2.
Remedies
Philpotts vs. Phil Manufacturing , 40 PHIL 471
STREET, J.:
The petitioner, W. G. Philpotts, a stockholder in the Philippine
Manufacturing Company, one of the respondents herein, seeks by this
proceeding to obtain a writ of mandamus to compel the respondents to
permit the plaintiff, in person or by some authorized agent or attorney,
to inspect and examine the records of the business transacted by said
company since January 1, 1918. The petition is filed originally in this
court under the authority of section 515 of the Code of Civil Procedure,
which gives to this tribunal concurrent jurisdiction with the Court of First
Instance in cases, among others, where any corporation or person
unlawfully excludes the plaintiff from the use and enjoyment of some
right to which he is entitled. The respondents interposed a demurrer,
and the controversy is now before us for the determination of the
questions thus presented.
The first point made has reference to a supposed defect of parties, and
it is said that the action can not be maintained jointly against the
corporation and its secretary without the addition of the allegation that
the latter is the custodian of the business records of the respondent
company.
By the plain language of sections 515 and 222 of our Code of Civil
Procedure, the right of action in such a proceeding as this is given
against the corporation; and the respondent corporation in this case
was the only absolutely necessary party. In the Ohio case of Cincinnati
Volksblatt Co. vs. Hoffmister (61 Ohio St., 432; 48 L. R. A., 735), only
the corporation was named as defendant, while the complaint, in
language almost identical with that in the case at bar, alleged a
demand upon and refusal by the corporation.
Nevertheless the propriety of naming the secretary of the corporation
as a codefendant cannot be questioned, since such official is
customarily charged with the custody of all documents,
correspondence, and records of a corporation, and he is presumably
the person against whom the personal orders of the court would be
made effective in case the relief sought should be granted. Certainly
there is nothing in the complaint to indicate that the secretary is an
improper person to be joined. The petitioner might have named the
president of the corporation as a respondent also; and this official might
be brought in later, even after judgment rendered, if necessary to the
effectuation of the order of the court.
Section 222 of our Code of Civil Procedure is taken from the California
Code, and a decision of the California Supreme Court —
Barber vs. Mulford (117 Cal., 356) — is quite clear upon the point that
both the corporation and its officers may be joined as defendants.
The real controversy which has brought these litigants into court is
upon the question argued in connection with the second ground of
demurrer, namely, whether the right which the law concedes to a
stockholder to inspect the records can be exercised by a proper agent
or attorney of the stockholder as well as by the stockholder in person.
There is no pretense that the respondent corporation or any of its
officials has refused to allow the petitioner himself to examine anything
relating to the affairs of the company, and the petition prays for a
peremptory order commanding the respondents to place the records of
all business transactions of the company, during a specified period, at
the disposal of the plaintiff or his duly authorized agent or attorney, it
being evident that the petitioner desires to exercise said right through
an agent or attorney. In the argument in support of the demurrer it is
conceded by counsel for the respondents that there is a right of
examination in the stockholder granted under section 51 of the
Corporation Law, but it is insisted that this right must be exercised in
person.
The pertinent provision of our law is found in the second paragraph of
section 51 of Act No. 1459, which reads as follows: "The record of all
business transactions of the corporation and the minutes of any
meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours."
This provision is to be read of course in connecting with the related
provisions of sections 51 and 52, defining the duty of the corporation in
respect to the keeping of its records.
Now it is our opinion, and we accordingly hold, that the right of
inspection given to a stockholder in the provision above quoted can be
exercised either by himself or by any proper representative or attorney
in fact, and either with or without the attendance of the stockholder.
This is in conformity with the general rule that what a man may do in
person he may do through another; and we find nothing in the statute
that would justify us in qualifying the right in the manner suggested by
the respondents.
This conclusion is supported by the undoubted weight of authority in
the United States, where it is generally held that the provisions of law
conceding the right of inspection to stockholders of corporations are to
be liberally construed and that said right may be exercised through any
other properly authorized person. As was said in Foster vs. White (86
Ala., 467), "The right may be regarded as personal, in the sense that
only a stockholder may enjoy it; but the inspection and examination
may be made by another. Otherwise it would be unavailing in many
instances." An observation to the same effect is contained in
Martin vs. Bienville Oil Works Co. (28 La., 204), where it is said: "The
possession of the right in question would be futile if the possessor of it,
through lack of knowledge necessary to exercise it, were debarred the
right of procuring in his behalf the services of one who could exercise
it." In Deadreck vs. Wilson (8 Baxt. [Tenn.], 108), the court said: "That
stockholders have the right to inspect the books of the corporation,
taking minutes from the same, at all reasonable times, and may be
aided in this by experts and counsel, so as to make the inspection
valuable to them, is a principle too well settled to need discussion."
Authorities on this point could be accumulated in great abundance, but
as they may be found cited in any legal encyclopedia or treaties
devoted to the subject of corporations, it is unnecessary here to refer to
other cases announcing the same rule.
In order that the rule above stated may not be taken in too sweeping a
sense, we deem it advisable to say that there are some things which a
corporation may undoubtedly keep secret, notwithstanding the right of
inspection given by law to the stockholder; as for instance, where a
corporation, engaged in the business of manufacture, has acquired a
formula or process, not generally known, which has proved of utility to it
in the manufacture of its products. It is not our intention to declare that
the authorities of the corporation, and more particularly the Board of
Directors, might not adopt measures for the protection of such process
form publicity. There is, however, nothing in the petition which would
indicate that the petitioner in this case is seeking to discover anything
which the corporation is entitled to keep secret; and if anything of the
sort is involved in the case it may be brought out at a more advanced
stage of the proceedings.
The demurrer is overruled; and it is ordered that the writ
of mandamus shall issue as prayed, unless within 5 days from
notification hereof the respondents answer to the merits. So ordered.
______________________________________
Pardo vs. Hercules, 46 PHIL 964
The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber
Company, Inc., one of the respondents herein, seeks by this original
proceeding in the Supreme Court to obtain a writ of mandamus to
compel the respondents to permit the plaintiff and his duly authorized
agent and representative to examine the records and business
transactions of said company. To this petition the respondents
interposed an answer, in which, after admitting certain allegations of
the petition, the respondents set forth the facts upon which they mainly
rely as a defense to the petition. To this answer the petitioner in turn
interposed a demurrer, and the cause is now before us for
determination of the issue thus presented.
It is inferentially, if not directly admitted that the petitioner is in fact a
stockholder in the Hercules Lumber Company, Inc., and that the
respondent, Ignacio Ferrer, as acting secretary of the said company,
has refused to permit the petitioner or his agent to inspect the records
and business transactions of the said Hercules Lumber Company, Inc.,
at times desired by the petitioner. No serious question is of course
made as to the right of the petitioner, by himself or proper
representative, to exercise the right of inspection conferred by section
51 of Act No. 1459. Said provision was under the consideration of this
court in the case of Philpotts vs. Philippine Manufacturing Co., and
Berry (40 Phil., 471), where we held that the right of examination there
conceded to the stockholder may be exercised either by a stockholder
in person or by any duly authorized agent or representative.
The main ground upon which the defense appears to be rested has
reference to the time, or times, within which the right of inspection may
be exercised. In this connection the answer asserts that in article 10 of
the By-laws of the respondent corporation it is declared that "Every
shareholder may examine the books of the company and other
documents pertaining to the same upon the days which the board of
directors shall annually fix." It is further averred that at the directors'
meeting of the respondent corporation held on February 16, 1924, the
board passed a resolution to the following effect:
The board also resolved to call the usual general (meeting of
shareholders) for March 30 of the present year, with notice to the
shareholders that the books of the company are at their disposition
from the 15th to 25th of the same month for examination, in appropriate
hours.
The contention for the respondent is that this resolution of the board
constitutes a lawful restriction on the right conferred by statute; and it is
insisted that as the petitioner has not availed himself of the permission
to inspect the books and transactions of the company within the ten
days thus defined, his right to inspection and examination is lost, at
least for this year.
We are entirely unable to concur in this contention. The general right
given by the statute may not be lawfully abridged to the extent
attempted in this resolution. It may be admitted that the officials in
charge of a corporation may deny inspection when sought at unusual
hours or under other improper conditions; but neither the executive
officers nor the board of directors have the power to deprive a
stockholder of the right altogether. A by-law unduly restricting the right
of inspection is undoubtedly invalid. Authorities to this effect are too
numerous and direct to require extended comment. (14 C.J., 859; 7
R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517;
Harkness vs. Guthrie, 27 Utah, 248; 107 Am., St. Rep., 664. 681.)
Under a statute similar to our own it has been held that the statutory
right of inspection is not affected by the adoption by the board of
directors of a resolution providing for the closing of transfer books thirty
days before an election. (State vs. St. Louis Railroad Co., 29 Mo., Ap.,
301.)
It will be noted that our statute declares that the right of inspection can
be exercised "at reasonable hours." This means at reasonable hours
on business days throughout the year, and not merely during some
arbitrary period of a few days chosen by the directors.
In addition to relying upon the by-law, to which reference is above
made, the answer of the respondents calls in question the motive which
is supposed to prompt the petitioner to make inspection; and in this
connection it is alleged that the information which the petitioner seeks
is desired for ulterior purposes in connection with a competitive firm
with which the petitioner is alleged to be connected. It is also insisted
that one of the purposes of the petitioner is to obtain evidence
preparatory to the institution of an action which he means to bring
against the corporation by reason of a contract of employment which
once existed between the corporation and himself. These suggestions
are entirely apart from the issue, as, generally speaking, the motive of
the shareholder exercising the right is immaterial. (7 R.C.L., 327.)
We are of the opinion that, upon the allegations of the petition and the
admissions of the answer, the petitioner is entitled to relief. The
demurrer is, therefore, sustained; and the writ of mandamus will issue
as prayed, with the costs against the respondent. So ordered.
______________________________________
Gonzales vs. PNB, 122 SCRA 489
VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First
Instance of Manila a special civil action for mandamus against the
herein respondent praying that the latter be ordered to allow him to look
into the books and records of the respondent bank in order to satisfy
himself as to the truth of the published reports that the respondent has
guaranteed the obligation of Southern Negros Development
Corporation in the purchase of a US$ 23 million sugar-mill to be
financed by Japanese suppliers and financiers; that the respondent is
financing the construction of the P 21 million Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc., and the construction of Passi Sugar
Mill at Iloilo by the Honiron Philippines, Inc., as well as to inquire into
the validity of Id transactions. The petitioner has alleged hat his written
request for such examination was denied by the respondent. The trial
court having dismissed the petition for mandamus, the instant appeal to
review the said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth
by the trial court in the decision herein sought to be reviewed, as
follows:
Briefly stated, the following facts gathered from the stipulation of the
parties served as the backdrop of this proceeding.
Previous to the present action, the petitioner instituted several cases in
this Court questioning different transactions entered into by the Bark
with other parties. First among them is Civil Case No. 69345 filed on
April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza
of Public Works and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber
Corporation, Allis Chalmers and General Motors Corporation In the
course of the hearing of said case on August 3, 1967, the personality of
herein petitioner to sue the bank and question the letters of credit it has
extended for the importation by the Republic of the Philippines of public
works equipment intended for the massive development program of the
President was raised. In view thereof, he expressed and made known
his intention to acquire one share of stock from Congressman
Justiniano Montano which, on the following day, August 30, 1967, was
transferred in his name in the books of the Bank.
Subsequent to his aforementioned acquisition of one share of stock of
the Bank, petitioner, in his dual capacity as a taxpayer and stockholder,
filed the following cases involving the bank or the members of its Board
of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the Board of
Directors of the Bank; the National Investment and Development Corp.,
Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto
and other Directors of the Bank, Passi (Iloilo) Sugar Central, Inc.,
Calinog-Lambunao Sugar Mill Integrated Farming, Inc., Talog sugar
Milling Co., Inc., Safary Central, Inc., and Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano
and the Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter to the
President of the Bank (Annex A, Pet.), requesting submission to look
into the records of its transactions covering the purchase of a sugar
central by the Southern Negros Development Corp. to be financed by
Japanese suppliers and financiers; its financing of the Cebu-Mactan
Bridge to be constructed by V.C. Ponce, Inc. and the construction of
the Passi Sugar Mills in Iloilo. On January 23, 1969, the Asst. Vice-
President and Legal Counsel of the Bank answered petitioner's letter
denying his request for being not germane to his interest as a one-
share stockholder and for the cloud of doubt as to his real intention and
purpose in acquiring said share. (Annex B, Pet.) In view of the Bank's
refusal the petitioner instituted this action.' (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial
court in its brief which he characterized as having been "correctly
stated." (Petitioner-Appellant"s Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed
to examine and inspect the books and records of the respondent bank
regarding the transactions mentioned on the grounds that the right of a
stockholder to inspect the record of the business transactions of a
corporation granted under Section 51 of the former Corporation Law
(Act No. 1459, as amended) is not absolute, but is limited to purposes
reasonably related to the interest of the stockholder, must be asked for
in good faith for a specific and honest purpose and not gratify curiosity
or for speculative or vicious purposes; that such examination would
violate the confidentiality of the records of the respondent bank as
provided in Section 16 of its charter, Republic Act No. 1300, as
amended; and that the petitioner has not exhausted his administrative
remedies.
Assailing the conclusions of the lower court, the petitioner has assigned
the single error to the lower court of having ruled that his alleged
improper motive in asking for an examination of the books and records
of the respondent bank disqualifies him to exercise the right of a
stockholder to such inspection under Section 51 of Act No. 1459, as
amended. Said provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the corporation
and the minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate
records may be denied on the ground that it is intended for an improper
motive or purpose, the law having granted such right to a stockholder in
clear and unconditional terms. He further argues that, assuming that a
proper motive or purpose for the desired examination is necessary for
its exercise, there is nothing improper in his purpose for asking for the
examination and inspection herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act
No. 1459, as amended, regarding the right of a stockholder to inspect
and examine the books and records of a corporation. The former
Corporation Law (Act No. 1459, as amended) has been replaced by
Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of
the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act
No. 1459 has been retained, but with some modifications. The second
and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide
the following:
The records of all business transactions of the corporation and the
minutes of any meeting shag be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable hours
on business days and he may demand, in writing, for a copy of
excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine
and copy excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted
for such refusal; and Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination
of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose
in making his demand.
As may be noted from the above-quoted provisions, among the
changes introduced in the new Code with respect to the right of
inspection granted to a stockholder are the following the records must
be kept at the principal office of the corporation; the inspection must be
made on business days; the stockholder may demand a copy of the
excerpts of the records or minutes; and the refusal to allow such
inspection shall subject the erring officer or agent of the corporation to
civil and criminal liabilities. However, while seemingly enlarging the
right of inspection, the new Code has prescribed limitations to the
same. It is now expressly required as a condition for such examination
that the one requesting it must not have been guilty of using improperly
any information through a prior examination, and that the person asking
for such examination must be "acting in good faith and for a legitimate
purpose in making his demand."
The unqualified provision on the right of inspection previously contained
in Section 51, Act No. 1459, as amended, no longer holds true under
the provisions of the present law. The argument of the petitioner that
the right granted to him under Section 51 of the former Corporation Law
should not be dependent on the propriety of his motive or purpose in
asking for the inspection of the books of the respondent bank loses
whatever validity it might have had before the amendment of the law. If
there is any doubt in the correctness of the ruling of the trial court that
the right of inspection granted under Section 51 of the old Corporation
Law must be dependent on a showing of proper motive on the part of
the stockholder demanding the same, it is now dissipated by the clear
language of the pertinent provision contained in Section 74 of Batas
Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in
seeking the inspection of the books of the respondent bank, he has not
set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the respondent bank and
to inquire into their validity. The circumstances under which he acquired
one share of stock in the respondent bank purposely to exercise the
right of inspection do not argue in favor of his good faith and proper
motivation. Admittedly he sought to be a stockholder in order to pry into
transactions entered into by the respondent bank even before he
became a stockholder. His obvious purpose was to arm himself with
materials which he can use against the respondent bank for acts done
by the latter when the petitioner was a total stranger to the same. He
could have been impelled by a laudable sense of civic consciousness,
but it could not be said that his purpose is germane to his interest as a
stockholder.
We also find merit in the contention of the respondent bank that the
inspection sought to be exercised by the petitioner would be violative of
the provisions of its charter. (Republic Act No. 1300, as amended.)
Sections 15, 16 and 30 of the said charter provide respectively as
follows:
Sec. 15. Inspection by Department of Supervision and Examination of
the Central Bank. — The National Bank shall be subject to inspection
by the Department of Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. —The Superintendent of Banks and
the Auditor General, or other officers designated by law to inspect or
investigate the condition of the National Bank, shall not reveal to any
person other than the President of the Philippines, the Secretary of
Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in
its custody, its current accounts or deposits belonging to private
individuals, corporations, or any other entity, except by order of a Court
of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.— Any
director, officer, employee, or agent of the Bank, who violates or
permits the violation of any of the provisions of this Act, or any person
aiding or abetting the violations of any of the provisions of this Act, shall
be punished by a fine not to exceed ten thousand pesos or by
imprisonment of not more than five years, or both such fine and
imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a
charter of its own, it is not governed, as a rule, by the Corporation Code
of the Philippines. Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters. —
Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them or
applicable to them. supplemented by the provisions of this Code,
insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new
Corporation Code with respect to the right of a stockholder to demand
an inspection or examination of the books of the corporation may not
be reconciled with the abovequoted provisions of the charter of the
respondent bank. It is not correct to claim, therefore, that the right of
inspection under Section 74 of the new Corporation Code may apply in
a supplementary capacity to the charter of the respondent bank.
b. Appraisal Right (Title X, Sec 80 and 85)
Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479 (2010)
BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand
payment of the value of their shareholdings.
In the stockholders’ suit to recover the value of their shareholdings from
the corporation, the Regional Trial Court (RTC) upheld the dissenting
stockholders, herein petitioners, and ordered the corporation, herein
respondent, to pay. Execution was partially carried out against the
respondent. On the respondent’s petition for certiorari, however, the
Court of Appeals (CA) corrected the RTC and dismissed the petitioners’
suit on the ground that their cause of action for collection had not yet
accrued due to the lack of unrestricted retained earnings in the books
of the respondent.
Thus, the petitioners are now before the Court to challenge the CA’s
decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156
entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his
capacity as Presiding Judge of Branch 46 of the Regional Trial Court of
Manila, et al.1
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a
domestic corporation engaged primarily in cargo shipping activities. In
June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders’ pre-emptive rights to newly
issued shares of stock. Feeling that the corporate move would be
prejudicial to their interest as stockholders, the petitioners voted against
the amendment and demanded payment of their shares at the rate of
₱2.276/share based on the book value of the shares, or a total of
₱2,298,760.00.
The respondent found the fair value of the shares demanded by the
petitioners unacceptable. It insisted that the market value on the date
before the action to remove the pre-emptive right was taken should be
the value, or ₱0.41/share (or a total of ₱414,100.00), considering that
its shares were listed in the Philippine Stock Exchange, and that the
payment could be made only if the respondent had unrestricted
retained earnings in its books to cover the value of the shares, which
was not the case.
The disagreement on the valuation of the shares led the parties to
constitute an appraisal committee pursuant to Section 82 of the
Corporation Code, each of them nominating a representative, who
together then nominated the third member who would be chairman of
the appraisal committee. Thus, the appraisal committee came to be
made up of Reynaldo Yatco, the petitioners’ nominee; Atty. Antonio
Acyatan, the respondent’s nominee; and Leo Anoche of the Asian
Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation of
₱2.54/share, for an aggregate value of ₱2,565,400.00 for the
petitioners.2
Subsequently, the petitioners demanded payment based on the
valuation of the appraisal committee, plus 2%/month penalty from the
date of their original demand for payment, as well as the
reimbursement of the amounts advanced as professional fees to the
appraisers.3
In its letter to the petitioners dated January 2, 2001, 4 the respondent
refused the petitioners’ demand, explaining that pursuant to the
Corporation Code, the dissenting stockholders exercising their
appraisal rights could be paid only when the corporation had
unrestricted retained earnings to cover the fair value of the shares, but
that it had no retained earnings at the time of the petitioners’ demand,
as borne out by its Financial Statements for Fiscal Year 1999 showing
a deficit of ₱72,973,114.00 as of December 31, 1999.
Upon the respondent’s refusal to pay, the petitioners sued the
respondent for collection and damages in the RTC in Makati City on
January 22, 2001. The case, docketed as Civil Case No. 01-086, was
initially assigned to Branch 132.5
On June 26, 2002, the petitioners filed their motion for partial summary
judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained
earnings of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE
THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the
Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the
Appraisal Committee is final, that the same cannot be disputed xxx
9) xxx there is no genuine issue to material fact and therefore, the
plaintiffs are entitled, as a matter of right, to a summary judgment. xxx 6
The respondent opposed the motion for partial summary judgment,
stating that the determination of the unrestricted retained earnings
should be made at the end of the fiscal year of the respondent, and that
the petitioners did not have a cause of action against the respondent.
During the pendency of the motion for partial summary judgment,
however, the Presiding Judge of Branch 133 transmitted the records to
the Clerk of Court for re-raffling to any of the RTC’s special commercial
courts in Makati City due to the case being an intra-corporate dispute.
Hence, Civil Case No. 01-086 was re-raffled to Branch 142.
Nevertheless, because the principal office of the respondent was in
Manila, Civil Case No. 01-086 was ultimately transferred to Branch 46
of the RTC in Manila, presided by Judge Artemio Tipon, 7 pursuant to
the Interim Rules of Procedure on Intra-Corporate Controversies
(Interim Rules) requiring intra-corporate cases to be brought in the RTC
exercising jurisdiction over the place where the principal office of the
corporation was found.
After the conference in Civil Case No. 01-086 set on October 23, 2002,
which the petitioners’ counsel did not attend, Judge Tipon issued an
order,8 granting the petitioners’ motion for partial summary judgment,
stating:
As to the motion for partial summary judgment, there is no question that
the 3-man committee mandated to appraise the shareholdings of
plaintiff submitted its recommendation on October 27, 2000 fixing the
fair value of the shares of stocks of the plaintiff at P2.54 per share.
Under Section 82 of the Corporation Code:
"The findings of the majority of the appraisers shall be final, and the
award shall be paid by the corporation within thirty (30) days after the
award is made."
"The only restriction imposed by the Corporation Code is–"
"That no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earning in its books to cover
such payment."
The evidence submitted by plaintiffs shows that in its quarterly financial
statement it submitted to the Securities and Exchange Commission, the
defendant has retained earnings of P11,975,490 as of March 21, 2002.
This is not disputed by the defendant. Its only argument against paying
is that there must be unrestricted retained earning at the time the
demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a
stockholder. The law does not say that the unrestricted retained
earnings must exist at the time of the demand. Even if there are no
retained earnings at the time the demand is made if there are retained
earnings later, the fair value of such stocks must be paid. The only
restriction is that there must be sufficient funds to cover the creditors
after the dissenting stockholder is paid. No such allegations have been
made by the defendant.9
On November 12, 2002, the respondent filed a motion for
reconsideration.
On the scheduled hearing of the motion for reconsideration on
November 22, 2002, the petitioners filed a motion for immediate
execution and a motion to strike out motion for reconsideration. In the
latter motion, they pointed out that the motion for reconsideration was
prohibited by Section 8 of the Interim Rules .  Thus, also on November
22, 2002, Judge Tipon denied the motion for reconsideration and
granted the petitioners’ motion for immediate execution.10
Subsequently, on November 28, 2002, the RTC issued a writ of
execution.11
Aggrieved, the respondent commenced a special civil action for
certiorari in the CA to challenge the two aforecited orders of Judge
Tipon, claiming that:
A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING
SUMMARY JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT
THE TIME THE "COMPLAINT" WAS FILED, LSC HAD NO RETAINED
EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND
NOT VIOLATING ANY RIGHTS OF THE SPOUSES TURNER, WHEN
IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES.
ANY RETAINED EARNINGS MADE A YEAR AFTER THE
"COMPLAINT" WAS FILED ARE IRRELEVANT TO THE SPOUSES
TURNER’S RIGHT TO RECOVER UNDER THE "COMPLAINT",
BECAUSE THE WELL-SETTLED RULE, REPEATEDLY BROUGHT
TO JUDGE TIPON’S ATTENTION, IS "IF NO RIGHT EXISTED AT
THE TIME (T)HE ACTION WAS COMMENCED THE SUIT CANNOT
BE MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE
ACCRUED THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS
GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND
ISSUED THE QUESTIONED "WRIT OF EXECUTION" DIRECTING
THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN
FAVOR OF THE SPOUSES TURNER, BECAUSE THAT JUDGMENT
IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39 OF
THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT
OF EXECUTION UNDER THE SUPREME COURT’S CATEGORICAL
HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF
APPEALS.
Upon the respondent’s application, the CA issued a temporary
restraining order (TRO), enjoining the petitioners, and their agents and
representatives from enforcing the writ of execution. By then, however,
the writ of execution had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary injunction
to prevent the execution. Thereupon, the sheriff resumed the
enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4,
2003,12 pertinently holding:
However, it is clear from the foregoing that the Turners’ appraisal right
is subject to the legal condition that no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment. Thus, the Supreme Court
held that:
The requirement of unrestricted retained earnings to cover the shares
is based on the trust fund doctrine which means that the capital stock,
property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that creditors
of a corporation are preferred over the stockholders in the distribution
of corporate assets. There can be no distribution of assets among the
stockholders without first paying corporate creditors. Hence, any
disposition of corporate funds to the prejudice of creditors is null and
void. Creditors of a corporation have the right to assume that so long as
there are outstanding debts and liabilities, the board of directors will not
use the assets of the corporation to purchase its own stock.
In the instant case, it was established that there were no unrestricted
retained earnings when the Turners filed their Complaint. In a letter
dated 20 August 2000, petitioner informed the Turners that payment of
their shares could only be made if it had unrestricted earnings in its
books to cover the same. Petitioner reiterated this in a letter dated 2
January 2001 which further informed the Turners that its Financial
Statement for fiscal year 1999 shows that its retained earnings ending
December 31, 1999 was at a deficit in the amount of ₱72,973,114.00, a
matter which has not been disputed by private respondents. Hence, in
accordance with the second paragraph of sec. 82, BP 68 supra, the
Turners’ right to payment had not yet accrued when they filed their
Complaint on January 22, 2001, albeit their appraisal right already
existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines,
Inc., the Supreme Court declared that:
Now, before an action can properly be commenced all the essential
elements of the cause of action must be in existence, that is, the cause
of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute, fixed
by agreement of the parties or implied by law must be performed or
complied with before commencing the action, unless the conduct of the
adverse party has been such as to prevent or waive performance or
excuse non-performance of the condition.
It bears restating that a right of action is the right to presently enforce a
cause of action, while a cause of action consists of the operative facts
which give rise to such right of action. The right of action does not arise
until the performance of all conditions precedent to the action and may
be taken away by the running of the statute of limitations, through
estoppel, or by other circumstances which do not affect the cause of
action. Performance or fulfillment of all conditions precedent upon
which a right of action depends must be sufficiently alleged,
considering that the burden of proof to show that a party has a right of
action is upon the person initiating the suit.
The Turners’ right of action arose only when petitioner had already
retained earnings in the amount of ₱11,975,490.00 on March 21, 2002;
such right of action was inexistent on January 22, 2001 when they filed
the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris,
the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by
law, an action commenced before the cause of action has accrued is
prematurely brought and should be dismissed. The fact that the cause
of action accrues after the action is commenced and while it is pending
is of no moment. It is a rule of law to which there is, perhaps, no
exception, either at law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. There are
reasons of public policy why there should be no needless haste in
bringing up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned
before the public tribunals to answer complaints which are groundless.
An action prematurely brought is a groundless suit. Unless the plaintiff
has a valid and subsisting cause of action at the time his action
is commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-
accrued cause of action is not permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals
and Lao vs. Court of Appeals.
The Turners’ apprehension that their claim for payment may prescribe if
they wait for the petitioner to have unrestricted retained earnings is
misplaced. It is the legal possibility of bringing the action that
determines the starting point for the computation of the period of
prescription. Stated otherwise, the prescriptive period is to be reckoned
from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction
when it entertained the herein Complaint and issued the assailed
Orders. Excess of jurisdiction is the state of being beyond or outside
the limits of jurisdiction, and as distinguished from the entire absence of
jurisdiction, means that the act although within the general power of the
judge, is not authorized and therefore void, with respect to the
particular case, because the conditions which authorize the exercise of
his general power in that particular case are wanting, and hence, the
judicial power is not in fact lawfully invoked.
We find no necessity to discuss the second ground raised in this
petition.
WHEREFORE, upon the premises, the petition is GRANTED. The
assailed Orders and the corresponding Writs of Garnishment are
NULLIFIED. Civil Case No. 02-104692 is hereby ordered DISMISSED
without prejudice to refiling by the private respondents of the action for
enforcement of their right to payment as withdrawing stockholders.
SO ORDERED.
The petitioners now come to the Court for a review on certiorari of the
CA’s decision, submitting that:
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW WHEN IT GRANTED THE PETITION FOR CERTIORARI WHEN
THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND
ITS JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN
GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT
AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF
JUDGMENT;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN
THE PETITION FOR CERTIORARI MERELY SOUGHT THE
ANNULMENT OF THE ORDER GRANTING THE MOTION FOR
PARTIAL SUMMARY JUDGMENT AND OF THE ORDER GRANTING
THE MOTION FOR IMMEDIATE EXECUTION OF THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED
QUESTIONS OF SUBSTANCE NOT THEREFORE DETERMINED BY
THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN
ACCORD WITH LAW OR WITH JURISPRUDENCE.
Ruling
The petition fails.
The CA correctly concluded that the RTC had exceeded its jurisdiction
in entertaining the petitioners’ complaint in Civil Case No. 01-086, and
in rendering the summary judgment and issuing writ of execution.
A.
Stockholder’s Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the right
to demand payment of the fair value of his or her shares. This right,
known as the right of appraisal, is expressly recognized in Section 81 of
the Corporation Code, to wit:
Section 81. Instances of appraisal right.  - Any stockholder of a
corporation shall have the right to dissent and demand payment of the
fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term
of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of the stockholders. It does not vest
unless objectionable corporate action is taken.13 It serves the purpose
of enabling the dissenting stockholder to have his interests purchased
and to retire from the corporation.141avvphil
Under the common law, there were originally conflicting views on
whether a corporation had the power to acquire or purchase its own
stocks. In England, it was held invalid for a corporation to purchase its
issued stocks because such purchase was an indirect method of
reducing capital (which was statutorily restricted), aside from being
inconsistent with the privilege of limited liability to creditors. 15 Only a few
American jurisdictions adopted by decision or statute the strict English
rule forbidding a corporation from purchasing its own shares. In some
American states where the English rule used to be adopted, statutes
granting authority to purchase out of surplus funds were enacted, while
in others, shares might be purchased even out of capital provided the
rights of creditors were not prejudiced. 16 The reason underlying the
limitation of share purchases sprang from the necessity of imposing
safeguards against the depletion by a corporation of its assets and
against the impairment of its capital needed for the protection of
creditors.17
Now, however, a corporation can purchase its own shares, provided
payment is made out of surplus profits and the acquisition is for a
legitimate corporate purpose.18 In the Philippines, this new rule is
embodied in Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall
have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code. (n)
The Corporation Code defines how the right of appraisal is exercised,
as well as the implications of the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted
against the proposed corporate action by making a written demand on
the corporation within 30 days after the date on which the vote was
taken for the payment of the fair value of his shares. The failure to
make the demand within the period is deemed a waiver of the appraisal
right.19
2. If the withdrawing stockholder and the corporation cannot agree on
the fair value of the shares within a period of 60 days from the date the
stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of whom
shall be named by the stockholder, another by the corporation, and the
third by the two thus chosen. The findings and award of the majority of
the appraisers shall be final, and the corporation shall pay their award
within 30 days after the award is made. Upon payment by the
corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his or her shares to the corporation.20
3. All rights accruing to the withdrawing stockholder’s shares, including
voting and dividend rights, shall be suspended from the time of demand
for the payment of the fair value of the shares until either the
abandonment of the corporate action involved or the purchase of the
shares by the corporation, except the right of such stockholder to
receive payment of the fair value of the shares.21
4. Within 10 days after demanding payment for his or her shares, a
dissenting stockholder shall submit to the corporation the certificates of
stock representing his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option of the
corporation, terminate his rights under this Title X of the Corporation
Code. If shares represented by the certificates bearing such notation
are transferred, and the certificates are consequently canceled, the
rights of the transferor as a dissenting stockholder under this Title shall
cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions that would have accrued on
such shares shall be paid to the transferee.22
5. If the proposed corporate action is implemented or effected, the
corporation shall pay to such stockholder, upon the surrender of the
certificates of stock representing his shares, the fair value thereof as of
the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.23
Notwithstanding the foregoing, no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover the payment. In case the corporation has
no available unrestricted retained earnings in its books, Section 83 of
the Corporation Code provides that if the dissenting stockholder is not
paid the value of his shares within 30 days after the award, his voting
and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted
retained earnings to fund the payment of the shares of stocks of the
withdrawing stockholders. Under the doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets.24 The creditors of a corporation have
the right to assume that the board of directors will not use the assets of
the corporation to purchase its own stock for as long as the corporation
has outstanding debts and liabilities.25 There can be no distribution of
assets among the stockholders without first paying corporate debts.
Thus, any disposition of corporate funds and assets to the prejudice of
creditors is null and void.26
B.
Petitioners’ cause of action was premature
That the respondent had indisputably no unrestricted retained earnings
in its books at the time the petitioners commenced Civil Case No. 01-
086 on January 22, 2001 proved that the respondent’s legal obligation
to pay the value of the petitioners’ shares did not yet arise. Thus, the
CA did not err in holding that the petitioners had no cause of action,
and in ruling that the RTC did not validly render the partial summary
judgment.
A cause of action is the act or omission by which a party violates a right
of another.27 The essential elements of a cause of action are: (a) the
existence of a legal right in favor of the plaintiff; (b) a correlative legal
duty of the defendant to respect such right; and (c) an act or omission
by such defendant in violation of the right of the plaintiff with a resulting
injury or damage to the plaintiff for which the latter may maintain an
action for the recovery of relief from the defendant. 28 Although the first
two elements may exist, a cause of action arises only upon the
occurrence of the last element, giving the plaintiff the right to maintain
an action in court for recovery of damages or other appropriate relief.29
Section 1, Rule 2, of the Rules of Court requires that every ordinary
civil action must be based on a cause of action. Accordingly, Civil Case
No. 01-086 was dismissible from the beginning for being without any
cause of action.
The RTC concluded that the respondent’s obligation to pay had
accrued by its having the unrestricted retained earnings after the
making of the demand by the petitioners. It based its conclusion on the
fact that the Corporation Code did not provide that the unrestricted
retained earnings must already exist at the time of the demand.
The RTC’s construal of the Corporation Code was unsustainable,
because it did not take into account the petitioners’ lack of a cause of
action against the respondent. In order to give rise to any obligation to
pay on the part of the respondent, the petitioners should first make a
valid demand that the respondent refused to pay despite having
unrestricted retained earnings. Otherwise, the respondent could not be
said to be guilty of any actionable omission that could sustain their
action to collect.
Neither did the subsequent existence of unrestricted retained earnings
after the filing of the complaint cure the lack of cause of action in Civil
Case No. 01-086. The petitioners’ right of action could only spring from
an existing cause of action. Thus, a complaint whose cause of action
has not yet accrued cannot be cured by an amended or supplemental
pleading alleging the existence or accrual of a cause of action during
the pendency of the action.30 For, only when there is an invasion of
primary rights, not before, does the adjective or remedial law become
operative.31 Verily, a premature invocation of the court’s intervention
renders the complaint without a cause of action and dismissible on
such ground.32 In short, Civil Case No. 01-086, being a groundless suit,
should be dismissed.
Even the fact that the respondent already had unrestricted retained
earnings more than sufficient to cover the petitioners’ claims on June
26, 2002 (when they filed their motion for partial summary judgment)
did not rectify the absence of the cause of action at the time of the
commencement of Civil Case No. 01-086. The motion for partial
summary judgment, being a mere application for relief other than by a
pleading,33 was not the same as the complaint in Civil Case No. 01-086.
Thereby, the petitioners did not meet the requirement of the Rules of
Court that a cause of action must exist at the commencement of an
action, which is "commenced by the filing of the original complaint in
court."34
The petitioners claim that the respondent’s petition for certiorari sought
only the annulment of the assailed orders of the RTC (i.e., granting the
motion for partial summary judgment and the motion for immediate
execution); hence, the CA had no right to direct the dismissal of Civil
Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondent’s petition for certiorari targeted only the RTC’s
orders granting the motion for partial summary judgment and the
motion for immediate execution, the CA’s directive for the dismissal of
Civil Case No. 01-086 was not an abuse of discretion, least of all grave,
because such dismissal was the only proper thing to be done under the
circumstances. According to Surigao Mine Exploration Co., Inc. v.
Harris:35
Subject to certain qualification, and except as otherwise provided by
law, an action commenced before the cause of action has accrued is
prematurely brought and should be dismissed. The fact that the cause
of action accrues after the action is commenced and while the case is
pending is of no moment. It is a rule of law to which there is, perhaps
no exception, either in law or in equity, that to recover at all there must
be some cause of action at the commencement of the suit. There are
reasons of public policy why there should be no needless haste in
bringing up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned
before the public tribunals to answer complaints which are groundless.
An action prematurely brought is a groundless suit. Unless the plaintiff
has a valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the acquisition
or accrual of one while the action is pending, and a supplemental
complaint or an amendment setting up such after-accrued cause of
action is not permissible.
Lastly, the petitioners argue that the respondent’s recourse of a special
action for certiorari was the wrong remedy, in view of the fact that the
granting of the motion for partial summary judgment constituted only an
error of law correctible by appeal, not of jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of an
error of jurisdiction, for it exceeded its jurisdiction by taking cognizance
of the complaint that was not based on an existing cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of
merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP
No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S.
Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional
Trial Court of Manila, et al.
Costs of suit to be paid by the petitioners.
SO ORDERED.
c. Derivative Suits
Richardson vs. Arizona Fuels Corp., 614 P.2d 636
STEWART, Justice:
We here review on interlocutory appeal an order of the district court of
Salt Lake County appointing a receiver for defendant Major Oil
Corporation (hereafter "Major") and certifying this case as a class
action. All references to rules refer to the Utah Rules of Civil Procedure.
Plaintiffs Donald J. Richardson, Grove L. Cook, and Wayne Weaver are
stockholders of Major who brought this action individually and on behalf
of all other stockholders of Major. The original complaint named as
defendants Arizona Fuels, Inc.; Eugene Dalton; and Deanna J. Dalton.
Arizona Fuels is alleged to be the legal or beneficial owner of 47% of
the issued and outstanding shares of stock of Major. Eugene Dalton is
alleged to be the controlling stockholder, officer and director of Arizona
Fuels and the controlling officer and director of Major. Deanna Dalton is
alleged to be an officer and director of both Major and Arizona Fuels.
The complaint was subsequently amended, inter alia, to name Major as
an involuntary defendant, pursuant to Rule 19(a). The amended
complaint describes this action as one brought as a class action
pursuant to Rule 23 and as a stockholders' derivative action pursuant to
Rule 23.1. Plaintiffs moved for an order certifying this suit as a class
action and for appointment of a receiver for Major pursuant to Rule 66.
Both motions were granted by the district court.
Defendants attack the order on the grounds (1) that the appointment of
a receiver was not justified, (2) that certification of all the claims in the
suit as a class action was improper, and (3) alternatively, that the
district court erred in not designating under which subsection of Rule
23(b) this action is to proceed. Plaintiffs' motions were granted solely
on the basis of the verified amended complaint.  by virtue of its contract with a third person, and to enjoin those in
We first consider the propriety of the appointment of a receiver. The
ground for appointment, as stated in the amended complaint, is that the
defendants' conduct has caused Major to become insolvent or placed
Major in imminent danger of becoming insolvent. Rule 66(a)(5) permits
appointment of a receiver "[i]n cases where a corporation . . . is
insolvent or in imminent danger of insolvency. . . ."
The authorities are generally in agreement that the appointment of a
receiver for a corporation is permissible at the request of stockholders
of the corporation suing either individually or on behalf of the
corporation. 3 Clark on Receivers § 738(d) (3rd ed. 1959); 16
Fletcher, Cyclopedia of the Law of Private Corporations  § 7688 (rev.
perm. ed. 1979) (hereinafter cited as "Fletcher"); 65
Am.Jur.2d Receivers § 11 (1972); 19 C.J.S. Corporations § 833c.
(1940). Defendants attack the appointment on the ground that it is not
justified by allegations on information and belief, even though those
allegations were stated in a verified complaint. The amended complaint
contains numerous allegations based on information and belief of
fraudulent and otherwise wrongful conduct on the part of defendants.
The allegations specify suspect transactions and state details of
alleged fraud. The allegations requesting appointment of a receiver,
however, are made without any qualification as to information and
belief, and these allegations are not controverted by defendants, either
by pleading or affidavit.
In determining whether a receiver should be appointed, the district
court should consider the pleadings as a whole. Receivers have
historically been appointed in cases where misappropriation of
corporate assets by corporate insiders is asserted. Stevens v. South
Ogden Land, Bldg. Improvement Co., 14 Utah 232, 47 P. 81
(1896); Bookout v. Atlas Financial Corp., 395 F. Supp. 1338 (D.Ga.
1974). If defendants seriously contend that insolvency is not imminent
or that a receivership is not appropriate under the circumstances, they
had abundant opportunity to provide factual support for their contention.
The record discloses that they did not do so.
The appointment of a receiver is among those discretionary powers
subject to review for abuse, but we cannot find abuse where the ground
for appointment is stated in the language of the rules and remains
uncontroverted through a full hearing with extensive preliminary written
memoranda.
The next issue is whether the district court erred in certifying this matter
as a class action. It is alleged in the amended complaint that "some" of
the causes of action found therein belong to Major, and that as to those
causes plaintiffs bring the suit derivatively on behalf of the corporation
pursuant to Rule 23.1.
A class action and a derivative action rest upon fundamentally different
principles of substantive law; to ignore those differences is not a minor
procedural solecism. A derivative action must necessarily be based on
a claim for relief which is owned by the stockholders' corporation.
Indeed, a prerequisite for filing a derivative action is the failure of the
corporation to initiate the action in its own name. The stockholder, as a
nominal party, has no right, title or interest whatsoever in the claim itself
— whether the action is brought by the corporation or by the
stockholder on behalf of the corporation.
A class action, on the other hand, is predicated on ownership of the
claim for relief sued upon in the representative of the class and all other
class members in their capacity as individuals. Shareholders of the
corporation may, of course, have claims for relief directly against their
corporation because the corporation itself has violated rights
possessed by the shareholders, and a class action would be an
appropriate means for enforcing their claims. A recovery in a class
action is a recovery which belongs directly to the shareholders.
However, in a derivative action, the plaintiff shareholder recovers
nothing and the judgment runs in favor of the corporation.
The difference in the two procedures and their relationship to
underlying substantive law has been stated as follows: 
Suits which are said to be derivative, and therefore come within the
rule, are those which seek to enforce any right which belongs to the
corporation and is not being enforced, such as the liability of corporate
officers or majority shareholders for mismanagement, to recover
corporate assets and related claims, to enforce rights of the corporation
charge of the corporation from causing it to commit an ultra vires act.
[Footnotes omitted.] [3B Moore's Federal Practice ¶ 23.1.16[1] (2nd ed.
1980).]
On the other hand,
[i]f the injury is one to the plaintiff as a stockholder and to him
individually, and not to the corporation, as where the action is based on
a contract to which he is a party, or on a right belonging severally to
him, or on a fraud affecting him directly, it is an individual action.
[Footnotes omitted.] [13 Fletcher § 5911 (1970).]
It is the duty of the district court to apply carefully the criteria set forth in
Rule 23(a) and (b) to the facts of the case to determine whether an
action may be maintained as a class action. 3B Moore's Federal
Practice ¶ 23.5. If the criteria of Rule 23 are complied with, it is within
the sound discretion of the district court to determine whether a suit, or
some of the issues in a lawsuit, should proceed as a class action. Id.
In this case, neither the memorandum decision nor the order of the
district court does any more than recite that the suit may be maintained
as a class action. Furthermore, the amended complaint in alleging that
the action should be maintained as a class action, does no more than
mimic the language of Rule 23. As was pointed out in Jones v.
Diamond, 519 F.2d 1090, 1098 (5th Cir. 1975), "Without more, mere
mimicry is insufficient to undergird a decision either way on the
propriety of class certification." See also Rossin v. Southern Union Gas
Co., 472 F.2d 707, 712 (10th Cir. 1973); Weathers v. Peters Realty
Corp., 499 F.2d 1197, 1200 (6th Cir. 1974). We therefore direct our
attention to the contents of the verified amended complaint, which was
the basis upon which the district court made its determination.
The amended complaint states twelve causes of action, the first eight of
which allege some fraudulent appropriation of or scheme to appropriate
Major's assets by defendants. These causes of action seek to require
the defendants to disgorge and return to Major the assets wrongfully
obtained. Of the remaining four causes, three seek compensatory or
punitive damages for injury attributable to alleged breaches of fiduciary
duty implicit in the fraudulent acts enumerated in the first eight causes.
The final cause of action seeks appointment of a receiver.
There is no doubt that the first eight causes of action allege injury to the
corporation only. The injury alleged can be asserted by plaintiffs only
derivatively as stockholders on behalf of the corporation. This leaves
the ninth, tenth and eleventh causes of action to be analyzed to
determine if they state claims which may be pursued by the
stockholders as a class to redress injuries to the stockholders as
individuals.
The ninth cause of action alleges initially that the defendants "breached
their fiduciary duties to Major Oil and to its stockholders. . . ." As a
general rule, directors and other officers of a corporation stand in a
fiduciary relation to the corporation. Branch v. Western Factors, Inc., 28
Utah 2d 361, 502 P.2d 570 (1972); 3 Fletcher § 838. While the
statement is made that directors and officers stand in a like relation to
the stockholders of the corporation, 3 Fletcher § 838, in Utah it is clear
that that relation is to the stockholders collectively. Jones Min. Co. v.
Cardiff Min. Mill. Co., 56 Utah 449, 456, 191 P. 426, 428 (1920);
accord, Hansen v. Granite Holding Co. , 117 Utah 530, 218 P.2d
274 (1950); 3 Fletcher § 838 at 144. The distinction between a fiduciary
duty owed to the corporation as a whole as opposed to the
stockholders collectively does not appear to be one of substance in this
case. There is no important  issue as to whether the cause of action
states a corporate claim. Although plaintiff frames this claim, in the
alternative, as one belonging to the shareholders, the claim for relief
belongs to the corporation.
The ninth cause of action then goes on to allege that the defendants
"mismanaged the corporate and prudential affairs of Major Oil. . . ." The
rule in Utah is that mismanagement of the corporation gives rise to a
cause of action in the corporation, even if the mismanagement results
in damage to stockholders by depreciating the value of the
corporation's stock. Morris v. Ogden State Bank, 84 Utah 127, 140-
41, 28 P.2d 138, 143 (1934). Therefore, any compensatory damages
which may be recovered on account of any breach by defendants of
their fiduciary duty as directors and officers or arising as a result of
mismanagement of the corporation by defendants belong to the
corporation and not to the stockholders individually.
The ninth cause of action also prays for punitive damages based on the
nature of defendants' conduct. Because there is no claim for relief for
punitive damages as such, a claim for punitive damages must be
related to an underlying cause of action on which the punitive damages
may be based. Graham v. Street, 2 Utah 2d 144, 270 P.2d 456 (1954);
22 Am.Jur.2d Damages § 241 (1965). Since we have concluded that
the other aspects of the ninth cause of action state a corporate claim,
the punitive damages claim alleged must likewise belong to the
corporation. In short, the ninth cause of action states a claim belonging
to the corporation and precludes that claim from being alleged as a
class action.
The tenth cause of action alleges that the defendants "defrauded the
stockholders of Major Oil Company. . . ." The fraud is premised on
defendants' fiduciary duty owed to the stockholders of the corporation.
That duty is alleged to have been breached in six particulars. Each of
the six alleged defalcations states a claim belonging to the corporation
and not to the stockholders or any of them individually. The tenth cause
of action is rounded out by allegations of the defendants' knowledge of
their wrongful conduct, the reasonable reliance of the plaintiffs on
defendants' performance of defendants' fiduciary duties, and the
resulting damage to the stockholders. However, in no regard can the
tenth cause of action be interpreted as stating a claim belonging to the
stockholders individually, and therefore that claim for relief will not
support a class action.
The eleventh cause of action alleges the possibility of other
conversions of Major's assets and alleges that the defendants should
be required to account to the stockholders for all of the assets of Major
and disgorge themselves of any assets so converted. This claim also
clearly belongs to the corporation.
Although class actions have historical antecedents in rules of equity
that go back several centuries in English jurisprudence, it is not to be
gainsaid that the modern class action rule is one of the most
farreaching and important changes in legal procedure in many a
decade. Its impact on the enforcement of consumer rights, antitrust
claims, securities claims and civil rights actions, to name but a few
areas, has been monumental. However, the class action device, if used
inappropriately and in lieu of a derivative action, is likely to result in
grave injustices, not the least of which is the diversion of assets
recovered in a lawsuit from creditors of a corporation to stockholders,
thereby reversing long established substantive rules of law as to the
relative priorities of the claims of creditors and stockholders to the
assets of an insolvent corporation.
