ALCANAR, Bernalyn D.

Case Digests No. 5

Doctrine: The articles of incorporation and the by-laws of a corporation

define and regulate the relations between the corporation and the
stockholders. In interpreting them, the literal meaning of their provisions shall
control, and such provisions should be construed as a whole and not in
isolation.

Case Title: Forest Hills Golf and Country Club, Inc. vs. Gardpro,Inc.,
GR. No. 164686, October 22, 2014 (J. Bersamin)

Facts: Petitioner Forest Hills Golf and Country Club, Inc., a non-profit stock
corporation, was established to promote social, recreational and athletic
activities among its members.

In March 1993, Fil-Estate Properties, Inc., a party to a Project Agreement to

develop the Forest Hills Residential Estates and the Forest Hills Golf and
Country Club, undertook to market the golf club shares of Forest Hills Golf
and Country Club, Inc. for a fee.

In 1995, Fil-Estate Properties, Inc. (FEPI) and Fil- Estate Golf and
Development, Inc. (FEGDI) engaged Fil-Estate Marketing Associates Inc.,
(FEMAI) to market and offer for sale the shares of stocks of Forest Hills.

In 1996, Gardpro, Inc. bought class "C" common shares of stock, which were
special corporate shares that entitled the registered owner to designate two
nominees or representatives for membership in the Club.

Gardpro designated Fernando R. Martin and Rolando N. Reyes to be its

corporate nominees; hence, the two applied for membership in the Club.
Forest Hills charged them membership fees of ₱50,000.00 each, prompting
Martin to immediately call up Albert and complain about being thus charged
despite having been assured that no such fees would be collected from them.
With Albert assuring that the fees were temporary, both nominees of Gardpro
paid the fees. At that time, the ₱45,000.00 membership fees of corporate
members were increased to ₱75,000.00 per nominee by virtue of the August
26, 1997 resolution of the Board of Directors. Any nominee who paid the fees
within a specified period was entitled to a discount of ₱25,000.00. Both
nominees of Gardpro were then admitted as members upon approval of their
applications by the Board of Directors. Later, Gardpro decided to change its
designated nominees, and Forest Hills charged Gardpro new membership
fees of ₱75,000.00 per nominee. When Gardpro refused to pay, the
replacement did not take place.

On July 7, 1999, Gardpro filed a complaint in the SEC.

SEC Hearing Officer: SEC Hearing Officer Natividad T. Querijero rendered

her decision (1) restraining defendant from collecting membership fees for
the two replacement members;(2) the membership fees already paid shall
be applied as membership fees for the two (2) replacement members; and
(3) to pay complainant attorney’s fees in the amount of P50,000.00.

SEC En Banc: Affirmed the findings of Hearing Officer Querijero, except the
granting of attorney’s fees to Gardpro. It held that nowhere in the by-laws of
respondent-appellant is there a provision that authorizes the collection of
membership fees every time a nominee of corporate shareholder is to be
replaced. What the by-laws authorizes is the collection of a "transfer fee," in
such amount as may be prescribed by the Board, for every change in the
designated nominees of a juridical entity.

CA: The Court of Appeals denied the petition for review and affirmed the
ruling of the SEC. It ruled that the payment of membership fee is not a part
of the procedure for the approval of the application for membership.

Issue: Whether the replacement nominees of Gardpro, Inc., who were

applying for membership in Forest Hills, should pay the required membership
fees.

Held: No, Forest Hills was not authorized under its articles of incorporation
and by-laws to collect new membership fees for the replacement nominees
of Gardpro.
The bylaws were the self-imposed rules resulting from the agreement
between Forest Hills and its members to conduct the corporate business in
a particular way. In that sense, the by-laws were the private "statutes" by
which Forest Hills was regulated, and would function. The charter and the
by-laws were thus the fundamental documents governing the conduct of
Forest Hills’ corporate affairs; they established norms of procedure for
exercising rights, and reflected the purposes and intentions of the
incorporators. Until repealed, the by-laws were a continuing rule for the
government of Forest Hills and its officers, the proper function being to
regulate the transaction of the incidental business of Forest Hills. The bylaws
constituted a binding contract as between Forest Hills and its members, and
as between the members themselves. Every stockholder governed by the
by-laws was entitled to access them. The by-laws were self-imposed private
laws binding on all members, directors and officers of Forest Hills. The
prevailing rule is that the provisions of the articles of incorporation and the
by-laws must be strictly complied with and applied to the letter.

In this case, the membership in the Club was a privilege, it being clear that
the mere purchase of a share in the Club did not immediately qualify a
juridical entity for membership. Admission for membership was still upon the
favorable action of the Board of Directors of the Club. Under Section 2.2.7 of
its by-laws, the application form was accomplished by the chairman of the
board, president or chief executive officer of the applicant juridical entity. The
designated nominees also accomplished their respective application forms,
duly proposed and seconded, and the nominees were evaluated as to their
qualifications. The nominees automatically became ineligible for
membership once they ceased to be officers of the corporate member under
its by-laws upon certification of such loss of tenure by a responsible officer
of the corporate member.

Based on the procedure set forth in Section 2.2.7 of the by-laws, the
applicant was the juridical entity, not its nominee or nominees. Although the
nominee or nominees also accomplished their application forms for
membership in the Club, it was the corporate member that was obliged to
pay the membership fees in its own capacity because the share was
registered in its name in the Stock and Transfer Book.
According to the second paragraph of Section 13.6 of the by-laws, the
transfer of playing rights entailed the payment of ₱10,000.00. Yet, Section
2.2.2 of the by-laws stipulated a transfer fee for every replacement. This
warranted the conclusion that Gardpro should pay to Forest Hills the transfer
fee of ₱10,000.00 because it desired to change its nominees.

There was an inconsistency between the by-laws of Forest Hills and the
affidavit of Albert as to the amounts of the membership fees of corporate
members. On one hand, Section 13.7 (Membership Fees) of the by-laws
stated that "the membership fee of Forty Five Thousand Pesos (₱45,000.00)
for corporate members must be paid by the applicant;" on the other, Albert’s
affidavit alleged that "each nominee shall pay the ₱75,000.00 membership
fee." To resolve the inconsistency, the by-laws should prevail because they
constituted the private statutes of the corporation and its members and must
be strictly complied with and applied to the letter.

In construing and applying the provisions of the articles of incorporation and

the by-laws of Forest Hills, the CA has leaned on the plain meaning rule
embodied in Article 1370 of the Civil Code, to the effect that if the terms of
the contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.

The CA was also guided by Article 1374 of the Civil Code, which declares
that "the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them
taken jointly." Verily, all stipulations of the contract are considered and the
whole agreement is rendered valid and enforceable, instead of treating some
provisions as superfluous, void, or inoperable.

WHEREFORE, the Court AFFIRMS the decision promulgated on September

26, 2003; and ORDERS the petitioner to pay the costs of suit. SO
ORDERED.
Doctrine: Without a set of by-laws which provides how the local/chapter
arrives at its decisions or otherwise wields its attributes of legal personality,
then every action of the local/chapter may be put into legal controversy.
However, if those key by-law provisions on matters such as quorum
requirements, meetings, or on the internal governance of the local/chapter
are themselves already provided for in the constitution, then it would be
feasible to overlook the requirement for by-laws.

