1. John Gokongwei v. SEC, G.R. No.
However, this draft was never presented to
L-45911, April 11, 1979
Check pictures
2. Grace Christian High School v. CA,
Grace Village Ass., Inc.,et., al.,G.R. No.
108905, October 23, 1997
GRACE CHRISTIAN HIGH SCHOOL,
petitioner,vs. THE COURT OF APPEALS,
GRACE VILLAGE ASSOCIATION, INC.,
ALEJANDRO G. BELTRAN, and ERNESTO
L. GO, respondents.
G.R. No. 108905 October 23, 1997
MENDOZA, J.:
Petitioner Grace Christian High School is an
educational institution located at the Grace
Village in Quezon City, while Private
respondent Grace Village Association, Inc.
["Association'] is an organization of lot
and/or building owners, lessees and
residents at Grace Village.
The original 1968 by-laws provide that the
Board of Directors, composed of eleven (11)
members, shall serve for one (1) year until
their successors are duly elected and have
qualified.
On 20 December 1975, a committee of the
board of directors prepared a draft of an
amendment to the
by-laws which provides that "GRACE
CHRISTIAN HIGH SCHOOL representative
is a permanent
Director of the ASSOCIATION."
the general membership for approval.
Nevertheless, from 1975 to 1990, petitioner
was given a permanent seat in the board of
directors of the association.
On 13 February 1990, the association's
committee on election sought to change the
by-laws and informed the Petitioner's school
principal "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. Petitioner requested the
chairman of the election committee to
change the notice to honor the 1975 by-
laws provision, but was denied.
The school then brought suit for mandamus
in the Home Insurance and Guaranty
Corporation (HIGC) to compel the board of
directors to recognize its right to a
permanent seat in the board.
Meanwhile, the opinion of the SEC was
sought by the association, and SEC
rendered an opinion to the effect that the
practice of allowing unelected members in
the board was contrary to the existing by-
laws of the association and to §92 of the
Corporation Code (B.P. Blg. 68). This was
adopted by the association in its Answer in
the mandamus filed with the HIGC.
The HIGC hearing officer ruled in favor of
the association, which decision was
affirmed by the HIGC Appeals Board and
the Court of Appeals.
Issue: W/N the 1975 provision giving the
petitioner a permanent board seat was
valid.
Ruling: No.
Section 23 of the Corporation Code (and its
predecessor Section 28 and 29 of the
Corporation Law) leaves no room for doubt
that the Board of Directors of a Corporation
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 these instances, the unelected
members sit as ex officio members, i.e., by
virtue of and for as long as they hold a
particular office (e.g. whoever is the
Archbishop of Manila is considered a
member of the board of Cardinal Santos
Memorial Hospital, Inc.)
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 it has gone unchallenged
for fifteen years 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.
It is more accurate to say that the members
merely tolerated petitioner's representative
and tolerance cannot be considered
ratification.
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.
3. PMI v NLRC, 277 SCRA 462
PMI COLLEGES vs. THE NATIONAL
LABOR RELATIONS COMMISSION and
ALEJANDRO GALVAN
G.R. No. 121466. August 15, 1997
FACTS:
On July 7, 1991, petitioner hired private
respondent as contractual instructor.
Pursuant to this engagement, private
respondent then organized classes in
marine engineering.
Initially, private respondent and other
instructors were compensated for services
rendered during the first three periods of the
abovementioned contract.
However, for reasons unknown to private
respondent, he stopped receiving payment
for the succeeding rendition of services.
This claim of nonpayment was embodied in
a letter. However the salary of private
respondent corresponding to the shipyard
and plant visits and the ongoing on the job
training of Class 41 on board MV Sweet
Glory of Sweet Lines, Inc. was not yet
included.
Private respondent’s claims, as expected,
were resisted by petitioner.
It alleged that classes in the courses offered
which complainant claimed to have
remained unpaid were not held or
conducted in the school premises of PMI
Colleges.
Petitioner maintained that it exercised no
appropriate and proper supervision of the
said classes which activities allegedly
violated certain rules and regulations of the
DECS.
