the corporation will
RULING:
make them liable.

YES.
Loyalty

- The directors and officers owes loyalty and allegiance to the corporation – a
The Court ruled that the August 20, 1936 resolution, passed in good faith
loyalty that is undivided and allegiance that is influenced by no consideration
by the board of directors, was valid and binding and formed an integral part of the
other than the welfare of the corporation.
amended milling contracts, the milling company having agreed to give concessions

to the planters, precisely to induce them to agree to an extension of their contracts.
Obedience
Petitioner filed two motions for reconsideration;; however, the doctrine of res
- obedience requires compliance with the laws and the rules .
judicata had set in. Wherefore, the appeal was denied.
- in relation to this duty, directors, trustees, and officers have the duty to act intra

vires and within authority.
NOTES:

• BUSINESS JUDGMENT RULE à the court recognizes that the boards
Montelibano v. Bacolod-Murcia May 18, 1962
are voted by the stockholders. Board would think in terms for the
ALFREDO MONTELIBANO and ALEJANDRO MONTELIBANOvs.THE HON.
stockholders.
COURT OF APPEALS and BACOLOD-MURCIA MILLING COMPANY, INC.
• Directors and officers à they are no infalliable, business judgment is valid
G.R. No. 85757, July 8, 1991
for as long as there is absence of BAD FAITH, GROSS NEGLIGENCE,

not performing patently wrong act/unlawful à Court will recognize it as
FACTS:
business judgment and cannot substitute the courts decision with the said

judgment
Alfredo and Alejandro Montelibano, together with other planters, entered
into contracts with Bacolod-Murcia Milling Co., Inc., for the milling of sugar cane at a • SECTION 31à court cannot interfere unless tyere is bad faith, gross
sharing ratio of 55% for the planters and 45% for the miller. The contracts were to be negligence or patently unlawful act
in force for thirty (30) years starting with the 1920-21 crops. A proposal was made to • Section 31 (2) with Section 34 CO - RELATE
amend the milling contracts by increasing the planters' share to 60% of the
manufactured sugar and molasses and giving them other concessions besides, but Litwin v. Allen, et al 25 N.Y.S. 2D 667 (1940)
the term of the contracts was extended to 45 years instead of 30. On August 30,
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CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) 2013400036
CASE SYNOPSIS Company (Defendant), agreed to participate in the purchase of $3,000,000 in

In consolidated actions, plaintiffs filed derivative stockholder suits against defendants Missouri Pacific Convertible Debentures, through the firm of J.P. Morgan & Co.
for allegedly improper transactions involving a trust company in which plaintiffs (Defendant), at par, with an option to the seller, Alleghany Corporation, to
owned shares. repurchase them at the same price at any time within six months. The purpose of
the purchase was to enable Alleghany to raise money to pay for particular
CASE FACTS properties without going over its borrowing limit. The only purpose served by the
In derivative stockholder action, plaintiffs sued defendants over four allegedly option therefore, was to make the transaction conform as closely as possible to a
improper transactions. Plaintiffs first claimed defendant officers' stock purchase of a loan without the usual incidents of a loan transaction. The decision to purchase
third-party corporation for their personal benefit violated their fiduciary duties. was made after the October 1929 stock market crash when the market was in a
slight upswing that started in April 1930. After October 1930, there was another
DISCUSSION sharp and unexpected drop in the market. Guaranty (Defendant) and Trust
(Defendant) could not sell any of the bonds until October 8, 1931, and the last
The court held trust company had no interest in third-party corporation;; thus, were not sold until December 28, 1937, which resulted in a loss of $2,250,000.
defendant officers had not breached their duty. Stockholders (Plaintiff) brought a derivative action to hold the directors liable for
Plaintiffs also charged defendant officers' bond acquisition on trust company's behalf the loss.
constituted an improper loan to third-party corporation.
The court held that the bonds were purchased negligently but that the applicable Issue.
statute of limitations prevented recovery against three defendant officers. Is a director liable for loss or damage other than what was proximately caused by
Plaintiffs also claimed defendant officers negligently extended a loan to a third-party his own acts or omissions in breach of his duty?
company and then improperly auctioned the loan's collateral due to
improper influence from defendant banking firm. Held.
The court followed the rule that allowed deference to business decisions, and held (Shientag, J.) No. Directors stand in a fiduciary relationship to their company.
defendant directors properly extended the loan using information they They are bound by rules of conscientious fairness, morality, and honesty, which
possessed and that their auction of the loan's collateral was equitable. are imposed by the law as guidelines for those who are under fiduciary
obligations. A director owes a loyalty to his corporation that is undivided and an
CONCLUSION allegiance uninfluenced by no consideration other than the welfare of the
The court entered partial judgment in favor of plaintiffs as to their claim involving the corporation. He must conduct the corporation’s business with the same degree of
improper purchase of bonds, due to defendant officers' negligence in approving the care and fidelity, as an ordinary prudent man would exercise when managing his
bond purchase. The court entered judgment in favor of defendants as to plaintiffs' own affairs of similar size and importance. A director of a bank is held to stricter
other claims. accountability. He must use that degree of care ordinarily exercised by prudent
bankers, and, if he does so, he will be absolved from liability even though his
Brief Fact Summary. opinion may turn out to be mistaken and his judgment faulty. The facts in
Stockholders (Plaintiff) brought a derivative action against Trust Company existence at the time of their occurrence must be considered when determining
(Defendant), its subsidiary, Guaranty Company (Defendant), and J.P. Morgan & Co. liability. In this case, the first question was whether the bond purchase was ultra
(Defendant) for a loss resulting from a bond transaction. vires. “It would seem that if it is against public policy for a bank, anxious to dispose
of some of its securities, to agree to buy them back at the same price, it is even
Synopsis of Rule of Law. more so where a bank purchases securities and gives the seller the option to buy
A director is not liable for loss or damage other than what was proximately caused by them back at the same price, thereby incurring the entire risk of loss with no
his own acts or omissions in breach of his duty. s resulting from a bond transaction. possibility of gain other than the interest derived from the securities during the
period the bank holds them.” Therefore, regarding the price of securities, the bank
Facts. inevitably assumed any risk of heavy loss, and any sharp rise was assured to
On October 16, 1930, Trust Company (Defendant) and its subsidiary, Guaranty benefit the seller. Trust (Defendant) could not avoid liability by having an
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agreement with its subsidiary, Guaranty (Defendant), for Guaranty (Defendant) to and did not take steps to salvage the loan, he is chargeable with negligence and is
take any loss, should it occur. In this case, “the entire arrangement was so accountable for his conduct
improvident, so risky, so unusual and unnecessary as to be contrary to fundamental
conceptions of prudent banking practice.” Therefore, the directors must be held COLLINS, J.
personally liable. The second question, in this case, was whether they were liable for
the entire 81 percent loss or whether their liability was limited to the percentage lost The defendant Man moves for judgment dismissing the amended complaint on
during the six-month option period. A director is not liable for loss or damage other the ground generally that it does not state facts sufficient to constitute a cause of
than what was proximately caused by his own acts or omissions in breach of his action against him, and specifically moves to dismiss the first, second, third, fourth,
duty. Only the option was tainted with improvidence. When the option expired, any seventh, eighth, ninth, tenth and eleventh causes of action on the ground that it
loss that followed was the result of the director’s independent business judgment for appears on the face of each one thereof that it does not state facts sufficient to
which they should not be held. constitute a cause of action against him.

Discussion. The litigation is by the trustee in bankruptcy of Frederick Southack Alwyn Ball,
In general, hesitation exists to hold directors liable for questionable conduct. The Jr., Inc., and seeks to recover $1,677,411.19 from the defendants, as former
main fear is that the directors’ financial liabilities may be devastating. Though the directors of the bankrupt corporation, for dereliction of duty and mismanagement in
chance of such liabilities being imposed may be small, it is feared that qualified the conduct of the bankrupt's affairs.
persons will be discouraged from serving as directors. In addition, directors may be
The amended complaint asserts eleven causes of action.
overly cautious and pass up a desirable business risk out of fear of being held for
any loss that might result. The fear of directors’ personal liability is often cited to The suit is grounded upon section 60 of the General Corporation Law, which,
justify broad indemnification and insurance provisions and for the adoption of state in part, provides: "An action may be brought against one or more of the directors or
statutes defining the scope of directors’ duties. officers of a corporation to procure judgment for the following relief or any part
thereof:
Walker v. Man, et al 253 N.Y.S. 458 (1931)
DOCTRINE: Exemplary case. Directors were made liable for doing wrongful acts & "1. To compel the defendants to account for their official conduct, including
committing waste, but w/ acquiescing & confirming the wrong doing of others, & w/ any neglect of or failure to perform their duties, in the management and disposition
doing nothing to retrieve the waste. of the funds and property, committed to their charge.
"2. To compel them to pay to the corporation, or to its creditors, any money
WALKER VS. MAN, ET.AL. and the value of any property, which they have acquired to themselves, or
(253 N.Y.S. 458;; 1931) transferred to others, or lost, or wasted, by or through any neglect of or failure to
FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a perform or other violation of their duties."
promissory note executed by Avram and endorsed by Lacey. The loan was not
authorized by any meeting of the board of directors and was not for the benefit of the Section 61 of the General Corporation Law authorizes the bringing of an action
corporation. The note was dishonored but defendant-directors did not protest the for the relief prescribed in section 60 by a trustee in bankruptcy of the corporation.
note for non-payment;; thus, Lacey, the indorser who was financially capable of
meeting the obligation, was subsequently discharged. As a prelude, let it be emphasized that we are dealing with allegation, not
proof. We are not now fixing liability, but determining whether liability may be
HELD: Directors are charged not with misfeasance, but with non-feasance, not only predicated upon the challenged allegations.
with doing wrongful acts and committing waste, but with acquiescing and confirming Many of the cases cited by the moving defendant, which condemn alternative
the wrong doing of others, and with doing nothing to retrieve the waste. Directors
or equivocal allegations, are no patterns for the present case. These directors are
have the duty to attempt to prevent wrongdoing by their co-directors, and if wrong is
charged not only with misfeasance, but with nonfeasance, not only with doing
committed, to rectify it. If the defendant knew that an unauthorized loan was made
wrongful acts and committing waste, but with acquiescing in and confirming the
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wrongdoing of others, and with doing nothing to retrieve the waste. As directors, existence and that the wrongful acts charged were made and done by the
these defendants were not only obligated to do nothing wrongful themselves, but to "defendants for the purpose of defrauding" the bankrupt's creditors then existing,
attempt to prevent wrongdoing by their fellow directors, and, if wrong be committed, or subsequent creditors now represented by the plaintiff herein.
to seek to rectify it. Passivity and disavowal of knowledge alone do not constitute a
pass to freedom from responsibility. A director may not shut off liability by shutting off The first cause of action then alleges that at the time of the formation of the
his hearing and sight. It is his duty to know what is transpiring. The company's corporation its authorized capital stock consisted of 10,000 shares of preferred
stockholders and creditors, as well as the public, have a right to rely upon the stock of a par value of $100 each, and 15,000 shares of common stock of no par
performance by him of the duties of a director. ( Kavanaugh v. Kavanaugh Knitting value, and that in connection with the formation of the corporation the board of
Co., 226 N.Y. 185, 193.) directors authorized the sale of stock of the corporation to the public generally;; that
in connection with such sale, the defendant Wheeler was employed by the
As it is succinctly put in Kavanaugh v. Gould ( 147 A.D. 281, 289), "The law has defendant Alwyn Ball, 3d, under an agreement whereby Wheeler was to receive
no place for dummy directors." eighteen per cent of the gross amount of any moneys received by him or the
corporation on account of the sale of the corporation's shares of stock. The claim is
True, liability is not to be fastened upon a director for every derleiction of duty of made that this agreement was not authorized by any resolution of the board of
a fellow director. directors and that the defendant Alwyn Ball, 3d, though purporting to act for the
corporation, acted without any authority of the corporation or the board;; that
"They are bound generally to use every effort that a prudent business man would thereafter the corporation paid to Wheeler $232,000 as commission and for his
use in supervising his own affairs." ( Kavanaugh v. Gould, supra.) services in selling $875,210 of the stock;; that the board knew that substantial
payments were being made to Wheeler "and knew or ought to have known the
"A wrong done or a duty omitted must lie at the foundation of his liability." ( Croft
approximate amount thereof." The charge is then made that "said directors
v. Williams, 88 N.Y. 384, 389.)
permitted and acquiesced in the payment to the said Wheeler of the sum of
"If at their meetings, or otherwise, information should come to [directors] them of $232,000 without ascertaining or making any check upon the agreements made
irregularity in the proceedings of the" corporation, "they are bound to take steps to with Wheeler, or the terms thereof, or the amount of the sales made by him, and
correct those irregularities." ( Kavanaugh v. Gould, supra.) without in any way properly, reasonably and fairly performing their duties and
obligations as directors of the said corporation;;" that said sum of $232,000 paid to
"They [directors] are liable only for the losses of its funds attributable to their Wheeler "was at least $74,000 in excess of any moneys to which Wheeler was
negligence." ( Bloom v. National United Benefit Sav. Loan Co., 81 Hun, 120, 127;; entitled" under his agreement with Alwyn Ball, 3d;; "and that the said overpayment
affd., 152 N.Y. 114.) Negligence, however, may ensue from inaction, as well as was made through the negligent acts, omission and wilful default and negligence
action. on the part of the defendants, and all of them, of their duties and obligations to the
stockholders and creditors of the said corporation, and in fraud thereof, and without
With these general principles as a setting, we proceed seriatim to an effort being made on the part of said directors to recover back said sums, or in any
examination of the various causes of action assailed. way, shape or form to protect the rights of stockholders and creditors of the
corporation and to preserve the assets thereof."
Prefatory to the specific charges, the first cause of action alleges that the
bankrupt was a domestic corporation engaged in the business of managing real Paragraph 15 of the complaint alleges that "At the time of the acts
properties, as agents for owners, in New York city, the leasing and renting of real hereinbefore set forth some of the defendants were directors of the corporation
property, the underwriting and selling of corporate bonds secured by mortgages upon and at the time that other defendants became directors they approved, acquiesced
real estate, and other business of a general real estate character;; that the bankrupt's in, confirmed and ratified the said acts of the other defendant directors so
by-laws provided for a board of directors consisting of fifteen members, and that the performed as aforesaid." This first cause concludes with an allegation of damage
business affairs of the bankrupt were managed by a board of directors consisting of in the sum of $74,000.
fifteen men, or a lesser number, during the entire period of the carrying on of its
business;; that the corporation was adjudicated a bankrupt in this Federal district in The moving defendant contends that this first cause does not assert that he
January, 1928;; that, at the time complained of, creditors of the bankrupt were in was a director during any part of the period in question, and he maintains that the
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above-quoted allegation in paragraph 15 that those not directors at the time the loan, and that it does not appear that at the time he was a director Lacey could
complained of "approved, acquiesced in, confirmed and ratified the said acts of the have been held by a suit upon the note. Surely, however, if the moving defendant
other defendant directors so performed as aforesaid," is a conclusion of law, and knew that an improvident and unauthorized loan had been made, and took no
consequently insufficient as a matter of law. steps whatever at salvaging the loan, and acquiesced in and confirmed the original
wrongful act, he would be open to the charge of negligence and should account for
It has been held, however, that "Ratification is a conclusion of fact and not a his conduct.
conclusion of law." ( Pollitz v. Wabash R.R. Co., 207 N.Y. 113, 131.) Ratification may
be implied through acquiescence instead of expressed by positive and distinct action The illustrations by the moving defendant in support of his contention that the
or language. ( Arnot v. Union Salt Co., 186 N.Y. 501.) It follows that the first cause passivity of one group may not be utilized as a basis for a suit, because of the
must be deemed sufficient. affirmative negligence of another group, are not apt. Our concern here is with the
duties and responsibilities of corporate directors. What has been written leads to
The second cause of action, after realleging the preliminary statements above the holding that the second cause is sufficient.
set forth, avers that in about February, 1925, the bankrupt advanced to one M.H.
Avram or M.H. Avram Co. the sum of $20,000, taking as security therefor the note of The third, fourth and fifth causes of action are predicated upon the declaration
M.H. Avram or M.H. Avram Co. indorsed by one J.D. Lacey;; that the loan was not and payment of dividends in violation of section 58 of the Stock Corporation Law.
authorized by any meeting of the board of directors and "was not for the benefit of The third cause alleges that at the time of the declaration of the dividend
the corporation or in aid of any business or business affairs of the corporation;;" that complained of therein, the defendants Comstock, Fife, Trisman, Allen, Alwyn Ball,
this loan item remained on the bankrupt's books until the bankruptcy as unpaid and Jr., Wadham, Alwyn Ball, 3d, John S. Ball, Russell and Arnold "were present
appeared as an asset "in various statements issued by said corporation from time to and/or voted;; that the other defendants herein did approve, ratify and acquiesce in
time." the said declaration of said dividend and did approve of, participate in and/or
receive payment of dividend pursuant to said declaration, and that the said
Paragraph 20 of the complaint charges that the directors "knew or ought to have defendants thereafter failed, neglected and refused to take any steps or
known the existence of said item upon the books of the defendant company, yet took proceedings or to make any efforts to recover back said sums on behalf of said
no proceedings of any kind or sort, either individually or at board meeting, or in any corporation, or to protect the rights of the corporation and to preserve the assets
other manner, for the collection or enforcement of said alleged loan;; and either thereof in that connection."
acquiesced in and ratified and confirmed said conversion of the funds of the
corporation, or negligently and wilfully and in violation of their duties and obligations The fourth cause alleges that at the time of the declaration of the unlawful
to the creditors and stockholders of the corporation, permitted the item to remain in dividend therein sought to be recovered, the defendants Comstock, Guggenheim,
an open item for several years without any steps or proceedings being taken by them Trisman, Ball, Jr., Ball, 3d, Russell, Fife, Allen, Wadham, John S. Ball and Arnold
to recover the amount thereof." "were present and/or voted," and the allegation of approval, etc., heretofore set
forth, is repeated.
The allegation follows that the note was dishonored, and that "no steps or
proceedings were taken by the defendants to have said note protested for The fifth cause alleges that at the time of the declaration of the unlawful
nonpayment and said note was negligently, carelessly or wilfully and fraudulently dividend made the basis of that cause, the defendants Comstock, Ball, Jr., this
permitted to remain unprotested and as a result thereof, the said Lacey, the endorser moving defendant Man, Ball, 3d, Trisman, Russell, Fife, Allen, Wadham J.S. Ball
thereof, who was fully and amply able financially to meet said obligation, was and Arnold "were present and/or voted," and the allegation of approval, etc., is
released and discharged from any obligation arising by virtue of his endorsement of reasserted.
said note."
The sufficiency of the third, fourth and fifth causes are assailed by the moving
Damage in the sum of $20,000 is claimed. defendant (and the defendant Perrine in a separate motion made by him) on two
grounds:
In challenging the sufficiency of this second cause of action, the moving
defendant again urges that there is no allegation that he was a director at the time of First, that section 58 of the Stock Corporation Law fastens joint and several
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liability for the payment of dividends out of surplus instead of earnings on "the Inc., there were approximately 5,200 units, consisting of one share of common
directors in whose administration the same shall have been declared or made, stock and one share of preferred stock of the corporation, held in the treasury;; that
except those who may have caused their dissent therefrom to be entered upon the subsequent thereto and pursuant to certain arrangements, Southack Ball, Inc.,
minutes of the meetings of directors at the time or who were not present when such received subscriptions for approximately 6,000 units prior to February 26, 1925;;
action was taken. * * *" that on or about March 18, 1925, at a meeting of the stockholders of Southack Ball,
Inc., the capital stock was authorized to be increased, making available for sale an
The moving defendant maintains that since it does not affirmatively appear that additional 10,000 shares of preferred and 5,000 shares of common stock;; that on
he was present or voted at the meeting, or did not cause his dissent to be registered, February 16, 1925, an alleged meeting of the board of directors of Southack Ball,
he is excluded from the operation of the section. Inc., was held, at which were present Alwyn Ball, Jr., Alwyn Ball, 3d, Trisman,
Russell, John S. Ball and Fife;; that at the time of such meeting there were eleven
Irrespective of section 58 of the Stock Corporation Law, if the moving defendant directors of the corporation, making six a quorum;; that "the virtual management
approved, ratified and acquiesced in the declaration of an unlawful dividend and and control of said meeting was exercised by the said defendants Ball who
approved of, participated in and/or received payment of such dividend, and represented three members of said board;; that the remaining three members of
"thereafter failed, neglected and refused to take any steps or proceedings or to make said board present at said time were in the employ of said corporation and
any efforts to recover back said sums on behalf of the corporation, or to protect the subservient to the wishes of the said defendants Ball;;" that at that meeting it was
rights of the stockholders and creditors of the corporation and to preserve the assets voted by the directors then present that the corporation, in order to meet the
thereof, in that connection," he would be liable. ( Darcy v. Brooklyn N.Y. Ferry Co., alleged oversubscription of units of its stock, should purchase from the defendants
127 A.D. 167;; affd., 196 N.Y. 99;; Johnson v. Nevins, 87 Misc. 430;; Brinckerhoff v. Ball 800 units of the stock of the company for the sum of $80,000;; that pursuant to
Bostwick, 99 N.Y. 185;; Mason v. Henry, 152 id. 529.) such action of the board, the corporation, on or about February 28, 1925, did
purchase from the said Balls 800 units and paid therefor the sum of $80,000. The
In City Investing Co. v. Gerken ( 121 Misc. 763, 764), Mr. Justice PROSKAUER
allegation is then made that the defendants Ball were disqualified by virtue of their
held: "With respect to the dividend, I find as a fact that it was declared and paid out
personal interest in the transaction from voting or participating therein;; that as a
of capital. The defendant Gerken was not at the meeting at which the dividend was
consequence thereof there was no quorum of the board, and that the resolution
voted. If this circumstance stood alone it would free him from liability under the
authorizing the purchase was invalid and nullified the purchase;; that at the time,
opinion of Mr. Justice CLARKE in Hutchinson v. Curtiss, 45 Misc. 484. But the
and thereafter, sufficient unissued units of stock were available to meet any paid
complaint alleges and the answer admits that all of the directors were present at a
subscription and that the purchase of the 800 additional units was unnecessary;;
subsequent meeting, `at which they were advised of the declaration and payment of
"and that the defendants herein knew and were well advised or ought to have
said dividend, and ratified and approved same.' This, coupled with the other facts
known of said facts at the time of the payment of said sum of $80,000 to the said
alleged, seems to me sufficient to charge Gerken with personal and affirmative
defendants Ball."
participation in the declaration and payment of the dividend."
It is charged that the directors present at the February 16, 1925, meeting
The second objection to these three causes of action is that there is an absence
exercised full control of the management of the corporation and that it was then
of allegation that at the time of the declaration of the unlawful dividends there were
within the board's discretion and control to increase the capital stock to meet any
any judgment creditors of the corporation. Under section 58 of the Stock Corporation
existing or prospective requirements for the filling of subscriptions;; that $80,000
Law, however, liability is "to such corporation. * * *" The trustee here represents the
was diverted from the treasury of the corporation to the defendants Ball, and
corporation. Furthermore, section 60 of the General Corporation Law authorizes the
should have been received by the corporation;; that the diversion was in violation of
recovery of damages for wasted assets by a trustee in bankruptcy. Manifestly
the obligations of the directors to the stockholders and creditors and in fraud of the
dividends declared in the manner here charged constitute a waste of assets.
corporation and creditors;; that such diversion constituted a violation of subdivision
The conclusion is that the third, fourth and fifth causes meet the requirements, 5 of section 664 of the Penal Law, and section 58 of the Stock Corporation Law;;
and that the objections thereto must be overruled. that the defendants not present at the meeting were elected and became directors
at the time of the increase, or shortly thereafter, and that they were advised and
The seventh cause alleges that, at the time of the incorporation of Southack Ball, knew, or ought to have known, of the wrongful conduct of February 16, 1925, and
6
the payments subsequently made to the defendants Ball;; and that "the other Southack Ball Management Corporation, whose stock consisted of 1,000 shares of
defendants herein did acquiesce, approve, confirm and ratify the conduct of the said no par value, and all of which were issued to the bankrupt in consideration of the
directors and the said defendants Ball and negligently failed and omitted to do transfer to the management corporation of the entire management business of the
anything or take any steps for the return of said moneys to the corporation or for the corporation, consisting of the good will and all its contracts, valued by the board at
protection of the rights of said corporation, its stockholders or creditors, actual or the time at $250,000, but which, it is alleged, were worth in excess thereof;; that
prospective," to the damage of the plaintiff, representing the corporation, in the sum thereafter the agreement between said four defendants and the corporation was
of $80,000. altered so as to include the 1,000 shares of management stock;; that then the
aforementioned defendants, as a part of the aforesaid scheme, transferred all of
The moving defendant indicates that this seventh cause of action affirmatively the collateral in their possession to the American Trust Company as security for
shows that he was not present at the meeting of February 16, 1925, and that the loans which had been made by that bank and guaranteed by the directors pursuant
allegation that certain named directors other than the moving defendant then owned to the agreement of August 6, 1926;; that thereafter these four so maneuvered that
all of the stock of the corporation and controlled the meeting excludes the moving the collateral was sold and the aforementioned defendants purchased the same for
defendant from liability. However, what has been said hereinabove as to knowledge, $1,000 when, in fact, the shares of the management corporation were valued in
acquiescence and ratification applies with equal force here. Accordingly, this seventh excess of $250,000.
cause is held adequate.
It is objected that this moving defendant did not cause or participate in the acts
The eighth cause repeats all of the allegations contained in the preceding seven complained of in this eighth cause.
causes, and charges that "as a result of the negligent, wasteful and fraudulent
management and conduct of the business and affairs of the corporation * * * and as a Sufficient is alleged, however, to taint the moving defendant with the general
result of the inattention to the conduct of the affairs of the corporation upon the part charge of negligence respecting this transaction. The eighth cause, therefore, is
of the defendants or some of them, and their gross neglect of their duties as directors held to state a cause of action against the moving defendant.
of the corporation, substantial losses were incurred upon the part of the said
corporation, so that in the early part of 1926 the corporation was unable to carry on The ninth cause charges the defendants with mismanagement in connection
its affairs and meet its current obligations with the assets then available;;" that about with the affairs of the Thayer West Point Hotel Corporation (in which the bankrupt
that time the corporation had unlawfully converted funds which came into its was interested), the bankrupt having guaranteed payment of the bills of the builder
possession as a fiduciary, and that in July, 1926, the amount so wrongfully converted and other contractors. It is charged that the construction costs exceeded what they
was approximately $70,000, which shortage became the subject of discussion by the should have, and as a consequence of this mismanagement regarding the hotel
board on July 14, 1926, when a ways and means committee was appointed, the bankrupt sustained damage in the sum of $585,279.09.
consisting of the defendants Comstock, Man (the moving defendant), Rich, Wadham,
Allen and Perrine;; that the defendants failed, neglected and refused to take The moving defendant insists that the directors cannot be held personally
proceedings to compel the defendants who had caused the wrongful diversion to liable because a building venture exceeds in cost the preliminary estimate and
make restitution, but, instead, "approved, ratified and acquiesced" therein;; that that, in effect, a mere error of judgment is alleged. Of course, the exercise of bad
thereafter and on August 6, 1926, an agreement was entered into between the judgment alone cannot be made the foundation for liability. This ninth cause,
corporation and the defendants Comstock, Guggenheim, Man and Perrine, however, goes beyond that, and charges that alterations of the plans of the hotel
whereunder these four defendants indorsed the corporation's note for $140,000. were made by the defendants "without any competent or proper or adequate
Certain collateral was pledged to them as security. The purpose of the agreement, it investigation upon their part or consultation amongst themselves or with others as
is averred, was that these four defendants should arrogate to themselves the to the financial obligations necessarily to be incurred thereby and the means of
financing the same and without any reasonable or proper regard to the financial
management of the corporation's affairs and that under the guise of lending their
credit to the corporation they placed themselves in the position whereby they would obligation of the corporation by virtue of its guaranteeing of the existing contracts
secure, upon their own terms and for their own use and purposes, in violation of their relating to the erection of said hotel and that the defendants with gross and
duties, all of the assets and property of the corporation. culpable negligence did not make any adequate or proper arrangements for the
financing of said additional expenditures in said sum of almost Eight Hundred
That, pursuant to and in execution of this scheme, there was incorporated Thousand Dollars." In this connection all of the defendants are charged with "gross
7
and culpable negligence * * * and * * * wanton disregard of their obligations as