Case Title: San Miguel Corporation vs. Mandaue Packing Products

Plants, GR. No. 152356, August 16, 2005 (J. Tinga)

Facts: On 15 June 1998, respondent, identifying itself as an affiliate of

Federation of Free Workers (FFW), filed a petition for certification election
with the DOLE Regional Office No. VII, seeking to be certified and to
represent the permanent rank-and-file monthly paid employees of the
petitioner.

Attached to the petition were the following: (1) a Charter Certificate issued
by FFW on 5 June 1998 certifying that respondent as of that date was duly
certified as a local or chapter of FFW; (2) a copy of the constitution of
respondent prepared by its Secretary, Noel T. Bathan and attested by its
President, Wilfred V. Sagun; (3) a list of respondent’s officers and their
respective addresses, again prepared by Bathan and attested by Sagun; (4)
a certification signifying that respondent had just been organized and no
amount had yet been collected from its members, signed by respondent’s
treasurer Chita D. Rodriguez and attested by Sagun; and (5) a list of all the
rank-and-file monthly paid employees of the Mandaue Packaging Products
Plants and Mandaue Glass Plant prepared by Bathan and attested by Sagun.

Petitioner moved for the dismissal of the petition on the ground that herein
respondent is not listed or included in the roster of legitimate labor
organizations based on the certification issued by the Officer-In-Charge,
Regional Director of the DOLE Regional Office No. VII, Atty. Jesus B. Gabor,
on 24 July 1998.

On 29 July 1998, respondent submitted to the Bureau of Labor Relations the

same documents earlier attached to its petition for certification. The
accompanying letter, signed by respondent’s president Sagun, stated that
such documents were submitted in compliance with the requirements for the
creation of a local/chapter pursuant to the Labor Code and its Implementing
Rules; and it was hoped that the submissions would facilitate the listing of
respondent under the roster of legitimate labor organizations.

Thereafter, the Chief of Labor Relations Division of DOLE Regional Office

No. VII issued a Certificate of Creation of Local/Chapter No. ITD. I-ARFBT-
058/98, certifying that from July 30, 1998, respondent has acquired legal
personality as a labor organization/worker’s association, it having submitted
all the required documents.

Petitioner filed a petition to cancel the union registration of respondent.

However, this petition was denied, and such denial was subsequently
affirmed by the Court of Appeals in a decision that has since become final.

Med-Arbiter: Med-Arbiter Manit issued an Order dismissing respondent’s

petition for certification election. The sole ground relied upon for the
dismissal was the Med-Arbiter’s Opinion that as of the date of filing of the
petition on June 15, 1998, respondent did not have the legal personality to
file the said petition for certification election.

DOLE: On appeal, DOLE Undersecretary Rosalinda Dimapilis-Baldoz

rendered a Decision reversing the Order. Undersecretary Baldoz concluded
that respondent acquired legal personality as early as June 15 1998, the date
it submitted the required documents, citing Section 3, Rule VI of the New
Rules Implementing the Labor Code (Implementing Rules) which deems that
a local/chapter acquires legal personality from the date of filing of the
complete documentary requirements as mandated in the Implementing
Rules. The DOLE also ruled that the contention that two of respondent’s
officers were actually supervisors can be threshed out in the pre-election
conferences where the list of qualified voters is to be determined.

CA: The Court of Appeals affirmed the two conclusions of the DOLE.

Issue: Whether the respondent has legal personality in filing the petition for
certification election.
Held: Yes, the respondent has legal personality in filing the petition for
certification election.

Article 234 of the Labor Code enumerates the requirements for registration
of an applicant labor organization, association, or group of unions or workers
in order that such entity could acquire legal personality and entitlement to
the rights and privileges granted by law to legitimate labor organizations.
These include a registration fee of fifty pesos (₱50.00); a list of the names of
the members and officers, and copies of the constitution and by-laws of the
applicant union.

However, the Labor Code itself does not lay down the procedure for the
registration of a local or chapter of a labor organization. Such has been
traditionally provided instead in the Implementing Rules, particularly in Book
V thereof. However, in the last decade or so, significant amendments have
been introduced to Book V, first by Department Order No. 9 which took effect
on June 21, 1997, and again by Department Order No. 40 dated 17 February
2003. The differences in the procedures laid down in these various versions
are significant. However, since the instant petition for certification was filed
in 1998, the Implementing Rules, as amended by Department Order No. 9,
should govern the resolution of this petition.

Section 1, Rule VI of Department Order No. 9 prescribes the documentary

requirements for the creation of a local/chapter. It states:

Section 1. Chartering and creation of a local chapter — A duly

registered federation or national union may directly create a
local/chapter by submitting to the Regional Office or to the Bureau two
(2) copies of the following:

a) A charter certificate issued by the federation or national union

indicating the creation or establishment of the local/chapter;

(b) The names of the local/chapter's officers, their addresses, and the
principal office of the local/chapter;
 (c) The local/chapter's constitution and by-laws; provided that where
the local/chapter's constitution and by-laws is the same as that of the
federation or national union, this fact shall be indicated accordingly.

All the foregoing supporting requirements shall be certified under oath

by the Secretary or Treasurer of the local/chapter and attested by its
President.

Meanwhile, Section 3, Rule VI of Department Order No. 9 provides that the

local/chapter acquires legal personality from the date of the filing of the
complete documentary requirements.

It is thus very clear that the issuance of the certificate of registration by the
Bureau or Regional Office is not the operative act that vests legal personality
upon a local/chapter under Department Order No. 9. Such legal personality
is acquired from the filing of the complete documentary requirements
enumerated in Section 1, Rule VI. Admittedly, the manner by which
respondent was deemed to have acquired legal personality by the DOLE and
the Court of Appeals was not in strict conformity with the provisions of
Department Order No. 9.

In regular order, it is the federation or national union, already in possession

of legal personality, which initiates the creation of the local/chapter. It issues
a charter certificate indicating the creation or establishment of the
local/chapter. It then submits this charter certificate, along with the names of
the local/chapter’s officers, constitution and by-laws to the Regional Office
or Bureau. It is the submission of these documents, certified under oath by
the Secretary or Treasurer of the local/chapter and attested by the President,
which vests legal personality in the local/chapter, which is then free to file on
its own a petition for certification election.

In this case, the federation in question, the FFW, did not submit any of these
documentary requirements to the Regional Office or Bureau. It did however
issue a charter certificate to the putative local/chapter (herein respondent).
Respondent then submitted the charter certificate along with the other
documentary requirements to the Regional Office, but not for the specific
purpose of creating the local/chapter, but for filing the petition for certification
election.

It could be properly said that at the exact moment respondent was filing the
petition for certification, it did not yet possess any legal personality, since the
requisites for acquisition of legal personality under Section 3, Rule VI of
Department Order No. 9 had not yet been complied with. It could also be
discerned that the intention of the Labor Code and its Implementing Rules
that only those labor organizations that have acquired legal personality are
capacitated to file petitions for certification elections. Such is the general rule.

