Ramirez vs Orientalist (GR 11897)

Facts

Ramon J. Ramirez is one of the Board of Directors of the Orientalist Company, a corporation duly
organized under the laws of the Philippine Islands, The Company is engaged in the business of
maintaining and conducting a theatre in the city of Manila for the exhibition of cinematographic films. The
plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris, France, and was engaged in
the business of marketing films for a manufacturer or manufacturers, there engaged in the production or
distribution of cinematographic material. J.F. Ramirez is represented by his son, Jose Ramirez.

The directors of the Orientalist Company, in Manila, became apprised of the fact that the plaintiff in Paris
had control of the agencies for two different marks of films, namely, the "Eclair Films" and the "Milano
Films;" and negotiations begun with said officials of the Orientalist Company by Jose Ramirez, as agent
of the plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the Orientalist
Company.

Jose Ramirez, as representative of his father, placed in the hands of Ramon J. Fernandez an offer stating
in detail the terms upon which the plaintiff would undertake to supply from Paris the aforesaid films.
Accordingly, Ramon J. Fernandez, had an informal conference with all the members of the company's
board of directors except one, and with approval of those with whom he had communicated, addressed a
letter to Jose Ramirez, in Manila, accepting the offer contained in the memorandum for the exclusive
agency of the Eclair films and for the Milano Films.

In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each
shipment being attached to the proper bill of lading. appears that the Orientalist Company was without
funds to meet these obligations and the first few drafts were dealt with in the following manner: The drafts,
upon presented through the bank, were accepted in the name of the Orientalist Company by its president
B. Hernandez, and were taken up by the latter with his own funds. As the drafts had thus been paid by B.
Hernandez, the films which had been procured by he payment of said drafts were treated by him as his
own property; and they in fact never came into the actual possession of the Orientalist Company as
owner at all, though it is true Hernandez rented the films to the Orientalist Company and they were
exhibited by it in the Oriental Theater under an arrangement which was made between him and the
theater's manager.

Issued transpired when Orientalist failed to pay the amount due over lack of funds. Ramirez filed an
action against Orientalist Company and Fernandez.

Issues:
1. WON the corporation is liable as to the act of Fernandez (on entering the contract)?

2. WON the resolution of the stockholders seemingly repudiating the acts of Fernandez have any
binding effect?

Ruling:

1. Yes.
It was incumbent upon the corporation, if it desired to question the authority of Fernandez to bind it, to
deny the due execution of said contracts under oath; otherwise, it is deemed admitted. Whether a
particular officer actually possesses the authority which he assumes to exercise is frequently known to
very few, and the proof of it usually is not readily accessible to the stranger who deals with the corporation
on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore
reasonable, in a case where an officer of a corporation has made a contract in its name, that the
corporation should be required, if it denies his authority, to state such defense in its answer. By this
means the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an
opportunity to adduce evidence showing either that the authority existed or that the contract was ratified
and approved.

Here, the failure of the defendant corporation to make any issue in its answer with regard to the authority
of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the
genuineness and due execution of the contracts sued upon, have the effect of eliminating the question of
his authority from the case, considered as a matter of mere pleading

2. No.
3.
Where a corporate contract has been effected with the approval of the board of directors, a resolution
adopted at a meeting of stockholders refusing to recognize the contract or repudiating it is without effect.

It thus appears that the board of directors, before the financial inability of the corporation to proceed with
the project was revealed, had already recognized the contracts as being in existence and had proceeded
to take the steps necessary to utilize the films. Particularly suggestive is the direction given at this
meeting for the publication of announcements in the newspapers to the effect that the company was
engaged in importing films. In the light of all the circumstances of the case, we are of the opinion that the
contracts in question were thus inferentially approved by the company's board of directors and that the
company is bound unless the subsequent failure of the stockholders to approve said contracts had the
effect of abrogating the liability thus created.

Both upon principle and authority it is clear that the action of the stockholders, whatever its character,
must be ignore. The functions of the stockholders of a corporation are, it must be remembered, of a
limited nature. The theory of a corporation is that the stockholders may have all the profits but shall turn
over the complete management of the enterprise to their representatives and agents, called directors.
Accordingly there is little for the stockholders to do beyond electing directors, making by-laws, and
exercising certain other special powers defined by law. In conformity with this idea it is settled that
contracts between a corporation and third persons must be made by the directors and not by the
stockholders. The corporation, in such matters, is represented by the former and not by the latter (Cook
on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely accordant with the provisions of
section 28 of our Corporation Law already referred to. It results that where a meeting of the stockholders
is called for the purpose of passing on the propriety of making a corporate contract, its resolutions are at
most advisory and not in any wise binding on the board.

It is not, however, necessary to found the judgment on this interpretation of the stock-holder's
proceedings, inasmuch as we think, for reasons presently to be stated, that the corporation is bound, and
we will here assume that in the end the contracts were not approved by the stockholders.
Gamboa vs Victoriano (GR L-40620)

FACTS:

Plaintiffs (herein respondents) are the owners of some shares of stocks of Inocentes de la
Rama Incs. There were 823 shares unissued. Upon acquisition of the plaintiffs of the shares of
stocks held by Rafael Ledema and Jose Sicangco, then Pres and VP of the Corp respectively,
defendants Borromeo, de la Rama and Gamboa, in order to forestall the takeover by the
plaintiffs of the corporation, surreptitiously met and elected Gamboa and De La Rama as the
Pres and VP of the Corp and thereafter passed a resolution authorizing the sale of the 823
unissued shares to the Gamboas and the dela Ramas. It was argued by the plaintiff that such
sale was in violation of their pre-emptive rights and made without the approval of the BOD.

Defendants, herein petitioner, moved to dismiss the complaint, questioning the trial court's
jurisdiction on matters affecting the management of the corporation by the board of directors,
and the enactment of a resolution by the defendants,
as members of the board of directors of the corporation, allowing the sale of the 823 shares of
stock to the defendants was purely a management concern which the courts could not interfere
with. Trial court denied such motion, hence this petition for certiorari.

Issue: WON the trial court had jurisdiction over the case?

Ruling

Yes.

The well-known rule is that courts cannot undertake to control the discretion of the board of
directors about administrative matters as to which they have legitimate power of action, and
contracts intra vires entered into by the board of directors are binding upon the corporation and
courts will not interfere unless such contracts are so unconscionable and oppressive as to
amount to a wanton destruction of the rights of the minority.

Here, the plaintiffs aver that the defendants have concluded a transaction among themselves as
will result to serious injury to the interests of the plaintiffs, so that the trial court has jurisdiction
over the case.

The petitioners further contend that the proper remedy of the plaintiffs would be to institute a
derivative suit against the petitioners in the name of the corporation in order to secure a binding
relief after exhausting all the possible remedies available within the corporation.
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation.
In such actions, the suing stockholder is regarded as a nominal party, with the corporation as
the real party in interest. In the case at bar, however, the plaintiffs are alleging and vindicating
their own individual interests or prejudice, and not that of the corporation. At any rate, it is yet
too early in the proceedings since the issues have not been joined.