directors." These allegations are adequate. ISSUE: Did the failure to take affirmative action to discover the thief amount to a
breach of duty to the corporation?
The tenth cause is general in terms, but taken in connection with the allegations
set forth in the preceding nine causes, which are realleged, and considering that the HOLDING: Yes, as far as the president is concerned, but not regarding the
defendants are called upon to account, it is sufficient. The defendants' remedy for an directors. The directors acted reasonably by relying on the information given to
amplification of the charges alleged in this cause, as well as the other causes, is a them. They had no reason to believe that there were any irregularities in the bank
motion for a bill of particulars. records. Dresser’s position was different. He was in the bank daily. He had
access to the books at all times. He knew of shortages and apparent
The eleventh cause accuses the defendants of unlawful conduct in speculating unexplained declines in deposits, yet he failed to make any attempt to
with the bankrupt's money in Florida real estate, it being charged that an investment discover the reasons behind these peculiar events. The continued losses were
was made in a corporation owned and controlled by certain of the defendants, as a his fault b/c the warnings that he had should have led him to investigate. Had
consequence of which the bankrupt was damaged in the sum of $75,000. It is he investigated, the losses may have been eliminated b/c he may have discovered
alleged that all of the defendants approved, ratified and acquiesced in the unlawful the reason behind them. Dresser, as president, was much closer to the
purchase of this worthless stock. This eleventh cause charges more than mere error operation of the bank than the directors. He was there every day, and he
of judgment, and is sufficient to compel all of the defendants to account for their supervised the actual operation of the bank. This the directors didn’t do;; therefore,
conduct in connection therewith. Where a fiduciary is personally interested in a Dresser’s position exposed him to the warning signs, while the directors
transaction concerning the trust, "there is in equity a presumption against the were not exposed and, therefore, he was personally liable while the directors
transaction, which he is required to explain." ( Sage v. Culver, 147 N.Y. 241, 247.) In were not.
such a case only a prima facie case would be established. ( Coplay Cement Mfg. Co.
v. Loeb, 124 Misc. 640;; affd., 215 A.D. 805.) MR. JUSTICE HOLMES delivered the opinion of the court.
For the reasons above stated, the motion of the defendant Man is in all This is a bill in equity brought by the receiver of a national bank to charge its
respects denied. former president and directors with the loss of a great part of its assets through the
thefts of an employee of the bank while they were in power. The case was sent to

a master who found for the defendants;; but the District Court entered a decree
Bates v. Dresser 251 US 524 (1920)
against all of them. 229 Fed. Rep. 772. The Circuit Court of Appeals reversed this
DOCTRINE: The President being closer to the operations of the bank on a day to decree, dismissed the bill as against all except the administrator of Edwin Dresser,
day basis is more liable for breach of diligence when compared to directors who must the president, cut down the amount with which he was charged and refused to add
act on the basis of reports & representations to them during board meetings. interest from the date of the decree of the District Court. 250 Fed. Rep. 525. 162
C.C.A. 541. Dresser's administrator and the receiver both appeal, the latter
contending that the decree of the District Court should be affirmed with interest and
FACTS: Dresser (Defendant) was the president of a small bank in Cambridge. The
costs.
bank had only a few employees, and defendant supervised all the work that was
done. One of the employees, Coleman, was promoted from messenger to The bank was a little bank at Cambridge with a capital of $100,000 and
bookkeeper in 1904. From 1904 until 1907, there were several small shortages in average deposits of somewhere about $300,000. It had a cashier, a bookkeeper, a
the bank and indications that an employee was stealing. There was no indication, teller and a messenger. Before and during the time of the losses Dresser was its
however, that Coleman was dishonest. In 1907, Coleman began using his access to president and executive officer, a large stockholder, with an inactive deposit of
the books to cover up the thefts he was making. He did this by altering the records in from $35,000 to $50,000. From July, 1903, to the end, Frank L. Earl was cashier.
such a way that the only way he could be caught was to examine the deposit record Coleman, who made the trouble, entered the service of the bank as messenger in
of all the deposits. During this time, defendant had several indications that someone September, 1903. In January, 1904, he was promoted to be bookkeeper, being
at the bank was a thief. He never attempted to ascertain who the thief was or to then not quite eighteen but having studied bookkeeping. In the previous August an
examine the books, even though he had the opportunity to do so.
8
auditor employed on the retirement of a cashier had reported that the daily balance seemed to decline noticeably and the directors considered the matter in
book was very much behind, that it was impossible to *527 prove the deposits, and September, 1909, but concluded that the falling off was due in part to the springing
that a competent bookkeeper should be employed upon the work immediately. up of rivals, whose deposits were increasing, but was parallel to a similar decrease
Coleman kept the deposit ledger and this was the work that fell into his hands. There in New York. An examination by a bank examiner in December, 1909, disclosed
was no cage in the bank, and in 1904 and 1905 there were some small shortages in nothing wrong to him.
the accounts of three successive tellers that were not accounted for, and the last of
them, Cutting, was asked by Dresser to resign on that ground. Before doing so he In this connection it should be mentioned that in the previous semi-annual
told Dresser that someone had taken the money and that if he might be allowed to examinations by national bank examiners nothing was discovered pointing to
stay he would set a trap and catch the man, but Dresser did not care to do that and malfeasance. The cashier was honest and everybody believed that they could rely
thought that there was nothing wrong. From Cutting's resignation on October 7, upon him, although in fact he relied too much upon Coleman, who also was
1905, Coleman acted as paying and receiving teller, in addition to his other duty, until unsuspected by all. If Earl had opened the envelopes from the clearing house, and
November, 1907. During this time there were no shortages disclosed in the teller's had seen the checks, or had examined the deposit *529 ledger with any care he
accounts. In May, 1906, Coleman took $2,000 cash from the vaults of the bank, but would have found out what was going on. The scrutiny of anyone accustomed to
restored it the next morning. In November of the same year he began the thefts that such details would have discovered the false additions and other indicia of fraud
come into question here. Perhaps in the beginning he took the money directly. But as that were on the face of the book. But it may be doubted whether anything less
he ceased to have charge of the cash in November, 1907, he invented another way. than a continuous pursuit of the figures through pages would have done so except
Having a small account at the bank, he would draw checks for the amount he by a lucky chance.
wanted, exchange checks with a Boston broker, get cash for the broker's check, and,
when his own check came to the bank through the clearing house, would abstract it The question of the liability of the directors in this case is the question whether
from the envelope, enter the others on his book and conceal the difference by a they neglected their duty by accepting the cashier's statement of liabilities and
charge to some other account or a false addition in the column of drafts or deposits failing to inspect the depositors' ledger. The statements of assets always were
in the depositors' ledger. He handed to the cashier only the slip from the clearing correct. A by-law that had been allowed to become obsolete or nearly so is invoked
house that showed the totals. The cashier paid whatever appeared to be due and as establishing their own standard of conduct. By that a committee was to be
thus Coleman's checks were honored. So far as Coleman thought it necessary, in appointed every six months "to examine into the affairs of the bank, to count its
view of the absolute trust in him on the part of all concerned, he took care that his cash, and compare its assets and liabilities with the balances on the general
balances should agree with those in the cashier's book. ledger, for the purpose of ascertaining whether or not the books are correctly kept,
and the condition of the bank is in a sound and solvent condition." Of course
*528 By May 1, 1907, Coleman had abstracted $17,000, concealing the fact by liabilities as well as assets must be known to know the condition and, as this case
false additions in the column of total checks, and false balances in the deposit shows, peculations may be concealed as well by a false understatement of
ledger. Then for the moment a safer concealment was effected by charging the liabilities as by a false show of assets. But the former is not the direction in which
whole to Dresser's account. Coleman adopted this method when a bank examiner fraud would have been looked for, especially on the part of one who at the time of
was expected. Of course when the fraud was disguised by overcharging a depositor his principal abstractions was not in contact with the funds. A debtor hardly expects
it could not be discovered except by calling in the pass-books, or taking all the to have his liability understated. Some animals must have given at least one
deposit slips and comparing them with the depositors' ledger in detail. By November, exhibition of dangerous propensities before the owner can be held. This fraud was
1907, the amount taken by Coleman was $30,100, and the charge on Dresser's a novelty in the way of swindling a bank so far as the knowledge of any experience
account was $20,000. In 1908 the sum was raised from $33,000 to $49,671. In 1909 had reached Cambridge before 1910. We are not prepared to reverse the finding
Coleman's activity began to increase. In January he took $6,829.26;; in March, of the master and the Circuit Court of Appeals that the directors should not be held
$10,833.73;; in June, his previous stealings amounting to $83,390.94, he took answerable for taking the cashier's statement of liabilities to be as correct as the
$5,152.06;; in July, $18,050;; in August, $6,250;; in September, $17,350;; in October, *530 statement of assets always was. If he had not been negligent without their
$47,277.08;; in November, $51,847;; in December, $46,956.44;; in January, 1910, knowledge it would have been. Their confidence seemed warranted by the semi-
$27,395.53;; in February, $6,473.97;; making a total of $310,143.02, when the bank annual examinations by the government examiner and they were encouraged in
closed on February 21, 1910. As a result of this the amount of the monthly deposits their belief that all was well by the president, whose responsibility, as executive
9
officer;; interest, as large stockholder and depositor;; and knowledge, from long daily hesitation the date of December 1, 1908, as the beginning of Dresser's liability, but
presence in the bank, were greater than theirs. They were not bound by virtue of the think it reasonable that interest should be charged against his estate upon the sum
office gratuitously assumed by them to call in the pass-books and compare them with found by the Circuit Court of Appeals to be due. It is a question of discretion, not of
the ledger, and until the event showed the possibility they hardly could have seen right, Lincoln v. Claflin, 7 Wall. 132;; Drumm-Flato Commission Co. v. Edmisson,
that their failure to look at the ledger opened a way to fraud. See Briggs v. Spaulding, 208 U.S. 534, 539, but to the extent that the decree of the District Court was
141 U.S. 132;; Warner v. Penoyer, 91 Fed. Rep. 587. We are not laying down general affirmed, Kneeland v. American Loan & Trust Co., 138 U.S. 509;; De La Rama *532
principles, however, but confine our decision to the circumstances of the particular v. De La Rama, 241 U.S. 154, 159, it seems to us just upon all the circumstances
case. that it should run until the receiver interposed a delay by his appeal to this Court.
The Scotland, 118 U.S. 507, 520. Upon this as upon the other points our decision
The position of the president is different. Practically he was the master of the is confined to the specific facts.
situation. He was daily at the bank for hours, he had the deposit ledger in his hands
at times and might have had it at any time. He had had hints and warnings in addition Decree modified by charging the estate of Dresser with interest from February
to those that we have mentioned, warnings that should not be magnified unduly, but 1, 1916, to June 1, 1918, upon the sum found to be due, and affirmed.
still that taken with the auditor's report of 1903, the unexplained shortages, the
suggestion of the teller, Cutting, in 1905, and the final seeming rapid decline in MR. JUSTICE McKENNA and MR. JUSTICE PITNEY dissent, upon the
deposits, would have induced scrutiny but for an invincible repose upon the status ground that not only the administrator of the president of the bank but the other
quo. In 1908 one Fillmore learned that a package containing $150 left with the bank directors ought to be held liable to the extent to which they were held by the District
for safe keeping was not to be found, told Dresser of the loss, wrote to him that he Court, 229 Fed. Rep. 772.
could but conclude that the package had been destroyed or removed by someone
connected with the bank, and in later conversation said that it was evident that there MR. JUSTICE VAN DEVANTER and MR. JUSTICE BRANDEIS took no part in
was a thief in the bank. He added that he would advise the president to look after the decision.
Coleman, that he believed he was living at a pretty fast pace, and that he *531 had

pretty good authority for thinking that he was supporting a woman. In the same year
PNB v. CA 83 SCRA 238 ( May 18, 1978)
or the year before, Coleman, whose pay was never more than twelve dollars a week,
83 SCRA 237 – Business Organization – Corporation Law – Corporation’s
set up an automobile, as was known to Dresser and commented on unfavorably, to
Liability for Negligence
him. There was also some evidence of notice to Dresser that Coleman was dealing
Rita Tapnio owes PNB an amount of P2,000.00. The amount is secured by her
in copper stocks. In 1909 came the great and inadequately explained seeming
sugar crops about to be harvested including her export quota allocation worth
shrinkage in the deposits. No doubt plausible explanations of his conduct came from
1,000 piculs. The said export quota was later dealt by Tapnio to a certain Jacobo
Coleman and the notice as to speculations may have been slight, but taking the
Tuazon at P2.50 per picul or a total of P2,500. Since the subject of the deal is
whole story of the relations of the parties, we are not ready to say that the two courts
mortgaged with PNB, the latter has to approve it. The branch manager of PNB
below erred in finding that Dresser had been put upon his guard. However little the
recommended that the price should be at P2.80 per picul which was the prevailing
warnings may have pointed to the specific facts, had they been accepted they would
minimum amount allowable. Tapnio and Tuazon agreed to the said amount. And
have led to an examination of the depositors' ledger, a discovery of past and a
so the bank manager recommended the agreement to the vice president of PNB.
prevention of future thefts.
The vice president in turn recommended it to the board of directors of PNB.
We do not perceive any ground for applying to this case the limitations of liability However, the Board of Directors wanted to raise the price to P3.00 per picul.
ex contractu adverted to in Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. This Tuazon does not want hence he backed out from the agreement. This
540. In accepting the presidency Dresser must be taken to have contemplated resulted to Tapnio not being able to realize profit and at the same time rendered
responsibility for losses to the bank, whatever they were, if chargeable to his fault. her unable to pay her P2,000.00 crop loan which would have been covered by her
Those that happened were chargeable to his fault, after he had warnings that should agreement with Tuazon.
have led to steps that would have made fraud impossible, even though the precise Eventually, Tapnio was sued by her other creditors and Tapnio filed a third party
form that the fraud would take hardly could have been foreseen. We accept with complaint against PNB where she alleged that her failure to pay her debts was
because of PNB’s negligence and unreasonableness.
10
2 ways DIRECTOR MAY HAVE COMPENSATION:

ISSUE: Whether or not Tapnio is correct. 1. fixed by the by-law granting compensation to director
2. not fixed in the bylaw but granted by the 2/3 outstanding stockholders
HELD: Yes. In this type of transaction, time is of the essence considering that • RATIONALE: directors as stockholders should be gratuitous if they
Tapnio’s sugar quota for said year needs to be utilized ASAP otherwise her allotment became a director .They should act for the stockholders advantage.
may be assigned to someone else, and if she can’t use it, she won’t be able to export • DIEM: by the directors à board resolution
her crops. It is unreasonable for PNB’s board of directors to disallow the agreement • Section 30 also applies to TRUSTEES
between Tapnio and Tuazon because of the mere difference of 0.20 in the agreed • NOT applicable to OFFICERS à must be reasonable compensation, and
price rate. What makes it more unreasonable is the fact that the P2.80 was not done in fraud
recommended both by the bank manager and PNB’s VP yet it was disapproved by
the board. Further, the P2.80 per picul rate is the minimum allowable rate pursuant to Western Institute of Technology v. Salas 278 SCRA 216
prevailing market trends that time. This unreasonable stand reflects PNB’s lack of the WESTERN INSTITUTE OF TECHNOLOGY, INC.
reasonable degree of care and vigilance in attending to the matter. PNB is therefore vs.
negligent. SALAS
A corporation is civilly liable in the same manner as natural persons for torts, G.R. No. 113032 August 21, 1997
because “generally speaking, the rules governing the liability of a principal or master
for a tort committed by an agent or servant are the same whether the principal or FACTS:
master be a natural person or a corporation, and whether the servant or agent be a
natural or artificial person. All of the authorities agree that a principal or master is Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-
liable for every tort which it expressly directs or authorizes, and this is just as true of Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same family,
a corporation as of a natural person, a corporation is liable, therefore, whenever a are the majority and controlling members of the Board of Trustees of Western
tortious act is committed by an officer or agent under express direction or authority Institute of Technology, Inc., a stock corporation engaged in the operation, among
from the stockholders or members acting as a body, or, generally, from the directors others, of an educational institution. According to petitioners, the minority
as the governing body.” stockholders of WIT, a Special Board Meeting was held. In attendance were other
members of the Board including one of the petitioners Reginald Villasis. In said
LIABILITY OF OFFICER – TRAMAT CASE meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting
• when officer becomes solidarily liable with the corporation - gross monthly compensation to the private respondents as corporate officers retroactive
negligence, issuance of watered stocks. Consent to be solidarily liable – June 1, 1985. A few years later, petitioners Homero Villasis, Prestod Villasis,
signing of promissory notes in his personal capacity, vicarious liability, trust Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private
receipt law – officer can be solidarily liable. respondents before the Office of the City Prosecutor, as a result of which two (2)
separate criminal informations, one for falsification of a public document and the
1) Compensation of directors – Sec. 30 other for estafa, were filed before the Regional Trial Court. The charge for
Section 30. Compensation of directors. – In the absence of any provision in the falsification of public document was anchored on the private respondents'
by-laws fixing their compensation, the directors shall not receive any submission of WIT's income statement for the fiscal year 1985-1986 with the
compensation, as such directors, except for reasonable per diems: Provided, Securities and Exchange Commission reflecting therein the disbursement of
however, That any such compensation other than per diems may be granted to corporate funds for the compensation of private respondents based on Resolution
directors by the vote of the stockholders representing at least a majority of the No. 4, series of 1986, making it appear that the same was passed by the board on
outstanding capital stock at a regular or special stockholders’ meeting. In no case March 30, 1986, when in truth, the same was actually passed on June 1, 1986, a
shall the total yearly compensation of directors, as such directors, exceed ten date not covered by the corporation's fiscal year 1985-1986. Thereafter, trial for the
(10%) percent of the net income before income tax of the corporation during the two criminal cases, was consolidated. After a full-blown hearing, Judge Porfirio
preceding year. (n) (LAST SENTENCE: includes per diem) Parian handed down a verdict of acquittal on both counts without imposing any civil

11
liability against the accused therein. Petitioners filed a Motion for Reconsideration of P19,500.00 per month. After trial, the court acquitted the private respondents on
the civil aspect of the RTC Decision which was, however, denied in an Order. both counts without imposing any civil liability against them. The individual
petitioners, minority stockholders of the corporation, thus seek to hold the private
ISSUE: respondents civilly liable despite their acquittal based on the alleged illegal
issuance by private respondents of Resolution No. 4, series of 1986, ordering the
Whether or not the case is derivative suit correctly filed in the Regional Trial disbursement of corporate funds and that the grant of compensation to private
Court. respondents is proscribed under Sec. 30 of the Corporation Code.