Yet there are peculiar circumstances in this case that allow the Court to rule
that respondent acquired the requisite legal personality at the same time it
filed the petition for certification election. In doing so, the Court
acknowledges that the strict letter of the procedural rule was not complied
with. However, labor laws are generally construed liberally in favor of labor,
especially if doing so affirms the constitutionally guaranteed right to self-
organization.

True enough, there was no attempt made by the national federation, or the
local/chapter for that matter, to submit the enumerated documentary
requirements to the Regional Office or Bureau for the specific purpose of
creating the local/chapter. However, these same documents were submitted
by the local/chapter to the Regional Office as attachments to its petition for
certification election. Under Section 3, Rule VI of Department Order No. 9, it
is the submission of these same documents to the Regional Office or Bureau
that operates to vest legal personality on the local/chapter.

Thus, in order to ascertain when respondent acquired legal personality, we

only need to determine on what date the Regional Office or Bureau received
the complete documentary requirements enumerated under Section 1, Rule
VI of Department Order No. 9.

Here, respondent never submitted a separate by-laws, nor does it appear

that respondent ever intended to prepare a set thereof. Section 1(c), Rule
VI, Book V of Department Order No. 9 provides that the submission of both
a constitution and a set of by-laws is required, or at least an indication that
the local/chapter is adopting the constitution and by-laws of the federation or
national union.

Without a set of by-laws which provides how the local/chapter arrives at its
decisions or otherwise wields its attributes of legal personality, then every
action of the local/chapter may be put into legal controversy.

However, if those key by-law provisions on matters such as quorum

requirements, meetings, or on the internal governance of the local/chapter
are themselves already provided for in the constitution, then it would be
feasible to overlook the requirement for by-laws. Indeed in such an event, to
insist on the submission of a separate document denominated as "By-Laws"
would be an undue technicality, as well as a redundancy.

An examination of respondent’s constitution reveals it sufficiently

comprehensive in establishing the necessary rules for its operation. Article
IV establishes the requisites for membership in the local/chapter. Articles V
and VI name the various officers and what their respective functions are. The
procedure for election of these officers, including the necessary vote
requirements, is provided for in Article IX, while Article XV delineates the
procedure for the impeachment of these officers. Article VII establishes the
standing committees of the local/chapter and how their members are
appointed. Article VIII lays down the rules for meetings of the union, including
the notice and quorum requirements thereof. Article X enumerates with
particularity the rules for union dues, special assessments, fines, and other
payments. Article XII provides the general rule for quorum in meetings of the
Board of Directors and of the members of the local/chapter, and cites the
applicability of the Robert’s Rules of Order43 in its meetings. And finally,
Article XVI governs and institutes the requisites for the amendment of the
constitution.

Indeed, it is difficult to see in this case what a set of by-laws separate from
the constitution for respondent could provide that is not already provided for
by the Constitution. These premises considered, there is clearly no need for
a separate set of by-laws to be submitted by respondent.
The Court likewise sees no impediment in deeming respondent as having
acquired legal personality as of June 15, 1998, the fact that it was the
local/chapter itself, and not the FFW, which submitted the documents
required under Section 1, Rule VI of Department Order No. 9. The evident
rationale why the rule states that it is the federation or national union that
submits said documents to the Bureau or Regional Office is that the creation
of the local/chapter is the sole prerogative of the federation or national union,
and not of any other entity. Certainly, a putative local/chapter cannot, without
the imprimatur of the federation or national union, claim affiliation with the
larger unit or source its legal personality therefrom.

Nonetheless, there is no good reason to deny legal personality or defer its

conferral to the local/chapter if it is evident at the onset that the federation or
national union itself has already through its own means established the
local/chapter. In this case, such is evidenced by the Charter Certificate dated
June 9, 1998, issued by FFW, and attached to the petition for certification
election. The Charter Certificate expressly states that respondent has been
issued the said certificate "to operate as a local or chapter. The Charter
Certificate expressly acknowledges FFW’s intent to establish respondent as
of June 9, 1998.

Thus, it is permissible for respondent to have submitted the required

documents itself to the Regional Office, and proper that respondent’s legal
personality be deemed existent as of June 15,1998, the date the complete
documents were submitted.

WHEREFORE, the Petition is DENIED. Costs against petitioner.

Doctrine: As the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it, by-laws are
indispensable to corporations in this jurisdiction. These may not be essential
to corporate birth but certainly, these are required by law for an orderly
governance and management of corporations. Nonetheless, failure to file
them within the period required by law by no means tolls the automatic
dissolution of a corporation.

Case Title: Loyola Grand Villas Homeowners Association, Inc. vs. CA,
GR. No. 117188, August 7, 1997 (J. Romero)

Facts: Loyola Grand Villas Homeowners Association (LGVHA) was

organized on February 8, 1983 as the association of homeowners and
residents of the Loyola Grand Villas.

Sometime in 1988, the officers of the LGVHAI tried to register its by-laws.
They failed to do so. To the officers' consternation, they discovered that there
were two other organizations within the subdivision — the North Association
and the South Association. According to private respondents, a non-resident
and Soliven himself, respectively headed these associations. They also
discovered that these associations had five (5) registered homeowners each
who were also the incorporators, directors and officers thereof. None of the
members of the LGVHAI was listed as member of the North Association
while three (3) members of LGVHAI were listed as members of the South
Association. The North Association was registered with the HIGC on
February 13, 1989 under Certificate of Registration No. 04-1160 covering
Phases West II, East III, West III and East IV. It submitted its by-laws on
December 20, 1988.

In July, 1989, when Soliven inquired about the status of LGVHAI, Atty.
Joaquin A. Bautista, the head of the legal department of the HIGC, informed
him that LGVHAI had been automatically dissolved for two reasons. First, it
did not submit its by-laws within the period required by the Corporation Code
and, second, there was non-user of corporate charter because HIGC had not
received any report on the association's activities. Apparently, this
information resulted in the registration of the South Association with the
HIGC on July 27, 1989 covering Phases West I, East I and East II. It filed its
by-laws on July 26, 1989.

These developments prompted the officers of the LGVHAI to lodge a

complaint with the HIGC. They questioned the revocation of LGVHAI's
certificate of registration without due notice and hearing and concomitantly
prayed for the cancellation of the certificates of registration of the North and
South Associations by reason of the earlier issuance of a certificate of
registration in favor of LGVHAI.

On January 26, 1993, after due notice and hearing, private respondents
obtained a favorable ruling from HIGC Hearing Officer Danilo C. Javier who
disposed of HIGC Case No. RRM-5-89 as follows:

HIGC: After due notice and hearing, private respondents obtained a

favorable ruling from HIGC Hearing Officer Danilo C. Javier, recognizing the
Loyola Grand Villas Homeowners Association, Inc. as the duly registered
and existing homeowners association for Loyola Grand Villas homeowners,
and declaring the Certificates of Registration of Loyola Grand Villas
Homeowners (North) Association, Inc. and Loyola Grand Villas Homeowners
(South) Association, Inc. as revoked or cancelled.