Later in the proceedings, petitioner
manifested that Mr. Tomas G. Cloma, Jr., a
member of the petitioners Board of Trustees
wrote a letter to the Chairman of the Board
on May 23, 1994, clarifying the case of
private respondent and stating therein, inter
alia, that under petitioners bylaws only the
Chairman is authorized to sign any contract
and that private respondent, in any event,
failed to submit documents on the alleged
shipyard and plant visits in Cavite Naval
Base.
ISSUE:
Whether or not the contract of
employment is invalid
RULING:
The court cannot concede that such
contract would be invalid just because the
signatory thereon was not the Chairman of
the Board which allegedly violated
petitioner’s bylaws. Since bylaws operate
merely as internal rules among the
stockholders, they cannot affect or prejudice
third persons who deal with the corporation,
unless they have knowledge of the same.
No proof appears on record that private
respondent ever knew anything about the
provisions of said bylaws.
In fact, petitioner itself merely asserts the
same without even bothering to attach a
copy or excerpt thereof to show that there is
such a provision. How can it now expect the
Labor Arbiter and the NLRC to believe it?
That this allegation has never been denied
by private respondent does not necessarily
signify admission of its existence because
technicalities of law and procedure and the
rules obtaining in the courts of law do not
strictly apply to proceedings of this nature.
4. China Banking Corp v CA, 270
SCRA 503
China Banking Corp. v. Court of Appeals
G.R. NO. 140687 DATE18 Dec. 2006
PONENTE CHICO-NAZARIO, J.:
FACTS: Jose Gotianuy accused his
daughter Mary Margaret Dee of stealing,
among his other properties, US dollar
deposits with Citibank N.A. amounting to not
less than P35,000,000.00 and
US$864,000.00. Mary Margaret Dee
received these amounts from Citibank N.A.
through checks which she allegedly
deposited at China Banking Corporation
(China Bank). He likewise accused his son-
in-law, George Dee, husband of his
daughter, Mary Margaret, of transferring his
real properties and shares of stock in
George Dees name without any
consideration. Jose Gotianuy, died during
the pendency of the case before the trial
court. He was substituted by his daughter,
Elizabeth Gotianuy Lo. The latter presented
the US Dollar checks withdrawn by Mary
Margaret Dee from his US dollar placement
with Citibank.

RTC ruling: As the foreign currency fund is
deposited with the movant China Banking
Corporation, the disclosure only as to the
name or in whose name the said fund is
deposited is not violative of the law.
China Bank filed a Petition for Certiorari with
the Court of Appeals.
ISSUE/S:
Whether or not petitioner China Bank is
correct in its submission that the Citibank
dollar checks with both Jose Gotianuy
and/or Mary Margaret Dee as payees,
deposited with China Bank, may not be
looked into under the law on secrecy of
foreign currency deposits.
RULING: NO.
The law provides that all foreign currency
deposits authorized under Republic Act No.
6426, as amended by Sec. 8, Presidential
Decree No. 1246, Presidential Decree No.
1035, as well as foreign currency deposits
authorized under Presidential Decree No.
1034 are considered absolutely confidential
in nature and may not be inquired into.
There is only one exception to the secrecy
of foreign currency deposits, that is,
disclosure is allowed upon the written
permission of the depositor.
In the case at bar, there is no issue as to
the source of the funds. Mary Margaret Dee
declared the source to be Jose Gotianuy.
There is likewise no dispute that these
funds in the form of Citibank US dollar
Checks are now deposited with China Bank.
As the owner of the funds unlawfully taken
and which are undisputably now deposited
with China Bank, Jose Gotianuy has the
right to inquire into the said deposits.
5. Ramon C. Lee et., al., v. CA, G.R.
No. 93695 February 4,1992
RAMON C. LEE and ANTONIO DM.
LACDAO vs.
THE HON. COURT OF APPEALS,
SACOBA MANUFACTURING
CORP., PABLO GONZALES, JR. and
THOMAS GONZALES
LEE vs. CA
(Case Digest)
G.R. No. 93695, February 4, 1992
FACTS: 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. 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. 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.