See Chaffee, Some Problems of Equity (1950); 3B Moore's Federal
Practice ¶ 23.02[1].
We therefore reverse the district court's certification of this suit as a
class action and remand for further proceedings not inconsistent with
this opinion.
______________________________________
SMC vs. Khan, 176 SCRA 447
NARVASA, J.:
On December 15, 1983, 33,133,266 shares of the outstanding capital
stock of the San Miguel Corporation were acquired 1 by fourteen (14)
other corporations, 2 and were placed under a Voting Trust Agreement
in favor of the late Andres Soriano, Jr. When the latter died, Eduardo
M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with
power to delegate the trusteeship in writing to Andres Soriano
III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the
country amid "persistent reports" that "huge and unusual cash
disbursements from the funds of SMC" had been irregularly made, and
the resources of the firm extensively used in support of the candidacy
of Ferdinand Marcos during the snap elections in February, 1986 .4
On March 26, 1986, an "Agreement" was executed between Andres
Soriano III, as "Buyer," and the 14 corporations, as "Sellers," for the
purchase by Soriano, "for himself and as agent of several persons," of
the 33,133,266 shares of stock at the price of P100.00 per share, or "an
aggregate sum of Three Billion Three Hundred Thirteen Million Three
Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00)
Pesos payable in specified installments. 5 The Agreement revoked the
voting trust above mentioned, and expressed the desire of the 14
corporations to sell the shares of stock "to pay certain outstanding and
unpaid debts," and Soriano's own wish to purchase the same "in order
to institutionalize and stabilize the management of the COMPANY in ..
(himself) and the professional officer corps, mandated by the
COMPANY's By- laws, and to direct the COMPANY towards giving the
highest priority to its principal products and extensive support to
agriculture programme of' the Government ... 6 Actually, according to
Soriano and the other private respondents, the buyer of the shares was
a foreign company, Neptunia Corporation Limited (of Hongkong, a
wholly owned subsidiary of San Miguel International which is, in turn, a
wholly owned subsidiary of San Miguel Corporation; 7 and it was
Neptunia which on or about April 1, 1986 had made the down payment
of P500,000,000.00, "from the proceeds of certain loans". 8
At this point the 33,133,266 SMC shares were sequestered by the
Presidential Commission on Good Government (PCGG), on the ground
that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close
associate and dummy of former President Marcos, and the sale thereof
was "in direct contravention of .. Executive Orders Numbered 1 and 2
(.. dated February 28, 1986 and March 12, 1986, respectively) which
prohibit .. the transfer, conveyance, encumbrance, concealment or
liquidation of assets and properties acquired by former President
Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez Marcos,
their close relatives, subordinates, business associates. 9 The
sequestration was subsequently lifted, and the sale allowed to proceed,
on representations by San Miguel Corporation x x that the shares were
'owned by 1.3 million coconut farmers;' the seller corporations were
'fully owned' by said farmers and Cojuangco owned only 2 shares in
one of the companies, etc. However, the sequestration was soon re-
imposed by Order of the PCGG dated May 19, 1986 .. The same order
forbade the SMC corporate Secretary to register any transfer or
encumbrance of any of the stock without the PCGG's prior written
authority. 10
San Miguel promptly suspended payment of the other installments of
the price to the fourteen (14) seller corporations. The latter as promptly
sued for rescission and damages.11
On June 4,1986, the PCGG directed San Miguel Corporation"to issue
qualifying shares" in the corporation to seven (7) individuals, including
Eduardo de los Angeles, "from the sequestered shares registered as
street certificates under the control of Anscor- Hagedorn Securities,
Inc.," to "be held in trust by .. (said seven [7] persons) for the benefit of
Anscor-Hagedom Securities, Inc. and/or whoever shall finally be
determined to be the owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution No. 86-122,
"decided to assume the loans incurred by Neptunia for the down
payment ((P500M)) on the 33,133,266 shares." The Board opined that
there was "nothing illegal in this assumption (of liability for the loans),"
since Neptunia was "an indirectly wholly owned subsidiary of SMC,"
there "was no additional expense or exposure for the SMC Group, and
there were tax and other benefits which would redound to the SMC
group of companies. 13
However, at the meeting of the SMC Board on January 30, 1987,
Eduardo de los Angeles, one of the PCGG representatives in the SMC
board, impugned said Resolution No. 86-12-2, denying that it was ever
adopted, and stating that what in truth was agreed upon at the meeting
of December 4, 1986 was merely a "further study" by Director Ramon
del Rosario of a plan presented by him for the assumption of the loan.
De los Angeles also pointed out certain "deleterious effects" thereof. He
was however overruled by private respondents. 14 When his efforts to
obtain relief within the corporation and later the PCGG proved futile, he
repaired to the Securities and Exchange Commission
(SEC).lâwphî1.ñèt
He filed with the SEC in April, 1987, what he describes as a derivative
suit in behalf of San Miguel Corporation, against ten (10) of the fifteen-
member Board of Directors who had "either voted to approve and/or
refused to reconsider and revoke Board Resolution No. 86-12-2." 15 His
Amended Petition in the SEC recited substantially the foregoing
antecedents and the following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia
Corporation, Ltd., had met and passed a resolution authorizing the
company to borrow up to US $26,500,000.00 from the Hongkong &
Shanghai Banking Corporation, Hongkong "to enable the Soriano
family to initiate steps and sign an agreement for the purchase of some
33,133,266 shares of San ,Miguel Corporation. 16
b) The loan of $26,500,000.00 was obtained on the same day, the
corresponding loan agreement having been signed for Neptunia by
Ralph Kahn and Carl Ottiger. At the latter's request, the proceeds of the
loan were deposited in different banks 17 for the account of "Eduardo J.
Soriano".
c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters
to the stockholders of San Miguel Corporation, 18 inter alia  soliciting
their proxies and announcing that "the Soriano family, friends and
affiliates acquired a considerable block of San Miguel Corporation
shares only a few days ago .., the transaction .. (having been) made
through the facilities of the Manila Stock Exchange, and 33,133,266
shares .. (having thereby been) purchased for the aggregate price of'
P3,313,326,600.00." The letters also stated that the purchase was "an
exercise of the Sorianos' right to buy back the same number of shares
purchased in 1983 by the .. (14 seller corporations)."
d) In implementing the assumption of the Neptunia loan and the
purchase agreement for which said loan was obtained, which
assumption constituted an improper use of corporate funds to pay
personal obligations of Andres Soriano III, enabling him; to purchase
stock of the corporation using funds of' the corporation itself, the
respondents, through various subsequent machinations and
manipulations, for interior motives and in breach of fiduciary duty,
compound the damages caused San Miguel Corporation by, among
other things: (1) agreeing to pay a higher price for the shares than was
originally covenanted in order to prevent a rescission of the purchase
agreement by the sellers; (2) urging UCPB to accept San Miguel
Corporation and Neptunia as buyers of the shares, thereby committing
the former to the purchase of its own shares for at least 25% higher
than the price at which they were fairly traded in the stock exchanges,
and shifting to said corporations the personal obligations of Soriano III
under the purchase agreement; and (3) causing to be applied to the
part payment of P1,800,000.00 on said purchase, various assets and
receivables of San Miguel Corporation.
The complaint closed with a prayer for injunction against the execution
or consummation of any agreement causing San Miguel Corporation to
purchase the shares in question or entailing the use of its corporate
funds or assets for said purchase, and against Andres Soriano III from
further using or disposing of the funds or assets of the corporation for
his obligations; for the nullification of the SMC Board's resolution of
April 2, 1987 making San Miguel Corporation a party to the purchase
agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles' derivative suit on two
grounds, to wit:
1 De los Angeles has no legal capacity to sue because —
a) having been merely imposed by the PCGG as a director on San
Miguel, he has no standing to bring a minority derivative suit;
b) he personally holds only 20 shares and hence cannotfairly and
adequately represent the minority stockholders of the corporation;
c) he has not come to court with clean hands; and
2. The Securities & Exchange Commission has no jurisdiction over the
controversy because the matters involved are exclusively within the
business judgment of the Board of Directors. 19
Kahn's motion to dismiss was subsequently adopted by his
correspondents .20
The motion to dismiss was denied by SEC Healing Officer Josefina L.
Pasay Paz, by order dated September 4, 1987. 21 In her view —
1) the fact that de los Angeles was a PCGG nominee was irrelevant
because in law, ownership of even one share only, sufficed to qualify a
person to bring a derivative suit;
2) it is indisputable that the action had been brought by de los Angeles
for the benefit of the corporation and all the other stockholders;
3) he was a stockholder at the time of the commission of the acts
complained of, the number of shares owned by him being to repeat,
immaterial;
4) there is no merit in the assertion that he had come to Court with
unclean hands, it not having been shown that he participated in the act
complained of or ratified the same; and
5) where business judgment transgresses the law, the securities and
Exchange Commission always has competence to inquire thereinto.
Kahn filed a petition for certiorari and prohibition with the Court of
Appeals, seeking the annulment of this adverse resolution of the SEC
Hearing Officer and her perpetual inhibition from proceeding with SEC
Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-
two. The majority 22 ruled that de los Angeles had no egal capacity to
institute the derivative suit, a conclusion founded on the following
propositions:
1) a party "who files a derivative suit should adequately represent the
interests of the minority stockholders;" since "De los Angeles holds 20
shares of stock out of 121,645,860 or 0.00001644% (appearing to be
undisputed), (he) cannot even be remotely said to adequately represent
the interests of the minority stockholders, (e)specially so when .. de los
Angeles was put by the PCGG to vote the majority stock," a situation
generating "a genuine conflict of interest;"
2) de los Angeles has not met this conflict-of-interest argument, i.e.,
that his position as PCGG-nominated director is inconsistent with his
assumed role of representative of minority stockholders; not having
been elected by the minority, his voting would expectedly consider the
interest of the entity which placed him in the board of directors;
3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that
the (a) PCGG cannot exercise acts of dominion over sequestered
property, (b) it has only powers of administration, and (c) its voting of
sequestered stock must be done only pursuant to its power of
administration; and
4) de los Angeles' suit is not a derivative suit, a derivative suit being
one brought for the benefit of the corporation.
The dissenting Justices, 24 on the other hand, were of the opinion that
the suit had been properly brought by de los Angeles because —
1) the number of shares owned by him was immaterial, he being a
stockholder in his own right;
2) he had not voted in favor of the resolution authorizing the purchase
of the shares; and
3) even if PCGG was not the owner of the sequestered shares, it had
the right to seek the protection of the interest of the corporation, it
having been held that even an unregistered shareholder or an equitable
owner of shares and pledgees of shares may be deemed a shareholder
for purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the
judgment of the Court of Appeals, imputing to the latter the following
errors:
1) having granted the writ of certiorari despite the fact that Kahn had
not first resorted to the plain remedy available to him, i.e., appeal to the
SEC en banc  and despite the fact that no question of jurisdiction was
involved;
2) having ruled on Kahn's petition on the basis merely of his factual
allegations, although he (de los Angeles) had disputed them and there
had been no trial in the SEC; and
3) having held that he (de los Angeles) could not file a derivative suit as
stockholder and/or director of the San Miguel Corporation.
For their part, and in this Court, the respondents make the following
assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the
ownership of the 33,133,266 shares of SMC stock, in light of this
Court's Resolution in G.R. Nos. 74910, 5075, 75094, 76397, 79459 and
79520, promulgated on August 10, 1988; 25
2) de los Angeles was beholden to the controlling stockholder in the
corporation (PCGG), which had "imposed" him on the corporation;
since the PCGG had a clear conflict of interest with the minority, de los
Angeles, as director of the former, had no legal capacity to sue on
behalf of the latter;
3) even assuming absence of conflict of interest, de los Angeles does
not fairly and adequately represent the interest of the minority
stockholders;
4) the respondents had properly applied for certiorari with the Court of
Appeals because —
a) that Court had, by law, exclusive appellate jurisdiction over officers
and agencies exercising quasi-judicial functions, and hence file
competence to issue the writ of certiorari;
b) the principle of exhaustion of administrative remedies does not apply
since the issue involved is one of law;
c) said respondents had no plain, speedy and adequate remedy within
SEC;
d) the Order of the SEC Investigating Officer — denying the motion to
dismiss — was issued without or in excess of jurisdiction, hence was
correctly nullified by the Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for
reconsideration by respondents in the SEC case; in any event, such a
motion was unnecessary in the premises.
De los Angeles' Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a derivative suit, viz:
a) the party bringing suit should be a shareholder as of the time of the
act or transaction complained of,
b) he has exhausted 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) c)the cause of action actually devolves on the corporation,
the ,wrongdoing or harm having been caused to the corporation and
not to .the particular stockholder bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in
his own right, having acquired those shares as early as 1977, (2) he
had sought without success to have the board of' directors remedy with
wrong, and (3) that wrong was in truth a 'wrong against the
stockholders of the corporation, generally, ,and not against him
individually — and it was the corporation, and not he, particularly, that
would be entitled to the appropriate' relief — the propriety of his suit
cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings
in the Court of Appeals and hence could not claim exclusion from the
scope of the doctrine of exhaustion of remedies; moreover, Rule 65,
invoked by him, bars a resort to certiorari. where a plain, speedy and
accurate remedy  was available to him in this case, to wit, a motion for
reconsideration before the Sec en banc  and, contrary to the
respondent's claim, De Los Angeles had in fact asserted to this
propositions before the Appellate Tribunal; and
3) the respondent had not raised the issue of jurisdiction before the
Court of Appeals; indeed, they admit to their Comment that that
issue has not yet been resolved by the SEC," be this as it may, the
derivative suit does not fall within the BASECO doctrine since it does
not involve any question of ownership of the 33,133,266 sequestered
SMC shares but rather, the validity of the resolution of the board of
directors for the assumption by the corporation, for the benefit of certain
of its officers and stockholders, of liability for loans contracted by
another corporation, which is an intra-corporate dispute within the
exclusive jurisdiction of the SEC.
1. De los Angeles is not opposed to the asserted position of the PCGG
that the sequestered SMC shares of stock belong to Ferdinand Marcos
and/or his dummies and/or cronies. His consent to sit in the board as
nominee of PCGG unquestionably indicates his advocacy of the PCGG
position. He does not here seek, and his complaint in the SEC does not
pray for, the annulment of the purchase by SMC of the stock in
question, or even the subsequent purchase of the same stock by
others 26 which proposition was challenged by (1) one Evio, in SEC
Case No. 3000; (2) by the 14 corporations which sold the stock to
SMC, in Civil Case No. 13865 of the Manila RTC, said cases having
later become subject of G.R. No. 74910 of this Court; (3) by Neptunia,
SMC, and others, in G.R. No. 79520 of this Court; and (4) by Eduardo
Cojuangco and others in Civil Case No. 16371 of the RTC, Makati, [on
the theory that the sequestered stock in fact belonged to coconut
planters and oil millers], said case later having become subject of G.R.
No. 79459 of this court .27 Neither does de los Angeles impugn,
obviously, the right of the PCGG to vote the sequestered stock thru its
nominee directors — as was done by United Coconut Planters Bank
and the 14 seller corporations (in SEC Case No. 3005, later
consolidated with SEC Case No. 3000 above mentioned, these two (2)
cases later having become subject of G.R.No. 76397) as well as by one
Clifton Ganay, a UCPB stockholder (in G.R. No. 75094 of this
Court).lâwphî1.ñèt  28
The subject matter of his complaint in the SEC does not therefore fall
within the ambit of this Court's Resolution of August 10, 1988 on the
cases just mentioned, to the effect that, citing PCGG v. Pena, et al 29 an
cases of the Commission regarding 'the funds, moneys, assets, and
properties illegally acquired or misappropriated by former President
Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close
relatives, Subordinates, Business Associates, Dummies, Agents, or
Nominees, whether civil or criminal, are lodged within the exclusive and
original jurisdiction of the Sandiganbayan,' and all incidents arising
from, incidental to, or related to, such cases necessarily fall likewise
under the Sandiganbayan's exclusive and original jurisdiction, subject
to review on certiorari exclusively by the Supreme Court." His complaint
does not involve any property illegally acquired or misappropriated by
Marcos, et al., or "any incidents arising from, incidental to, or related to"
any case involving such property, but assets indisputably belonging to
San Miguel Corporation which were, in his (de los Angeles') view, being
illicitly committed by a majority of its board of directors to answer for
loans assumed by a sister corporation, Neptunia Co., Ltd.
De los Angeles' complaint, in fine, is confined to the issue of the validity
of the assumption by the corporation of the indebtedness of Neptunia
Co., Ltd., allegedly for the benefit of certain of its officers and
stockholders, an issue evidently distinct from, and not even remotely
requiring inquiry into the matter of whether or not the 33,133,266 SMC
shares sequestered by the PCGG belong to Marcos and his cronies or
dummies (on which- issue, as already pointed out, de los Angeles, in
common with the PCGG, had in fact espoused the affirmative). De los
Angeles' dispute, as stockholder and director of SMC, with other SMC
directors, an intra-corporate one, to be sure, is of no concern to the
Sandiganbayan, having no relevance whatever to the ownership- of the
sequestered stock. The contention, therefore, that in view of this
Court's ruling as regards the sequestered SMC stock above adverted
to, the SEC has no jurisdiction over the de los Angeles complaint,
cannot be sustained and must be rejected. The dispute concerns acts
of the board of directors claimed to amount to fraud and
misrepresentation which may be detrimental to the interest of the
stockholders, or is one arising out of intra-corporate relations between
and among stockholders, or between any or all of them and the
corporation of which they are stockholders .30
2. The theory that de los Angeles has no personality to bring suit in
behalf of the corporation — because his stockholding is minuscule, and
there is a "conflict of interest" between him and the PCGG — cannot be
sustained, either.
It is claimed that since de los Angeles 20 shares (owned by him since
1977) represent only. 00001644% of the total number of outstanding
shares (1 21,645,860), he cannot be deemed to fairly and adequately
represent the interests of the minority stockholders. The implicit
argument — that a stockholder, to be considered as qualified to bring a
derivative suit, must hold a substantial or significant block of stock —
finds no support whatever in the law. The requisites for a derivative
suit 31 are as follows:
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; 32
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; 33 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. 34
The bona fide ownership by a stockholder of stock in his own right
suffices to invest him with standing to bring a derivative action for the
benefit of the corporation. The number of his shares is immaterial since
he is not suing in his own behalf, or for the protection or vindication of
his own particular right, or the redress of a wrong committed against
him, individually, but in behalf and for the benefit of the corporation.
3. Neither can the "conflict-of-interest" theory be upheld. From the
conceded premise that de los Angeles now sits in the SMC Board of
Directors by the grace of the PCGG, it does not follow that he is legally
obliged to vote as the PCGG would have him do, that he cannot
legitimately take a position inconsistent with that of the PCGG, or that,
not having been elected by the minority stockholders, his vote would
necessarily never consider the latter's interests. The proposition is not
only logically indefensible, non sequitur, but also constitutes an
erroneous conception of a director's role and function, it being plainly a
director's duty to vote according to his own independent judgment and
his own conscience as to what is in the best interests of the company.
Moreover, it is undisputed that apart from the qualifying shares given to
him by the PCGG, he owns 20 shares in his own right, as regards
which he cannot from any aspect be deemed to be "beholden" to the
PCGG, his ownership of these shares being precisely what he invokes
as the source of his authority to bring the derivative suit.
4. It is also theorized, on the authority of the BASECO decision, that the
PCGG has no power to vote sequestered shares of stock as an act of
dominion but only in pursuance — to its power of administration. The
inference is that the PCGG's act of voting the stock to elect de los
Angeles to the SMC Board of Directors was unauthorized and void;
hence, the latter could not bring suit in the corporation's behalf. The
argument is strained and obviously of no merit. As already more than
plainly indicated, it was not necessary for de los Angeles to be a
director in order to bring a derivative action; all he had to be was a
stockholder, and that he was owning in his own right 20 shares of
stock, a fact not disputed by the respondents.
Nor is there anything in the Baseco decision which can be interpreted
as ruling that sequestered stock may not under any circumstances be
voted by the PCGG to elect a director in the company in which such
stock is held. On the contrary, that it held such act permissible is
evident from the context of its reference to the Presidential
Memorandum of June 26, 1986 authorizing the PCGG, "pending the
outcome of proceedings to determine the ownership of .. sequestered
shares of stock,"'to vote such shares .. at all stockholders' meetings
called for the election of directors ..," the only caveat being that the
stock is not to be voted simply because the power to do so exists,
whether it be to oust and replace directors or to effect substantial
changes in corporate policy, programs or practice, but only "for
demonstrably weighty and defensible grounds" or "when essential to
prevent disappearance or wastage of corporate property."
The issues raised here do not peremptorily call for a determination of
whether or not in voting petitioner de los Angeles to the San Miguel
Board, the PCGG kept within the parameters announced in Baseco;
and absent any showing to the contrary, consistently with the
presumption that official duty is regularly performed, it must be
assumed to have done so.
WHEREFORE, the petition is GRANTED. The appealed decision of the
Court of Appeals in CA- G.R. SP No. 12857 — setting aside the order
of September 4, 1987 issued in SEC Case No. 3153 and dismissing
said case — is REVERSED AND SET ASIDE. The further disposition in
the appealed decision for the issuance of a writ of preliminary injunction
upon the filing and approval of a bond of P500,000.00 by respondent
Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and
any writ of injunction issued pursuant thereto is lifted. Costs against
private respondents.
SO ORDERED.
Pascual vs. Orosco, 19 PHIL 83
RENT, J.:
This is an appeal by the plaintiff from a judgment sustaining a demurrer
to the first and second causes of action set forth in the amended
complaint. The demurrer as to both causes of action was based upon
the following grounds:
(a) Lack of legal capacity to use on part of plaintiff;
(b) Failure to state facts constituting a cause of action;
( c) Defect of parties plaintiff; and,
(d) Uncertainty.
The lower court sustained the demurrer as to both causes of action
upon the second ground above-mentioned.
The following errors have been assigned:
The court a quo erred in sustaining the demurrer to the first cause of
action and dismissing the same because (a) the facts alleged constitute
a cause of action, and (b) the remedy sought by the plaintiff is the only
one available.
The same errors are assigned as to the second cause of action.
The gist of the first and second causes of action is as follows:
That during the years 1903, 1904, 1905, and 1907 the defendants and
appellees, without the knowledge, consent, or acquiescence of the
stockholders, deducted their respective compensation from the gross
income instead of from the net profits of the bank, thereby defrauding
the bank and its stockholders of approximately P20,000 per annum;
that though due demands has been made upon them therefor,
defendants refuse to refund to the bank the sums so misappropriated,
or any part thereof; that defendants constitute a majority of the present
board of directors of the bank, who alone can authorize an action
against them in the name of the corporation, and that prior to the filing
of the present suit plaintiff exhausted every remedy in the premises
within this banking corporation.
The second cause of action sets forth that defendants' and appellees'
immediate predecessors in office in this bank during the years 1899,
1900, 1901, and 1902, committed the same illegality as to their
compensation as is charged against the defendants themselves; that in
the four years immediately following the year 1902, the defendants and
appellees were the only officials or representatives of the bank who
could and should investigate and take action in regard to the sums of
money thus fraudulently appropriated by their predecessors; that they
were the only persons interested in the bank who knew of the
fraudulent appropriation by their predecessors; that they wholly
neglected to take any action in the premises or inform the stockholders
thereof; that due demand has been made upon defendants to
reimburse the bank for this loss; that the bank itself can not bring an
action in its own name against the defendants and appellees, for the
reason already stated, and that there remains no remedy within the
corporation itself.
The questions raised in third cause of action are not before us at this as
the demurrer to that cause of action was overruled.
The court below sustained the demurrer as to the first and second
causes of action on the ground that in actions of this character the
plaintiff must aver in his complaint that he was the owner of stock in the
corporation at the time of the occurrences complained of, or else that
the stock has since devolved upon him by operation of law.
This action was brought by the plaintiff Pascual, in his own right as a
stockholder of the bank, for the benefit of the bank, and all the other
stockholders thereof. The plaintiff sues on behalf of the corporation,
which, even though nominally a defendant, is to all intents and
purposes the real plaintiff in this case. That such is the case is shown
by the prayer of the complaint which is that judgment be entered in
favor of the bank.
According to the pleadings, the Banco Español-Filipino is a banking
corporation, constituted as such by royal decree of the Crown of Spain
in the year 1854, the original grant having been subsequently extended
and modified by royal decree of July 14, 1897, and by Act No. 1790 of
the Philippine Commission. From the first it has been a bank of issue,
and under the Spanish regime was regarded as a quasi-public
institution, its full title having been originally "Banco Español-Filipino de
Isabel II." The Captain-General of the Philippine Islands was its
protector and supreme head. To him belonged the power to appoint its
directors and other managing officers, remove them from office for
cause, fix the rate of interest demandable by the bank, resolve all
doubts and controversies relating to its management, "and finally,
exercise, as representative of Her Majesty's Government, the powers
that the laws give him respecting public establishments protected and
privileged."
It is alleged in the amended complaint that the only compensation
contemplated or provided for the managing officers of the bank was a
certain per cent of the net profits resulting from the bank's operations,
as set forth in article 30 of its reformed charter or statutes, which article
is as follows:
Of the profits or gains which may result from the bank's operations,
after deducting all the expenses of its administration and the part, if
any, which corresponds to the legal reserve fund, there shall be set
apart ten per cent for the directors and five per cent for the board of
government, the distribution of which shall be made as provided in the
regulations. The eighty-five per cent remaining shall belong integrally to
the shareholders pro rata the number of shares owned by each.
Before proceeding to the determination of the real questions involved in
this case it might be well to note briefly the origin and history of the right
of a stockholder in a corporation to maintain a suit of this kind.
A corporation is an artificial being, invinsible, intangible, and existing
only in contemplation of law. (Chief Justice Marshall in Trustees of
Dartmouth College vs. Woodward, 4 Wheat., 636.)
The word "corporation" is but a collective name for the corporators or
members who compose an incorporated association; and where it is
said that a corporation is itself a person, or being, or creature, this must
be understood in a figurative sense only. (Morawetz on Private
Corporations, 2nd ed., sec. 1.)
A corporation is "an artificial person created by the sovereign from
natural persons and in which artificial person the natural persons of
which it is composed become merged and nonexistent." (Quoted with
approval in case of The People, ex rel. Winchester, etc.,
respondent, vs. Coleman, et al., commissioners of taxes etc.,
appellants, 133 N.Y. Appls., 279.)
In suits of this character the corporation itself and not the plaintiff
stockholder is the real party in interest. The rights of the individual
stockholder are merged into that of the corporation. It is a universally
recognized doctrine that a stockholder in a corporation has no title legal
or equitable to the corporate property; that both of these are in the
corporation itself for the benefit of all the stockholders. Text writers
illustrate this rule by the familiar example of one person or entity
owning all the stock and still having no greater or essentially different
title than if he owned but one single share. Since, therefore, the
stockholder has no title, it is evident that what he does have, with
respect to the corporation and his fellow stockholder, are certain
rights sui generis. These rights are generally enumerated as being,
first, to have a certificate or other evidence of his status as stockholder
issued to him; second, to vote at meetings of the corporation; third, to
receive his proportionate share of the profits of the corporation; and
lastly, to participate proportionately in the distribution of the corporate
assets upon the dissolution or winding up. (Purdy's Beach on Private
Corporations, sec. 554.)
The right of individual stockholders to maintain suits for and on behalf
of the corporation was denied until within a comparatively short time,
but his right is now no longer doubted. On this point Cook on
Corporations, 5th ed. (1903), secs. 644, 645, and 646, says:
Notwithstanding this fact, however, that it was the duty and right of the
corporation to bring suit remedy these wrongs, it gradually became
apparent that frequently the corporation was helpless and unable to
institute the suit. It was found, where the guilty parties themselves
controlled the directors and also a majority of the stock, that the
corporation was in their power, was unable to institute suit, and that the
minority of the stockholders were being defrauded of their rights and
were without remedy. The time came when the minority of the
stockholders of the defrauded corporation — the corporation itself
being controlled by the guilty parties — were given a standing in court
for the purpose of taking up the cause of the corporation, and, in its
name and stead, of bringing the guilty parties to an account.
Accordingly, in 1843, in the leading case of Foss vs. Harbottle, a
stockholder brought suit in the name of himself and other defrauded
stockholders, and for the benefit of the corporation, against the
directors, for a breach of their duty to the corporation. This case was
decided against the complaining stockholder, on the ground that the
complainant had not proved that the corporation itself was under the
control of the guilty parties, and had not proved that it was unable to
institute suit. The court, however, broadly intimated that a
case might arise when a suit instituted by defrauded stockholders
would be entertained by the court and redress given. Acting upon this
suggestion, and impelled by the utter inadequacy of suits instituted by
the corporation, defrauded stockholders continued to institute these
suits and to urge the courts of equity to grant relief. These efforts were
unsuccessful in clearly establishing the right of stockholders herein until
the cases of Atwol against Merriwether, in England, 1867, and of
Dodge vs. Woolsey, in this country, in 1855. These two great and
leading cases have firmly established the law for England and America,
that where corporate directors have committed a breach of trust either
by their frauds, ultra vires acts, or negligence, and the corporation is
unable or unwilling to institute suit to remedy the wrong, a single
stockholder may institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong done directly to the corporation and indirectly to
the stockholders.
It is now no longer doubted, — said Mr. Justice Wayne, in the case of
Dodge vs. Woolsey, 18 How. (U.S.), 331 — either in England or the
United States, that courts of equity, in both, have a jurisdiction over
corporations, at the instance of one or more of their members; to apply
preventive remedies by injunction, to restrain those who administer
them from doing acts which would amount to a violation of charters, or
to prevent any misapplication of their capitals or profits, which might
result in lessening the dividends of stockholders, or the value of their
shares, as either may be protected by the franchises of a corporation, if
the acts intended to be done create what is in the law denominated a
breach of trust. And the jurisdiction extends to inquire into, and to
enjoin, as the case may require that to be done, any proceedings by
individuals, in whatever character they may profess to act, if the subject
of complaint is an imputed violation of a corporate franchise, or the
denial of a right growing out of it, for which there is not an adequate
remedy at law.
So it is clear that the plaintiff, by reason of the fact that he is a
stockholder in the bank (corporation) has a right to maintain a suit for
and on behalf of the bank, but the extent of such a right must depend
upon when, how, and for what purpose he acquired the shares which
he now owns. In the determination of these questions we can not see
how, if it be true that the bank is a quasi-public institution, it can affect
in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of
November, 1903; that the defendants, as members of the board of
directors and board of government, respectively, during each and all
the years 1903, 1904, 1905, 1906, and 1907, did fraudulently, and to
the great prejudice of the bank and its stockholders, appropriate to their
own use from the profits of the bank sums of money amounting
approximately to P20,000 per annum.
Article 31 of the bank's charter provides that dividends shall be
declared each semestre. The stockholders meet once a year, in
February, to receive and consider the report of the bank's operations
contained in the annual balance and memorial. Beyond this they have
no direct voice in the affairs of the bank, but all who are then
stockholders and have a right to vote must clearly have a right to vote
upon all the business proceedings of the year, irrespective of the date
upon which they may have become stockholders. They are entitled to
all the dividends that have been earned by their stock during the year
which has not been earned by their stock during the year which has not
been already declared and paid, regardless of the precise period of the
year in which it may have accrued. So, in the general meeting of the
stockholders on February 3, 1904, the plaintiff had a right to participate.
Neither the charter, the by-laws, nor the regulations prescribe when,
within the semestre, the dividends shall be declared; but it may be
presumed that such dividends are declared at the end of
the semestre and that the first semestre  begins with the first day of
January of each year. On this basis the owner of stock from whom the
plaintiff purchased his ten shares might have received the dividends
corresponding to these ten shares for the first semestre (six months) of
the year 1903. The dividends were declared twice a year, every six
months. The times for declaring the dividends are specifically and
distinctly pointed out — one period is separated from the other. Every
six months forms a period. So if the plaintiff was not entitled to the
dividends for the first period (from January to July, 1903), he having
become a stockholder in September of that year, he would have been
entitled to the dividends on his stock for the second period,
or semestre. The plaintiff was, therefore, a stockholder during all the
time for which he seeks recovery in his first cause of action, except the
first six months of the year 1903. Then again, as a matter of fact (which
we do not now decide), if the defendants had taken their salaries for the
year 1903 at the close of that year or at any time after September 13,
the plaintiff would then have had an interest and, on the theory that he
was a stockholder, could have questioned the legality of the
defendants' right to take such salary, inasmuch as his dividends would
be directly affected, in that, if the defendants took 10 per cent of the
gross instead of the net earnings of the bank, his dividend on his ten
shares for the second period (from July to December, 1903) would be
less.
Conceding that this cause of action is demurrable on the grounds that
the plaintiff was not a stockholder during the first six moths of the year
1903, should the demurrer have been sustained as to the whole cause
of action when the time for which recovery is sought is clearly divisible?
Section 90 of the Code of Civil Procedure in force in the Philippine
Islands provides, in part, as follows:
2. ... If the complaint contains more than one cause of action, each
distinct cause of action must be set forth in a separate paragraph
containing all the facts constituting the particular cause of action.
Where the matter in a single count is divisible in its nature, the
demurrer should be confined to those parts which are defective, as the
same general rule which applies to different counts applies also to
divisible matter in the same count constituting different causes of
action; and where one count, containing distinct averments, discloses a
good cause of action in one of such averments, as when several
breaches are assigned, some well and others ill, a general demurrer
will be overruled. (6 Ency. Plead. & Prac., 303, 304.)
The complaint contains three causes of action, each set forth in a
separate paragraph. The matter in the first cause is, as we have said,
divisible in its nature. The rule above quoted is, therefore, perfectly
applicable.
The most important question to be decided is, did the lower court err in
sustaining the demurrer to the second cause of action? If this question
be decided in the negative, then it will not be necessary to determine
whether or not the allegations in this part of the complaint are sufficient
to hold the defendants liable for the acts of their predecessors.
It affirmatively appears from the complaint that the plaintiff was not a
stockholder during any of the time in question in this second cause of
action. Upon the question whether or not a stockholder can maintain a
suit of this character upon a cause of action pertaining to the
corporation when it appears that he was not a stockholder at the time of
the occurrence of the acts complained of and upon which the action is
based, the authorities do not agree.
In the case of Hawes vs. Oakland (14 Otto [104 U.S.], 450, 456), the
plaintiff, a shareholder in the Contra Costa Waterworks Company,
brought a bill in equity against the company and the city of Oakland in
the Circuit Court of the United States for California, on the ground that
he was a citizen of New York and the defendant citizens of California,
alleging that the company was furnishing the city of Oakland with water
free charge beyond what the law required it to do, and that, although he
had required them to desist, the directors had failed to heed his protest
and that unless enjoined they would continue to furnish water to the city
in excess of their legal obligations in this particular, to the damage of
plaintiff and the shareholders.
To this complaint the city of Oakland demurred upon the ground that
the appellant had shown no capacity in himself to maintain the suit, the
injury, if any, being to the corporation and the right to sue pertaining to
it solely. The demurrer was sustained and the bill dismissed,
whereupon the plaintiff carried the case to the Supreme Court of the
United States.
The decision of the court, which was written by Mr. Justice Miller and
concurred in by all the other justices, contains a review of the earlier
decisions of the English and American courts with respect to the right of
stockholders of corporations to maintain suits of this character. In
concluding, the court, after enumerating a number of circumstances in
which a stockholder might be permitted to sue upon a cause of action
pertaining to the corporation, said:
But in addition to the existence of grievances which call for this kind of
relief, it is equally important that before the shareholder is permitted, in
his own name to institute and conduct a litigation which usually belongs
to the corporation, he should 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 of his grievances, or action in conformity
to his wishes. He must make an earnest, not a simulated effort, with the
managing body of the corporation, to induce remedial action on their
part, and this must be made apparent to the court. If the time permits,
or has permitted, he must show, if he fails with the directors, that he
has made an honest effort to obtain action by the stockholders as a
body, in the matter of which he complains. And he must show a case, if
this is not done, where it could not be done, or it was not reasonable to
require it.
The effort to induce such action as plaintiff desires on the part of the
directors, or of the stockholders when that is necessary, and the cause
of failure in these efforts, and all allegation that plaintiff was a
shareholder at the time of the transactions of which he complains, or
that the shares have devolved on him since by operation of law and
that the suit is not a collusive one to confer on a court otherwise have
no cognizance, should be in the bill, which should be verified by
affidavit.
This case was decided January 16, 1882. More than a year afterward
the Supreme Court embodied the procedural part of this decision in the
94th Equity Rule, adopted January 23, 1883. The rule reads as follows:
Every bill brought by one or more stockholders in a corporation against
the corporation and other parties, founded on rights which may properly
be asserted by the corporation, must be verified by oath, and must
contain an allegation that the plaintiff was a shareholder at the time of
the transaction of which he complains, or that his shares had devolved
on him since by operation of law, and that the suit is not a collusive one
to confer on a court of the United States jurisdiction of a case of which
it would not otherwise have cognizance. It must also set forth with
particularity the efforts of the plaintiff to secure such action as he
desires on the part of the managing directors or trustees, and, if
necessary, of the shareholders, and the causes of his failure to obtain
such action.
January 21, 1884, the Supreme Court decided the case of Dimpfel vs.
Ohio, etc., R.R. Co. (110 U.S., 212; 28 Law Ed., 121, 122), which was
similar to the Hawes case, above cited. Mr. Justice Field, by whom the
opinion of the court was written, says (p. 122):
The suit was brought to set aside a contract by which the Ohio and
Mississippi Railway Company became the owner of a portion of its road
known as the Springfield Division, and to obtain a decree from the court
declaring that the bonds, issued by the company and secured by a
mortgage upon that division, are null and void. It was commenced by
Dimpfel, and individual stockholder in the company, who stated in his
bill, that it was filed on behalf of himself and such other stockholders as
might join him in the suit. Callaghan, another stockholder, is the only
one who joined him. The two claim to be owners of fifteen hundred
shares of the stock of the company. The whole number of shares is
240,000. The owners of the balance of this large number make no
complaint of the transactions which the complainants seek to annul.
And it does not appear that the complainant owned their shares when
these transactions took place. For aught we can see to the contrary,
they may have purchased the shares long afterwards, expressly to
annoy and vex the company, in the hope that they might thereby extort,
from its fears, a larger benefit than the other stockholders have
received or may reasonably expect from the purchase, or compel the
company to buy their shares at prices above the market value.
Unfortunately, litigation against large companies is often instituted by
individual stockholders from no higher motive.
The bill in this case was also open to the objection that the plaintiff had
not exhausted the means of redress available within the corporation.
The next proceeds to consider this point, but prefaces its remarks with
the following significant phrase:
But assuming that the complainants were the owners of the shares held
by them when the transactions of which they complain took place, it
does not appear that they made any attempt, etc.
Counsel for the plaintiff in a very able and exhaustive brief sought to
show that the doctrine laid down in these two cases is not applicable to
the case at bar, first, because the Supreme Court in these cases
merely established a rule of practice, designed to prevent collusive
suits in the Federal court; and, second, that if such rule is to be
regarded as a declaration of substantive law, it is wrong on principle
and should be disregarded. Many of the authorities cited by the plaintiff
to the effect that the rule is merely one of practice, peculiar to the
Federal court, base that conclusion upon the fact that the requirement
of the inclusion of the averments in question in the bill to be found in
the 94th Equity Rule. Some of the authorities cited, which hold this
view, are: Pomeroy, Eq. Jur., sec. 1096; Thompson, Corporations, sec.
4570; Cook, Corporations vol. 3, secs. 736, 737; Morawetz,
Corporations, sec. 209; Forrester vs. Mining Co., 55 Pac. Rep., 229.
In the first place the doctrine was announced in Hawes vs.
Oakland, supra, more than a year before the 94th Equity Rule was
promulgated, so that it can admit of no dispute that in the opinion of the
Supreme Court, as least, the ownership of stock at the time of the
transaction complained of was essential to the right to maintain such an
action as a matter of substantive law, prior to and independent of the
Equity Rule.
It is true that the court in writing the decision in the Hawes case, had in
mind the prevalence of the practice of bringing suits in the Federal
courts, by collusion between the parties, which should property be tried
in the State court. It is equally true that the court was desirous of
preventing a continuance of these fraudulent practices, by establishing
a test which should prevent them. The basis of the right to sue in the
Federal courts being diversity of citizenship, the usual method
employed to enable parties to suits of this kind to invoke the jurisdiction
of these courts was to have a few shares of stock transferred to some
person who was a citizen of a State other than that of which the
proposed defendants were citizens. In a case of this kind the transfer of
the stock would be, of necessity, merely nominal, and the plaintiff,
under such circumstances, would not be a bona fide stockholder, and
would not be entitled to maintain the suit. Of necessity, in cases of this
kind, of genuine collusion to create a fictitious diversity of citizenship
the nominal transfer of the stock is made at a date subsequent to that
of the occurrence of the acts or omissions complained of. Although the
court was lawfully entitled to protect itself against such frauds as those
of which it complains in this case, and to refuse to take cognizance of
cases in which, owing to the purely fictitious nature of the simulated
diversity of citizenship, the proper tribunals were the State courts, on
the other hand, in cases of genuine diversity of citizenship, it could not
lawfully refuse to exercise the jurisdiction vested in it. No citation of
authority is needed to support the proposition that it is the duty of courts
to exercise the jurisdiction properly conferred upon them. It is
elementary that where there is a higher tribunal authorized to issue the
writ, mandamus will lie to put the judicial machinery in motion.
(Spelling, Extraordinary Relief, sec. 1394.) This being the case, the
conclusion is obvious that the mere fact that in some cases persons
suing as stockholders for the redress of grievances anterior to the
transfer of the stock held by the plaintiff are not acting in good faith
would not justify or authorize a refusal to take jurisdiction in any case  in
which the plaintiff's stock was acquired after the occurrence of the facts
supposed to constitute the cause of action, unless the court were of the
opinion, as a matter of substantive law, that in no event would a
stockholder so situated be entitled to maintain such an action.
It is only upon this assumption that the correctness of the decision in
Hawes vs. Oakland and the legality of the 94th Equity Rule can be
maintained. The court had no authority to change the substantive law
either by its decision or the rule, and it is not to be presumed that it
intended to do so. A careful examination of the Hawes case and of the
rule will show that no such change was in fact made. The decision is
merely declaratory of the preexisting law, as the court understood it to
be, and the rule merely provides a rule of pleading.
The decision in the Hawes case it that among other necessary
averments, the bill should contain "an allegation that the plaintiff was a
shareholder at the time of the transaction of which he complains ... and
that the suit is not a collusive one to confer jurisdiction on a court of the
United States in a case in which it would otherwise have no cognizance
... ." The language of the 94th Equity Rule is practically identical with
this. It provides, in terms that a stockholder's bill in cases of this
character "must contain an allegation that the plaintiff was a
stockholder at the time of the transaction of which he complains ... and
that the suit is not a collusive one to confer jurisdiction . . . ."
This is, obviously, a mere rule of pleading — it requires averments of
facts upon which the plaintiff's cause of action and the jurisdiction of the
court rest. It assumes, as the court had already decided, that the
ownership of the stock at the time of the transaction is a fact essential
to the maintenance of the suit in any event. Unless that fact exists no
cause of action exists, whether the suit is collusive or not. Even if the
stock was owned prior to the transaction complained of, if the suit is
collusive — as it would be, for instance if one of the defendants had
acquired a merely colorable domicile in another State to support the
allegation of diversity of citizenship — the plaintiff has no right to
maintain the action in a Federal court. Consequently, the rule requires
that these two facts be distinctly averred. The requirement that they be
pleaded is procedural. The necessity of the existence of the facts in
order to give rise to the right of action is substantive.
If the Supreme Court had been of the opinion, as are some of the State
courts and text writers cited in plaintiff's brief, that the transferee of
shares of stock in a corporation acquires the right to sue upon the
causes of action which accrued before he acquired such shares, it
surely would not have attempted to deprive him of the right to exercise
in the Federal court an action which, were it not for diversity of
citizenship, he might exercise in a State court. If the court had believed
that the transferee of stock could, under any circumstances, sue upon a
cause of action accruing to the corporation prior to such transfer, the
rule instead of requiring the plaintiff to allege unconditionally that he
was a stockholder at the time of the transaction complained of and that
the suit is not collusive, would have provided that the plaintiff should be
required to aver in his sworn bill the date upon which he acquired his
stock, and if it appeared that it was acquired after the occurrence of the
acts complained of, then that he should also required to aver under
oath that the suit was not collusive.
Sound reason and good authority sustain the rule that a purchaser of
stock can not complain of the prior acts and management of the
corporation. (Home Fire Ins. Co. vs. Baker, 60 L.R.A., 927, 933, citing
Hawes vs. Oakland, supra; Dimpfel vs. Ohio & M.R. Co., supra;
Taylor vs. Fayette Fuel Gas Co., 146 Pa., 13; Alexander vs. Searcy, 81
Ga., 536; Clark vs. American Coal Co., 86 Iowa, 436; United Electric
Securities Co., vs. Louisiana Electric Light Co., 68 Fed., 673;
Venner vs. Atchison T. & S.F.R. Co., 28 Fed., 581; Heath vs. Erie R.
Co., 8 Blachf., 347; Dannmeyer vs. Coleman, 8 Sawy., 51; Works vs.
Sowers, 2 Walk (Pa.), 416; 4 Thompson Corp., 4569.)
In Alexander vs. Searcy, supra, the court said (p. 550):
The weight of authority seems to be that a person who did not own
stock at the time of the transactions complained of can not complain or
bring a suit to have them declared illegal.
In the United Electric Securities Co. vs. Louisiana Electric Light
Co., supra, it is said:
As a general proposition, the purchaser of stock in a corporation is not
allowed to attack the acts and management of the company prior to the
acquisition of his stock; otherwise we might have a case where stock
duly represented in a corporation consented to and participated in bad
management and waste, and after reaping the benefits from such
transaction, could be easily passed into the hands of a subsequent
purchaser, who could make his harvest by appearing and contesting
the very acts and conducts which his vendor had consented to.
Where stock is required for the purpose of bringing suit it has been held
that the complainant is a mere interloper and entitled to no
consideration. And stockholder suits not brought in good faith in the
interest of the corporation have been dismissed on the ground. (Home
Fire Ins. Co. vs. Baker, supra, and cases cited therein.) Some of the
State courts hold that a purchaser of shares in a corporation acquires
all the rights of the vendor. The Alabama Supreme Court has gone so
far as to hold that a purchaser in good faith is not necessarily
disqualified as a suitor in all cases because the prior holder was
personally disqualified. (Parsons vs. Joseph, 92 Ala., 403.) From the
pleadings in this case (it having been decided by the Supreme Court
upon a demurrer) it appears that Joseph sought to have cancelled
certain certificates of stock issued by the Street Railway Company to
Parsons, on the ground that said stock was fictitious and was issued in
violation of the constitution and statute law of the State. It was alleged,
as a special defense, that if the transactions, which form the basis of
the issuance of the stock to Parsons, were illegal, and fraudulent, and
not done in good faith, the complainant, Joseph, was estopped from
setting up fraud in such transactions or, seeking to cancel the stock,
because one E. Lesser, who was complainant's transferrer, participated
in all of said transactions. In this case the court, speaking through Mr.
Justice Coleman, said:
If the transferee purchased the shares in good faith, and without notice
of the fact that the prior holder had precluded himself from suing, he
would have as just a title to relief as if he had purchased from a
shareholder who was under no disability; but if the purchaser was
aware that the prior holder had barred his right to relief, neither justice
nor public policy would require that the transferee, under these
circumstances, should be accorded any greater rights than his
transferrer.
xxx           xxx           xxx
If a stockholder participates in a wrongful or fraudulent contract, or
silently acquiesces until the contract becomes executed, he can not
then come into a court of equity to cancel the contract, and more
especially if the company, or himself, as a stockholder, has reaped a
benefit from the contract; and this rule holds good, although the
consideration of the contract may be one expressly prohibited by
statute. The same disability would attach to the transferee of his stock
who bought with notice.
This rule, in the main, is correctly stated, but we think that the latter part
of the same should be modified so as to read: "The same disability
would attach to the transferee of his stock who bought with or without
notice." We base our modification of this rule upon the ground that a
transferee could not sue as being a bona fide purchaser in ignorance of
the disability attaching to his vendor, because shares of stock, strictly
speaking, are not negotiable, and the sale can not pass greater rights
than those possessed by the vendor. (Clark vs. American Coal Co., 86
Iowa, 436; 4 Thomp. Corp., 3410.)
It is self-evident that the plaintiff in the case at bar was not, before he
acquired in September, 1903, the shares which he now owns, injured
or affected in any manner by the transactions set forth in the second
cause of action. His vendor could have complained of these
transactions, but he did not choose to do so. The discretion whether to
sue to set them aside, or to acquiesce in and agree to them, is, in our
opinion, incapable of transfer. If the plaintiff himself had been injured by
the acts of defendants' predecessors that is another matter. He ought
to take things as he found them when he voluntarily acquired his ten
shares. If he was defrauded in the purchase of these shares he should
sue his vendor.
If the party himself, who is the victim of fraud or usury, chooses to
waive his remedy and release the party, it does not belong to a
subsequent purchaser under him to recall and assume the remedy for
him. (Quoted with approval in the case of the Graham vs. La Crosse
and Milwaukee R.R. Co., 102., U.S., 148.)