CA: The Court of Appeals affirmed the Resolution of the HIGC Appeals
Board. It found nothing in the provisions of Section 46 and 22, Corporation
Code, or in any other provision of the Code and other laws which provide or
at least imply that failure to file the by-laws results in an automatic dissolution
of the corporation. While Section 46, in prescribing that by-laws must be
adopted within the period prescribed therein, may be interpreted as a
mandatory provision, particularly because of the use of the word "must," its
meaning cannot be stretched to support the argument that automatic
dissolution results from non-compliance.

Moreover, the CA did not agree with the petitioner's interpretation that
Section 46, Corporation Code prevails over Section 6, P.D. 902-A and that
the latter is invalid because it contravenes the former. There is no basis for
such interpretation considering that these two provisions are not inconsistent
with each other. They are, in fact, complementary to each other so that one
cannot be considered as invalidating the other.

Issue: Whether the failure of a corporation to file its by-laws within one month
from the date of its incorporation, as mandated by Section 46 of the
Corporation Code, would result in its automatic dissolution.

Held: No, the failure of a corporation to file its by-laws within one month from
the date of its incorporation, as mandated by Section 46 of the Corporation
Code, will not result in its automatic dissolution.

As correctly postulated by the petitioner, interpretation of this provision of law

begins with the determination of the meaning and import of the word "must"
in this section Ordinarily, the word "must" connotes an imperative act or
operates to impose a duty which may be enforced. It is synonymous with
"ought" which connotes compulsion or mandatoriness. However, the word
"must" in a statute, like "shall," is not always imperative. It may be consistent
with an exercise of discretion. In this jurisdiction, the tendency has been to
interpret "shall" as the context or a reasonable construction of the statute in
which it is used demands or requires. This is equally true as regards the
word "must." Thus, if the languages of a statute considered as a whole and
with due regard to its nature and object reveals that the legislature intended
to use the words "shall" and "must" to be directory, they should be given that
meaning.

In this respect, portions of the deliberations of the Batasang Pambansa No.

68 demonstrates clearly that automatic corporate dissolution for failure to file
the by-laws on time was never the intention of the legislature. Moreover,
even without resorting to the records of deliberations of the Batasang
Pambansa, the law itself provides the answer to the issue propounded by
petitioner.

Taken as a whole and under the principle that the best interpreter of a statute
is the statute itself (optima statuli interpretatix est ipsum statutum), Section
46 reveals the legislative intent to attach a directory, and not mandatory,
meaning for the word "must" in the first sentence thereof. Note should be
taken of the second paragraph of the law which allows the filing of the by-
laws even prior to incorporation. This provision in the same section of the
Code rules out mandatory compliance with the requirement of filing the by-
laws "within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange Commission." It
necessarily follows that failure to file the by-laws within that period does not
imply the "demise" of the corporation. By-laws may be necessary for the
"government" of the corporation, but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes. There
are in fact cases where by-laws are unnecessary to corporate existence or
to the valid exercise of corporate powers.

Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within
the period provided for in Section 46. However, such omission has been
rectified by Presidential Decree No. 902-A, the pertinent provisions on the
jurisdiction of the SEC of which state:

Sec. 6. In order to effectively exercise such jurisdiction, the

Commission shall possess the following powers:

xxx xxx xxx

(1) To suspend, or revoke, after proper notice and hearing, the

franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law, including the
following:

xxx xxx xxx

5. Failure to file by-laws within the required period;

xxx xxx xxx

Even under the foregoing express grant of power and authority, there can be
no automatic corporate dissolution simply because the incorporators failed
to abide by the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright "demise" of corporate existence.
Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the incorporators
must be given the chance to explain their neglect or omission and remedy
the same.

That the failure to file by-laws is not provided for by the Corporation Code
but in another law is of no moment. P.D. No. 902-A, which took effect
immediately after its promulgation on March 11, 1976, is very much apposite
to the Code. Accordingly, the provisions abovequoted supply the law
governing the situation in the case at bar, inasmuch as the Corporation Code
and P.D. No. 902-A are statutes in pari materia.

As the rules and regulations or private laws enacted by the corporation to

regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it, by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth
but certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them within the
period required by law by no means tolls the automatic dissolution of a
corporation.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED

and the questioned Decision of the Court of Appeals AFFIRMED. This
Decision is immediately executory. Costs against petitioner.
Doctrine: The board of directors of corporations must be elected from
among the stockholders or members. There may be corporations in which
there are unelected members in the board but only as ex officio members,
i.e., by virtue of and for as long as they hold a particular office.

Case Title: Grace Christian High School vs. CA, GR. No. 108905,
October 23, 1997 (J. Mendoza)

Facts: Petitioner Grace Christian High School is an educational institution

offering preparatory, kindergarten and secondary courses at the Grace
Village in Quezon City. Private respondent Grace Village Association, Inc.,
on the other hand, is an organization of lot and/or building owners, lessees
and residents at Grace Village, while private respondents Alejandro G.
Beltran and Ernesto L. Go were its president and chairman of the committee
on election, respectively, in 1990, when this suit was brought.

For fifteen years — from 1975 until 1989 — petitioner's representative had
been recognized as a "permanent director" of the association. But on
February 13, 1990, petitioner received notice from the association's
committee on election that the latter was reconsidering the right of
petitioner's representative to continue as an unelected member of the board.

The draft of the amended by-laws upon which petitioner based its claim was
never presented to the general membership for approval. Nevertheless, from
1975, after it was presumably submitted to the board, up to 1990, petitioner
was given a permanent seat in the board of directors of the association. On
February 13, 1990, the association's committee on election in a letter
informed James Tan, principal of the school, that "it was the sentiment that
all directors should be elected by members of the association" because "to
make a person or entity a permanent Director would deprive the right of
voters to vote for fifteen (15) members of the Board," and "it is undemocratic
for a person or entity to hold office in perpetuity." For this reason, Tan was
told that "the proposal to make the Grace Christian High School
representative as a permanent director of the association, although
previously tolerated in the past elections should be reexamined." Following
this advice, notices were sent to the members of the association that the
provision on election of directors of the 1968 by-laws of the association would
be observed.

As the board denied petitioner's request to be allowed representation without

election, petitioner brought an action for mandamus in the Home Insurance
and Guaranty Corporation.

HIGC: The hearing officer rendered a decision dismissing petitioner's action.

The hearing officer held that the amended by-laws, upon which petitioner
based its claim, "was merely a proposed by-laws which, although
implemented in the past, had not yet been ratified by the members of the
association nor approved by competent authority"; that, on the contrary, in
the meeting held on April 17, 1990, the directors of the association declared
"the proposed by-law dated December 20, 1975 prepared by the committee
on by-laws . . . null and void" and the by-laws of December 17, 1968 as the
"prevailing by-laws under which the association is to operate until such time
that the proposed amendments to the by-laws are approved and ratified by
a majority of the members of the association and duly filed and approved by
the pertinent government agency." The hearing officer rejected petitioner's
contention that it had acquired a vested right to a permanent seat in the
board of directors. He held that past practice in election of directors could
not give rise to a vested right and that departure from such practice was
justified because it deprived members of association of their right to elect or
to be voted in office, not to say that "allowing the automatic inclusion of a
member representative of petitioner as permanent director [was] contrary to
law and the registered by-laws of respondent association."