Subsequently, the trial court issued an order
advising the private respondents to take the
appropriate steps to serve the summons to
ALFA. 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. 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. The trial court upheld
the validity of the service of summons on
ALFA through the petitioners. A second
motion for reconsideration was filed by the
petitioners reiterating their stand that by
virtue of the voting trust agreement they
ceased to be officers and directors of ALFA,
hence, they could no longer receive
summons or any court processes for or on
behalf of ALFA and in support thereof, they
attached a copy of the voting trust
agreement between all the stockholders of
ALFA and the DBP whereby the
management and control of ALFA became
vested upon the DBP. The trial court then
reversed itself and declared that service
upon the petitioners cannot be considered
as proper service of summons on ALFA.
The case was elevated to the CA which
reversed the above-mentioned Orders
holding that there was proper service of
summons on ALFA through the petitioners.
ISSUES:
(1) Whether or not the execution of the
voting trust agreement by a stockholder
whereby all his shares to the corporation
have been transferred to the trustee
deprives the stockholder of his position as
director of the corporation;
(2) Whether or not the service of summons
on ALFA effected through the petitioners, as
president and vice-president, of the subject
corporation after the execution of the voting
trust agreement valid and effective;
RULING:
1. Yes. By its very nature, a voting trust
agreement results in the separation of the
voting rights of a stockholder from his other
rights. The execution of a voting trust
agreement, therefore, may create a
dichotomy between the equitable or
beneficial ownership of the corporate shares
of stockholders, on the one hand, and the
legal title thereto on the other hand. In the
instant case, the petitioners maintain that
with the execution of the voting trust
agreement between them and the other
stockholders of ALFA, as one party, and the
DBP, as the other party, the former
assigned and transferred all their shares in
ALFA to DBP, as trustee and thus, they can
no longer be considered directors of ALFA.
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. 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.
On the contrary, it is manifestly clear from
The facts of this case show that the
the terms of the voting trust agreement
petitioners, by virtue of the voting trust
between ALFA and the DBP that the
agreement executed in 1981 disposed of all
duration of the agreement is contingent
their shares through assignment and
upon the fulfillment of certain obligations of
delivery in favor of the DBP, as trustee.
ALFA with the DBP. There is evidence on
Consequently, the petitioners ceased to
record that at the time of the service of
own at least one share standing in their
summons on ALFA through the petitioners
names on the books of ALFA as required
on August 21, 1987, the voting trust
under Section 23 of the new Corporation
agreement in question was not yet
Code. They also ceased to have anything to
terminated so that the legal title to the
do with the management of the enterprise.
stocks of ALFA, then, still belonged to the
The petitioners ceased to be directors.
DBP.
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 2. No. Under section 13, Rule 14 of the
agreement between ALFA and the DBP Revised Rules of Court, it is provided that:
transferred legal ownership of the stock "Sec. 13. Service upon private domestic
covered by the agreement to the DBP as corporation or partnership. — If the
trustee, the latter became the stockholder of defendant is a corporation organized under
record with respect to the said shares of the laws of the Philippines or a partnership
stocks. Both parties, ALFA and the DBP, duly registered, service may be made on
were aware at the time of the execution of the president, manager, secretary, cashier,
the agreement that by virtue of the transfer agent or any of its directors."
of shares of ALFA to the DBP, all the
directors of ALFA were stripped of their
positions as such. There can be no reliance
It is a basic principle in Corporation Law that
on the inference that the five-year period of
a corporation has a personality separate
the voting trust agreement in question had
and distinct from the officers or members
lapsed in 1986 so that the legal title to the
who compose it. Thus, the above rule on
stocks covered by the said voting trust
service of processes of a corporation
agreement ipso facto reverted to the
enumerates the representatives of a
petitioners as beneficial owners pursuant to
corporation who can validly receive court
the 6th paragraph of section 59 of the new
processes on its behalf. Not every
Corporation Code which reads:
stockholder or officer can bind the
"Unless expressly renewed, all rights corporation considering the existence of a
granted in a voting trust agreement shall corporate entity separate from those who
automatically expire at the end of the compose it. The petitioners in this case do
agreed period, and the voting trust not fall under any of the enumerated
certificate as well as the certificates of stock officers. The service of summons upon
in the name of the trustee or trustees shall ALFA, through the petitioners, therefore, is
thereby be deemed cancelled and new not valid. To rule otherwise, as correctly
certificates of stock shall be reissued in the argued by the petitioners, will contravene
name of the transferors." 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, the petition is
hereby GRANTED.