But it is contended that this is a case in which the debtor corporation
was defrauded of its property, and that as the company had a right of
proceeding for its recovery, any of its judgment and execution creditors
have an equal right; that it is a property right, and one that inures to the
benefit of creditors.
Conceding that creditors who were such when the fraudulent
procurement of the debtor's property occurred — and cases to that
effect have been cited — the question still remains, whether, the debtor
being unwilling to disturb the transaction, subsequent creditors have
such an interest that they can reach the property for the satisfaction of
their debts. We doubt whether any case, going as far as this, can be
found. No such case has been cited in the argument. Dicta of judges to
that effect may undoubtedly be produced, but they are not supported by
the facts of the cases under consideration.
It seems clear that subsequent creditors have no better right than
subsequent purchasers, to question a previous transaction in which the
debtor's property was obtained from him by fraud, which he has
acquiesced in, and which he has manifested no desire to disturb. Yet,
in such a case, subsequent purchasers have no such right. (Id.)
So it seems to be settled by the Supreme Court of the United States, as
a matter of substantive law, that a stockholder in a corporation who was
not such at the time of the transactions complained of, or whose shares
had not devolved upon him since by operation of law, can not maintain
suits of this character, unless such transactions continue and are
injurious to the stockholder, or affect him especially and specifically in
some other way.
We are, therefore of the opinion, and so hold, that the judgment
appealed from, sustaining the demurrer to the first cause of action
should be, and the same is hereby reversed; and the judgment
sustaining the demurrer to the second cause of action should be, and is
hereby affirmed, without any special ruling as to costs. The record will
be returned to the court whence it came for further proceedings in
accordance with this decision. So ordered.
Evangelista vs. Santos, 86 PHIL 387
REYES, J.:
This is an action by the minority stockholders of a corporation against
its principal officer for damages resulting from his mismanagement of
its affairs and misuse of its assets.
The complaint alleges that plaintiffs are minority stockholders of the
Vitali Lumber Company, Inc., a Philippine corporation organized for the
exploitation of a lumber concession in Zamboanga, Philippines; that
defendant holds more than 50 per cent of the stocks of said corporation
and also is and always has been the president, manager, and treasurer
thereof; and that defendant, in such triple capacity, through fault,
neglect, and abandonment allowed its lumber concession to lapse and
its properties and assets, among them machineries, buildings,
warehouses, trucks, etc., to disappear, thus causing the complete ruin
of the corporation and total depreciation of its stocks. The complaint
therefore prays for judgment requiring defendant: (1) to render an
account of his administration of the corporate affairs and assets: (2) to
pay plaintiffs the value of t heir respective participation in said assets
on the basis of the value of the stocks held by each of them; and (3) to
pay the costs of suit. Plaintiffs also ask for such other remedy as may
be and equitable.
The complaint does not give plaintiffs' residence, but, but purposes of
venue, alleges that defendant resides at 2112 Dewey Boulevard,
corner Libertad Street, Pasay, province of Rizal. Having been served
with summons at that place, defendant filed a motion for the dismissal
of the complaint on the ground of improper venue and also on the
ground that the complaint did not state a cause of action in favor of
plaintiffs.
In support of the objection to the venue, the motion, which is under
oath, states that defendant is a resident of Iloilo City and not of Pasay,
and at the hearing of the motion defendant also presented further
affidavit to the effect that while he has a house in Pasay, where
members of his family who are studying in Manila live and where he
himself is sojourning for the purpose of attending to his interests in
Manila, yet he has permanent residence in the City of Iloilo where he is
registered as a voter for election purposes and has been paying his
residence certificate. Plaintiffs opposed the motion for dismissal but
presented no counter proof and merely called attention to the Sheriff's
return showing service of summons on defendant personally at his
alleged residence at No. 2112 Dewey Boulevard, Pasay.
After hearing, the lower court rendered its order, granting the motion for
dismissal upon the two grounds alleged by defendant, and
reconsideration of this order having been denied, plaintiffs have
appealed to this Court.
The appeal presents two questions. The first refers to venue and the
second, to the right of the plaintiffs to bring this action for their benefit.
As to the first question, it is important to remember that the laying of the
venue of an action is not left to plaintiff's caprice. The matter is
regulated by the Rules of Court. And in actions like the present, which
is one in personam, the regulation applicable is that contained in
section 1 of Rule 5, which provides:
Civil actions in Courts of First Instance may be commenced and tried
where the defendant or any of the defendant resides or may be found,
or where the plaintiff or any of the plaintiffs resides, at the election of
the plaintiff.
Objection to improper venue may be interposed at any time prior to the
trial. (Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p. 108.)
Believing that defendant resided in the province of Rizal, herein
plaintiffs brought their action in the Court of First Instance of that
province. But that belief proved erroneous, for the lower court found
after hearing that defendant had his residence in Iloilo. The finding is
based on defendant's sworn statement not rebutted by any proof to the
contrary.
There is nothing to the contention that defendant's motion to dismiss
necessarily presupposes a hypothetical admission of the allegations of
the complaint, among them the averment that defendant is a resident of
Rizal province, for the motion precisely denies that averment and
alleges that his real residence is in Iloilo City. This, defendant had the
right to do in objecting to the court's jurisdiction on the ground of
improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of
the venue in the province where the defendant "may be found." But this
phrase has already been held to have a limited application. It is the
same phrase used in section 377 of Act 190 from which section 1 of
Rule 5 was taken, and as construed by this Court it applies only to
cases where defendant has no residence in the Philippine Islands. This
was the construction adopted in the case of Cohen vs. Benguet
Commercial Co., Ltd., 34 Phil. 526, which was an action brought in
Manila by a nonresident against a corporation which had its residence
for legal purposes in Baguio but whose President was found in Manila
and there served with summons. This Court there said:
Section 377 provides that actions of this character "may be brought in
any province where the defendants or any necessary party defendant
may reside or be found, or in any province where the plaintiff or one of
the plaintiffs resides, at the election of the plaintiff." The plaintiff in this
action has no residence in the Philippine Islands. Only one of the
parties to the action resides here. There can be, therefore, no election
by plaintiff as to the trial. It must be in the province where the defendant
resides. The defendant resides, in the eye of the law, in Baguio. Was it
"found" in the city of Manila under section 377, its president being in
that city where the service of summons was made? We think not. The
word "found" as used section 377 has a different meaning that belongs
to it as used in section 394, which refers exclusively to the place where
the summons may be served. As we have said a summons may be
legally served on a defendant wherever he may be "found," i. e.,
wherever he may be, provided he be in the Philippine Islands; but the
venue cannot be laid wherever the defendant may be "found." There is
an element entering in section 377 which is not present in section 394,
that is a residence. Residence of the plaintiff or defendant does not
affect the place where a summons may be served; but residence is the
vital thing when we deal with venue. The venue must be laid in the
province where one of the parties resides. If the plaintiff is a
nonresident the venue must laid in the province of the defendant's
residence. The venue can be laid in the province where defendant is
"found" only when defendant has no residence in the Philippine Islands.
A defendant can not have a residence in one province and be "found"
in another. As long as he has a residence in the Philippine Islands he
can be "found," for the purposes of section 377, only  in the province of
his residence. In such case the words "residence" and "found" are
synonymous. If he is a nonresident then the venue may laid in the
province where he is "found" at the time venue the action is
commenced or in the province of plaintiff's residence. This applies also
to a domestic corporation.
While the service of the summons was good in either Baguio or Manila
we are of the opinion that the objection of the defendant to the place of
trial was proper in both cases and that the trial court should have held
that the venue was improperly laid.
And elaborating on the point when the case came up for
reconsideration, the Court further said:
The moving party contends that the venue was properly laid under
section 377 in that was laid in the province where the defendant was
found at the time summons was served on its president, he having
been found and served with process in the city of Manila. for the
purpose of the discussion we assumed in the main case, as the plaintiff
claimed, that the defendant was in fact and in law found in the city of
Manila; and proceeded to decide the cause upon the theory that, even
if the defendant were found in the city of Manila, that did not justify,
under the facts of the case, the laying of the venue in the city of Manila.
We do not believe that the moving party's objection that our
construction deprives the word "found" of all significance and results, in
effect, in eliminating it from the statue, is sound. We do not deprive it of
all significance and effect and do not eliminate it from the statue. We
give it the only effect which can be given it and still accord with the
other provisions of the section which give defendant the right to have
the venue laid in the province of his residence, the effect which it was
intended by the legislature they should have. We held that the word
"found" was applicable in certain cases, and in such cases gave it full
significance and effect. We declared that it was applicable and effective
in cases where the defendant is a nonresident. In such cases where
the defendant is a nonresident. In such cases the venue may be laid
wherever he may be found in the Philippine Islands at the time of the
service of the process, but we also held that where he is a resident of
the Philippine Islands the word "found" has no application and the
venue must be laid in the province where he resides.
The construction which the moving party asks us to place on that
provision of section 377 above quoted would result in the destruction of
the privilege conferred by the section upon a resident defendant which
requires the venue to be laid in the province where he resides. This is
clear; for, if the venue may be laid in any province where the defendant,
although a resident of some other province, any be found at the time
process is served on him, then the provision that it shall be laid in the
province where he resides is no value to him. If a defendant residing in
the province of Rizal is helpless when the venue is laid in the province
of Mindoro in an action in which the plaintiff is a nonresident or resides
in Manila, what is the value of a residence in Rizal? If a defendant
residing in Jolo is without remedy when a nonresident plaintiff or a
plaintiff residing in Jolo lays the venue in Bontoc because the
defendant happens to be found there, of what significance is a
residence in Jolo? The phrases "where the defendant ... may reside"
and "or be found" must be construed together and in such manner that
both may be given effect. The construction asked for by the moving
party would deprive the phrase "where the defendant ... may reside" of
all significance, as the plaintiff could always elect to lay the venue in the
province where the defendant was "found" and not where he resided;
whereas the construction which we place upon these phrases permits
both to have effect. We declare that, when the defendant is a resident
of the Philippine Islands, the venue must be laid either in the province
where the plaintiff resides or in the province where the defendant
resides, and in no other province. Where, however, the defendant is a
nonresident the venue may be laid wherever defendant may be found
in the Philippine Islands. This construction gives both phrases their
proper and legitimate effect without doing violence to the spirit which
informs all laws relating to venue and which insists always that the
action shall tried in the place where the greater convenience of the
parties will be served. Ordinarily a defendant's witness are found where
the defendant resides; and plaintiff's witnesses are generally found
where he resides or where the defendant resides. It is, therefore,
generally desirable to have the action tried where on of the resides.
Where the plaintiff is a nonresident and the contract upon which suit is
brought was made in the Philippine Islands it may safely be asserted
that the convenience of the defendant would be best served by a trial in
the province where he resides.
The fact that defendant was sojourning in Pasay t the time he was
served with summons does not make him a resident of that place for
purposes of venue. Residence is "the permanent home, the place to
which, whenever absent for business or pleasure, one intends to return,
..." (67 C.J., pp. 123-124.) A man can have but one domicile at a time
(Alcantara vs. Secretary of Interior, 61 Phil., 459), and residence is
anonymous with domicile under section 1 of Rule 5 (Moran's
Comments, supra, p. 104).
In view of the foregoing, we hold that the objection to the venue was
correctly sustained by the lower court.
As to the second question, the complaint shows that the action is for
damages resulting from mismanagement of the affairs and assets of
the corporation by its principal officer, it being alleged that defendant's
maladministration has brought about the ruin of the corporation and the
consequent loss of value of its stocks. The injury complained of is thus
primarily to the corporation, so that the suit for the damages claimed
should be by the corporation rather than by the stockholders (3
Fletcher, Cyclopedia of Corporation pp. 977-980). The stockholders
may not directly claim those damages for themselves for that would
result in the appropriation by, and the distribution among them of part of
the corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be legally
done in view of section 16 of the Corporation Law, which provides:
No shall corporation shall make or declare any stock or bond dividend
or any dividend whatsoever from the profits arising from its business, or
divide or distribute its capital stock or property other than actual profits
among its members or stockholders until after the payment of its debts
and the termination of its existence by limitation or lawful dissolution.
But while it is to the corporation that the action should pertain in cases
of this nature, however, if the officers of the corporation, who are the
ones called upon to protect their rights, refuse to sue, or where a
demand upon them to file the necessary suit would be futile because
they are the very ones to be sued or because they hold the controlling
interest in the corporation, then in that case any one of the stockholders
is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations, pp.
977-980). But in that case it is the corporation itself and not the plaintiff
stockholder that is the real property in interest, so that such damages
as may be recovered shall pertain to the corporation (Pascual vs. Del
Saz Orosco, 19 Phil. 82, 85). In other words, it is a derivative suit
brought by a stockholder as the nominal party plaintiff for the benefit of
the corporation, which is the real property in interest (13 Fletcher,
Cyclopedia of Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the action
not for the benefit of the corporation but for their own benefit, since they
ask that the defendant make good the losses occasioned by his
mismanagement and pay to them the value of their respective
participation in the corporate assets on the basis of their respective
holdings. Clearly, this cannot be done until all corporate debts, if there
be any, are paid and the existence of the corporation terminated by the
limitation of its charter or by lawful dissolution in view of the provisions
of section 16 of the Corporation Law.
It results that plaintiff's complaint shows no cause of action in their favor
so that the lower court did not err in dismissing the complaint on that
ground.
While plaintiffs ask for remedy to which they are not entitled unless the
requirement of section 16 of the Corporation Law be first complied with,
we note that the action stated in their complaint is susceptible of being
converted into a derivative suit for the benefit of the corporation by a
mere change in the prayer. Such amendment, however, is not possible
now, since the complaint has been filed in the wrong court, so that the
same last to be dismissed.
The order appealed from is therefore affirmed, but without prejudice to
the filing of the proper action in which the venue shall be laid in the
proper province. Appellant's shall pay costs. So ordered.
Republic Bank vs. Cuadero, 19 SCRA 671
REYES, J.B.L., J.:
Direct appeal from an order of the Court of First Instance of Manila, in
its civil case No. 53936, dismissing the petitioner's complaint on the
ground of failure to state cause of action.
In the Court below, Damaso Perez, a stockholder of the Republic Bank,
a Philippine banking corporation domiciled in Manila, instituted a
derivative suit for and in behalf of said Bank, against Miguel Cuaderno,
Bienvenido Dizon, the Board of Directors of the Republic Bank, and the
Monetary Board of the Central Bank of the Philippines. Paragraph 6 of
the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following: .
6. That the relator herein filed the present derivative suit without any
further demand on the Board of Directors of the Republic Bank for the
reason that such formal demand to institute the present complaint
would be a futile formality since the members of the board are
personally chosen by defendant Pablo Roman himself.
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had
complained to the Monetary Board of the Central Bank against certain
frauds allegedly committed by defendant Pablo Roman, in that being
chairman of the Board of Directors of the Republic Bank, and of its
Executive Loan Committee, in 1957 to 1959, "in grave abuse of his
fiduciary duty and taking advantage of his said positions and in
connivance with other officials of the Republic Bank", Roman had
fraudulently granted or caused to be granted loans to fictitious and non-
existing persons and to their close friends, relatives and/or employees,
who were in reality their dummies, on the basis of fictitious and inflated
appraised values of real estate properties; that said loans amounted to
almost 4 million pesos; that acting upon the complaint, Miguel
Cuaderno (then Governor of the Central Bank) and the Monetary Board
ordered an investigation, which was carried out by Bank Examiners;
that they and the Superintendent of Banks of the Central Bank reported
that certain mortgage loans amounting to P2,303,400.00 were granted
in violation of sections 77, 78 and 88 of the General Banking Act; that
acting on said reports, the Monetary Board, of which defendant
Cuaderno was a member, ordered a new Board of Directors of the
Republic Bank to be elected, which was done, and subsequently
approved by the Monetary Board; that on January 5, 1960, the latter
accepted the offer of Pablo Roman to put up adequate security for the
questioned loans made by the Republic Bank, and such security was
made a condition for the resumption of the Bank's normal operations;
that subsequently, the Central Bank through its Governor, Miguel
Cuaderno, referred to special prosecutors of the Department of Justice
on July 22, 1960, the banking frauds and violations of the Banking Act,
reported by the Superintendent of Banks, for investigation and
prosecution, but no information was filed up to the time of the
retirement of Cuaderno in 1961; that other similar frauds were
subsequently discovered; that to neutralize the impending action
against him, Pablo Roman engaged Miguel Cuaderno as technical
consultant at a compensation of P12,500.00 per month, and selected
Bienvenido Dizon as chairman of the Board of Directors of the Republic
Bank; that the Board of Directors composed of individuals personally
selected and chosen by Roman, connived and confederated in
approving the appointment and selection of Cuaderno and Dizon; that
such action was motivated by bad faith and without intention to protect
the interest of the Republic Bank but were prompted to protect Pablo
Roman from criminal prosecution; that the appointment of Cuaderno
and his acceptance of the position of technical consultant are immoral,
anomalous and illegal, and his compensation highly unconscionable,
because court actions involving the actuations of Cuaderno as
Governor and Member or Chairman of the Monetary Board are still
pending in court; that as member of the Monetary Board from 1961 to
1962, Bienvenido Dizon exercised supervision over the Republic Bank;
that the selection of Dizon as chairman of the Board of the Republic
Bank after he was forced to resign from the presidency of the Philippine
National Bank and from membership of the Monetary Board and within
one year thereafter is in violation of option 3, sub-paragraph (d) of the
Anti-Graft and Corrupt Practices Act; that both Cuaderno and Dizon
were alter egos  of Pablo Roman; that the Monetary Board was about to
approve the appointment of Cuaderno and Dizon and would do so
unless enjoined.
The complaint, therefore, prayed for a writ of preliminary injunction
against the Monetary Board to prevent its confirmation of the
appointments of Dizon and Cuaderno; against the Board of Directors of
the Republic Bank from recognizing Cuaderno as technical consultant
and Dizon as Chairman of the Board; and against Pablo Roman from
appointing or selecting officers or directors of the Republic Bank, and
against the recognition of any such appointees until final determination
of the action. And concluded by praying that after due hearing,
judgment be rendered, —
a) making the writ of injunction permanent;
b) declaring the appointment of defendant Miguel Cuaderno as
technical consultant with monthly compensation of P12,500.00
unconscionable, immoral, illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman
of the Board of Directors of the Republic Bank violative of Section 3,
sub-paragraph (d) of Republic Act No. 5019, otherwise known as the
Anti-Graft and Corrupt Practices Act, and therefore, illegal and null and
void;
d) declaring that defendant Pablo Roman, in view of his criminal liability
for the fraudulent real estate mortgage loans in the Republic Bank
amounting to P4 million, has no right to select or to be allowed to select
person or persons who are his alter egos to manage the Republic
Bank, and enjoining the defendant Board of Directors of the Republic
Bank from recognizing any officers or directors appointed or selected
by defendant Pablo Roman;
e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to
return to the Republic Bank all amounts they may have received either
in the form of compensation, remuneration or emolument, with an
interest thereon at the rate of 6%; or to order defendant Pablo Roman
to refund the amounts paid to said defendant Miguel Cuaderno and
defendant Bienvenido Dizon, and to pay such reasonable damages to
the plaintiff Republic Bank;
f) ordering all the defendants to pay the sum of P25,000.00 as
attorney's fees, including all expenses of litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and
affirmative defenses; but the other defendants filed separate motions to
dismiss on practically the same grounds: no valid cause of action
against the individual movants; lack of legal capacity of plaintiff-relator
to sue; and non-exhaustion of intra-corporate remedies. These motions
were duly opposed by plaintiff Damaso Perez.1äwphï1.ñët
On October 24, 1963, the court, "taking into consideration the grounds
alleged in the motions to dismiss and the opposition for the issuance of
a writ of preliminary injunction and the affirmative defenses filed by the
defendants and the arguments in support thereof", and "that there are
already eight cases pending in the different branches of this court
between practically the same parties", denied the petition for a writ of
preliminary injunction and dismissed the case. The court in effect
suggested that the matter at issue in the case may be presented in any
of the pending eight cases by means of amended and supplemental
pleadings.
Plaintiff Damaso Perez thereupon appealed to this Court.
The issue in this appeal, then, is whether or not the Court below erred
in dismissing the complaint. In this connection, it should be
remembered that the defenses of the Monetary Board of the Central
Bank, being interposed in an answer and not in a motion to dismiss, are
not here at issue. Our sole concern is with the motions to dismiss of the
other defendants, Roman, Cuaderno, Dizon, and the Board of Directors
of the Republic Bank.
They mainly controvert the right of plaintiff to question the appointment
and selection of defendants Cuaderno and Dizon, which they contend
to be the result of corporate acts with which plaintiff, as stockholder,
cannot interfere. Normally, this is correct, but Philippine jurisprudence
is settled that an individual stockholder is permitted to institute a
derivative or representative 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 (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85;
Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64
Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's
action here is precisely in conformity, with these principles. He is
neither alleging nor vindicating his own individual interest or prejudice,
but the interest of the Republic Bank and the damage caused to it. The
action he has brought is a derivative one, expressly manifested to be
for and in behalf of the Republic Bank, because it was futile to demand
action by the corporation, since its Directors were nominees and
creatures of defendant Pablo Roman (Complaint, p. 6). The frauds
charged by plaintiff are frauds against the Bank that redounded to its
prejudice.
The complaint expressly pleads that the appointment of Cuaderno as
technical consultant, and of Bienvenido Dizon to head the Board of
Directors of the Republic Bank, were made only to shield Pablo Roman
from criminal prosecution and not to further the interests of the Bank,
and avers that both men are Roman's alter egos. There is no denying
that the facts thus pleaded in the complaint constitute a cause of action
for the bank: if the questioned appointments were made solely to
protect Roman from criminal prosecution, by a Board composed by
Roman's creatures and nominees, then the moneys disbursed in favor
of Cuaderno and Dizon would be an unlawful wastage or diversion of
corporate funds, since the Republic Bank would have no interest in
shielding Roman, and the directors in approving the appointments
would be committing a breach of trust; the Bank, therefore, could sue to
nullify the appointments, enjoin disbursement of its funds to pay them,
and recover those paid out for the purpose, as prayed for in the
complaint in this case (Angeles vs. Santos, supra.).
Facts pleaded in the complaint are to be deemed accepted by the
defendants who file a motion to dismiss the complaint for failure to state
a cause of action. This is the cardinal principle in the matter. And, it has
been ruled that the test of sufficiency of the facts alleged is whether or
not the Court could render a valid judgment as prayed for, accepting as
true the exclusive facts set forth in the complaint. 1So rigid is the norm
prescribed that if the Court should doubt the truth of the facts averred it
must not dismiss the complaint but require an answer and proceed to
trial on the merits.2
Defendants urge that the action is improper because the plaintiff was
not authorized by the corporation to bring suit in its behalf. Any such
authority could not be expected as the suit is aimed to nullify the action
taken by the manager and the board of directors of the Republic Bank;
and any demand for intra-corporate remedy would be futile, as
expressly pleaded in the complaint. These circumstances permit a
stockholder to bring a derivative suit (Evangelista vs. Santos, 86 Phil.
394). That no other stockholder has chosen to make common cause
with plaintiff Perez is irrelevant, since the smallness of plaintiff's
holdings is no ground for denying him relief (Ashwander vs. TVA, 80 L.
Ed. 688). At any rate, it is yet too early in the proceedings for the
absence of other stockholders to be of any significance, no issues
having even been joined.
There remains the procedural question whether the corporation itself
must be made party defendant. The English practice is to make the
corporation a party plaintiff, while in the United States, the usage leans
in favor  of its being joined as party defendant (see Editorial Note, 51
LRA [NS] 123). Objections can be raised against either method.
Absence of corporate authority would seem to militate against making
the corporation a party plaintiff, while joining it as defendant places the
entity in the awkward position of resisting an action instituted for its
benefit. What is important is that the corporation' should be made a
party, in order to make the Court's judgment binding upon it, and thus
bar future relitigation of the issues. On what side the corporation
appears loses importance when it is considered that it lay within the
power of the trial court to direct the making of such amendments of the
pleadings, by adding or dropping parties, as may be required in the
interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not
a ground to dismiss an action. (Ibid.)
We see no reason to support the contention of defendant Bienvenido
Dizon that the action of plaintiff amounts to a quo warranto  proceeding.
Plaintiff Perez is not claiming title to Dizon's position as head of the
Republic Bank's board of directors. The suit is aimed at preventing the
waste or diversion of corporate funds in paying officers appointed solely
to protect Pablo Roman from criminal prosecution, and not to carry on
the corporation's bank business. Whether the complaint's allegations to
such effect are true or not must be determined after due hearing.
Independently of the grounds advanced by the defendants in their
motions to dismiss, the Court a quo  gave as a further pretext for the
dismissal of the action the pendency of eight other lawsuits between
practically the same parties; reasoning that the question at issue in the
present case could be incorporated in any one of the other actions by
amended or supplemental pleading. We fail to see that this justifies the
dismissal of the case under appeal. In the first place, there is no
pretense that the cause of action here was already included in any of
the other pending cases. As a matter of fact, dismissal of the present
action was not sought on the ground of pendency of another action
between the same parties. Secondly, the amendment of a complaint
after a responsive pleading is filed, would rest upon the discretion of
the party and the Court. Hence, this case cannot be dismissed simply
because of the possibility that the cause of action here can be
incorporated or introduced in any of those of the pending cases.
In view of the foregoing, the order dismissing the complaint is reversed
and set aside. The case is remanded to the court of origin with
instructions to overrule the motions to dismiss and require the
defendants to answer the complaint. Thereafter, the case shall be tried
and decided on its merits. Costs against defendants-appellees. So
ordered.
Reyes vs. Tan, 3 SCRA 198
LABRADOR, J.:
This is a petition for certiorari  to review and set aside an order of the
Court of First Instance of Manila, Hon. Bienvenido A. Tan, presiding, in
Civil Case No. 42375, entitled "Francisca R. Justiniani vs. Wadhumal
Dalamal, et al.", appointing a receiver of the corporation Roxas-Kalaw
Textile Mills, Inc. In said action, plaintiff Justiniani asks the court to
order the directors of the corporation, jointly and severally, to repair the
damage caused to the corporation, of which all the plaintiff and
defendants are members. The action was filed about January of 1960
and the order for the appointment of the receiver issued on February
15, 1960, while the designation of the receiver was made in an order of
the court dated April 30, 1960.
In the complaint in said Civil Case No. 42375, it is alleged that the
corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June 5,
1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M.
Roxas, Jose Ma. Barcelona and Morris Wilson, for and on behalf of the
following primary principals with the following shareholdings: Adelia K.
Roxas, 1200 Class A shares; I. Sherman, 900 Class A shares; Robert
W. Born, 450 Class A shares and Morris Wilson, 450 Class A shares;
that the plaintiff holds both Class A and Class B shares and number
and value thereof are is follows: Class A — 50 shares, Class B —
1,250 shares; that on May 8, 1957, the Board of Directors approved a
resolution designating one Dayaram as co-manager with the specific
understanding that he was to act as defendant Wadhumal Dalamal's
designee, Morris Wilson was likewise designated as co-manager with
responsibilities for the management of the factory only, that an office in
New York was opened for the purpose of supervising purchases, which
purchases must have the unanimous agreement of Cesar K. Roxas,
New York resident member of the board of directors, Robert Born and
Wadhumal Dalamal or their respective representatives; that several
purchases aggregating $289,678.86 were made in New York for raw
materials such as greige cloth, rayon and grey goods for the textile mill
and shipped to the Philippines, which shipment were found out to
consist not of raw materials but already finished products, such as,
West Point Khaki rayon suiting materials dyed in the piece, finished
rayon tafetta in cubes, cotton eyelets, etc., for which reasons the
Central Bank of the Philippines stopped all dollar allocations for raw
materials for the corporation which necessarily led to the paralyzation
of the operation of the textile mill and its business; that the supplier of
the aforesaid finished goods was the United Commercial Company of
New York in which defendant Dalamal had interests and the letter of
credit for said goods were guaranteed by the Indian Commercial
Company and the Indian Traders in which firms defendant Dalamal
likewise held interests; that the resale of the finished goods was the
business of the Indian Commercial Company of Manila, which company
could not obtain dollar allocations for importations of finished goods
under the Central Bank regulations; that plaintiff and some members of
the board of directors urged defendants to proceed against Dalamal,
exposing his offense to the Central Bank, and to initiate suit against
Dalamal for his fraud against the corporation; that defendants refused
to proceed against Dalamal and instead continued to deal with the
Indian Commercial Company to the damage and prejudice of the
corporation. The prayer asks for the appointment of a receiver and a
judgment marking defendants jointly and severally liable for the
damages.
After a denial of a motion to dismiss and the filing of an answer alleging
that the complaint states no cause of action, the motion for the
appointment of a receiver was set for hearing and subsequently the
court entered the order for the appointment of a receiver. The court
found and held:
The second ground of the defendant's motion to dismiss and or deny
the petition is the allegedly want of a cause of action of the plaintiff's
complaint. Philippine jurisprudence is complete with authorities
upholding the principle that this ground for dismissal must appear in the
face of the complaint itself; and that to determine the sufficiency of the
cause of action, only the facts alleged in the complaint and no other,
should be considered; in fine, the test of sufficiency of cause of action
is whether or not, admitting the facts alleged in the complaint, the Court
could render a valid judgment upon the same in accordance with the
prayer of the petition (e.g., Paminsan v. Costales, 29 Phil. 587, 489).
The complaint in the instant case abounds with arguments establishing
and supporting plaintiff's cause of action for and in behalf of the Roxas-
Kalaw Textile Mills, Inc. against all the defendants (See e.g.
paragraphs 4, 5, 6 and 7 of the Complaint). Taking these paragraphs of
the complaint in context, it is clear that the plaintiff has sufficient
averred facts constituting a cause or basis for a derivative suit for
"injuries to the corporation, as by negligence, mismanagement or fraud
of its directors, are normally dealt with as wrong to the whole group of
share holders in their corporate capacity, to be redressed in a suit by or
on behalf of the corporation.1awphîl.nèt
Evident from the defendants' motion to dismiss and/or to deny the
petition for receivership is their complete failure to come up with a valid
and substantial defense against or denial of the complaint's allegations
of mismanagement, if not the actual commission of ultra vires and
illegal acts. Invariably the props of defendants' motion consist of the
unconvincing countercharges of the plaintiff's non-observance of the
technicalities of our procedural law and disregard of technical and
evidently futile intracorporate remedies to redress the violations
charged against the defendants. It is clear that the controlling majority
did nothing for two years to protect the interests of corporation. (See
pars. 5-7, complaint.)
The defendants themselves having admitted in open court during the
oral discussion of their motion to dismiss and the plaintiff's motion for
receivership that the majority stockholders will under any condition
entertain any suggestion of the minority shareholders, the appointment
of an independent third party in the management of the corporation
becomes imperative for the survival of the company. (Order dated Feb.
15, 1960).
On April 30, 1960, the court issued mother order which reads as
follows:
After this incident wherein it was clearly shown that the minority
stockholders, represented by the plaintiff, have no recourse whatsoever
before the majority stockholders of the company, and after it has been
shown that the majority has violated the law by importing into the
Philippines finished goods instead of raw materials as stipulated in their
license, and since these acts are prejudicial to the company because it
might result in the cancellation of their license, the Court is of the
opinion and so holds that the appointment of a receiver is absolutely
necessary for the protection not only of the rights of the minority but
also those of the majority stockholders of the company.
In the first assignment of error, petitioner claims that respondent
Justiniani neither alleged nor proved the existence of an emergency
requiring the immediate appoinment of a receiver of the Roxas-Kalaw
Textile Mill, Inc.; that the alleged fraudulent transaction took place more
than two years before the application for receivership, and so was the
refusal of the directors to sue or prosecute Dalamal. This contention is
not well founded. At the hearing of the petition for the appointment of a
receiver held on January 30, 1960, various records of shipments of
finished textile goods on dollar allocations for raw materials were
exhibited. Publicity had also been given to the importations of textiles
by the corporation, in place of cotton raw materials. The record shows
the list of the various documents proving the purchase of letters of
credit for textiles. These textiles were denied importation and had to be
re-exported. The fact of the importation of finished textiles on dollar
allocations for raw materials in violation of Central Bank regulations
was, therefore, conclusively shown.
It is also not denied by petitioner that the allocation of dollars to the
corporation for the importation of raw materials was suspended. In the
eyes of the court below, as well as in our own, the importation of
textiles instead of raw materials, as well as the failure of the Board of
Directors to take action against those directly responsible for the
misuse of dollar allocations constitute fraud, or consent thereto on the
part of the directors. Therefore, a breach of trust was committed which
justified the derivative suit by a minority stockholder on behalf of the
corporation.
It is well settled in this jurisdiction that where corporate directors are
guilty of a breach of trust — not of mere error of judgment or abuse of
discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders. An illustration of a suit of this kind is
found in the case of Pascual vs. Del Saz Orozco  (19 Phil. 82), decided
by this Court as early as 1911. In that case, the Banco Español-Filipino
suffered heavy losses due to fraudulent connivance between a
depositor and an employee of the bank, which losses, it was
contended, could have been avoided if the president and directors had
been more vigilant in the administration of the affairs of the bank. The
stockholders constituting the minority brought a suit in behalf of the
bank against the directors to recover damages, and this over the
objection of the majority of the stockholders and the directors. This
court held that the suit could properly be maintained. (64 Phil., Angeles
vs. Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697).
The claim that respondent Justiniani did not take steps to remedy the
illegal importation for a period of two years is also without merit. During
that period of time respondent had the right to assume and expect that
the directors would remedy the anomalous situation of the corporation
brought about by their own wrong doing. Only after such period of time
had elapsed could respondent conclude that the directors were remiss
in their duty to protect the corporation property and business.
Counsel for petitioner claims that respondent Justiniani was treasurer
of the corporation for sometime and had control of funds and this
notwithstanding, she had not taken the steps to remedy the situation. In
answer we state that the fraud consisted in importing finished textile
instead of raw cotton for the textile mill; the fraud, therefore, was
committed by the manager of the business and was consented to by
the directors, evidently beyond reach of respondent.
The directors permitted the fraudulent transaction to go unpunished
and nothing appears to have been done to remove the erring
purchasing managers. In a way the appointment of a receiver may
have been thought of by the court below so that the dollar allocation for
raw material may be revived and the textile mill placed on an operating
basis. It is possible that if a receiver in which the Central Bank may
have confidence is appointed, the dollar allocation for raw material may
be restored. Claim is made that if a receiver is appointed, the Philippine
National Bank to which the corporation owes considerable sums of
money might be led to foreclose the mortgage. Precisely the
appointment of a receiver in whom the bank may have had confidence
might rehabilitate the business and bring a restoration of the dollar
allocation much needed for raw material and an improvement in the
business and assets the corporation, thus insuring the collection of the
bank's loan.
Considering the above circumstances we are led to agree with the
judge below that the appointment of a receiver was not only expedient
but also necessary to restore the faith and confidence of the Central
Bank authorities in the administration of the affairs of the corporation,
thus ultimately leading to a restoration of the dollar allocation so
essential to the operation of the textile mills. The first assignment of
error is, therefore, overruled.
In the second assignment of error, petitioner claims that the
management has been changed and the new management has not
been afforded a chance to show what it can do. This ground of the
petition was not mentioned or raised as a ground of defense or
objection to the appointment of a receiver in the court below. It is only
raised for the first time before Us in the petition for  certiorari.  The
principle has long ago been enunciated by Us that an appellate court
may not consider any ground of objection that was not raised in the
court below. (Tan Machan v. Trinidad, 3 Phil. 684; Ramiro v. Graño, 54
Phil. 744; Vda. de Villaruel, et al. v. Manila Motor Co., Inc., et al., G.R.
No. L-10394, Dec. 13, 1958; Collector of Internal Revenue v. Estate of
F. P. Buan, et al., G.R. Nos. L-11438-39, and L-11542-46, July 31,
1958; S.V.S. Pictures, Inc., et al. v. The Court of Appeals, et al., G.R.
No. L-7075, January 29, 1960; Elena Peralta Vda. de Caina vs. Hon.
Andres Reyes, et al., G.R. No. L-15792, May 30, 1960).
The supposed new management, alleged as a ground for the reversal
of the order of the court below appointing a receiver, is not in itself a
ground of objection to the appointment of a receiver. The parties found
to be guilty of the fraud, as a cause of which receivership proceedings
were instituted, were the Board of Directors, which took no action to
stop the anomalies being perpetrated by the management. But it
appears that the management must have acted directly under orders of
the Board of Directors. The appointment of a new management,
therefore, would not remedy the anomalous situation in which the
corporation is found, because such situation was not due to the
management alone but principally because of direction of the Board of
Directors.
The second ground for the petition is, therefore, also without merit.
WHEREFORE, the court finds that the court below did not commit an
abuse of discretion in appointing a receiver for the corporation and the
petition to set aside the order for the appointment of a receiver should
be, as it is hereby, dismissed. With costs against the petitioner.
ROLE OF DIRECTORS AND OFFICERS
1. Function of the Board of Directors
a. Role of directors, officers and trustees
Generally:
Bernas vs. Cinco, G.R. Nos. 163356-57 (2015)
The Facts
Makati Sports Club (MSC) is a domestic corporation duly organized
and existing under Philippine laws for the primary purpose of
establishing, maintaining, and providing social, cultural, recreational
and athletic . activities among its members.
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H.
Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T.
Macrohon and Paulino T. Lim (Bernas Group) were among the
Members of the Board of Directors and Officers of the corporation
whose terms were to expire either in 1998 or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea ·
and Alex Y. Pardo (Cinco Group) are the members and stockholders of
the corporation who were elected Members of the Board of Directors
and Officers of the club during the 17 December 1997 Special
Stockholders Meeting.
The antecedent events of the meeting and its results, follow:
Alarmed with the rumored anomalies in handling the corporate funds,
the MSC Oversight Committee (MSCOC), composed of the past
presidents of the club, demanded from the Bernas Group, who were
then incumbent officers of the corporation, to resign from their
respective positions to pave the way for the election of new set of
officers.4 Resonating this clamor were the stockholders of the
corporation representing at least 100 shares who sought the assistance
of the MSCOC to call for a special stockholders meeting for the
purpose of removing the sitting officers and electing new
ones.5 Pursuant to such request, the MSCOC called a Special
Stockholders' Meeting and sent out notices 6 to all stockholders and
members stating therein the time, place and purpose of the meeting.
For failure of the Bernas Group to secure an injunction before the
Securities Commission (SEC), the meeting proceeded wherein Jose A.
Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T.
Frondoso, Ignacio T. Macrohon, Jr. and Paulino T. Lim were removed
from office and, in their place and stead, Jovencio F. Cinco, Ricardo G.
Librea, Alex Y. Pardo, Roger T. Aguiling, Rogelio G. · Villarosa,
Armando David, Norberto Maronilla, Regina de Leon-Herlihy and
Claudio B. Altura, were elected.7
Aggrieved by the turn of events, the Bernas Group initiated an action
before the Securities Investigation and Clearing Department (SICD) of
the SEC docketed as SEC Case No. 5840 seeking for the nullification
of the 17 December 1997 Special Stockholders Meeting on the ground
that it was improperly called. Citing Section 28 of the Corporation Code,
the Bernas Group argued that the authority to call a meeting lies with
the Corporate . Secretary and not with the MSCOC which functions
merely as an oversight body and is not vested with the power to call
corporate meetings. For being called by the persons not authorized to
do so, the Bernas Group urged the SEC. to declare the 17 December
1997 Special Stockholders' Meeting, including the removal of the sitting
officers and the election of new ones, be nullified.
For their part, the Cinco Group insisted that the 17 December 1997
Special Stockholders' Meeting is sanctioned by the Corporation Code
and the MSC by-laws. In justifying the call effected by the MSCOC,
they reasoned that Section 258 of the MSC by-laws merely authorized
the Corporate Secretary to issue notices of meetings and nowhere
does it state that such authority solely belongs to him. It was further
asseverated by the Cinco Group that it would be useless to course the
request to call a meeting thru the Corporate Secretary because he
repeatedly refused to call a special stockholders' meeting despite
demands and even "filed a suit to restrain the holding of a special
meeting.9
Meanwhile, the newly elected directors initiated an investigation on the
alleged anomalies in administering the corporate affairs and after
finding Bernas guilty of irregularities,10 the Board resolved to expel him
from the club by selling his shares at public auction. 11 After the
notice12 requirement was complied with, Bernas' shares was
accordingly sold for ₱902,000.00 to the highest bidder:
Prior to the resolution of SEC Case No. 5840, an Annual Stockholders'
Meeting was held on 20 April 1998 pursuant to Section 8 of the MSC
bylaws.13 During the said meeting, which was attended by 1,017
stockholders representing 2/3 of the outstanding shares, the majority
resolved to approve, confirm and ratify, among others, the calling and ·
holding of 17 December 1997 Special Stockholders' Meeting, the acts
and resolutions adopted therein including the removal of Bernas Group
from the Board and the election of their replacements.14
Due to the filing of several petitions for and against the removal of the
Bernas Group from the Board pending before the SEC resulting in the
piling up of legal controversies involving MSC, the SEC En Banc, in its
Decision15 dated 30 March 1999, resolved to supervise the holding of
the 1999 Annual Stockholders' Meeting. During the said meeting, the
stockholders once again approved, ratified and confirmed the holding of
the 17 December 1997 Special Stockholders' Meeting.
The conduct of the 17 December 1997 Special Stockholders' Meeting
was likewise ratified by the stockholders during the 2000 Annual
Stockholders' Meeting which was held on 17 April 2000.16
On 9 May 2000, the SICD rendered a Decision 17 in SEC Case No. 12-.
97-5840 finding, among others, that the 17 December 1997 Special
Stockholders' Meeting and the Annual Stockholders' Meeting
conducted on 20 April 1998 and 19 April 1999 are invalid. The SICD
likewise nullified the expulsion of Bernas from the corporation and the
sale of his share at the public auction. The dispositive portion of the
said decision reads:
WHEREFORE, in view of the foregoing considerations this Office,
through the undersigned Hearing Officer, hereby declares as follows:
(1) The supposed Special Stockholders' Meeting of December 17, 1997
was prematurely or invalidly called by the [the Cinco Group]. It
therefore failed to produce any legal effects and did not effectively
remove [the Bernas Group] as directors of the Makati Sports Club, Inc.
(2) The April 20, 1998 meeting was not attended by a sufficient number
of valid proxies. No quorum could have been present at the said
meeting. No corporate business could have been validly completed
and/or transacted during the said meeting. Further, it was not called by
the validly elected Corporate Secretary Victor Africa nor presided over
by the validly elected president Jose A. Bernas. Even if the April 20,
1998 meeting was valid, it could not ratify the December 17, 1997
meeting because being a void meeting, the December 1 7, 1997
meeting may not be ratified.
(3) The April 1998 meeting was null and void and therefore produced
no legal effect.
(4) The April 1999 meeting has not been raised as a defense in the
Answer nor assailed in a supplemental complaint. However, it has been
raised by [the Cinco Group] in a manifestation dated April 21, 1999 and
in their position paper dated April 8, 2000. Its legal effects must be the
subject of this Decision in order to put an end to the controversy at
hand. In the first place, by [the Cinco Group's] own admission, the
alleged attendance at the April 1999 meeting amounted to less than 2/3
of the stockholders entitled to vote, the minimum number required to
effect a removal. No removal or ratification of a removal may be
effected by less than 2/3 vote of the stockholders. Further, it cannot
ratify the December 1997 meeting for failure to adhere to the
requirement of the By-laws on notice as explained in paragraph (2)
above, even if it was accompanied by valid proxies, which it was not.
(5) The [the Cinco Group], their agents, representatives and all persons
acting for and conspiring on their behalf, are hereby permanently
enjoined from carrying into effect the resolutions and actions adopted
during the 17 December 1997 and April 20, 1998 meetings and of the
Board of Directors and/or other stockholders' meetings resulting
therefrom, and from performing acts of control and management of the
club.
(6) The expulsion of complainant Jose A. Bernas as well as the public
auction of his share is hereby declared void and without legal effect, as
prayed for. While it is true that [the Cinco Group] were no.t restrained
from acting as directors during the pendency of this case, their tenure
as directors prior to this Decision is in the nature of de facto directors of
a de facto Board. Only the ordinary acts of administration which [the
Cinco Group] carried out de facto in good faith are valid. Other acts,
such as political acts and the expulsion or other disciplinary acts
imposed on the [the Bernas Group] may not be appropriately taken by
de facto officers because the legality of their tenure as directors is not
complete and subject to the outcome of this case. (7) No awards for
damages and attorney's fees.18
On appeal, the SEC En Banc, in its 12 December 2000
Decision19 reversed the findings of the SICD and validated the holding
of the 17 December 1997 Special Stockholders' Meeting as well as the
Annual Stockholders' Meeting held on 20 April 1998 and 19 April 1999.
On 28 April 2003, the Court of Appeals rendered a Decision 20 declaring
the 17 December 1997 Special Stockholders' Meeting invalid for being
improperly called but affirmed the actions taken during the Annual
Stockholders' Meeting held on 20 April 1998, 19 April 1999 and 17 April
2000.
In a Resolution21 dated 27 April 2004, the appellate court refused to
reconsider its earlier decision.
Aggrieved by the disquisition of the Court of Appeals, both parties
elevated the case before this Court by filing their respective Petitions
for Review on Certiorari. While the Bernas Group agrees with the
disquisition of the appellate court that the Special Stockholders'
Meeting is invalid for being called by the persons not authorized to do
so, they urge the Court to likewise invalidate the holding of the
subsequent Annual Stockholders' Meetings invoking the application of
the holdover principle. The Cinco Group, for its part, insists that the
holding. of 17 December 1997 Special Stockholders' Meeting is valid
and binding underscoring the overwhelming ratification made by the
stockholders during the subsequent annual stockholders' meetings and
the previous refusal of the Corporate Secretary to call a special
stockholders' meeting despite demand. For the resolution of the Court
are the following issues:
The Issues
I.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
ERRED IN RULING THAT THE 17 DECEMBER 1997 SPECIAL
STOCKHOLDERS' MEETING IS INVALID; AND
II.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
ERRED IN FAILING TO NULLIFY THE HOLDING OF THE ANNUAL
STOCKHOLDERS' MEETING ON 20 APRIL 1998, 19 APRIL 1999
AND 17 APRIL 2000.
The Court's Ruling
The Corporation Code laid down the rules on the removal of the
Directors of the corporation by providing, inter alia, the persons
authorized to call the meeting and the number of votes required for the
purpose of removal, thus:
Sec. 28. Removal of directors or trustees. -Any director or trustee of a
corporation may be removed from office by a vote of the stockholders
holding or representing at least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-stock corporation, by a vote
of at least two-thirds (2/3) of the members entitled to vote: Provided,
That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must be
called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority
of the outstanding capital stock, or, if it be a non-stock corporation, on
the written demand of a majority of the members entitled to vote.
Should the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary,
the call for the meeting may be addressed directly to the stockholders
or members by any stockholder or member of the corporation signing
the demand. Notice of the time and place of such meeting, as well as of
the intention to propose such removal, must be given by publication or
by written notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may not be used
to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this
Code. (Emphasis supplied)
Corollarily, the pertinent provisions of MSC by-laws which govern the
manner of calling and sending of notices of the annual stockholders'
meeting and the special stockholders' meeting provide:
SEC. 8. Annual Meetings. The annual meeting of stockholders shall be
held at the Clubhouse on the third Monday of April of every year unless
such day be a holiday in which case the annual meeting shall be held
on the next succeeding business day. At such meeting, the President
shall render a report to the stockholders of the clubs.
xxxx
SEC. 10. Special Meetings. Special meetings of stockholders shall be
held at the Clubhouse when called by the President or by the Board of
Directors or upon written request of the stockholders representing not
less than one hundred (100) shares. Only matters specified in the
notice and call will be taken up at special meetings.
xxxx
SEC. 25. Secretary. The Secretary shall keep the stock and transfer
book and the corporate seal, which he shall stamp on all documents
requiring such seal, fill and sign together with the President, all the
certificates of stocks issued, give or caused to be given all notices
required by law of these By-laws as well as notices of all meeting of the
Board and of the stockholders; shall certify as to quorum at meetings;
shall approve and sign all correspondence pertaining to the Office of
the Secretary; shall keep the minutes of all meetings of the
stockholders, the Board of Directors and of all committees in a book or
books kept for that purpose; and shall be acting President in the
absence of the President and Vice-:President. The Secretary must be a
citizen and a resident of the Philippines. The Secretary shall keep a
record of all the addresses and telephone numbers of all
stockholders.22
Textually, only the President and the Board of Directors are authorized
by the by-laws to call a special meeting. In cases where the person
authorized to call a meeting refuses, fails or neglects to call a meeting,
then the stockholders representing at least 100 shares, upon written
request, may file a petition to call a special stockholder's meeting.
In the instant case, there is no dispute that the 17 December 1997
Special Stockholders' Meeting was called neither by the President nor
by the Board of Directors but by the MSCOC. While the MSCOC, as its
name suggests, is created for the purpose of overseeing the affairs of
the corporation, nowhere in the by-laws does it state that it is
authorized to exercise corporate powers, such as the power to call a
special meeting, solely vested by law and the MSC by-laws on the
President or the Board of Directors.