RULING: The Supreme Court held that the proscription against granting compensation to
directors/trustees of a corporation is not a sweeping rule. The implication under
NO. Sec. 30 of the Corporation Code is that members of the board may receive
compensation in addition to reasonable per diems when they render services to
Granting, for purposes of discussion, that this is a derivative suit as insisted the corporation in a capacity other than as directors/trustees. Resolution No. 4 s.
by petitioners, which it is not, the same is outrightly dismissible for having been 1986 granted compensation to private respondents not in their capacity as
wrongfully filed in the regular court devoid of any jurisdiction to entertain the members of the board but rather as officers of the corporation. The instant case
complaint. The ease should have been filed with the Securities and Exchange which is merely an appeal on the civil aspect of the criminal cases for estafa and
Commission (SEC) which exercises original and exclusive jurisdiction over derivative falsification of public document, is not a derivative suit. Even if the case is a
suits, they being intra-corporate disputes, per Section 5 (b) of P.D. No. 902-A: “In derivative suit, the same was wrongfully filed in the regular court as the proper
addition to the regulatory and adjudicative functions of the Securities and Exchange forum is the Securities and Exchange Commission which exercises original and
Commission over corporations, partnerships and other forms of associations exclusive jurisdiction over intra-corporate disputes. The acquittal in the criminal
registered with it as expressly granted under existing laws and decrees, it shall have cases is not merely based on reasonable doubt but rather on a finding that the
original and exclusive jurisdiction to hear and decide cases involving: Controversies accused-private respondents did not commit action ex delicto cannot prosper.
arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates;; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or 2) Duty of diligence/Business Judgment Rule – Secs.23, 31
associates, respectively;; and between such corporation, partnership or association TITLE III BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
and the State insofar as it concerns their individual franchise or right to exist as such Section 23. The board of directors or trustees. – Unless otherwise provided in
entity. this Code, the corporate powers of all corporations formed under this Code shall
be exercised, all business conducted and all property of such corporations
SYNOPSIS – CD ASIA controlled and held by the board of directors or trustees to be elected from among
Private respondents, majority and controlling members of the Board of Trustees of the holders of stocks, or where there is no stock, from among the members of the
Western Institute of Technology, Inc. were acquitted of the crimes of estafa and corporation, who shall hold office for one (1) year until their successors are
falsification of public document. The falsification charge was anchored on private elected and qualified. (28a)
respondents submission of the school's income statement for fiscal year 1985-1986 Every director must own at least one (1) share of the capital stock of the
with the Securities and Exchange Commission reflecting therein the disbursement of corporation of which he is a director, which share shall stand in his name on the
corporate funds for the compensation of private respondents based on Resolution books of the corporation. Any director who ceases to be the owner of at least one
No. 4, series of 1986, and making it appear that the Resolution was passed by the (1) share of the capital stock of the corporation of which he is a director shall
board on March 30, 1986, when in truth the same was actually passed on June 1, thereby cease to be a director. Trustees of non-stock corporations must be
1986, a date not covered by the corporation's fiscal year. The charge of estafa is members thereof. A majority of the directors or trustees of all corporations
based on private respondent's having disbursed funds of the corporation by effecting organized under this Code must be residents of the Philippines.
payment of their retroactive salaries of P186,470.00 and subsequently paying
themselves every 15th and 30th of the month starting June 15, 1986 in the amount of
12
Section 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the HELD:
corporation or who are guilty of gross negligence or bad faith in directing the The contracts in question are “forward sales” contracts—a sales
affairs of the corporation or acquire any personal or pecuniary interest in conflict agreement entered into, even though the goods are not yet in the hands of the
with their duty as such directors or trustees shall be liable jointly and severally for seller. Given the peculiar nature of copra trading, i.e. copra must be disposed of as
all damages resulting therefrom suffered by the corporation, its stockholders or soon as possible else it would lose weight and would decrease its value, it
members and other persons. necessitates a quick turnover and execution of the contract on short notice (w/in 24
hours). It would be difficult if not impractical to call a formal meeting of the board
NOTE:
each time a contract is to be executed.
• Relate section 31 with 34 à Section 34 on Business Opportunity à it must Kalaw was a corporate officer entrusted with general management and
belong to the corporation control of NACOCO. He had implied authority to make any contract or do any act
• If not a business opportunity, that the director will grab à will not be liable which is necessary for the conduct of the business. He may, without authority
for dmages under Section 34 since it does not belong to the corporation from the board, perform acts of ordinary nature for as long as these redound to the
interest of the corporation. Particularly, he contracted forward sales with business
Board of Liquidators v. Kalaw 20 SCRA 987 entities. Long before some of these contracts were disputed, he contracted by
Board of Liquidators vs. Heirs of Kalaw himself alone, without board approval. All of the members of the board knew about
G.R. No. L-18805;; August 14, 1967 this practice and have entrusted fully such decisions with Kalaw. He was never
questioned nor reprimanded nor prevented from this practice. In fact, the board
FACTS: itself, through its acts and by acquiescence, have laid aside the by-law requirement
Maximo Kalaw is chairman of the board and general manager of the of prior board approval. Thus, it cannot now declare that these contracts (failures)
National Coconut Corporation (NACOCO), a non-profit GOCC empowered by its are not binding on NACOCO.
charter to buy sell barter export and deal in coconut, copra, and desiccated coconut. Ratification by a corporation of an unauthorized act or contract by its
Bocar, Garcia and Moll were directors. It entered into contracts for the trading and officers relates back to the time of the act or contract ratified and is equivalent to
delivery of copra. Nature intervened—4 typhoons devastated agriculture and copra original authority. The theory of corporate ratification is predicated upon the right of
production. NACOCO was on the verge of sustaining losses and could not be able to a corporation to contract, and any ratification or adoption is equivalent to a grant of
make good on the contracts. Sensing this, Kalaw submitted the contracts to the prior authority. Ratification “cleanses the contract from all its defects from the
board for approval and made a full disclosure of the situation. No action was taken, moment it was constituted. Thus, even in the face of an express by-law
and no vote was taken on the matter. On 20 Jan 1947 the board met again with requirement of prior approval, the law on corporations is not to be held too rigid
Kalaw, Bocar, Garcia, and Moll in attendance, and approved the contracts. NACOCO and inflexible as to fail to recognize equitable considerations.
however only partially performed the contracts. One of the contracts concerns the
Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-court and paid FACTS:
Drayfus P567,024.52 representing 70% of total claims. The total settlements sum up
to P1.3M. NACOCO sues Kalaw, and his directors Bocar, Moll and Garcia to recover National Coconut Corporation (NACOCO) is with Maximo Kalaw as its
this sum, alleging negligence, bad faith and breach of trust in approving the General Manager and Chairman of the BOD. Under his tenure NACOCO entered
contracts, by not having them approved by the board. TC dismisses complaint. into different contracts involving the trade of coconuts. It failed, however, due to
NACOCO claims that the by-laws provide that prior board approval is required before natural calamities that greatly affected the production of coconuts. This led to some
the GM can perform or execute in behalf of NACOCO all contracts necessary to customers of NACOCO suing the corporation for undelivered coconuts due to them
accomplish its purpose. under the contracts that they signed. This was settled by NACOCO by paying the
customers.
ISSUE: Thereafter, NACOCO seeks to recover the above sum of P1,343,274.52
WON the Kalaw contracts are valid despite its lack of prior board approval from general manager and board chairman Maximo M. Kalaw, and directors Juan
as required by the NACOCO by-laws. Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under
13
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 Benguet Electric Coop. v. NLRC 209 SCRA 55
approved the contracts. Benguet Electric Cooperative vs. NLRC
G.R. No. 89070;; May 18, 1992
ISSUE:
FACTS:
Whether or not Kalaw may be held liable by NACOCO for the debts the Cosalan, GM of the Benguet Electric Cooperative, was informed by COA
corporation incurred under his administration. that cash advances received by officers and employees of Benguet Electric had
been virtually written off the books, that per diems and allowances showed
RULING: substantial inconsistencies with the directives of the National Electrification
Administration, and that several irregularities in the utilization of funds released by
NO. NEA to Benguet. Cosalan then implemented the remedial measures recommended
by COA. Board members of Benguet responded by abolishing the housing
They were done with implied authority from the BOD. These previous allowance of Cosalan, reduced his salary, representation and other allowances,
contracts, it should be stressed, were signed by Kalaw without prior authority from and directed him to hold in abeyance all disciplinary actions, and struck his name
the board. Said contracts were known all along to the board members. Nothing was out as principal signatory of Benguet Electric. The Board adopted another series of
said by them. The aforesaid contracts stand to prove one thing. Obviously NACOCO resolutions which resulted in the ouster of Cosalan as GM. Cosalan nonetheless
board met the difficulties attendant to forward sales by leaving the adoption of means continued to work as GM, contending that only the NEA can suspend and remove
to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw. him. The Board then refused to act on Cosalan request to release compensation
Settled jurisprudence has it that where similar acts have been approved by due him. Cosalan files a complaint with the NLRC against the Board of Benguet
the directors as a matter of general practice, custom, and policy, the general Electric, and impleaded Benguet Electric itself as well as the individual members of
manager may bind the company without formal authorization of the board of the board in their official and private capacities. Labor Arbiter rules in favor of
directors. In varying language, existence of such authority is established, by proof of Cosalan, holding both the company and the board solidarily liable to Cosalan.
the course of business, the usages and practices of the company and by the NLRC modifies award to Cosalan by declaring Benguet alone, and not the Board
knowledge which the board of directors has, or must be presumed to have, of acts members, was liable to Cosalan. Benguet appeals.
and doings of its subordinates in and about the affairs of the corporation.
Authorities, great in number, are one in the idea that "ratification by a ISSUE:
corporation of an unauthorized act or contract by its officers or others relates back to WON both the corporation and board members are liable to Cosalan.
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 HELD:
nothing more nor less than the making of an original contract. The theory of YES. The Board members and officers of a corporation who purport to act
corporate ratification is predicated on the right of a corporation to contract, and any for and in behalf of the corporation, keep within the lawful scope of their authority in
ratification or adoption is equivalent to a grant of prior authority. so acting, and act in good faith, do not become liable, civilly or otherwise, for the
consequences of their acts. Those acts are properly attributed to the corporation
NOTE: alone and no personal liability is incurred. In this case, the board members
• for an officer à prove guilty of gross negligence or bad faith à must be obviously wanted to get rid of Cosalan and acted with indecent haste in removing
clearly established by evidence and bad faith. him from his GM position. This shows strong indications that the members of the
• Officers / directors à trustees of the properties of the corporation for the board had illegally suspended and dismissed him precisely because he was trying
stockholders to rectify the financial irregularities.
• Insolvencies à directors becomes trustees of the creditors The Board members are also liable for damages under Sec. 31 of the
14
Corporation Code, which by virtue of Sec. 4 thereof, makes it applicable in a Prime White Cement entered into a dealership agreement with one of its
supplementary manner to all corporations, including those with special or individual directors, Alejandro Te, for the latter to be the exclusive distributor of 20,000 bags
charters so long as these are not inconsistent therewith. of Prime White cement per month @ P9.70 per bag for the entire Mindanao area
The Board members are also guilty of gross negligence and bad faith for 5 years, and that a letter of credit be opened to secure payment. Te advertised
in directing the affairs of the corporation in enacting the said resolutions, and his dealership and was able to obtain possible clients, and entered into
in doing so, acted beyond the scope of their authority. agreements with several hardware stores for the purchase of the cement. Te then
informed Prime White of the orders, but the latter imposed additional conditions,
3) Self-dealing directors- Sec. 32 which effectively delayed the delivery of the cement, lowered the number of bags
• Co-relate Section 32(2) with Section 34 to be delivered, and increased the price per bag. It also made the prices subject to
• If the person obtains a business opportunity for himself but he is an office à change unilaterally and additional conditions on the manner of payment. Te
Section 31 refused to comply and Prime White cancelled the dealership agreement. Te sued
• NOT RATIFIED à vitiated for specific performance and damages. TC ruled in favor of Te.
• Other conditions are not complied but 2/3 is complied à? ISSUE:
• If all conditions are complied à valid and cannot be rescinded WON the dealership agreement is a valid and enforceable contract
binding on the corporation.
Section 32. Dealings of directors, trustees or officers with the corporation. – A

contract of the corporation with one or more of its directors or trustees or officers
HELD:
is voidable, at the option of such corporation, unless all the following conditions
NO. It is not valid and enforceable. All corporate powers are exercised by
are present: the Board. It may also delegate specific powers to its President or other officers. In
1. That the presence of such director or trustee in the board meeting in the absence of express delegation, a contract entered into by the President in
which the contract was approved was not necessary to constitute a behalf of the corporation, may still bind the latter if the board should ratify expressly
quorum for such meeting;;
or impliedly. In the absence of express or implied ratification, the President may as
2. That the vote of such director or trustee was not necessary for the
a general rule bind the corporation through a contract in the ordinary course of
approval of the contract;;
business, provided the same is reasonable under the circumstances. These rules
3. That the contract is fair and reasonable under the circumstances;; and
are applicable where the President or other officer acting for the corporation is
4. That in case of an officer, the contract has been previously authorized
dealing with a third person.
by the board of directors. The situation is different where a director or officer is dealing with
his own corporation. Te was not an ordinary stockholder;; he was a member
Where any of the first two conditions set forth in the preceding paragraph is of the Board and Auditor of the corporation. He is what is often called a “self-
absent, in the case of a contract with a director or trustee, such contract may be dealing” director. As a director, he holds a position of trust and owes a duty
ratified by the vote of the stockholders representing at least two-thirds (2/3) of
of loyalty to his corporation. In case his interests conflict with those of the
the outstanding capital stock or of at least two-thirds (2/3) of the members in a
corporation, he cannot sacrifice the latter to his own advantage and benefit.
meeting called for the purpose: Provided, That full disclosure of the adverse
The trust relationship springs from the control and guidance of the corporate
interest of the directors or trustees involved is made at such meeting: Provided,
affairs and property interests of the stockholders. A director’s contract with
however, That the contract is fair and reasonable under the circumstances. (n)
his corporation is not in all instances void or voidable. If the contract is fair
and reasonable under the circumstances, it may be ratified by the
Prime White Cement v. IAC 220 SCRA 103 stockholders provided a full disclosure of his adverse interest is made.

Prime White Cement vs. IAC
G.R. No. L-68555;; March 19, 1993 4) Interlocking directors – Sec. 33

Section 33. Contracts between corporations with interlocking directors. – Except in
FACTS:
cases of fraud, and provided the contract is fair and reasonable under the
15
circumstances, a contract between two or more corporations having interlocking While this was pending, the corporation called for a stockholder’s meeting
directors shall not be invalidated on that ground alone: Provided, That if the interest for the ratification of the amendment to the by-laws. This prompted petitioner to
of the interlocking director in one corporation is substantial and his interest in the seek for summary judgment. This was denied by the SEC. In another case filed by
other corporation or corporations is merely nominal, he shall be subject to the petitioner, he alleged that the corporation had been using corporate funds in other
provisions of the preceding section insofar as the latter corporation or corporations corporations and businesses outside the primary purpose clause of the corporation
are concerned. in violation of the Corporation Code.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock ISSUE:
shall be considered substantial for purposes of interlocking directors. (n) WON the amended by-laws of SMC of disqualifying a competitor
(Interlocking director) from nomination or election to the Board of Directors of SMC

are valid and reasonable.
NOTE:

• CONDITIONS: HELD:
1. Not fraudulent Under US corporate law, corporations have the power to make by-laws
2. Fair and reasonable under the circumstances declaring a person employed in the service of a rival company to be ineligible for
3. The interest of the interlocking director à substantial interest in one the corporation's Board of Directors. ... An amendment which renders ineligible, or
corporation and a nominal interest in the other corporation. if elected, subjects to removal, a director if he be also a director in a corporation
• APPLY SECTION 32 à directors who has nominal interest àhe is at a whose business is in competition with or is antagonistic to the other corporation is
disadvantage à corporation code protects those with nominal. Considered valid." This is based upon the principle that where the director is so employed in
as a self dealing corporation à apply only his interest in one is substantial the service of a rival company, he cannot serve both, but must betray one or the
and the other is nominal other. Such an amendment "advances the benefit of the corporation and is good."
• WHAT IF, director voted for the approval of the contract and that his interest In the Philippines, section 21 of the Corporation Law expressly provides that a
is 30% in one and 20% in another à is it valid? Both corporation approved corporation may make by-laws for the qualifications of directors. Thus, it has been
à it is valid, his interest is substantial in both so he is allowed to vote held that an officer of a corporation cannot engage in a business in direct
o Nominal interest of both, both corporation voted to validate the competition with that of the corporation where he is a director by utilizing
contract, including his vote à still valid information he has received as such officer, under "the established law that a
director or officer of a corporation may not enter into a competing enterprise which
Gokongwei v. SEC et al. 89 SCRA 336 cripples or injures the business of the corporation of which he is an officer or
FACTS: director.”
Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for It is also well established that corporate officers "are not permitted to use
the declaration of nullity of the by-laws etc. against the majority members of the BOD their position of trust and confidence to further their private interests." In a case
and San Miguel. It is stated in the by-laws that the amendment or modification of the where directors of a corporation cancelled a contract of the corporation for
by-laws may only be delegated to the BOD’s upon an affirmative vote of stockholders exclusive sale of a foreign firm's products, and after establishing a rival business,
representing not less than 2/3 of the subscribed and paid up capital stock of the the directors entered into a new contract themselves with the foreign firm for
corporation, which 2/3 could have been computed on the basis of the capitalization at exclusive sale of its products, the court held that equity would regard the new
the time of the amendment. Petitioner contends that the amendment was based on contract as an offshoot of the old contract and, therefore, for the benefit of the
the 1961 authorization, the Board acted without authority and in usurpation of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to
power of the stockholders in amending the by-laws in 1976. He also contends that the exclusion of his principal.
the 1961 authorization was already used in 1962 and 1963. He also contends that
the amendment deprived him of his right to vote and be voted upon as a stockholder FACTS:
(because it disqualified competitors from nomination and election in the BOD of
SMC), thus the amended by-laws were null and void.
16
Gokonwei alleged that on September 18, 1976, individual respondents the proprietors of the corporate interests and are ultimately the only beneficiaries
amended by bylaws of San Miguel Corporation, basing their authority to do so on a thereof
resolution of the stockholders adopted on March 13, 1961, when the outstanding It is obviously to prevent the creation of an opportunity for an officer or
capital stock of respondent corporation was only P70,139.740.00, divided into director of San Miguel Corporation, who is also the officer or owner of a competing
5,513,974 common shares at P10.00 per share and 150,000 preferred shares at corporation, from taking advantage of the information which he acquires as director
P100.00 per share. At the time of the amendment, the outstanding and paid up to promote his individual or corporate interests to the prejudice of San Miguel
shares totalled 30,127,043, with a total par value of P301,270,430.00. It was Corporation and its stockholders, that the questioned amendment of the by-laws
contended that according to section 22 of the Corporation Law and Article VIII of the was made.
by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws Certainly, where two corporations are competitive in a substantial sense,
may be delegated to the Board of Directors only by the affirmative vote of it would seem improbable, if not impossible, for the director, if he were to discharge
stockholders representing not less than 2/3 of the subscribed and paid up capital effectively his duty, to satisfy his loyalty to both corporations and place the
stock of the corporation, which 2/3 should have been computed on the basis of the performance of his corporation duties above his personal concerns.
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 5) Doctrine of Corporate Opportunity – Sec. 34
usurpation of the power of the stockholders. Section 34. Disloyalty of a director. – Where a director, by virtue of his office,
It was claimed that prior to the questioned amendment, petitioner had all the acquires for himself a business opportunity which should belong to the
qualifications to be a director of respondent corporation, being a substantial corporation, thereby obtaining profits to the prejudice of such corporation, he
stockholder thereof;; that as a stockholder, petitioner had acquired rights inherent in must account to the latter for all such profits by refunding the same, unless his act
stock ownership, such as the rights to vote and to be voted upon in the election of has been ratified by a vote of the stockholders owning or representing at least
directors;; and that in amending the by-laws, respondents purposely provided for two-thirds (2/3) of the outstanding capital stock. This provision shall be
petitioner's disqualification and deprived him of his vested right as afore-mentioned, applicable, notwithstanding the fact that the director risked his own funds in the
hence the amended by-laws are null and void. venture. (n)

ISSUE: NOTE:
• The corporate opportunity doctrine is the legal principle providing that
Whether or not SMC’s BoD acted in bad faith in making the amendment directors, officers, and controlling shareholders of a corporation must not
which disqualified Gokongwei from being elected as Director. take for themselves any business opportunity that could benefit the

RULING: corporation.[1] The corporate opportunity doctrine is one application of
the fiduciary duty of loyalty
NO. • The corporate opportunity doctrine does not apply to all fiduciaries of a
corporation;; rather, it is limited to directors, officers, and controlling
SMC is merely protecting its interest from Gokongwei, who owns companies shareholders.[3] The doctrine applies regardless of whether the
in direct competition with SMC’s business. Although in the strict and technical sense, corporation is harmed by the transaction;; indeed, it applies even if the
directors of a private corporation are not regarded as trustees, there cannot be any corporation benefits from the transaction.[4] The corporate opportunity
doubt that their character is that of a fiduciary insofar as the corporation and the doctrine only applies if the opportunity was not disclosed to the
stockholders as a body are concerned. As agents entrusted with the management of corporation. If the opportunity was disclosed to the board of directors
the corporation for the collective benefit of the stockholders, they occupy a fiduciary and the board declined to take the opportunity for the corporation, the
relation, and in this sense the relation is one of trust. It springs from the fact that fiduciary may take the opportunity for him- or herself.[5] When the
directors have the control and guidance of corporate affairs and property;; hence of corporate opportunity doctrine applies, the corporation is entitled to all
the property interests of the stockholders. Equity recognizes that stockholders are profits earned by the fiduciary from the transaction
17
• Elements: A business opportunity is a corporate opportunity if the knowledge of a substantial transaction, such as an offer to acquire the
corporation is financially able to undertake the opportunity, the whole company.
opportunity is within the corporation's line of business, and the
corporation has an interest or expectancy in the opportunity.[7] The Strong v.Repide 41 Phil. 947
Delaware Court of Chancery has stated, "An opportunity is within a
corporation's line of business . . . if it is an activity as to which the Strong and Strong vs. Repide
corporation has fundamental knowledge, practical experience and ability 41 Phil. 9473 May 1909
to pursue."[8] In In re eBay, Inc. Shareholders Litigation, investing in PONENTE : Justice Peckham
various securities was held to be in a line of business of eBay despite FACTS:
the fact that eBay's primary purpose is to provide an online auction Among the lands comprising the friar lands are the Dominican lands, the only
valuable asset owned by the corporation Philippine Sugar Estates Development
platform.[9] Investing was in a line of business of eBay because eBay Company Limited (Philippine Sugar Estates). Francisco Gutierrez Repide (Repide),
"consistently invested a portion of its cash on hand in marketable defendant, was the majority stockholder and one of the five directors of Philippine
securities."[10] A corporation has an interest or expectancy in a Sugar Estates. He was likewise elected by the board as the agent and
business opportunity if the opportunity would further an established administrator general of such company.
business policy of the corporation.[11]
The factual backdrop being during US occupation, the US Government wanted to
NOTE:
secure title over the friar lands. To accomplish this objective, Governor for the
• Directors are not full time or employee of the corporation except if they are
Philippines entered into negotiations for the purchase of the Dominican lands,
COO, CEO or CFO à acts of said directors to take business opportunity à
during which Repide represented Philippine Sugar Estates. The first offer of the
ratified by the stockholders will make said director not liable anymore for
Governor was to purchase the subject lands in the amount of $6,043,219.47. As
profits or loss incurred by him. the majority stockholder of Philippine Sugar Estates and without prior consultation
• Reason why ratified ? if director owns 2/3 to ratify, it is not attractive to the with the other stockholders, Repide rejected the offer. For the second offer, the
business or not in line with the corporations business purchase price was increased to $7,535,000.
• Business Opportunity belongs to the corporation à director takes such
opportunity he shall be liable under Sec34 (is it in line with the corporations While negotiations for the second offer were ongoing and while still holding out for
business?) a higher price of the Dominican lands, Repide took steps to purchase the 800
• Business Opportunity NOT BELONGS to the corporation à director will not shares of stock of Philippine Sugar Estates. These shares were owned by Mrs.
be liable if he takes said opportunity Eleanor Strong (Strong) which were then in the possession of her agent, F. Stuart
Jones (Jones). Repide, instead of seeing Jones, employed Kauffman who later on
6) Duty to stockholders - Special Facts Doctrine employed Sloan, a broker, to purchase the shares of Strong. Jones sold the 800
NOTES: shares of Strong for 16,000 Mexican currency. For this sale transaction a check of
• Special facts doctrine is a term used in corporate law to describe the one Rueda Ramos was issued.
fiduciary duty of a corporate officer to shareholders to disclose information
during a transaction involving a stock transfer. This duty arises because of Later on, the negotiations for the purchase of the Dominican lands were concluded
the superior knowledge the officer holds by virtue of his or her position. and a contract of sale was subsequently executed. This sale transaction increased
• The special facts doctrine requires a director to disclose information in the the value of the shares of stocks originally owned by Strong from 16,000 Mexican
context of a sale of the stock of a privately held corporation “only when a currency to 76,256 US currency. During the negotiations regarding the purchase of
director is possessed of special knowledge of future plans or secret the shares of stock of Strong, not one word of the facts affecting the value of this
resources and deliberately misleads a stockholder who is ignorant of stock was made known to her nor her agent, Jones. After the sale of Dominican
them.” To satisfy the special facts requirement, a plaintiff must point to lands and after the purchase of the 800 shares of Strong, Repide became the
owner of 30,400 out of the 42,030 shares of Philippine Sugar Estates.
18
property the administration or sale of which, may have been entrusted to them, and
Strong filed a complaint for the recovery of her 800 shares. She argued that her that this is the extent of the prohibition.
agent Jones had no authority to sell her shares and that Repide fraudulently
concealed the facts affecting their value.
7) Duty to creditors –

