Chapter 3

AUTHORITY TO DO ACTS FOR THE CORPORATION THRU THE BOARD OF DIRECTORS

1. Q: Three out of five directors of X Corporation resolved to assign the corporation’s right
of redemption over its remaining assets, the lots mortgaged to a bank. A deed of
assignment was subsequently executed in favor of M who then redeemed the said
properties. However, R, who was the highest bidder at the public auction, assailed the
validity of the deed of assignment for being an ultra vires act of the Board of Directions
contending that the three directors who made the resolution were not among those
listed as stockholders of X Corporation in the stock and transfer book and thus they
cannot execute any transaction for the corporation. Is the argument of R tenable?
Explain.

A: Yes, R’s argument is tenable. Under Sec. 22 of the RCC, only persons who own at least one
share of the capital stock of the corporation can be directors. Ownership of shares is determined
by the nooks of the corporation. Since the three directors are not stockholders in the corporate
books, they are automatically disqualified to be directors. The three directors ceased to be
directors when they ceased to be stockholders of X corporation. Hence, they cannot validly
approve and execute transactions in behalf of the corporation. (Pena v. CA)

2.

3. . Q: PAW is a domestic corporation organized to operate a customs bonded warehouse.

To obtain a license for the operation of a bonded warehouse from the Bureau of
Customs, Mr. AP, the corporation president, solicited a proposal from Mr. SS for the
preparation of the feasibility study. The initial proposal of SS was accepted by AP. Later,
upon AP’s request, SS sent another proposal to PAW for an operations manual and
seminar/workshop for its employees. The manual was sent to the Bureau of Customs
which thereafter issued a license in favor of PAW to operate a bonded warehouse. SS
likewise conducted a three-day training seminar for the employees of the corporation.
Alleging non-payment, SS subsequently filed a collection suit against the corporation.
PAW resisted the claim on the ground that the second contract for services did not bind
it because it was entered into by its president without authority of the Board of
Directors. Is the contention valid?
4. Q: The Board of Directors of X Corporation issued a resolution authorizing its Treasurer
and General Manager, Mr. A, to secure a loan for Y Corporation, a financing company,
and to sign all papers, documents or promissory notes necessary to secure the loan.
Another resolution was later approved by the Board authorizing Mr. A to act as the
signatory in securing a discounting line with Y Corporation. Mr. A was authorized to sign
all instruments, documents and checks necessary to secure the discounting line. Later,
Mr. A signed Deeds of Assignment and assigned postdated checks of X Corporation to Y
Corporation. A endorsed the checks by signing his name at the back of the checks. The
checks were all dishonored prompting Y Corporation to demand payment from X
Corporation. X Corporation to denied liability yon the checks raising the defense of lack
of authority of a to sign the Deeds of Assignment and asserting that A signed the Deeds
and indorsed the checks in his personal capacity. Is the defense valid?
5. X Corp sold its ice plants to Y Corp who in return executed a mortgage over a property
to secure payment of the purchase price. As a result of the sale, X Corp terminated all its
employees and paid their separation pay. Y Corp thereafter, sold the same ice plant to Z
Corp. Mr. Q, the General Manger of Z Corp owns one half interest in said Corp. Due to
failure to pay the balance, X Corp extrajudicially foreclosed the property and was the
highest bidder in the public auction. Subsequently the latter sold the ice plant, subject
to the right of redemption by Y Corp, to Mr. T, who rehired X Corp’s previous
employees. Thereafter the ice plant was redeemed and possession was obtained by
virtue of the mandatory injunction. However, Z Corp did not re-employ the re-hired
employees and through Mr. Q terminated their services. Can the corporate officers like
the general manager be held personally liable for damages on account of terminaton of
services of the employees. Can the Corporate officers like the general manager by held
personally liable for damages on account of termination of services of the employees.

6. Billy Bomba had been employed by DAD Realty Corporation as a pump operator in 1990
and had since performed such work at its Maharklika Subdivision. In 1999, Bomba filed a
complaint with the Labor Arbiter against DAD Realty Corp and its Vice President Tita
Gloria, for wage differentials, overtime pay, incentive leave pay, 13 th month pay, holiday
pay and rest day pay. The labor arbiter found that Bomba was indeed entitled to such
sought amounts. Is VP Gloria solidarity obligated with DAD Realty Corp for the corporate
liability?