The board of directors is the directing and controlling body of the
corporation. It is a creation of the stockholders and derives its power to
control and direct the affairs of the corporation from them. The board of
directors, in drawing to itself the power of the corporation, occupies a
position of trusteeship in relation to the stockholders, in the sense that
the board should exercise not only care and diligence, but utmost good
faith in the management of the corporate affairs.23
The underlying policy of the Corporation Code is that the business and
affairs of a corporation must be governed by a board of directors whose
members have stood for election, and who have actually been elected
by the stockholders, on an annual basis. Only in that way can the
continued accountability to shareholders, and the legitimacy of their
decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of
power by the directors or officers over the properties that they do not
own.24
Even the Corporation Code is categorical in stating that a corporation
exercises its powers through its board of directors and/or its duly
authorized officers and agents, except in instances where the
Corporation Code requires stockholders' approval for certain specific
acts:
SEC. 23. The Board of Directors or Trustees. - Unless otherwise
provided in this Code, the corporate powers of all the 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 and trustees x x x.
A corporation's board of directors is understood to be that body which
(1) exercises all powers provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3) controls and holds all
the property of the corporation. Its members have been characterized
as trustees or directors clothed with fiduciary character.25
It is ineluctably clear that the fiduciary relation is between the
stockholders and the board of directors and who are vested with the
power to manage the affairs of the corporation. The ordinary trust
relationship of · directors of a corporation and stockholders is not a
matter of statutory or technical law. 26 It springs from the fact that
directors have the control and guidance of corporate affairs and
property and hence of the property interests of the
stockholders.27 Equity recognizes that stockholders are the proprietors
of the corporate interests and are ultimately the only beneficiaries
thereof.28 Should the board fail to perform its fiduciary duty to safeguard
the interest of the stockholders or commit acts prejudicial to their
interest, the law and the by-laws provide mechanisms to remove and
replace the erring director.29
Relative to the powers of the Board of Directors, nowhere in the
Corporation Code or in the MSC by-laws can it be gathered that the
Oversight Committee is authorized to step in wherever there is breach
of fiduciary duty and call a special meeting for the purpose of removing
the existing officers and electing their replacements even if such call
was made upon the request of shareholders. Needless to say, the
MSCOC is neither · empowered by law nor the MSC by-laws to call a
meeting and the subsequent ratification made by the stockholders did
not cure the substantive infirmity, the defect having set in at the time
the void act was done. The defect goes into the very authority of the
persons who made the call for the meeting. It is apt to recall that illegal
acts of a corporation which contemplate the doing of an act which is
contrary to law, morals or public order, or contravenes some rules of
public policy or public duty, are, like similar transactions between
individuals, void.30 They cannot serve as basis for a court action, nor
acquire validity by performance, ratification or estoppel. 31 The same
principle can apply in the present case. The void election of 17
December 1997 cannot be ratified by the subsequent Annual
Stockholders' Meeting.
A distinction should be made between corporate acts or contracts
which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which are contrary to law, morals or
public policy or public duty, and are, like similar transactions between
individuals, void: They cannot serve as basis of a court action nor
acquire validity by performance, ratification or estoppel. Mere ultra vires
acts, on the other hand, or those which are not illegal or void ab initio,
but are not merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable when
ratified by the stockholders.32 The 1 7 December 1997 Meeting belongs
to the category of the latter, that is, it is void ab initio and cannot be
validated.
Consequently, such Special Stockholders' Meeting called by the
Oversight Committee cannot have any legal effect. The removal of the
Bernas Group, as well as the election of the Cinco Group, effected by
the assembly in that improperly called meeting is void, and since the
Cinco Group has no legal right to sit in the board, their subsequent acts
of expelling Bernas from the club and the selling of his shares. at the
public auction, are likewise invalid.
The Cinco Group cannot invoke the application of de facto officership
doctrine to justify the actions taken after the invalid election since the
operation of the principle is limited to third persons who were originally
not part of the corporation but became such by reason of voting of
government-sequestered shares.33 In Cojuangco v. Roxas,34 the Court
deemed the directors who were elected through the voting of
government of sequestered shares who assumed office in good faith as
de facto officers, viz:
In the light of the foregoing discussion, the Court finds and so holds
that the PCGG has no right to vote the sequestered shares of
petitioners including the sequestered corporate shares. Only their
owners, duly authorized representatives or proxies may vote the said
shares. Consequently, the election of private respondents Adolfo
Azcuna, Edison Coseteng and Patricio Pineda as members of the
board of directors of SMC for 1990-1991 should be set aside. However,
petitioners cannot be declared as duly elected members of the board of
directors thereby. An election for the purpose should be held where the
questioned shares may be voted by their owners and/or their proxies.
Such election may be held at the next shareholders' meeting in April
1991 or at such date as may be set under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de facto
officers who in good faith assumed their duties and responsibilities as
duly elected members of the board of directors of the SMC. They are
thereby legally entitled to emoluments of the office including salary,
fees and other compensation attached to the office until they vacate the
same. (Emphasis supplied)
Apparently, the assumption of office of the Cinco Group did not bear
parallelism with the factual milieu in Cojuangco and as such they
cannot be considered as de facto officers and thus, they are without
colorable authority to authorize the removal of Bernas and the sale of
his shares at the public auction. They cannot bind the corporation to
third persons who acquired the shares of Bernas and such third
persons cannot be deemed as buyer in good faith.35
The case would have been different if the petitioning stockholders went
directly to the SEC and sought its assistance to call a special
stockholders' meeting citing the previous refusal of the Corporate
Secretary to call a meeting. Where there is an officer authorized to call
a meeting and that officer refuses, fails, or neglects to call a meeting,
the SEC can assume jurisdiction and issue an order to the petitioning
stockholder to call a meeting pursuant to its regulatory and
administrative powers to implement the Corporation Code.36 This is
clearly provided for by Section 50 of the Corporation Code which we
quote:
Sec. 50. Regular and special meetings of stockholders or members. - x
xx
xxxx
Whenever, for any cause, there is no person authorized to call a
meeting, the Securities and Exchange Commission, upon petition of a
stockholder or member, and on a showing of good cause therefore,
may issue an order to the petitioning stockholder or member directing
him to call a meeting of the corporation by giving proper notice required
by this Code or by the by-laws. The petitioning stockholder or member
shall preside thereat until at least majority of the stockholders or
members present have chosen one of their member[s] as presiding
officer.
As early as Ponce v. Encarnacion, etc. and Gapol, 37 the Court of First
Instance (now the SEC)38 is empowered to call a meeting upon petition
of the stockholder or member and upon showing of good cause, thus:
On the showing of good cause therefore, the court may authorize a
stockholder to call a meeting and to preside thereat until the majority
stockholders representing a majority of the stock present and permitted
to be voted shall have chosen one among them to preside it. And this
showing of good cause therefor exists when the court is apprised of the
fact that the by-laws of the corporation require the calling of a general
meeting of the stockholders to elect the board of directors but the call
for such meeting has not been done.39
The same jurisprudential rule resonates in Philippine National
Construction Corporation v. Pabion,40 where the Court validated the
order of the SEC to compel the corporation to conduct a stockholders'
meeting in the exercise of its regulatory and administrative powers to
implement the Corporation Code:
SEC's assumption of jurisdiction over this case is proper, as the
controversy involves the election of PNCC's directors. Petitioner does
not really contradict the nature of the question presented and agrees
that there is an intra-corporate question involved.
xxxx
Prescinding from the above premises, it necessarily follows that SEC
can compel PNCC to hold a stockholders' meeting for the purpose of
electing members of the latter's board of directors.
xxxx
As respondents point out, the SEC's action is also justified by its
regulatory and administrative powers to implement the Corporation
Code, specifically to compel the PNCC to hold a stockholders' meeting
for election purposes.41
Given the broad administrative and regulatory powers of the SEC
outlined under Section 50 of the Corporation Code and Section 6 of
Presidential Decree (PD) No. 902-A, the Cinco Group cannot claim that
if was left without recourse after the Corporate Secretary previously
refused to heed its demand to call a special stockholders' meeting. If it
be true that the Corporate Secretary refused to call a meeting despite
fervent demand from the MSCOC, the remedy of the stockholders
would have been to file a petition to the SEC to direct him to call a
meeting by giving proper notice required under the Code. To rule
otherwise would open the floodgates to abuse where any stockholder,
who consider himself aggrieved by certain corporate actions, could call
a special stockholders' meeting for the purpose of removing the sitting
officers in direct violation of the rules pertaining to the call of meeting
laid down in the by-laws.
Every corporation has the inherent power to adopt by-laws for its
internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among themselves
in reference to the management of its affairs. 42 The by-laws of a
corporation are its own private laws which substantially have the same
effect as the laws of the corporation. They are in effect written into the
charter. In this sense they become part of the fundamental law of the
corporation with which the corporation and its directors and officers
must comply.43 The general rule is that a corporation, through its board
of directors, should act in the manner and within the formalities, if any,
prescribed in 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
by-laws, otherwise, any action taken therein may be questioned by the
objecting director or shareholder.44
Certainly, the rules set in the by-laws are mandatory for every member
of the corporation to respect. 1âwphi1 They are the fundamental law of
the corporation with which the corporation and its officers and members
must comply. It is on this score that we cannot upon the other hand
sustain the Bernas Group's stance that the subsequent annual
stockholders' meetings were invalid.
First, the 20 April 1998 Annual Stockholders Meeting was valid
because it was sanctioned by Section 8 45 of the MSC bylaws. Unlike in
Special Stockholders Meeting46 wherein the bylaws mandated that such
meeting shall be called by specific persons only, no such specific
requirement can be obtained under Section 8.
Second, the 19 April 1999 Annual Stockholders Meeting is likewise
valid because in addition to the fact that it was conducted in
accordance to Section 8 of the MSC bylaws, such meeting was
supervised by the SEC in the exercise of its regulatory and
administrative powers to implement the Corporation Code.47
Needless to say, the conduct of SEC supervised Annual Stockholders
Meeting gave rise to the presumption that the corporate officers who
won the election were duly elected to their positions and therefore can
be rightfully considered as de jure officers. As de jure officials, they can
lawfully exercise functions and legally perform such acts that are within
the scope of the business of the corporation except ratification of
actions that are deemed void from the beginning.
Considering that a new set of officers were already duly elected in 1998
and 1999 Annual Stockholders Meetings, the Bernas Group cannot be
permitted to use the holdover principle as a shield to perpetuate in
office. Members of the group had no right to continue as directors of the
corporation unless reelected by the stockholders in a meeting called for
that purpose every year.48 They had no right to hold-over brought about
by the failure to perform the duty incumbent upon them. 49 If they were
sure to be reelected, why did they fail, neglect, or refuse to call the
meeting to elect the members of the board?50
Moreover, it is fundamental rule that factual findings of quasi-judicial
agencies like the SEC, if supported by substantial evidence, are
generally accorded not only great respect but even finality, and are
binding upon this Court unless it was shown that the quasi-judicial
agencies had arbitrarily disregarded evidence before it had
misapprehended evidence to such an extent as to compel a contrary
conclusion if such evidence had been properly appreciated.51 It is not
the function of this Court to analyze or weigh all over again the
evidence and credibility of witnesses presented before the lower court,
tribunal, or office, as we are not trier of facts. 52 Our jurisdiction is limited
to reviewing and revising errors of law imputed to the lower court, the
latter's finding of facts being conclusive and not reviewable by this
Court.53 However, when it can be shown that administrative bodies
grossly misappreciated evidence of such nature as to compel a
contrary conclusion, the Court will not hesitate to reverse its factual
findings.54 In the case at bar, the incongruent findings of the SEC on the
one hand, and the Court of Appeals on the other, constrained the Court
to review the records to ascertain which body correctly appreciated the
facts vis-a-vis the standing statutory and jurisprudential principles.
After finding that the ruling of the appellate court was in accordance
with the existing laws and jurisprudence as exhaustively discussed
above, we hereby quote with approval its disquisition: (1) The
supposed Special Stockholders' Meeting of 1 7 December 1997 was
prematurely or invalidly called by the [Cinco Group]. It therefore failed
to produce any legal effects and did not effectively remove [the Bernas
Group] as directors of the Makati Sports Club, Inc.;
(2) The expulsion of [Bernas] as well as the public auction of his shares
is hereby declared void and without legal effect;
(3) The ratification of the removal of [the Bernas Group] as directors,
the expulsion of Bernas and the sale of his share by the [Cinco Group]
and by the stockholders held in their Regular Stockholders' Meeting
held in April of 1998, 1999 and 2000, is void and produces no effects
as they were not the proper party to cause the ratification;
(4) All other actions of the [Cinco Group] and stockholders taken during
the Regular Stockholders' Meetings held in April 1998, 1999 and 2000,
including the election of the [Cinco Group] as directors after the
expiration of the term of office of [Bernas Group] as directors, are
hereby declared valid.55
In fine, we hold that 17 December 1997 Special Stockholders' Meeting
is null and void and produces no effect; the resolution expelling the
Bernas Group from the corporation and authorizing the sale of Bernas'
shares at the public auction is likewise null and void. The subsequent
Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999 and
17 April 2000 are valid and binding except the ratification of the
removal of the Bernas Group and the sale of Bernas' shares at the
public auction effected by the body during the said meetings. The
expulsion of the Bernas Group and the subsequent auction of Bernas'
shares are void from the very beginning and therefore the ratifications
effected during the subsequent meetings cannot be sustained. A void
act cannot be the subject of ratification.56
WHEREFORE, premises considered, the petitions of Jose A. Bernas,
Cecile. H. Cheng, Victor Africa, Jesus B. Maramara, Jose T. Frondoso,
Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos. 163356-57 and of
Jovencio Cinco, Ricardo Librea and Alex Y. Pardo in G.R. Nos.
163368-69 are hereby DEN~ED. The assailed Decision dated 28 April
2003 and Resolution dated 27 April 2004 of the Court of Appeals are
hereby AFFIRMED.
SO ORDERED.
______________________________________
2. Election and Tenure of Directors/Trustees
a. Qualifications and Disqualifications of directors and trustees
(Sections 22 and 26 of the RCC)
Lee vs. Court of Appeals, 205 SCRA 752 [1992]
GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between two
parties in this case? Who owns the stocks of the corporation under the
terms of the voting trust agreement? How long can a voting trust
agreement remain valid and effective? Did a director of the corporation
cease to be such upon the creation of the voting trust agreement?
These are the questions the answers to which are necessary in
resolving the principal issue in this petition for  certiorari  — whether or
not there was proper service of summons on Alfa Integrated Textile
Mills (ALFA, for short) through the petitioners as president and vice-
president, allegedly, of the subject corporation after the execution of a
voting trust agreement between ALFA and the Development Bank of
the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts
appear:
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 on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the
third party complaint which the Regional Trial Court of Makati, Branch
58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party
complaint.
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 dated July 22, 1988, 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.
On August 4, 1988, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to
ALFA.
On August 16, 1988, 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 dated September
27, 1988, 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.
On January 2, 1989, the trial court 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.
On January 19, 1989, 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. In support of their second motion for reconsideration,
the petitioners attached thereto a copy of the voting trust agreement
between all the stockholders of ALFA (the petitioners included), on the
one hand, and the DBP, on the other hand, whereby the management
and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its
previous Order dated January 2, 1989 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.
On May 15, 1989, the private respondents moved for a reconsideration
of the above Order which was affirmed by the court in its Order dated
August 14, 1989 denying the private respondent's motion for
reconsideration.
On September 18, 1989, a petition for certiorari  was belatedly
submitted by the private respondent before the public respondent
which, nonetheless, resolved to give due course thereto on September
21, 1989.
On October 17, 1989, the trial court, not having been notified of the
pending petition for certiorari with public respondent issued an Order
declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps in
prosecuting the third party complaint in order that the court would not
be constrained to dismiss the same for failure to prosecute.
Subsequently, on October 25, 1989 the private respondents filed a
motion for reconsideration on which the trial court took no further
action.
On March 19, 1990, after the petitioners filed their answer to the private
respondents' petition for certiorari, the public respondent rendered its
decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent judge
dated April 25, 1989 and August 14, 1989 are hereby SET ASIDE and
respondent corporation is ordered to file its answer within the
reglementary period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the
decision of the public respondent which resolved to deny the same on
May 10, 1990. Hence, the petitioners filed this certiorari  petition
imputing grave abuse of discretion amounting to lack of jurisdiction on
the part of the public respondent in reversing the questioned Orders
dated April 25, 1989 and August 14, 1989 of the court a quo, thus,
holding that there was proper service of summons on ALFA through the
petitioners.
In the meantime, the public respondent inadvertently made an entry of
judgment on July 16, 1990 erroneously applying the rule that the period
during which a motion for reconsideration has been pending must be
deducted from the 15-day period to appeal. However, in its Resolution
dated January 3, 1991, the public respondent set aside the aforestated
entry of judgment after further considering that the rule it relied on
applies to appeals from decisions of the Regional Trial Courts to the
Court of Appeals, not to appeals from its decision to us pursuant to our
ruling in the case of Refractories Corporation of the Philippines
v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp.
249-250)
In their memorandum, the petitioners present the following arguments,
to wit:
(1) that the execution of the voting trust agreement by a stockholders
whereby all his shares to the corporation have been transferred to the
trustee deprives the stockholders of his position as director of the
corporation; to rule otherwise, as the respondent Court of Appeals did,
would be violative of section 23 of the Corporation Code ( Rollo, pp.
270-3273); and
(2) that the petitioners were no longer acting or holding any of the
positions provided under Rule 14, Section 13 of the Rules of Court
authorized to receive service of summons for and in behalf of the
private domestic corporation so that the service of summons on ALFA
effected through the petitioners is not valid and ineffective; to maintain
the respondent Court of Appeals' position that ALFA was properly
served its summons through the petitioners would be contrary to the
general principle that a corporation can only be bound by such acts
which are within the scope of its officers' or agents' authority ( Rollo, pp.
273-275)
In resolving the issue of the propriety of the service of summons in the
instant case, we dwell first on the nature of a voting trust agreement
and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders
of a corporation and the trustee or by a group of identical agreements
between individual stockholders and a common trustee, whereby it is
provided that for a term of years, or for a period contingent upon a
certain event, or until the agreement is terminated, control over the
stock owned by such stockholders, either for certain purposes or for all
purposes, is to be lodged in the trustee, either with or without a
reservation to the owners, or persons designated by them, of the power
to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19
Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly
recognizes voting trust agreements, a more definitive meaning may be
gathered. The said provision partly reads:
Sec. 59. Voting Trusts — One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon
a trustee or trustees the right to vote and other rights pertaining to the
share for a period rights pertaining to the shares for a period not
exceeding five (5) years at any one time: Provided, that in the case of a
voting trust specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding (5) years but shall
automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the terms
and conditions thereof. A certified copy of such agreement shall be filed
with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be cancelled and new ones shall be issued
in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.
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. (5 Fletcher, Cyclopedia of
the Law on Private Corporations, section 2075 [1976] p.
331 citing Tankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, 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." (section 59, 5th paragraph of the
Corporation Code) Thus, the traditional concept of a voting trust
agreement primarily intended to single out a stockholder's right to vote
from his other rights as such and made irrevocable for a limited
duration may in practice become a legal device whereby a transfer of
the stockholder's shares is effected subject to the specific provision of
the voting trust agreement.
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.
The law simply provides that a voting trust agreement is an agreement
in writing whereby one or more stockholders of a corporation consent to
transfer his or their shares to a trustee in order to vest in the latter
voting or other rights pertaining to said shares for a period not
exceeding five years upon the fulfillment of statutory conditions and
such other terms and conditions specified in the agreement. The five
year-period may be extended in cases where the voting trust is
executed pursuant to a loan agreement whereby the period is made
contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of
the creation of the voting trust agreement. 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. They argue that by virtue to of the voting trust
agreement the petitioners can no longer be considered directors of
ALFA. In support of their contention, the petitioners invoke section 23 of
the Corporation Code which provides, in part, that:
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 . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust
agreement between ALFA and the DBP had all the more safeguarded
the petitioners' continuance as officers and directors of ALFA inasmuch
as the general object of voting trust is to insure permanency of the
tenure of the directors of a corporation. They cited the commentaries by
Prof. Aguedo Agbayani on the right and status of the transferring
stockholders, to wit:
The "transferring stockholder", also called the "depositing stockholder",
is equitable owner for the stocks represented by the voting trust
certificates and the stock reversible on termination of the trust by
surrender. It is said that the voting trust agreement does not destroy the
status of the transferring stockholders as such, and thus render them
ineligible as directors. But a more accurate statement seems to be that
for some purposes the depositing stockholder holding voting trust
certificates in lieu of his stock and being the beneficial owner thereof,
remains and is treated as a stockholder. It seems to be deducible from
the case that he may sue as a stockholder if the suit is in equity or is of
an equitable nature, such as, a technical stockholders' suit in right of
the corporation. [Commercial Laws of the Philippines by Agbayani, Vol.
3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
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. (Salonga, Philippine
Law on Private Corporations, 1958 ed., p. 268; Pineda and Carlos, The
Law on Private Corporations and Corporate Practice, 1969 ed., p. 175;
Campos and Lopez-Campos, The Corporation Code; Comments,
Notes & Selected Cases, 1981, ed., p. 386; Agbayani, Commentaries
and Jurisprudence on the Commercial Laws of the Philippines,  Vol. 3,
1988 ed., p. 536). 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." Section 30 of the old Code states
that:
Every director must own in his own right  at least one share of the
capital stock of the stock corporation of which he is a director, which
stock shall stand in his name on the books of the corporation. A director
who ceases to be the owner of at least one share of the capital stock of
a stock corporation of which is a director shall thereby cease to be a
director . . . (Emphasis supplied)
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 (see Campos and Lopez-Campos, supra,
p. 296) 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 (2
Fletcher, Cyclopedia of the Law of Private Corporations , section 300, p.
92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
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 new
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. The
transfer of shares from the stockholder of ALFA to the DBP is the
essence of the subject voting trust agreement as evident from the
following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the
certificate of the shares of the stocks owned by them respectively and
shall do all things necessary for the transfer of their respective shares
to the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust
certificate for the number of shares transferred, which shall be
transferrable in the same manner and with the same effect as
certificates of stock subject to the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of
ALFA, annual or special, upon any resolution, matter or business that
may be submitted to any such meeting, and shall possess in that
respect the same powers as owners of the equitable as well as the
legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share
of stock for the purpose of qualifying such person as director of ALFA,
and cause a certificate of stock evidencing the share so transferred to
be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his
shares to the same trustees without the need of revising this
agreement, and this agreement shall have the same force and effect
upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis supplied)
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.
Moreover, in the Certification dated January 24, 1989 issued by the
DBP through one Elsa A. Guevarra, Vice-President of its Special
Accounts Department II, Remedial Management Group, the petitioners
were no longer included in the list of officers of ALFA "as of April 1982."
(CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate
their claim that the subject voting trust agreement did not deprive the
petitioners of their position as directors of ALFA, the public respondent
committed a reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao) may
have ceased to be president and vice-president, respectively, of the
corporation at the time of service of summons on them on August 21,
1987, they were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the
express terms of Stipulation No. 4 of the subject voting trust
agreement. Both parties, ALFA and the DBP, were aware at the time of
the execution of the agreement that by virtue of the transfer of shares
of ALFA to the DBP, all the directors of ALFA were stripped of their
positions as such.
There can be no reliance on the inference that the five-year period of
the voting trust agreement in question had lapsed in 1986 so that the
legal title to the stocks covered by the said voting trust agreement ipso
facto reverted to the petitioners as beneficial owners pursuant to the
6th paragraph of section 59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
and the voting trust certificate as well as the certificates of stock in the
name of the trustee or trustees shall thereby be deemed cancelled and
new certificates of stock shall be reissued in the name of the
transferors.
On the contrary, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the
agreement is contingent upon the fulfillment of certain obligations of
ALFA with the DBP. This is shown by the following portions of the
agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its
credit is secured by a first mortgage on the manufacturing plant of said
company;
WHEREAS, ALFA is also indebted to other creditors for various
financial accomodations and because of the burden of these
obligations is encountering very serious difficulties in continuing with its
operations.
WHEREAS, in consideration of additional accommodations from the
TRUSTEE, ALFA had offered and the TRUSTEE has accepted
participation in the management and control of the company and to
assure the aforesaid participation by the TRUSTEE, the TRUSTORS
have agreed to execute a voting trust covering their shareholding in
ALFA in favor of the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the purpose
aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is
renewable for as long as the obligations of ALFA with DBP, or any
portion thereof, remains outstanding; (CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986,
the DBP would not have transferred all its rights, titles and interests in
ALFA "effective June 30, 1986" to the national government through the
Asset Privatization Trust (APT) as attested to in a Certification dated
January 24, 1989 of the Vice President of the DBP's Special Accounts
Department II. In the same certification, it is stated that the DBP, from
1987 until 1989, had handled APT's account which included ALFA's
assets pursuant to a management agreement by and between the DBP
and APT (CA Rollo, p. 142) Hence, there is evidence on record that at
the time of the service of summons on ALFA through the petitioners on
August 21, 1987, the voting trust agreement in question was not yet
terminated so that the legal title to the stocks of ALFA, then, still
belonged to the DBP.
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. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347
[1976]; Osias Academy v. Department of Labor and Employment, et al.,
G.R. Nos. 83257-58, December 21, 1990). 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. (Far Corporation v.
Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far
East Motor Corp. 81 SCRA 303 [1978]).
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. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).
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.
SO ORDERED.
Gokongwei vs. SEC, 89 SCRA 336, (1979)
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer
for issuance of writ of preliminary injunction, arose out of two cases
filed by petitioner with the Securities and Exchange Commission, as
follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San
Miguel Corporation, filed with the Securities and Exchange Commission
(SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by- laws, injunction and
damages with prayer for a preliminary injunction" against the majority of
the members of the Board of Directors and San Miguel Corporation as
an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs.
Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas,
Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto
and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18,
1976, individual respondents amended by bylaws of the corporation,
basing their authority to do so on a resolution of the stockholders
adopted on March 13, 1961, when the outstanding capital stock of
respondent corporation was only P70,139.740.00, divided into
5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a total par
value of P301,270,430.00. It was contended that according to section
22 of the Corporation Law and Article VIII of the by-laws of the
corporation, the power to amend, modify, repeal or adopt new by-laws
may be delegated to the Board of Directors only by the affirmative vote
of stockholders representing not less than 2/3 of the subscribed and
paid up capital stock of the corporation, which 2/3 should have been
computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without
authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in
1961 had already been exercised in 1962 and 1963, after which the
authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of
the Board of Directors had changed since the authority was given in
1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned
amendment, petitioner had all the qualifications to be a director of
respondent corporation, being a Substantial stockholder thereof; that as
a stockholder, petitioner had acquired rights inherent in stock
ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents
purposely provided for petitioner's disqualification and deprived him of
his vested right as afore-mentioned hence the amended by-laws are
null and void. 1
As additional causes of action, it was alleged that corporations have no
inherent power to disqualify a stockholder from being elected as a
director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing
other corporations, entered into contracts (specifically a management
contract) with respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative of
determining whether they or other persons are engaged in competitive
or antagonistic business; that the portion of the amended bylaws which
states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business
and family relationship, is unreasonable and oppressive and, therefore,
void; and that the portion of the amended by-laws which requires that
"all nominations for election of directors ... shall be submitted in writing
to the Board of Directors at least five (5) working days before the date
of the Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null
and void and the certificate of filing thereof be cancelled, and that
individual respondents be made to pay damages, in specified amounts,
to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed
with the Securities and Exchange Commission an "Urgent Motion for
Production and Inspection of Documents", alleging that the Secretary of
respondent corporation refused to allow him to inspect its records
despite request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do so.
Among the documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds
of respondent corporation in San Miguel International, Inc.; and (e) lists
of salaries, allowances, bonuses, and other compensation, if any,
received by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was
opposed by respondents, alleging, among others that the motion has
no legal basis; that the demand is not based on good faith; that the
motion is premature since the materiality or relevance of the evidence
sought cannot be determined until the issues are joined, that it fails to
show good cause and constitutes continued harrasment, and that some
of the information sought are not part of the records of the corporation
and, therefore, privileged.
During the pendency of the motion for production, respondents San
Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto
filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action
taken by the Board of Directors on September 18, 1976 resulting in
the ... amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board on
March 13, 1961 and long prior thereto has never been revoked of
SMC"; that contrary to petitioner's claim, "the vote requirement for a
valid delegation of the power to amend, repeal or adopt new by-laws is
determined in relation to the total subscribed capital stock at the time
the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his
intra-corporate remedy for the nullification of the amendment, which is
to secure its repeal by vote of the stockholders representing a majority
of the subscribed capital stock at any regular or special meeting, as
provided in Article VIII, section I of the by-laws and section 22 of the
Corporation law, hence the, petition is premature; that petitioner is
estopped from questioning the amendments on the ground of lack of
authority of the Board. since he failed, to object to other amendments
made on the basis of the same 1961 authorization: that the power of
the corporation to amend its by-laws is broad, subject only to the
condition that the by-laws adopted should not be respondent
corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures
to minimize or eliminate situations where its directors might be tempted
to put their personal interests over t I hat of the corporation; that the
questioned amended by-laws is a matter of internal policy and the
judgment of the board should not be interfered with: That the by-laws,
as amended, are valid and binding and are intended to prevent the
possibility of violation of criminal and civil laws prohibiting combinations
in restraint of trade; and that the petition states no cause of action. It
was, therefore, prayed that the petition be dismissed and that petitioner
be ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various
grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their
opposition to the petition, denying the material averments thereof and
stating, as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in
business competitive to that of respondent corporation, began acquiring
shares therein. until September 1976 when its total holding amounted
to 622,987 shares: that in October 1972, the Consolidated Foods
Corporation (CFC) likewise began acquiring shares in respondent
(corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president
and controlling shareholder of Robina and CFC (both closed
corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and Robina,
"conducted malevolent and malicious publicity campaign against SMC"
to generate support from the stockholder "in his effort to secure for
himself and in representation of Robina and CFC interests, a seat in
the Board of Directors of SMC", that in the stockholders' meeting of
March 18, 1976, petitioner was rejected by the stockholders in his bid
to secure a seat in the Board of Directors on the basic issue that
petitioner was engaged in a competitive business and his securing a
seat would have subjected respondent corporation to grave
disadvantages; that "petitioner nevertheless vowed to secure a seat in
the Board of Directors at the next annual meeting; that thereafter the
Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary
damages, expenses of litigation and attorney's fees were presented
against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion
for production and inspection of documents was filed by all the
respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were
allowed to intervene as oppositors and they accordingly filed their
oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission
resolved the motion for production and inspection of documents by
issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the
petitioner and respondents in the above-entitled case, it is hereby
ordered:
1. That respondents produce and permit the inspection, copying and
photographing, by or on behalf of the petitioner-movant, John
Gokongwei, Jr., of the minutes of the stockholders' meeting of the
respondent San Miguel Corporation held on March 13, 1961, which are
in the possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues involved
in the main case. Accordingly, the respondents should allow petitioner-
movant entry in the principal office of the respondent Corporation, San
Miguel Corporation on January 14, 1977, at 9:30 o'clock in the morning
for purposes of enforcing the rights herein granted; it being understood
that the inspection, copying and photographing of the said documents
shall be undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or papers
not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as
the list of salaries, allowances, bonuses, compensation and/or
remuneration received by respondent Jose M. Soriano, Jr. and Andres
Soriano from San Miguel International, Inc. and/or its successors-in-
interest, the Petition to produce and inspect the same is hereby
DENIED, as petitioner-movant is not a stockholder of San Miguel
International, Inc. and has, therefore, no inherent right to inspect said
documents;
3. In view of the Manifestation of petitioner-movant dated November 29,
1976, withdrawing his request to copy and inspect the management
contract between San Miguel Corporation and A. Soriano Corporation
and the renewal and amendments thereof for the reason that he had
already obtained the same, the Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the
matter of production and inspection of the authority of the stockholders
of San Miguel Corporation to invest the funds of respondent corporation
in San Miguel International, Inc., until after the hearing on the merits of
the principal issues in the above-entitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its
reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be
heard, respondent corporation issued a notice of special stockholders'
meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws", setting such meeting for February 10,
1977. This prompted petitioner to ask respondent Commission for a
summary judgment insofar as the first cause of action is concerned, for
the alleged reason that by calling a special stockholders' meeting for
the aforesaid purpose, private respondents admitted the invalidity of the
amendments of September 18, 1976. The motion for summary
judgment was opposed by private respondents. Pending action on the
motion, petitioner filed an "Urgent Motion for the Issuance of a
Temporary Restraining Order", praying that pending the determination
of petitioner's application for the issuance of a preliminary injunction
and/or petitioner's motion for summary judgment, a temporary
restraining order be issued, restraining respondents from holding the
special stockholder's meeting as scheduled. This motion was duly
opposed by respondents.
On February 10, 1977, respondent Commission issued an order
denying the motion for issuance of temporary restraining order. After
receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were
ratified. On February 14, 1977, petitioner filed a consolidated motion for
contempt and for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for
summary judgment was filed by petitioner before respondent
Commission on March 10, 1977. Petitioner alleges that up to the time
of the filing of the instant petition, the said motion had not yet been
scheduled for hearing. Likewise, the motion for reconsideration of the
order granting in part and denying in part petitioner's motion for
production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent
corporation had been scheduled for May 10, 1977, petitioner filed with
respondent Commission a Manifestation stating that he intended to run
for the position of director of respondent corporation. Thereafter,
respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of respondent
corporation disqualifying and precluding petitioner from being a
candidate for director unless he could submit evidence on May 3, 1977
that he does not come within the disqualifications specified in the
amendment to the by-laws, subject matter of SEC Case No. 1375. By
reason thereof, petitioner filed a manifestation and motion to resolve
pending incidents in the case and to issue a writ of injunction, alleging
that private respondents were seeking to nullify and render ineffectual
the exercise of jurisdiction by the respondent Commission, to
petitioner's irreparable damage and prejudice, Allegedly despite a
subsequent Manifestation to prod respondent Commission to act,
petitioner was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted
inability on the part of the SEC to act hence petitioner came to this
Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent
corporation has been investing corporate funds in other corporations
and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he
filed with respondent Commission, on January 20, 1977, a petition
seeking to have private respondents Andres M. Soriano, Jr. and Jose
M. Soriano, as well as the respondent corporation declared guilty of
such violation, and ordered to account for such investments and to
answer for damages.
On February 4, 1977, motions to dismiss were filed by private
respondents, to which a consolidated motion to strike and to declare
individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions
were filed as early as February 4, 1977, the commission acted thereon
only on April 25, 1977, when it denied respondents' motion to dismiss
and gave them two (2) days within which to file their answer, and set
the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting,
including in the Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the
stockholders at the meeting on March 20, 1972 to invest corporate
funds in other companies or businesses or for purposes other than the
main purpose for which the Corporation has been organized, and
ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the
SEC an urgent motion for the issuance of a writ of preliminary
injunction to restrain private respondents from taking up Item 6 of the
Agenda at the annual stockholders' meeting, requesting that the same
be set for hearing on May 3, 1977, the date set for the second hearing
of the case on the merits. Respondent Commission, however,
cancelled the dates of hearing originally scheduled and reset the same
to May 16 and 17, 1977, or after the scheduled annual stockholders'
meeting. For the purpose of urging the Commission to act, petitioner
filed an urgent manifestation on May 3, 1977, but this notwithstanding,
no action has been taken up to the date of the filing of the instant
petition.
With respect to the afore-mentioned SEC cases, it is petitioner's
contention before this Court that respondent Commission gravely
abused its discretion when it failed to act with deliberate dispatch on
the motions of petitioner seeking to prevent illegal and/or arbitrary
impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against
petitioner, in gross derogation of petitioner's rights to property and due
process. He prayed that this Court direct respondent SEC to act on
collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order
restraining private respondents from disqualifying or preventing
petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from
causing the ratification or confirmation of Item 6 of the Agenda of the
annual stockholders' meeting on May 10, 1977, or from Making
effective the amended by-laws of respondent corporation, until further
orders from this Court or until the Securities and Ex-change
Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that
after a restraining order had been issued by this Court, or on May 9,
1977, the respondent Commission served upon petitioner copies of the
following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying
petitioner's motion for reconsideration, with its supplement, of the order
of the Commission denying in part petitioner's motion for production of
documents, petitioner's motion for reconsideration of the order denying
the issuance of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated motion to
declare respondents in contempt and to nullify the stockholders'
meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing
petitioner to run as a director of respondent corporation but stating that
he should not sit as such if elected, until such time that the Commission
has decided the validity of the bylaws in dispute, and denying
deferment of Item 6 of the Agenda for the annual stockholders'
meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying
petitioner's motion for reconsideration of the order of respondent
Commission denying petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that
respondent Commission acted with indecent haste and without
circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation
of petitioner's right to due process when it decided en banc an issue not
raised before it and still pending before one of its Commissioners, and
without hearing petitioner thereon despite petitioner's request to have
the same calendared for hearing , and (3) that the respondents acted
oppressively against the petitioner in violation of his rights as a
stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders
complained of be declared null and void and that respondent
Commission be ordered to allow petitioner to undertake discovery
proceedings relative to San Miguel International. Inc. and thereafter to
decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose
M. Soriano filed their comment, alleging that the petition is without merit
for the following reasons:
(1) that the petitioner the interest he represents are engaged in
business competitive and antagonistic to that of respondent San Miguel
Corporation, it appearing that the owns and controls a greater portion of
his SMC stock thru the Universal Robina Corporation and the
Consolidated Foods Corporation, which corporations are engaged in
business directly and substantially competing with the allied businesses
of respondent SMC and of corporations in which SMC has substantial
investments. Further, when CFC and Robina had accumulated
investments. Further, when CFC and Robina had accumulated shares
in SMC, the Board of Directors of SMC realized the clear and present
danger that competitors or antagonistic parties may be elected
directors and thereby have easy and direct access to SMC's business
and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect
respondent SMC from the clear and present danger that business
competitors, if allowed to become directors, will illegally and unfairly
utilize their direct access to its business secrets and plans for their own
private gain to the irreparable prejudice of respondent SMC, and,
ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less
that the Constitution and pertinent laws against combinations in
restraint of trade;
(3) that by laws are valid and binding since a corporation has the
inherent right and duty to preserve and protect itself by excluding
competitors and antogonistic parties, under the law of self-preservation,
and it should be allowed a wide latitude in the selection of means to
preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos.
1375 and 1423 was due to petitioner's own acts or omissions, since he
failed to have the petition to suspend, pendente lite the amended by-
laws calendared for hearing. It was emphasized that it was only on April
29, 1977 that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3, 1977. The
instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act "with deliberate dispatch",
and
(5) that, even assuming that the petition was meritorious was, it has
become moot and academic because respondent Commission has
acted on the pending incidents, complained of. It was, therefore, prayed
that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his
comment, alleging that the petition has become moot and academic for
the reason, among others that the acts of private respondent sought to
be enjoined have reference to the annual meeting of the stockholders
of respondent San Miguel Corporation, which was held on may 10,
1977; that in said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as director;
and that in the same meeting, Item 6 of the Agenda was discussed,
voted upon, ratified and confirmed. Further it was averred that the
questions and issues raised by petitioner are pending in the Securities
and Exchange Commission which has acquired jurisdiction over the
case, and no hearing on the merits has been had; hence the elevation
of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the
petition presents justiciable questions for the determination of this Court
because (1) the respondent Commission acted without circumspection,
unfairly and oppresively against petitioner, warranting the intervention
of this Court; (2) a derivative suit, such as the instant case, is not
rendered academic by the act of a majority of stockholders, such that
the discussion, ratification and confirmation of Item 6 of the Agenda of
the annual stockholders' meeting of May 10, 1977 did not render the
case moot; that the amendment to the bylaws which specifically bars
petitioner from being a director is void since it deprives him of his
vested rights.
Respondent Commission, thru the Solicitor General, filed a separate
comment, alleging that after receiving a copy of the restraining order
issued by this Court and noting that the restraining order did not
foreclose action by it, the Commission en banc issued Orders Nos.
449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that
Order No. 450 which denied deferment of Item 6 of the Agenda of the
annual stockholders' meeting of respondent corporation, took into
consideration an urgent manifestation filed with the Commission by
petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of the
corporation as well as falling within the sphere of stockholders' right to
know, deliberate upon and/or to express their wishes regarding
disposition of corporate funds considering that their investments are the
ones directly affected." It was alleged that the main petition has,
therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition
with prayer for preliminary injunction, alleging that the actuations of
respondent SEC tended to deprive him of his right to due process, and
"that all possible questions on the facts now pending before the
respondent Commission are now before this Honorable Court which
has the authority and the competence to act on them as it may see fit."
(Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for
resolution;
(1) whether or not the provisions of the amended by-laws of respondent
corporation, disqualifying a competitor from nomination or election to
the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in
denying petitioner's request for an examination of the records of San
Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and
(3) whether or not respondent SEC committed grave abuse of
discretion in allowing discussion of Item 6 of the Agenda of the Annual
Stockholders' Meeting on May 10, 1977, and the ratification of the
investment in a foreign corporation of the corporate funds, allegedly in
violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question
which public interest requires to be resolved —
It is the position of the petitioner that "it is not necessary to remand the
case to respondent SEC for an appropriate ruling on the intrinsic
validity of the amended by-laws in compliance with the principle of
exhaustion of administrative remedies", considering that: first: "whether
or not the provisions of the amended by-laws are intrinsically valid ... is
purely a legal question. There is no factual dispute as to what the
provisions are and evidence is not necessary to determine whether
such amended by-laws are valid as framed and approved ... "; second:
"it is for the interest and guidance of the public that an immediate and
final ruling on the question be made ... "; third: "petitioner was denied
due process by SEC" when "Commissioner de Guzman had openly
shown prejudice against petitioner ... ", and "Commissioner Sulit ...
approved the amended by-laws ex-parte  and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only
entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray
that this Court resolve the legal issues raised by the parties in keeping
with the "cherished rules of procedure" that "a court should always
strive to settle the entire controversy in a single proceeding leaving no
root or branch to bear the seeds of future ligiation", citing Gayong v.
Gayos. 3 To the same effect is the prayer of San Miguel Corporation
that this Court resolve on the merits the validity of its amended by laws
and the rights and obligations of the parties thereunder, otherwise "the
time spent and effort exerted by the parties concerned and, more
importantly, by this Honorable Court, would have been for naught
because the main question will come back to this Honorable Court for
final resolution." Respondent Eduardo R. Visaya submits a similar
appeal.
It is only the Solicitor General who contends that the case should be
remanded to the SEC for hearing and decision of the issues involved,
invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should
always strive to settle the entire controversy in a single proceeding,
leaving nor root or branch to bear the seeds of future litigation. 4 Thus,
in Francisco v. City of Davao, 5 this Court resolved to decide the case
on the merits instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved by the
remand of the case. In Republic v. Security Credit and Acceptance
Corporation, et al., 6 this Court, finding that the main issue is one of law,
resolved to decide the case on the merits "because public interest
demands an early disposition of the case", and in Republic v. Central
Surety and Insurance Company, 7 this Court denied remand of the
third-party complaint to the trial court for further proceedings, citing
precedent where this Court, in similar situations resolved to decide the
cases on the merits, instead of remanding them to the trial court where
(a) the ends of justice would not be subserved by the remand of the
case; or (b) where public interest demand an early disposition of the
case; or (c) where the trial court had already received all the evidence
presented by both parties and the Supreme Court is now in a position,
based upon said evidence, to decide the case on its merits. 8 It is
settled that the doctrine of primary jurisdiction has no application where
only a question of law is involved. 8a Because uniformity may be
secured through review by a single Supreme Court, questions of law
may appropriately be determined in the first instance by courts. 8b In
the case at bar, there are facts which cannot be denied, viz.: that the
amended by-laws were adopted by the Board of Directors of the San
Miguel Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation Law;
that in a special meeting on February 10, 1977 held specially for that
purpose, the amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the Hongkong
Brewery and Distellery, a beer manufacturing company in Hongkong,
was made by the San Miguel Corporation in 1948; and that in the
stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by
the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a
competitor from nomination or election to the Board of Directors of
SMC are valid and reasonable —
The validity or reasonableness of a by-law of a corporation in purely a
question of law. 9 Whether the by-law is in conflict with the law of the
land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is
subject, however, to the limitation that where the reasonableness of a
by-law is a mere matter of judgment, and one upon which reasonable
minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and
unreasonable because they were tailored to suppress the minority and
prevent them from having representation in the Board", at the same
time depriving petitioner of his "vested right" to be voted for and to vote
for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M.
Soriano and San Miguel Corporation content that ex. conclusion of a
competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and
undivided Loyalty to the corporation; that it is essentially a preventive
measure to assure stockholders of San Miguel Corporation of
reasonable protective from the unrestrained self-interest of those
charged with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in the
promotion of the interest of the competitor at the expense of the San
Miguel Corporation, or the promotion of both the interests of petitioner
and respondent San Miguel Corporation, which may, therefore, result in
a combination or agreement in violation of Article 186 of the Revised
Penal Code by destroying free competition to the detriment of the
consuming public. It is further argued that there is not vested right of
any stockholder under Philippine Law to be voted as director of a
corporation. It is alleged that petitioner, as of May 6, 1978, has
exercised, personally or thru two corporations owned or controlled by
him, control over the following shareholdings in San Miguel
Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b)
Universal Robina Corporation — 738,647 shares; (c) CFC Corporation
— 658,313 shares, or a total of 1,403,285 shares. Since the
outstanding capital stock of San Miguel Corporation, as of the present
date, is represented by 33,139,749 shares with a par value of P10.00,
the total shares owned or controlled by petitioner represents 4.2344%
of the total outstanding capital stock of San Miguel Corporation. It is
also contended that petitioner is the president and substantial
stockholder of Universal Robina Corporation and CFC Corporation,
both of which are allegedly controlled by petitioner and members of his
family. It is also claimed that both the Universal Robina Corporation
and the CFC Corporation are engaged in businesses directly and
substantially competing with the alleged businesses of San Miguel
Corporation, and of corporations in which SMC has substantial
investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S
CORPORATIONS AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of,
competition are enumerated in its Board the areas of competition are
enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition
affecting SMC involved product sales of over P400 million or more than
20% of the P2 billion total product sales of SMC. Significantly, the
combined market shares of SMC and CFC-Robina in layer pullets
dressed chicken, poultry and hog feeds ice cream, instant coffee and
woven fabrics would result in a position of such dominance as to affect
the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct
competition on product lines which, for SMC, represented sales
amounting to more than ?478 million. In addition, CFC-Robina was
directly competing in the sale of coffee with Filipro, a subsidiary of
SMC, which product line represented sales for SMC amounting to more
than P275 million. The CFC-Robina group (Robitex, excluding Litton
Mills recently acquired by petitioner) is purportedly also in direct
competition with Ramie Textile, Inc., subsidiary of SMC, in product
sales amounting to more than P95 million. The areas of competition
between SMC and CFC-Robina in 1977 represented, therefore, for
SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting
of March 18, 1976, 9,894 stockholders, in person or by proxy, owning
23,436,754 shares in SMC, or more than 90% of the total outstanding
shares of SMC, rejected petitioner's candidacy for the Board of
Directors because they "realized the grave dangers to the corporation
in the event a competitor gets a board seat in SMC." On September 18,
1978, the Board of Directors of SMC, by "virtue of powers delegated to
it by the stockholders," approved the amendment to ' he by-laws in
question. At the meeting of February 10, 1977, these amendments
were confirmed and ratified by 5,716 shareholders owning 24,283,945
shares, or more than 80% of the total outstanding shares. Only 12
shareholders, representing 7,005 shares, opposed the confirmation and
ratification. At the Annual Stockholders' Meeting of May 10, 1977,
11,349 shareholders, owning 27,257.014 shares, or more than 90% of
the outstanding shares, rejected petitioner's candidacy, while 946
stockholders, representing 1,648,801 shares voted for him. On the May
9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning
more than 30 million shares, or more than 90% of the total outstanding
shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS
OF DIRECTORS EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were
adopted by the Board of Directors of San Miguel Corporation a-, a
measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board
may cause upon the corporation and the other stockholders
inseparable prejudice. Submitted for resolution, therefore, is the issue
— whether or not respondent San Miguel Corporation could, as a
measure of self- protection, disqualify a competitor from nomination
and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the
inherent power to adopt by-laws 'for its internal government, and to
regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management
of its affairs. 12 At common law, the rule was "that the power to make
and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout
the United States that in the absence of positive legislative provisions
limiting it, every private corporation has this inherent power as one of
its necessary and inseparable legal incidents, independent of any
specific enabling provision in its charter or in general law, such power
of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications, duties and
compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director
must own in his right at least one share of the capital stock of the stock
corporation of which he is a director ... " In Government v. El
Hogar, 14 the Court sustained the validity of a provision in the corporate
by-law requiring that persons elected to the Board of Directors must be
holders of shares of the paid up value of P5,000.00, which shall be held
as security for their action, on the ground that section 21 of the
Corporation Law expressly gives the power to the corporation to
provide in its by-laws for the qualifications of directors and is "highly
prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR
Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will  of the majority
shall govern in all matters within the limits of the act of incorporation
and lawfully enacted by-laws and not forbidden by law." 15 To this
extent, therefore, the stockholder may be considered to have "parted
with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation,
and surrendered it to the will of the majority of his fellow
incorporators. ... It cannot therefore be justly said that the contract,
express or implied, between the corporation and the stockholders is
infringed ... by any act of the former which is authorized by a majority ...