The appeals board of the HIGC affirmed the decision of the hearing officer.

CA: The Court of Appeals affirmed the decision of the HIGC. It held that
there was no valid amendment of the association's by-laws because of
failure to comply with the requirement of its existing by-laws, prescribing the
affirmative vote of the majority of the members of the association at a regular
or special meeting called for the adoption of amendment to the by-laws.

Issue: Whether petitioner’s representative may be recognized as a

“permanent director” of the private respondent.
Held: No, petitioner’s representative may not be recognized as a “permanent
director” of the private respondent.

Article XIX of Grace Village Association’ by-laws actually implements Section

22 of the Corporation Law (Act No. 1459) which provides:

Section 22. The owners of a majority of the subscribed capital stock,

or a majority of the members if there be no capital stock, may, at a
regular or special meeting duly called for the purpose, amend or repeal
any by-law or adopt new by-laws. The owners of two-thirds of the
subscribed capital stock, or two-thirds of the members if there be no
capital stock, may delegate to the board of directors the power to
amend or repeal any by-law or to adopt new by-laws: Provided,
however, That any power delegated to the board of directors to amend
or repeal any by-law or adopt new by-laws shall be considered as
revoked whenever a majority of the stockholders or of the members of
the corporation shall so vote at a regular or special meeting. And
provided, further, That the Director of the Bureau of Commerce and
Industry shall not hereafter file an amendment to the by-laws of any
bank, banking institution or building and loan association, unless
accompanied by certificate of the Bank Commissioner to the effect that
such amendments are in accordance with law.

The proposed amendment to the by-laws was never approved by the

majority of the members of the association as required by these provisions
of the law and by-laws. But petitioner contends that the members of the
committee which prepared the proposed amendment were duly authorized
to do so and that because the members of the association thereafter
implemented the provision for fifteen years, the proposed amendment for all
intents and purposes should be considered to have been ratified by them.

Even a careful perusal of Section 92 of the Corporation Code would not show
that it prohibits a non-stock corporation or association from granting one of
its members a permanent seat in its board of directors or trustees. If there is
no such legal prohibition then it is allowable provided it is so provided in the
Articles of Incorporation or in the by-laws as in the instant case.
The Corporation Code (B.P. Blg. 68) provides:

Section 23. The Board of Directors or Trustees. — 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 corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks,
or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their
successors are elected and qualified.

The provisions of the former and present corporation law leave no room for
doubt as to their meaning: the board of directors of corporations must be
elected from among the stockholders or members. There may be
corporations in which there are unelected members in the board but it is clear
that in the examples cited by petitioner the unelected members sit as ex
officio members, i.e., by virtue of and for as long as they hold a particular
office. But in the case of petitioner, there is no reason at all for its
representative to be given a seat in the board. Nor does petitioner claim a
right to such seat by virtue of an office held. In fact it was not given such seat
in the beginning. It was only in 1975 that a proposed amendment to the by-
laws sought to give it one.

Since the provision in question is contrary to law, the fact that for fifteen years
it has not been questioned or challenged but, on the contrary, appears to
have been implemented by the members of the association cannot forestall
a later challenge to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the power of the
members of the association to waive its invalidity. For that matter the
members of the association may have formally adopted the provision in
question, but their action would be of no avail because no provision of the
by-laws can be adopted if it is contrary to law.

Nor can petitioner claim a vested right to sit in the board on the basis of
"practice." Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law. Even less tenable is petitioner's claim that
its right is "coterminus with the existence of the association."

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

Doctrine: Section 89 of Batas Pambansa Blg. 68, or the Corporation Code
of the Philippines, recognizes a member's right to vote by proxy. Section 58
then provides that a proxy shall be in writing, signed by the member, and
filed with the corporate secretary before the scheduled meeting.

Case Title: Cezar Yatco Real Estate Services vs. Bel Air Village
Association Inc. GR. No. 211780, November 21, 2018 (J. Perez)

Facts: Makati Development Corporation developed Bel-Air Village, a

residential subdivision in Makati City, and sold lots to interested buyers. The
contracts of sale between Makati Development Corporation and the lot
buyers in Bel-Air Village were subjected to specific conditions and
easements embodied in the Deed Restrictions, which had a lifetime of 50
years.

Sometime in 1998, Bel-Air Village Association, Inc. created the 2007

Committee to assess and propose amendments to the Deed Restrictions, in
anticipation of its impending expiration. The 2007 Committee circulated
questionnaires among the homeowners and held meetings to gather input
on the proposed amendments.

In June 2006, the Association had its annual meeting and discussed the
proposed amendments and revisions to the Deed Restrictions.

In September 2006, the Association circulated copies of the proposed

amendments and revisions to the homeowners.

In October 2006, in a special board meeting, the Association passed a board

resolution calling for the Deed Restrictions' amendment. The first of the 10
proposed amendments suggested extending the Deed Restrictions' term to
August 23, 2032.

The Association agreed to set on December 12, 2006 a special membership

meeting to submit the board resolution to the homeowners for their
ratification.
On December 12, 2006, 718 members out of a total of 934 members in good
standing and eligible to vote, attended the special membership meeting. Of
the votes cast, 72% chose to extend the period of the Deed Restrictions, 3%
rejected the extension, and 25% abstained.

On February 8, 2007, Cezar Yatco Real Estate Services, GRD Property

Resources, Masterman Land Corporation (Masterman), Gamaliel, Lourdes,
Sofia Limjap (Sofia), and Pijuan (collectively, the complainants), who had all
voted against the Deed Restrictions' extension, filed a Verified Complaint
before the Housing and Land Use Regulatory Board.

In their Verified Complaint, the complainants alleged that the Deed

Restrictions was only effective for 50 years, or from January 15, 1957 to
January 15, 2007, as it did not provide for its extension. Thus, the
complainants contended that the Association's resolution extending the
Deed Restrictions' effectivity was illegally and arbitrarily approved. They also
averred that no quorum was reached in the December 12, 2006 special
membership meeting.

Issue: Whether the extension of the Deed Restrictions' term of effectivity

was validly voted upon by a majority of private respondent Bel- Air Village
Association, Inc.'s members.

Held: Yes, the extension of the Deed Restrictions' term of effectivity was
validly voted upon by a majority of private respondent Bel- Air Village
Association, Inc.'s members.

The Deed Restrictions is a restrictive covenant that governs how lot owners
can use or enjoy their properties. It was annotated on the land titles issued
to the lot owners and it is not disputed that lot owners are bound by these
annotations under Section 39 of Act 496, or the Land Registration Act, which
provides that proxy is a form of agency created in instances when a person
is unable to personally cast his or her vote; hence, the act of voting is
delegated to another person.