ISSUE:
Steinberg v. Velasco 52 Phil. 953
Was there fraud in effecting the purchase of Strong’s shares?
G.R. No. L-30460;; March 12, 1929

RULING:
FACTS:
Yes. With the factual circumstances of this case, it became the duty of
The board of the corporation authorized the purchase of 330shares of
Repide, acting in good faith, to state the facts before making the purchase of
capital stock of the corporation and the declaration of dividends at a time when the
Strong’s shares. That Repide was one of the directors of Philippine Sugar Estates
corporation was indebted and in such a bad financial condition. The directors relied
was but one of the facts upon which liability is asserted. He was not only a director,
on the face value on the books of its A/R, which had little or no value. Furthermore
but he owned three-fourths of the shares of its stock, and was, at the time of the
it appears that two of the directors were permitted to resign so that they could sell
purchase of the stock, administrator general of the company with large powers and
their stock to the corporation. The corporation became insolvent, and the receiver
engaged in the negotiations which finally led to the sale of the company’s lands at a
Steinberg sues the directors.
price which greatly enhanced the value of the stock. He was the negotiator for the

sale of the Dominican lands and was acting substantially as the agent of the
ISSUE:
shareholders of Philippine Sugar Estates by reason of his ownership of the shares in
Duty to creditors.
the company. Because of such ownership and agency, no one knew as well as he

does about the exact condition of the negotiations. He was the only one who knew of
HELD:
the probability of the sale of the Dominican lands to the government and of the
Creditors of a corporation have the right to assume that so long as there
probable purchase price. Under these circumstances, Repide employed an agent to
are outstanding debts and liabilities, the BOD will not use the assets of the
purchase the stock of Strong, concealed his own identity and his knowledge of the
corporation to buy its own stock, and will not declare dividends to stockholders
state of negotiations and their probable result. The concealment of his identity while
when the corporation is insolvent.
procuring the purchase of the stock, by his agent, was in itself strong evidence of
In this case, it was found that the corporation did not have an actual bona
fraud on the part of Repide. By such means, the more easily was he able to avoid
fide surplus from which dividends could be paid. Moreover, the Court noted that
questions relative to the negotiations for the sale of Dominican lands and actual
the Board of Directors purchased the stock from the corporation and declared the
misrepresentations regarding that subject. He kept up the concealment as long as he
dividends on the stock at the same Board meeting, and that the directors were
could by giving the check of a third person Rueda Ramos, for the purchase money.
permitted to resign so that they could sell their stock to the corporation. Given all
This move of Repide was a studied and intentional omission to be characterized as
of this, it was apparent that the directors did not act in good faith or were grossly
part of the deceitful machinations to obtain the purchase without giving any
ignorant of their duties. Either way, they are liable for their actions which affected
information whatever as to the state and probable result of the negotiations and to
the financial condition of the corporation and prejudiced creditors.
obtain a lower price for the shares of Strong. After the purchase of stock, he

continued negotiations for the sale of the Dominican lands as the administrator
FACTS:
general and eventually entered into a contract of sale. The whole transaction gives

conclusive evidence of the overwhelming influence Repide had in the negotiations
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic
and it is clear that the final consummation was in his hands at all times.
corporation. The defendants are residents of the Philippine Islands. It is alleged

that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-
OBITER DICTUM:
president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as
The directors are declared to be mandatories of the society and that they
director of Trading Company, at a meeting of the board of directors, approved and
are prohibited from acquiring by purchase, even at public or judicial auction, the
authorized various lawful purchases already made of a large portion of the capital
19
stock of the company from its various stockholders with total amount of the capital express his objection in writing and file the same with the corporate secretary, shall
stock unlawfully purchased was P3,300. At the time of such purchase, the be solidarily, liable with the stockholder concerned to the corporation and its
corporation had accounts payable amounting to P13,807.50, most of which were creditors for the difference between the fair value received at the time of issuance
unpaid at the time petition for the dissolution of the corporation was its financial of the stock and the par or issued value of the same. (n)
condition, in contemplation of an insolvency and dissolution. That on September 11,

1923, when the petition was filed for its dissolution upon the ground that it was
9) Duty of shareholders in close corps. – Secs. 97(2);; 100 (4),(5)
insolvent, its accounts payable amounted to P9,241.19, and its accounts receivable
P12,512.47, or an apparent asset of P3,271.28 over and above its liabilities. Section 97. Articles of incorporation. – The articles of incorporation of a close
corporation may provide:
ISSUE: 1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated
Whether or not the Petition Corporation can acquire its own shares. therein, subject to the provisions of the following section;;
2. For a classification of directors into one or more classes, each of whom
RULING: may be voted for and elected solely by a particular class of stock;; and
3. For a greater quorum or voting requirements in meetings of stockholders
NO. or directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of
It is, indeed, peculiar that the action of the board in purchasing the stock the corporation shall be managed by the stockholders of the corporation rather than
from the corporation and in declaring the dividends on the stock was all done at the by a board of directors. So long as this provision continues in effect:
same meeting of the board of directors, and it appears in those minutes that the both 1. No meeting of stockholders need be called to elect directors;;
Ganzon and Mendaros were formerly directors and resigned before the board 2. Unless the context clearly requires otherwise, the stockholders of the
approved the purchase and declared the dividends, and that out of the whole 330 corporation shall be deemed to be directors for the purpose of applying the
shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out provisions of this Code;; and
of the 330, which were purchased by the corporation, and for which it paid P3,300. 3. The stockholders of the corporation shall be subject to all liabilities of
In other words, the directors were permitted to resign so that they could sell directors.
their stock to the corporation. As stated, the authorized capital stock was P20,000 The articles of incorporation may likewise provide that all officers or
divided into 2,000 shares of the par value of P10 each, which only P10,030 was employees or that specified officers or employees shall be elected or
subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there appointed by the stockholders, instead of by the board of directors.
would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends,
there would be left P4,000 only. In this situation and upon this state of facts, it is very Section 100. Agreements by stockholders. -
apparent that the directors did not act in good faith or that they were grossly ignorant
of their duties. 4. A written agreement among some or all of the stockholders in a close
Creditors of a corporation have the right to assume that so long as there are corporation shall not be invalidated on the ground that it so relates to the
outstanding debts and liabilities, the board of directors will not use the assets of the conduct of the business and affairs of the corporation as to restrict or
corporation to purchase its own stock, and that it will not declare dividends to interfere with the discretion or powers of the board of directors: Provided,
stockholders when the corporation is insolvent. That such agreement shall impose on the stockholders who are parties
thereto the liabilities for managerial acts imposed by this Code on directors.
8) Watered Stocks - Sec. 65 5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close corporation,
Section 65. Liability of directors for watered stocks. – Any director or officer of a
the stockholders shall be held to strict fiduciary duties to each other and
corporation consenting to the issuance of stocks for a consideration less than its
among themselves. Said stockholders shall be personally liable for
par or issued value or for a consideration in any form other than cash, valued in
corporate torts unless the corporation has obtained reasonably adequate
excess of its fair value, or who, having knowledge thereof, does not forthwith
20
liability insurance. shares of stock to be represented by each proxy shall be specifically

indicated in the proxy form. If some of the proxy forms do not indicate
XlV. DEVICES AFFECTING CONTROL – DISCUSS HOW EACH ITEM AFFECTS the number of shares, the total shareholdings of the stockholder shall be
CONTROL tallied and the balance thereof, if any, shall be alloted to the holder of
1) Proxy device – Sec. 58;; SEC Memo Circ. 4 (2004) the proxy form without the number of shares. If all are blank, the stocks
shall be distributed equally among the proxies. The number of persons
Section 58. Proxies. – Stockholders and members may vote in person or by
to be designated as proxies may be limited by the By-laws
proxy in all meetings of stockholders or members. Proxies shall in writing, signed

by the stockholder or member and filed before the scheduled meeting with the
ONE SHARE- ONE VOTE POLICY
corporate secretary. Unless otherwise provided in the proxy, it shall be valid only
1. Pursuant to Section 24 of the Corporation Code, one share is entitled to
for the meeting for which it is intended. No proxy shall be valid and effective for a
1 vote. Voting shall always be in the basis of the number of shares and
period longer than five (5) years at any one time. (n)
not on the number of stockholders present in the stockholders' meeting.
This is limitation: how does it affect the control of the corporation? à To ensure that 2. Common shares shall have complete voting rights and such shares
the absent stockholder can still avail of his right to vote cannot be deprived of such rights except as provided by law
3. Each common share shall be equal in all respects to every other
common share. Corporations are hereby prohibited from issuing multiple
VOTING BY MAIL voting and non-voting common shares nor can they limit the maximum
1. stockholders attending stockholder' meetings shall vote their shares as number of votes per stockholder irrespective of the number of shares he
provided by existing laws holds.
2. stockholders shall have the right to vote at all stockholders' meetings in
person or by proxy. The stockholder may deliver, in person or by mail, OUTSTANDING CAPITAL STOCK
his proxy vote directly to the corporation 1. The articles of incorporation and the certificate of stocks cannot deprive
3. in Case provided In Section 16 of the Corporation Code of the the preferred shares of the right to cote in the following cases (Section 6,
philippines where written assent is allowed, the same number of votes Corporation Code)
shall be observed and voting can likewise be done by proxy i. Amendment of the articles of incorporation;;
4. The stockholder may designate any person of his choice to act as his ii. Adoption and amendment of by-laws;;  
proxy. Absent such designation, the Chairman of the meeting shall be iii. Sale, lease, exchange, mortgage, pledge or other disposition of
deemed authorized and hereby directed to cast the vote as indicated by all or substantially all of the corporate property;;  
the voting stockholder or his proxy iv. Incurring, creating or increasing bonded indebtedness;;  
5. The proxy must be dated. If a duly accomplished and executed proxy is
v. Increase or decrease of capital stock;;  
undated, the postmark or date of dispatch indicated in the electronic mail
vi. Merger or consolidation of the corporation with another
or, if not mailed, its actual date of presentation, shall be considered as
the date of proxy corporation or other corporations;;  
6. Where the corporation receives more than one (1) proxy from the same vii. Investment of corporate funds in another corporation or
stockholder and they are all undated, the postmark or electronic dates business in accordance with this Code;; and  
shall be considered. If the proxies are mailed on the same date, the one viii. Dissolution of the corporation.
bearing the latest time of day indicated in the postmark or latest time of 2. For purposes of the foregoing, the phrase “outstanding capital stock” as
dispatch appearing in the electronic mail shall prevail. If the proxies are defined under Section 137 of the Corporation Code shall be deemed to
not mailed, then the time of their actual presentation is considered. That include preferred shares.
which is presented last will be recognized.
7. If the stockholder intends to designate several proxies, the number of Types – general/limited;;
21
GENERAL Restrictions, renewal, etc.

• A general or unrestricted proxy gives a general discretionary power of RESTRICTIONS:
attorney to vote for directors and on all ordinary matters that may • The question as to whether the by-laws may deny the stockholder the right
properly come before a regular meeting, even specific mention of them to vote by proxy has not yet been ruled upon by our Supreme Court.
is not made in the notice of the meeting. A general proxy has no However, our Securities and Exchange Commission has expressed the
authority, however, to vote for fundamental changes in the corporate opinion that the appointment of a proxy is purely personal and an incident
charter or for dissolution or a transfer of all of the property to another of ownership and, therefore, a by-law provision prohibiting the use of proxy
corporation, or other unusual transactions. is contrary to law and, hence, null and void
LIMITED • The by-laws may, however, impose conditions as to the form and manner
• limited proxy may restrict the authority to vote on specified matters only of voting by proxy. But these conditions must be reasonable. A by-law
and may direct the manner in which the vote shall be cast. which imposes unreasonably restrictive conditions is void for it is
practically a denial of the right to vote by proxy.

Duration – limited and specific/continuing • Proxies may be given only by those who are entitled to vote in the
stockholders' meeting.
DURATION
• The Code states: "Unless otherwise provided in the proxy, it shall be FORM
valid only for the meeting for which it is intended. No proxy shall be valid • "proxies shall be in writing, signed by the stockholder and filed before the
and effectivefor a period longer than five (5) years at anyone time."53 scheduled meeting with the corporate secretary."51 The by-laws may not
Under this provision, it is clear that the proxy may fix the period during provide that the proxy may be oral. However,. the by-laws may require as
which it may be used, but it cannot exceed five years, renewable for not an additional requirement the acknowledgment before a notary public of
more than five years for each renewal. Where the proxy does not fix any the proxy.52 The by-laws may also prescribe a reasonable period before
period, then it expires after the meeting for which it was given. It cannot the meeting when the written proxy should be filed with the secretary;; e.g.,
be used again for a subsequent meeting unless it is renewed. not later than two days before the meeting.
REVOCATION
• A proxy, like agency in general, is revocable unless coupled with an SEC vs CA October 22, 2014
interest, even though it may expressly be declared to be irrevocable. SECURITIES AND EXCHANGE COMMISSION, Petitioner,
Revocation of a proxy need not be made by formal notice in writing to vs. THE HONORABLE COURT OF APPEALS, OMICO CORPORATION, EMILIO
the corporation unless so required by statute. Revocation may be S. TENG AND TOMMY KIN HING TIA, Respondents.
expressed to the proxy holder, by a subsequent proxy to another or by
sale of the shares. Thus it may be revoked orally or by conduct. x - - - - - - - - - - - - - - - - - - - - - - - x
Appearing and assert- ing the right to vote at a meeting revokes a proxy
previously given. Like agency in general, proxy is also terminated by the G.R. No. 189014
death of the principal, or of the agent, or by the loss of capacity by either
party, unless this is changed by statute. ASTRA SECURITIES CORPORATION, Petitioner,
vs. OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING
• At the end of five years, whether or not it is coupled with an interest and TIA, Respondents.
even where the period fixed exceeds five years, the proxy automatically
loses its effectivity.
FACTS

22
Omico Corporation (Omico) is a company whose shares of stock are listed and Astra instituted before the SEC a Complaint18 for indirect contempt against Omico
traded in the Philippine Stock Exchange, Inc.4 Astra Securities Corporation (Astra) is for disobedience of the CDO. On the other hand, Omico filed before the CA a
one of the stockholders of Omico owning about 18% of the latter’s outstanding Petition for Certiorari and Prohibition19 imputing grave abuse of discretion on the
capital stock.5 part of the SEC for issuing the CDO.

Omico scheduled its annual stockholders’ meeting on 3 November 2008.6 It set the ISSUE
deadline for submission of proxies on 23 October 2008 and the validation of proxies
on 25 October 2008. Whether the SEC has jurisdiction over controversies arising from the
validation of proxies for the election of the directors of a corporation.
Astra objected to the validation of the proxies issued in favor of Tommy Kin Hing Tia
(Tia), representing about 38% of the outstanding capital stock of Omico.7 Astra also OUR RULING
objected to the inclusion of the proxies issued in favor of Tia and/or Martin Buncio,
representing about 2% of the outstanding capital stock of Omico.8 About a month after the CA issued the assailed Decision, this Court promulgated
31
GSIS v. CA, which squarely answered the above issue in the negative.
Astra maintained that the proxy issuers, who were brokers, did not obtain the
32
required express written authorization of their clients when they issued the proxies in In that case, we observed that Section 6 (g) of Presidential Decree No. (P.D.)
favor of Tia. In so doing, the issuers were allegedly in violation of SRC Rule 902-A dated 11 March 1976 conferred on SEC the power “[t]o pass upon the
20(11)(b)(xviii)9 of the Amended Securities Regulation Code (SRC or Republic Act validity of the issuance and use of proxies and voting trust agreements for absent
No. 8799) Rules.10 Furthermore, the proxies issued in favor of Tia exceeded 19, stockholders or members.” Section 6, however, opens thus: “In order to effectively
thereby giving rise to the presumption of solicitation thereof under SRC Rule exercise such jurisdiction x x x.” This opening clearly refers to the preceding
33
20(2)(B)(ii)(b)11 of the Amended SRC Rules. Tia did not comply with the rules on Section 5. The Court pointed out therein that the power to pass upon the validity
proxy solicitation, in violation of Section 20.112 of the SRC. of proxies was merely incidental or ancillary to the powers conferred on the SEC
under Section 5 of the same decree. With the passage of the SRC, the powers
Despite the objections of Astra, Omico’s Board of Inspectors declared that the granted to SEC under Section 5 were withdrawn, together with the incidental and
proxies issued in favor of Tia were valid.13 ancillary powers enumerated in Section 6.

On 27 October 2008, Astra filed a Complaint14 before the Securities and Exchange While the regular courts now had the power to hear and decide cases involving
Commission (SEC) praying for the invalidation of the proxies issued in favor of Tia. controversies in the election of directors, it was not clear whether the SRC also
Astra also prayed for the issuance of a cease and desist order (CDO) enjoining the transferred to these courts the incidental and ancillary powers of the SEC as
holding of Omico’s annual stockholders’ meeting until the SEC had resolved the enumerated in Section 6 of P.D. 902-A. Thus, in GSIS v. CA, it was necessary for
issues pertaining to the validation of proxies. the Court to determine whether the action to invalidate the proxies was intimately
tied to an election controversy. Hence, the Court
On 30 October 2008, SEC issued the CDO enjoining Omico from accepting and pronounced:chanRoblesvirtualLawlibrary
including the questioned proxies in determining a quorum and in electing the
members of the board of directors during the annual stockholders’ meeting on 3 Under Section 5(c) of Presidential Decree No. 902-A, in relation to the
November 2008.15 SRC, the jurisdiction of the regular trial courts with respect to election-
related controversies is specifically confined to “controversies in the
Attempts to serve the CDO on 3 November 2008 failed, and the stockholders’ election or appointment of directors, trustees, officers or managers of
meeting proceeded as scheduled with 52.3% of the outstanding capital stock of corporations, partnerships, or associations.” Evidently, the
Omico present in person or by proxy.16 The nominees for the board of directors jurisdiction of the regular courts over so-called election contests
were elected upon motion.17 or controversies under Section 5 (c) does not extend to every
potential subject that may be voted on by shareholders, but only
23
to the election of directors or trustees, in which stockholders are

authorized to participate under Section 24 of the Corporation Code. SRC Rule 20(11)(b)(xxi) of the Amended SRC Rules provides:

This qualification allows for a useful distinction that gives due effect to SRC RULE 20.
the statutory right of the SEC to regulate proxy solicitation, and the

statutory jurisdiction of regular courts over election contests or Disclosures to Stockholders Prior to Meeting
controversies. The power of the SEC to investigate violations of its rules (formerly, SRC Rule 20 – The Proxy Rule)
on proxy solicitation is unquestioned when proxies are obtained to vote
on matters unrelated to the cases enumerated under Section 5 of x x x x
Presidential Decree No. 902-A. However, when proxies are solicited
in relation to the election of corporate directors, the resulting 11. Other Procedural Requirements
controversy, even if it ostensibly raised the violation of the SEC
rules on proxy solicitation, should be properly seen as an election x x x x
controversy within the original and exclusive jurisdiction of the trial
courts by virtue of Section 5.2 of the SRC in relation to Section 5 (c) b. Proxy
of Presidential Decree No. 902-A.
x x x x
The conferment of original and exclusive jurisdiction on the regular courts xxi. In the validation of proxies, a special committee of
over such controversies in the election of corporate directors must be inspectors shall be designated or appointed by the Board of
seen as intended to confine to one body the adjudication of all related Directors which shall be empowered to pass on the validity of
claims and controversy arising from the election of such directors. For proxies. Any dispute that may arise pertaining thereto, shall
that reason, the aforequoted Section 2, Rule 6 of the Interim Rules be resolved by the Securities and Exchange Commission
broadly defines the term “election contest” as encompassing all plausible upon formal complaint filed by the aggrieved party, or by
incidents arising from the election of corporate directors, including: (1) the SEC officer supervising the proxy validation process.
any controversy or dispute involving title or claim to any elective office in (Emphasis supplied)
a stock or nonstock corporation, (2) the validation of proxies, (3) the

manner and validity of elections and (4) the qualifications of candidates, On the other hand, these are the provisions of Section 1, Rule 1;; and Section 2,
including the proclamation of winners. If all matters anteceding the Rule 6 of the Interim Rules of Procedure Governing Intra-Corporate Disputes:
holding of such election which affect its manner and conduct, such as the
proxy solicitation process, are deemed within the original and exclusive RULE 1
jurisdiction of the SEC, then the prospect of overlapping and competing General Provisions
jurisdictions between that body and the regular courts becomes
frighteningly real. From the language of Section 5 (c) of Presidential
SECTION 1. (a) Cases Covered – These Rules shall govern the procedure to
Decree No. 902-A, it is indubitable that controversies as to the be observed in civil cases involving the following:
qualification of voting shares, or the validity of votes cast in favor of a

candidate for election to the board of directors are properly cognizable
a) Devices or schemes employed by, or any act of, the board of directors, business
and adjudicable by the regular courts exercising original and exclusive
associates, officers or partners, amounting to fraud or misrepresentation which
34
jurisdiction over election cases. x x x. may be detrimental to the interest of the public and/or of the stockholders,
partners, or members of any corporation, partnership, or
The ruling harmonizes the seeming conflict between the Amended SRC Rules association;;cralawlawlibrary
promulgated by the SEC and the Interim Rules of Procedure Governing Intra-
Corporate Disputes promulgated by the Court. b) Controversies arising out of intra-corporate, partnership, or association relations,
24
36
between and among stockholders, members, or associates;; and between, any or all the majority of the outstanding capital stock of Omico. Also, the fact that there
of them and the corporation, partnership, or association of which they are was no actual voting did not make the election any less so, especially since Astra
stockholders, members, or associates, respectively;;cralawlawlibrary had never denied that an election of directors took place.

c) Controversies in the election or appointment of directors, trustees, officers, We find no merit either in the proposal of Astra regarding the “two (2) viable, non-
37
or managers of corporations, partnerships, or associations;; exclusive and successive legal remedies to question the validity of proxies.” It
suggests that the power to pass upon the validity of proxies to determine the
d) Derivative suits;; and existence of a quorum prior to the conduct of the stockholders’ meeting should lie
with the SEC;; but, after the stockholders’ meeting, questions regarding the use of
e) Inspection of corporate books. invalid proxies in the election of directors should be cognizable by the regular
courts, since there was already an election to speak of.
x x x x
First, this interpretation is akin to the argument struck down by the Court in GSIS v.
RULE 6 CA. If the Court adopts the suggestion, “we would be perpetually confronted with
Election Contests the spectacle of election controversies being heard and adjudicated by both the
SEC and the regular courts, made possible through a mere allegation that the
x x x x anteceding x x x process was errant, but the competing cases [were] filed with one
38
objective in mind – to affect the outcome of the election of the board of directors.”
SECTION 2. Definition. – An election contest refers to any controversy or
dispute involving title or claim to any elective office in a stock or non-stock Second, the validation of proxies serves a number of purposes, including
corporation, the validation of proxies, the manner and validity of elections, and the determining the existence of a quorum and ascertaining the authenticity of proxies
qualifications of candidates, including the proclamation of winners, to the office of to be used for the election of directors at the stockholders’ meeting. Section 2,
director, trustee or other officer directly elected by the stockholders in a close Rule 6, of the Interim Rules of Procedure Governing Intra-Corporate Disputes
corporation or by members of a non-stock corporation where the articles of provides that an election contest covers any controversy or dispute involving the
incorporation or by-laws so provide. (Emphases supplied) validation of proxies, in general. Thus, it can only refer to all the beneficial
purposes that validation of proxies can bring about when made in connection with
The Court explained that the power of the SEC to regulate proxies remains in place a forthcoming election of directors. Thus, there is no point in making distinctions
35
in instances when stockholders vote on matters other than the election of directors. between who has jurisdiction before and who has jurisdiction after the election of
The test is whether the controversy relates to such election. All matters affecting the directors, as all controversies related thereto – whether before, during or after –
manner and conduct of the election of directors are properly cognizable by the shall be passed upon by regular courts as provided by law.
regular courts. Otherwise, these matters may be brought before the SEC for
resolution based on the regulatory powers it exercises over corporations, The Court closes with an observation.
partnerships and associations.
As in the instant cases, GSIS v. CA is a consolidation of two cases, one of which
Astra endeavors to remove the instant case from the ambit of GSIS v. CA by arguing was filed by a private party and the other by the SEC itself. In both cases, the
that 1) the validation of proxies in this case relates to the determination of the parties were aggrieved by the CA ruling, so they filed the cases seeking a
existence of a quorum;; and 2) no actual voting for the members of the board of pronouncement from the Court that it recognizes the jurisdiction of the SEC over
directors was conducted, as the directors were merely elected by motion. the controversy.

