Metroheights Subdivision Homeowners Association, Inc. v.

CMS Construction and Development Corp

Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

Ruling: We find that respondents MWSS and CMS Construction should be held liable for damages to
petitioner but not the Cruzes who are the directors and stockholders of respondent CMS Construction.

Section 31 of the Corporation Code is the governing law on personal liability of officers for the debts of
the corporation, to wit: “Sec. 31. Liability of directors, trustees or officers. — Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty
of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its stockholders or members
and other persons.”

We find that petitioner failed to show that the Cruzes committed any of those above-quoted acts to
make them personally liable.

Eizmendi vs. Fernandez

The 15-day reglementary period within which to file an election contest under the Interim Rules is
meant to hasten the submission and resolution of corporate election controversies, so that the state of
uncertainty in the corporate leadership is settled; and that the said period not meant to block suits
questioning the unlawful acts of winning directors, including the legitimacy of their authority.

To allow Fernandez to indirectly question the validity of the February 23, 2013 election would be a clear
violation of the 15-day reglementary period to file an election contest under the Interim Rules.

BUSINESS JUDGMENT RULE

Questions of policy or management are left solely to the honest decision of officers and directors of a
corporation and the courts are without authority to substitute their judgment for the judgment of the
board of directors; the board is the business manager of the corporation and so long as it acts in good
faith, its orders are not reviewable by the courts or the SEC. (Montelibano v. Bacolod-Murica Milling Co.,
G.R. No. L-15092, May 18, 1962; Phil. Stock Exchange, Inc. v. Ca, G.R. No. 125469, October 27, 1997).

GR: Contracts intra vires entered into by the board of directors are binding upon the corporation beyond
the interference of courts. The courts are barred from intruding into business judgments of
corporations, when the same are made in good faith (Ong v Tiu, G.R. No. 144476. April 8, 2003).
XPNs: Courts can inquire unto contracts which are: 1. Unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority (Ong v Tiu, ibid); or 2. When there is bad faith or gross
negligence by the directors (Republic Communications Inc v CA, G.R. No. 135074, January 29, 1999).

Different methods of voting

1. Straight voting – every stockholder may vote such number of shares for as many persons as there are
directors to be elected.

2. Cumulative voting for one candidate – a stockholder is allowed to concentrate his votes and give one
candidate, as many votes as the number of directors to be elected multiplied by the number of his
shares shall equal.

3. Cumulative voting by distribution – a stockholder may cumulate his shares by multiplying the number
of his shares by the number of directors to be elected and distribute the same among as many
candidates as he shall see fit

Ways of filling up the vacancies in the board

1. Vacancies to be filled up by stockholders or members: (ERORI)

a. Expiration of term;
b. Removal;
c. Grounds Other than removal or expiration of term, where the remaining directors do not constitute a
quorum for the purpose of filling the vacancy;
d. If the vacancy may be filled by the remaining directors or trustees but the board Refers the matter to
stockholders or members; or
e. Increase in the number of directors results to vacancy.

2. Vacancies filled up by members of the board -If still constituting a quorum, at least a majority of the
members are empowered to fill any vacancy occurring in the board other than by removal by the
stockholders or members or by expiration of term (CC, Sec. 29. RCC, Sec 28).

MEETING

REGULAR - WHEN: The date fixed in the by-laws; or If there is no date in the by-laws – shall be held
monthly

SPECIAL - At any time deemed necessary or as may be provided in the bylaws.

DOCTRINE OF CENTRALIZED MANAGEMENT

GR: The Doctrine of Centralized Management states that all corporate powers are exercised by the BOD
or BOT.
The Board is the body which:
(1) Exercises all powers provided for under the Corporation Code;
(2) Conducts all Business of the corporation; and
(3) Controls and holds all the properties of the corporation (CC, Sec 23 [RCC, Sec 22])

XPN: The doctrine is not applicable to the following instances:

1. In case of delegation to the Executive Committee duly authorized in the by-laws;

2. Authorization pursuant to a contracted manager which may be an individual, a partnership, or
another corporation; and
3. In case of close corporations, the stockholders may manage the business of the corporation instead of
a board of directors, if the articles of incorporation so provide.

DOCTRINE OF CORPORATE OPPORTUNITY

The doctrine of corporate opportunity means that if the director acquired a business opportunity that
should belong to the corporation, he must account to the corporation for all the profits he obtained
unless his act was ratified by the stockholders representing at least two-thirds of the outstanding capital
stock.

TRUST FUND DOCTRINE

The subscribed capital stock of the corporation is a trust fund for the payment of debts of the
corporation which the creditors have the right to look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s unpaid
subscription.

SECURITIES AND EXCHANGE COMMISSION (SEC) AND INSURANCE COMMISSION (IC),Petitioners, -

versus-. COLLEGE ASSURANCE PLAN PHILIPPINES, INC., Respondent.