Section 89 of Batas Pambansa Blg. 68, or the Corporation Code of the

Philippines, recognizes a member's right to vote by proxy. Section 58 then
provides that a proxy shall be in writing, signed by the member, and filed with
the corporate secretary before the scheduled meeting.

However, the Corporation Code also empowers the members to provide for
their own proxy requirements in their by-laws, as seen in Section 47(4),
which provides

Nonetheless, in the absence of additional formal requirements for proxies in

the by-laws, the basic requirements for a written proxy submitted prior to the
scheduled meeting under Section 58 govern. Again, the Court of Appeals did
not err when it upheld the validity of the submitted proxies and the
overwhelming vote to extend the Deed Restrictions term of effectivity.
Finally, PADCOM Condominium Corporation v. Ortigas Center Association,
Inc. reiterated that automatic membership in a homeowners' association
does not violate lot owners' right to freedom of association because they
were not forced to buy their lots from the developer:

WHEREFORE, premises considered, the Petition is DENIED.

Doctrine: Without the certification of the corporate secretary, it is incumbent
upon the other directors or stockholders as the case may be, to submit proof
that the minutes of the meeting is accurate and reflective of what transpired
during the meeting.

Case Title: Lopez Realty vs. Tanjangco, GR. No. 154291, November 12,
2014 (J. Reyes)

Facts: Lopez Realty, Inc. and Dr. Jose Tanjangco were the registered co-
owners of three parcels of land and the building erected thereon known as
the "Trade Center Building."

Jose’s one-half share in the subject properties were later transferred and
registered in the name of his son Reynaldo Tanjangco and daughter-in-law,
Maria Luisa Arguelles (spouses Tanjangco).

Except for Arturo and Teresita, the rest of the stockholders were members
of the Board of Directors. Asuncion was LRI’s Corporate Secretary.

It was finally agreed by the body that Asuncion F. Lopez will be given the
priority to accept equal the Tanjangco offer and the same to be exercised
within ten (10 accept) days. Failure on her part to act on the offer, the said
offer will be deemed accepted.

Asuncion failed to exercise her option to purchase the subject properties

within the stated period. Thus, on August 17, 1981, while Asuncion was
abroad, the remaining directors: Rosendo, Benjamin and Leo convened in a
special meeting, where, in a resolution, Arturo F. Lopez had been authorized
by the Board to immediately negotiate with the Tanjangcos on the matter of
the latter’s offer to purchase ½ of the Trade Center Building and in
connection there with he is given full power and authority by the Board to
carry out the complete termination of the sale terms and conditions as
embodied in the Resolution of July 27, 1981 and in connection therewith is
likewise authorized to sign for and in behalf of Lopez Realty Incorporated.
Upon learning of the above developments, Asuncion sent cablegrams to
Rosendo and Jose on August 25, 1981, requesting them not to proceed with
the sale.

The sale was ratified through the July 30, 1982 Board Resolution.

RTC: Finding the sale null and void, the trial court ruled that Arturo lacked
the authority to sell LRI’s interest on the subject properties to the spouses
Tanjangco on LRI’s behalf in view of the procedural infirmities which
attended the meeting held on August 17, 1981.

CA: The CA recognized Arturo’s authority to sell LRI’s interest on the subject
properties, holding that this Court had earlier declared the August 17, 1981
Board Resolution as valid in Lopez Realty, Inc. v. Fontecha.

The CA likewise ruled that whatever infirmity attended the August 17, 1981
Board Resolution was cured by ratification of the majority of the directors in
the joint stockholders and directors meeting held on July 30, 1982.

Issue: Whether the sale to the spouses Tanjangco is valid.

Held: Yes, the sale to the spouses Tanjangco is valid.

The general rule is that a corporation, through its board of directors, should
act in the manner and within the formalities, if any, prescribed by its charter
or by the general law. Thus, directors must act as a body in a meeting called
pursuant to the law or the corporation’s bylaws, otherwise, any action taken
therein may be questioned by any objecting director or shareholder.
However, the actions taken in such a meeting by the directors or trustees
may be ratified expressly or impliedly. Implied ratification may take various
forms — like silence or acquiescence, acts showing approval or adoption of
the act, or acceptance and retention of benefits flowing therefrom.

In the present case, the ratification was expressed through the July 30, 1982
Board Resolution.
The proper custodian of the books, minutes and official records of a
corporation is usually the corporate secretary. Being the custodian of
corporate records, the corporate secretary has the duty to record and
prepare the minutes of the meeting. The signature of the corporate secretary
gives the minutes of the meeting probative value and credibility.

Thus, without the certification of the corporate secretary, it is incumbent upon

the other directors or stockholders as the case may be, to submit proof that
the minutes of the meeting is accurate and reflective of what transpired
during the meeting. Conformably to the foregoing, in the absence of
Asuncion’s certification, only Juanito, Benjamin and Rosendo, whose
signatures appeared on the minutes, could be considered as to have ratified
the sale to the spouses Tanjangco.

Yet, notwithstanding the lack of Leo’s signature to prove that he indeed voted
in favor of the ratification, the results are just the same for he owns one share
of stock only. Pitted against the shares of the other stockholders who voted
in favor of ratification, Asuncion and Leo were clearly outvoted.

In sum, whatever defect there was on the sale to the spouses Tanjangco
pursuant to the August 17, 1981 Board Resolution, the same was cured
through its ratification in the July 30, 1982 Board Resolution. It is of no
moment whether Arturo was authorized to merely negotiate or to enter into
a contract of sale on behalf of LRI as all his actions in connection to the sale
were expressly ratified by the stockholders holding 67% of the outstanding
capital stock.

WHEREFORE, the instant petition is DENIED. The Decision dated February

22, 2002 of the Court of Appeals in CA-G.R. CV No. 63519 is hereby
AFFIRMED.
Doctrine: "Quorum" is defined as that number of members of a body which,
when legally assembled in their proper places, will enable the body to
transact its proper business. "Majority," when required to constitute a
quorum, means the greater number than half or more than half of any total.

Case Title: Balinghasay vs. Castillo, GR. No. 185664, April 8, 2015 (J.
Reyes)

Facts: The MCPI, a domestic corporation organized in 1977, operates the

Medical Center Parañaque (MCP). Castillo, Oscar, Flores, Navarro, and
Templo are minority stockholders of MCPI. Each of them holds 25 Class B
shares. On the other hand, nine of the herein petitioners, namely,
Balinghasay, Bernabe, Alodia, Jimenez, Oblepias, Savet, Villamora,Valdez
and Villareal, are holders of Class A shares and were Board Directors of
MCPI. The other eight petitioners are holders of Class B shares. The
petitioners are part of a group who invested in the purchase of ultrasound
equipment, the operation of and earnings from which gave rise to the instant
controversy.

Before 1997, the laboratory, physical therapy, pulmonary and ultrasound

services in MCP were provided to patients by way of concessions granted to
independent entities. When the concessions expired in 1997, MCPI decided
that it would provide on its own the said services, except ultrasound.