6. Valle Verde Country Club, Inc.,
et.,al., v. Victor Africa, G.R. No. 151969.
Sept. 4, 2009
FACTS
On February 27, 1996, during the Annual
Stockholders’ Meeting of petitioner Valle
Verde Country Club, Inc. (VVCC), the
VVCC Board of Directors were elected
including Eduardo Makalintal (Makalintal)
among others. In the years 1997, 1998,
1999, 2000, and 2001, however, the
requisite quorum for the holding of the
stockholders’ meeting could not be
obtained. Consequently, the directors
continued to serve in the VVCC Board in a
hold-over capacity. Later, Makalintal
resigned as member of the VVCC Board.
He was replaced by Jose Ramirez
(Ramirez), who was elected by the
remaining members of the VVCC Board on
March 6, 2001. Respondent Africa (Africa),
a member of VVCC, questioned the election
of Ramirez as members of the VVCC Board
with the Regional Trial Court (RTC),
respectively. Africa claimed that a year
after Makalintal’s election as member of the
VVCC Board in 1996, his [Makalintal’s] term
– as well as those of the other members of
the VVCC Board – should be considered to
have already expired. Thus, according to
Africa, the resulting vacancy should have
been filled by the stockholders in a regular
or special meeting called for that purpose,
and not by the remaining members of the
VVCC Board, as was done in this case.
The RTC sustained Africa’s complaint.
ISSUE
Whether the remaining directors of the
corporation’s Board, still constituting a
quorum, can elect another director to fill in a
vacancy caused by the resignation of a
hold-over director.
RULING
NO.
When Section 23 of the Corporation Code
declares that “the board of directors…shall
hold office for one (1) year until their
successors are elected and qualified,” we
construe the provision to mean that the term
of the members of the board of directors
shall be only for one year; their term expires
one year after election to the office. The
holdover period – that time from the lapse of
one year from a member’s election to the
Board and until his successor’s election and
qualification – is not part of the director’s
original term of office, nor is it a new term;
the holdover period, however, constitutes
part of his tenure. Corollary, when an
incumbent member of the board of directors
continues to serve in a holdover capacity, it
implies that the office has a fixed term,
which has expired, and the incumbent is
holding the succeeding term.
[Here], when remaining members of the
VVCC Board elected Ramirez to replace
Makalintal, there was no more unexpired
term to speak of, as Makalintal’s one-year
term had already expired. Pursuant to law,
the authority to fill in the vacancy caused by
Makalintal’s leaving lies with the VVCC’s
stockholders, not the remaining members of
its board of directors. To assume – as
VVCC does – that the vacancy is caused by
Makalintal’s resignation in 1998, not by the
expiration of his term in 1997, is both
illogical and unreasonable. His resignation
as a holdover director did not change the
nature of the vacancy; the vacancy due to
the expiration of Makalintal’s term had been
created long before his resignation.
7. Nectorina S. Raniel et., al., v. Paul
Jochico et., al., G.R. No. 153413, March 1,
2007
CONCEPTS:
https://www.studocu.com/ph/document/univ
ersity-of-the-cordilleras/management-
accounting/module-4-corporation-law-
lesson-4/11249321
See File
8. Agdao Residents Inc. v. Maramion,
GR 188642 (2016)
READINGS:
https://studylib.net/doc/25712625/pdfcoffee.