." 16
Pursuant to section 18 of the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital
stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the disenting
minority has only one right, viz.: "to object thereto in writing and
demand payment for his share." Under section 22 of the same law, the
owners of the majority of the subscribed capital stock may amend or
repeal any by-law or adopt new by-laws. It cannot be said, therefore,
that petitioner has a vested right to be elected director, in the face of
the fact that the law at the time such right as stockholder was acquired
contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be considered
is whether the disqualification of a competitor from being elected to the
Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt
that their character is that of a fiduciary insofar as the corporation and
the stockholders as a body are concerned. As agents entrusted with
the management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." 18 "The ordinary trust relationship of directors of
a corporation and stockholders", according to Ashaman v. Miller, 19 "is
not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the
standard of fiduciary obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who
is in such fiduciary position cannot serve himself first and his cestuis
second. ... He cannot manipulate the affairs of his corporation to their
detriment and in disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate the ancient
precept against serving two masters ... He cannot utilize his inside
information and strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the corporation what
he could not do so directly. He cannot violate rules of fair play by doing
indirectly though the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the detriment
of the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical
requirements. For that power is at all times subject to the equitable
limitation that it may not be exercised for the aggrandizement,
preference or advantage of the fiduciary to the exclusion or detriment of
the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without
detriment to one of them. A judge cannot be impartial if personally
interested in the cause. No more can a director. Human nature is too
weak -for this. Take whatever statute provision you please giving power
to stockholders to choose directors, and in none will you find any
express prohibition against a discretion to select directors having the
company's interest at heart, and it would simply be going far to deny by
mere implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in
a competing company from being a director, the same reasoning would
apply to disqualify the wife and immediate member of the family of such
stockholder, on account of the supposed interest of the wife in her
husband's affairs, and his suppose influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested.
So it is also true that we cannot condemn as selfish and dangerous and
unreasonable the action of the board in passing the by-law. The strife
over the matter of control in this corporation as in many others is
perhaps carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or not the
action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases.23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH
RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE
BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN
COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS
BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that
corporations have the power to make by-laws declaring a person
employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24 This is based upon the
principle that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the other. Such
an amendment "advances the benefit of the corporation and is good."
An exception exists in New Jersey, where the Supreme Court held that
the Corporation Law in New Jersey prescribed the only qualification,
and therefore the corporation was not empowered to add additional
qualifications. 25 This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation
Law expressly provides that a corporation may make by-laws for the
qualifications of directors. Thus, it has been held that an officer of a
corporation cannot engage in a business in direct competition with that
of the corporation where he is a director by utilizing information he has
received as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing enterprise which
cripples or injures the business of the corporation of which he is an
officer or director. 26
It is also well established that corporate officers "are not permitted to
use their position of trust and confidence to further their private
interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered
into a new contract themselves with the foreign firm for exclusive sale
of its products, the court held that equity would regard the new contract
as an offshoot of the old contract and, therefore, for the benefit of the
corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by
the courts that the fiduciary standards could not be upheld where the
fiduciary was acting for two entities with competing interests. This
doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San
Miguel Corporation has access to sensitive and highly confidential
information, such as: (a) marketing strategies and pricing structure; (b)
budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of a
competing corporation, from taking advantage of the information which
he acquires as director to promote his individual or corporate interests
to the prejudice of San Miguel Corporation and its stockholders, that
the questioned amendment of the by-laws was made. Certainly, where
two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge
effectively his duty, to satisfy his loyalty to both corporations and place
the performance of his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego , supra the
court sustained as valid and reasonable an amendment to the by-laws
of a bank, requiring that its directors should not be directors, officers,
employees, agents, nominees or attorneys of any other banking
corporation, affiliate or subsidiary thereof. Chief Judge Parker,
in McKee,  explained the reasons of the court, thus:
... A bank director has access to a great deal of information concerning
the business and plans of a bank which would likely be injurious to the
bank if known to another bank, and it was reasonable and prudent to
enlarge this minimum disqualification to include any director, officer,
employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against
rivals and others who might acquire information which might be used
against the interests of the corporation as a legitimate object of by-law
protection. With respect to attorneys or persons associated with a firm
which is attorney for another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office discussions or
accessibility of files. Defendant's directors determined that its welfare
was best protected if this opportunity for conflicting loyalties and
potential misuse and leakage of confidential information was
foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the
courts, as follows:
(1) A director shall not be directly or indirectly interested as a
stockholder in any other firm, company, or association which competes
with the subject corporation.
(2) A director shall not be the immediate member of the family of any
stockholder in any other firm, company, or association which competes
with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or
trustee in any other firm, company, or association which compete with
the subject corporation.
(4) A director shall be of good moral character as an essential
qualification to holding office.
(5) No person who is an attorney against the corporation in a law suit is
eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human
experience — that a person cannot serve two hostile masters without
detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his
taking unfair advantage of his position as director of San Miguel
Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the
validity and reasonableness of the by-laws here involved. Apart from
the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in running for
board membership — which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would
be against all accepted principles underlying a director's duty of fidelity
to the corporation, for the policy of the law is to encourage and enforce
responsible corporate management. As explained by Oleck: 31 "The law
win not tolerate the passive attitude of directors ... without active and
conscientious participation in the managerial functions of the company.
As directors, it is their duty to control and supervise the day to day
business activities of the company or to promulgate definite policies
and rules of guidance with a vigilant eye toward seeing to it that these
policies are carried out. It is only then that directors may be said to
have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing
sensitive information with a director whose fiduciary duty of loyalty may
well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director
such as the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such situations,
the director has an economic incentive to appropriate for the benefit of
his own corporation the corporate plans and policies of the corporation
where he sits as director.
Indeed, access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel Corporation
would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the
strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to
his advantage. 32
There is another important consideration in determining whether or not
the amended by-laws are reasonable. The Constitution and the law
prohibit combinations in restraint of trade or unfair competition. Thus,
section 2 of Article XIV of the Constitution provides: "The State shall
regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition
shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. —The
penalty of prision correccional in its minimum period or a fine ranging
from two hundred to six thousand pesos, or both, shall be imposed
upon:
1. Any person who shall enter into any contract or agreement or shall
take part in any conspiracy or combination in the form of a trust or
otherwise, in restraint of trade or commerce or to prevent by artificial
means free competition in the market.
2. Any person who shag monopolize any merchandise or object of
trade or commerce, or shall combine with any other person or persons
to monopolize said merchandise or object in order to alter the price
thereof by spreading false rumors or making use of any other artifice to
restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of
any merchandise or object of commerce or an importer of any
merchandise or object of commerce from any foreign country, either as
principal or agent, wholesale or retailer, shall combine, conspire or
agree in any manner with any person likewise engaged in the
manufacture, production, processing, assembling or importation of such
merchandise or object of commerce or with any other persons not so
similarly engaged for the purpose of making transactions prejudicial to
lawful commerce, or of increasing the market price in any part of the
Philippines, or any such merchandise or object of commerce
manufactured, produced, processed, assembled in or imported into the
Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or
object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies
and combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels of
competition by improving the consumers' effectiveness as the final
arbiter in free markets. These laws are designed to preserve free and
unfettered competition as the rule of trade. "It rests on the premise that
the unrestrained interaction of competitive forces will yield the best
allocation of our economic resources, the lowest prices and the highest
quality ... ." 34 they operate to forestall concentration of economic
power. 35 The law against monopolies and combinations in restraint of
trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest
by unduly restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair
competition" appear to have a well defined meaning in other
jurisdictions. A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general sense, or to
control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised
and competition actually excluded, but that power exists to raise prices
or exclude competition when desired. 38 Further, it must be considered
that the Idea of monopoly is now understood to include a condition
produced by the mere act of individuals. Its dominant thought is the
notion of exclusiveness or unity, or the suppression of competition by
the qualification of interest or management, or it may be thru
agreement and concert of action. It is, in brief, unified tactics with
regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of
petitioner are not in accord with reality. The election of petitioner to the
Board of respondent Corporation can bring about an illegal situation.
This is because an express agreement is not necessary for the
existence of a combination or conspiracy in restraint of trade. 40 It is
enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be
considered is what the parties actually did and not the words they used.
For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such
corporations are, by virtue of their business and location of
operation, competitors so that the elimination of competition between
them would constitute violation of any provision of the anti-trust
laws. 42 There is here a statutory recognition of the anti-competitive
dangers which may arise when an individual simultaneously acts as a
director of two or more competing corporations. A common director of
two or more competing corporations would have access to confidential
sales, pricing and marketing information and would be in a position to
coordinate policies or to aid one corporation at the expense of another,
thereby stifling competition. This situation has been aptly explained by
Travers, thus:
The argument for prohibiting competing corporations from sharing even
one director is that the interlock permits the coordination of policies
between nominally independent firms to an extent that competition
between them may be completely eliminated. Indeed, if a director, for
example, is to be faithful to both corporations, some accommodation
must result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that would injure B
without violating his duty of loyalty to B at the same time he could
hardly abstain from voting without depriving A of his best judgment. If
the firms really do compete  — in the sense of vying for economic
advantage at the expense of the other —  there can hardly be any
reason for an interlock between competitors other than the suppression
of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S.
Congress on section 9 of the Clayton Act, it was established that: "By
means of the interlocking directorates one man or group of men have
been able to dominate and control a great number of corporations ... to
the detriment of the small ones dependent upon them and to the injury
of the public. 44
Shared information on cost accounting may lead to price fixing.
Certainly, shared information on production, orders, shipments,
capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost
conditions of the products of San Miguel Corporation, the essence of
competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The
competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most out
of the consumers. Where the two competing firms control a substantial
segment of the market this could lead to collusion and combination in
restraint of trade. Reason and experience point to the inevitable
conclusion that the inherent tendency of interlocking directorates
between companies that are related to each other as competitors is to
blunt the edge of rivalry between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate competition. As
respondent SMC aptly observes, knowledge by CFC-Robina of SMC's
costs in various industries and regions in the country win enable the
former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups
and change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most profitable
volume at which it could produce for every product line in which it
competes with SMC. Access to SMC pricing policy by CFC-Robina
would in effect destroy free competition and deprive the consuming
public of opportunity to buy goods of the highest possible quality at the
lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent,
engaged in agriculture, then the election of petitioner to the Board of
SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any
stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely
for investment and not for the purpose of bringing about or attempting
to bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to
prevent the candidacy of petitioner for election to the Board. If the by-
law were to be applied in the case of one stockholder but waived in the
case of another, then it could be reasonably claimed that the by-law
was being applied in a discriminatory manner. However, the by law, by
its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible
to run for director, there must be hearing and evidence must be
submitted to bring his case within the ambit of the disqualification.
Sound principles of public policy and management, therefore, support
the view that a by-law which disqualifies a competition from election to
the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide
latitude may be accorded to the corporation in adopting measures to
protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon
which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have expressed their
authority. 45
Although it is asserted that the amended by-laws confer on the present
Board powers to perpetua themselves in power such fears appear to be
misplaced. This power, but is very nature, is subject to certain well
established limitations. One of these is inherent in the very convert and
definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree, certain
characteristics essential to the business sought. It means an
independent endeavor of two or more persons to obtain the business
patronage of a third by offering more advantageous terms as an
inducement to secure trade. 46 The test must be whether the business
does in fact compete, not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristics
activity. 47 It is, therefore, obvious that not every person or entity
engaged in business of the same kind is a competitor. Such factors as
quantum and place of business, Identity of products and area of
competition should be taken into consideration. It is, therefore,
necessary to show that petitioner's business covers a substantial
portion of the same markets for similar products to the extent of not
less than 10% of respondent corporation's market for competing
products. While We here sustain the validity of the amended by-laws, it
does not follow as a necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due process,
there must be due hearing at which the petitioner must be given the
fullest opportunity to show that he is not covered by the disqualification.
As trustees of the corporation and of the stockholders, it is the
responsibility of directors to act with fairness to the
stockholders.48 Pursuant to this obligation and to remove any suspicion
that this power may be utilized by the incumbent members of the Board
to perpetuate themselves in power, any decision of the Board to
disqualify a candidate for the Board of Directors should be reviewed by
the Securities behind Exchange Commission en banc and its decision
shall be final unless reversed by this Court on certiorari. 49 Indeed, it is
a settled principle that where the action of a Board of Directors is an
abuse of discretion, or forbidden by statute, or is against public policy,
or is ultra vires, or is a fraud upon minority stockholders or creditors, or
will result in waste, dissipation or misapplication of the corporation
assets, a court of equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in
denying petitioner's request for an examination of the records of San
Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —
Respondent San Miguel Corporation stated in its memorandum that
petitioner's claim that he was denied inspection rights as stockholder of
SMC "was made in the teeth of undisputed facts that, over a specific
period, petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders
for use at the annual stockholders' meeting of May 18, 1975; (3) a copy
of the minutes of the stockholders' meeting of March 18,1976; (4) a
breakdown of SMC's P186.6 million investment in associated
companies and other companies as of December 31, 1975; (5) a listing
of the salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate officers of SMC;
(6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC;
and (7) copies of the minutes of all meetings of the Board of Directors
from January 1975 to May 1976, with deletions of sensitive data, which
deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in
writing on September 18, 1976; (1) that SMC's foreign investments are
handled by San Miguel International, Inc., incorporated in Bermuda and
wholly owned by SMC; this was SMC's first venture abroad, having
started in 1948 with an initial outlay of ?500,000.00, augmented by a
loan of Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres Soriano; (2)
that as of December 31, 1975, the estimated value of SMI would
amount to almost P400 million (3) that the total cash dividends received
by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4)
that from 1972-1975, SMI did not declare cash or stock dividends, all
earnings having been used in line with a program for the setting up of
breweries by SMI
These averments are supported by the affidavit of the Corporate
Secretary, enclosing photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation
Law, "(t)he record of all business transactions of the corporation and
minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and
records is based upon their ownership of the assets and property of the
corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable
ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him
with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. 53 In other words,
the inspection has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in character and not
inimical to the interest of the corporation. 54 In Grey v. Insular
Lumber, 55 this Court held that "the right to examine the books of the
corporation must be exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for specific and honest purpose,
and not to gratify curiosity, or for speculative or vexatious purposes.
The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into
and consider the stockholder's good faith and his purpose and motives
in seeking inspection. 56 Thus, it was held that "the right given by
statute is not absolute and may be refused when the information is not
sought in good faith or is used to the detriment of the
corporation." 57 But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is
to take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of showing
impropriety of purpose or motive. 58 It appears to be the general rule
that stockholders are entitled to full information as to the management
of the corporation and the manner of expenditure of its funds, and to
inspection to obtain such information, especially where it appears that
the company is being mismanaged or that it is being managed for the
personal benefit of officers or directors or certain of the stockholders to
the exclusion of others." 59
While the right of a stockholder to examine the books and records of a
corporation for a lawful purpose is a matter of law, the right of such
stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different
thing.
Some state courts recognize the right under certain conditions, while
others do not. Thus, it has been held that where a corporation owns
approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding
company, the legal fiction of distinct corporate entities may be
disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60 and
that a writ of mandamus, may be granted, as the records of the
subsidiary were, to all incontents and purposes, the records of the
parent even though subsidiary was not named as a party. 61 mandamus
was likewise held proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar
thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused
where the subsidiary corporation is a separate and distinct corporation
domiciled and with its books and records in another jurisdiction, and is
not legally subject to the control of the parent company, although it
owned a vast majority of the stock of the subsidiary. 63 Likewise,
inspection of the books of an allied corporation by stockholder of the
parent company which owns all the stock of the subsidiary has been
refused on the ground that the stockholder was not within the class of
"persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the
contractual right of former stockholders to inspect books and records of
the corporation included the right to inspect corporation's subsidiaries'
books and records which were in corporation's possession and control
in its office in New York."
In the Bailey  case, 66 stockholders of a corporation were held entitled to
inspect the records of a controlled subsidiary corporation which used
the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents"
before respondent SEC, petitioner contended that respondent
corporation "had been attempting to suppress information for the
stockholders" and that petitioner, "as stockholder of respondent
corporation, is entitled to copies of some documents which for some
reason or another, respondent corporation is very reluctant in revealing
to the petitioner notwithstanding the fact that no harm would be caused
thereby to the corporation." 67 There is no question that stockholders
are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the
stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly
owned by respondent San Miguel Corporation and, therefore, under its
control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to
inspect the books and records of the corporation as extending to books
and records of such wholly subsidiary which are in respondent
corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in
allowing the stockholders of respondent corporation to ratify the
investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that
respondent corporation invested corporate funds in SMI without prior
authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of allowing
ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the
stockholders for ratification is a sound corporate practice and should
not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its
funds in any other corporation or business or for any purpose other
than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-
thirds of the voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the stockholders. It
is only when the purchase of shares is done solely for investment and
not to accomplish the purpose of its incorporation that the vote of
approval of the stockholders holding shares entitling them to exercise
at least two-thirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer
manufacturing facilities by SMC was an investment in the same
business stated as its main purpose in its Articles of Incorporation,
which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel
Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong
Brewery & Distillery, Ltd.) for the manufacture and marketing of San
Miguel beer thereat. Restructuring of the investment was made in
1970-1971 thru the organization of SMI in Bermuda as a tax free
reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar
Central Co., Inc., supra, appears relevant. In said case, one of the
issues was the legality of an investment made by Manao Sugar Central
Co., Inc., without prior resolution approved by the affirmative vote of 2/3
of the stockholders' voting power, in the Philippine Fiber Processing
Co., Inc., a company engaged in the manufacture of sugar bags. The
lower court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is important to the
investing corporation and would aid it in its purpose, to require authority
of the stockholders would be to unduly curtail the power of the Board of
Directors." This Court affirmed the ruling of the court a quo on the
matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities.  — A private
corporation, in order to accomplish is purpose as stated in its articles of
incorporation, and subject to the limitations imposed by the Corporation
Law, has the power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidence of indebtedness of any
domestic or foreign corporation. Such an act, if done in pursuance of
the corporate purpose, does not need the approval of stockholders; but
when the purchase of shares of another corporation is done solely for
investment and not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary . In any case, the
purchase of such shares or securities must be subject to the limitations
established by the Corporations law; namely, (a) that no agricultural or
mining corporation shall be restricted to own not more than 15% of the
voting stock of nay agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the purpose of
bringing about a monopoly in any line of commerce of combination in
restraint of trade." The Philippine Corporation Law by Sulpicio S.
Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. — A private corporation has the
power to invest its corporate funds "in any other corporation or
business, or for any purpose other than the main purpose for which it
was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least two-
thirds of the voting power on such a propose at a stockholders' meeting
called for that purpose,' and provided further, that no agricultural or
mining corporation shall in anywise be interested in any other
agricultural or mining corporation. When the investment is necessary to
accomplish its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not necessary ."" (Id.,
p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no question that a
corporation, like an individual, may ratify and thereby render binding
upon it the originally unauthorized acts of its officers or other
agents. 70 This is true because the questioned investment is neither
contrary to law, morals, public order or public policy. It is a corporate
transaction or contract which is within the corporate powers, but which
is defective from a supported failure to observe in its execution the.
requirement of the law that the investment must be authorized by the
affirmative vote of the stockholders holding two-thirds of the voting
power. This requirement is for the benefit of the stockholders. The
stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset. "Mere ultra
vires  acts", said this Court in Pirovano, 71 "or those which are not illegal
and void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing
and marketing facilities which is apparently relevant to the corporate
purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual
meeting of May 10, 1977 cannot be construed as an admission that
respondent corporation had committed an ultra vires act, considering
the common practice of corporations of periodically submitting for the
gratification of their stockholders the acts of their directors, officers and
managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays
that petitioner be allowed to examine the books and records of San
Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San
Miguel Corporation, six (6) Justices, namely, Justices Barredo,
Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to
dismiss the petition without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if elected to
sit as director of respondent San Miguel Corporation being decided,
after a new and proper hearing by the Board of Directors of said
corporation, whose decision shall be appealable to the respondent
Securities and Exchange Commission deliberating and acting en
banc  and ultimately to this Court. Unless disqualified in the manner
herein provided, the prohibition in the afore-mentioned amended by-
laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando,
voted to declare the issue on the validity of the foreign investment of
respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the
amended by-laws, pending hearing by this Court on the applicability of
section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject
amendment to the by-laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr.,
Fernandez and Guerrero filed a separate opinion, wherein they voted
against the validity of the questioned amended bylaws and that this
question should properly be resolved first by the SEC as the agency of
primary jurisdiction. They concur in the result that petitioner may be
allowed to run for and sit as director of respondent SMC in the
scheduled May 6, 1979 election and subsequent elections until
disqualified after proper hearing by the respondent's Board of Directors
and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby
rendered GRANTING the petition by allowing petitioner to examine the
books and records of San Miguel International, Inc. as specified in the
petition. The petition, insofar as it assails the validity of the amended
by- laws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No
costs.
Detective & Protective Bureau vs. Cloribel, 26 SCRA 255 (1968)
ZALDIVAR, J.:
The complaint, in Civil Case No. 56949 of the Court of First Instance of
Manila, dated May 4, 1964, filed by Detective and Protective Bureau,
Inc., therein plaintiff (petitioner herein) against Fausto S. Alberto,
therein defendant (respondent herein), for accounting with preliminary
injunction and receivership, alleged that plaintiff was a corporation duly
organized and existing under the laws of the Philippines; that defendant
was managing director of plaintiff corporation from 1952 until January
14, 1964; that in June, 1963, defendant illegally seized and took control
of all the assets as well as the books, records, vouchers and receipts of
the corporation from the accountant-cashier, concealed them illegally
and refused to allow any member of the corporation to see and
examine the same; that on January 14, 1964, the stockholders, in a
meeting, removed defendant as managing director and elected Jose de
la Rosa in his stead; that defendant not only had refused to vacate his
office and to deliver the assets and books to Jose de la Rosa, but also
continued to perform unauthorized acts for and in behalf of plaintiff
corporation; that defendant had been required to submit a financial
statement and to render an accounting of his administration from 1952
but defendant has failed to do so; that defendant, contrary to a
resolution adopted by the Board of Directors on November 24, 1963,
had been illegally disposing of corporate funds; that defendant, unless
immediately restrained ex-parte, would continue discharging the
functions of managing director; and that it was necessary to appoint a
receiver to take charge of the assets and receive the income of the
corporation. Plaintiff prayed that a preliminary injunction ex-parte be
issued restraining defendant from exercising the functions of managing
director and from disbursing and disposing of its funds; that Jose M.
Barredo be appointed receiver; that, after judgment, the injunction be
made permanent and defendant be ordered to render an accounting.
Herein respondent Judge, the Honorable Gaudencio Cloribel, set for
hearing plaintiff's prayer for ancillary relief and required the parties to
submit their respective memoranda. On June 18, 1964, respondent
Judge granted the writ of preliminary injunction prayed for, conditioned
upon plaintiff's filing a bond of P5,000.00. Plaintiff filed the bond, but
while the same was pending approval defendant Fausto S. Alberto
filed, on July 1, 1964, a motion to admit a counter-bond for the purpose
of lifting the order granting the writ of preliminary injunction. Inspite of
the opposition filed by plaintiff, respondent Judge issued, on August 5,
1964, an order admitting the counterbond and setting aside the writ of
preliminary injunction.
On the belief that the order approving the counter-bond and lifting the
writ of preliminary injunction was contrary to law and the act of
respondent Judge constituted a grave abuse of discretion, and that
there was no plain, speedy and adequate remedy available to it,
plaintiff filed with this Court the instant petition for certiorari, praying that
a writ of preliminary injunction enjoining defendant Fausto S. Albert
from exercising the functions of managing director be issued, and that
the order dated August 5, 1964 of respondent Judge approving the
counter-bond and lifting the writ of preliminary injunction he had
previously issued be set aside and declared null and void. The Court
gave due course to the petition but did not issue a preliminary
injunction.
In his answer, now respondent Fausto S. Alberto traversed the material
allegations of the petition, justified the order complained of, and prayed
for the dismissal of the petition.
From the pleadings, it appears that the only issue to be resolved is
whether the order of respondent Judge dated August 5, 1964, admitting
and approving the counter-bond of P5,000 and setting aside the writ of
preliminary injunction granted in his order dated June 18, 164, was
issued contrary to law and with grave abuse of discretion.
Now petitioner contends that the setting aside of the order granting the
writ was contrary to law and was done with a grave abuse of discretion,
because: (1) the motion to admit defendant's counter-bond was not
supported by affidavits showing why the counter-bond should be
admitted, as required by Section 6 of Rule 58; (2) the preliminary
injunction was not issued ex-parte but after hearing, and the admission
of the counter-bond rendered said writ ineffective; (3) the writ was
granted in accordance with Rule 58 of the Rules of Court and
established precedents' (4) public interest required that the writ be not
set aside because respondent had arrogated unto himself all the
powers of petitioning corporation, to the irreparable damage of the
corporation; and that (5) the counter-bond could not compensate
petitioner's damage.
1. The first reason given by petitioner in support of its contention that
the dissolution of the writ of preliminary injunction was contrary to law is
that the motion to admit respondent's counter-bond for the dissolution
of the writ was not supported by affidavits as required by section 6 of
Rule 58 of the Rules of Court. The controverted motion, however, does
not appear in the record. However, the record shows that respondent
Alberto had filed a verified answer to the complaint and a verified
opposition to the issuance of the writ of preliminary injunction.
Regarding the necessity of verification of the motion for dissolution of a
writ of preliminary injunction, this Court has ruled that the requirement
of verification is not absolute but is dependent on the circumstances
obtaining in a particular case. In the case of Sy Sam Bio, et al. vs.
Barrios and Buyson Lampa,1 the only question raised was whether the
respondent Judge exceeded his jurisdiction and abused his discretion
in setting aside an order directing the issuance of a writ of preliminary
injunction. In maintaining the affirmative, petitioners in that case alleged
that the questioned order was issued in violation of the provisions of
Section 169 of Act 190(which is one of the sources of Sec. 6 of Rule 58
of the revised Rules of Court)inasmuch as the Judge set aside said
order and directed the dissolution of the preliminary injunction without
any formal petition of the parties and without having followed the
procedure prescribed by the statute. There was, however, a verbal
application for the dissolution of the writ, based upon the ground of the
in suficiency of the complaint which was the basis of the application for
the issuance of said writ of preliminary injunction. This Court said:
Section 169 of Act 1909 does not prescribe the manner of filing the
application to annul or modify a writ of preliminary injunction. It simply
states that if a temporary injunction be granted without notice, the
defendant, at any time before trial, may apply, upon reasonable notice
to the adverse party, to the judge who granted the injunction, or to the
judge of the court of which the action was brought, to dissolve or modify
the same.
On the strength of the decision in the above-cited case, this Court
in Caluya, et al. vs. Ramos, et al.,2 said;
Petitioners' criticism that the motion to dissolve filed by the defendants
in Civil Case No. 4634 was not verified, is also groundless inasmuch as
even an indirect verbal application for the dissolution of an ex
parte order of preliminary injunction has been held to be a sufficient
compliance with the provisions of Section 6 of Rule 60 (Moran,
Comments on the Rules of Court, Second Edition, Vol. II, p. 65, citing
the case of Sy Yam Bio v. Barrios, etc., 63 Phil. 206), the obvious
reason being that said rule does not prescribe the form by which an
application for the dissolution or modification of an order of preliminary
injunction should be presented.
If according to the above rulings, Section 6 of Rule 60 (now sec. 6,
Rule 58) of the Rules of Court did not require any form for the
application for the dissolution of the writ of preliminary injunction, then
respondent Fausto Alberto's motion to lift the preliminary injunction in
the court below need not be verified, and much less must the motion be
supported by affidavits, as urged by petitioner.
However, in Canlas, et al. vs. Aquino, et al .,3 this Court ruled that a
motion for the dissolution of a writ of preliminary injunction should be
verified. In that case, respondent Tayag filed an unverified motion for
the dissolution of a writ of preliminary injunction, alleging that the same
"would work great damage to the defendant who had already spend a
considerable sum of money" and that petitioners "can be fully
compensated for any damages that they may suffer." The court granted
the motion and dissolved the preliminary injunction. In an original action
for a writ of certiorari filed with this Court to annual said order, this
Court remarked in part:
Petitioners herein are entitled to the writ prayed for. The motion of
respondent Tayag for the dissolution of the writ of preliminary injunction
issued on October 22, 1959, was unverified....
From the precedents quoted above, as well as from the terminology of
Section 6 of Rule 58 of the new Rules of Court, it is evident that
whether the application for the dissolution of the writ of preliminary
injunction must be verified or not depends upon the ground upon which
such application is based. If the application is based on the
insufficiency of the complaint, the motion need not be verified. If the
motion is based on the ground that the injunction would cause great
damage to defendant while the plaintiff can be fully compensated for
such damages as he may suffer, the motion should be verified.
In the instant case, it is alleged by petitioner that the motion for the
dissolution of the writ of preliminary injunction was not verified. This
allegation was not denied in the answer. But because said motion does
not appear in the record of the case now before this Court, We cannot
determine what are the grounds for the dissolution that are alleged
therein, and so We cannot rule on whether the motion should have
been verified or not. This Court, therefore, has to rely on the order of
respondent Judge, dated August 5, 1964, which states that "the filing of
the counter-bond is in accordance with law." Consequently, the first
ground alleged by petitioner must be brushed aside.
2. The second and third reasons alleged by petitioner in its petition for
certiorari assume that a preliminary injunction issued after hearing and
in accordance with Rule 58 cannot be set aside. This contention is
untenable. The provision of Section 6 of Rule 58 that "the injunction
may be refused, or, if granted ex parte, may be dissolved" can not be
construed as putting beyond the reach of the court the dissolution of an
injunction which was granted after hearing. The reason is because a
writ of preliminary injunction is an interlocutory order, and as such it is
always under the control of the court before final judgment. Thus,
in Caluya, et al. vs. Ramos, et al.,4 this Court said:
The first contention of the petitioners is that, as said injunction was
issued after a hearing, the same cannot be dissolved, specially on the
strength of an unverified motion for dissolution and in the absence to
support it. Reliance is placed on Section 6 of Rule 60 of the Rules of
Court which provides that "the injunction may be reduced, or, if
granted ex parte, maybe dissolved," thereby arguing that if an
injunction is not issued ex parte the same cannot be dissolved. The
contention is clearly erroneous. Although said section prescribes the
grounds for objecting to, or for moving the dissolution of, a preliminary
injunction prior to its issuance or after its granting ex parte, it does not
thereby outlaw a dissolution if the injunction has been issued after a
hearing. This is to be so, because a writ of preliminary injunction is an
interlocutory order which is always under the control of the court before
final judgment. (Manila Electric Company vs. Artiaga and Green, 50
Phil. 144, 147).
This Court has also ruled that the dissolution of a writ of preliminary
injunction issued after hearing, even if the dissolution is ordered without
giving the other party an opportunity to be heard, does not constitute an
abuse of discretion and may be cured not by certiorari but by appeal.
In Clarke vs. Philippine Ready Mix Concrete Co., Inc., et al .,5 one of the
issues presented was whether a writ of preliminary injunction granted
the plaintiff by a trial court after hearing, might be dissolved upon an ex
parte application by the defendant, and this Court ruled that:
The action of a trial court in dissolving a writ of preliminary injunction
already issued after hearing, without giving petitioner an opportunity to
be heard, does not constitute lack or excess of jurisdiction or an abuse
of discretion, and any irregularity committed by the trial court on this
score may be cured not by certiorari but by appeal.
3. The fourth reason alleged by petitioner in support of its stand is that
public interest demanded that the writ enjoining respondent Fausto
Alberto from exercising the functions of managing director be
maintained. Petitioner contended that respondent Alberto had
arrogated to himself the power of the Board of Directors of the
corporation because he refused to vacate the office and surrender the
same to Jose de la Rosa who had been elected managing director by
the Board to succeed him. This assertion, however, was disputed by
respondent Alberto who stated that Jose de la Rosa could not be
elected managing director because he did not own any stock in the
corporation.
There is in the record no showing that Jose de la Rosa owned a share
of stock in the corporation. If he did not own any share of stock,
certainly he could not be a director pursuant to the mandatory provision
of Section 30 of the Corporation Law, which in part provides:
There is in the record no showing that Jose de la Rosa owned a share
of stock in the corporation. If he did not own any share of stock,
certainly he could not be a director pursuant to the mandatory provision
of Section 30 of the Corporation Law, which in part provides:
Sec. 30. Every director must own in his own right at least one share of
the capital stock of the stock corporation of which he is a director,
which stock shall stand in his name on the books of the corporations....
If he could not be a director, he could also not be a managing director
of the corporation, pursuant to Article V, Section 3 of the By-Laws of
the Corporation which provides that:
The manager shall be elected by the Board of Directors from among its
members.... (Record, p. 48)
If the managing director-elect was not qualified to become managing
director, respondent Fausto Alberto could not be compelled to vacate
his office and cede the same to the managing director-elect because
the by-laws of the corporation provides in Article IV, Section 1 that
"Directors shall serve until the election and qualification of their duly
qualified successor."
4. The fifth reason alleged by herein petitioner in support of its
contention that respondent Judge gravely abused his discretion when
he lifted the preliminary injunction upon the filing of the counter-bond
was that said counter-bond could not compensate for the irreparable
damage that the corporation would suffer by reason of the continuance
of respondent Fausto Alberto as managing director of the corporation.
Respondent Alberto, on the contrary, contended that he really was the
owner of the controlling interest in the business carried on the name of
the petitioner, having invested therein a total of P57,727.29 as against
the sum of P4,000 only invested by one other director, Jose M.
Barredo. We find that there was a question as to who own the
controlling interest in the corporation. Where ownership is in dispute,
the party in control or possession of the disputed interest is presumed
to have the better right until the contrary is adjudged, and hence that
party should not be deprived of the control or possession until the court
is prepared to adjudicate the controverted right in favor of the other
party.6
Should it be the truth that respondent Alberto is the controlling
stockholder, then the damages said respondent would suffer would be
the same, if not more, as the damages that the corporation would suffer
if the injunction were maintained. If the bond of P5,000 filed by
petitioner for the injunction would be sufficient to answer for the
damages that would be suffered by respondent Alberto by reason of
the injunction, there seems to be no reason why the same amount
would not be sufficient to answer for the damages that might be
suffered by the petitioning corporation by reason of the lifting of the
injunction. The following ruling of this Court has a persuasive
application in this case:
The rule that a court should not, by means of a preliminary injunction,
transfer property in litigation from the possession of one party to
another is more particularly applicable where the legal title is in dispute
and the party having possession asserts ownership in himself.7
Let it be stated, in relation to all the reason given by petitioner, that it is
a settled rule that the issuance of the writ of preliminary injunction as an
ancillary or preventive remedy to secure the rights of a party in a
pending case is entirely within the discretion of the court taking
cognizance of the case — the only limitation being that this discretion
should be exercised based upon the grounds and in the manner
provided by law,8 and it is equally well settled that a wide latitude is
given under Section 7 of Rule 58 of the Rules of Court to the trial court
to modify or dissolve the injunction as justice may require. The court
which is to exercise that discretion is the trial court, not the appellate
court.9 The exercise of sound judicial discretion by the lower court in
injunctive matters should not be interfered with except in cases of
manifest abuse.10 In the instant case, We find that petitioner failed to
show manifest abuse of discretion by respondent Judge in setting aside
the writ of preliminary injunction.
There is, however, one vital reason why the instant petition for certiorari
should be denied. And it is, that from the order dissolving the writ of
preliminary injunction, the petitioner has gone directly to this Court
without giving the respondent Judge (or trial court) a chance or
opportunity to correct his error, if any, in an appropriate motion for
reconsideration. An omission to comply with this procedural
requirement justifies a denial of the writ applied for.11
The instant case is not one of the exceptions in the application of this
rule, which are: where the questions of jurisdiction has been squarely
raised, argued before, submitted to, and met and decided by the
respondent court; where the questioned order is a patent nullity; and
where there is a deprivation of the petitioner's fundamental right to due
process.12
It being our considered view that respondent Judge had not committed
grave abuse of discretion in issuing the order dated August 5, 1964
lifting the writ of preliminary injunction which had previously been
granted in the order dated June 18, 1964, and the herein petition for
certiorari having been filed without previously complying with a well
settled procedural requirement, there is no alternative for this Court but
to order its dismissal.
WHEREFORE, the instant petition for certiorari with preliminary
injunction is dismissed, with costs againsts the petitioner. It is so
ordered.
______________________________________
b. Election of Directors or Trustees
Directors (Sections 23 and 25 of the RCC)
Grace Christian HS vs. CA, GR No. 108905, [23 October 1997]
The question for decision in this case is the right of petitioner’s
representative to sit in the board of directors of respondent Grace
Village Association, Inc. as a permanent member thereof. 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 "reexamining" (actually,
reconsidering) the right of petitioner’s representative to continue as an
unelected member of the board. 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. Its action was dismissed by the hearing officer whose
decision was subsequently affirmed by the appeals board. Petitioner
appealed to the Court of Appeals, which in turn upheld the decision of
the HIGC’s appeals board. Hence this petition for review based on the
following contentions:
1. The Petitioner herein has already acquired a vested right to a
permanent seat in the Board of Directors of Grace Village Association;
2. The amended By-laws of the Association drafted and promulgated
by a Committee on December 20, 1975 is valid and binding; and
3. The Practice of tolerating the automatic inclusion of petitioner as a
permanent member of the Board of Directors of the Association without
the benefit of election is allowed under the law. 1
Briefly stated, the facts are as follows:
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.
As adopted in 1968, the by-laws of the association provided in Article
IV, as follows
The annual meeting of the members of the Association shall be held on
the first Sunday of January in each calendar year at the principal office
of the Association at 2:00 P.M. where they shall elect by plurality vote
and by secret balloting, the Board of Directors, composed of eleven
(11) members to serve for one year until their successors are duly
elected and have qualified. 2
It appears, that on December 20, 1975, a committee of the board of
directors prepared a draft of an amendment to the by-laws, reading as
follows: 3
VI. ANNUAL MEETING
The Annual Meeting of the members of the Association shall be held on
the second Thursday of January of each year. Each Charter or
Associate Member of the Association is entitled to vote. He shall be
entitled to as many votes as he has acquired thru his monthly
membership fees only computed on a ratio of TEN (P10.00) PESOS for
one vote.
The Charter and Associate Members shall elect the Directors of the
Association. The candidates receiving the first fourteen (14) highest
number of votes shall be declared and proclaimed elected until their
successors are elected and qualified. GRACE CHRISTIAN HIGH
SCHOOL representative is a permanent Director of the ASSOCIATION.
This draft 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." 4 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.
Petitioner requested the chairman of the election committee to change
the notice of election by following the procedure in previous elections,
claiming that the notice issued for the 1990 elections ran "counter to the
practice in previous years" and was "in violation of the by-laws (of
1975)" and "unlawfully deprive[d] Grace Christian High School of its
vested right [to] a permanent seat in the board." 5
As the association denied its request, the school brought suit for
mandamus in the Home Insurance and Guaranty Corporation to
compel the board of directors of the association to recognize its right to
a permanent seat in the board. Petitioner based its claim on the
following portion of the proposed amendment which, it contended, had
become part of the by-laws of the association as Article VI, paragraph
2, thereof:
The Charter and Associate Members shall elect the Directors of the
Association. The candidates receiving the first fourteen (14) highest
number of votes shall be declared and proclaimed elected until their
successors are elected and qualified. GRACE CHRISTIAN HIGH
SCHOOL representative is a permanent Director of the ASSOCIATION.
It appears that the opinion of the Securities and Exchange Commission
on the validity of this provision was sought by the association and that
in reply to the query, the 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).
Private respondent association cited the SEC opinion in its answer.
Additionally, the association contended that the basis of the petition for
mandamus was merely "a proposed by-laws which has not yet been
approved by competent authority nor registered with the SEC or HIGC."
It argued that "the by-laws which was registered with the SEC on
January 16, 1969 should be the prevailing by-laws of the association
and not the proposed amended by-laws."
In reply, petitioner maintained that the "amended by-laws is valid and
binding" and that the association was estopped from questioning the
by-laws.
A preliminary conference was held on March 29, 1990 but nothing
substantial was agreed upon. The parties merely agreed that the board
of directors of the association should meet on April 17, 1990 and April
24, 1990 for the purpose of discussing the amendment of the by-laws
and a possible amicable settlement of the case. A meeting was held on
April 17, 1990, but the parties failed to reach an agreement. Instead,
the board adopted a resolution declaring the 1975 provision null and
void for lack of approval by members of the association and the 1968
by-laws to be effective.
On June 20, 1990, the hearing officer of the HIGC 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." 8
The appeals board of the HIGC affirmed the decision of the hearing
officer in its resolution dated September 13, 1990. It cited the opinion of
the SEC based on §92 of the Corporation Code which reads:
§92. Election and term of trustees. — Unless otherwise provided in the
articles of incorporation or the by-laws, the board of trustees of non-
stock corporations, which may be more than fifteen (15) in number as
may be fixed in their articles of incorporation or by-laws, shall, as soon
as organized, so classify themselves that the term of office of one-third
(1/3) of the number shall expire every year; and subsequent elections
of trustees comprising one-third (1/3) of the board of trustees shall be
held annually and trustees so elected shall have a term of three (3)
years. Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired
period.
The HIGC appeals board denied claims that the school" [was] being
deprived of its right to be a member of the Board of Directors of
respondent association," because the fact was that "it may nominate as
many representatives to the Association’s Board as it may deem
appropriate." It said that "what is merely being upheld is the act of the
incumbent directors of the Board of correcting a long standing practice
which is not anchored upon any legal basis." 9
Petitioner appealed to the Court of Appeals but petitioner again lost as
the appellate court on February 9, 1993, affirmed the decision of the
HIGC. The Court of Appeals 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. Article
XIX of the by-laws provides: 10
The members of the Association by an affirmative vote of the majority
at any regular or special meeting called for the purpose, may alter,
amend, change or adopt any new by-laws.
This provision of the by-laws actually implements §22 of the
Corporation Law (Act No. 1459) which provides:
§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. Petitioner contends:
Considering, therefore, that the "agents" or committee were duly
authorized to draft the amended by-laws and the acts done by the
"agents" were in accordance with such authority, the acts of the
"agents" from the very beginning were lawful and binding on the
homeowners (the principals) per se without need of any ratification or
adoption. The more has the amended by-laws become binding on the
homeowners when the homeowners followed and implemented the
provisions of the amended by-laws. This is not merely tantamount to
tacit ratification of the acts done by duly authorized "agents" but
express approval and confirmation of what the "agents" did pursuant to
the authority granted to them.
Corollarily, petitioner claims that it has acquired a vested right to a
permanent seat in the board. Says petitioner:
The right of the petitioner to an automatic membership in the board of
the Association was granted by the members of the Association
themselves and this grant has been implemented by members of the
board themselves all through the years. Outside the present
membership of the board, not a single member of the Association has
registered any desire to remove the right of herein petitioner to an
automatic membership in the board. If there is anybody who has the
right to take away such right of the petitioner, it would be the individual
members of the Association through a referendum and not the present
board some of the members of which are motivated by personal
interest.
Petitioner disputes the ruling that the provision in question, giving
petitioner’s representative a permanent seat in the board of the
association, is contrary to law. Petitioner claims that that is not so
because there is really no provision of law prohibiting unelected
members of boards of directors of corporations. Referring to §92 of the
present Corporation Code, petitioner says:
It is clear that the above provision of the Corporation Code only
provides for the manner of election of the members of the board of
trustees of non-stock corporations which may be more than fifteen in
number and which manner of election is even subject to what is
provided in the articles of incorporation or by-laws of the association
thus showing that the above provisions [are] not even mandatory.
Even a careful perusal of the above provision 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.
x       x       x
If fact, the truth is that this is allowed and is being practiced by some
corporations duly organized and existing under the laws of the
Philippines.
One example is the Pius XII Catholic Center, Inc. Under the by-laws of
this corporation, that whoever is the Archbishop of Manila is considered
a member of the board of trustees without benefit of election. And not
only that. He also automatically sits as the Chairman of the Board of
Trustees, again without need of any election.
Another concrete example is the Cardinal Santos Memorial Hospital,
Inc. It is also provided in the by-laws of this corporation that whoever is
the Archbishop of Manila is considered a member of the board of
trustees year after year without benefit of any election and he also sits
automatically as the Chairman of the Board of Trustees.
It is actually §§28 and 29 of the Corporation Law — not §92 of the
present law or §29 of the former one — which require members of the
boards of directors of corporations to be elected. These provisions
read:
§28. Unless otherwise provided in this Act, the corporate powers of all
corporations formed under this Act shall be exercised, all business
conducted and all property of such corporations controlled and held by
a board of not less than five nor more than eleven directors to be
elected from among the holders of stock or, where there is no stock,
from the members of the corporation: Provided, however, That in
corporations, other than banks, in which the United States has or may
have a vested interest, pursuant to the powers granted or delegated by
the Trading with the Enemy Act, as amended, and similar Acts of
Congress of the United States relating to the same subject, or by
Executive Order No. 9095 of the President of the United States, as
heretofore or hereafter amended, or both, the directors need not be
elected from among the holders of the stock, or, where there is no
stock from the members of the corporation. (emphasis added)
§29. At the meeting for the adoption of the original by-laws, or at such
subsequent meeting as may be then determined, directors shall be
elected to hold their offices for one year and until their successors are
elected and qualified. Thereafter the directors of the corporation shall
be elected annually by the stockholders if it be a stock corporation or by
the members if it be a nonstock corporation, and if no provision is made
in the by-laws for the time of election the same shall be held on the first
Tuesday after the first Monday in January. Unless otherwise provided
in the by-laws, two weeks’ notice of the election of directors must be
given by publication in some newspaper of general circulation devoted
to the publication of general news at the place where the principal office
of the corporation is established or located, and by written notice
deposited in the post-office, postage pre-paid, addressed to each
stockholder, or, if there be no stockholders, then to each member, at
his last known place of residence. If there be no newspaper published
at the place where the principal office of the corporation is established
or located, a notice of the election of directors shall be posted for a
period of three weeks immediately preceding the election in at least
three public places, in the place where the principal office of the
corporation is established or located. (Emphasis added)
The present Corporation Code (B.P. Blg. 68), which took effect on May
1, 1980, 12 similarly provides:
§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. (Emphasis added)
These 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. 13
It is probable that, in allowing petitioner’s representative to sit on the
board, the members of the association were not aware that this was
contrary to law. It should be noted that they did not actually implement
the provision in question except perhaps insofar as it increased the
number of directors from 11 to 15, but certainly not the allowance of
petitioner’s representative as an unelected member of the board of
directors. 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. Even less tenable is petitioner’s
claim that its right is "coterminus with the existence of the association."
Finally, petitioner questions the authority of the SEC to render an
opinion on the validity of the provision in question. It contends that
jurisdiction over this case is exclusively vested in the HIGC.
But this case was not decided by the SEC but by the HIGC. The HIGC
merely cited as authority for its ruling the opinion of the SEC chairman.
The HIGC could have cited any other authority for the view that under
the law members of the board of directors of a corporation must be
elected and it would be none the worse for doing so.
Trustees (Section 91 of the RCC)
c. Cumulative Voting (Villianueva, Philippine Corporate Law)
1. Cole Formula
2. Glassner Formula
3. D’Hondt Remainders Table
d. Vacancy in the board (Section 28 of the RCC)
e. Term of office; Hold-Over Principle (Section 22 of the RCC)
Ponce vs. Encarnacion, 94 PHIL 81 (1953)
PADILLA, J.:
This is a petition for a writ of certiorari  to annul an order of the
respondent court granting Potenciano Gapol authority, pursuant to
section 26, Act No. 1459, otherwise known as the Corporation Law, to
call a meeting of the stockholders of the Dagunoy Enterprises, Inc. and
to preside at such meeting by giving proper notice to the stockholders,
as required by law or by laws of the corporation, until after the majority
of the stockholders present and qualified to vote shall have chosen one
of them to act as presiding officer of the meeting; another order denying
a motion of the petitioners to have the previous order set aside; and a
third order denying a motion to the same effect as the one previously
filed.
