December 9, 1988

Seguion Reyna Montecillo & Ongsiako

A. Soriano Building
Ayala Avenue
Makati, Metro Manila

Gentlemen :

This refers to your letter, dated December 7, 1988, requesting for opinion of
this Commission on the query posed therein. prcd

As represented in your letter, Polymedic General Hospital Inc. by resolution

of its stockholders, dated August 16, 1988, proposes to increase its authorized
capital stock from the present P10,000,000.00 divided into 1,000 shares of the par
value of P10,000.00 per share to P40,000,000.00 divided into 4,000 shares of the
par value of P10,000.00 each. The increase will be fully subscribed and paid-up to
enable the Hospital to buy back from the GSIS for a total consideration of P50M
the land, building, and other assets of the Hospital which were previously
conveyed to the GSIS by way of dacion en pago. The amount raised through
subscriptions of stockholders of record will be further amplified by loans to be
secured from selected financial institutions.

All stockholders of record of the Hospital were given the pre-emptive right
to subscribe to 20 shares at P10,000.00 per share; all were specifically given a
deadline within which to indicate whether or not they were subscribing to the
increase in the authorized capital stock, and upon failure thereof, they would be
deemed to have waived their pre-emptive right to such increase. Quite a number of
medical stockholders indicated their willingness to subscribe; some unequivocably
waived their pre-emptive right, while still others chose to ignore the request for
subscription or express waiver.

It was likewise manifested in your letter, that the buy-back arrangement

with the GSIS is conditioned upon the ability or the Hospital to come up with the
required amount within a given period. Hence, in view of the time constraint and
the importance of the buy-back arrangement which assures the survival of the
Hospital, the board of directors subsequently adopted a resolution to the effect that
medical stockholders who subscribe for and fully pay up the P200,000.00 worth of
shares allotted to each of them would be allowed to maintain their respective
clinics within the area reserved for doctor's offices in the Hospital; conversely,
medical stockholders who fail to do so or who waive their pre-emptive right to
subscribe to the capital increase will forthwith lose their right to maintain their

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medical clinics within the Hospital premises. They may however continue to bring
in patients for confinement at the Hospital as visiting physicians.

Accordingly, some medical stockholders who currently hold clinic within

the Hospital premises will be adversely affected by the board resolution above
adverted to. At this point, it was emphasized however that all the medical
stockholders holding respective clinics at the Hospital do not have any formal or
written lease contracts with the Hospital covering the space(s) occupied by them.
The aggregate amount of P1,000.00 a month jointly paid for each room by the
doctors who share clinic in a particular room was just enough to cover the monthly
expenses incurred for light, water and air-conditioning facilities, and said amount
was not intended as rentals. It is, therefore, inferred from your letter that no
lessor-lessee relationship exists between the Hospital and the medical
stockholders.

Hence, your query is: whether or not the board resolution limiting the use of
Hospital premises for medical clinics exclusively to medical stockholders who
subscribe and pay in full the shares allotted to them out of the increase in the
authorized capital stock is legally feasible.

On the basis or the facts above presented the following information may be
imparted:

Section 23 of the Corporation Code of the Philippines reads as follows:

"Unless otherwise provided in this Code, the corporate powers of all

corporations formed under this Code shall be exercised, all business
conducted and all property of such corporation controlled and held by the
board of directors or trustees . . .".

In general, courts will not undertake to review the expediency of the

business transactions authorized by the directors. A large discretion is lodged in
them. Hence, questions of value and policy are for their business judgment and
under the so called "business judgment rule", it is sufficient that reasonable
diligence and care have been exercised in the management of corporate affairs.
(Ballantine on Corporations, rev. ed., p. 160-161). The business judgment rule
exists to protect and promote the full and free exercise of the power of
management given to the directors. (3A Fletcher Cyc. Corp., 1986 rev. vol., sec.
1039). Thus, in Auerbach V. Bennett, 47 NY2d 619, 419 NYS2d 920, 393 NE2d
994, (cited in Fletcher, Supra., p. 49), the Court held: "Business judgment rule bars
judicial inquiry into actions of corporate directors taken in good faith and in the
exercise of honest judgment in lawful and legitimate furtherance of corporate
purposes." Likewise, in Fields v. Sax, 123 Ill app 3d 460, 462 NE2d 983, (cited in
Fletcher, Supra., p. 50), "absent bad faith, fraud or illegality, or gross
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overreaching, the courts are not at liberty to interfere with the exercise of business
judgment by directors. Also, in Helfman v. American Light & Traction Co., 121
NJEq. 1, 187 A 540, "Courts will not substitute its judgment for that of directors in
matters of purely business and economic problems." In Lewis v. S.L. & E. Inc., 629
F2d, 764, (CA2, 1980), citing Fletcher Cyc. Corp., sec. 1239 (perm. ed.), it was
further held that "Business judgment rule places heavy burden on shareholders
who would attack corporate transactions."

It appears that the resolution of the board of directors of Polymedic General

Hospital, Inc., which has been put issue, was passed by the Board in an honest and
reasonable exercise of business judgment to save the substantial assets of the
hospital from dissipation.

It is, therefore, opined that said resolution of the board limiting the use of
Hospital premises for medical clinics only to medical stockholders who subscribed
and pay in full the shares allotted to them out of the increase in the authorized
capital stock is legally justifiable provided that the following conditions are met:
"(1) management acts in a good faith belief that its decision is in the company's
best interests; (2) it exercises due care in ascertaining relevant facts and law before
making the decision; and (3) it has no personal interest in the transaction". (3A
Fletcher Cyc. Corp., 1986 rev. vol., sec. 1040, p. 58). prcd

Please be advised accordingly.

Very truly yours,

(SGD.) JULIO A. SULIT, JR.

Chairman

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