Indeed, the validation of proxies in this case relates to the determination of the Calling to mind established jurisprudential principles, the Court therein ruled that
existence of a quorum. Nonetheless, it is a quorum for the election of the directors, quasi-judicial agencies do not have the right to seek the review of an appellate
39
and, as such, which requires the presence – in person or by proxy – of the owners of court decision reversing any of their rulings. This is because they are not real
25
parties-in-interest. Thus, the Court expunged the petition filed by the SEC for the Unless expressly renewed, all rights granted in a voting trust agreement shall
latter’s lack of capacity to file the suit. So it must be in the instant cases. automatically expire at the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the name of the trustee or
WHEREFORE, the petition in G.R. No. 187702 is EXPUNGED for lack of capacity of trustees shall thereby be deemed cancelled and new certificates of stock shall be
petitioner to file the suit. reissued in the name of the transferors.

The voting trustee or trustees may vote by proxy unless the agreement
The petition in G.R. No. 189014 is DENIED. The Court of Appeals Decision dated 18
provides otherwise. (36a)
March 2009 and Resolution dated 9 July 2009 in CA-G.R. SP No. 106006 are
AFFIRMED. AFFECT?
• Voting trustee affects of the control of the corporation by
• Mechanics and right
2) Voting trusts – Sec. 59;;
Section 59. Voting trusts. – One or more stockholders of a stock corporation Everett v. Asia Banking (49 Phil 512) (IN ORDER TO PERPETRATE FRAUD)
may create a voting trust for the purpose of conferring upon a trustee or trustees
the right to vote and other rights pertaining to the shares for a period not HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.
exceeding five (5) years at any time: Provided, That in the case of a voting trust ROBINSON
specifically required as a condition in a loan agreement, said voting trust may be vs.
for a period exceeding five (5) years but shall automatically expire upon full THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC
payment of the loan. A voting trust agreement must be in writing and notarized, BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D.
and shall specify the terms and conditions thereof. A certified copy of such MACINTOSH
agreement shall be filed with the corporation and with the Securities and G.R. No. L-25241. November 3, 1926
Exchange Commission;; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the voting trust FACTS:
agreement shall be cancelled and new ones shall be issued in the name of the
trustee or trustees stating that they are issued pursuant to said agreement. In the In order more effectually to plunder the Company and to defraud these
books of the corporation, it shall be noted that the transfer in the name of the plaintiffs the said defendants, Mullen, Barclay, Mears and Macintosh, made,
trustee or trustees is made pursuant to said voting trust agreement. executed and filed in the Bureau of Commerce and Industry of the Philippine
The trustee or trustees shall execute and deliver to the transferors voting trust Islands, articles of incorporation of a corporation called the "Philippine Motors
certificates, which shall be transferable in the same manner and with the same Corporation," having its principal office in the City of Manila, a capital stock of
effect as certificates of stock. P25,000, of which the sum of P5,000, was alleged to have been subscribed and
paid as follows: the defendant Barclay P200, defendant Mears P1,200, defendant
The voting trust agreement filed with the corporation shall be subject to Kelly P1,200, defendant Macintosh P1,200, defendant Mullen P1,200, the
examination by any stockholder of the corporation in the same manner as any treasurer thereof being the defendant Mears. And these plaintiffs beg leave to refer
other corporate book or record: Provided, That both the transferor and the trustee to the original articles of Incorporation on file in the said Bureau for greater
or trustees may exercise the right of inspection of all corporate books and records certainty.
in accordance with the provisions of this Code. (approved by the SEC) That at the time of such incorporation each and every one of the last above
Any other stockholder may transfer his shares to the same trustee or trustees named defendants was an officer or employee of the defendant Bank. That these
upon the terms and conditions stated in the voting trust agreement, and plaintiffs have nor information nor means of obtaining information as to whether the
thereupon shall be bound by all the provisions of said agreement. money alleged to have been described by them for their shares of stock was of
No voting trust agreement shall be entered into for the purpose of their personal funds and property or whether it was money furnished them by the
circumventing the law against monopolies and illegal combinations in restraint of Bank of purpose moneys such incorporation was a fraud upon these plaintiffs for
trade or used for purposes of fraud. the reason that it was intended for the sole purpose of taking over the assets of the
26
Company and said defendants were enabled to effectuate such intent by reason of FACTS:
their positions as officers and employees of the Bank. Batjak, a manufacturer of coco oil and copra cake for export, is on the
brink of bankruptcy. It entered in to a Financial Agreement with PNB for additional
ISSUE: operating capital for its 3 processing mills and to pay its other debts to other banks.
Under the agreement with PNB, NIDC, a wholly-owned subsidiary of PNB, would
Whether or not plaintiffs have the capacity to sue. invest P6.7M worth of preferred shares convertible within 5 years into common
stock to pay off the other debts and the balance to pay off its own due with PNB.
RULING: PNB also granted various credit accommodations. Batjak as part of the deal
mortgaged all its properties in the province. A 5-year voting trust agreement was
YES. executed in favor of NIDC by the stockholders representing 60% outstanding stock
of Batjak. Years later, PNB instituted foreclosure proceedings against the
Invoking the well-known rule that shareholders cannot ordinarily sue in mortgaged properties due to Batjak’s insolvency, and soon became owner of the
equity to redress wrongs done to the corporation, but that the action must be brought properties. Batjak failed to exercise its right to redeem within the period allowed
by the Board of Directors, the appellees argue — and the court below held — that and PNB transferred ownership of the 2 oil mills to NIDC. Three years later, Batjak
the corporation Teal and Company is a necessary party plaintiff and that the plaintiff represented by majority stockholders, inquired with NIDC if it was still interested in
stockholders, not having made any demand on the Board to bring the action, are not negotiating the renewal of the voting trust agreement. NIDC replied that it was no
the proper parties plaintiff. But, like most rules, the rule in question has its longer interested and requested turn-over of all Batjak assets and properties.
exceptions. It is alleged in the complaint and, consequently, admitted through the Batjak demanded an accounting of all assets and properties and operations but
demurrer that the corporation Teal and Company is under the complete control of the NIDC refused to comply. Batjak then filed an action for mandamus. CFI Judge
principal defendants in the case, and, in these circumstances, it is obvious that a Aquino issued a TRO prohibiting NIDC from removing any record, report, or
demand upon the Board of Directors to institute an action and prosecute the same document or disposing all of the properties of Batjak, and allowed Batjak to inspect
effectively would have been useless, and the law does not require litigants to perform the same. Batjak then moved for the appointment of a receiver. NIDC and PNB
useless acts. opposes, but overruled by CFI. MR’s denied.
The conclusion of the court below that the plaintiffs, not being stockholders
in the Philippine Motors Corporation, had no legal right to proceed against that ISSUE:
corporation in the manner suggested in the complaint evidently rest upon a WON NIDC was constituted as trustee of the assets, management and
misconception of the character of the action. In this proceeding it was necessary for operations of Batjak due to the expiration of the Voting Trust Agreement.
the plaintiffs to set forth in full the history of the various transactions which eventually
led to the alleged loss of their property and, in making a full disclosure, references to HELD:
the Philippine Motors Corporation appear to have been inevitable. It is to be noted NO. A Voting Trust Agreement only transfers voting or other rights
that the plaintiffs seek no judgment against the corporation itself at this stage of the pertaining to the shares subject of the agreement, or control over the stock.
proceedings. Stockholders of a corporation that lost all its assets through foreclosures cannot go
after those properties.
NIDC v. Aquino (163 SCRA 153) (VOTING TRUST AGREEMENT AS A However, the acquisition by PNB-NIDC of the properties in question was
SECURITY) not made or effected under the capacity of a trustee but as a foreclosing creditor
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO for the purpose of recovering on a just and valid obligation of Batjak.
VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO
vs. FACTS:
HON. BENJAMIN AQUINO, et al.
G.R. No. L-34192 June 30, 1988 Batjak, is a Filipino-American corporation which has indebtedness to
Philippine National Bank (PNB) amounted to P11,915,000.00, As security for the
payment of its obligations and advances against shipments, Batjak mortgaged its
27
three (3) coco-processing oil mills to Manila Bank, Republic Bank , and PCIB, or control over the stock hence the acquisition by PNB-NIDC of the properties in
respectively. In need for additional operating capital to place the three (3) coco- question was not made or effected under the capacity of a trustee but as a
processing mills at their optimum capacity and maximum efficiency and to settle, pay foreclosing creditor for the purpose of recovering on a just and valid obligation of
or otherwise liquidate pending financial obligations with the different private banks, Batjak.
Batjak applied to PNB for additional financial assistance. A Financial Agreement was
submitted by PNB to Batjak for acceptance which was duly accepted by Batjak. Upon LEE vs CA
receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any LEE vs. CA
mortgages they held on the properties of Batjak. Batjak executed a first mortgage in G.R. No. 93695 February 4, 1992
favor of PNB on all its properties A Voting Trust Agreement was executed in favor of
NIDC by the stockholders representing 60% of the outstanding paid-up and
subscribed shares of Batjak. This agreement was for a period of five (5) years and, FACTS: On November 15, 1985, a complaint for a sum of money was filed by the
upon its expiration, was to be subject to negotiation between the parties. Forced by International Corporate Bank, Inc. against the private respondents SACOBA
the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings against MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS GONZALES
the oil mills of Batjak. The properties were sold to PNB as the highest bidder. Three who, in turn, filed a third party complaint against ALFA and the petitioners RAMON
years thereafter, Batjak wrote a letter to NIDC inquiring if the latter was still interested C. LEE and ANTONIO DM. LACDAO on March 17, 1986. On September 17, 1987,
in negotiating the renewal of the Voting Trust Agreement. Batjak wrote another letter the petitioners filed a motion to dismiss the third party complaint which the
to NIDC informing the latter that Batjak would now safely assume that NIDC was no Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.
longer interested in the renewal of said Voting Trust Agreement. Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance
of an alias summons upon ALFA through the DBP as a consequence of the
ISSUE: 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
Whether or not the NIDC and PNB acquired ownership over the assets of to the DBP. On August 16, 1988, the private respondents filed a Manifestation and
Batjak despite a voting trust agreement between Batjak’s stockholders and NIDC. Motion for the Declaration of Proper Service of Summons which the trial court
granted. On motion for reconsideration, petitioners contend that Rule 14, section
RULING: 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
YES. mode of service under Rule 14, Section 16 of the said Rules, i.e.,through
publication to effect proper service upon ALFA. In their Comment to the Motion for
What was assigned to NIDC was the power to vote the shares of stock of Reconsideration dated September 27, 1988, the private respondents argued that
the stockholders of Batjak, representing 60% of Batjak's outstanding shares, and the voting trust agreement dated March 11, 1981 did not divest the petitioners of
who are the signatories to the agreement. The power entrusted to NIDC also their positions as president and executive vice-president of ALFA so that service of
included the authority to execute any agreement or document that may be necessary summons upon ALFA through the petitioners as corporate officers was proper. On
to express the consent or assent to any matter, by the stockholders. Nowhere in the January 2, 1989, the trial court upheld the validity of the service of summons on
said provisions or in any other part of the Voting Trust Agreement is mention made of ALFA through the petitioners. On second motion for reconsideration, petitioners
any transfer or assignment to NIDC of Batjak's assets, operations, and management. reiterate their stand that by virtue of the voting trust agreement they ceased to be
NIDC was constituted as trustee only of the voting rights of 60% of the paid-up and officers and directors of ALFA, hence, they could no longer receive summons or
outstanding shares of stock in Batjak. Under the provision on termination what was to any court processes for or on behalf of ALFA. On April 25, 1989, the trial court
be returned by NIDC as trustee to Batjak's stockholders, upon the termination of the reversed itself by setting aside its previous Order and declared that service upon
agreement, are the certificates of shares of stock belonging to Batjak's stockholders, the petitioners who were no longer corporate officers of ALFA cannot be
not the properties or assets of Batjak itself which were never delivered, in the first considered as proper service of summons on ALFA. On May 15, 1989, the private
place to NIDC, under the terms of said Voting Trust Agreement. A voting trust respondents moved for a reconsideration of the above Order which was affirmed
transfers only voting or other rights pertaining to the shares subject of the agreement by the court in its Order dated August 14, 1989 denying the private respondent's
28
motion for reconsideration. On September 18, 1989, a petition for certiorari was delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to
belatedly submitted by the private respondent before the public respondent. own at least one share standing in their names on the books of ALFA as required
Meanwhile, the trial court, not having been notified of the pending petition under Section 23 of the new Corporation Code. They also ceased to have anything
for certiorari with public respondent issued an Order declaring as final the Order to do with the management of the enterprise. The petitioners ceased to be
dated April 25, 1989. The filed petition for certiorari before the CA was given due directors. Hence, the transfer of the petitioners' shares to the DBP created
course setting aside the orders of respondent judge dated April 25, 1989 and August vacancies in their respective positions as directors of ALFA. The transfer of shares
14, 1989. Motion for reconsideration was likewise denied. Hence, this petition for from the stockholder of ALFA to the DBP is the essence of the subject voting trust
certiorari. agreement.

ISSUE: Whether or not the creation of voting trust agreement divests the petitioners 3) Pooling & voting agreements – Sec. 100
of their positions as president and executive vice-president of ALFA. Section 100. Agreements by stockholders. -
RULING: A voting trust agreement results in the separation of the voting rights of a 1. Agreements by and among stockholders executed before the formation and
stockholder from his other rights such as the right to receive dividends, the right to organization of a close corporation, signed by all stockholders, shall survive the
inspect the books of the corporation, the right to sell certain interests in the assets of incorporation of such corporation and shall continue to be valid and binding
the corporation and other rights to which a stockholder may be entitled until the between and among such stockholders, if such be their intent, to the extent that
liquidation of the corporation. However, in order to distinguish a voting trust such agreements are not inconsistent with the articles of incorporation,
agreement from proxies and other voting pools and agreements, it must pass three irrespective of where the provisions of such agreements are contained, except
criteria or tests, namely: (1) that the voting rights of the stock are separated from the those required by this Title to be embodied in said articles of incorporation.
other attributes of ownership;; (2) that the voting rights granted are intended to be
irrevocable for a definite period of time;; and (3) that the principal purpose of the grant 2. An agreement between two or more stockholders, if in writing and signed
of voting rights is to acquire voting control of the corporation. by the parties thereto, may provide that in exercising any voting rights, the shares
Both under the old and the new Corporation Codes there is no dispute as to the most held by them shall be voted as therein provided, or as they may agree, or as
immediate effect of a voting trust agreement on the status of a stockholder who is a determined in accordance with a procedure agreed upon by them.
party to its execution — from legal titleholder or owner of the shares subject of the 3. No provision in any written agreement signed by the stockholders, relating
voting trust agreement, he becomes the equitable or beneficial owner. 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.
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot 4. A written agreement among some or all of the stockholders in a close
be adversely affected by the simple act of such director being a party to a voting trust corporation shall not be invalidated on the ground that it so relates to the conduct
agreement inasmuch as he remains owner (although beneficial or equitable only) of of the business and affairs of the corporation as to restrict or interfere with the
the shares subject of the voting trust agreement pursuant to which a transfer of the discretion or powers of the board of directors: Provided, That such agreement
stockholder's shares in favor of the trustee is required (section 36 of the old shall impose on the stockholders who are parties thereto the liabilities for
Corporation Code). No disqualification arises by virtue of the phrase "in his own right" managerial acts imposed by this Code on directors.
provided under the old Corporation Code. 5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close corporation, the
With the omission of the phrase "in his own right" the election of trustees and other stockholders shall be held to strict fiduciary duties to each other and among
persons who in fact are not beneficial owners of the shares registered in their names themselves. Said stockholders shall be personally liable for corporate torts unless
on the books of the corporation becomes formally legalized. Hence, this is a clear the corporation has obtained reasonably adequate liability insurance.
indication that in order to be eligible as a director, what is material is the legal title to,
not beneficial ownership of, the stock as appearing on the books of the corporation. • Based on the agreement of the stockholders – VALID à to direct the
The facts of this case show that the petitioners, by virtue of the voting trust direction of the company
agreement executed in 1981 disposed of all their shares through assignment and • Written agreements by stockhodlers
29
• In a cumulative voting system, the number of votes available to a

shareholder in any given election is equal to the number of shares
4) Cumulative voting – Sec. 24 outstanding held by the shareholder times the number of positions up for
PREPARE TO ILLUSTRATE vote. All positions are voted on at the same time, and the person with the
Section 24. Election of directors or trustees. – At all elections of directors or highest amount of votes wins the election. The key difference between
trustees, there must be present, either in person or by representative authorized to cumulative voting and plurality voting is that these votes may be voted in
act by written proxy, the owners of a majority of the outstanding capital stock, or if any possible combination and may all be cast for the same director. For
there be no capital stock, a majority of the members entitled to vote. The election example, if shareholders were asked for five directors, each share would
must be by ballot if requested by any voting stockholder or member. In stock be entitled to five votes, which could all be cast for the same candidate. It
corporations, every stockholder entitled to vote shall have the right to vote in person is important to remember that cumulative voting will only be used to elect
or by proxy the number of shares of stock standing, at the time fixed in the by-laws, the board of directors, and is not applicable for other votes held by
in his own name on the stock books of the corporation, or where the by-laws are shareholders or the board of directors.
silent, at the time of the election;; and said stockholder may vote such number of • The formula to determine the number of shares necessary to elect a
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 candidates as he shall see
fit: Provided, That the total number of votes cast by him shall not exceed the majority of directors is:
number 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 • where
delinquent stock shall be voted. Unless otherwise provided in the articles of X = number of shares needed to elect a given number of directors
incorporation or in the by-laws, members of corporations which have no capital S = total number of shares at the meeting
stock may cast as many votes as there are trustees to be elected but may not cast N = number of directors needed
more than one vote for one candidate. Candidates receiving the highest number of D = total number of directors to be elected
votes shall be declared elected. Any meeting of the stockholders or members called • The formula to determine how many directors can be elected by a faction
for an election may adjourn from day to day or from time to time but not sine die or
indefinitely if, for any reason, no election is held, or if there are not present or
represented by proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to
controlling a certain number of shares is:
vote. (31a)

• with N becoming the number of directors which can be elected and X the
NOTE:
number of shares controlled. Note that several sources include a variation
• . For example, if the election is for four directors and you hold 500 shares
of this formula using "X" rather than "(X-1)". Such a formulation does not
(with one vote per share), under the regular method you could vote a
assure you of having enough votes to elect a director if the "-1” is missing.
maximum of 500 shares for each one candidate (giving you 2,000 votes
Without the "-1" you will only be able to determine how many shares you
total—500 votes per each of the four candidates). With cumulative voting,
must have to tie, not what you need to win. Of course not every
you are afforded the 2,000 votes from the start and could choose to vote
shareholder votes perfectly every time, so the flawed formula may work in
all 2,000 votes for one candidate, 1,000 each to two candidates, or
many practical instances despite it being conceptually flawed and
otherwise divide your votes whichever way you wanted.
mathematically wrong.