In 1997, the MCPI’s Board of Directors awarded the operation of the

ultrasound unit to a group of investors (ultrasound investors) composed
mostly of Obstetrics-Gynecology (Ob-gyne) doctors. The ultrasound
investors held either Class A or Class B shares of MCPI. Among them were
nine of the herein petitioners, who were then, likewise, MCPI Board
Directors. The group purchased a Hitachi model EUB-200 C ultrasound
equipment costing ₱850,000.00 and operated the same. Albeit awarded by
the Board of Directors, the operation was not yet covered by a written
contract.6

In the meeting of the MCPI’s Board of Directors held on August 14, 1998,
seven (7) of the twelve (12) Directors present were part of the ultrasound
investors. The Board Directors made a counter-offer anent the operation of
the ultrasound unit. Hence, essentially then, the award of the ultrasound
operation still bore no formal stamp of approval.

On February 5, 1999, twelve (12) Board Directors attended the Board

meeting and eight (8) of them were among the ultrasound investors. A
Memorandum of Agreement (MOA) was entered into by and between MCPI,
represented by its President then, Bernabe, and the ultrasound investors,
represented by Oblepias.

On October 6, 1999, Flores wrote MCPI’s counsel a letter challenging the

Board of Directors’ approval of the MOA for being prejudicial to MCPI’s
interest. Thereafter, on February 7, 2000, Flores manifested to MCPI’s Board
of Directors and President his view regarding the illegality of the MOA, which,
therefore, cannot be validly ratified.

On March 22, 2001, the herein respondents filed with the RTC a derivative
suit against the petitioners for violation of Section 31 of the Corporation
Code.

RTC: Rendered a Decision dismissing the respondents’ amended complaint.

The RTC found that MCPI had, in effect, impliedly ratified the MOA by
accepting or retaining benefits flowing therefrom.

CA: Granted the Petition for Review and declared the MOA invalid.

Issue: Whether the CA erred in declaring the MOA invalid.

Held: No, the CA did not err in declaring the MOA invalid.

As acknowledged by the petitioners and aptly pointed out by the

respondents, the existence of the circumstances and urgent hospital
necessity justifying the purchase and operation of the ultrasound unit by the
investors were not at the outset offered as evidence. Having been belatedly
raised, the aforesaid defenses were not scrutinized during the trial and their
truth or falsity was not uncovered. This is fatal to the petitioners’ cause. The
CA thus cannot be faulted for ruling against the petitioners in the face of
evidence showing that: (a) there was no quorum when the Board meetings
were held on August 14, 1998 and February 5, 1999; (b) the MOA was not
ratified by a vote of two-thirds of MCPI’s outstanding capital stock; and (c)
the Balance Sheets for the years 1996 to 2000 indicated that MCPI was in a
financial position to purchase the ultrasound equipment.

The petitioners harp on their lofty purpose, which had supposedly moved
them to purchase and operate the ultrasound unit. Unfortunately, their claims
are not evident in the records.1âwphi1 Further, even if their claims were to
be assumed as true for argument’s sake, the fact remains that the Board
Directors, who approved the MOA, did not outrightly inform the stockholders
about it. The ultrasound equipment was purchased and had been in
operation since 1997, but the matter was only brought up for ratification by
the stockholders in the annual meetings held in the years 2000 to 2003. This
circumstance lends no credence to the petitioners’ cause.
Doctrine: Service must be made on a representative so integrated with the
corporation sued as to make it a priori supposable that he will realize his
responsibilities and know what he should do with any legal papers served on
him.

Case Title: Lee vs. Court of Appeals, GR. No. 93695, February 4, 1992
(J. Gutierrez Jr.)

Facts: On November 15, 1985, a complaint for a sum of money was filed by
the International Corporate Bank, Inc. against the private respondents who,
in turn, filed a third party complaint against ALFA and the petitioners.

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 petitioner's letter informing the court that the summons
for ALFA was erroneously served upon them considering that the
management of ALFA had been transferred to the DBP.

In a manifestation, the DBP claimed that it was not authorized to receive

summons on behalf of ALFA since the DBP had not taken over the company
which has a separate and distinct corporate personality and existence.

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

The private respondents filed a Manifestation and Motion for the Declaration
of Proper Service of Summons which the trial court granted on August 17,
1988.

On September 12, 1988, the petitioners filed a motion for reconsideration

submitting that Rule 14, section 13 of the Revised Rules of Court is not
applicable since they were no longer officers of ALFA and that the private
respondents should have availed of another mode of service under Rule 14,
Section 16 of the said Rules, i.e., through publication to effect proper service
upon ALFA.
In their Comment to the Motion for Reconsideration, the private respondents
argued that the voting trust agreement dated March 11, 1981 did not divest
the petitioners of their positions as president and executive vice-president of
ALFA so that service of summons upon ALFA through the petitioners as
corporate officers was proper.

RTC: Upheld the validity of the service of summons on ALFA through the
petitioners, thus, denying the latter's motion for reconsideration and requiring
ALFA to filed its answer through the petitioners as its corporate officers.

Thereafter, the trial court reversed itself by setting aside its previous Order
and declared that service upon the petitioners who were no longer corporate
officers of ALFA cannot be considered as proper service of summons on
ALFA.

CA: Deciding the private respondents' petition for certiorari, the CA rendered
its decision setting aside the orders of the trial court and ordering ALFA to
file its answer within the reglementary period.

Issue: Whether the service of summons on ALFA effected through the

petitioners is valid.

Held: No, the service of summons on ALFA effected through the petitioners
is not valid.

By its very nature, a voting trust agreement results in the separation of the
voting rights of a stockholder from his other rights such as the right to receive
dividends, the right to inspect the books of the corporation, the right to sell
certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However,
in order to distinguish a voting trust agreement from proxies and other voting
pools and agreements, it must pass three criteria or tests, namely: (1) that
the voting rights of the stock are separated from the 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 of
voting rights is to acquire voting control of the corporation.
Under section 59 of the Corporation Code, a voting trust agreement may
confer upon a trustee not only the stockholder's voting rights but also other
rights pertaining to his shares as long as the voting trust agreement is not
entered "for the purpose of circumventing the law against monopolies and
illegal combinations in restraint of trade or used for purposes of fraud."

The execution of a voting trust agreement, therefore, may create a dichotomy

between the equitable or beneficial ownership of the corporate shares of a
stockholders, on the one hand, and the legal title thereto on the other hand.

Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director which share shall stand in his name on
the books of the corporation. Any director who ceases to be the owner of at
least one (1) share of the capital stock of the corporation of which he is a
director shall thereby cease to be director.

Both under the old and the new Corporation Codes there is no dispute as to
the most immediate effect of a voting trust agreement on the status of a
stockholder who is a party to its execution — from legal titleholder or owner
of the shares subject of the voting trust agreement, he becomes the equitable
or beneficial owner. The penultimate question, therefore, is whether the
change in his status deprives the stockholder of the right to qualify as a
director under section 23 of the present Corporation Code which deletes the
phrase "in his own right."