The petitioners aver that the Daguhoy Enterprises, Inc., was duly
registered as such on 24 June 1948; that on 16 April 1951 at a meeting
duly called, the voluntary dissolution of the corporation and the
appointment of Potenciano Gapol as receiver were agreed upon and to
that end a petitioner Domingo Ponce; that instead of filing the petition
for voluntary dissolution of the of the corporation as agreed upon, the
respondent Potenciano Gapol, who is the largest stockholder, charged
his mind and filed a complaint in the Court of First Instance of Manila
(civil No. 13753) to compel the petitioners to render an accounting of
the funds and assets of the corporation, to reimburse it, jointly and
severally, in the sum of P4,500, the purchase price of a parcel of land
acquired by the corporation; P6,190 loaned to the wife of petitioner
Domingo Ponce; and P8,000 spent by the latter in his trip to the United
States, or a total sum of P18,690, plus interest, or such sum as may be
found after the accounting shall have been rendered to have been
misspent, misapplied, missappropriated and converted by the petitioner
Domingo Ponce to his own use and benefit; that on 18 May 1951 the
plaintiff in that case, the respondent Potenciano Gapol in this case, filed
a motion praying that the petitioners be removed as members of the
board of directors which was denied by the court; that on 3 January
1952 respondent Potenciano Gapol filed a petition (civil No. 15445,
Exhibit L), praying for an order directing him to a call a meeting of the
stockholders of the corporation and to preside at such meeting in
accordance with section 26 of the Corporation law; that two days later,
without notice to the petitioners and to the other members of the board
of directors and in violation of the Rules of Court which require that the
adverse parties be notified of the hearing of the motion three days in
advance, the respondent court issued the order as prayed for (Exhibit
M); that the petitioners learned only of this order of the court on 27
February, when the Bank of America refused to recognize the new
board of directors elected at such meeting and returned the checks
drawn upon it by the said board of directors; that the election of Juanito
R. Tianzon as member of the board of directors of the corporation he
must be a member of the Legionarios del Trabajo, as required and
provided for in article 7 of the by-laws of the corporation; that on 5
March the petitioners filed a petition in the respondent court to have the
order of 5 January set aside but on April, the date set for the hearing of
the petition, as the respondent judge was on leave vacation judge
directed its transfer to the branch of the respondent judge; that without
having set the motion for hearing, the respondent court denied the
motion of 5 March in its order of 7 May; that on 14 May the petitioners
filed another motion inviting the attention of the respondent court to the
irregularity and illegality of its procedure and setting the motion for
hearing on 21 May, but the court denied the motion by its order of 13
June.
The only question to determine in this case is whether under and
pursuant to section 26 of Act No. 1459, known as the Corporation law,
the respondent court may issue the order complained of. Said section
provides: —
Whenever, from any cause, there is no person authorized to call a
meeting, or when the officer authorized to do so refuses, fails or
neglects to call a meeting, any judge of a Court of First Instance on the
showing of good cause therefor, may issue an order to any stockholder
or member of a corporation, directing him to call a meeting of the
corporation by giving the proper notice required by this Act or by-laws;
and if there be no person legally authorized to preside at such meeting,
the judge of the Court of First Instance may direct the person calling the
meeting to preside at the same until a majority of the members or
stockholders representing a majority of the stock members or
stockholders presenting a majority of the stock present and permitted
by law to be voted have chosen one of their number to act as presiding
officer for the purposes of the meeting.
On the showing of good cause therefor, the court may authorize a
stockholder to call a meeting and to preside threat until the majority
stockholders representing a majority strockholders representing a
majority of the stock present and permitted to be voted shall have
chosen one among them to preside it. And this showing of good cause
therefor exists when the court is apprised of the fact that the by-laws of
the corporation require the calling of a general meeting of the
stockholders to elect the board of directors but call for such meeting
has not been done.
Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides:
The Board of Directors shall compose of five (5) members who shall be
elected by the stockholders in a general meeting called for that purpose
which shall be held every even year during the month of January.
Article 20 of the by-laws in part provides:
. . . Regular general meetings are those which shall be called for every
even year, . . . .
The requirement that "on the showing of good cause therefor," the court
may grant to a stockholder the authority to call such meeting and to
preside thereat does not mean that the petition must be set for hearing
with notice served upon the board of directors. The respondent court
was satisfied that there was a showing of good cause for authorizing
the respondent Potenciano Gapol to call a meeting of the stockholders
for the purpose of electing the board of directors as required and
provided for in the by-laws, because the chairman of the board of
directors called upon to do so had failed, neglected, or refused to
perform his duty. It may be likened to a writ of preliminary injunction or
of attachment which may be issued ex-parte  upon compliance with the
requirements of the rules and upon the court being satisfied that the
same should be issue. Such provisional reliefs have not been deemed
and held as violative of the due process of law clause of the
Constitution.
In several state of the Union1 the remedy which may be availed of our
resorted to in a situation such as the one brought about in this case is
mandamus to compel the officer or incumbent board of directors to
perform a duties specifically enjoined by law or by-laws, to wit: to call a
meeting of the stockholders. Dela ware is the estate that has a law
similar to ours and there the chancellor of a chancery court may
summarily issue or enter an order authorizing a stockholder to call a
meeting of the stockholders of the corporation and preside thereat. 2 It
means that the chancellor may issue such order without notice and
hearing.
That the relief granted by the respondent court lies within its jurisdiction
is not disputed. Having the authority to grant the relief, the respondent
court did not exceed its jurisdiction; nor did it abuse its discretion in
granting it.
With persistency petitioners claim that they have been deprived of their
right without due process of law. They had no right to continue as
directors of the corporation unless reflected by the stockholders in a
meeting called for that purpose every even year. They had no right to a
hold-over brought about by the failure to perform the duty incumbent
upon one of them. If they felt that they were sure to be reelected, why
did they fail, neglect, or refuse to call the meeting to elect the members
of the board? Or, why did they not seek their reelection at the meeting
called to elect the directors pursuant to the order of the respondent
court.
The alleged illegality of the election of one member of the board of
directors at the meeting called by the respondent Potenciano Gapol as
authorized by the court being subsequent to the order complained of
cannot affect the validity and legality of the order. If it be true that one
of the directors elected at the meting called by the respondent
Potenciano Gapol, as authorized by the order of the court complained
of, was not qualified in accordance with the provisions of the by-laws,
the remedy of an aggrieved party would be quo a warranto. Also, the
alleged previous agreement to dissolve the corporation does not affect
or render illegal the order issued by the respondent court.
The petition is denied, with costs against the petitioners.
f. Removal of directors or trustees (Section 27 of the RCC)
Roxas vs. Dela Rosa, 49 PHIL 609 (1926)
STREET, J.:
This is an original petition for the writ of certiorari  whereby the
petitioners, Baldomeo Roxas, Enrique Echaus, and Roman J. Lacson,
seek to procure the abrogation of an order of the respondent judge
granting a preliminary injunction in an action in the Court of First
Instance of Occidental Negros, instituted by Agustin Coruna and Mauro
Ledesma against the petitioners and the Binalbagan Estate, Inc. The
cause is now before us upon the issues made by the answers filed by
the respondents.
It appears that the Binalbagan Estate, Inc., is a corporation having its
principal plant in Occidental Negros where it is engaged in the
manufacture of raw sugar from canes grown upon farms accessible to
its central. In July, 1924, the possessors of a majority of the shares of
the Binalbagan Estate, Inc., formed a voting trust composed of three
members, namely, Salvador Laguna, Segunda Monteblanco, and
Arthur F. Fisher, as trustee. By the document constituting this voting
trust the trustees were authorized to represent and vote the shares
pertaining to their constituents, and to this end the shareholders
undertook to assign their shares to the trustees on the books of the
company. The total number of outstanding shares of the corporation is
somewhat over 5,500, while the number of shares controlled by the
voting trust is less than 3,000.
On February 1, 1926, the general annual meeting of the shareholders
of the Binalbagan Estate, Inc., took place, at which Mr. J. P. Heilbronn
appeared as representative of the voting trust, his authority being
recognized by the holders of all the other shares present at this
meeting. Upon said occasion Heilbronn, by virtue of controlling the
majority of the shares, was able to nominate and elect a board of
directors to his own liking, without opposition from the minority. After
the board of directors had been thus elected and had qualified, they
chose a set of officers constituting of Jose M. Yusay, president,
Timoteo Unson, vice-president, Jose G. Montalvo, secretary-treasurer,
and H. W. Corp and Agustin Coruna, as members. Said officials
immediately entered upon the discharged of their duties and have
continued in possession of their respective offices until the present
time.
Since the creation of the voting trust there have been a number of
vacancies caused by resignation or the absence of members from the
Philippine Islands, with the result that various substitutions have been
made in the personnel of the voting trust. At the present time the
petitioners Roxas, Echaus, and Lacson presumably constitute its
membership. We say presumably, because in the present proceedings
an issue of fact is made by the respondents upon the point whether the
three individuals named have been regularly substituted for their
several predecessors. In the view we take of the case it is not
necessary to determine this issue; and we shall assume provisionally
that the three petitioners are the lawful components of the voting trust.
Although the present officers of the Binalbagan Estate, Inc., were
elected by the representative of the voting trust, the present trustee are
apparently desirous of ousting said officers, without awaiting the
termination of their official terms at the expiration of one year from the
date of their election. In other to effect this purpose the petitioners in
their character as members of the voting trust, on August 2, 1926,
caused the secretary of the Binalbagan Estate, Inc., to issue to the
shareholders a notice calling for a special general meeting of
shareholders to be held at 10 a. m., on August 16, 1926, "for the
election of the board of directors, for the amendment of the By-Laws,
and for any other business that can be dealt with in said meeting."
Within a few days after said notice was issued Agustin Coruña, as
member of the existing board, and Mauro Ledesma, as a simple
shareholder of the corporation, instituted a civil action (No. 3840) in the
Court of First Instance of Occidental Negros against the trustees and
the Binalbagan Estate, Inc., for the purpose of enjoining the meeting
completed in the notice above-mentioned.
In response to a proper for a preliminary injunction, in connection with
said action, the respondent judge issued the restraining order, or
preliminary injunction, which gave rise to the present petition for the writ
of certiorari. In the dispositive part of said order the Binalbagan Estate,
Inc., its lawyers, agents, representatives, and all others who may be
assisting or corroborating with them, are restrained from holding the
general shareholders' meeting called for the date mentioned and from
electing new directors for the company in substitution of the present
incumbents, said injunction to be effective until further order of the
court. it is now asserted here by the petitioners that the making of this
order was beyond the legitimate powers of the respondent judge, and it
is accordingly prayed that said order be set aside.
We are of the opinion that this contention is untenable and that the
respondent judge acted within his legitimate powers in making the
order against which relief is sought. In order to expose the true
inwardness of the situation before us it is necessary to take not of the
fact that under the law the directors of a corporation can only be
removed from office by a vote of the stockholders representing at least
two-thirds of the subscribed capital stock entitled to vote (Act No. 1459,
sec. 34); while vacancies in the board, when they exist, can be filled by
mere majority vote, (Act No. 1459, sec. 25). Moreover, the law requires
that when action is to be taken at a special meeting to remove the
directors, such purpose shall be indicated in the call (Act No. 1459, sec.
34).
Now, upon examining into the number of shares controlled by the
voting trust, it will be seen that, while the trust controls a majority of the
stock, it does not have a clear two-thirds majority. It was therefore
impolitic for the petitioners, in forcing the call for the meeting of August
16, to come out frankly and say in the notice that one of the purpose of
the meeting was to removed the directors of the corporation from office.
Instead, the call was limited to the election of the board of directors, it
being the evident intention of the voting trust to elect a new board as if
the directorate had been then vacant.
But the complaint in civil No. 3840 directly asserts that the members of
the present directorate were regularly elected at the general annual
meeting held in February, 1926; and if that assertion be true, the
proposal to elect, another directorate, as per the call of August 2, if
carried into effect, would result in the election of a rival set of directors,
who would probably need the assistance of judgment of court in an
independent action of quo warranto  to get them installed into office,
even supposing that their title to the office could be maintained. That
the trial judge had jurisdiction to forestall that step and enjoin the
contemplated election is a matter about which there cannot be the
slightest doubt. The law contemplates and intends that there will be one
of directors at a time and that new directors shall be elected only as
vacancies occur in the directorate by death, resignation, removal, or
otherwise. lawphil.net
It is instituted that there was some irregularity or another in the election
of the present directorate. We see nothing upon which this suggestion
can be safely planted; And at any rate the present board of directors
are de facto  incumbents of the office whose acts will be valid until they
shall be lawfully removed from the office or cease from the discharge of
their functions. In this case it is not necessary for us to agitate
ourselves over the question whether the respondent judge properly
exercised his judicial discretion in granting the order complained of. If
suffices to know that in making the order he was acting within the limits
of his judicial powers.
It will be noted that the order in question enjoins the defendants from
holding the meeting called for August 16; and said order must not be
understood as constituting any obstacle for the holding of the regular
meeting at the time appointed in the by-laws of the corporation.
4. Exercise of Directors’ Functions
a. Meetings of directors or trustees
(Sections 53 and 54 of the RCC)
Expertravel & Tours, Inc. vs. CA (GR No. 152392 [2005])
CALLEJO, SR., J.:
Before us is a petition for review on certiorari  of the Decision1 of the
Court of Appeals (CA) in CA-G.R. SP No. 61000 dismissing the petition
for certiorari and mandamus filed by Expertravel and Tours, Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the
Republic of South Korea and licensed to do business in the Philippines.
Its general manager in the Philippines is Suk Kyoo Kim, while its
appointed counsel was Atty. Mario Aguinaldo and his law firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a
Complaint2 against ETI with the Regional Trial Court (RTC) of Manila,
for the collection of the principal amount of P260,150.00, plus
attorney’s fees and exemplary damages. The verification and
certification against forum shopping was signed by Atty. Aguinaldo,
who indicated therein that he was the resident agent and legal counsel
of KAL and had caused the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty.
Aguinaldo was not authorized to execute the verification and certificate
of non-forum shopping as required by Section 5, Rule 7 of the Rules of
Court. KAL opposed the motion, contending that Atty. Aguinaldo was its
resident agent and was registered as such with the Securities and
Exchange Commission (SEC) as required by the Corporation Code of
the Philippines. It was further alleged that Atty. Aguinaldo was also the
corporate secretary of KAL. Appended to the said opposition was the
identification card of Atty. Aguinaldo, showing that he was the lawyer of
KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he
had been authorized to file the complaint through a resolution of the
KAL Board of Directors approved during a special meeting held on
June 25, 1999. Upon his motion, KAL was given a period of 10 days
within which to submit a copy of the said resolution. The trial court
granted the motion. Atty. Aguinaldo subsequently filed other similar
motions, which the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit 3 of even date,
executed by its general manager Suk Kyoo Kim, alleging that the board
of directors conducted a special teleconference on June 25, 1999,
which he and Atty. Aguinaldo attended. It was also averred that in that
same teleconference, the board of directors approved a resolution
authorizing Atty. Aguinaldo to execute the certificate of non-forum
shopping and to file the complaint. Suk Kyoo Kim also alleged,
however, that the corporation had no written copy of the aforesaid
resolution.
On April 12, 2000, the trial court issued an Order 4 denying the motion to
dismiss, giving credence to the claims of Atty. Aguinaldo and Suk Kyoo
Kim that the KAL Board of Directors indeed conducted a teleconference
on June 25, 1999, during which it approved a resolution as quoted in
the submitted affidavit.
ETI filed a motion for the reconsideration of the Order, contending that
it was inappropriate for the court to take judicial notice of the said
teleconference without any prior hearing. The trial court denied the
motion in its Order5 dated August 8, 2000.
ETI then filed a petition for certiorari and mandamus, assailing the
orders of the RTC. In its comment on the petition, KAL appended a
certificate signed by Atty. Aguinaldo dated January 10, 2000, worded
as follows:
SECRETARY’S/RESIDENT AGENT’S CERTIFICATE
KNOW ALL MEN BY THESE PRESENTS:
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and
appointed Corporate Secretary and Resident Agent of KOREAN
AIRLINES, a foreign corporation duly organized and existing under and
by virtue of the laws of the Republic of Korea and also duly registered
and authorized to do business in the Philippines, with office address at
Ground Floor, LPL Plaza Building, 124 Alfaro St., Salcedo Village,
Makati City, HEREBY CERTIFY that during a special meeting of the
Board of Directors of the Corporation held on June 25, 1999 at which a
quorum was present, the said Board unanimously passed, voted upon
and approved the following resolution which is now in full force and
effect, to wit:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo &
Associates or any of its lawyers are hereby appointed and authorized to
take with whatever legal action necessary to effect the collection of the
unpaid account of Expert Travel & Tours. They are hereby specifically
authorized to prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and prosecution of said claim
in Court, attend the Pre-Trial Proceedings and enter into a compromise
agreement relative to the above-mentioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my signature this
10th day of January, 1999, in the City of Manila, Philippines.
On December 18, 2001, the CA rendered judgment dismissing the
petition, ruling that the verification and certificate of non-forum shopping
executed by Atty. Aguinaldo was sufficient compliance with the Rules of
Court. According to the appellate court, Atty. Aguinaldo had been duly
authorized by the board resolution approved on June 25, 1999, and
was the resident agent of KAL. As such, the RTC could not be faulted
for taking judicial notice of the said teleconference   of the KAL Board of
Directors.
ETI filed a motion for reconsideration of the said decision, which the CA
denied. Thus, ETI, now the petitioner, comes to the Court by way of
petition for review on certiorari  and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM
THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED DECISION
AND WHEN IT ISSUED ITS QUESTIONED RESOLUTION, ANNEXES
A AND B OF THE INSTANT PETITION?7
The petitioner asserts that compliance with Section 5, Rule 7, of the
Rules of Court can be determined only from the contents of the
complaint and not by documents or pleadings outside thereof. Hence,
the trial court committed grave abuse of discretion amounting to excess
of jurisdiction, and the CA erred in considering the affidavit of the
respondent’s general manager, as well as the Secretary’s/Resident
Agent’s Certification and the resolution of the board of directors
contained therein, as proof of compliance with the requirements of
Section 5, Rule 7 of the Rules of Court. The petitioner also maintains
that the RTC cannot take judicial notice of the said
teleconference  without prior hearing, nor any motion therefor. The
petitioner reiterates its submission that the teleconference and the
resolution adverted to by the respondent was a mere fabrication.
The respondent, for its part, avers that the issue of whether modern
technology is used in the field of business is a factual issue; hence,
cannot be raised in a petition for review on certiorari  under Rule 45 of
the Rules of Court. On the merits of the petition, it insists that Atty.
Aguinaldo, as the resident agent and corporate secretary, is authorized
to sign and execute the certificate of non-forum shopping required by
Section 5, Rule 7 of the Rules of Court, on top of the board resolution
approved during the teleconference of June 25, 1999. The respondent
insists that "technological advances in this time and age are as
commonplace as daybreak." Hence, the courts may take judicial notice
that the Philippine Long Distance Telephone Company, Inc. had
provided a record of corporate conferences and meetings through
FiberNet using fiber-optic transmission technology, and that such
technology facilitates voice and image transmission with ease; this
makes constant communication between a foreign-based office and its
Philippine-based branches faster and easier, allowing for cost-cutting in
terms of travel concerns. It points out that even the E-Commerce Law
has recognized this modern technology. The respondent posits that the
courts are aware of this development in technology; hence, may take
judicial notice thereof without need of hearings. Even if such hearing is
required, the requirement is nevertheless satisfied if a party is allowed
to file pleadings by way of comment or opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the
matter of teleconferencing as a means of conducting meetings of board
of directors for purposes of passing a resolution; until and after
teleconferencing is recognized as a legitimate means of gathering a
quorum of board of directors, such cannot be taken judicial notice of by
the court. It asserts that safeguards must first be set up to prevent any
mischief on the public or to protect the general public from any possible
fraud. It further proposes possible amendments to the Corporation
Code to give recognition to such manner of board meetings to transact
business for the corporation, or other related corporate matters; until
then, the petitioner asserts, teleconferencing cannot be the subject of
judicial notice.
The petitioner further avers that the supposed holding of a special
meeting on June 25, 1999 through teleconferencing where Atty.
Aguinaldo was supposedly given such an authority is a farce,
considering that there was no mention of where it was held, whether in
this country or elsewhere. It insists that the Corporation Code requires
board resolutions of corporations to be submitted to the SEC. Even
assuming that there was such a teleconference, it would be against the
provisions of the Corporation Code not to have any record thereof.
The petitioner insists that the teleconference and resolution adverted to
by the respondent in its pleadings were mere fabrications foisted by the
respondent and its counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping.—  The plaintiff or principal
party shall certify under oath in the complaint or other initiatory pleading
asserting a claim for relief, or in a sworn certification annexed thereto
and simultaneously filed therewith: (a) that he has not theretofore
commenced any action or filed any claim involving the same issues in
any court, tribunal or quasi-judicial agency and, to the best of his
knowledge, no such other action or claim is pending therein; (b) if there
is such other pending action or claim, a complete statement of the
present status thereof; and (c) if he should thereafter learn that the
same or similar action or claim has been filed or is pending, he shall
report that fact within five (5) days therefrom to the court wherein his
aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable
by mere amendment of the complaint or other initiatory pleading but
shall be cause for the dismissal of the case without prejudice, unless
otherwise provided, upon motion and after hearing. The submission of
a false certification or non-compliance with any of the undertakings
therein shall constitute indirect contempt of court, without prejudice to
the corresponding administrative and criminal actions. If the acts of the
party or his counsel clearly constitute willful and deliberate forum
shopping, the same shall be ground for summary dismissal with
prejudice and shall constitute direct contempt, as well as a cause for
administrative sanctions.
It is settled that the requirement to file a certificate of non-forum
shopping is mandatory8 and that the failure to comply with this
requirement cannot be excused. The certification is a peculiar and
personal responsibility of the party, an assurance given to the court or
other tribunal that there are no other pending cases involving basically
the same parties, issues and causes of action. Hence, the certification
must be accomplished by the party himself because he has actual
knowledge of whether or not he has initiated similar actions or
proceedings in different courts or tribunals. Even his counsel may be
unaware of such facts.9 Hence, the requisite certification executed by
the plaintiff’s counsel will not suffice.10
In a case where the plaintiff is a private corporation, the certification
may be signed, for and on behalf of the said corporation, by a
specifically authorized person, including its retained counsel, who has
personal knowledge of the facts required to be established by the
documents. The reason was explained by the Court in National Steel
Corporation v. Court of Appeals,11  as follows:
Unlike natural persons, corporations may perform physical actions only
through properly delegated individuals; namely, its officers and/or
agents.
… proceedings against such corporation, thus:
The corporation, such as the petitioner, has no powers except those
expressly conferred on it by the Corporation Code and those that are
implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly-
authorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly-authorized
for the purpose by corporate by-laws or by specific act of the board of
directors. "All acts within the powers of a corporation may be performed
by agents of its selection; and except so far as limitations or restrictions
which may be imposed by special charter, by-law, or statutory
provisions, the same general principles of law which govern the relation
of agency for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his power to act
for the corporation; and agents once appointed, or members acting in
their stead, are subject to the same rules, liabilities and incapacities as
are agents of individuals and private persons."
…
… For who else knows of the circumstances required in the Certificate
but its own retained counsel. Its regular officers, like its board chairman
and president, may not even know the details required therein.
Indeed, the certificate of non-forum shopping may be incorporated in
the complaint or appended thereto as an integral part of the complaint.
The rule is that compliance with the rule after the filing of the complaint,
or the dismissal of a complaint based on its non-compliance with the
rule, is impermissible. However, in exceptional circumstances, the court
may allow subsequent compliance with the rule.12 If the authority of a
party’s counsel to execute a certificate of non-forum shopping is
disputed by the adverse party, the former is required to show proof of
such authority or representation.
In this case, the petitioner, as the defendant in the RTC, assailed the
authority of Atty. Aguinaldo to execute the requisite verification and
certificate of non-forum shopping as the resident agent and counsel of
the respondent. It was, thus, incumbent upon the respondent, as the
plaintiff, to allege and establish that Atty. Aguinaldo had such authority
to execute the requisite verification and certification for and in its behalf.
The respondent, however, failed to do so.
The verification and certificate of non-forum shopping which was
incorporated in the complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite
210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila,
after having sworn to in accordance with law hereby deposes and say:
THAT -
1. I am the Resident Agent and Legal Counsel of the plaintiff in the
above entitled case and have caused the preparation of the above
complaint;
2. I have read the complaint and that all the allegations contained
therein are true and correct based on the records on files;
3. I hereby further certify that I have not commenced any other action
or proceeding involving the same issues in the Supreme Court, the
Court of Appeals, or different divisions thereof, or any other tribunal or
agency. If I subsequently learned that a similar action or proceeding
has been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, or any tribunal or agency, I will
notify the court, tribunal or agency within five (5) days from such
notice/knowledge.
As gleaned from the aforequoted certification, there was no allegation
that Atty. Aguinaldo had been authorized to execute the certificate of
non-forum shopping by the respondent’s Board of Directors; moreover,
no such board resolution was appended thereto or incorporated
therein.
While Atty. Aguinaldo is the resident agent of the respondent in the
Philippines, this does not mean that he is authorized to execute the
requisite certification against forum shopping. Under Section 127, in
relation to Section 128 of the Corporation Code, the authority of the
resident agent of a foreign corporation with license to do business in
the Philippines is to receive, for and in behalf of the foreign corporation,
services and other legal processes in all actions and other legal
SEC. 127. Who may be a resident agent. –  A resident agent may either
be an individual residing in the Philippines or a domestic corporation
lawfully transacting business in the Philippines: Provided, That in the
case of an individual, he must be of good moral character and of sound
financial standing.
SEC. 128. Resident agent; service of process. – The Securities and
Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by any
foreign corporation that such corporation file with the Securities and
Exchange Commission a written power of attorney designating some
persons who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or
other legal proceedings against such corporation, and consenting that
service upon such resident agent shall be admitted and held as valid as
if served upon the duly-authorized officers of the foreign corporation as
its home office.14
Under the law, Atty. Aguinaldo was not specifically authorized to
execute a certificate of non-forum shopping as required by Section 5,
Rule 7 of the Rules of Court. This is because while a resident agent
may be aware of actions filed against his principal (a foreign
corporation doing business in the Philippines), such resident may not
be aware of actions initiated by its principal, whether in the Philippines
against a domestic corporation or private individual, or in the country
where such corporation was organized and registered, against a
Philippine registered corporation or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident
agent, was not specifically authorized to execute the said certification. It
attempted to show its compliance with the rule subsequent to the filing
of its complaint by submitting, on March 6, 2000, a resolution purporting
to have been approved by its Board of Directors during a
teleconference held on June 25, 1999, allegedly with Atty. Aguinaldo
and Suk Kyoo Kim in attendance. However, such attempt of the
respondent casts veritable doubt not only on its claim that such a
teleconference was held, but also on the approval by the Board of
Directors of the resolution authorizing Atty. Aguinaldo to execute the
certificate of non-forum shopping.
In its April 12, 2000 Order, the RTC took judicial notice that because of
the onset of modern technology, persons in one location may confer
with other persons in other places, and, based on the said premise,
concluded that Suk Kyoo Kim and Atty. Aguinaldo had a teleconference
with the respondent’s Board of Directors in South Korea on June 25,
1999. The CA, likewise, gave credence to the respondent’s claim that
such a teleconference took place, as contained in the affidavit of Suk
Kyoo Kim, as well as Atty. Aguinaldo’s certification.
Generally speaking, matters of judicial notice have three material
requisites: (1) the matter must be one of common and general
knowledge; (2) it must be well and authoritatively settled and not
doubtful or uncertain; and (3) it must be known to be within the limits of
the jurisdiction of the court. The principal guide in determining what
facts may be assumed to be judicially known is that of notoriety. Hence,
it can be said that judicial notice is limited to facts evidenced by public
records and facts of general notoriety.[15] Moreover, a judicially noticed
fact must be one not subject to a reasonable dispute in that it is either:
(1) generally known within the territorial jurisdiction of the trial court; or
(2) capable of accurate and ready determination by resorting to sources
whose accuracy cannot reasonably be questionable.16
Things of "common knowledge," of which courts take judicial matters
coming to the knowledge of men generally in the course of the ordinary
experiences of life, or they may be matters which are generally
accepted by mankind as true and are capable of ready and
unquestioned demonstration. Thus, facts which are universally known,
and which may be found in encyclopedias, dictionaries or other
publications, are judicially noticed, provided, they are of such universal
notoriety and so generally understood that they may be regarded as
forming part of the common knowledge of every person. As the
common knowledge of man ranges far and wide, a wide variety of
particular facts have been judicially noticed as being matters of
common knowledge. But a court cannot take judicial notice of any fact
which, in part, is dependent on the existence or non-existence of a fact
of which the court has no constructive knowledge.17
In this age of modern technology, the courts may take judicial notice
that business transactions may be made by individuals through
teleconferencing. Teleconferencing is interactive group communication
(three or more people in two or more locations) through an electronic
medium. In general terms, teleconferencing can bring people together
under one roof even though they are separated by hundreds of
miles.18 This type of group communication may be used in a number of
ways, and have three basic types: (1) video conferencing - television-
like communication augmented with sound; (2) computer conferencing -
printed communication through keyboard terminals, and (3) audio-
conferencing-verbal communication via the telephone with optional
capacity for telewriting or telecopying.19
A teleconference represents a unique alternative to face-to-face (FTF)
meetings. It was first introduced in the 1960’s with American Telephone
and Telegraph’s Picturephone. At that time, however, no demand
existed for the new technology. Travel costs were reasonable and
consumers were unwilling to pay the monthly service charge for using
the picturephone, which was regarded as more of a novelty than as an
actual means for everyday communication.20 In time, people found it
advantageous to hold teleconferencing in the course of business and
corporate governance, because of the money saved, among other
advantages include:
1. People (including outside guest speakers) who wouldn’t normally
attend a distant FTF meeting can participate.
2. Follow-up to earlier meetings can be done with relative ease and
little expense.
3. Socializing is minimal compared to an FTF meeting; therefore,
meetings are shorter and more oriented to the primary purpose of the
meeting.
4. Some routine meetings are more effective since one can audio-
conference from any location equipped with a telephone.
5. Communication between the home office and field staffs is
maximized.
6. Severe climate and/or unreliable transportation may necessitate
teleconferencing.
7. Participants are generally better prepared than for FTF meetings.
8. It is particularly satisfactory for simple problem-solving, information
exchange, and procedural tasks.
9. Group members participate more equally in well-moderated
teleconferences than an FTF meeting.21
On the other hand, other private corporations opt not to hold
teleconferences because of the following disadvantages:
1. Technical failures with equipment, including connections that aren’t
made.
2. Unsatisfactory for complex interpersonal communication, such as
negotiation or bargaining.
3. Impersonal, less easy to create an atmosphere of group rapport.
4. Lack of participant familiarity with the equipment, the medium itself,
and meeting skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order; frequently one
person monopolizes the meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible. 22
Indeed, teleconferencing can only facilitate the linking of people; it does
not alter the complexity of group communication. Although it may be
easier to communicate via  teleconferencing, it may also be easier to
miscommunicate. Teleconferencing cannot satisfy the individual needs
of every type of meeting.23
In the Philippines, teleconferencing and videoconferencing of members
of board of directors of private corporations is a reality, in light of
Republic Act No. 8792. The Securities and Exchange Commission
issued SEC Memorandum Circular No. 15, on November 30, 2001,
providing the guidelines to be complied with related to such
conferences.24 Thus, the Court agrees with the RTC that persons in the
Philippines may have a teleconference with a group of persons in
South Korea relating to business transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim
participated in a teleconference along with the respondent’s Board of
Directors, the Court is not convinced that one was conducted; even if
there had been one, the Court is not inclined to believe that a board
resolution was duly passed specifically authorizing Atty. Aguinaldo to
file the complaint and execute the required certification against forum
shopping.
The records show that the petitioner filed a motion to dismiss the
complaint on the ground that the respondent failed to comply with
Section 5, Rule 7 of the Rules of Court. The respondent opposed the
motion on December 1, 1999, on its contention that Atty. Aguinaldo, its
resident agent, was duly authorized to sue in its behalf. The
respondent, however, failed to establish its claim that Atty. Aguinaldo
was its resident agent in the Philippines. Even the identification
card25 of Atty. Aguinaldo which the respondent appended to its pleading
merely showed that he is the company lawyer of the respondent’s
Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of the
teleconference only during the hearing of January 28, 2000; Atty.
Aguinaldo then prayed for ten days, or until February 8, 2000, within
which to submit the board resolution purportedly authorizing him to file
the complaint and execute the required certification against forum
shopping. The court granted the motion. 26 The respondent, however,
failed to comply, and instead prayed for 15 more days to submit the
said resolution, contending that it was with its main office in Korea. The
court granted the motion per its Order27 dated February 11, 2000. The
respondent again prayed for an extension within which to submit the
said resolution, until March 6, 2000.28 It was on the said date that the
respondent submitted an affidavit of its general manager Suk Kyoo
Kim, stating, inter alia,  that he and Atty. Aguinaldo attended the said
teleconference on June 25, 1999, where the Board of Directors
supposedly approved the following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo &
Associates or any of its lawyers are hereby appointed and authorized to
take with whatever legal action necessary to effect the collection of the
unpaid account of Expert Travel & Tours. They are hereby specifically
authorized to prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and prosecution of said claim
in Court, attend the Pre-trial Proceedings and enter into a compromise
agreement relative to the above-mentioned claim.29
But then, in the same affidavit, Suk Kyoo Kim declared that the
respondent "do[es] not keep a written copy of the aforesaid Resolution"
because no records of board resolutions approved during
teleconferences were kept. This belied the respondent’s earlier
allegation in its February 10, 2000 motion for extension of time to
submit the questioned resolution that it was in the custody of its main
office in Korea. The respondent gave the trial court the impression that
it needed time to secure a copy of the resolution kept in Korea, only to
allege later (via the affidavit of Suk Kyoo Kim) that it had no such
written copy. Moreover, Suk Kyoo Kim stated in his affidavit that the
resolution was embodied in the Secretary’s/Resident Agent’s Certificate
signed by Atty. Aguinaldo. However, no such resolution was appended
to the said certificate.
The respondent’s allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said resolution
(with Atty. Aguinaldo in attendance) is incredible, given the additional
fact that no such allegation was made in the complaint. If the resolution
had indeed been approved on June 25, 1999, long before the complaint
was filed, the respondent should have incorporated it in its complaint,
or at least appended a copy thereof. The respondent failed to do so. It
was only on January 28, 2000 that the respondent claimed, for the first
time, that there was such a meeting of the Board of Directors held on
June 25, 1999; it even represented to the Court that a copy of its
resolution was with its main office in Korea, only to allege later that no
written copy existed. It was only on March 6, 2000 that the respondent
alleged, for the first time, that the meeting of the Board of Directors
where the resolution was approved was held via  teleconference.
Worse still, it appears that as early as January 10, 1999, Atty.
Aguinaldo had signed a Secretary’s/Resident Agent’s Certificate
alleging that the board of directors held a teleconference on June 25,
1999. No such certificate was appended to the complaint, which was
filed on September 6, 1999. More importantly, the respondent did not
explain why the said certificate was signed by Atty. Aguinaldo as early
as January 9, 1999, and yet was notarized one year later (on January
10, 2000); it also did not explain its failure to append the said certificate
to the complaint, as well as to its Compliance dated March 6, 2000. It
was only on January 26, 2001 when the respondent filed its comment
in the CA that it submitted the Secretary’s/Resident Agent’s
Certificate30 dated January 10, 2000.
The Court is, thus, more inclined to believe that the alleged
teleconference on June 25, 1999 never took place, and that the
resolution allegedly approved by the respondent’s Board of Directors
during the said teleconference was a mere concoction purposefully
foisted on the RTC, the CA and this Court, to avert the dismissal of its
complaint against the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The
Decision of the Court of Appeals in CA-G.R. SP No. 61000 is
REVERSED and SET ASIDE. The Regional Trial Court of Manila is
hereby ORDERED to dismiss, without prejudice, the complaint of the
respondent.
b. Compensation for directors or trustees
(Section 29 of the RCC)
Western Institute of Technology vs. Salas (GR No. 113032 [1997])
HERMOSISIMA, JR., J.:
Up for review on certiorari are: (1) the Decision dated September 6,
1993 and (2) the Order dated November 23, 1993 of Branch 33 of the
Regional Trial Court of Iloilo City in Criminal Cases Nos. 37097 and
37098 for estafa and falsification of a public document, respectively.
The judgment acquitted the private respondents of both charges, but
petitioners seek to hold them civilly liable.
Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad
Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to
the same family, are the majority and controlling members of the Board
of Trustees of Western Institute of Technology, Inc. (WIT, for short), a
stock corporation engaged in the operation, among others, of an
educational institution. According to petitioners, the minority
stockholders of WIT, sometime on June 1, 1986 in the principal office of
WIT at La Paz, Iloilo City, a Special Board Meeting was held. In
attendance were other members of the Board including one of the
petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting,
copies of notice thereof, dated May 24, 1986, were distributed to all
Board Members. The notice allegedly indicated that the meeting to be
held on June 1, 1986 included Item No. 6 which states:
Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of
Western Institute of Technology, Inc. on compensation of all officers of
the corporation.1
In said meeting, the Board of Trustees passed Resolution No. 48, s.
1986, granting monthly compensation to the private respondents as
corporate officers retroactive June 1, 1985, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs.
Soledad Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly compensation for
services rendered as follows: Chairman — P9,000.00/month, Vice
Chairman — P3,500.00/month, Corporate Treasurer —
P3,500.00/month and Corporate Secretary — P3,500.00/month,
retroactive June 1, 1985 and the ten per centum of the net profits shall
be distributed equally among the ten members of the Board of
Trustees. This shall amend and superceed (sic) any previous
resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on
March 30, 1986 is true and correct to the best of my knowledge and
belief.
(Sgd) ANTONIO S. SALAS
Corporate Secretary2
A few years later, that is, on March 13, 1991, petitioners Homero
Villasis, Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an
affidavit-complaint against private respondents before the Office of the
City Prosecutor of Iloilo, as a result of which two (2) separate criminal
informations, one for falsification of a public document under Article 171
of the Revised Penal Code and the other for estafa under Article 315,
par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial
Court of Iloilo City. The charge for falsification of public document was
anchored on the private respondents' submission of WIT's income
statement for the fiscal year 1985-1986 with the Securities and
Exchange Commission (SEC) reflecting therein the disbursement of
corporate funds for the compensation of private respondents based on
Resolution No. 4, series of 1986, making it appear that the same was
passed by the board on March 30, 1986, when in truth, the same was
actually passed on June 1, 1986, a date not covered by the
corporation's fiscal year 1985-1986 (beginning May 1, 1985 and ending
April 30, 1986). The Information for falsification of a public document
states:
The undersigned City Prosecutor accuses RICARDO T. SALAS,
SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS and RICHARD S. SALAS (whose dates and places of birth
cannot be ascertained) of the crime of FALSIFICATION OF A PUBLIC
DOCUMENT, Art. 171 of the Revised Penal Code, committed as
follows:
That on or about the 10th day of June, 1986, in the City of Iloilo,
Philippines and within the jurisdiction of this Honorable Court, the
above-named accused, being then the Chairman, Vice-Chairman,
Treasurer, Secretary, and Trustee (who later became Secretary),
respectively, of the board of trustees of the Western Institute of
Technology, Inc., a corporation duly organized and existing under the
laws of the Republic of the Philippines, conspiring and confederating
together and mutually helping one another, to better realized ( sic) their
purpose, did then and there wilfully, unlawfully and criminally prepare
and execute and subsequently cause to be submitted to the Securities
and Exchange Commission an income statement of the corporation for
the fiscal year 1985-1986, the same being required to be submitted
every end of the corporation fiscal year by the aforesaid Commission,
and therefore, a public document, including therein the disbursement of
the retroactive compensation of accused corporate officers in the
amount of P186,470.70, by then and there making it appear that the
basis thereof Resolution No. 4, Series of 1986 was passed by the
board of trustees on March 30, 1986, a date covered by the
corporation's fiscal year 1985-1986 (i.e., from May 1, 1985 to April 30,
1986), when in truth and in fact, as said accused well knew, no such
Resolution No. 48, Series of 1986 was passed on March 30, 1986.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22, 1991.3 [Emphasis ours].
The Information, on the other hand, for estafa reads:
The undersigned City Prosecutor accuses RICARDO SALAS,
SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS, RICHARD S. SALAS (whose dates and places of birth cannot
be ascertained) of the crime of ESTAFA, Art. 315, par. 1 (b) of the
Revised Penal Code, committed as follows:
That on or about the 1st day of June, 1986, in the City of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, the
above-named accused, being then the Chairman, Vice-Chairman,
Treasurer, Secretary, and Trustee (who later became Secretary),
respectively; of the Board of Trustees of Western Institute of
Technology, Inc., a corporation duly organized and existing under the
laws of the Republic of the Philippines, conspiring and confederating
together and mutually helping one another to better realize their
purpose, did then and there wilfully, unlawfully and feloniously defraud
the said corporation (and its stockholders) in the following manner, to
wit: herein accused, knowing fully well that they have no sufficient,
lawful authority to disburse — let alone violation of applicable laws and
jurisprudence, disbursed the funds of the corporation by effecting
payment of their retroactive salaries in the amount of P186,470.00 and
subsequently paying themselves every 15th and 30th of the month
starting June 15, 1986 until the present, in the amount of P19,500.00
per month, as if the same were their own, and when herein accused
were informed of the illegality of these disbursements by the minority
stockholders by way of objections made in an annual stockholders'
meeting held on June 14, 1986 and every year thereafter, they refused,
and still refuse, to rectify the same to the damage and prejudice of the
corporation (and its stockholders) in the total sum of P1,453,970.79 as
of November 15, 1991.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22, 1991.4 [Emphasis ours]
Thereafter, trial for the two criminal cases, docketed as Criminal Cases
Nos. 37097 and 37098, was consolidated. After a full-blown hearing,
Judge Porfirio Parian handed down a verdict of acquittal on both
counts5 dated September 6, 1993 without imposing any civil liability
against the accused therein.
Petitioners filed a Motion for Reconsideration 6 of the civil aspect of the
RTC Decision which was, however, denied in an Order dated
November 23, 1993.7
Hence, the instant petition.
Significantly on December 8, 1994, a Motion for Intervention, dated
December 2, 1994, was filed before this Court by Western Institute of
Technology, Inc., supposedly one of the petitioners herein, disowning
its inclusion in the petition and submitting that Atty. Tranquilino R. Gale,
counsel for the other petitioners, had no authority whatsoever to
represent the corporation in filing the petition. Intervenor likewise
prayed for the dismissal of the petition for being utterly without merit.
The Motion for Intervention was granted on January 16, 1995.8
Petitioners would like us to hold private respondents civilly liable
despite their acquittal in Criminal Cases Nos. 37097 and 37098. They
base their claim on the alleged illegal issuance by private respondents
of Resolution No. 48, series of 1986 ordering the disbursement of
corporate funds in the amount of P186,470.70 representing retroactive
compensation as of June 1, 1985 in favor of private respondents, board
members of WIT, plus P1,453,970.79 for the subsequent collective
salaries of private respondents every 15th and 30th of the month until
the filing of the criminal complaints against them on March 1991.
Petitioners maintain that this grant of compensation to private
respondents is proscribed under Section 30 of the Corporation Code.
Thus, private respondents are obliged to return these amounts to the
corporation with interest.
We cannot sustain the petitioners. The pertinent section of the
Corporation Code provides:
Sec. 30. Compensation of directors — In the absence of any provision
in the by-laws fixing their compensation, the directors shall not receive
any compensation, as such directors, except for reasonable per
diems: Provided, however, That any such compensation (other than per
diems) may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%)
percent of the net income before income tax of the corporation during
the preceding year. [Emphasis ours]
There is no argument that directors or trustees, as the case may be,
are not entitled to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their office. This rule
is founded upon a presumption that directors/trustees render service
gratuitously, and that the return upon their shares adequately furnishes
the motives for service, without compensation. 9 Under the foregoing
section, there are only two (2) ways by which members of the board
can be granted compensation apart from reasonable per diems: (1)
when there is a provision in the by-laws fixing their compensation; and
(2) when the stockholders representing a majority of the outstanding
capital stock at a regular or special stockholders' meeting agree to give
it to them.
This proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of
note is the clear phraseology of Section 30 which states: ". . . [T]he
directors shall not receive any compensation, as such directors, . . . ."
The phrase as such directors is not without significance for it delimits
the scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render
services to the corporation in a capacity other than as
directors/trustees.10 In the case at bench, Resolution No. 48, s. 1986
granted monthly compensation to private respondents not in their
capacity as members of the board, but rather as officers of the
corporation, more particularly as Chairman, Vice-Chairman, Treasurer
and Secretary of Western Institute of Technology. We quote once more
Resolution No. 48, s. 1986 for easy reference, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs.
Soledad Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly compensation for
services rendered as follows: Chairman — P9,000.00/month, Vice
Chairman — P3,500.00/month, Corporate Treasurer —
P3,500.00/month and Corporate Secretary — P3,500.00/month,
retroactive June 1, 1985 and the ten per centum of the net profits shall
be distributed equally among the ten members of the Board of
Trustees. This shall amend and superceed (sic) any previous
resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on
March 30, 1986 is true and correct to the best of my knowledge and
belief.
(Sgd) ANTONIO S. SALAS
Corporate Secretary11 [Emphasis ours]
Clearly, therefore, the prohibition with respect to granting compensation
to corporate directors/trustees as such under Section 30 is not violated
in this particular case. Consequently, the last sentence of Section 30
which provides:
. . . . . . . In no case shall the total yearly compensation of directors, as
such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year. (Emphasis
ours]
does not likewise find application in this case since the compensation is
being given to private respondents in their capacity as officers of WIT
and not as board members.
Petitioners assert that the instant case is a derivative suit brought by
them as minority shareholders of WIT for and on behalf of the
corporation to annul Resolution No. 48, s. 1986 which is prejudicial to
the corporation.
We are unpersuaded. A derivative suit is an action brought by minority
shareholders in the name of the corporation to redress wrongs
committed against it, for which the directors refuse to sue. 12 It is a
remedy designed by equity and has been the principal defense of the
minority shareholders against abuses by the majority. 13 Here, however,
the case is not a derivative suit but is merely an appeal on the civil
aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of
Iloilo for estafa and falsification of public document. Among the basic
requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must
allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join.14 This is necessary to
vest jurisdiction upon the tribunal in line with the rule that it is the
allegations in the complaint that vests jurisdiction upon the court or
quasi-judicial body concerned over the subject matter and nature of the
action.15 This was not complied with by the petitioners either in their
complaint before the court a quo nor in the instant petition which, in
part, merely states that "this is a petition for review on certiorari on pure
questions of law to set aside a portion of the RTC decision in Criminal
Cases Nos. 37097 and 37098"16 since the trial court's judgment of
acquittal failed to impose any civil liability against the private
respondents. By no amount of equity considerations, if at all deserved,
can a mere appeal on the civil aspect of a criminal case be treated as a
derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as
insisted by petitioners, which it is not, the same is outrightly dismissible
for having been wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The ease should have been filed
with the Securities and Exchange Commission (SEC) which exercises
original and exclusive jurisdiction over derivative suits, they being intra-
corporate disputes, per Section 5 (b) of P.D. No. 902-A:
In addition to the regulatory and adjudicative functions of the Securities
and Exchange Commission over corporations, partnerships and other
forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
xxx xxx xxx
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between
any or all of them and the corporation , partnership or association of
which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the State
insofar as it concerns their individual franchise or right to exist as such
entity;
xxx xxx xxx
[Emphasis ours]
Once the case is decided by the SEC, the losing party may file a
petition for review before the Court of Appeals raising questions of fact,
of law, or mixed questions of fact and law. 17 It is only after the case has
ran this course, and not earlier, can it be brought to us via a petition for
review on certiorari under Rule 45 raising only pure questions of
law.18 Petitioners, in pleading that we treat the instant petition as a
derivative suit, are trying to short-circuit the entire process which we
cannot here sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097 and
37098 for falsification of public document and estafa, which this petition
truly is, we have to deny the petition just the same. It will be well to
quote the respondent court's ratiocinations acquitting the private
respondents on both counts:
The prosecution wants this Court to believe and agree that there is
falsification of public document because, as claimed by the
prosecution, Resolution No. 48, Series of 1986 (Exh. "1-E-1") was not
taken up and passed during the Regular Meeting of the Board of
Trustees of the Western Institute of Technology (WIT), Inc. on March
30, 1986, but on June 1, 1986 special meeting of the same board of
trustees.
This Court is reluctant to accept this claim of falsification. The
prosecution omitted to submit the complete minutes of the regular
meeting of the Board of Trustees on March 30, 1986. It only presented
in evidence Exh. "C", which is page 5 or the last page of the said
minutes. Had the complete minutes (Exh. "1") consisting of five (5)
pages, been submitted, it can be readily seen and understood that
Resolution No. 48, Series of 1986 (Exh. "1-E-1") giving compensation
to corporate officers, was indeed included in Other Business, No. 6 of
the Agenda, and was taken up and passed on March 30, 1986. The
mere fact of existence of Exh. "C" also proves that it was passed on
March 30, 1986 for Exh. "C" is part and parcel of the whole minutes of
the Board of Trustees Regular Meeting on March 30, 1986. No better
and more credible proof can be considered other than the Minutes
(Exh. "1") itself of the Regular Meeting of the Board of Trustees on
March 30, 1986. The imputation that said Resolution No. 48 was
neither taken up nor passed on March 30, 1986 because the matter
regarding compensation was not specifically stated or written in the
Agenda and that the words "possible implementation of said Resolution
No. 48, was expressly written in the Agenda for the Special Meeting of
the Board on June 1, 1986, is simply an implication . This evidence by
implication to the mind of the court cannot prevail over the Minutes
(Exh. "1") and cannot ripen into proof beyond reasonable doubt which
is demanded in all criminal prosecutions.
This Court finds that under the Eleventh Article (Exh. "3-D-1") of the
Articles of Incorporation (Exh. "3-B") of the Panay Educational
Institution, Inc., now the Western Institute of Technology, Inc., the
officers of the corporation shall receive such compensation as the
Board of Directors may provide. These Articles of Incorporation was
adopted on May 17, 1957 (Exh. "3-E"). The Officers of the corporation
and their corresponding duties are enumerated and stated in Sections
1, 2, 3 and 4 of Art. III of the Amended By-Laws of the Corporation
(Exh. "4-A") which was adopted on May 31, 1957. According to Sec. 6,
Art. III of the same By-Laws, all officers shall receive such
compensation as may be fixed by the Board of Directors.