com-2021-corporate-law-outline-pdf-free
9. Antonio C. Carag v. NLRC, Isabel G.
Panganiban et., al., G.R. No.147590, April
2, 2007
FACTS:
The National Federation of Labor Unions
(NAFLU) and Mariveles Apparel
Corporation Labor Union (MACLU), on
behalf of the rank and file employees of
Mariveles Apparel Corporation (MAC) filed a
complaint against MAC for illegal dismissal
brought about by its illegal closure of
business. The dispute started when, in the
absence of the required notice of cessation
of its business, MAC ceased its operations
with the intention of completely closing its
shop or factory. Such intention was
manifested in a letter, allegedly claimed by
MAC as its notice was filed only on the
same day that the operations closed. As a
result of the said business closure, the
workers who rendered their services were
not paid their salaries or wages. Hence, the
rank and file employees claimed that the
manner of closure of the operations of MAC
was illegal. While the complaint was lodged
before the Labor Arbiter, the complainant
filed a motion to implead MAC‘s Chairman
of the Board Antonio Carag and MAC‘s
President Armando David. The inclusion of
Carag and David in the complaint is to
guarantee the satisfaction of any judgment
favorable to the complainants.
However, the counsel for respondents,
submitted a position paper and stated that
complainants should not have impleaded
Carag and David because MAC is actually
owned by a consortium of banks. Carag and
David own shares in MAC only to qualify
them to serve as MAC’s officers.
ISSUES:
1) Whether or not Carag and David could be
held personally liable for corporate debts.
NO. Complainants did not allege in their
complaint that Carag willfully and knowingly
voted for or assented to any patently
unlawful act of MAC. Neither does bad faith
arise automatically just because a
corporation fails to comply with the notice
requirement of labor laws on company
closure or dismissal of employees.
2) When is a director personally liable for
the debts of the corporation?
HELD:
The rule is that a director is not personally
liable for the debts of the corporation, which
has a separate legal personality of its own.
Section 31 of the Corporation Code lays
down the exceptions to the rule, as follows:
―Liability of directors, trustees or officers. –
Directors or trustees who wilfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest
in conflict with their duty as such directors or
trustees shall be liable jointly and severally
for all damages resulting therefrom suffered
by the corporation, its stockholders or
members and other persons.
Section 31 makes a director personally
liable for corporate debts if he willfully and
knowingly votes for or assents to patently
unlawful acts of the corporation. Section 31
also makes a director personally liable if he
is guilty of gross negligence or bad faith in
directing the affairs of the corporation.
Neither did Arbiter Ortiguerra make any
finding to this effect in her Decision.
Complainants did not also allege that Carag
is guilty of gross negligence or bad faith in
directing the affairs of MAC. To hold a
director personally liable for debts of the
corporation, and thus pierce the veil of
corporate fiction, the bad faith or
wrongdoing of the director must be
established clearly and convincingly. Bad
faith is never presumed. Bad faith does not
connote bad judgment or negligence. Bad
faith imports a dishonest purpose. Bad faith
means breach of a known duty through
some ill motive or interest. Bad faith
partakes of the nature of fraud. Neither does
bad faith arise automatically just because a
corporation fails to comply with the notice
requirement of labor laws on company
closure or dismissal of employees. The
failure to give notice is not an unlawful act
because the law does not define such
failure as unlawful. Such failure to give
notice is a violation of procedural due
process but does not amount to an unlawful
or criminal act.
For a wrongdoing to make a director
personally liable for debts of the
corporation, the wrongdoing approved or
assented to by the director must be a
patently unlawful act. Mere failure to comply
with the notice requirement of labor laws on
company closure or dismissal of employees
does not amount to a patently unlawful act.
Patently unlawful acts are those declared
unlawful by law which imposes penalties for
commission of such unlawful acts. There
must be a law declaring the act unlawful
and penalizing the act.
Labor Law; It was clarified in Carag v.
National Labor Relations Commission (520
SCRA 28 [2007]), and McLeod v. National
Labor Relations Commission (512 SCRA
222 [2007]), that Article 212(e) of the Labor
Code, by itself, does not make a corporate
officer personally liable for the debts of the
corporation—the governing law on personal
liability of directors or officers for debts of
the corporation is still Section 31 of the
Corporation Code.