• Proportional Voting • Help minority in votings
• Director or member who is voted by stockholders cannot be removed
30
without just cause 5. Increase or decrease of capital stock;;

6. Merger or consolidation of the corporation with another corporation or
5) Classification of shares – Sec. 6 other corporations;;
Section 6. Classification of shares. – The shares of stock of stock corporations 7. Investment of corporate funds in another corporation or business in
may be divided into classes or series of shares, or both, any of which classes or accordance with this Code;; and
series of shares may have such rights, privileges or restrictions as may be stated in 8. Dissolution of the corporation.
the articles of incorporation: Provided, That no share may be deprived of voting Except as provided in the immediately preceding paragraph, the vote necessary to
rights except those classified and issued as "preferred" or "redeemable" shares, approve a particular corporate act as provided in this Code shall be deemed to refer
unless otherwise provided in this Code: Provided, further, That there shall always only to stocks with voting rights. (5a)
be a class or series of shares which have complete voting rights. Any or all of the
shares or series of shares may have a par value or have no par value as may be 6) Control Test vs. Grandfather Rule
provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan • control test or the liberal rule. The other is the Grandfather Rule, which
associations shall not be permitted to issue no-par value shares of stock. is known to be the stricter and more stringent test.
Preferred shares of stock issued by any corporation may be given preference in • The control test provides that shares belonging to corporations or
the distribution of the assets of the corporation in case of liquidation and in the partnerships at least 60% of the capital of which is owned by Filipino
distribution of dividends, or such other preferences as may be stated in the articles citizens shall be considered of Philippine nationality. This test is
of incorporation which are not violative of the provisions of this Code: Provided, straightforward and does not scrutinize further the ownership of the
That preferred shares of stock may be issued only with a stated par value. The Filipino shareholdings.
board of directors, where authorized in the articles of incorporation, may fix the • On the other hand, the Grandfather Rule determines the actual Filipino
terms and conditions of preferred shares of stock or any series thereof: Provided, ownership and control in a corporation by tracing both the direct and
That such terms and conditions shall be effective upon the filing of a certificate indirect shareholdings in the corporation. “the Grandfather test was
thereof with the Securities and Exchange Commission. originally intended to look into the citizenship of the individuals who
Shares of capital stock issued without par value shall be deemed fully paid and ultimately own and control the shares of stock of a corporation for
non-assessable and the holder of such shares shall not be liable to the corporation purposes of determining compliance with the constitutional requirement
or to its creditors in respect thereto: Provided;; That shares without par value may of Filipino ownership”.The shareholdings should ideally be traced (i.e.
not be issued for a consideration less than the value of five (P5.00) pesos per grandfathered) to the point where natural persons hold the shares.
share: Provided, further, That the entire consideration received by the corporation However, this may be impractical and a limit must be set when tracing
for its no-par value shares shall be treated as capital and shall not be available for through the corporate layers to attribute nationality. Citing a
distribution as dividends. memorandum from the Securities and Exchange Commission (SEC),
A corporation may, furthermore, classify its shares for the purpose of insuring the Supreme Court noted the suggestion of the SEC to apply the
compliance with constitutional or legal requirements. Grandfather Rule on two levels of corporate relations for publicly-held
Except as otherwise provided in the articles of incorporation and stated in the corporations or where shares are traded in the stock exchange, and to
certificate of stock, each share shall be equal in all respects to every other share. three levels for closely held ones or those which are not traded in any
Where the articles of incorporation provide for non-voting shares in the cases stock exchange. Clearly, the limits should not go beyond the level of
allowed by this Code, the holders of such shares shall nevertheless be entitled to what is reasonable.
vote on the following matters: • The Court explained that the use of the Grandfather Rule is a
1. Amendment of the articles of incorporation;; supplement to the Control Test in implementing the wisdom of the
2. Adoption and amendment of by-laws;; “Filipinization” provisions of the Constitution.
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or • The Court further discussed that the Grandfather Rule applies only
substantially all of the corporate property;; when the 60-40 Filipino-foreign ownership is in doubt or where
4. Incurring, creating or increasing bonded indebtedness;; there is reason to believe that there is non-compliance with the
31
provisions of the Constitution on the nationality restriction. “Doubt” any one term.
refers to various indicia that the “beneficial ownership” and “control” of
the corporation do not in fact reside in Filipino shareholders but in The provisions of the next preceding paragraph shall apply to any contract
foreign stakeholders. whereby a corporation undertakes to manage or operate all or substantially all of
the business of another corporation, whether such contracts are called service
7) Restriction on transfer of shares – Sec. 98 contracts, operating agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to the exploration,
Section 98. Validity of restrictions on transfer of shares. – Restrictions on the right
development, exploitation or utilization of natural resources may be entered into
to transfer shares must appear in the articles of incorporation and in the by-laws as
for such periods as may be provided by the pertinent laws or regulations. (n)
well as in the certificate of stock;; otherwise, the same shall not be binding on any

purchaser thereof in good faith. Said restrictions shall not be more onerous than
***take note of the requirements
granting the existing stockholders or the corporation the option to purchase the
shares of the transferring stockholder with such reasonable terms, conditions or
period stated therein. If upon the expiration of said period, the existing stockholders 10) “Super” votes;; unusual voting/quorum reqs. – Sec. 97
or the corporation fails to exercise the option to purchase, the transferring Section 97. Articles of incorporation. – The articles of incorporation of a close
stockholder may sell his shares to any third person. corporation may provide:
1. For a classification of shares or rights and the qualifications for owning
8) Prescribing qualifications for directors – Sec. 47 (5) or holding the same and restrictions on their transfers as may be stated
therein, subject to the provisions of the following section;;
Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this
2. For a classification of directors into one or more classes, each of whom
Code, other special laws, and the articles of incorporation, a private corporation
may be voted for and elected solely by a particular class of stock;; and
may provide in its by-laws for:
3. For a greater quorum or voting requirements in meetings of
5. The qualifications, duties and compensation of directors or trustees,
stockholders or directors than those provided in this Code.
officers and employees;;
The articles of incorporation of a close corporation may provide that the business
of the corporation shall be managed by the stockholders of the corporation rather
9) Management contracts – Sec. 44 than by a board of directors. So long as this provision continues in effect:
Section 44. Power to enter into management contract. – No corporation shall 1. No meeting of stockholders need be called to elect directors;;
conclude a management contract with another corporation unless such contract 2. Unless the context clearly requires otherwise, the stockholders of the
shall have been approved by the board of directors and by stockholders owning corporation shall be deemed to be directors for the purpose of applying
at least the majority of the outstanding capital stock, or by at least a majority of the provisions of this Code;; and
the members in the case of a non-stock corporation, of both the managing and 3. The stockholders of the corporation shall be subject to all liabilities of
the managed corporation, at a meeting duly called for the purpose: Provided, directors.
That (1) where a stockholder or stockholders representing the same interest of The articles of incorporation may likewise provide that all officers or employees or
both the managing and the managed corporations own or control more than one- that specified officers or employees shall be elected or appointed by the
third (1/3) of the total outstanding capital stock entitled to vote of the managing stockholders, instead of by the board of directors.
corporation;; or (2) where a majority of the members of the board of directors of • Unusual voting or quorum requirement – which is different from what is
the managing corporation also constitute a majority of the members of the board under the code… this is stipulated in the AOI (exampled: unanimous)
of directors of the managed corporation, then the management contract must be • CONTROL: it would be harder to change the status quo – veto power
approved by the stockholders of the managed corporation owning at least two- when the super vote is not met, it would take a greated number fshares
thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least or members to pass a corporate act.
two-thirds (2/3) of the members in the case of a non-stock corporation. No
management contract shall be entered into for a period longer than five years for
32
11) Shares that cannot vote --- Sec. 89 vs. sec. 6 shall be guilty of an offense which shall be punishable under Section 144 of this
Section 89. Right to vote. – The right of the members of any class or classes to Code: Provided, That if such refusal is made pursuant to a resolution or order of the
vote may be limited, broadened or denied to the extent specified in the articles of board of directors or trustees, the liability under this section for such action shall be
incorporation or the by-laws. Unless so limited, broadened or denied, each imposed upon the directors or trustees who voted for such refusal: and Provided,
member, regardless of class, shall be entitled to one vote. 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
Unless otherwise provided in the articles of incorporation or the by-laws, a member minutes has improperly used any information secured through any prior
may vote by proxy in accordance with the provisions of this Code. (n) 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
Voting by mail or other similar means by members of non-stock corporations may demand.
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 Stock corporations must also keep a book to be known as the "stock and transfer
Commission. 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
Depriving their right to vote – they cannot vote
• 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
XV. RIGHT OF INSPECTION ----Secs 74 – 75;; by and to whom made;; and such other entries as the by-laws may prescribe. The
TITLE VIII CORPORATE BOOKS AND RECORDS 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
Section 74. Books to be kept;; stock transfer agent. – Every corporation shall keep or stockholder of the corporation at reasonable hours on business days.
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 No stock transfer agent or one engaged principally in the business of registering
trustees, in which shall be set forth in detail the time and place of holding the transfers of stocks in behalf of a stock corporation shall be allowed to operate in the
meeting, how authorized, the notice given, whether the meeting was regular or Philippines unless he secures a license from the Securities and Exchange
special, if special its object, those present and absent, and every act done or Commission and pays a fee as may be fixed by the Commission, which shall be
ordered done at the meeting. Upon the demand of any director, trustee, stockholder renewable annually: Provided, That a stock corporation is not precluded from
or member, the time when any director, trustee, stockholder or member entered or performing or making transfer of its own stocks, in which case all the rules and
left the meeting must be noted in the minutes;; and on a similar demand, the yeas regulations imposed on stock transfer agents, except the payment of a license fee
and nays must be taken on any motion or proposition, and a record thereof carefully herein provided, shall be applicable. (51a and 32a;; P.B. No. 268.)
made. The protest of any director, trustee, stockholder or member on any action or
Section 75. Right to financial statements. – Within ten (10) days from receipt of a
proposed action must be recorded in full on his demand.
written request of any stockholder or member, the corporation shall furnish to him
The records of all business transactions of the corporation and the minutes of any its most recent financial statement, which shall include a balance sheet as of the
meetings shall be open to inspection by any director, trustee, stockholder or end of the last taxable year and a profit or loss statement for said taxable year,
member of the corporation at reasonable hours on business days and he may showing in reasonable detail its assets and liabilities and the result of its operations.
demand, in writing, for a copy of excerpts from said records or minutes, at his
At the regular meeting of stockholders or members, the board of directors or
expense.
trustees shall present to such stockholders or members a financial report of the
Any officer or agent of the corporation who shall refuse to allow any director, operations of the corporation for the preceding year, which shall include financial
trustees, stockholder or member of the corporation to examine and copy excerpts statements, duly signed and certified by an independent certified public accountant.
from its records or minutes, in accordance with the provisions of this Code, shall be
However, if the paid-up capital of the corporation is less than P50,000.00, the
liable to such director, trustee, stockholder or member for damages, and in addition,
33
financial statements may be certified under oath by the treasurer or any responsible the complaint. In addition to the requirements in Section 6, Rule 2 of these Rules,
officer of the corporation. (n) the answer must state the following:chanroblesvirtuallawlibrary
(1) The grounds for the refusal of defendant to grant the demands of the
NOTE: plaintiff, stating the law and jurisprudence in support thereof;;
• Corporation can refuse because of the volume of the documents (2) The conditions or limitations on the exercise of the right to inspect which
• Copy at your own expense or can take a picture should be imposed by the court;; and cralaw
• MINUTES à need approval of the directors (3) The cost of inspection, including manpower and photocopying expenses,
• WHO HAS JURISDICTION OVER DERIVATIVE SUIT à RTC if the right to inspect is granted.cralaw

Sec. 5. Affidavits, documentary and other evidence. - The parties shall attach to the
Rule 7, Rules of Proc. On Intra-corp. Controversies complaint and answer the affidavits of witnesses, documentary and other evidence
in support thereof, if any.
Rule 7
INSPECTION OF CORPORATE BOOKS AND RECORDS Sec. 6. Effect of failure to answer. - If the defendants fails to file an answer within
the period above provided, the court, within ten (10) days from the lapse of the said
Section 1. Cases covered. - The provisions of this Rule shall apply to disputes period, motu proprio or upon motion, shall render judgment as warranted by the
exclusively involving the rights of stockholders or members to inspect the books allegations of the complaint, as well as the affidavits, documentary and other
and records and/or to be furnished with the financial statements of a corporation, evidence on record. In no case shall the court award a relief beyond or different
under Sections 74 and 75 of Batas Pambansa Blg. 68, otherwise known as the from that prayed for.cralaw
Corporation Code of the Philippines.
Sec. 7. Decision. - The court shall render a decision based on the pleadings,
Sec. 2. Complaint. - In addition to the requirements in section 4, Rule 2 of these affidavits and documentary and other evidence attached thereto within fifteen (15)
Rules, the complaint must state the following: days from receipt of the last pleading. A decision ordering defendants to allow the
(1) The case is for the enforcement of plaintiff's right of inspection of inspection of books and records and/or to furnish copies thereof shall also order the
corporate orders or records and/or to be furnished with financial statements plaintiff to deposit the estimated cost of the manpower necessary to produce the
under Sections 74 and 75 of the Corporation Code of the Philippines;; books and records and the cost of copying, and state, in clear and categorical
(2) A demand for inspection and copying of books and records and/or to be terms, the limitations and conditions to the exercise of the right allowed or enforced.
furnished with financial statements made by the plaintiff upon defendant;;
 (3) The refusal of defendant to grant the demands of the plaintiff and the
Purpose;; requirements;; coverage;; remedies if denied;;
reasons given for such refusals, if any;; and
Defenses available to D/T/O held liable
(4) The reasons why the refusal of defendant to grant the demands

of the plaintiff is unjustified and illegal, stating the law and jurisprudence in
***REQUIREMENTS FOR DERIVATIVE SUITSà book of Aquino
support thereof.cralaw
APPRAISAL RIGHTS à Instances

Sec. 3. Duty of the court upon the filing of the complaint. - Within two (2) days from
Philpotts v. Phil. Mfg. Co. 40 Phil. 479
the filing of the complaint, the court, upon a consideration of the allegations thereof,
W. G. PHILPOTTS
may dismiss the complaint outright if it is not sufficient in form and substance, or, if
vs.
it is sufficient, order the issuance of summons which shall be served, together with
PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY
a copy of the complaint, on the defendant within two (2) days from its issuance.
GR. No. L-15568 November 8, 1919

Sec. 4. Answer. - The defendant shall file his answer to the complaint, serving a
FACTS:
copy thereof on the plaintiff, within ten (10) days from the service of summons and

34
W. G. Philpotts, a stockholder in the Philippine Manufacturing Company, Directors, might not adopt measures for the protection of such process form
one of the respondents herein, seeks by this proceeding to obtain a writ publicity. There is, however, nothing in the petition which would indicate that the
of mandamus to compel the respondents to permit the plaintiff, in person or by some petitioner in this case is seeking to discover anything which the corporation is
authorized agent or attorney, to inspect and examine the records of the business entitled to keep secret;; and if anything of the sort is involved in the case it may be
transacted by said company since January 1, 1918. The petition is filed originally in brought out at a more advanced stage of the proceedings.
this court under the authority of section 515 of the Code of Civil Procedure, which
gives to this tribunal concurrent jurisdiction with the Court of First Instance in cases, Pardo v. Hercules Lumber 47 Phil. 965
among others, where any corporation or person unlawfully excludes the plaintiff from ANTONIO PARDO
the use and enjoyment of some right to which he is entitled. The respondents vs.
interposed a demurrer, and the controversy is now before us for the determination of THE HERCULES LUMBER CO., INC., and IGNACIO FERRER
the questions thus presented. G.R. No. L-22442 August 1, 1924

ISSUE: FACTS:

Whether or not the right to inspect records and transactions of the The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber
corporation is permitted. Company, Inc., one of the respondents herein, seeks by this original proceeding in
the Supreme Court to obtain a writ of mandamus to compel the respondents to
RULING: permit the plaintiff and his duly authorized agent and representative to examine the
records and business transactions of said company. To this petition the
YES. respondents interposed an answer, in which, after admitting certain allegations of
the petition, the respondents set forth the facts upon which they mainly rely as a
Now it is our opinion, and we accordingly hold, that the right of inspection defense to the petition. To this answer the petitioner in turn interposed a demurrer,
given to a stockholder in the provision above quoted can be exercised either by and the cause is now before us for determination of the issue thus presented.
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 ISSUE:
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 Whether or not the respondent have the right to deny inspection request
respondents. by petitioner.
This conclusion is supported by the undoubted weight of authority in the
United States, where it is generally held that the provisions of law conceding the right RULING:
of inspection to stockholders of corporations are to be liberally construed and that
said right may be exercised through any other properly authorized person. As was YES.
said in Foster vs. White (86 Ala., 467), "The right may be regarded as personal, in
the sense that only a stockholder may enjoy it;; but the inspection and examination The general right given by the statute may not be lawfully abridged to the
may be made by another. extent attempted in this resolution. It may be admitted that the officials in charge of
In order that the rule above stated may not be taken in too sweeping a sense, a corporation may deny inspection when sought at unusual hours or under other
we deem it advisable to say that there are some things which a corporation may improper conditions;; but neither the executive officers nor the board of directors
undoubtedly keep secret, notwithstanding the right of inspection given by law to the have the power to deprive a stockholder of the right altogether. A by-law unduly
stockholder;; as for instance, where a corporation, engaged in the business of restricting the right of inspection is undoubtedly invalid. Authorities to this effect are
manufacture, has acquired a formula or process, not generally known, which has too numerous and direct to require extended comment. Under a statute similar to
proved of utility to it in the manufacture of its products. It is not our intention to our own it has been held that the statutory right of inspection is not affected by the
declare that the authorities of the corporation, and more particularly the Board of
35
adoption by the board of directors of a resolution providing for the closing of transfer ELLICE AGRO-INDUSTRIAL CORPORATION, MARGO MANAGEMENT AND
books thirty days before an election. DEVELOPMENT CORPORATION, RAUL E. GALA, VITALIANO N. AGUIRRE II,
It will be noted that our statute declares that the right of inspection can be ADNAN V. ALONTO, ELIAS N. CRESENCIO, MOISES S. MANIEGO, RODOLFO
exercised "at reasonable hours." This means at reasonable hours on business days B. REYNO, RENATO S. GONZALES, VICENTE C. NOLAN, NESTOR N.
throughout the year, and not merely during some arbitrary period of a few days BATICULON
chosen by the directors. G.R. No. 156819. December 11, 2003
In addition to relying upon the by-law, to which reference is above made, the
answer of the respondents calls in question the motive which is supposed to prompt FACTS:
the petitioner to make inspection;; and in this connection it is alleged that the
information which the petitioner seeks is desired for ulterior purposes in connection On March 28, 1979, the Ellice Agro-Industrial Corporation was formed
with a competitive firm with which the petitioner is alleged to be connected. It is also and organized. The total subscribed capital stock of the corporation was P3.5
insisted that one of the purposes of the petitioner is to obtain evidence preparatory to Million with 35,000 shares. Additional shares were acquired and subscribed from
the institution of an action which he means to bring against the corporation by reason said corporation. Subsequently, on September 16, 1982, the Margo Management
of a contract of employment which once existed between the corporation and and Development Corporation (Margo) was incorporated. The total subscribed
himself. These suggestions are entirely apart from the issue, as, generally speaking, capital stock of Margo was 20,000 shares at P200, 000.00. Several transfers of
the motive of the shareholder exercising the right is immaterial. shares of Ellice to Margo were made by the stockholders and some payments of
subscription were made by transferring parcels of land by the Gala Spouses.
FACTS: In essence, petitioners want this Court to disregard the separate juridical
Corporate secretary of Hercules Lumber refused to permit Pardo, a personalities of Ellice and Margo for the purpose of treating all property purportedly
stockholder, or his agent to inspect the records and business transactions of the owned by said corporations as property solely owned by the Gala spouses. The
company at the times desired by Pardo. Basis of the refusal was the provision in the petitioners’ contention in support of this theory is that the purposes for which Ellice
company’s by-laws which stipulated that every stockholder may examine the books and Margo were organized should be declared as illegal and contrary to public
of the company and other documents upon the days which the board annually fixes. policy. They claim that the respondents never pursued exemption from land
reform coverage in good faith and instead merely used the corporations as tools to
ISSUE: circumvent land reform laws and to avoid estate taxes. Specifically, they point out
When is the time or times within which the right of inspection may be that respondents have not shown that the transfers of the land in favor of Ellice
exercised? were executed in compliance with the requirements of Section 13 of R.A. 3844.
Furthermore, they alleged that respondent corporations were run without any of the
HELD: conventional corporate formalities.
The resolution of the board limiting the rights of stockholders to inspect its
records to a period of 10 days prior to the annual SH meeting is an unreasonable ISSUE:
restriction in accordance with the Corporation Code which provides that the right to
inspect can be exercised at reasonable hours. The right of inspection was interpreted Whether or not the purpose of the creation of the two corporations is
to mean that the right may be exercised at reasonable hours on business days illegal and against public policy.
throughout the year, and not merely during an arbitrary period of a few days chosen
by the directors. RULING:

Gonzales v. PNB 122 SCRA 490 NO.
• Primary Purpose
Impugning the legality of the purposes for which Ellice and Margo were
ALICIA E. GALA, GUIA G. DOMINGO and RITA G. BENSON organized, amount to collateral attacks which are prohibited in this jurisdiction. The
vs. best proof of the purpose of a corporation is its articles of incorporation and by-
36
laws. The articles of incorporation must state the primary and secondary purposes of of using improperly any information secured through a prior examination, and that
the corporation, while the by-laws outline the administrative organization of the the person asking for such must be acting in good faith and for a legitimate
corporation, which, in turn, is supposed to insure or facilitate the accomplishment of purpose. It is the stockholder seeking to exercise the right of inspection to set forth
said purpose. A perusal of the Articles of Incorporation of Ellice and Margo shows no the reasons and purposes for which he desires such inspection. SC held that the
sign of the allegedly illegal purposes that petitioners are complaining of. If a purpose of Gonzales, which was to arm himself with evidence which he can use
corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the against the bank for acts done by the latter when he was still a total stranger (i.e.
SEC has no authority to inquire whether the corporation has purposes other than not a SH), were not deemed proper motives and his request was denied.
those stated, and mandamus will lie to compel it to issue the certificate of
incorporation. Veraguth v. Isabela Sugar Co. 57 Phil. 266
With regard to their claim that Ellice and Margo were meant to be used as FACTS:
mere tools for the avoidance of estate taxes, suffice it say that the legal right of a Veraguth, a director and stockholder of the Isabela Sugar Company, Inc.,
taxpayer to reduce the amount of what otherwise could be his taxes or altogether filed a petition with the lower court praying that: a final and absolute writ of
avoid them, by means which the law permits, cannot be doubted. mandamus be issued to each and all of the respondent directors to notify him
Thus, even if Ellice and Margo were organized for the purpose of exempting within the reglementary period, of all regular and special meetings of the board of
the properties of the Gala spouses from the coverage of land reform legislation and directors of the Company, and to place at his disposal at reasonable hours the
avoiding estate taxes, the court cannot disregard their separate juridical minutes, documents, and books of said corporation for his inspection as director
personalities. and stockholder. He likewise contends that when asked that he be permitted to
inspect the books of the corporation, he was denied access on the ground that the
G.R. No. L-24850;; March 1, 1926 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
FACTS: obtained in each case.
Gonzales instituted a suit, as a taxpayer, against Sec. of Public Works and
Communications, the Commissioner of Public Highways, and PNB for alleged
anomalies committed regarding the bank’s extension of credit to import public works ISSUE:
equipment intended for the massive development program. The petitioner’s standing WON Veraguth can exercise the right of inspection of the books prior to
was questioned because he did not own any share in PNB. Consequently, the approval of the Board.
Petitioner bought 1 share of PNB stocks in order to gain standing as a stockholder.
Petitioner thereafter sought to inquire and ordered PNB to produce its books HELD:
and records which the Bank refused, invoking the provisions from its charter created NO. Directors have the unqualified right to inspect the books and
by Congress. The petitioner filed petition for mandamus to compel PNB to produce records of a corporation at all reasonable times. Pretexts may not be put
its books and records. The RTC dismissed the petition and it ruled that the right to forward by the officers to keep a director or stockholder from inspecting the
examine and inspect corporate books is not absolute, but is limited to purposes books and minutes of the corporation, and the right to inspect cannot be
reasonably related to the interest of the stockholder, must be asked for in good faith denied on the grounds that the director or stockholders are on unfriendly
for a specific and honest purpose and not gratify curiosity or for speculative or vicious terms with the officers. A director or stockholder has no absolute right to
purposes. secure certified copies of the minutes until these minutes have been written
up and approved by the directors.
ISSUE:
WON the right of inspection may be compelled by Gonzales.
NOTE: TAKE NOTE OF THE CONFIDENTIALITY CLAUSE
HELD:
NO. The Code has prescribed limitations to the right of inspection, requiring Gokongwei v. SEC L- 45911, April 11, 1979
as a condition for examination that the person requesting must not have been guilty ISSUE:
37
WON Gokongwei may be allowed to inspect the books of the corporation. Section 1. Derivative action. — A stockholder or member may bring an action in the
name of a corporation or association, as the case may be, provided,
HELD: that:chanroblesvirtuallawlibrary
YES. Where the right to inspect is granted by statute to the stockholder, it is (1) He was a stockholder or member at the time the acts or transactions
given to him as such and must be exercised by him with respect to his interest as a subject of the action occurred and the time the action was filed;;
stockholder and for some purpose germane thereto or in the interest of the (2) He exerted all reasonable efforts, and alleges the same with particularity
corporation. The inspection has to be germane to the petitioner’s interest as a in the complaint, to exhaust all remedies available under the articles of
stockholder and has to be proper and lawful in character and not inimical to the incorporation, by-laws, laws or rules governing the corporation or
interest of the corporation. partnership to obtain the relief he desires;;  
The stockholder’s right to inspect is based on his ownership of the assets (3) No appraisal rights are available for the acts or acts complained of;; and
and property of the corporation. It is therefore an incident of ownership of the
cralaw  
corporate property, whether this ownership or interest be termed an equitable
(4) The suits is not a nuisance or harassment suit.cralaw
ownership, beneficial ownership, or quasi-ownership, and is predicated upon the
In case of nuisance of harassment suit, the court shall forthwith dismiss the case.
necessity of self-protection. On application for mandamus to enforce the right, it is
Sec. 2. Discontinuance. - A derivative action shall not be discontinued,
proper for the court to inquire into and consider the stockholder’s good faith and his
compromised or settled without approval of the court. During the pendency of the
purpose and motives in seeking inspection. But the impropriety of purpose such as
action, any sale of shares of the complaining stockholders shall be approved by the
will defeat enforcement must be set up by the corporation defensively if the Court is
court. If the court determines that the interest of the stockholders or members will
to take cognizance of it as a qualification. In other words, the law take from the
be substantially affected by the discontinuance, compromise or settlement, the
stockholder the burden of showing the propriety of purpose and place upon the
court may direct that notice, by publication or otherwise, be given to the
corporation the burden of showing impropriety of purpose or motive.
stockholders or members whose interest it determines will be so affected.
The foreign subsidiary is wholly-owned by SMC and therefore under its
control, and would be more in accord with equity, good faith, and fair dealing to
construe the statutory right of Gokongwei as stockholder to inspect the books of the NOTE:
parent as extending to the books of the subsidiary in its control. • Derivative suit VS Individual Suit VS Class Suit
• Exhaust intra corporate remedies before going to court
NOTE: • Harassment Suits
• Principal and the subsidiary is different corporation BUT exception is • Share should be in his own name
discussed in Gokongwei vs SEC • Number of share is immaterial
• INSPECTION o He is suing in behalf of the corporation
o Good faith of stockholders is presumed therefore must allow the •
inspection
o EXCEPT: if corporation can prove bad faith of the shareholder in Evangelista v. Santos 86 Phil. 387
suits, and that the purpose in not germane to his right as a G.R. No. L-1721;; May 19, 1950
shareholder.
• FACTS:
Plaintiffs, minority stockholders of Vitali Lumber Company, alleges in their
XVl. DERIVATIVE SUIT - Rule 8, Rules of Proc. On Intra-corporate complaint that defendant as president, manager and treasurer of their company,
Controversies through fault, neglect and abandonment allowed it lumber concession to lapse and
Rule 8 its properties and assets to disappear causing the complete ruin of the
DERIVATIVE SUITS corporation’s operation and total depreciation of its stocks.
They pray for an accounting from the defendant of the corporate affairs
and assets, payment to them of the value of their respective participation in said
38
assets on the basis of the value of the stocks held by each of them and to pay the derivative or representative suit on behalf of the corporation wherein he holds
cost of the suit. 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
ISSUE: corporation. In such actions, the suing stockholder is regarded as a nominal party,
WON the plaintiff-stockholders has the right to bring suit in their benefit. with the corporation as the real party in interest. Normally, it is the corporation
through the board of directors which should bring the suit. But as in this case, the
HELD: members of the board of directors of the bank were the nominees and creatures of
NO. The complaint shows that the action is for damages resulting from respondent Roman and thus, any demand for an intra-corporate remedy would be
mismanagement of the affairs and assets of the corporation by its principal officer, it futile, the stockholder is permitted to bring a derivative suit.
being alleged that defendant's maladministration has brought about the ruin of the Should the corporation be made a party? The English practice is to
corporation and the consequent loss of value of its stocks. The injury complained of make the corporation a party plaintiff while the US practice is to make it a party
is thus primarily to the corporation, so that the suit for the damages claimed should defendant. What is important though is that the corporation should be made a
be by the corporation rather than by the stockholders. The stockholders may not party in order to make the court's ruling binding upon it and thus bar any future re-
directly claim those damages for themselves for that would result in the appropriation litigation of the issues.
by and the distribution among them of part of the corporate assets before the
dissolution of the corporation and the liquidation of its debts and liabilities something SMC v. Khan L- 85339 (Aug. 11, 1989)
which cannot be legally done. G.R. No. 85339;; August 11, 1989
But while it is to the corporation that the action should pertain in cases of
this nature, however, if the officers of the corporation, who are the ones called upon FACTS:
to protect their rights, refuse to sue, or where a demand upon them to file the Fourteen corporations initially acquired shares of outstanding capital stock
necessary suit would be futile because they are the very ones to be sued or because of SMC and constituted a Voting Trust thereon in favor of Andres Soriano, Jr.
they hold the controlling interest in the corporation, then in that case any of the When the latter died Eduardo Cojuanco was elected as the substitute trustee.
stockholders is allowed to bring suit. But in that case, the corporation is the real party However, after the EDSA revolution, Cojuanco fled out of the country, and
in interest. subsequently an agreement was entered into between the 14 corporations and
Andres Soriano III (as an agent of several persons) for the purchase of the shares
Republic Bank v. Cuaderno 19 SCRA 671 held by the former.
G.R. No. L-22399;; March 30, 1967 Actually the buyer of the shares was Neptunia Corporation, a foreign
corporation and wholly-owned subsidiary of another subsidiary wholly owned by
FACTS: SMC. Neptunia paid the downpayment from the proceeds of certain loans. PCGG
A derivative suit was brought against the officers and the board. Complaint then sequestered the shares subject of the sale so SMC suspended all the other
alleged that the directors approved a resolution granting excessive compensation to installments of the price to the sellers. The 14 corporations then sued for rescission
the corporate officers. Suit was filed in order to prevent dissipation of the corporate and damages.
funds for the payment of salaries of the said officers. Board claims the action cannot Meanwhile, PCGG directed SMC to issue qualifying shares to seven (7)
prosper for failure to compel the board to file the suit for and in behalf of the individuals including Eduardo de los Angeles from the sequestered shares for them
corporation. to hold in trust. Then, the SMC’s board of directors passed a resolution assuming
the loans incurred by Neptunia for the downpayment. De los Angeles assailed the
ISSUE: resolution alleging that it was not passed by the board aside from its deleterious
WON the action cannot prosper for failure to compel the board to file suit in effects on the corporation’s interest. When his efforts to obtain relief within the
behalf of the corporation. corporation proved futile, he filed this action with the SEC. Respondent directors
alleged that de los Angeles has no legal standing having been merely “imposed”
HELD: by the PCGG and that the twenty (20) shares owned by him personally cannot
NO. It is settled that an individual stockholder is permitted to institute a fairly and adequately represent the interest of the minority.
39
The case at bar was initiated before the RTC by respondents as a