Section 16.4, Rule 16 of the New Rules states: “No withdrawal shall be made from the Trust Fund except
for paying the Benefits such as the monetary consideration, the cost of services rendered or property
delivered, trust fees, bank charges and investment expenses in the operation of the Trust Fund,
termination values payable to the Planholders, annuities, contributions of cancelled plans to the fund
and taxes on Trust Funds. Furthermore, only reasonable withdrawals for minor repairs and costs of
ordinary maintenance of trust fund assets shall be allowed.” Moreover, Section 30 of R.A. No. 9829
expressly stipulates that the trust fund is to be used at all times for the sole benefit of the planholders,
and cannot ever be applied to satisfy the claims of the creditors of the company.

Accordingly, the CA gravely erred in authorizing the payment out of the trust fund of the obligations due
to Smart and FEMI. Even assuming that the obligations were incurred by the respondent in order to
infuse sufficient money in the trust fund to correct its deficiencies, such obligations should be paid for
by its assets, not by the trust fund. Moreover, the respondent intimated that the bonds were assigned
to the trust fund without any reservations or conditions imposed thereon.
Thus, we uphold the petitioners' following stance that the MRT III Bonds already formed part of the
assets of the trust fund upon infusion.

SUBSCRIPTION AGREEMENTS

It is a contract for the acquisition of unissued stock in an existing corporation or a corporation still to be
formed. It is considered as such notwithstanding the fact that the parties refer to it as purchase or some
other contract.

Nature of a subscription contract

A subscription contract is indivisible. Consequently, where stocks were subscribed and part of the
subscription contract price was not paid, the whole subscription shall be considered delinquent and not
only the shares which correspond to the amount not paid.

Valid considerations in a subscription agreement

1. Actual cash paid to the corporation;.

2. Property, tangible or intangible (i.e. patents or copyrights), provided:
a. The property is actually received by the corporation
b. The property is necessary or convenient for its use and lawful purposes
c. It must be subject to a fair valuation equal to the par or issued value of the stock issued
d. The valuation thereof shall initially be determined by the incorporators; and
e. The valuation is subject to the approval by the SEC.
3. Labor or services actually rendered to the corporation.
4. Prior corporate obligations or indebtedness.
5. Amounts transferred from unrestricted retained earnings to stated capital (in case of declaration of
stock dividends).
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.

Doctrine of Individuality (Indivisibility) of Subscription.

A subscription is one entire and indivisible whole contract. It cannot be divided into portions.

SHARES OF STOCK

Stock or share of stock is one of the units in which the capital stock is divided. It represents the interest
or right which the owner has —

1. In the management of the corporation in which he takes part through his right to vote (if voting rights
are permitted for that class of stock by the AOI);
2. In a portion of the corporate earnings, if and when segregated in the form of dividends; and
3. Upon its dissolution land winding up, in the property and assets of the corporation remaining after
the payment of corporate debts and liabilities to creditors.
Kinds or classifications of shares
1. Par value shares
2. No par value shares
3. Common shares
4. Preferred shares
5. Redeemable shares
6. Treasury shares
7. Founder’s share
8. Voting shares
9. Non-voting shares
10. Convertible shares
11. Watered stock
12. Fractional share
13. Shares in escrow
14. Over-issued stock
15. Street certificate
16. Promotion share

DOCTRINE OF EQUALITY OF SHARES

Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares
issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are
also subject to the same liabilities.

PARTICIPATION IN MANAGEMENT

Under the CC, stockholders or members periodically elect the board of directors or trustees, who are
charged with the management of the corporation. The board, in turn, periodically elects officers to carry
out management functions on a day-to-day basis. As owners, though, the stockholders or members have
residual powers over fundamental and major corporate changes.

While stockholders and members (in some instances) are entitled to receive profits, the management
and direction of the corporation are lodged with their representatives and agents -- the board of
directors or trustees. In other words, acts of management pertain to the board; and those of ownership,
to the stockholders or members. In the latter case, the board cannot act alone, but must seek approval
of the stockholders or members.

The following are the obligations of the stockholder:

1. Liability to the corporation for unpaid subscription
2. Liability to the corporation for interest on unpaid subscription if so required by the by laws
3. Liability to the creditors of the corporation for unpaid subscription;
4. Liability for watered stock;
5. Liability for dividends unlawfully paid; and
6. Liability for failure to create corporation
While a stockholder has no personal liability for the debts of the corporation beyond the amount of his
capital investment, he is personally liable for the above obligations. In addition, he may become
personally liable for damages or otherwise for any wrongful disposition of corporate assets, breaches of
fiduciary duties, fraud, gross negligence, unauthorized acts, violations of law, or improper us of the
corporate form.

DERIVATIVE SUIT

Neither the Corporation Code nor the Securities Regulation Code expressly grant the stockholder the
right to institute a derivative suit. It is impliedly recognized when the said laws make corporate directors
or officers liable for damages suffered by the corporation and its stockholders for violation of their
fiduciary duties.