The doctrine of piercing the corporate veil
applies only in three (3) basic areas,
namely: 1) defeat of public convenience as
when the corporate fiction is used as a
vehicle for the evasion of an existing
obligation; 2) fraud cases or when the
corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter
ego cases, where a corporation is merely a
farce since it is a mere alter ego or business
conduit of a person, or where the
corporation is so organized and controlled
and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit
or adjunct of another corporation.— In the
absence of malice, bad faith, or a specific
provision of law making a corporate officer
liable, such corporate officer cannot be
made personally liable for corporate
liabilities.
10. Filipinas Port Services Inc.,
Represented by Eliodoro C. Cruz et.,al., v.
Victorino S. Go et.,al., G.R. No. 161886,
March 16, 2007
FACTS:
The case involves a petition for
review on certiorari.
We have here Eliodoro C. Cruz
suing on behalf of the stockholders of
Filipinas Port Services alleging that there
has been numerous cases of
mismanagement by the board of directors:
creation of an executive committee not
provided for in the by-laws of the
corporation
disproportionate increase in the salary of
officials
re-creation of already existing positions
creation of additional positions with holders
not doing any work to deserve any monthly
remuneration.
He prayed for the return of the salary
received by all the unnecessarily appointed
members.
The Trial Court sided with the respondent
and ruled that the creation of the executive
committee and the additional position was
legitimate given that it was provided by the
corporation’s by-law. However, the prayer
for the return of salaries received was
granted, even if the positions and the
committee were valid, for the court ruled
that Filipinas Port Services is not a big
corporation requiring multiple executive
positions.
The respondents appealed the decision and
they received a favourable decision as the
Court of Appeals granted the respondents’
appeal, reversed and set aside the
appealed decision of the trial court and
accordingly dismissed the so-called
derivative suit filed by Cruz, et al.,
Cruz did not take the decision sitting down,
hence the petition.
To counter the appeal filed by Cruz,
respondents also claim that what Cruz filed
is not a derivative suit.
The petition was denied and the
challenged decision of the CA was affirmed.
Only, the Supreme Court clarified the issue
involving the legitimacy of the derivative
suit.
ISSUE:
Was the case filed by Cruz, on behalf of
Filipinas Port Services Inc., a derivative
suit?
HELD:
YES.
Under the Corporation Code, where a
corporation is an injured party, its power to
sue is lodged with its board of directors or
trustees. But an individual stockholder or an
individual trustee may be permitted to
institute a derivative suit in behalf of the
corporation in order to protect or vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or when a
demand upon them to file the necessary
action would be futile because they are the
ones to be sued, or because they hold
control of the corporation. In such actions,
the corporation is the real party-in-interest
while the suing stockholder, in behalf of the
corporation, is only a nominal part.
Here, the action below is principally
for damages resulting from alleged
mismanagement of the affairs of Filport by
its directors/officers, it being alleged that the
acts of mismanagement are detrimental to
the interests of Filport. Thus, the injury
complained of primarily pertains to the
corporation so that the suit for relief should
be by the corporation. However, since the
ones to be sued are the directors/officers of
the corporation itself, a stockholder, like
petitioner Cruz, may validly institute a
“derivative suit” to vindicate the alleged
corporate injury, in which case Cruz is only
a nominal party while Filport is the real
party-in-interest.
Besides, the requisites before a derivative
suit can be filed by a stockholder or
individual trustee are present in this case, to
wit:
a) the party bringing suit should be a
shareholder as of the time of the act or
transaction complained of, the number of
his shares not being material;
b) he has tried to exhaust intra-
corporate remedies, i.e., has made a
demand on the board of directors for the
appropriate relief but the latter has failed or
refused to heed his plea; and
c) the cause of action actually devolves
on the corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit.