ISSUE: derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in
WON de los Angeles have the legal standing to sue. (Derivative suit) order to compel petitioners to account for and reimburse to the said corporation the
corporate assets and funds which the latter allegedly misappropriated for their
HELD: personal benefit.
YES. The bona fide ownership by a stockholder in his own right suffices to
invest him with the standing to bring a derivative suit for the benefit of the ISSUE:
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 Whether or not the derivative suit is valid.
a wrong committed against him individually but in behalf and for the benefit of the
corporation. RULING:
The requisites of a derivative suit are: (1) the party bringing the suit should
be a stockholder as of the time of the act or transactions complained of, the number YES.
of shares not being material;; (2) exhaustion of intra-corporate remedies (has made a
demand on the board of directors for the appropriate relief but the latter has failed or The general rule is that where a corporation is an injured party, its power
refused to heed his plea);; and (3) the cause of action actually devolves on the to sue is lodged with its board of directors or trustees. Nonetheless, an individual
corporation and not to the particular stockholder bringing the suit. stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate corporate rights, whenever
Yu v. YukayguanGR 177549 (June 18, 2009) the officials of the corporation refuse to sue, or are the ones to be sued, or hold the
ANTHONY YU et al. control of the corporation. In such actions, the suing stockholder is regarded as a
vs. nominal party, with the corporation as the real party in interest. A derivative action
JOSEPH YUKAYGUAN et al. is a suit by a shareholder to enforce a corporate cause of action. The corporation is
GR 177549, 18 June 2009 a necessary party to the suit. And the relief which is granted is a judgment against
a third person in favor of the corporation.
FACTS: Glaringly, a derivative suit is fundamentally distinct and independent from
liquidation proceedings. They are neither part of each other nor the necessary
Petitioners and the respondents were all stockholders of Winchester consequence of the other. There is totally no justification for the Court of Appeals
Industrial Supply, Inc. On 15 October 2002, respondents filed against petitioners a to convert what was supposedly a derivative suit instituted by respondents, on their
verified Complaint forAccounting, Inspection of Corporate Books and Damages own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding
1
through Embezzlement and Falsification of Corporate Records and Accounts [6] for the liquidation of Winchester, Inc.
before the RTC of Cebu. The said Complaint was filed by respondents, in their own While it may be true that the parties earlier reached an amicable
behalf and as a derivative suit on behalf of Winchester, Inc., and was docketed as settlement, in which they agreed to already distribute the assets of Winchester,
SRC Case No. 022-CEB. The factual background of the Complaint was stated in the Inc., and in effect liquidate said corporation, it must be pointed out that
attached Affidavit executed by respondent Joseph. respondents themselves repudiated said amicable settlement before the RTC,
According to respondents, Winchester, Inc. was established and even after the same had been partially implemented;; and moved that their case be
incorporated on 12 September 1977, with petitioner Anthony as one of the set for pre-trial. Attempts to again amicably settle the dispute between the parties
incorporators, holding 1,000 shares of stock worth P100,000.00. Petitioner Anthony before the Court of Appeals were unsuccessful.
paid for the said shares of stock with respondent Joseph’s money, thus, making the
former a mere trustee of the shares for the latter. G.R. No. 177549;; June 18, 2009

FACTS:
1
The case stemmed from the petition of Anthony Yu et. al. against his
40
younger half-brother Joseph Yukayguan et. al., who were all shareholders of EUGENIO DEL SAZ OROZCO, ET AL.
Winchester Industrial Supply Inc., a company engaged in hardware and industrial G.R. No. L-5174. March 17, 1911
equipment business.
Accusing his older brother’s family of misappropriating funds and assets of FACTS:
the company, Yukayguan filed a derivative suit. After trial, the Cebu Regional Trial
Court dismissed the case, saying Yukayguan failed to follow and observe the This action was brought by the plaintiff Pascual, in his own right as a
essentials for filing of a derivative suit or action. The ruling was upheld but later stockholder of the bank, for the benefit of the bank, and all the other stockholders
reversed by the Court of Appeals, prompting Yu to elevate the matter to the SC. thereof. The Banco Español-Filipino is a banking corporation, constituted as such
by royal decree of the Crown of Spain in the year 1854, the original grant having
ISSUE: been subsequently extended and modified by royal decree of July 14, 1897, and
Mandatory requirements before courts can give due course to derivative by Act No. 1790 of the Philippine Commission.
suits – or legal actions that may be taken by a stockholders on behalf of a It is alleged in the amended complaint that the only compensation
corporation or association. contemplated or provided for the managing officers of the bank was a certain per
cent of the net profits resulting from the bank's operations, as set forth in article 30
HELD: of its reformed charter or statutes.
The fact that Winchester, Inc. is a family corporation should not in any way The gist of the first and second causes of action is as follows: The
exempt respondents from complying with the clear requirements and formalities of defendants constitute a majority of the present board of directors of the bank, who
the rules for filing a derivative suit. alone can authorize an action against them in the name of the corporation. It
A stockholder’s right to institute a derivative suit is not based on any appears that during the years 1903, 1904, 1905, and 1907 the defendants and
express provision of the Corporation Code, or even the Securities Regulation Code, appellees, without the knowledge, consent, or acquiescence of the stockholders,
but is impliedly recognized when the said laws make corporate directors or officers deducted their respective compensation from the gross income instead of from the
liable for damages suffered by the corporation and its stockholders for violation of net profits of the bank, thereby defrauding the bank and its stockholders of
their fiduciary duties. approximately P20,000 per annum.
However, there are mandatory requirements before a derivative suit The second cause of action sets forth that defendants' and appellees' immediate
can be given due course by the Court. Citing Section 1, Rule 8 of the Interim predecessors in office in the bank during the years 1899, 1900, 1901, and 1902,
Rules of Procedure Governing Intra-Corporate Controversies, the SC said committed the same illegality as to their compensation as is charged against the
derivative actions may be filed provided that the suing party was a stockholder defendants themselves. In the four years immediately following the year 1902, the
or member at the time the acts or transactions subject of the action occurred defendants and appellees were the only officials or representatives of the bank
and at the time the action was filed;; and he exerted all reasonable efforts, and who could and should investigate and take action in regard to the sums of money
alleges the same with particularity in the complaint, to exhaust all remedies thus fraudulently appropriated by their predecessors. They were the only persons
available under the articles of incorporation, by-laws, laws or rules governing interested in the bank who knew of the fraudulent appropriation by their
the corporation or partnership to obtain the relief he desires. As additional predecessors.
requirements, the SC said there must be no appraisal rights — which would The court below sustained the demurrer as to the first and second causes of action
allow a stockholder to sell his holdings back to the company – available and on the ground that in actions of this character the plaintiff must aver in his
the suit is not a nuisance or harassment suit. complaint that he was the owner of stock in the corporation at the time of the
occurrences complained of, or else that the stock has since devolved upon him by
Pascual v. Orozco 19 Phil 83 operation of law.
Addition To: continuing injury incurred by stockholder, despite the fact he was not a
stockholder at the beginning of the injury ISSUE:

CANDIDO PASCUAL Whether or not the petitioner has a cause of action to file a derivative suit.
vs.
41
RULING: PRCI could continue to focus its efforts on pursuing its core business competence
of horse racing. Instead of organizing and establishing a new corporation for the
YES. said purpose, PRCI management opted to acquire another domestic corporation,
JTH Davies Holdings, Inc. The Board agreed to acquire the stocks of latter
As to the first cause of action: In suits of this character the corporation itself company through an exchange of their Makati property.
and not the plaintiff stockholder is the real party in interest. The rights of the
Said move was made into a resolution but was opposed by some stockholders.
individual stockholder are merged into that of the corporation. It is a universally
The Board and petitioners continued to acquire the company, which was
recognized doctrine that a stockholder in a corporation has no title legal or equitable
surrounded by fraud as alleged by the respondents. The petitioners proceeded
to the corporate property;; that both of these are in the corporation itself for the benefit
with the plan despite the demand by respondents to appraise the stocks of JTH
of all the stockholders. So it is clear that the plaintiff, by reason of the fact that he is a
Davies Holdings. A case was filed by respondents and was granted by the RTC.
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 Issue: Whether or not appraisal rights are available to respondents.
what purpose he acquired the shares which he now owns.
As to the Second cause of action: It affirmatively appears from the complaint Held: No. It bears to point out that every derivative suit is necessarily grounded on
that the plaintiff was not a stockholder during any of the time in question in this an alleged violation by the board of directors of its fiduciary duties, committed by
second cause of action. Upon the question whether or not a stockholder can mismanagement, misrepresentation, or fraud, with the latter two situations already
maintain a suit of this character upon a cause of action pertaining to the corporation implying bad faith. If the Court upholds the position of respondents Miguel, et al. –
when it appears that he was not a stockholder at the time of the occurrence of the that the existence of mismanagement, misrepresentation, fraud, and/or bad faith
acts complained of and upon which the action is based, the authorities do not agree. renders the right of appraisal unavailable – it would give rise to an absurd situation.
Inevitably, appraisal rights would be unavailable in any derivative suit. This renders
Cuav.OcampoTan GR 181455/182008 (12/04/2009) the requirement in Rule 8, Section 1(3) of the IPRICC superfluous and effectively
G.R. No. 181455-56, December 4, 2009 inoperative;; and in contravention of an elementary rule of legal hermeneutics that
effect must be given to every word, clause, and sentence of the statute, and that a
Chico-Nazario, J.: statute should be so interpreted that no part thereof becomes inoperative or
superfluous.
Facts: PRCI is a corporation organized and established under Philippine laws to
carry on the business of a race course in all its branches and, in particular, to The import of establishing the availability or unavailability of appraisal rights to the
conduct horse races or races of any kind, to accept bets on the results of the races, minority stockholder is further highlighted by the fact that it is one of the factors in
and to construct grand or other stands, booths, stablings, paddocks, clubhouses, determining whether or not a complaint involving an intra-corporate controversy is
refreshment rooms and other erections, buildings, and conveniences, and to a nuisance and harassment suit.
conduct, hold and promote race meetings and other shows and exhibitions.
In case of nuisance or harassment suits, the court may, motu proprio or upon
PRCI owns only two real properties, each covered by several transfer certificates of motion, forthwith dismiss the case.
title. One is known as the Sta. Ana Racetrack located in Makati City, and the other is
located in the towns of Naic and Tanza, Cavite. The availability or unavailability of appraisal rights should be objectively based on
the subject matter of the complaint, i.e., the specific act or acts performed by the