Requisites for the existence of a derivative suit

1. Corporate cause of action: the cause of action must devolve upon the corporation itself; the
wrongdoing or harm having been caused to the corporation and not to the particular stockholder
brining the suit

2. Stockholder: the party bringing the suit must be a stockholder

a. At the time the acts or transactions subject of the action occurred; and
b. at the time the action was filed

3. Exhaustion of all intra-corporate remedies available under the AOI, By-Laws, laws or rules governing
the corporation or partnership to obtain the relief he desires.

4. Not a Nuisance or Harassment suit.

5. Appraisal right is not available

PRE-EMPTIVE RIGHT

It is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class in
proportion to their present shareholding.

Purpose of pre-emptive right -

To enable the shareholder to retain his proportionate control in the corporation and to retain his equity
in the surplus

QUORUM
Quorum required in a stock or non-stock corporation

Unless otherwise provided for in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock entitled to vote or a majority of the members in the case of
non-stock corporations.
SALE OF DELINQUENT SHARES

If within 30 days from expiry of the date of payment or from the date stated in the call made by the
board, and no payment is made, all stocks covered by said subscription shall thereupon become
delinquent and shall be subject to delinquency sale unless the BOD orders otherwise.

Effects of stock delinquency

1. Upon the stockholder

a. Accelerates the entire amount of the unpaid subscription
b. Subjects the shares to interest expenses and costs
c. Disenfranchises the shares from any right that inheres to a stockholder, except the right to dividends

2. Upon the director owning delinquent shares

a. If the delinquent stockholder is a director, the director shall continue to be a director but he cannot
run for re-election
b. A delinquent stockholder seeking to be elected as director may not be a candidate for, not be duly
elected to, the board.

VILLONGCO VS. YABUT

The total outstanding capital stocks without distinction as to disputed or undisputed shares of stock, is
the basis in determining the presence of quorum. Applying the said rule in the case at bar, the 3,140
shares of the late Geronima and the fractional .67, .67, and .66 shares of Eumir Que Camara, Paolo Que
Camara and Abimar Que Camara which are the subject of another dispute filed before the RTC must be
included in determining the presence of quorum in the Annual Stockholders Meeting wherein Cecilia,
Ma. Corazon and Eumir Carlo were elected as directors and later elected themselves to the following
positions: Cecilia as Chairperson/Vice President/Treasurer; Ma. Corazon as Vice
Chairperson/President/General Manager; and Eumir Carlo as Corporate Secretary/Secretary. Thus, the
200,000 outstanding capital stocks of Phil-Ville should be the basis for determining the presence of a
quorum, without any distinction. Therefore, to constitute a quorum, the presence of 100,001 shares of
stocks in Phil-Ville is necessary.

In the case at bar, the Court agreed with the CA when it held that only 98,430 shares of stocks were
present during the January 25, 2014 stockholders meeting at Max's Restaurant, therefore, no quorum
had been established.

The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders' meeting. Only stocks actually issued and outstanding may be voted. Thus, for stock
corporations, the quorum is based on the number of outstanding voting stocks. The distinction of
undisputed or disputed shares of stocks is not provided for in the law or the jurisprudence. Ubi lex non
distinguit nec nos distinguere debemus — when the law does not distinguish we should not distinguish.
PROXY
Stockholders and members may vote in person or by proxy in all meetings of stockholders or members.
However the right of members to vote by proxy may be denied under the articles of incorporation or
bylaws of a non-stock corporation.

The term “proxy” designates the formal written authority given by the owner or holder of the stock,
who has a right to vote it, or by a member, as principal, to another person, as agent, to exercise the
voting rights of the former.

Proxy is not allowed in BOD.

VOTING TRUST

A voting trust agreement (VTA) is an agreement whereby one or more stockholders transfer their shares
of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other
specific rights) over such shares; and in return, trust certificates are given to the stockholder/s, which
are transferable like stock certificates, subject, to the trust agreement.

Principal purpose: acquire control of the corporation

RIGHT OF APPRAISAL

It refers to the right of the stockholder to demand payment of the fair value of his shares, after
dissenting from a proposed corporate action involving a fundamental change in the charter or articles of
incorporation in the cases provided by law.

Section 66. Payment of Balance of Subscription

Winning bidder in a delinquency sale

1. The person participating in the delinquency sale who offers to pay the full amount of the balance of
the subscription together with the accrued interest, costs of advertisement and expenses of sale, for the
smallest number of shares;.

2. If there is no bidder as mentioned above, the corporation may bid for the same, and the total amount
due shall be credited as paid in full in the books of the corporation. The purchase by the corporation
must be made out of net earnings in view of the trust fund doctrine. Thereafter, the reacquired shares
shall be considered as treasury shares.

NOTE: The board is not bound to accept the highest bid unless the contrary appears. The bidder is the
one making the offer to purchase, which the corporation is free to accept or reject.

Q: What happens to the remaining shares, if any, were not sold?

A: The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of stock covering such shares.