Under the old Corporation Code, the eligibility of a director, strictly speaking,
cannot be adversely affected by the simple act of such director being a party
to a voting trust agreement inasmuch as he remains owner (although
beneficial or equitable only) of the shares subject of the voting trust
agreement pursuant to which a transfer of the stockholder's shares in favor
of the trustee is required (section 36 of the old Corporation Code). No
disqualification arises by virtue of the phrase "in his own right" provided
under the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees and
other persons who in fact are not beneficial owners of the shares registered
in their names on the books of the corporation becomes formally legalized
Hence, this is a clear 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.

The facts of this case show that the petitioners, by virtue of the voting trust
agreement executed in 1981 disposed of all their shares through assignment
and delivery in favor of the DBP, as trustee. Consequently, the petitioners
ceased to own at least one share standing in their names on the books of
ALFA as required under Section 23 of the Corporation Code. They also
ceased to have anything to do with the management of the enterprise. The
petitioners ceased to be directors. Hence, the transfer of the petitioners'
shares to the DBP created vacancies in their respective positions as
directors of ALFA.

Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stock covered by the agreement to the
DBP as trustee, the latter became the stockholder of record with respect to
the said shares of stocks. In the absence of a showing that the DBP had
caused to be transferred in their names one share of stock for the purpose
of qualifying as directors of ALFA, the petitioners can no longer be deemed
to have retained their status as officers of ALFA which was the case before
the execution of the subject voting trust agreement. There appears to be no
dispute from the records that DBP has taken over full control and
management of the firm.

In view of the foregoing, the ultimate issue of whether or not there was proper
service of summons on ALFA through the petitioners is readily answered in
the negative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

Sec. 13. Service upon private domestic corporation or partnership. —

If the defendant is a corporation organized under the laws of the
Philippines or a partnership duly registered, service may be made on
the president, manager, secretary, cashier, agent or any of its
directors.
It is a basic principle in Corporation Law that a corporation has a personality
separate and distinct from the officers or members who compose it. Thus,
the above rule on service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court processes on
its behalf. Not every stockholder or officer can bind the corporation
considering the existence of a corporate entity separate from those who
compose it.

The rationale of the aforecited rule is that service must be made on a

representative so integrated with the corporation sued as to make it a priori
supposable that he will realize his responsibilities and know what he should
do with any legal papers served on him.

The petitioners in this case do not fall under any of the enumerated officers.
The service of summons upon ALFA, through the petitioners, therefore, is
not valid. To rule otherwise, as correctly argued by the petitioners, will
contravene the general principle that a corporation can only be bound by
such acts which are within the scope of the officer's or agent's authority.

WHEREFORE, premises considered, the petition is hereby GRANTED. The

appealed decision dated March 19, 1990 and the Court of Appeals'
resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25,
1989 and October 17, 1989 issued by the Regional Trial Court of Makati,
Branch 58 are REINSTATED.
Doctrine: Any question on the increase of stocks made before the illegal
sales should not be raised in the instant election contest case but should be
the subject of a separate proceeding.

Case Title: Estate of Dr. Juvencio P. Ortanez vs. Lee, GR. No. 184251,
March 9, 2016 (J. Perez)

Facts: Dr. Ortañez organized and founded the Philippine International Life
Insurance Company, Inc. (Philinterlife). At the time of its incorporation, Dr.
Ortañez owned ninety percent (90%) of the subscribed capital stock of
Philinterlife.

Upon his death on July 21, 1980, Dr. Ortañez left behind an estate consisting
of, among others, 2,029 shares of stock in Philinterlife, then representing at
least 50.725% of the outstanding capital stock of Philinterlife which was at
4,000 shares valued at P4,000,000.00.

On 30 March 2006, petitioners filed a Complaint for Election Contest before

the RTC of Quezon City. The complaint challenged the lawfulness and
validity of the meeting and election conducted by the group of Jose C. Lee
(respondents) on March 15, 2006. During the assailed meeting, Jose C. Lee
(Lee), Angel Ong, Benjamin C. Lee, Carmelita Tan, Ma. Paz C. Lee, John
Oliver Pascual, Edwin C. Lee, Conrado C. Cruz, Jr., Brenda Ortañez, Julie
Ann Parado and Gary Jason Santos were elected as members of the Board
of Directors of Philinterlife.

Petitioners claimed that before the contested election, they formally informed
the respondents that without the participation of the Estate, no quorum would
be constituted in the scheduled annual stockholders' meeting.

Petitioners, who insisted that they represented at least 51% of the

outstanding capital stock of 5,000 shares of Philinterlife, conducted on the
same day and in the same venue but in a different room, their own annual
stockholders' meeting and proceeded to elect their own set of directors.

RTC: Dismissed the complaint filed by petitioners on the ground that the
latter did not present the required preponderance of evidence to substantiate
their claim that they were the owners of at least 51% of the outstanding
capital stock of Philinterlife.

CA: Dismissed the petition.

Issue: Whether respondents were validly elected as Board of Directors

during the annual stockholders' meeting of Philinterlife held on March 15,
2006.

Held: Yes. In the absence of evidence to the contrary, the presumption is

that the respondents were duly elected as directors/officers of Philinterlife
during the aforesaid annual stockholders' meeting. Petitioners cannot, in the
instant election contest case, question the increases in the capital stocks of
the corporation.

Upon a closer analysis of our ruling in G.R. No. 146006, however, we note
that only the 4 March 1982 memorandum of agreement was declared void
and as a consequence thereto, the subsequent sale to FLAG was likewise
declared void. With regard to the increases in Philinterlife's capital stock, we
only declared void those increases approved on the vote of petitioners' non-
existent shareholdings. In other words, only those increases after the illegal
sales of shares of stock are considered void. The validity of the increases of
stock before 1989 (from 1980 to 1988) has never been questioned before
any court. Parenthetically, any question on the increase of stocks made
before the illegal sales should not be raised in the instant election contest
case but should be the subject of a separate proceeding.

The Court gave more weight to the Capital Structure of Philinterlife as of

December 15, 1980, which shows that the Estate owned 2,029 shares of the
5,000 total outstanding shares or 40.58%. It is evident, therefore, that as of
15 December 15, 1980, the Estate no longer owned 50.725% of the
outstanding capital stock of Philinterlife. In view of the increase of the capital
structure of Philinterlife from 4,000 shares to 5,000 shares, the percentage
of shareholdings owned by the Estate was naturally reduced from 50.73%
(2,029 shares out of 4,000 shares) to 40.58% (2,029 shares out of 5,000
shares). In other words, the Estate's 2,029 shares became a minority
shareholder of Philinterlife from December 15, 1980 up to March 24, 1983.
The Capital Structure proffered by the respondents negated the claim of
petitioners that they have always been the true and lawful owners of at least
51% of Philinterlife.

From the foregoing facts and based on a careful evaluation of the evidence
on record, we are of the considered view that petitioners indeed failed to
present the required preponderance of evidence to prove their allegation in
the complaint that they represented more than 51% of the outstanding capital
stock of Philinterlife during the annual stockholders' meeting held on March
15, 2006.

Petitioners cannot, in the instant election contest case, question the

increases in the capital stocks of the corporation.

WHEREFORE, in the light of the foregoing premises, the instant appeal is

hereby DENIED.