7. Where the BOD of a corp consists of 9 members, two having died during their term of
office, 1 being abroad, what would be the quorum? How many affirmative votes would
be necessary to a pass a resolution? Explain.
8. Q: On Dec. 9, 1985, Matatag Corporation revalued its assets. On the basis of reappraisal,
the BOD also declared cash divideds for all stockholders. On Dec. 16, 1985, Matatag
Corp amassed substantial profits in a highly lucrative transaction. Some minority
stockholders, however, did not want to complicate their income tax problems for 1985
and refused to accept their cash dividents. They also filed suit to compel the other
stockholders to return to Matatag Corp. the money they received as dividends. Not one
of the stockholders who formed the majority joined in the suit since they were happy
with the money they received. When a case was filed against the Board, the BOD raised
the Business Judgement Rule. What is the business judgment rule and does it have any
relevance to this case?

A: Under the Business Judgement Rule the acts of the Board within the powers
conferred upon them cannot be reviewed by courts. They are generally binding on the
stockholders and the courts. The BOD is authorized to exercise absolute but sound
discretion on matters regarding the operation of the Corp.
Declaration of dividends is one of those actions that are within the discretion of the
Board. Thus, the Business Judgment Rule is relevant because declaration of dividends is
usually binding and cannot be reviewed by Courts. (1986 Bar)

PROVISIONS IN THE ARTICLES OF INCORPORATION

1. Q: IAI Inc by a Stock Purchase Agreement, sold to AI, Inc. for the sum of P19.5
million all its outstanding shares of stocks in F Corp. The agreement was signed by
LG and JV, presidents of IAI and AI respectively. IAI expressly warranted in the
agreement that the networth of F Corp is P12 Million, IAI will pay AI the deficiency.
AI paid IAI P12 million and retained the amount of P7.5 million to answer for any
deficiency in the net worth. Instead of reflecting a net worth, it turned out that F
had a deficiency of P1.2 million. However, considering that AI retained P7.5 million,
the balance of the reimbursed is only P5.2 million. Later, LG, the president of IAI
propsed in writing that AI’s claim for refund be reduced to P4.09 million but he
promised to pay the costs of certain superstructres in behalf of AI. AI accepted the
proposal. Later, IAI’s Board refused to implement the accepted proposal on the
ground that while the said Board authorized LG to sell the shares, it did not
authorize LG to make the last proposal. Is this position tenable?

A: The position of the Board of IAI is not tenable. An officer of the corporation who is
authorized to sell the stock of another corporation has the implied power to perform all
other obligations arising therefrom, such as securing payment of the shares of stock. By
allowing its president to sign the Stock Purchase Agreement on its behalf, IAI clothed
him with apparent capacity to perform all acts that are expressly provided for or
impliedly and inherently included in such power to sell. (Inter-Asia Investment Industries
Inc v. CA)

2. Q: Can the President of a Corp or the Chariman of its Board of Directors bind the
Corp. Explain.

3. Q: Evans, the President of 3D Corp, wrote a letter to ED, offering to sell the latter
5,000 bags of fertilizer at P100 per bag. Ed signed his conformity to the letter-offer,
and paid a downpayment of P50,000. A few days later, the Corporate Secretary of
3D informed Ed of the decision of their Board of Directors not to ratify the letter-
offer. However, since Ed had already paid the downpayment, 3D Corporation
delivered 500 bags of fertilizer, which Ed accepted. 3D made it clear that the
delivery should be considered an entirely new transaction. Thereafter, Ed sought
enforcement of the letter offer. Is there a binding contract for the 5000 bags of
fertilizer? Explain.
4. Q: ACME Trading Company, Inc., a trading company wholly owned by foreign
stockholders, was persuaded by Paulo Alva Filipino to invest in 20% of the
outstanding shares of stock of a corporation he is forming which will engage in the
department store business (the department store corporation). Paulo also urged
ACME to invest in 40% of the outstanding shares of stock of the realty corporation
he is putting up to own the land on which the department store will be built (the
realty corporation)
a. May ACME invest in the said department store corporation? Explain.
b. May ACME invest in the realty corporation? Discuss.
c. May the President of ACME, a foreigner sit in the Board of Directors of the said
department store corporation? May he be a adirector of the realty corporation?
Discuss.
d. May the Treasurer of ACME, another foreigner, occupy the same position in the
said department store corp? May he be a treasurer of the said realty corp?
Explain.
5. Q: The purpose of the propsed X Corporation is the extraction and treatment of
water. The Capital of X Corp is divided as follows: 70% of the outstanding capital
shall be owned by A Corp, a 60% Filipino and 40% foreign-owned corporation. The
remaining 30% shall belong to a foreign company. Can X Corp engage in the
proposed purpose or business?