It is the perception of this Court that the grant of compensation or
salary to the accused in their capacity as officers of the corporation,
through Resolution No. 48, enacted on March 30, 1986 by the Board of
Trustees, is authorized by both the Articles of Incorporation and the By-
Laws of the corporation. To state otherwise is to depart from the clear
terms of the said articles and by-laws. In their defense the accused
have properly and rightly asserted that the grant of salary is not for
directors, but for their being officers of the corporation who oversee the
day to day activities and operations of the school.
xxx xxx xxx
. . .[O]n the question of whether or not the accused can be held liable
for estafa under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is
perceived by this Court that the receipt and the holding of the money by
the accused as salary on basis of the authority granted by the Articles
and By-Laws of the corporation are not tainted with abuse of
confidence. The money they received belongs to them and cannot be
said to have been converted and/or misappropriated by them.
xxx xxx xxx 19
[Emphasis ours]
From the foregoing factual findings, which we find to be amply
substantiated by the records, it is evident that there is simply no basis
to hold the accused, private respondents herein, civilly liable. Section
2(b) of Rule 111 on the New Rules on Criminal Procedure provides:
Sec. 2. Institution of separate civil action.
xxx xxx xxx
(b) Extinction of the penal action does not carry with it extinction of the
civil, unless the extinction proceeds from a declaration in a final
judgment that the fact from which the civil might arise did not exist.
[Emphasis ours]
Likewise, the last paragraph of Section 2, Rule 120 reads:
Sec. 2. Form and contents of judgment.
xxx xxx xxx
In case of acquittal, unless there is a clear showing that the act from
which the civil liability might arise did not exist , the judgment shall make
a finding on the civil liability of the accused in favor of the offended
party. [Emphasis ours]
The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely
based on reasonable doubt but rather on a finding that the accused-
private respondents did not commit the criminal acts complained of.
Thus, pursuant to the above rule and settled jurisprudence, any civil
action ex delicto cannot prosper. Acquittal in a criminal action bars the
civil action arising therefrom where the judgment of acquittal holds that
the accused did not commit the criminal acts imputed to them.20
WHEREFORE, the instant petition is hereby DENIED with costs against
petitioners.
SO ORDERED.
______________________________________
Officers
5.
(Section 24 of the RCC)
Ongkingco vs. NLRC, 270 SCRA 613 [1997]
KAPUNAN, J.:
At fore, once again, is the jurisdictional tug of war between the National
Labor Relations Commission (NLRC) and the Securities & Exchange
Commission (SEC) in this special civil action for certiorari under Rule
65 of the Revised Rules of Court. It seeks to set aside the Resolutions
of the NLRC in NLRC NCR Case No. 00-05-02780-92 (NLRC CA No.
004329-93) dated 9 March 1995 and 4 April 1995 which reversed the
decision of Labor Arbiter Oswald Lorenzo and denied petitioners'
motion for reconsideration, respectively.
Petitioner Galeria de Magallanes Condominium Association, Inc.
(Galeria for brevity) is a non-stock, non-profit corporation formed in
accordance with R.A. No. 4726, otherwise known as the Condominium
Act. "Its primary purpose is to hold title to the common areas of the
Galeria de Magallanes Condominium Project and to manage and
administer the same for the use and convenience of the residents
and/or owners."1 Petitioner Bienvenido Ongkingco was the president of
Galeria at the time private respondent filed his complaint.
On 1 September 1990, Galeria's Board of Directors appointed private
respondent Federico B. Guilas as Administrator/Superintendent. He
was given a "monthly salary of P10,000 subject to review after five (5)
months and subsequently thereafter as Galeria's finances improved."2
As Administrator, private respondent was tasked with the maintenance
of the "performance and elegance of the common areas of the
condominium and external appearance of the compound thereof for the
convenience and comfort of the residents as well as to keep up the
quality image, and hence the value of the investment for the owners
thereof."3
However, on 17 March 1992, through a resolution passed by the Board
of Directors of Galeria, private respondent was not re-appointed as
Administrator.
As a result, on 15 May 1992, private respondent instituted a complaint
against petitioners for illegal dismissal and non-payment of salaries
with the NLRC.
In response, on 22 July 1992, petitioners filed a motion to dismiss
alleging that it is the SEC, and not the labor arbiter, which has
jurisdiction over the subject matter of the complaint.
Labor Arbiter Lorenzo granted the aforestated motion to dismiss in his
order dated 29 December 1992. He ruled, thus:
A judicious calibration of the position taken by the contending parties
preponderate clearly in favor of respondents, that this case is within the
jurisdiction of the Securities and Exchange Commission and not this
Office (Labor Arbiter).
Our reasons are as follows:
ONE. The Position of Administrator or Superintendent is a corporate
position, whose appointment depended on the Board of Directors. As
such, the position of the administrator is a corporate creation.
TWO. Clearly from the respondent corporation's Articles of
Incorporation, Art. V, Sec. 6 thereof, the appointment and removal of
the administrator is a prerogative that belongs to the Board, and
thereby involves the exercise of deliberate choice and faculty of
discriminative selection.
THIRD. Thus, we find lacking of merit the argument of complainant that
since he is not a member of the condominium association where he
was formerly administrator, or is not a unit holder thereof, since a
person's relationship to a corporation is not determinative of the
services performed but by the incidents of the relationship as they exist.
(PSBA v. LEANO, 127 SCRA 778.)
The resolution, therefore, of the other pending incident, which is the
MOTION FOR SUBSTITUTION OF PARTIES is hereby deferred for
action by the SEC.
WHEREFORE, in view of all the foregoing considerations, this Office
hereby orders the dismissal of the instant action for reason of lack of
jurisdiction. The complainant, if he is mindful should file this case with
the Securities and Exchange Commission.
SO ORDERED.4
The NLRC, however, reversed the Labor Arbiter's order in its resolution
dated 9 March 1995. It ruled in this wise:
We find merit in the appeal. It cannot be gainsaid that the complainant's
cause of action in his complaint is illegal dismissal which issue falls four
square within the jurisdiction of the NLRC. This is so, because while it
may be true that the termination of the complainant was effected
allegedly by a resolution of the Board of Directors of the respondent
association, this did not make the dispute intracorporate in nature.
Moreover, We have taken note of the fact that the complainant is
neither a member of the association nor an officer thereof. Hence, We
are more convinced that he is an employee of the respondent
association occupying the position of administrator who is in (sic)
charged with the function of managing and administering the building or
condominium owned by the members. Indeed, there is a whale of
difference between a member of the association who is a part owner of
the building and a mere employee performing managerial and
administrative functions which are necessary in the usual undertaking
of the respondent Association. The complainant falls under the second
category.
And, to the point of being repetitious, it needs to be stressed that the
fact that the complainant was removed by the Board of Directors did
not change the issue from an illegal dismissal case to an intracorporate
one. For, what remains to be resolved here is whether or not the
complainant's removal from his position as Administrator was for a just
and valid cause and in compliance with due process. And, as the facts
now stand, the issue is within the scope of authority of the National
Labor Relations Commission to resolve.
We simply could not agree with the conclusions of law made by the
Arbiter a quo on the applicability of the provisions of P.D. 902. Our view
finds basis in the case of Gregorio Araneta University
Foundation v. Antonio J. Teodoro and NLRC (167 SCRA 79) wherein
the Supreme Court had the occasion to clarify the jurisdiction of the
Securities and Exchange Commission and that of the NLRC. It
(Supreme Court) held, thus
"x x x Relying on Philippine School of Business Administration, et al.,
(127 SCRA 778) and Dy, et al., vs. National Labor Relations
Commission, et al., (145 SCRA 211), Petitioner theorizes that since
private respondent was a corporate officer, the present controversy is
within the jurisdiction of the Securities and Exchange Commission,
pursuant to P.D. 902-A, and not in the public respondent.
Without need of applying the rule on estoppel by laches against
petitioner, its contention must fail on the ground of misplaced reliance.
As explained in Dy, the same is true with Philippine Business
Administration, the controversies therein were intra corporate in nature
and squarely within the purview of Section 5(c), PD. 902-A since the
real question was the invalidity of the board of director's meeting
wherein corporate officers involved were not re-elected, resulting in the
termination of their services." (Underscoring ours.)
As obtaining in this case, no intracorporate controversy exists, hence,
the jurisdiction of the NLRC should be sustained.
WHEREFORE, finding merit on the appeal, the same is hereby, given
due course. Accordingly, the Order appealed from is declared Null and
Void and is hereby, VACATED and SET ASIDE. Accordingly, let the
records of the case be remanded to the Arbitration Branch of origin for
further proceedings. With the directive that the instant case be given
priority in the calendar of the Labor Arbiter for the speedy disposition
hereon. Concomitant hereto, the respondents are hereby directed to
submit their position paper within ten (10) days from receipt hereof.
SO ORDERED.5
Petitioners filed a motion for reconsideration but the same was denied
in the NLRC's resolution dated 4 April 1995. 6 Hence, the present
recourse.
The petitioners raised a single issue:
THE PRIVATE RESPONDENT ACTED WITHOUT OR IN EXCESS OF
ITS JURISDICTION OR COMMITTED GRAVE ABUSE OF
DISCRETION IN TAKING COGNIZANCE OF A SUBJECT MATTER
THAT FELL WITHIN THE ORIGINAL AND EXCLUSIVE
JURISDICTION OF THE SEC.
The petition is granted.
Specifically delineated in P.D. 902-A are the cases over which the SEC
exercises exclusive jurisdiction:
SECTION 5. In addition to the regulatory and adjudicative functions of
the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest of
the public and/or of the stockholders, partners, members of
associations or organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between
any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the State
insofar as it concerns their individual franchise or right to exist as such
entity;
c) Controversies in the election or appointment of directors, trustees,
officers, or managers of such corporations, partnerships or
associations.
d) Petitions of corporations, partnerships or associations to be declared
in the state of suspension of payments in cases where the corporation,
partnership or association possesses property to cover all of its debts
but foresees the impossibility of meeting them when they respectively
fall due or in cases where the corporation, partnership or association
has no sufficient assets to cover its liabilities, but is under the
Management Committee created pursuant to this Decree.
(Underscoring ours.)
The Solicitor General contends that the case at bar falls outside the
purview of the aforequoted provision. He insists that private respondent
was a mere employee of petitioner corporation being tasked mainly, as
administrator/superintendent, with the upkeep of the condominium's
common areas. He, thus, maintains that private respondent cannot be
deemed a corporate officer because "it is the nature of one's functions
and not the nomenclature or title given to one's job which determines
one's status in a corporation."7
The contentions of public respondent lack merit. That private
respondent is an officer of petitioner corporation and not its mere
employee cannot be questioned. The by-laws of the Galeria de
Magallanes Condominium Association specifically includes the
Superintendent/Administrator in its roster of corporate officers:
ARTICLE IV
OFFICERS
Section 1. Executive Officers The Executive officers of the corporation
shall be a President, a Vice President, a Treasurer, all of whom shall be
elected by the Board of Directors. They may be removed with or
without cause at any meeting by the concurrence of four directors. The
Board of Directors may appoint a Superintendent or Administrator and
such other officers and employees and delineate their powers and
duties as the Board shall find necessary to manage the affairs of the
corporation.8 (Underscoring ours.)
xxx.
Section 6. The Superintendent or Administrator The Board of Directors
may appoint a Superintendent or Administrator for the condominium
project if the activities and financial condition of the Association so
warrant. If one is so appointed, he shall be the principal administrative
officer of the Association. He shall attend to routinary and day-to-day
business and activities of the Association and shall keep regular officer
hours for the purpose. He shall have such other duties and powers as
may be conferred upon him by the Board of Directors or delegated by
the President of the Association.
At the discretion of the Board of Directors, the work and duties of
Superintendent or Administrator may be entrusted to a juridical entity
which is qualified and competent to perform such work.9
Closely approximating the dispute at bar is the recent case of Tabang
v. NLRC.10 This Court, through Justice Florenz D. Regalado, ruled that:
Contrary to the contention of petitioner, a medical director and a
hospital administrator are considered as corporate officers under the
by-laws of respondent corporation. Section 2(i), Article I thereof states
that one of the powers of the Board of Trustees is "(t)o appoint a
Medical Director, Comptroller/Administrator, Chiefs of Services and
such other officers as it may deem necessary and prescribe their
powers and duties."
The president, vice-president, secretary and treasurer are commonly
regarded as the principal or executive officers of a corporation, and
modern corporation statutes usually designate them as the officers of
the corporation. However, other offices are sometimes created by the
charter or by-laws of a corporation, or the board of directors may be
empowered under the by-laws of a corporation to create additional
offices as may be necessary.
It has been held that an "office" is created by the charter of the
corporation and the officer is elected by the directors or stockholders.
On the other hand, an "employee" usually occupies no office and
generally is employed not by action of the directors or stockholders but
by the managing officer of the corporation who also determines the
compensation to be paid to such employee.
In the case at bar, considering that herein petitioner, unlike an ordinary
employee, was appointed by respondent corporation's Board of
Trustees in its memorandum of October 30, 1990, she is deemed an
officer of the corporation. Perforce, Section 5(c) of Presidential Decree
No. 902-A, which provides that the SEC exercises exclusive jurisdiction
over controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships or associations,
applies in the present dispute. Accordingly, jurisdiction over the same is
vested in the SEC, and not in the Labor Arbiter or the NLRC.
Supplementing the afore-quoted ruling, in Lozon v. NLRC11 and
Espino v. NLRC,12 citing Fortune Cement Corp. v. NLRC,13 we declared
that:
A corporate officer's dismissal is always a corporate act and/or an intra-
corporate controversy and that nature is not altered by the reason or
wisdom which the Board of Directors may have in taking such action.
Based on the foregoing, we must rule that private respondent was
indeed a corporate officer. He was appointed directly by the Board of
Directors not by any managing officer of the corporation and his salary
was, likewise, set by the same Board. Having thus determined, his
dismissal or non-appointment is clearly an intra-corporate matter and
jurisdiction, therefore, properly belongs to the SEC and not the NLRC.
The respondents also attack the SEC's jurisdiction over the instant
case on grounds that Guilas was not elected by the Board of Directors
but was merely appointed.
This particular argument baffles us. P.D. 902-A cannot be any clearer.
Sec. 5(c) of said law expressly covers both election and appointment of
corporate directors, trustees, officers and managers.14
It is of no consequence, likewise, that the complaint of private
respondent for illegal dismissal includes money claims, jurisdiction
remains with the SEC as ruled in the case of Cagayan de Oro
Coliseum, Inc. v. Office of the MOLE:15
Although the reliefs sought by Chaves appear to fall under the
jurisdiction of the labor arbiter as they are claims for unpaid salaries
and other remunerations for services rendered, a close scrutiny thereof
shows that said claims are actually part of the perquisites of his position
in, and therefore interlinked with his relations with the corporation. In
Dy v. NLRC, the Court said: "(t)he question of remuneration involving
as it does, a person who is not a mere employee but a stockholder and
officer, an integral part, it might be said, of the corporation, is not a
simple labor problem but a matter that comes within the area of
corporate affairs and, management, and is in fact a corporate
controversy in contemplation of the Corporation Code."
WHEREFORE, the petition for certiorari is given DUE COURSE, the
assailed resolutions of the NLRC are hereby REVERSED and the
Order of the Labor Arbiter dated 29 December 1992 REINSTATED.
SO ORDERED.
Tabang vs. NLRC, 266 SCRA 462 [1997]
REGALADO, J.:
This is a petition for certiorari which seeks to annul the resolution of the
National Labor Relations Commission (NLRC), dated June 26, 1995,
affirming in toto the order of the labor arbiter, dated April 26, 1994,
which dismissed petitioner's complaint for illegal dismissal with money
claims for lack of jurisdiction.
The records show that petitioner Purificacion Tabang was a founding
member, a member of the Board of Trustees, and the corporate
secretary of private respondent Pamana Golden Care Medical Center
Foundation, Inc., a non-stock corporation engaged in extending
medical and surgical services.
On October 30, 1990, the Board of Trustees issued a memorandum
appointing petitioner as Medical Director and Hospital Administrator of
private respondent's Pamana Golden Care Medical Center in Calamba,
Laguna.
Although the memorandum was silent as to the amount of
remuneration for the position, petitioner claims that she received a
monthly retainer fee of five thousand pesos (P5,000.00) from private
respondent, but the payment thereof was allegedly stopped in
November, 1991.
As medical director and hospital administrator, petitioner was tasked to
run the affairs of the aforesaid medical center and perform all acts of
administration relative to its daily operations.
On May 1, 1993, petitioner was allegedly informed personally by Dr.
Ernesto Naval that in a special meeting held on April 30, 1993, the
Board of Trustees passed a resolution relieving her of her position as
Medical Director and Hospital Administrator, and appointing the latter
and Dr. Benjamin Donasco as acting Medical Director and acting
Hospital Administrator, respectively. Petitioner averred that she
thereafter received a copy of said board resolution.
On June 6, 1993, petitioner filled a complaint for illegal dismissal and
non-payment of wages, allowances and 13th month pay before the
labor arbiter.
Respondent corporation moved for the dismissal of the complaint on
the ground of lack of jurisdiction over the subject matter. It argued that
petitioner's position as Medical Director and Hospital Administrator was
interlinked with her position as member of the Board of Trustees,
hence, her dismissal is an intra-corporate controversy which falls within
the exclusive jurisdiction of the Securities and Exchange Commission
(SEC).
Petitioner opposed the motion to dismiss, contending that her position
as Medical Director and Hospital Administrator was separate and
distinct from her position as member of the Board of Trustees. She
claimed that there is no intra-corporate controversy involved since she
filed the complaint in her capacity as Medical Director and Hospital
Administrator, or as an employee of private respondent.
On April 26, 1994, the labor arbiter issued an order dismissing the
complaint for lack of jurisdiction. He ruled that the case falls within the
jurisdiction of the SEC, pursuant to Section 5 of Presidential Decree
No.
902-A. 1
Petitioner's motion for reconsideration was treated as an appeal by the
labor arbiter who consequently ordered the elevation of the entire
records of the case to public respondent NLRC for appellate review. 2
On appeal, respondent NLRC affirmed the dismissal of the case on the
additional ground that "the position of a Medical Director and Hospital
Administrator is akin to that of an executive position in a corporate
ladder structure." hence, petitioner's removal from the said position was
an intra-corporate controversy within the original and exclusive
jurisdiction of the SEC. 3
Aggrieved by the decision, petitioner filed the instant petition which we
find, however, to be without merit.
We agree with the findings of the NLRC that it is the SEC which has
jurisdiction over the case at bar. The charges against herein private
respondent partake of the nature of an intra-corporate controversy.
Similarly, the determination of the rights of petitioner and the
concomitant liability of private respondent arising from her ouster as a
medical director and/or hospital administrator, which are corporate
offices, is an intra-corporate controversy subject to the jurisdiction of
the SEC.
Contrary to the contention of petitioner, a medical director and a
hospital administrator are considered as corporate officers under the
by-laws of respondent corporation. Section 2(i), Article I thereof states
that one of the powers of the Board of Trustees is "(t)o appoint a
Medical Director, Comptroller/Administrator, Chiefs of Services and
such other officers as it may deem necessary and prescribe their
powers and duties."4
The president, vice-president, secretary and treasurer are commonly involving as it does, a person who is not a mere employee but a
regarded as the principal or executive officers of a corporation, and stockholder and officer, an integral part, it might be said, of the
modern corporation statutes usually designate them as the officers of corporation, is not a simple labor problem but a matter that comes
the corporation. 5 However, other offices are sometimes created by the within the area of corporate affairs and management and is in fact a
charter or by-laws of a corporation, or the board of directors may be corporate controversy in contemplation of the Corporation Code."
empowered under the by-laws of a corporation to create additional
offices as may be necessary. 6 It has been held that an "office'' is WHEREFORE, the questioned resolution of the NLRC is hereby
created by the charter of the corporation and the officer is elected by AFFIRMED, without prejudice to petitioner's taking recourse to and
the directors or stockholders. 7 On the other hand, an "employee" seeking relief through the appropriate remedy in the proper forum.
usually occupies no office and generally is employed not by action of
SO ORDERED.
the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such
employee. 8
Gurrea vs. Lezama, 103 PHIL 553 (1958)
In the case at bar, considering that herein petitioner, unlike an ordinary
employee, was appointed by respondent corporation's Board of SYLLABUS
Trustees in its memorandum of October 30, 1990, 9 she is deemed an
officer of the corporation. Perforce, Section 5(c) of Presidential Decree
No. 902-A, which provides that the SEC exercises exclusive jurisdiction
1. CORPORATION LAW; WHO ARE CONSIDERED OFFICERS OF
over controversies in the election appointment of directors, trustees,
THE CORPORATION; CASE AT BAR. — The only officers of a
officers or managers of corporations, partnerships or associations,
corporation are those given that character either by the Corporation
applies in the present dispute. Accordingly, jurisdiction over the same is
Law or by its by-laws. The rest can be considered merely as employees
vested in the SEC, and not in the Labor Arbiter or the NLRC.
or subordinate officials. In the case at bar; considering that plaintiff has
Moreover, the allegation of petitioner that her being a member of the been appointed manager by the board of directors and as such does
Board of Trustees was not one of the considerations for her not have the character of an officer, the conclusion is inescapable that
appointment is belied by the tenor of the memorandum itself. It states: he can be suspended or removed by said board of directors under such
"We hope that you will uphold and promote the mission of our terms as it may see fit and not as provided for in the by-laws. Evidently,
foundation," 10 and this cannot be construed other than in reference to the power to appoint carries with it the power to remove, and it would
her position or capacity as a corporate trustee. be incongruous to hold that having been appointed by the board of
directors he could only be removed by the stockholders.
A corporate officer's dismissal is always a corporate act, or an intra-
corporate controversy, and the nature is not altered by the reason or 2. ID.; ID.; ID.; LIABILITY FOR VIOLATION OF PENAL PROVISIONS
wisdom with which the Board of Directors may have in taking such OF STATUTES DOES NOT MAKE MANAGER OFFICER OF
action. 11 Also, an intra-corporate controversy is one which arises CORPORATION. — The fact that the "manager" of the corporation in
between a stockholder and the corporation. There is no distinction, the several statutes enacted by Congress is held criminally liable for
qualification, nor any exemption whatsoever. The provision is broad violation of any of the penal provisions therein prescribed does not
and covers all kinds of controversies between stockholders and make him an "officer" of the corporation. This liability flows from the
corporations. 12 nature of his duties which are delegated to him by the board of
directors. He is paid for them. Hence, he has to answer for them should
With regard to the amount of P5,000,00 formerly received by herein he use it in violation of law.
petitioner every month, the same cannot be considered as
compensation for her services rendered as Medical Director and
Hospital Administrator. The vouchers 13 submitted by petitioner show
that the said amount was paid to her by PAMANA, Inc., a stock
corporation which is separate and distinct from herein private DECISION
respondent. Although the payments were considered advances to
Pamana Golden Care, Calamba branch, there is no evidence to show
that the Pamana Golden Care stated in the vouchers refers to herein
respondent Pamana Golden Care Medical Center Foundation, Inc.
BAUTISTA ANGELO, J.:
Pamana Golden Care is a division of Pamana, Inc., while respondent
Pamana Golden Care Medical Center Foundation, Inc. is a non-stock,
non-profit corporation. It is stated in the memorandum of petitioner that
Pamana, Inc. is a stock and profit corporation selling pre-need plan for
education, pension and health care. The health care plan is called Plaintiff instituted this action in the Court of First Instance of Iloilo to
Pamana Golden Care Plan and the holders are called Pamana Golden have Resolution No. 65 of the Board of Directors of the La Paz Ice
Care Card Holders or, simply, Pamana Members. 14 Plant and Cold Storage Co., Inc., removing him from his position of
manager of said corporation declared null and void and to recover
It is an admitted fact that herein petitioner is a retained physician of damages incident thereto. The action is predicated on the ground that
Pamana, Inc., whose patients are holders of the Pamana Golden Care said resolution was adopted in contravention of the provisions of the
Card. In fact, in her complaint 15 filed before the Regional Trial Court of by-laws of the corporation, of the Corporation Law and of the
Calamba, herein petitioner is asking among others, for professional understanding, intention and agreement reached among its
fees and/or retainer fees earned for her treatment of Pamana Golden stockholders.
Care card holders. 16 Thus, at most, said vouchers can only be
considered as proof of payment of retainer fees made by Pamana, Inc. Defendant answered the complaint setting up as defense that plaintiff
to herein petitioner as a retained physician of Pamana Golden Care. had been removed by virtue of a valid resolution.
Moreover, even assuming that the monthly payment of P5,000.00 was
In connection with this complaint, plaintiff moved for the issuance of a
a valid claim against respondent corporation, this would not operate to
writ of preliminary injunction to restrain defendant Jose Manuel Lezama
effectively remove this case from the jurisdiction of the SEC. In the
from managing the corporation pending the determination of this case,
case of Cagayan de Oro Coliseum, Inc. vs. Office of the Minister of
but after hearing where parties presented testimonial and documentary
Labor and Employment, etc., et al., 17 we ruled that "(a)lthough the
evidence, the court denied the motion. Thereafter, by agreement of the
reliefs sought by Chavez appear to fall under the jurisdiction of the
parties and without any trial on the merits, the case was submitted for
labor arbiter as they are claims for unpaid salaries and other
judgment on the sole legal question of whether plaintiff could be legally
remunerations for services rendered, a close scrutiny thereof shows
removed as manager of the corporation merely by resolution of the
that said claims are actually part of the perquisites of his position in,
board of directors or whether the affirmative vote of 2/3 of the paid
and therefore interlinked with, his relations with the corporation. In Dy,
shares of stocks was necessary for that purpose. And passing upon
et al., vs. NLRC, et al., the Court said: "(t)he question of remuneration
this legal point, the trial court held that the removal of plaintiff was legal
and dismissed the complaint without pronouncement as to costs.
Plaintiff appealed to the Court of Appeals but finding that the question
at issue is one of law, the latter certified the case to us for decision.
Section 33 of the Corporation Law provides: "Immediately after the
election, the directors of a corporation must organize by the election of
a president, who must be one of their number, a secretary or clerk who
shall be a resident of the Philippines . . . and such other officers as may
be provided for in the by-laws." The by-laws of the instant corporation in
turn provide that in the board of directors there shall be a president, a
vice-president, a secretary and a treasurer. These are the only ones
mentioned therein as officers of the corporation. The manager is not
included although the latter is mentioned as the person in whom the
administration of the corporation is vested, and with the exception of
the president, the by-laws provide that the officers of the corporation
may be removed or suspended by the affirmative vote of 2/3 of the
paid-up shares of the corporation (Exhibit A).
From the above the following conclusion is clear: that we can only
regard as officers of a corporation those who are given that character
either by the Corporation Law or by its by-laws. The rest can be
considered merely as employees or subordinate officials. And
considering that plaintiff has been appointed manager by the board of
directors and as such does not have the character of an officer, the
conclusion is inescapable that he can be suspended or removed by
said board of directors under such terms as it may see fit and not as
provided for in the by-laws. Evidently, the power to appoint carries with
it the power to remove, and it would be incongruous to hold that having
been appointed by the board of directors he could only be removed by
the stockholders.
The above interpretation finds also support in the American authorities.
Fletcher, in his treatise, states the rule in the following wise: "It is
sometimes important to determine whether a person representing a
corporation is to be classed as an officer of the company or merely as
an agent or employee, especially in construing statutes relating only to
‘officers’ of corporations. Generally the officers of a corporation are
enumerated in its charter or by-laws, and include a president, vice-
president, secretary, treasurer and sometimes others. The statutes in
most of the states expressly provide for the election of a president,
secretary and treasurer, and then provide that there shall be such other
officers, agents and factors as the corporation shall authorize for that
purpose. If the charter expressly enumerates who shall be officers of
the company, a person whose position is not enumerated is not an
officer as to members of the corporation, since the charter is conclusive
upon them" (Fletcher, Cyclopedia of the Law of Private Corporations,
Vol. II, p. 19). It has been likewise held "that the offices pertaining to a
private corporation are defined in its charter and by-laws, and that no
other positions in the service of the corporation are offices" (Ann. 53
A.L.R., 599).
Indeed, there are authorities galore that hold that a general manager is
not an officer of a corporation, even if his powers and influence may be
as great as those of any officer in said organization.
"Officers Distinguished from Mere Employees. — As already stated,
both officers and employees are agents of the corporation and the
difference between them is largely one of degree; the officers are the
most important employees exercising greater authority or power in the
management of the business. Ordinarily, too, the principal offices are
designated by statute, charter or by-law provisions, and specific duties
are imposed upon certain officers. Thus the state statute or a by-law
may provide that stock certificates shall be signed by the president and
countersigned by the secretary or treasurer. The general manager of a
corporation is not ordinarily classed as an officer, but due powers and
influence may be quite as great as those of any person in the
organization." (Grange, Corporation Law for Officers and Directors, p.
432; Emphasis supplied.)
"One distinction between officers and agents of a corporation lies in the
manner of their creation. An officer is created by the charter of the
corporation, and the officer is elected by the directors or the
stockholders. An agency is usually created by the officers, or one or
more of them, and the agent is appointed by the same authority. It is
clear that the two terms officers and agents are by no means
interchangeable. One, deriving its existence from the other, and being
dependent upon that other for its continuation, is necessarily restricted
in its powers and duties, and such powers and duties are not
necessarily the same as those pertaining to the authority creating it.
The officers, as such, are the corporation. An agent is an employee.’A
mere employment, however liberally compensated, does not rise to the
dignity of an office.’ 21 Am. & Eng. Enc. Law (2d Ed.) 836. In Wheeler
& Wilson Mfg. Co. v. Lawson, 57 Wis. 400, 15 N. W. 398, it was held
that under a statute requiring an affidavit to be made by an officer of a
corporation, the general agent or managing agent, within the state, of a
foreign corporation is not an officer. In Farmers’ Loan & Trust Co. v.
Warring, 20 Wis. 305, service was made upon the ‘principal agent’ of a
corporation holding in trust a railroad, when the statute required service
upon a ‘principal officer.’ In answering the question whether or not the
agent was a principal officer the court said: ‘It is evident he was not,
and must be regarded only as an agent, not as an officer of any kind,
much less a principal officer.’ A ruling that a ‘general manager’ of a
corporation was not authorized to verify pleadings, under a statute
requiring verification by ‘an officer’ was made in Meton v. Isham Wagon
Co. (Sup.) 4 N. Y. Supp. 215. In Raleigh, etc. R. Co. v. Pullman Co.,
122 Ga. 704, 50 S.E. 1008 (4), it was held that the term ‘general
manager’ as applied to one representing a corporation, and especially
a railroad corporation, imported an agent of a very extensive authority;
but it was not ruled that even the term ‘general manager’ would import
that the person holding that position was necessarily an officer of the
company. One distinction between an officer and an agent suggested
in Commonwealth v. Christian, 9 Phila. (Pa.) 558, is that an officer of a
corporation, if illegally excluded from his office, may by mandamus
compel the corporation to reinstate him; while an agent may be
dismissed without cause, and his only remedy would be compensation
in damages. It would not be contended that the ‘general agent of the
defendant at Columbus,’ in the event of his discharge, could be
reinstated by mandamus. We do not think the general agent at
Columbus was an officer of the defendant company. Therefore his
alleged waiver of a condition in the policy was not binding upon the
company." (Vardeman v. Penn. Mut. Life Ins. Co., 125 Ga. 117, 54 S.E.
p. 66; Emphasis supplied.)
"The plaintiff predicates this action on said contract, and claims that the
same being signed by the defendant through its ‘general manager’ if
admitted in evidence, would show sufficient authority prima facie to do
any act which the directors could authorize or ratify. The instrument in
question being signed by James W. Codle, ‘General Manager’, and no
evidence on the trial being produced showing the duties of said
manager or what kind of an office he was general manager of, the
words ‘general manager’ without proof as to the nature of services
performed by the person called ‘general manager’, have no meaning in
law, excepting that the person bearing the title is an employee who has
been designated with a title. It does not make him an officer of the
company employing him." (Studebaker Bros. Co. v. R. M. Rose Co.,
119 N.Y.S. pp. 970, 97; Emphasis supplied.)
We therefore hold that plaintiff has been properly removed when the
board of directors of the instant corporation approved its Resolution No.
65 on June 3, 1948.
We will now clarify some of the points raised by the distinguished
dissenter in his dissenting opinion.
The fact that the "manager" of the corporation in the several statutes
enacted by Congress is held criminally liable for violation of any of the
penal provisions therein prescribed does not make him an "officer" of
the corporation. This liability flows from the nature of his duties which
are delegated to him by the board of directors. He is paid for them.
Hence, he has to answer for them should he use it in violation of law. In
the case of Robinson v. Moark-Nemo Consol Mining Co., Et Al., 163 S.
W. 889, in connection with the liability of the manager, the court said:
"Common justice and common sense demand that, where those in
charge and control of the management of a corporation direct it along
paths of wrongdoing, they should be held accountable by law . . . . This
doctrine will prevent many wrongs, and have a salutary influence in
bringing about the lawful and orderly management of corporations."
It is claimed that the cases of Meton v. Isham Wagon, 4 N.Y.S., 215
and State v. Bergs, 217 N. W., 736, supporting the theory that a
manager is not necessarily an officer, are in illo tempore. 1 It is
submitted that we do not adopt a rule just because it is new nor reject
another just because it is old. We adopt a rule because it is a good and
sound rule. The fact however is that they are not the only authorities
supporting that theory. Additional cases are cited by Fletcher in support
thereof, such as the cases of Vardeman v. Penn. Mut. Life Ins. Co.,
supra; Studebaker Bros. Co. v. R. M. Rose Co., supra.
The dissenting opinion quotes from Thompson and Fletcher to support
the theory that the general manager of a corporation may be
considered as its principal officer even though not so mentioned in its
charter or by-laws. We have examined the cases cited in support of
that theory but we have found that they are not in point. Thus, we have
found (1) that the parties involved are mostly outsiders who press their
transactions against the corporation; (2) that the point raised is whether
the acts of the manager bind the corporation; (3) that the tendency of
the courts is to hold the corporation liable for the acts of the manager
so long as they are within the powers granted, hence, the courts
emphasized the importance of the position of manager; and (4) the
position of manager was discussed from the point of view of an outsider
and not from the internal organization of the corporation, or in
accordance with its charter or by-laws. In the present case, however,
the parties are the manager and the corporation. And the solution of the
problem hinges on the internal government of the corporation where
the charter and the by-laws are necessarily involved in the
determination of the rights of the parties. Indeed, it has been held: "But
it is urged that a corporation may have officers not recognized by the
charter and by-laws. It is possible this may be so as to matters arising
between strangers and the corporation." [Com. v. Christian, 9 Phila.
(Pa.) 556; Emphasis supplied].
The cases on all fours with the present are those of State ex rel
Blackwood v. Brast, Et Al., 127 S. E. 507 and Denton Milling Co. v.
Blewitt, 254 S. W. 236, 238, where the parties involved are the
manager and the corporation. The issue raised is the relation of the
manager towards the corporation. The position of the manager is
discussed from the point of view of its internal government. And the
holding of the court is that the manager is the creation of the board of
directors and the agent through whom the corporate duties of the board
are performed. Hence, the manager holds his position at the pleasure
of the board. This stipulation is well expressed in the following words of
Thompson
"The word ‘manager’ implies agency, control, and presumptively
sufficient authority to bind a corporation in a case in which the
corporation was an actual party. It has been said that such agent must
have the same general supervision of the corporation as is associated
with the office of cashier or secretary. By whatever name he may be
called, such managing agent is a mere employee of the board of
directors and holds his position subject to the particular contract of
employment; and unless the contract of employment fixes his term of
office, it may be terminated at the pleasure of the board. . . . The
manager, like any other appointed agent, is subject to removal when
his term expires and on the request of the proper officer he should turn
over his business to the corporation and, where he refuses to comply,
he may be restrained from the further performance of work for the
corporation." (Thompson on Corporations, Vol. III, 3rd., pp. 209-
210; Emphasis supplied.)
It is not correct to hold that the theory that a manager is not classed as
an officer of a corporation is only the minority view. If we consider the
states that hold that managers are merely agents or employees as
among those that hold the theory that managers are not necessarily
officers, then our theory is supported by the majority view. Indeed, this
view is upheld by nine states, 2 whereas only six states adopt the view
that managers are considered principal officers of the corporation. 3
The dissenting opinion quotes the provision of the by-laws relative to
the administration of the affairs of the instant corporation. It is there
provided that the affairs of the corporation shall be successively
administered by (1) the stockholders; (2) the board of directors; and (3)
the manager. From this it concludes that the manager should be
considered an officer.
The above enumeration only emphasizes the different organs through
which the affairs of the corporation should be administered and the
order in which the powers should be exercised. The stockholders are
the entity composing the whole corporation. The board of directors is
the entity elected by the stockholders to manage the affairs of the
corporation. And the manager is the individual appointed by the board
of directors to carry out the powers delegated to him. In other words,
the manager is the creation of the board of directors. He is an alter ego
of the board. As our law provides that only those enumerated in the
charter or in the by-laws are considered officers, the manager who has
not been so enumerated therein, but only incidentally mentioned in the
order of management, cannot be considered an officer of the
corporation within their purview.
The mere fact that the directors are not mentioned in the by-laws as
officers does not deprive them of their category as such for their
character as officers is secured in the charter. The same is not true with
the manager. Customs and corporate usages cannot prevail over the
express provisions of the charter and the by-laws.
There is no comparison between an appointee of the President,
especially one in the judiciary, and the appointee of the board of
directors of a corporation. In the first case, removal is especially
provided for by law and in the second, the appointee holds office at the
pleasure of the board. And with regard to the powers of the board of
directors to remove a manager of the corporation, Thompson has the
following to say:
". . . Below the grade of director and such other officers as are elected
by the corporation at large, the general rule is that the officers of private
corporations hold their offices during the will of the directors, and are
hence removable by the directors without assigning any cause for the
removal, except so far as their power may be restrained by contract
with the particular officer, — just as any other employer may discharge
his employee. Speaking generally, it may be said that the power to
appoint carries with it the power to remove. . . . the directors who
appoint a ministerial officer may undoubtedly remove him at pleasure,
and he has no remedy other than an action for damages against the
corporation for a breach of contract. . . . The ordinary ministerial and
other lesser officers, however, hold their offices during the pleasure of
the directors and may be removed at will, without assigned cause. Of
this class of officers and agents are the secretary and treasurer of the
corporation, the general manager, the assistant manager, the field
manager, the attorney of the company, an assistant horticulturist, and
the bookkeepers." (Thompson on Corporations, Vol. III, 521-523.)
Wherefore, the decision appealed from is affirmed, with costs
against Appellant.
Paras, C.J., Montemayor, Concepcion, Reyes, J. B. L. and
Endencia, JJ., concur.
Separate Opinions
BENGZON, J., dissenting:chanrob1es virtual 1aw library
Disposition of this appeal depends on the question whether Manager
Ricardo Gurrea is "an officer" of the corporation. If he is, he wins. The
majority says he is not. I disagree, because the authorities hold the
manager to be the principal executive officer of the corporation,
because our Legislature considers him as such, or at least as one of
the principal officers, and because we have heretofore regarded him as
an officer of the corporation. Moreover, judging from the history of this
corporation’s organization and operation I think the stockholders
intended that the manager shall be removed only by a two-thirds vote.
I. Manager is principal executive officer. West Coast v. Hurd, 27 Phil.,
401, held that corporations may not be criminally prosecuted for
violations of the law although their officials could be made liable
therefor.
Thereafter several statutes have been enacted expressly making the
"manager" criminally responsible for violations by the corporation of: the
Usury Laws, 1 the Price Control Law, 2 the law on Employment of
Women and Children 3 the Chemistry Law, 4 the Minimum Wage Law,
5 the Chemical Engineering Law, 6 the Labor on Sunday Law, 7 and
other laws. 8 Only the manager; not the president, nor the directors nor
other officers. This obviously shows that in the opinion of the
legislature, the manager is the principal executive officer of the
corporation, through whom the latter acts and transacts business.
In this case however, this Court (the majority) declares that the
manager is not even an officer. Did the Legislature err? Let the
authorities speak.
"A general manager of a corporation has been defined to be a person
who really has the most general control over the affairs of the
corporation, and who has knowledge of all its business, and property,
and can act in emergencies on his own responsibility; he may be
considered the principal officer." (Thompson on Corporations, Vol. III p.
209, citing 14 Am. & Eng. Ency. of Law (2d ed.) 1002; American Inv.
Co. v. Cable Co., 4 Ga. App. 106, 60 S.E. 1037; Kansas City v.
Cullinan, 65 Kans. 68, 68 Pac. 1099; Manross v. Uncle Sam Oil Co., 88
Kans. 237, Pac. 385, Ann. Cas. 1914, 827; Robinson v. Moark-Nemo
Cansol Min, Co., 178 Mo. App. 531, 163 S. W. 885. See also Kelly v.
Newark Shoe Stores Co., 190 N. Car. 406, 130 S. E. 32.)
"A general manager, where his duties are fixed by by-laws or
otherwise, has been defined as "the person who really has the most
general control over the affairs of a corporation, and who has
knowledge of all its business and property, and who can act in
emergencies on his own responsibility; who may be considered the
principal officer." (Fletcher, Cyclopedia of Corporations Vol. II p. 598
citing Anderson’s Law Dictionary (quoted in Robert E. Lee Silver Min.
Co. v. Omaha & Grant Smelting & Refining Co., 16 Colo. 118, 122, 26
Pac. 326; Kansas City v. Culliman, 65 Kan. 68, 77, 68 Pac. 1099;
Stearns-Roger Mfg. Co. v. Aztec Gold Mining & Milling Co. 14 N. M.
300, 330, 93 Pac. 706); Marderosian V. National Casualty Co.; Cal.
App. -, 273 Pac. 1093; State ex rel. Blackwood v. Brast, 98 W. Va. 596,
127 S. E. 507, See also Manross v. Uncle Sam Oil Co., 88 Kan. 237,
128 Pac. 385, Ann. Gas. 1914 827; Robinson v. Moark-Nemo Consul,
Min. Co., 178 Mo. App. 531, 163 S. W. 885; Ritchie v. Illinois Cent. R.
Co., Neb. 631, 635, 128 N. W. 35; Booker-Jones Oil Co. v. National
Refining Co. (Tex. Civ. App.) , 132 S. W. 815.
Thompson Op. Cit. Vol. III sec. 1690. In the Grange quotation, majority
impliedly admits "manager" is the same as "general manager
"Manager" and "General Manager" are interchangeable.
The Legislature was right. It punished the principal executive officer for
wrongs committed for and by the corporate entity.
II. Textbook v. Treatises. The majority disregarded the extensive
treatises of Thompson on Corporations (12 volumes) and Fletcher on
Corporations (20 volumes), only to rely on the one-volume work of
Attorney Grange, confessedly (in its preface) not written for "the
corporation lawyer," being a "concise" statement of the basic principles
of corporation law. In support of his statement, said attorney cites two
cases only: Meton v. Isham Wagon, 4 N. Y. Suppl. and State v. Bergs,
195 Wis. 73, 217 N. W. 736.
The first was decided in illo tempore, long ago, in 1889; at that time
corporate development was in its initial stages. And it was decided by
the Supreme Court of New York, which everybody knows is only an
appellate court, the highest court in that state being the Court of
Appeals.
The second case expressly follows the Meton decision.
On the other hand more than ten cases from eight states of the
American Union support the Thompson and Fletcher excerpts above
quoted. Clearly the choice of this Court’s majority, reflects the minority
view. Worse still, it ignores the Congressional viewpoint.
The majority decision draws the conclusion that the manager is not an
officer, from these two propositions or premises: Generally, the officers
in a corporation are mentioned in its charter as an officer in the by-laws
of the La Paz Ice Plant and Cold Storage Co., Inc. Let me analyze
these propositions in their order.
III. By-laws mention manager. As to the first, observe the word
"generally." The quotations from Thompson and Fletcher do not rest on
the charter or by-laws of the corporation. They consider the duties and
powers of the position. And our own laws, the Usury Law, the Price
Control Law, the Law on Employment of Women and Children, the
Chemistry Law, the Minimum Wage Law, the Chemical Engineering
Law, the Labor or Sunday Law, etc., postulate the manager’s dominant
official position in the corporate set-up regardless of whether he is
mentioned in the by-laws. The first proposition of the majority decision
could be applied to other less known officials, such as the cashier, the
auditor, superintendent, branch manager, etc.
Nevertheless, for the sake of argument, I will admit the first proposition
as an absolute rule, with no exceptions: officers of the corporation must
be mentioned in its charter and/or by-laws. Is the manager mentioned
in the by-laws of the La Paz Ice Plant? I say yes, definitely; and I quote
the by-laws:
It will thus be seen that, together with the directors, the manager
(gerente) is named as one of the administrators which means officers.
There is no specific article in its by-laws enumerating the officers of this
corporation. True, there is a portion entitled "Funcionarios" and under it
several articles specify the duties, respectively of the President, Vice-
President, Secretary and Treasurer. And obviously because they found
therein no article on the duties of the manager (gerente) the majority
concluded, inclusio unius est exclusio alterius, ergo, the manager is not
"funcionario." Yet they dare not argue thusly, because if they did, I
would answer: directors are not mentioned therein, ergo directors are
not officers too and then their position would become untenable.
The "manager" (gerente) and the directors are not mentioned under
"Funcionarios" because they had already been mentioned in the
previous articles above quoted under "Administracion" ; and because it
was thought unnecessary to define their powers and duties, those of
the directors being fixed by the corporation laws, and those of the
manager by general corporate usage.
"The governing principle with reference to the general power of a
manager is that where he has the actual charge and management of
the business, by the appointment of or with the knowledge of the
directors, the corporation will be bound by his acts and contracts which
are necessary or incident in the course of the business, without other
evidence of actual authority. As a general rule, he has authority to do
anything which is ordinarily necessary to the principal business of the
corporate organization and not in excess of its powers. . . . His
apparent authority is said to be co-extensive with the scope of all
managerial requirements and necessities. A general manager acting
within the scope of his authority has the power to bind the corporation
as to contracts and dealings with its corporate property. He has power
to do any act necessary to carry on the ordinary business of the
corporation. He has no authority, however, to bind the corporation as to
matters outside the scope of the corporate purposes." (Thompson on
Corporations Vol. III p. 210-212.)
IV. Manager higher than secretary or treasurer. Indeed, if we were to
make comparisons, the manager should be placed on a higher level
than the secretary or treasurer whom the majority would qualify as
officers, because the manager being expressly allowed to take part in
the "administration" "gobierno y administracion" which concerns itself
with "the over-all determination of major policies and objectives," 9
besides exercising other executive functions, the manager I repeat,
exerts far greater power than the above two officials in the affairs of the
corporation.
In fact some of our statutes put him on the same class as the president
of the corporation, when it comes to responsibility for violations of law.
"The president or the manager" shall be liable — several statutes so
provide 10 — not the secretary or treasurer.
V. This Court held manager is officer. This Court itself impliedly admits
the manager of a corporation to be an officer thereof, because in Yu
Chuk v. Kong Li Po 46 Phil. 608, we held that by virtue of his position,
the manager could validly make reasonable contracts of employment
binding on the corporation. And our Rules recognize in him power to
represent the corporation as an officer 11 thereof, because said Rules
provide that service of summons upon the manager is service in the
corporation.
VI. Appointing power, sometimes not power to remove. The majority
finds it hard to believe that being an appointee of the board of directors,
the manager could not be removed by the latter. They forget that in the
law of officers such a situation often obtains. The President appoints
the members of this Court, and other officials; but he cannot remove
them. True, the Constitution so provides. But in this case also the by-
laws of the corporation so provide: its officers may be removed only by
two-thirds vote of the paid-up shares.
Their decision does not explain, but the majority’s thinking appears to
be influenced by the apprehension that if Gurrea’s contention (2/3 vote)
is now sustained, he may never be replaced, because he own one-half
of the shares, and he may abuse his powers. To me that is a
groundless worry. The board of directors has means to check. And
then, what are courts for? Where is the protection extended to
stockholders against abuses of those in control?
VII. Stockholders intended security for manager. It would be interesting
to inquire whether in approving the two-thirds requirement in the by-
laws, the stockholders intended to apply it only to the Vice President,
the Secretary and the Treasurer — excluding the manager — as the
majority opinion declares.
It must be remembered that since the beginning, Gurrea’s family owned
or controlled one-half of the shares and Manuel Lezama’s family the
other half. Evidently, because Gurrea voted for them, Lezama and two
others of his family became directors in the five-man board of directors.
In reciprocity for such vote or concession, Gurrea was named manager.
12 As owner of one-half of the shares Gurrea could effectively block
approval of any by-laws that did not protect his interest. Therefore, he
would not have approved the by-laws in question if they did not protect
his position as manager 13 , knowing that being in the minority in the
board of directors his position would be at the mercy of the Lezama
family. The bargain between the Lezama and Gurrea families must
have been this: Majority of directors of Lezama; minority for Gurrea
plus the position of manager; 14 the Lezama directors cannot be
changed by Gurrea alone (he owns one-half only); and Gurrea may not
be changed by the Lezama directors (they have one-half shares only).