Following the trend in the development of properties in the same area, PRCI wished board of directors, without regard to the subjective conclusion of the minority
to convert its Makati property from a racetrack to urban residential and commercial stockholder instituting the derivative suit that such act constituted mismanagement,
use. Given the location and size of its Makati property, PRCI believed that said misrepresentation, fraud, or bad faith.
property was severely under-utilized. Hence, PRCI management decided to transfer
its racetrack from Makati to Cavite.
Ching and Wellington v. Subic Bay Golf Sept. 10, 2014
Now as to its Makati property, PRCI management decided that it was best to spin off
the management and development of the same to a wholly owned subsidiary, so that G.R. No. 174353 September 10, 2014
42
NESTOR CHING and ANDREW WELLINGTON, Petitioners, Petitioners claimed in the Complaint that defendant corporation did not
vs. SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias disclose to them the above amendment which allegedly makes the shares non-
SUSAN HU, HU TSUNG CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG TZU proprietary, as it takes away the rightof the shareholders to participate in the pro-
and REYNALD R. SUAREZ, Respondents. rata distribution of the assets of the corporation after its dissolution. According to
D E C I S I O N petitioners, this is in fraud of the stockholders who only discovered the amendment
LEONARDO-DE CASTRO, J.: when they filed a case for injunction to restrain the corporation from suspending
their rights to use all the facilities of the club. Furthermore, petitioners alleged that
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court the Board of Directors and officers of the corporation did not call any stockholders’
1
seeking the review of the Decision dated October 27, 2005 of the Court of Appeals meeting from the time of the incorporation, in violation of Section 50 of the
2
in CA-G.R. CV No. 81441, which affirmed the Order dated July 8, 2003 of the Corporation Code and the By-Laws of the corporation. Neither did the defendant
Regional Trial Court (RTC), Branch 72 of Olongapo City in Civil Case No. 03-001 directors and officers furnish the stockholders with the financial statements of the
dismissing the Complaint filed by herein petitioners. corporation nor the financial report of the operation of the corporation in violation of
Section 75 of the Corporation Code. Petitioners also claim that on August 15,
On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a 1997, SBGCCI presented to the SEC an amendment to the By-Laws of the
3
Complaint with the RTC of Olongapo City on behalf of the members of Subic Bay corporation suspending the voting rights of the shareholders except for the five
Golf and Country Club, Inc. (SBGCCI) against the said country club and its Board of founders’ shares. Said amendment was allegedly passed without any stockholders’
Directors and officers under the provisions of Presidential Decree No. 902-A in meeting or notices to the stockholders in violation of Section 48 of the Corporation
relation to Section 5.2 of the Securities Regulation Code. The Subic Bay Golfers and Code.
Shareholders Incorporated (SBGSI), a corporation composed of shareholders of the
defendant corporation, was also named as plaintiff. The officers impleaded as The Complaint furthermore enumerated several instances of fraud in the
defendants were the following: (1) itsPresident, Hu Ho Hsiu Lien alias Susan Hu;; (2) management of the corporation allegedly committed by the Board of Directors and
its treasurer, Hu Tsung Chieh alias Jack Hu;; (3) corporate secretary Reynald Suarez;; officers of the corporation, particularly:
and (4) directors Hu Tsung Hui and Hu Tsung Tzu. The case was docketed as Civil
Case No. 03-001. The complaint alleged that the defendant corporation sold shares a. The Board of Directors and the officers of the corporation did not
to plaintiffs at US$22,000.00 per share, presenting to them the Articles of indicate in its financial report for the year 1999 the amount of P235,584,000.00
Incorporation which contained the following provision: collected from the subscription of 409 shareholders who paid U.S.$22,000.00
for one (1) share of stock at the then prevailing rate of P26.18 to a dollar. The
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no stockholders were not informed how these funds were spent or its
dividends shall be declared in their favor. Shareholders shall be entitled only to a pro- whereabouts.
4
rata share of the assets of the Club at the time of its dissolution or liquidation.
b. The Corporation has been collecting green fees from the patrons of the
However, on June 27, 1996, an amendment to the Articles of Incorporation was golf course at an average sum of P1,600.00 per eighteen (18) holes but the
approved by the Securities and Exchange Commission (SEC), wherein the above income is not reported in their yearly report. The yearly report for the year
provision was changed as follows: 1999 contains the report of the Independent Public Accountant who stated that
the company was incorporated on April 1, 1996 but has not yet started its
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no regular business operation. The golf course has been in operation since 1997
dividends shall be declared in their favor. In accordance with the Lease and and as such has collected green fees from non-members and foreigners who
Development Agreement by and between Subic Bay Metropolitan Authority and The played golf in the club. There is no financial report as to the income derived
Universal International Group of Taiwan, where the golf courseand clubhouse from these sources.
component thereof was assigned to the Club, the shareholders shall not have
5
proprietary rights or interests over the properties of the Club. x x x. (Emphasis c. There is reliable information that the Defendant Corporation has not
supplied.) paid its rentals to the Subic Bay Metropolitan Authority which up to the present
is estimated to be not less than one (1) million U.S. Dollars. Furthermore, the
43
electric billings of the corporation [have] not been paid which amounts also to (b) Contrary to the allegations in the Complaint, said subscriptions were
9
several millions of pesos. reflected inSBGCCI’s balance sheets for the fiscal years 1998 and 1999;;
d. That the Supreme Court sustained the pre-termination of its contract with (c) Plaintiffs were never presented the original Articles of Incorporation of
the SBMA and presently the club is operating without any valid contract with SBGCCI since their shares were purchased after the amendment of the
SBMA. The defendant was ordered by the Supreme Court to yield the Articles of Incorporation and such amendment was publicly known to all
10
possession, the operation and the management of the golf course to SBMA. Up members prior and subsequent to the said amendment;;
to now the defendants [have] defied this Order.
(d) Shareholders’ meetingshad been held and the corporate acts complained
11
e. That the value of the shares of stock of the corporation has drastically of were approved at shareholders’ meetings;;
declined from its issued value of U.S.$22,000.00 to only Two Hundred Thousand
Pesos, (P200,000.00) Philippine Currency. The shareholders [have] lost in terms (e) Financial statements of SBGCCI had always been presented to
12
ofinvestment the sum estimated to be more than two hundred thousand shareholders justifiably requesting copies;;
pesos.This loss is due to the fact that the Club is mismanaged and the golf
course is poorly maintained. Other amenities of the Club has (sic) not yet been (f) Green fees collected were reported in SBGCCI’s audited financial
13
constructed and are not existing despite the lapse of morethan five (5) years statements;;
from the time the stocks were offered for sale to the public. The cause of the
(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI
decrease in value of the sharesof stocks is the fraudulent mismanagement of the 14
6 continued to operate under a valid contract with the SBMA;; and
club.
(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in
Alleging that the stockholders suffered damages as a result of the fraudulent 15
fact the value of members’ shares have increased.
mismanagement of the corporation, petitioners prayed in their Complaint for the
following: Respondents further claimed by way ofdefense that petitioners failed (a) to
show that it was authorized by SBGSI to file the Complaint on the said
WHEREFORE, it is most respectfully prayed that upon the filing of this case a
corporation’s behalf;; (b) to comply with the requisites for filing a derivative suit and
temporary restraining order be issued enjoining the defendants from acting as
an action for receivership;; and (c) to justify their prayer for injunctive relief since the
Officers and Board of Directors of the Corporation. After hearing[,] a writ of
Complaint may be considered a nuisance or harassment suit under Section 1(b),
preliminary injunction be issued enjoining defendants to act as Board of Directors 16
Rule1 of the Interim Rules of Procedure for Intra-Corporate Controversies. Thus,
and Officers of the Corporation. In the meantime a Receiver be appointed by the
they prayed for the dismissal of the Complaint.
Court to act as such until a duly constituted Board of Directors and Officers of the
Corporation be elected and qualified. On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC
held that the action is a derivative suit, explaining thus:
That defendants be ordered to pay the stockholders damages in the sum of Two
Hundred Thousand Pesos each representing the decrease in value of their shares of The Court finds that this case is intended not only for the benefit of the two
stocks plus the sum of P100,000.00 as legal expense and attorney’s fees, as well as petitioners. This is apparentfrom the caption of the case which reads Nestor Ching,
7
appearance fee of P4,000.00 per hearing. Andrew Wellington and the Subic Bay Golfers and Shareholders, Inc., for and in
behalf of all its members as petitioners. This is also shown in the allegations of the
In their Answer, respondents specifically denied the allegations of the Complaint
petition[.] x x x.
and essentially averred that:
On the bases of these allegations of the petition, the Court finds that the case
(a) The subscriptions of the 409 shareholders were paid to Universal
is a derivative suit. Being a derivative suit in accordance with Rule 8 of the Interim
International Group Development Corporation (UIGDC), the majority shareholder
8 Rules, the stockholders and members may bring an action in the name of the
of SBGCCI, from whom plaintiffs and other shareholders bought their shares;;
corporation or association provided that he (the minority stockholder) exerted all
44
reasonable efforts and allege[d] the same with particularity in the complaint to According to petitioners, the above provision (which should be read in relation
exhaust of (sic) all remedies available under the articles of incorporation, by-laws or to Section 5.2 of the Securities Regulation Code which transfers jurisdiction over
rules governing the corporation or partnership to obtain the reliefs he desires. An such cases to the RTC) allows any stockholder to file a complaint against the
examination of the petition does not show any allegation that the petitioners applied Board of Directors for employing devices or schemes amounting to fraud and
for redress to the Board of Directors of respondent corporation there being no misrepresentation which is detrimental to the interest of the public and/or the
demand, oralor written on the respondents to address their complaints. Neither did stockholders.
the petitioners appl[y] for redress to the stockholders of the respondent corporation
and ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners In the alternative, petitioners allege that if this Court rules that the Complaint is
should have asked the Board of Directors of the respondent corporation and/or its a derivative suit, it should nevertheless reverse the RTC’s dismissal thereof on the
ground of failure to exhaust remedies within the corporation. Petitioners cite
stockholders to hold a meeting for the taking up of the petitioners’ rights in this
17 19
petition. Republic Bank v. Cuaderno wherein the Court allowed the derivative suit even
without the exhaustion of said remedies as it was futile to do so since the Board
The RTC held that petitioners failed to exhaust their remedies within the ofDirectors were all members of the same family. Petitioners also point out that in
respondent corporation itself. The RTC further observed that petitioners Ching and Cuadernothis Court held that the fact that therein petitioners had only one share of
Wellington were not authorized by their co-petitioner Subic Bay Golfers and stock does not justify the denial of the relief prayed for.
Shareholders Inc. to filethe Complaint, and therefore had no personality to file the
same on behalf ofthe said shareholders’ corporation. According to the RTC, the To refute the lower courts’ ruling that there had been non-exhaustion of intra-
shareholdings of petitioners comprised of two shares out of the 409 alleged corporate remedies on petitioners’ part, they claim that they filed in Court a case
outstanding shares or 0.24% is an indication that the action is a nuisance or for Injunction docketed as Civil Case No. 103-0-01, to restrain the corporation from
harassment suit which may be dismissed either motu proprio or upon motion in suspending their rights to use all the facilities of the club, on the ground that the
accordance with Section 1(b) of the Interim Rules of Procedure for Intra-Corporate club cannot collect membership fees until they have completed the amenities as
18 advertised when the shares of stock were sold to them. They allegedly asked the
Controversies.
Club to produce the minutes of the meeting of the Board of Directors allowing the
Petitioners Ching and Wellington elevated the case to the Court of Appeals, amendments of the Articles of Incorporation and By-Laws. Petitioners likewise
where it was docketed as CA-G.R. CV No. 81441. On October 27, 2005, the Court of assail the dismissal of the Complaint for being a harassment ornuisance suit
Appeals rendered the assailed Decision affirming that of the RTC. before the presentation of evidence. They claim that the evidence they were
supposed to present will show that the members of the Board of Directors are not
Hence, petitioners resort to the present Petition for Review, wherein they argue qualified managers of a golf course.
that the Complaint they filed with the RTC was not a derivative suit. They claim that
they filed the suit in their own right as stockholders against the officers and Board of We find the petition unmeritorious.
Directors of the corporation under Section 5(a) of Presidential DecreeNo. 902-A,
which provides: At the outset, it should be noted thatthe Complaint in question appears to have
been filed only by the two petitioners, namely Nestor Ching and Andrew
Sec. 5. In addition tothe regulatory and adjudicative functions of the Securities Wellington, who each own one stock in the respondent corporation SBGCCI. While
and Exchange Commission over corporations, partnerships and other forms of the caption of the Complaint also names the "Subic Bay Golfers and Shareholders
associations registered with it as expressly granted under existing laws and decrees, Inc. for and in behalf of all its members," petitioners did not attach any
it shall have original and exclusive jurisdiction to hear and decide cases involving: authorization from said alleged corporation or its members to file the Complaint.
Thus, the Complaint is deemed filed only by petitioners and not by SBGSI.
(a) Devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and On the issue of whether the Complaint is indeed a derivative suit, we are
misrepresentation which may be detrimental to the interest of the public and/or of mindful of the doctrine that the nature of an action, as well as which court or body
the stockholders, partners, members of associations or organizations registered has jurisdiction over it, isdetermined based on the allegations contained in the
with the Commission. complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to
45
20
recover upon all or some of the claims asserted therein. interest."
We have also held that the body rather than the title of the complaint determines x x x x
21
the nature of an action.
Indeed, the Court notes American jurisprudence to the effect that a derivative
22
In Cua, Jr. v. Tan, the Court previously elaborated on the distinctions among a suit, on one hand, and individual and class suits, on the other, are mutually
derivative suit, anindividual suit, and a representative or class suit: exclusive, viz.:
A derivative suit must be differentiated from individual and representative or "As the Supreme Court has explained: "A shareholder’s derivative suit seeks
class suits, thus: to recover for the benefit of the corporation and its whole body of shareholders
when injury is caused to the corporation that may not otherwise be redressed
"Suits by stockholders or members of a corporation based on wrongful or because of failureof the corporation to act. Thus, ‘the action is derivative, i.e., in the
fraudulent acts of directors or other persons may be classified intoindividual suits, corporate right, if the gravamen of the complaint is injury to the corporation, or to
class suits, and derivative suits. Where a stockholder or member is denied the right the whole body of its stock and property without any severance or distribution
of inspection, his suit would be individual because the wrong is done to him among individual holders, or it seeks to recover assets for the corporation or to
personally and not to the other stockholders or the corporation. Where the wrong is prevent the dissipation of its assets.’ x x x. In contrast, "a directaction [is one] filed
done to a group of stockholders, as where preferred stockholders’ rights are violated, by the shareholder individually (or on behalf of a classof shareholders to which he
a class or representative suitwill be proper for the protection of all stockholders or she belongs) for injury to his or her interestas a shareholder. x x x. [T]he two
belonging to the same group. But where the acts complained of constitute a wrong to actions are mutually exclusive: i.e., the right of action and recovery belongs to
the corporation itself, the cause of action belongs to the corporation and not to the either the shareholders (direct action) *651 or the corporation(derivative action)." x
individual stockholder or member. Although in most every case of wrong to the x x.
corporation, each stockholder is necessarily affected because the value of his
interest therein would be impaired, this fact of itself is not sufficient to give him an Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder
individual cause of action since the corporation is a person distinct and separate from alleged that the other shareholder of the corporation negligently managed the
him, and can and should itself sue the wrongdoer. Otherwise, not only would the business, resulting in its total failure. x x x. The appellate court concluded that the
theory of separate entity be violated, but there would be multiplicity of suits as well as plaintiff could not maintain the suit as a direct action: "Because the gravamen of
a violation of the priority rights of creditors. Furthermore,there is the difficulty of the complaint is injury to the whole body of its stockholders, it was for the
determining the amount of damages that should be paid to each individual corporation to institute and maintain a remedial action. x x x. A derivative action
stockholder. would have been appropriate if its responsible officials had refused or failed to act."
x x x. The court wenton to note that the damages shown at trial were the loss of
However, in cases of mismanagement where the wrongful acts are committed by corporate profits. x x x. Since "[s]hareholders own neither the property nor the
the directors or trustees themselves, a stockholder or member may find that he has earnings of the corporation," any damages that the plaintiff alleged that resulted
no redress because the former are vested by law with the right to decide whether or from such loss of corporate profits "were incidental to the injury to the corporation."
notthe corporation should sue, and they will never be willing to sue themselves. The (Citations omitted.)
corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right of a The reliefs sought in the Complaint, namely that of enjoining defendants from
stockholder to sue on behalf of a corporation in what eventually became known as a acting as officers and Board of Directors of the corporation, the appointment of a
"derivative suit." It has been proven to be an effective remedy of the minority against receiver, and the prayer for damages in the amount of the decrease in the value of
the abuses of management. Thus, an individual stockholder is permitted to institute a the sharesof stock, clearly show that the Complaint was filed to curb the alleged
derivative suit on behalf of the corporation wherein he holds stock in order to protect mismanagement of SBGCCI. The causes of action pleaded by petitioners do not
or vindicate corporate rights, whenever officials of the corporation refuse to sue orare accrue to a single shareholder or a class of shareholders but to the corporation
the ones to be sued or hold the control of the corporation. In such actions, the suing itself.
stockholder is regarded as the nominal party, with the corporation as the party in
46
However, as minority stockholders, petitioners do not have any statutory right to The RTC dismissed the Complaint for failure to comply with the second and
override the business judgments of SBGCCI’s officers and Board of Directors on the fourth requisites above.
ground of the latter’s alleged lackof qualification to manage a golf course. Contraryto
the arguments of petitioners, Presidential Decree No. 902-A, which is entitled Upon a careful examination of the Complaint, this Court finds that the same
REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH should not have been dismissed on the ground that it is a nuisance or harassment
ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE suit. Although the shareholdings of petitioners are indeed only two out of the 409
ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT, does alleged outstanding shares or 0.24%, the Court has held that it is enough that a
not grant minority stockholders a cause of action against waste and diversion by the member or a minority of stockholders file a derivative suit for and in behalf of a
25
Board of Directors, but merely identifies the jurisdiction of the SEC over corporation.
actionsalready authorized by law or jurisprudence. It is settled that a stockholder’s
right to institute a derivative suit is not based on any express provisionof the With regard, however, to the second requisite, we find that petitioners failed to
Corporation Code, or even the Securities Regulation Code, but is impliedly state with particularity in the Complaint that they had exerted all reasonable efforts
recognized when the said laws make corporate directors or officers liable for to exhaust all remedies available under the articles of incorporation, by-laws, and
damages suffered by the corporation and its stockholders for violation of their laws or rules governing the corporation to obtain the relief they desire. The
fiduciary duties.
23 Complaint contained no allegation whatsoever of any effort to avail of intra-
corporate remedies. Indeed, even if petitioners thought it was futile to exhaust
At this point, we should take note that while there were allegations in the intra-corporate remedies, they should have stated the same in the Complaint and
Complaint of fraud in their subscription agreements, such as the misrepresentation of specified the reasons for such opinion. Failure to do so allows the RTC to dismiss
the Articles of Incorporation, petitioners do not pray for the rescission of their the Complaint, even motu proprio, in accordance with the Interim Rules. The
subscription or seekto avail of their appraisal rights. Instead, they ask that requirement of this allegation in the Complaint is not a useless formality which may
26
defendants be enjoined from managing the corporation and to pay damages for their be disregarded at will.1âwphi1 We ruled in Yu v. Yukayguan :
mismanagement. Petitioners’ only possible cause of action as minority stockholders
The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing
against the actions of the Board of Directors is the common law right to file a
derivative suit. The legal standing of minority stockholders to bring derivative suits is Intra-Corporate Controversies are simple and do not leave room for statutory
construction. The second paragraph thereof requires that the stockholder filing a
not a statutory right, there being no provision in the Corporation Code or related
derivative suit should have exerted all reasonable efforts to exhaust all remedies
statutes authorizing the same, but is instead a product of jurisprudence based on
availableunder the articles of incorporation, by-laws, laws or rules governing the
equity. However, a derivative suit cannot prosper without first complying with the
24
legal requisites for its institution. corporation or partnership to obtain the relief he desires;; and to allege such fact
with particularityin the complaint. The obvious intent behind the rule is to make the
Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate derivative suit the final recourse of the stockholder, after all other remedies to
Controversies imposes the following requirements for derivative suits: obtain the relief sought had failed.
(1) He was a stockholder or member at the time the acts or transactions subject WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the
of the action occurred and at the time the action was filed;; Court of Appeals in CA-G.R. CV No. 81441 which affirmed the Order of the
Regional Trial Court (RTC) of Olongapo City dismissing the Complaint filed
(2) He exerted all reasonable efforts, and alleges the same with particularity in thereon by herein petitioners is AFFIRMED.
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to SO ORDERED.
obtain the relief he desires;;
MERGER AND CONSOLIDATION Sec. 76-80
(3) No appraisal rights are available for the act or acts complained of;; and
TITLE IX
(4) The suit is not a nuisance or harassment suit.
47
directors or trustees of all the constituent corporations and ratified by the

MERGER AND CONSOLIDATION affirmative vote of stockholders representing at least two-thirds (2/3) of the
Sec. 76. Plan or merger of consolidation. - Two or more corporations may outstanding capital stock or of two-thirds (2/3) of the members of each of the
merge into a single corporation which shall be one of the constituent constituent corporations. Such plan, together with any amendment, shall be
corporations or may consolidate into a new single corporation which shall be the considered as the agreement of merger or consolidation. (n)
consolidated corporation. Sec. 78. Articles of merger or consolidation. - After the approval by the
The board of directors or trustees of each corporation, party to the merger or stockholders or members as required by the preceding section, articles of
consolidation, shall approve a plan of merger or consolidation setting forth the merger or articles of consolidation shall be executed by each of the constituent
following: corporations, to be signed by the president or vice-president and certified by the
secretary or assistant secretary of each corporation setting forth:
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;; 1. The plan of the merger or the plan of consolidation;;
2. The terms of the merger or consolidation and the mode of carrying 2. As to stock corporations, the number of shares outstanding, or in the
the same into effect;;   case of non-stock corporations, the number of members;; and  
3. A statement of the changes, if any, in the articles of incorporation of 3. As to each corporation, the number of shares or members voting for
the surviving corporation in case of merger;; and, with respect to the and against such plan, respectively. (n)
consolidated corporation in case of consolidation, all the statements Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of
required to be set forth in the articles of incorporation for corporations consolidation, signed and certified as herein above required, shall be submitted
organized under this Code;; and   to the Securities and Exchange Commission in quadruplicate for its approval:
4. Such other provisions with respect to the proposed merger or Provided, That in the case of merger or consolidation of banks or banking
consolidation as are deemed necessary or desirable. (n) institutions, building and loan associations, trust companies, insurance
companies, public utilities, educational institutions and other special
Sec. 77. Stockholder's or member's approval. - Upon approval by majority corporations governed by special laws, the favorable recommendation of the
vote of each of the board of directors or trustees of the constituent corporations appropriate government agency shall first be obtained. If the Commission is
of the plan of merger or consolidation, the same shall be submitted for approval satisfied that the merger or consolidation of the corporations concerned is not
by the stockholders or members of each of such corporations at separate inconsistent with the provisions of this Code and existing laws, it shall issue a
corporate meetings duly called for the purpose. Notice of such meetings shall be certificate of merger or of consolidation, at which time the merger or
given to all stockholders or members of the respective corporations, at least two consolidation shall be effective.
(2) weeks prior to the date of the meeting, either personally or by registered
mail. Said notice shall state the purpose of the meeting and shall include a copy If, upon investigation, the Securities and Exchange Commission has reason to
or a summary of the plan of merger or consolidation. The affirmative vote of believe that the proposed merger or consolidation is contrary to or inconsistent
stockholders representing at least two-thirds (2/3) of the outstanding capital with the provisions of this Code or existing laws, it shall set a hearing to give the
stock of each corporation in the case of stock corporations or at least two-thirds corporations concerned the opportunity to be heard. Written notice of the date,
(2/3) of the members in the case of non-stock corporations shall be necessary time and place of hearing shall be given to each constituent corporation at least
for the approval of such plan. Any dissenting stockholder in stock corporations two (2) weeks before said hearing. The Commission shall thereafter proceed as
may exercise his appraisal right in accordance with the Code: Provided, That if provided in this Code. (n)
after the approval by the stockholders of such plan, the board of directors Sec. 80. Effects or merger or consolidation. - The merger or consolidation
decides to abandon the plan, the appraisal right shall be extinguished. shall have the following effects:cralaw
Any amendment to the plan of merger or consolidation may be made, provided 1. The constituent corporations shall become a single corporation which,
such amendment is approved by majority vote of the respective boards of
48
in case of merger, shall be the surviving corporation designated in the • MERGER : A + B = A absorbs B à A is automatically dissolved
plan of merger;; and, in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;; • MERGER : A + B = B absorbs A è B is automatically dissolved
2. The separate existence of the constituent corporations shall cease, o All properties of A will be transferred to B
except that of the surviving or the consolidated corporation;;  
o B issue shares of stocks to A
3. The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities and powers and shall be subject to all the o A becomes the stockholder of B
duties and liabilities of a corporation organized under this Code;;
à CONSOLIDATION à it shall absorb all the liabilities of the consolidated
4. The surviving or the consolidated corporation shall thereupon and company à Creditors or lien rights should not be impaired
thereafter possess all the rights, privileges, immunities and franchises
of each of the constituent corporations;; and all property, real or • Corporation may agree what liabilities are absorbed as long as creditors
personal, and all receivables due on whatever account, including right is not impaired à
subscriptions to shares and other choses in action, and all and every
other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or deed;; and
5. The surviving or consolidated corporation shall be responsible and Y-1 Leisure Case
liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated • Surviving Company will be the one to absorb the absorbed company
corporation had itself incurred such liabilities or obligations;; and any
pending claim, action or proceeding brought by or against any of such
constituent corporations may be prosecuted by or against the surviving
or consolidated corporation. The rights of creditors or liens upon the DISSOLUTION
property of any of such constituent corporations shall not be impaired
by such merger or consolidation. (n) TITLE XIV

DISSOLUTION
NOTES: Sec. 117. Methods of dissolution. - A corporation formed or organized under the
provisions of this Code may be dissolved voluntarily or involuntarily. (n)
• CONSOLIDATION : A plus B = C… A and B are constituent, C is a new
corporation Sec. 118. Voluntary dissolution where no creditors are affected. - If
dissolution of a corporation does not prejudice the rights of any creditor having a
o A and B is deemed dissolved claim against it, the dissolution may be effected by majority vote of the board of
directors or trustees, and by a resolution duly adopted by the affirmative vote of
o C is the consolidated corporation the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or
of at least two-thirds (2/3) of the members of a meeting to be held upon call of the
o A and B will transfer its properties to C
directors or trustees after publication of the notice of time, place and object of the
o C will now issue stocks to A and B stockholders meeting for three (3) consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located;; and if no newspaper is
o A and B will now be stockholders of C published in such place, then in a newspaper of general circulation in the
49
Philippines, after sending such notice to each stockholder or member either by the provisions of this Code on liquidation. (n)
registered mail or by personal delivery at least thirty (30) days prior to said
meeting. A copy of the resolution authorizing the dissolution shall be certified by a Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the
majority of the board of directors or trustees and countersigned by the secretary of Securities and Exchange Commission upon filing of a verified complaint and after
proper notice and hearing on the grounds provided by existing laws, rules and
the corporation. The Securities and Exchange Commission shall thereupon issue
the certificate of dissolution. (62a) regulations. (n)
Sec. 119. Voluntary dissolution where creditors are affected. - Where the Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its
dissolution of a corporation may prejudice the rights of any creditor, the petition for own limitation or is annulled by forfeiture or otherwise, or whose corporate
dissolution shall be filed with the Securities and Exchange Commission. The existence for other purposes is terminated in any other manner, shall nevertheless
petition shall be signed by a majority of its board of directors or trustees or other be continued as a body corporate for three (3) years after the time when it would
officers having the management of its affairs, verified by its president or secretary have been so dissolved, for the purpose of prosecuting and defending suits by or
or one of its directors or trustees, and shall set forth all claims and demands against it and enabling it to settle and close its affairs, to dispose of and convey its
against it, and that its dissolution was resolved upon by the affirmative vote of the property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.
stockholders representing at least two-thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the members at a meeting of its stockholders or At any time during said three (3) years, the corporation is authorized and
members called for that purpose. empowered to convey all of its property to trustees for the benefit of stockholders,
If the petition is sufficient in form and substance, the Commission shall, by an members, creditors, and other persons in interest. From and after any such
order reciting the purpose of the petition, fix a date on or before which objections conveyance by the corporation of its property in trust for the benefit of its
thereto may be filed by any person, which date shall not be less than thirty (30) stockholders, members, creditors and others in interest, all interest which the
days nor more than sixty (60) days after the entry of the order. Before such date, a corporation had in the property terminates, the legal interest vests in the trustees,
copy of the order shall be published at least once a week for three (3) consecutive and the beneficial interest in the stockholders, members, creditors or other
persons in interest.
weeks in a newspaper of general circulation published in the municipality or city
where the principal office of the corporation is situated, or if there be no such Upon the winding up of the corporate affairs, any asset distributable to any
newspaper, then in a newspaper of general circulation in the Philippines, and a creditor or stockholder or member who is unknown or cannot be found shall be
similar copy shall be posted for three (3) consecutive weeks in three (3) public escheated to the city or municipality where such assets are located.
places in such municipality or city.

Upon five (5) day's notice, given after the date on which the right to file objections
as fixed in the order has expired, the Commission shall proceed to hear the Except by decrease of capital stock and as otherwise allowed by this Code, no
petition and try any issue made by the objections filed;; and if no such objection is corporation shall distribute any of its assets or property except upon lawful
sufficient, and the material allegations of the petition are true, it shall render dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)
judgment dissolving the corporation and directing such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets and pay the
debts of the corporation. (Rule 104, RCa) NOTE:
Sec. 120. Dissolution by shortening corporate term. - A voluntary dissolution - Let the End the term
may be effected by amending the articles of incorporation to shorten the corporate - Amend articles to shorten it
term pursuant to the provisions of this Code. A copy of the amended articles of - Sec 22 à should always be notice and hearing for the dissolution of the
incorporation shall be submitted to the Securities and Exchange Commission in company
accordance with this Code. Upon approval of the amended articles of - Voluntary and involuntary dissolution:
incorporation of the expiration of the shortened term, as the case may be, the o Voluntary – 180
corporation shall be deemed dissolved without any further proceedings, subject to o Involuntary -
50
- Liquidation comes after dissolution, purpose is to pay of the credit.

Whatever is the net can now be distributed to the stockholder or members.
Sec 94-95
- Liquidation à
o Juridical personality ceases in dissolutionà but there is winding up
period à corporation can still go after debtors, creditors can still
sue corporation. Corporation during this period cannot conduct
business only. This period is only for LIQUIDATION
o Trustees à appointed by the Board à they hold it in trust for the
corporation and the stockholders. 3 year period of winding up à
trustees may continue liquidation beyond the 3 year period.
o Liquidation may continue after 3 years if a trustee is appointed by
the board within the 3 year
o ANOTHER WAY IS: Receivership à
- TRUST FUND DOCTRINE:
- LIQUIDATION and DISSOLUTION of Non Stock Corporation
51

Corporation Code Outline 6 (Atty. M.I.P Romero) 2013400036

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Corporation Code Outline 6 (Atty. M.I.P Romero) 2013400036

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CORPORATION CODE OUTLINE 6 (ATTY. M.I.

CASE SYNOPSIS Company (Defendant), agreed to participate in the purchase of $3,000,000 in

and culpable negligence * * * and * * * wanton disregard of their obligations as

2 ways DIRECTOR MAY HAVE COMPENSATION:

liability insurance. shares of stock to be represented by each proxy shall be specifically

GENERAL Restrictions, renewal, etc.

to the election of directors or trustees, in which stockholders are

• In a cumulative voting system, the number of votes available to a

without just cause 5. Increase or decrease of capital stock;;

The case at bar was initiated before the RTC by respondents as a

directors or trustees of all the constituent corporations and ratified by the

- Liquidation comes after dissolution, purpose is to pay of the credit.

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