Indisputably, petitioner Cruz (1) is a
stockholder of Filport; (2) he sought without
success to have its board of directors
remedy what he perceived as wrong when
he wrote a letter requesting the board to do
the necessary action in his complaint; and
(3) the alleged wrong was in truth a wrong
against the stockholders of the corporation
generally, and not against Cruz or
Minterbro, in particular. And while it is true
that the complaining stockholder must show
to the satisfaction of the court that he has
exhausted all the means within his reach to
attain within the corporation itself the
redress for his grievances, or actions in
conformity to his wishes, nonetheless,
where the corporation is under the complete
control of the principal defendants or other
trustees, as here, there is no necessity of
making a demand upon the directors. The
reason is obvious: a demand upon the
board to institute an action and prosecute
the same effectively would have been
useless and an exercise in futility.
Bottom line, when it comes to cases
involving two or more trustees, an individual
trustee can file a derivative suit duly
following the requisites without the need to
exhaust internal remedies where the
trusteeship is under the complete control of
the other trustees for it will be a waste of
time.
11. Prime White Cement Corp. v. IAC,
Alejandro Te, G.R. No. 68555, March 19,
1993
FACTS:
Falcon, president of PWCC, and Trazo,
Board member of PWCC entered into an
agreement with Te, also a Board member of
PWCC. They agreed that the latter shall be
the sole dealer of Prime White cement in
Mindanao. Te already made known to the
public that he is the sole dealer of cement in
Mindanao before the cement is to be
delivered, thus various hardware then
approached him to be his sub-dealers and
consequently, he entered into various
contracts with them.
Falcon and Trazo were not authorized by
the Board of PWCC to enter into such
contract. Nevertheless, the Board wished to
retain the contract but they wanted some
amendment which includes the increase of
the selling price per bag, decrease of the
total amount of cement bags plus the
contract shall only be effective for a period
of three months and not 5 years. Te refused
the counter-offer. PWCC then awarded the
contract to someone else.
ISSUE:
Whether the dealership agreement entered
by Falcon, Trazo and Te is a valid and
enforceable contract.
RULING:
No. Te is a self-dealing director as he deals
business with the same corporation in which
he is a director. There is nothing wrong per
se with that. However, Sec. 32 provides that
a contract of the corporation with one or
more of its directors or trustees or officers is
voidable, at the option of such corporation,
unless all the following conditions are
present:
1. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
2. That the vote of such director or trustee
was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable
under the circumstances; and
4. That in the case of an officer, the
contract with the officer has been previously
authorized by the Board of Directors.
In this particular case, the Supreme Court
focused on the fact that the contract
between PWCC and Te through Falcon and
Trazo was not reasonable because of the
very low selling price. The Price at that time
was at least P13.00 per bag and the original
contract only stipulates P9.70. Also, the
original contract was for 5 years and there’s
no clause in the contract which protects
PWCC from inflation. As a director, Te in
this transaction should protect the
corporation’s interest more than his
personal interest. His failure to do so is
disloyalty to the corporation. Hence, PWCC
has all the rights to void the contract and
look for someone else, which it did.
Trazo’s act imposes a condition which Te
denied. Conditions of Te in the contract are
found to be unreasonable. It is prejudicial to
the corporation and is only favorable to Te
thus the former is correct in awarding the
contract to other dealers.
12. People’s Aircargo and Warehousing
Co., Inc., v. CA and Stefani Sano, G.R. No.
117847, October 7, 1998

xxx See FIle

Personal Note: RE: Corporate Power and

Self Dealing Director –

The power of the corporation to act and

transact is vested and belongs to its board
of directors or trustees. But it may be
delegated to others such as its corporate
officers. The validity and enforceability of
corporate acts depend on whether the act is
authorized by the board. But this does not
mean that the authority to act may be
secured only before an officer or board
member enters into a contract or
transaction. The contract is still valid until
rescinded by the corporation’s board of
directors or trustees. The contract or
transaction it entered is only voidable and
may be ratified by the board expressly or
impliedly.

A board member may also transact with its

corporation provided that the transaction is
not prejudicial to the corporation. The law
provides conditions for those self-dealing
directors for the transaction to be valid.

In this case, the contract that Falcon, Trazo,

and Te is a voidable contract until the
corporation wishes to ratify Falcon and