In fact this arrangement continued for a long period of time (beginning
in the year 1927) until the Lezamas thought of the "appointed-by-
directors-removed-by-directors" idea in 1948-ironically enough, after
the corporation had declared substantial dividends 15 under Gurrea’s
management.
VIII. My vote goes without hesitation to appellant Gurrea, with due
respect of course to the majority opinion. He should be reinstated and
compensated. How, I need not explain, my opinion having been
overruled.
I am flattered that, after reading my above dissent, the majority has
found it necessary to re-write its decision in an effort to answer some —
not all — of the points I raised or to remove the grounds on which
rested a couple of objections (V. Textbook v. Treatises). For once, the
"voice in the wilderness" has been heard.
No need to re-write my dissent to meet the altered situation. Otherwise,
the majority decision might again be reformed, and the discussion will
be prolonged or will never end.
Now I am thoroughly convinced of the justness of my vote for appellant
(with apologies to my honored colleagues on the other side), because
having expressly undertaken to rebut my above dissent, the majority
decision left one vital point untouched 16 : the stockholders in
approving the by-laws intended the manager to be a "funcionario,"
removable only by two-thirds vote. Also because the revised version of
the majority opinion is partly founded (again my apologies) on two
fallacious propositions which, contained in a few lines, will require more
than two pages to refute. 17
To match my contention that eight states of the American Union
consider the manager as officer of the corporation, the majority now
argue that nine states hold managers to be "agents or employees" ;
and so they claim to reflect the prevailing view. It is inferable from their
statement that some of the states (or decisions) they have in mind hold
managers as agents, and others employees. How many belong to the
last class (managers-are-employees), they are careful not to specify;
thus the suspicion can not be downed that less than eight belong to
that class; otherwise, there was no reason to include the other kind of
cases (managers-are-agents) to be able to list nine states in their
column. 18 Yet, the issue here is not whether managers are agents or
not. Undoubtedly, officers — including managers — of the corporation
are also its agents; hence, those "managers-are-agents" decisions
neither boost their position nor countercheck mine.
First fallacy. — And yet, this seems to be the majority’s unexpressed
method of reasoning on this matter of "managers-are- agents" : There
are decisions holding the manager to be an agent of the corporation;
there are also decisions holding that an agent of a corporation is not an
officer thereof; hence, all these decisions combine to hold that the
manager is not an officer.
Books on the science of correct thinking repudiate the fallacious
argumentation known as "Equivocation." It consists in using the same
word in different meanings, for example: Spirits are incorporeal; liquors
are spirits; therefore, liquors are incorporeal. The wrong conclusion
stems from the fallacy of employing "spirits" in a double meaning.
Reduced to a shorter syllogism, the majority’s position is this: manager
is agent of the corporation; Agent is not officer; therefore, manager is
not officer.
With all due respect, I say, there is sophistical "equivocation" here. In
the major premise "agent" is used in general (common noun) to denote
"representative," any one acting or speaking for the corporation.
Whereas, Agent in the second premise (capital letter, because proper
noun) is used in particular, i.e., a person occupying the position in the
corporation designated "Managing Agent" "General Agent" "Principal
Agent" or simply "Agent." The decisions supporting this second premise
simply hold that this or that particular "General Agent" or "Managing
Agent" or "Agent" is not classified as an officer of the corporation, in
view of his powers or responsibilities. There is no decision declaring
that "all agents (in general) of the corporation are not its officers" ;
because it would not be correct, the President of a corporation being
admittedly its officer, and also its agent (not capital letter), since he acts
for and on behalf of the corporation. Following the majority’s reasoning
it may be argued: the president of a corporation is agent thereof,
Agents of the corporation are not officers thereof; hence, the president
is not officer. Absurd, no? "Equivocation" again.
Second fallacy. — Disputing my position that eight states consider
managers as officers, the majority come out with "only six states adopt
the view that managers are considered principal officers of the
corporation." The issue may I remind them, is whether managers are
officers. Whether principal or not, is immaterial. One abundant source
of fallacies consists in ignoring or evading the issue. Aristotle called it
ignoratio elenchi.
Twelve states support dissent. — Let me now seek to reinforce the
ranks of the opposition. Four states, in addition to those already
mentioned in my above dissent, may be counted in the managers-are-
officers column. 19 That makes twelve states on my side, which should
be held to be the right side if only in deference to the Congressional
viewpoint clearly implied in the statutes I have indicated.
LABRADOR, J., concurring:chanrob1es virtual 1aw library
I concur in the above dissent of Mr. Justice Bengzon. As by Act 13 of
the By-Laws the manager is made an officer of the corporation, he may
not be removed or suspended except by the affirmative vote of 2/3 of
the paid-up shares, as provided in the By-Laws. (Exh. A).
REYES, A., J., dissenting:chanrob1es virtual 1aw library
The by-laws of this corporation provide that with the exception of the
president, the officers of the corporation may be removed or suspended
by the affirmative vote of two-thirds of the paid-up shares of the
corporation.
The majority opinion holds that this provision of the by-laws does not
apply to the manager because he is not an officer of the corporation.
But the claim that the manager is not an officer of the corporation is
neither based on a correct premise nor is it the result of sound
reasoning.
Says the majority:
"Section 33 of the Corporation Law provides: ‘Immediately after the
election, the directors of a corporation must organize by the election of
a president, who must be one of their number, a secretary or clerk who
shall be a resident of the Philippines . . . and such other officers as may
be provided for in the by-laws.’ The by-laws of the instant corporation in
turn provide that in the board of directors there shall be a president, a
vice-president, a secretary and a treasurer. These are the only ones
mentioned therein as officers of the corporation. The manager is not
included although the latter is mentioned as the person in whom the
administration of the corporation is vested . . . ."
In the first place, I don’t think it is correct to say that the president, the
vice-president, the secretary and the treasurer are the only ones
mentioned in the by-laws as officers of the corporation. For in truth, the
by-laws do not say who shall be regarded as officers of the corporation.
Moreover, the above quoted portion of the majority opinion itself says
that (I quote) ‘the manager . . . is mentioned as the person in whom the
administration of the corporation is vested . . . ." Administering a
corporation involves the exercise of both authority and trust, so that one
invested with such function should be classified as an officer.
There are, for sure, in the by-laws several articles under the heading
"Funcionarios." One would expect from this heading that those articles
would enumerate the funcionarios or officers of the corporation.
Actually, however, they do not, for they merely define the duties or
functions of certain officers: the president, the vice-president, the
secretary and the treasurer. If the duties of the manager are not defined
in those articles, it must be because it is already stated elsewhere in
the by-laws that the corporation is to be administered by the general
meeting of stockholders, the Board of Directors and the manager. It is
not, therefore, correct to say that the manager is not an officer just
because his duties are not defined in those articles. Indeed, as Mr.
Justice Bengzon points out in his dissent, neither are the duties of the
directors enumerated therein and yet there is no denying that the
directors are also officers of the corporation.
I must take exception to the theory of the majority that as the manager
is appointed by the Board of Directors he may be suspended or
removed by the Board "under such terms as it may see fit and not as
may be provided by the by-laws." Under what principle of the
corporation law could the pretense be justified that the board of
directors may disregard the by-laws, when the validity of these are not
questioned?
On the other hand, there is good reason for believing that the by-laws
requiring a two-third vote of the paid-up stocks for the removal of an
officer of this corporation was meant precisely to prevent the removal of
the manager by the Board of Directors alone. This is made clear in the
following portion of Mr. Justice Bengzon’s dissenting opinion:
"VI. Stockholders intended security for manager. It would be interesting
to inquire whether in approving the two-thirds requirement in the by-
laws, the stockholders intended to apply it only to the Vice-President,
the Secretary and the Treasurer — excluding the manager — as the
majority opinion declares.
"It must be remembered that since the beginning, Gurrea’s family
owned or controlled one half of the shares and Manuel Lezama’s family
the other half. Evidently, because Gurrea voted for them, Lezama and
two others of his family became directors in the five-man board of
directors. In reciprocity for such vote or concession, Gurrea was named
manager. As owner of one-half of the shares Gurrea could effectively
block approval of any by-laws that did not protect his interests.
Therefore, he would not have approved the by-laws in question if they
did not protect his position as manager, knowing that being in the
minority in the board of directors his position would be at the mercy of
the Lezama family. The bargain between the Lezama and Gurrea
families must have been this: Majority of directors of Lezama; minority
for Gurrea plus the position of manager; the Lezama directors cannot
be changed by Gurrea alone (he owns one-half only); and Gurrea may
not be changed by the Lezama directors (they have one half shares
only)."
With the above clarification of the situation that led to the approval of
the by-law on the removal of officers, I think this Court would do well to
rely less on the technicalities of definition and adhere more to its
function of giving effect to the by-law in accordance with its purpose.
PSBA vs. Leano, 127 SCRA 778 (1984)
SYLLABUS
1. COMMERCIAL LAW; CORPORATION LAW; SECURITIES AND
EXCHANGE COMMISSION; JURISDICTION THEREOF VIS-A-VIS
THE NATIONAL LABOR RELATIONS COMMISSION; CASE AT BAR.
— The jurisdiction of the Securities and Exchange Commission (SEC)
vis-a-vis the National Labor Relations Commission (NLRC) is in issue.
An intracorporate controversy would call for SEC jurisdiction. A labor
dispute, that of the NLRC.
2. ID.; ID.; INTRA-CORPORATE CONTROVERSIES; LEGALITY OF
ELECTION OF CORPORATE DIRECTORS, IN THE NATURE OF;
CASE AT BAR. — Basically, therefore, the question is whether the
election of directors on August 1, 1981 and the election of officers on
September 5, 1981, which resulted in TAN’s failure to be re-elected,
were validly held. This is the crux of the question that TAN has raised
before the SEC. Even in his position paper before the NLRC, TAN
alleged that the election on August 1, 1981 of the three directors was in
contravention of the PSBA By-Laws providing that any vacancy in the
Board shall be filled by a majority vote of the stockholders at a meeting
specially called for the purpose. Thus, he concludes, the Board meeting
on September 5, 1981 was tainted with irregularity on account of the
presence of illegally elected directors without whom the results could
have been different. TAN invoked the same allegations in his complaint
filed with the SEC. So much so, that on December 17, 1981, the SEC
(Case No. 2145) rendered a Partial Decision annulling the election of
the three directors and ordered the convening of a stockholders’
meeting for the purpose of electing new members of the Board. 9 The
correctness of said conclusion is not for us to pass upon in this case.
TAN was present at said meeting and again sought the issuance of
injunctive relief from the SEC. The foregoing indubitably show that,
fundamentally, the controversy is intra-corporate in nature.
3. ID.; ID.; SECURITIES AND EXCHANGE COMMISSION;
JURISDICTION; ORIGINAL AND EXCLUSIVE OVER INTRA-
CORPORATE CONTROVERSIES UNDER PRESIDENTIAL DECREE
NO. 902-A; CASE AT BAR. — Presidential Decree No. 902-A vests in
the Securities and Exchange Commission original and exclusive
jurisdiction to hear and decide controversies involving the election of
directors, officers, or managers of corporations registered with the
Commission, the relation between and among its stockholders, and
between them and the corporation. The instant case is not a case of
dismissal. The situation is that of a corporate office having been
declared vacant, and of TAN’s not having been elected thereafter. The
matter of whom to elect is a prerogative that belongs to the Board, and
involves the exercise of deliberate choice and the faculty of
discriminative selection. Generally speaking, the relationship of a
person to a corporation, whether as officer or as agent or employee, is
not determined by the nature of the services performed, but by the
incidents of the relationship as they actually exist. (Bruce v. Travelers
Ins. Co., 266 F2d 781, cited in 19 Am. Jur. 2d 526).
DECISION
MELENCIO-HERRERA, J.:
This Petition for Certiorari questions the jurisdiction of respondent
Labor Arbiter over the present controversy (No. NCR-9-20-81) involving
private respondent-complainant, Rufino R. Tan (TAN), and petitioners,
the Philippine School of Business Administration (PSBA), a domestic
corporation, and majority of its Directors.
TAN is one of the principal stockholders of PSBA. Before September 5,
1981, he was a Director and the Executive Vice President enjoying
salaries and allowances.
On August 1, 1981, at the PSBA Board of Directors’ regular meeting,
three members were elected to fill vacancies in the seven-man body.
On September 5, 1981, also during a regular meeting, the Board
declared all corporate positions vacant except those of the Chairman
and President, and at the same time elected a new set of officers. TAN
was not re-elected as Executive Vice-President. 1
On September 16, 1981, TAN filed with the National Labor Relations
Commission (NLRC) (National Capital Region) a complaint for Illegal
Dismissal against petitioners alleging that he was "summarily, illegally,
irregularly and improperly removed from his position as Executive Vice-
President . . . without cause, investigation or notice" (NLRC Case No.
NCR-9-20-81) (the Labor Case, in brief).
On September 21, 1981, TAN also filed a one-million-peso damage suit
against petitioners before the then Court of First Instance of Rizal,
Quezon City, for illegal and oppressive removal (Civil Case No. Q-
33444).
And, on September 28, 1981, TAN lodged before the Securities and
Exchange Commission (SEC) another complaint against petitioners
essentially questioning the validity of the PSBA elections of August 1,
1981 and September 5, 1981, and of his "ouster" as Executive Vice-
President (SEC Case No. 2145).chanrobles lawlibrary : rednad
On October 13, 1981, SEC issued a subpoena duces tecum
commanding the production of corporate documents, books and
records. 2 So much so, that on December 17, 1981, the SEC (Case No. 2145)
On October 15, 1981, respondent Labor Arbiter also issued a
subpoena duces tecum to submit the same books and documents. 3
Before the NLRC, petitioners moved for the dismissal of TAN’s
complaint, invoking the principle against split jurisdiction.
On October 22, 1981, petitioners availed of this Petition contending
mainly that:
"1. The respondent labor arbiter illegally assumed jurisdiction over the
complaint for ‘Illegal Dismissal’ because the failure of the private
respondent to be re-elected to the corporate position of Executive Vice-
President was an intra-corporate question over which the Securities
and Exchange Commission had already assumed jurisdiction.
"2. The issuance by the respondent labor arbiter of a subpoena duces
tecum was likewise without jurisdiction especially if considered in the
light of procedural and substantial requirements therefor such that it is
imperative that the supervising authority of this Honorable Court should
be exercised to prevent a substantial wrong and to do substantial
justice." 4
TAN counter-argues that his sole and exclusive cause of action is
illegal dismissal, falling within the jurisdiction of the NLRC, for he was
dismissed suddenly and summarily without cause in violation of his
constitutional rights to due process and security of tenure. He prays
that his dismissal be declared illegal and that his reinstatement be
ordered with full backwages and without loss of other
benefits.chanroblesvirtualawlibrary
We issued a Temporary Restraining Order, enjoining respondent Labor
Arbiter from proceeding in any manner with the Labor Case, and
subsequently gave due course to the Petition.
The jurisdiction of the SEC vis-a-vis the NLRC is in issue. An
intracorporate controversy would call for SEC jurisdiction. A labor
dispute, that of the NLRC.
Relevant and pertinent it is to note that the PSBA is a domestic
corporation duly organized and existing under our laws. General
management is vested in a Board of seven directors elected annually
by the stockholders entitled to vote, who serve until the election and
qualification of their successors. Any vacancy in the Board of Directors
is filled by a majority vote of the subscribed capital stock entitled to vote
at a meeting specially called for the purpose, and the director or
directors so chosen hold office for the unexpired term. 5 Corporate
officers are provided for, among them, the Executive Vice-President,
who is elected by the Board of Directors from their own number. 6 The
officers receive such salaries or compensation as the Board of
Directors may fix. 7 The By-Laws likewise provide that should the
position of any officer of the corporation become vacant by reason of
death, resignation, disqualification, or otherwise, the Board of Directors,
by a majority vote, may choose a successor or successors who shall
hold office for the expired term of his predecessor. 8
It was at a board regular monthly meeting held on August 1, 1981, that
three directors were elected to fill vacancies. And, it was at the regular
Board Meeting of September 5, 1981 that all corporate positions were
declared vacant in order to effect a reorganization, and at the ensuing
election of officers, TAN was not re-elected as Executive Vice-
President.
Basically, therefore, the question is whether the election of directors on
August 1, 1981 and the election of officers on September 5, 1981,
which resulted in TAN’s failure to be re-elected, were validly held. This
is the crux of the question that TAN has raised before the SEC. Even in
his position paper before the NLRC, TAN alleged that the election on
August 1, 1981 of the three directors was in contravention of the PSBA
By-Laws providing that any vacancy in the Board shall be filled by a
majority vote of the stockholders at a meeting specially called for the
purpose. Thus, he concludes, the Board meeting on September 5,
1981 was tainted with irregularity on account of the presence of illegally
elected directors without whom the results could have been different.
TAN invoked the same allegations in his complaint filed with the SEC.
rendered a Partial Decision annulling the election of the three directors
and ordered the convening of a stockholders’ meeting for the purpose
of electing new members of the Board. 9 The correctness of said
conclusion is not for us to pass upon in this case. TAN was present at
said meeting and again sought the issuance of injunctive relief from the
SEC.
The foregoing indubitably show that, fundamentally, the controversy is
intra-corporate in nature. It revolves around the election of directors,
officers or managers of the PSBA, the relation between and among its
stockholders, and between them and the corporation. Private
respondent also contends that his "ouster" was a scheme to intimidate
him into selling his shares and to deprive him of his just and fair return
on his investment as a stockholder received through his salary and
allowances as Executive Vice-President. Vis-a-vis the NLRC, these
matters fall within the jurisdiction of the SEC. Presidential Decree No.
902-A vests in the Securities and Exchange Commission
". . . original and exclusive jurisdiction to hear and decide cases
involving
"a) Devices or schemes employed by or any acts, of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest of
the public and/or stockholders, partners, members of associations or
organizations registered with the Commission.
"b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between
any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the state
insofar as it concerns their individual franchise or right to exist as such
entity;
"c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnerships or associations.
10
This is not a case of dismissal. The situation is that of a corporate office
having been declared vacant, and of TAN’s not having been elected
thereafter. The matter of whom to elect is a prerogative that belongs to
the Board, and involves the exercise of deliberate choice and the
faculty of discriminative selection. Generally speaking, the relationship
of a person to a corporation, whether as officer or as agent or
employee, is not determined by the nature of the services performed,
but by the incidents of the relationship as they actually exist. 11
With the foregoing conclusion, it follows that the issuance of a
subpoena duces tecum by the Labor Arbiter will have to be set aside.
WHEREFORE, judgment is hereby rendered (1) ordering respondent
Labor Arbiter to dismiss the complaint in NLRC Case No. NCR-9-20-81
for lack of jurisdiction; (2) nullifying the subpoena duces tecum issued
by him in said case; and (3) declaring the Temporary Restraining Order
heretofore issued permanent.

Pearson & George vs. NLRC, 67 SCAD 698, 30 Jan 1996 (113928)
DAVIDE, JR., J.:
In this special civil action for certiorari under Rule 65 of the Rules of
Court, the petitioner seeks the annulment of the decision of 22 April
19931 and order of 25 November 19932 of public respondent National
Labor Relations Commission (NLRC) in NLRC CA No. 0034-07-92
which, respectively, dismissed the petitioner's appeal from the decision
of the Labor Arbiter in NLRC NCR Case No. 00-04-02127-90 and
denied the petitioner's motion for reconsideration.
The petitioner insists that the Labor Arbiter and the NLRC do not have
jurisdiction over the private respondent's complaint for illegal dismissal
arising out of his removal as Managing Director of the petitioner due to
his non-reelection and the abolition of the said position. It claims that
the matter is intra-corporate and thus falls within the exclusive
jurisdiction of the Securities and Exchange Commission (SEC)
pursuant to Section 5(c) of P.D. No. 902-A.
In a Manifestation submitted in lieu of the required comment on the
petition, the Office of the Solicitor General agrees with the petitioner
that the NLRC has no jurisdiction over the private respondent's
complaint for illegal dismissal and prays that the NLRC be granted a
new period within which to file its own comment should it desire to do
so.
The NLRC filed its own comment contending that it has jurisdiction over
the case because the private respondent was not just an incorporator
but also a Managing Director and a line officer or an employee of the
petitioner with a salary of P33,000.00 a month; hence, his complaint for
illegal dismissal as such employee is within the jurisdiction of the
NLRC.
The private respondent does not meet the substantive issues raised by
the petitioner but merely sets up the following defenses: (1) the petition
was filed long after the lapse of ten days provided for in Article 223 of
the Labor Code; (2) a special civil action for certiorari under Rule 65 is
not the proper remedy because of the aforementioned provision; (3) the
petition is defective because it does not allege when the petitioner
received the NLRC decision; and (4) the petition raises factual issues.
In its Reply, the petitioner refutes the foregoing arguments of the
private respondent by stating that (1) this Court may take cognizance of
petitions questioning the decisions of the NLRC on the ground of lack
or excess of jurisdiction or grave abuse of discretion inspite of Article
223 of the Labor Code making final the said decisions after ten
calendar days from receipt thereof; (2) the only way by which a labor
case may reach this Court is through a petition for certiorari, which
must be filed within a reasonable time from receipt of the resolution
denying the motion for reconsideration of the decision of the
Commission; (3) for purposes of showing the timeliness of the petition,
the petitioner has only to state, as it did, the date the order denying the
motion for reconsideration was received; and (4) in order to resolve the
main issue raised in this petition, viz., whether the NLRC has
jurisdiction over this case, it was necessary to state the factual
circumstances of the case.
After deliberating on the pleadings submitted by the parties, we
resolved to give due course to this petition and to require the parties to
submit their respective memoranda.
The factual antecedents as culled from the pleadings are not in dispute:
Private respondent Leopoldo Llorente (hereinafter Llorente) was a
member of the Board of Directors of the petitioner. In its organizational
meeting on 12 January 1989, the Board of Directors elected among
themselves the corporate officers. Llorente was elected as Vice-
Chairman of the Board and as Managing Director for a term of one year
and until his successor should have been duly elected pursuant to the
petitioner's by-laws.
On 29 January 1990, Llorente was preventively suspended, with pay,
by reason of alleged anomalous transactions entered by him, which
were prejudicial to the interest of the petitioner.
In a letter dated 1 February 1990, Llorente demanded from the
petitioner access to his room which the latter allegedly sealed;
compensation for his suspension or termination; and delivery of his
stock certificates for 9,998 shares.
On 17 February 1990, the petitioner sent Llorente a letter requiring him
to explain the acts enumerated therein which he allegedly committed.
On 27 February 1990, Llorente, through his counsel, protested his
suspension and requested an examination of the supporting documents
to enable him to explain the accusations leveled against him, but to no
avail.
At the regular stockholders' meeting on 5 March 1990, the stockholders
of the petitioner elected a new set of directors. Llorente was not
reelected. On the same day, the new Board of Directors held a meeting
wherein it elected a new set of officers and abolished the position of
Managing Director.
On 12 March 1990, the petitioner's counsel informed Llorente of his
non-reelection, the abolition of the position of Managing Director, and
his termination for cause.
On 11 April 1990, Llorente filed with the Labor Arbiter a complaint for
unfair labor practice, illegal dismissal, and illegal suspension alleging
therein that he was dismissed without due process of law. The case
was docketed as NLRC NCR Case No. 00-04-02127-90.
Upon receipt of the summons, the petitioner filed a Motion to Dismiss
alleging therein that the case falls within the jurisdiction of the SEC and
not of the NLRC.
In his order of 1 March 1991, the Labor Arbiter denied the said motion
on the ground that Llorente was not merely acting as a Director but was
likewise doing the functions of a manager or line officer of the
corporation.
The parties thereafter filed their respective position papers.
In a decision dated 18 May 1992, the Labor Arbiter found for Llorente,
ruled that he was illegally terminated from employment, and disposed
as follows:
WHEREFORE, premises considered, judgment is hereby rendered
finding the suspension and the eventual dismissal as illegal and
ordering respondent to:
1. Pay the complainant his full backwages from January 29, 1990 to
date or in the amount of Nine Hundred Twelve Thousand Seven
Hundred Eighty (P912,780.00) Pesos;
2. To pay complainant attorney's fees equivalent to ten (10%) percent
of his backwages;
3. This Office is cognizant of the fact that due to the instant case, the
relations between the parties is so strained that the reinstatement may
no longer be feasible. Besides, there may be no equivalent position as
the Office of the Managing Director had been abolished ; and
4. To pay complainant moral damages in the amount of Fifty Thousand
(P50,000.00) Pesos.
The petitioner appealed to the NLRC from the said decision.
Relying on our decision in LEP International Philippines,
Inc. vs. National Labor Relations Commission,3 the NLRC dismissed
the petitioner's appeal and affirmed the decision of the Labor Arbiter. It
likewise denied the petitioner's motion for reconsideration.
Hence, this petition for certiorari in support of which the petitioner
asserts as follows:
I
THE NLRC ACTED WITHOUT JURISDICTION AND WITH GRAVE
ABUSE OF DISCRETION IN ASSUMING JURISDICTION OVER THE
PRESENT CONTROVERSY BETWEEN PETITIONER AND PRIVATE
RESPONDENT WHO IS ADMITTEDLY ONE OF ITS
INCORPORATORS/STOCKHOLDERS AND A CORPORATE
OFFICER.
II
THE NLRC COMMITTED SERIOUS ERRORS AND ACTED WITH
GRAVE ABUSE OF DISCRETION IN FINDING THAT THE REMOVAL
FROM OFFICE BY NON-REELECTION OF PRIVATE RESPONDENT
IS ONE OF ILLEGAL DISMISSAL CASE WHEREIN IT HAS
JURISDICTION TO TRY AND DECIDE.
III
THE NLRC COMMITTED SERIOUS ERROR AND ACTED WITH
GRAVE ABUSE OF DISCRETION, ASSUMING WITHOUT
CONCEDING THAT IT HAS JURISDICTION OVER THE PRESENT
CONTROVERSY, THAT PRIVATE RESPONDENT WAS ILLEGALLY
DISMISSED FROM SERVICE.
The pith issue thus raised is whether it is the SEC or the NLRC which
has jurisdiction over the complaint for illegal dismissal which the private
respondent had filed with the NLRC.
We agree with both the petitioner and the Office of the Solicitor General
that the removal of Llorente as Managing Director is purely an intra-
corporate dispute which falls within the exclusive jurisdiction of the SEC
and not of the NLRC.
In reality, Llorente was not dismissed. If he lost the position of
Managing Director, it was primarily because he was not reelected as
Director during the regular stockholders' meeting on 5 March 1990. The
office of Managing Director presupposes that its occupant is a Director;
hence, one who is not a Director of the petitioner or who has ceased to
be a Director cannot be elected or appointed as a Managing Director.
Elsewise stated, the holding of the position of Director is a prerequisite
for the election, appointment, or designation of Managing Director. If a
Managing Director should lose his position because he ceased to be a
Director for any reason, such as non-reelection as in the case of
Llorente, such loss is not dismissal but failure to qualify or to maintain a
prerequisite for that position. Then too, the position of Managing
Director was abolished.
Any question relating or incident to the election of the new Board of
Directors, the non-reelection of Llorente as a Director, his loss of the
position of Managing Director, or the abolition of the said office are
intra-corporate matters. Disputes arising therefrom are intra-corporate
disputes which, if unresolved within the corporate structure of the
petitioner, may be resolved in an appropriate action only by the SEC
pursuant to its authority under paragraphs (b) and (c), Section 5 of P.D.
No. 902-A,4 which provide as follows:
Sec. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships
and other forms of associations registered with it as expressly granted
under existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
xxx       xxx       xxx
(b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between
any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the state
insofar as it concerns their individual franchise or right to exist as such
entity;
(c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnership or associations.
Thus, in Philippine School of Business Administration vs. Leano,5 we
ruled that a complaint for illegal dismissal arising from a Board of
Directors' action declaring vacant all corporate positions except that of
Chairman and President, and from the non-reelection of the former
Executive Vice-President during the ensuing election of officers is not
cognizable by the NLRC. Pertinent portions of our opinion therein read
as follows:
Basically, therefore, the question is whether the election of directors on
August 1, 1981 and the election of officers on September 5, 1981,
which resulted in TAN's failure to be re-elected, were validly held. This
is the crux of the question that TAN has raised before the SEC. Even in
his position paper before the NLRC, TAN alleged that the election on
August 1, 1981 of the three directors was in contravention of the PSBA
By-Laws providing that any vacancy in the Board shall be filled by a
majority vote of the stockholders at a meeting specially called for the
purpose. Thus, he concludes, the Board meeting on September 5,
1981 was tainted with irregularity on account of the presence of illegally
elected directors without whom the results could have been different.
TAN invoked the same allegations in his complaint filed with the SEC.
So much so, that on December 17, 1981, the SEC (Case No. 2145)
rendered a Partial Decision annulling the election of the three directors
and ordered the convening of a stockholders' meeting for the purpose
of electing new members of the Board. The correctness of said
conclusion is not for us to pass upon in this case. TAN was present at
said meeting and again sought the issuance of injunctive relief from the
SEC.
The foregoing indubitably show that, fundamentally, the controversy is
intra-corporate in nature. It revolves around the election of directors,
officers or managers of the PSBA, the relation between and among its
stockholders, and between them and the corporation. Private
respondent also contends that his "ouster" was a scheme to intimidate
him into selling his shares and to deprive him of his just and fair return
on his investment as a stockholder received through his salary and
allowances as Executive Vice-President. Vis-a-vis the NLRC, these
matters fall within the jurisdiction of the SEC.
xxx       xxx       xxx
This is not a case of dismissal. The situation is that of a corporate office
having been declared vacant, and of TAN's not having been elected
thereafter. The matter of whom to elect is a prerogative that belongs to
the Board, and involves the exercise of deliberate choice and the
faculty of discriminative selection. Generally speaking, the relationship
of a person to a corporation, whether as officer or as agent or
employee, is not determined by the nature of the services performed,
but by the incidents of the relationship as they actually exist.
We reiterated this rule in Dy vs. National Labor Relations
Commission,6 which involved an action for illegal dismissal filed by a
bank manager who was not reelected as such, and in Fortune Cement
Corporation vs. National Labor Relations Commission ,7 which involved
a complaint for illegal dismissal instituted by an Executive Vice-
President of the corporation who lost that position when he was
dismissed as such by the Board of Directors for loss of trust and
confidence.
The reliance by the NLRC on LEP International Philippines, Inc. vs.
National Labor Relations Commission is misplaced. What was
challenged in that case was not the jurisdiction of the respondent
Commission but its act of upholding the validity of the dismissal of
LEP's Chief Executive, who was not a stockholder, much less a
director, of LEP but was merely a managerial employee of the said
company.
WHEREFORE, the instant petition is GRANTED. The challenged
decision of 22 April 1993 and order of 25 November 1993 of public
respondent National Labor Relations Commission in NLRC Case No.
0034-07-92 and the decision of 18 May 1992 of the Labor Arbiter in
NLRC NCR Case No. 00-04-02127-90 are hereby ANNULLED and
SET ASIDE for having been rendered without jurisdiction.
No pronouncement as to costs.
SO ORDERED.
Reahs Corporation vs. NLRC, GR No. 117473 [14 April 1997]
SYLLABUS
2. COMMERCIAL LAW; CORPORATION CODE; DOCTRINE OF
SEPARATE PERSONALITY OF A CORPORATION; EXCEPTIONS. —
As a general rule established by legal fiction, the corporation has a
personality separate and distinct from its officers, stockholders and
members. Hence, officers of a corporation are not personally liable for
their official acts unless it is shown that they have exceeded their
authority. This fictional veil, however, can be pierced by the very same
law which created it when "the notion of the legal entity is used as a
means to perpetrate fraud, an illegal act, as a vehicle for the evasion of
an existing obligation, and to confuse legitimate issues."
3. ID.; ID.; ID.; ID.; OFFICERS, WHEN SOLIDARILY LIABLE WITH
CORPORATION. — . . . At the very least, as what we held in Pabalan
v. NLRC, to justify solidary liability, "there must be an allegation or
showing that the officers of the corporation deliberately or maliciously
designed to evade the financial obligation of the corporation to its
employees," or a showing that the officers indiscriminately stopped its
business to perpetrate an illegal act, as a vehicle for the evasion of
existing obligations, in circumvention of statutes, and to confuse
legitimate issues.
4. ID.; ID.; ID.; ID.; ID.; CASE AT BENCH. — In the case at bar, the
thrust of petitioners’ arguments was aimed at confining liability solely to
the corporation, as if the entity were an automaton designed to perform
functions at the push of a button. The issue, however, is not limited to
payment of separation pay under Article 283 but also payment of labor
standard benefits such as underpayment of wages, holiday pay and
13th month pay to two of the private respondents. While there is no
sufficient evidence to conclude that petitioners have indiscriminately
stopped the entity’s business, at the same time, petitioners have opted
to abstain from presenting sufficient evidence to establish the serious
and adverse financial condition of the company. . . . This uncaring
attitude on the part of the officers of Reah’s gives credence to the
supposition that they simply ignored the side of the workers who, more
or less, were only demanding what is due them in accordance with law.
In fine, these officers were conscious that the corporation was violating
labor standard provisions but they did not act to correct these
violations; instead, they abruptly closed business. Neither did they offer
separation pay to the employees as they conveniently resorted to a
lame excuse that they suffered serious business losses, knowing fully
well that they had no substantial proof in their hands to prove such
losses. Under these circumstances, we cannot allow labor to go home
with an empty victory. Neither would it be oppressive to capital to hold
petitioners Castulo, Pascua and Valenzuela solidarity liable with Reah’s
Corporation because the law presumes that they have acted in the
latter’s interest when they obstinately refused to grant the labor
standard benefits and separation pay due private respondent-
employees.
5. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CERTIORARI;
AWARD OF 10% ATTORNEY’S FEES WITHOUT FACTUAL AND
LEGAL BASIS CONSTITUTES GRAVE ABUSE OF DISCRETION;
CASE AT BENCH. — The last issue raised by petitioners is whether
there is legal basis for the payment of 10% attorney’s fees out of the
total amount awarded to private respondents Red and Tulabing. The
Court finds this portion of the assailed decision to have been rendered
with grave abuse of discretion as both the labor arbiter and the NLRC
failed to make an express finding of fact and cite the applicable law to
justify the grant of such award. Under Article 111 of the Labor Code,
10% attorneys fees may be assessed only in cases where there is an
unlawful withholding of wages, or under Article 222 — those arising
from collective bargaining negotiations that may be charged against
union funds in an amount to be agreed upon by the parties. None of
these situations exists in the case at bar.
DECISION
PADILLA, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court to
annul and set aside the decision dated 29 April 1994 rendered by the
National Labor Relations Commission (NLRC) in NLRC Case No.
005024-93 entitled "Bonifacio Red, Et Al., v. Reah’s Corporation, et.
al.", which affirmed the decision of the Labor arbiter holding individual
petitioners jointly and severally liable with petitioner Reah’s Corporation
to pay private respondents’ claims for underpayment of wages, holiday
pay, 13th month pay and separation pay.
The facts, as culled by the labor arbiter from the position papers of both
parties, are as follows:jgc:chanrobles.com.ph
"Complainant Bonifacio Red alleges that he started working as a
supervisor at the health and sauna parlor of respondents from
September 5, 1977 to November 6, 1990, with a salary of P50.00, that
the said establishment was closed by respondents on November 6,
1990, without any notice and without paying his wages, separation pay
and other benefits under the law; and that he works a minimum of
twelve (12) hours a day without being paid overtime.
Complainant Benedicto Tulabing alleges that he started on December
16, 1986 up to November 6, 1990 in the same establishment with a
salary of P26.00 a day; that he works thirteen (13) hours a day without
payment of overtime pay.
Complainant Nancy Cenita and Susan Calwit alleges [sic] that they
were hired as waitresses on May 20, 1990 up to November 6, 1990 and
paid on commission basis at P0.25 per bottle of beer sold to or
consumed by the customers and that they work ten (10) hours a day
without being paid overtime.
Complainants Edna Wahingon, Susan dela Cruz, Sonia dela Cruz and
Victoria Padilla claims [sic] working as attendants and were hired on
different dates until November 6, 1990. All were paid on commission
basis at the rate of twenty (20%) percent of the service fee paid by the
customers, P90.00 and P110.00 respectively, for ordinary and VIP
service; that they render(ed) eleven (11) hours of work a day without
being paid overtime; and that the closure of the health parlor was illegal
as they were not notified.
On the other hand, respondents allege that sometime in 1986, a certain
Ms. Soledad Domingo, the sole proprietress and operator of Rainbow
Sauna located at 316 Araneta Avenue, Quezon City, offered to sell her
business to respondent Reah’s Corporation. After the sale, all the
assets of Ms. Domingo were turned over to respondent Reah’s, which
put a sing-along coffee shop and massage clinic; that complainant Red
started his employment on the first week of December 1988 as a
roomboy at P50.00/day and was given living quarters inside the
premises as he requested; that sometime in March 1989, complainant
Red asked permission to go to Bicol for a period of ten (10) days, which
was granted, and was given an advance money of P1,200.00 to bring
some girls from the province to work as attendants at the respondent’s
massage clinic; that it was only on January 1, 1990 that complainant
Red returned and was re-hired under the same terms and conditions of
his previous employment with the understanding that he will have to
refund the P1,200.00 cash advance given to him; that due to poor
business, increase in the rental cost and the failure of Meralco to
reconnect the electrical services in the establishment, it suffered losses
leading to its closure." 1
On 6 May 1993, the labor arbiter rendered judgment dismissing private
respondents’ complaints for unfair labor practice and illegal dismissal
but upholding the claims for separation pay, underpayment of wages,
holiday pay and 13th month pay. All eight (8) private respondents were
awarded separation pay. However, only Bonifacio Red and Benedicto
Tulabing were declared entitled to the claimed labor standard benefits
as the rest were found to have been employed on commission basis.
The labor arbiter further awarded attorney’s fees to private respondents
Bonifacio Red and Benedicto Tulabing amounting to ten (10%) percent
of their adjudged money claims.
Petitioners appealed the labor arbiter’s decision to the NLRC,
contending mainly that Article 283 of the Labor Code, "exempts
establishment(s) from payment of termination pay when the closure of
business is due to serious business losses or financial reverses" ; that
petitioners Castulo, Pascua and Valenzuela, while admittedly the acting
chairman of the board, board member and accountant — acting
manager respectively of Reah’s Corporation, cannot be held jointly and
severally liable with Reah’s "unless there is evidence to show that the
cause of the closure of the business was due to the criminal negligence
of the [respondent] officers."
The NLRC dismissed the appeal based on the following dispositions
"Anent the issue on separation pay, Article 283 of the Labor Code
provides that ‘[T]he employer may . . . terminate the employment of any
employee due to . . . the closing or cessation of operation of the
establishment or undertaking . . . by serving a written notice on the
workers and the Ministry of Labor and Employment at least one (1)
month before the intended date thereof. . . .’ This, respondents failed to
comply. Neither did respondents present any evidence to prove that
Reah’s closure was really due to SERIOUS business losses or financial
reverses. We only have respondents’ mere say-so on the matter.
The Supreme Court held in Basilio Balasbas v. NLRC, et. al. (G.R. No.
85286, August 24, 1992, 3rd Division, Romero, J.) that —
‘Under Article 283 of the Labor Code, the closure of a business
establishment or reduction of personnel is a ground for the termination
of the services of any employee unless the closing or retrenching is for
the purpose of circumventing the provision of the law. But while
business reverses can be a just cause for terminating employees, The rule, therefore, is that in all cases of business closure or cessation
these must be sufficiently proved by the employer. (Indino v. NLRC, of operation or undertaking of the employer, the affected employee is
G.R. No. 80352, September 29, 1989, 178 SCRA 168).’ entitled to separation pay. This is consistent with the state policy of
treating labor as a primary social economic force, affording full
Thus, we cannot but agree that complainants are entitled to the protection to its rights as well as its welfare. 6 The exception is when
payment of separation pay." 2 the closure of business or cessation of operations is due to serious
business losses or financial reverses; duly proved, in which case, the
Petitioners filed a motion for reconsideration but this was denied by the right of affected employees to separation pay is lost for obvious
NLRC on 30 August 1994. In the present petition, petitioners raise reasons. In the case at bar, the corporation’s alleged serious business
three (3) issues which, for brevity and clarity, may be simplified as losses and financial reverses were not amply shown or proved.
follows
We now proceed to rule on the corollary issue of whether or not
I.
individual petitioners Castulo, Pascua and Valenzuela should be held
WHETHER OR NOT PETITIONERS-OFFICERS CAN BE HELD
liable in solidum with the corporation (REAH’s) in the payment to
JOINTLY AND SEVERALLY LIABLE WITH THE CORPORATION IN
private respondents of separation pay and labor standard benefits.
THE PAYMENT OF SEPARATION PAY TO PRIVATE
RESPONDENTS UNDER ARTICLE 283 OF THE LABOR CODE.
As a general rule established by legal fiction, the corporation has a
II. personality separate and distinct from its officers, stockholders and
WHETHER OR NOT THE OFFICERS OF REAH’S CORPORATION members. Hence, officers of a corporation are not personally liable for
CAN BE HELD JOINTLY AND SEVERALLY LIABLE WITH THE their official acts unless it is shown that they have exceeded their
CORPORATION IN PAYMENT OF THE MONETARY CLAIMS authority. This fictional veil, however, can be pierced by the very same
AWARDED PRIVATE RESPONDENTS IN THE ABSENCE OF ANY law which created it when "the notion of the legal entity is used as a
FINDING OF UNFAIR LABOR PRACTICES OR ILLEGAL DISMISSAL; means to perpetrate fraud, an illegal act, as a vehicle for the evasion of
an existing obligation, and to confuse legitimate issues." Under the
III. Labor Code, for instance, when a corporation violates a provision
WHETHER OR NOT THERE IS LEGAL BASIS FOR THE NLRC TO declared to be penal in nature, the penalty shall be imposed upon the
AFFIRM THE AWARD OF 10% ATTORNEY’S FEES TO PRIVATE guilty officer or officers of the corporation. 7
RESPONDENTS.
The Solicitor General, in behalf of private respondents, argues that the
Petitioners argue that since the charges of illegal dismissal and unfair
doctrine laid down in the case of A.C. Ransom Labor Union — CCLU v.
labor practices were dismissed by the labor arbiter, they cannot be held
NLRC 8 should be applied to the case at bar. In that case, a judgment
solidarily liable with the corporation for the payment of separation pay
against a corporation (A.C. Ransom) to reinstate its dismissed
and labor standard benefits to private respondents, when they used
employees with back wages was declared to be a continuing solidary
their business judgment to close the establishment because of serious
liability of the company president and all who may have thereafter
business losses. They contend that even if they were the top corporate
succeeded to said office after the records failed to identify the officer or
officers of Reah’s corporation at the time they closed the business, the
agents directly responsible for failure to pay the back wages of its
corporation has a personality that is separate and distinct from its
employees. The Court noted Ransom’s subterfuge in organizing
officers and stockholders. Since there was no finding that they violated
another family corporation while the case was on litigation with the
Sec. 31 of the Corporation Code 3 they cannot be held solidarily liable
intent to phase out the existing corporation in case of an adverse
with the corporation. Petitioners further maintain that the corporation
decision, as what actually happened when it ceased operations a few
also cannot be held liable because Article 283 of the Labor Code
months after the labor arbiter ruled in favor of Ransom’s employees.
"orders payment of separation pay only when the closure of the
business is due to causes other than serious business losses or
The basis, said the Court, is found in Article 212(c) of the Labor Code
financial reverses" .
which provides that "an employer includes any person acting in the
interest of an employer, directly or indirectly." "Since Ransom is an
Petitioners have obviously resorted to a misreading of the last sentence
artificial person, it must have an officer who can be presumed to be the
of Article 283 which provides that —
employer, . . . The corporation only in the technical sense is the
employer."
". . . In case of retrenchment to prevent losses and in cases of closures
or cessation of operations of establishment or undertaking not due to
This ruling was eventually applied by the Court in the following cases:
serious business losses or financial reverses, the separation pay shall
Maglutac v. NLRC, 9 an illegal dismissal case, where the most ranking
be equivalent to one (1) month pay or at least (½) month pay for every
officer of Commart, petitioner therein, was held solidarily liable with the
year of service, whichever is higher. A fraction of at least six (6) months
corporation which thereafter became insolvent and suspended
shall be considered as one (1) whole year."
operations; Chua v. NLRC, 10 also an illegal dismissal case, where the
vice-president of a corporation was held solidarily liable with the
It is not the function of the law nor its intent to supplant the prerogative
corporation for the payment of the unpaid salaries of its president; and
of management in running its business, such as, to compel the latter to
in Gudez v. NLRC, 11 where the president and treasurer were held
operate at a continuing loss. Thus, Article 283 provides as an
solidarily liable with the corporation which had ceased operations but
authorized cause in the termination of employment the "closing or
failed to pay the wage and money claims of its employees.
cessation of operation of the establishment or undertaking." However,
the burden of proving that the termination was for a valid or authorized
These cases, however, should be construed still as exceptions to the
cause shall rest on the employer. 4 If the business closure is due to
doctrine of separate personality of a corporation which should remain
serious losses or financial reverses, the employer must present
as the guiding rule in determining corporate liability to its employees. At
sufficient proof of its actual or imminent losses; it must show proof that
the very least, as what we held in Pabalan v. NLRC, 12 to justify
the cessation of or withdrawal from business operations was bona fide
solidary liability, "there must be an allegation or showing that the
in character. 5
officers of the corporation deliberately or maliciously designed to evade
the financial obligation of the corporation to its employees", or a
The grant of separation pay, as an incidence of termination of
showing that the officers indiscriminately stopped its business to
employment under Article 283, is a statutory obligation on the part of
perpetrate an illegal act, as a vehicle for the evasion of existing
the employer and a demandable right on the part of the employee,
obligations, in circumvention of statutes, and to confuse legitimate
except only where the closure or cessation of operations was due to
issues.
serious business losses or financial reverses and there is sufficient
proof of this fact or condition. In the absence of such proof of serious
In the case at bar, the thrust of petitioners’ arguments was aimed at
business losses or financial reverses, the employer closing his
confining liability solely to the corporation, as if the entity were an
business is obligated to pay his employees and workers their
automaton designed to perform functions at the push of a button. The
separation pay.
issue, however, is not limited to payment of separation pay under
Article 283 but also payment of labor standard benefits such as
underpayment of wages, holiday pay and 13th month pay to two of the
private respondents. While there is no sufficient evidence to conclude
that petitioners have indiscriminately stopped the entity’s business, at
the same time, petitioners have opted to abstain from presenting
sufficient evidence to establish the serious and adverse financial
condition of the company.

As the NLRC aptly stated:

"Neither did respondents (petitioners) present any evidence to prove

that Reah’s closure was really due to SERIOUS business losses or
financial reverses. We only have respondents mere say-so on the
matter." 13

This uncaring attitude on the part of the officers of Reah’s gives

credence to the supposition that they simply ignored the side of the
workers who, more or less, were only demanding what is due them in
accordance with law. In fine, these officers were conscious that the
corporation was violating labor standard provisions but they did not act
to correct these violations; instead, they abruptly closed business.
Neither did they offer separation pay to the employees as they
conveniently resorted to a lame excuse that they suffered serious
business losses, knowing fully well that they had no substantial proof in
their hands to prove such losses.

The findings of the NLRC did not indicate whether or not Reah’s
Corporation has continued its personality after it had stopped
operations when it closed its sing-along, coffee shop, and massage
clinic in November 1990. But in its petition, petitioners aver, among
others, that the "company totally folded for lack of patrons,
(disconnection of) light and discontinuance of the leased premises [sic]
for failure to pay the increased monthly rentals from P8,000 to
P20,000." 14 Under the Rules of Evidence, petitioners are bound by the
allegations contained in their pleading. Since petitioners themselves
have admitted that they have dissolved the corporation de facto, the
Court presumes that Reah’s Corporation had become insolvent and
therefore would be unable to satisfy the judgment in favor of its
employees. Under these circumstances, we cannot allow labor to go
home with an empty victory. Neither would it be oppressive to capital to
hold petitioners Castulo, Pascua and Valenzuela solidarily liable with
Reah’s Corporation because the law presumes that they have acted in
the latter’s interest when they obstinately refused to grant the labor
standard benefits and separation pay due private respondent-
employees.

The last issue raised by petitioners is whether there is legal basis for
the payment of 10% attorney’s fees out of the total amount awarded to
private respondents Red and Tulabing. The Court finds this portion of
the assailed decision to have been rendered with grave abuse of
discretion as both the labor arbiter and the NLRC failed to make an
express finding of fact and cite the applicable law to justify the grant of
such award. Under Article 111 of the Labor Code, 10% attorneys fees
may be assessed only in cases where there is an unlawful withholding
of wages, 15 or under Article 222 — those arising from collective
bargaining negotiations that may be charged against union funds in an
amount to be agreed upon by the parties. None of these situations
exists in the case at bar.

WHEREFORE, the decision of respondent National Labor Relations

Commission is hereby AFFIRMED in so far as it holds petitioners
Castulo, Pascua, and Valenzuela jointly and severally liable with
Reah’s Corporation to pay all private respondents separation pay and
private respondents Red and Tulabing other monetary benefits but the
award of ten percent (10%) attorneys fees is hereby DELETED for lack
of factual and legal basis.