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Corporation Law Midterms Case Digests (Atty.

Quimson)
Harden v. Benguet Consolidated Mining Co. Doctrine: As it was the intention of our lawmakers to stimulate the introduction of the American corporation into Philippine law in the place of sociedad anonima, it was necessary to make certain adjustments resulting from the continued co-existence for a time of the 2 forms of commercial entities. A sociedad anonima is something very much like the English joint stock company, with features resembling those of both partnership and the corporation. However, with the enactment of Act No. 1459, or the Corporation Law, there is an evident purpose to introduce American corporation into the Philippines as a standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. Facts: Benguet Consolidated Mining Co was organized in the year 1903 as a sociedad anonima in conformity with the provisions of the Spanish law; while the Balatoc Mining Co. was organized in December 1925 as a corporation in conformity with the provisions of the Corporation Law. Balatoc Mining, being largely undeveloped, entered into a contract with Benguet Consolidated to secure the capital necessary to develop their property. The principal features of said contract were that Benguet company was to proceed with the development and construction of a milling plant for the Balatoc Mine and to construct an appropriate power plant for a consideration that Benguet Company was to receive shares of a par value of P600,000 in payment. In compensation for the work, a certificate of stock worth 600,000 was delivered to Benguet Company. But as soon as the success of the development had become apparent, Balatoc Mining filed an action in court for the principal purpose of restoration of the sum of money it paid to Benguet and the annulment of their contract on the ground that the Corporation Law of the country makes it unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture and mining. Whether or not Benguet Company, organized as a sociedad anonima, is a corporation within the meaning of the language used by the Congress and later by the Legislature, prohibiting a mining corporation from being interested in another mining corporation. Ratio: When the Philippine Bill was approved in 1902, the congress inserted certain provisions (section 74 and 75 of the Act) were inserted. Section 75, which still remains in the law, as amended reads, "it shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or mining". Subsequently, the Corporation law was passed with the evident purpose of setting up the corporation as the standard commercial entity of the country. The word corporation has been used loosely to refer to sociedad anonima. But when the word corporation is used in the sense of a sociedad anonima, it should be associated with the Spanish expression either in parenthesis or connected by the word "or". This device has been adopted in the aforequoted provision. In drafting the Corporation Law, the words in Section 75 have been inserted bodily and it is of course obvious that whatever meaning originally attached to the provision, the same significance should be attached to Section 13 of the Corporation Law insofar as such provisions may be applicable. Sociedad anonimas previously created in the islands are given the option to continue business as such or to reform and organize under the provisions of the Law. If a sociedad anonima continues to operate as such, instead of reforming and reorganizing under the Corporation Law, it will be continued to be governed by the laws that were in force prior to the passage of this Act in relation to their organization and method of transacting business , but their relations to the public and public officials shall be governed by the provisions of this act. As to other issues, the court held that Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong was committed, that Balatoc was an active inducer of the commission of that wrong in that a contract is performed on both sides. Balatoc was found to have no right of action against Benguet.
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Corporation Law Midterms Case Digests (Atty. Quimson)


Palacio v. Fely Transportation Company Doctrine: The defendant corporation in this case should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. Facts: Defendant company herein hired one Carillo as its driver. While driving, he willfully, unlawfully and feloniously and in a negligent and reckless manner, ran over a child Mario Palacio (son of Gregorio Palacio, plaintiff in this case). The son suffered a simple fracture of the right temor and was hospitalized for a period of 5 months. By reason of this, Gregorio Palacio was forced to sell one air compressor and one heavy duty electric drill for a sacrifice sale. In answer to the case, Fely Transportation Company alleged that there is no cause of action and that the sale of the jeepney to one Isabelo Calingasan to Fely Transportation was made long after the conviction of the negligent driver. Fely Transpo alleges that this case was clearly an unfounded civil action filed merely to harass them. The lower court, in the criminal case against the negligent driver, held that the person subsidiarily liable is the employer of the driver and not the defendant corporation. Thus, this appeal. Issue: Whether or not the employer is subsidiarily liable and not Fely Transportation. Ratio: It is evident that Isabelo's main purpose in forming the corporation was to evade his subsidiary civil liability. This can be seen from the fact that the incorporators of the "corporation" are Isabelo, his wife, his son, Dr. Calingasan and his two daughters. Furthermore, the failure of the defendant corporation to prove that it has other property other than the jeepney strengthens the conviction that its formation was for the purpose of evading civil liability. The defendant corporation in this case should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. Guanzon and Sons Inc. v. Register of Deeds of Manila Doctrine: Where the purpose of the liquidation as well as the distribution of the assets of the corporation is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders, and the certificate should be considered as one in the nature of a transfer or conveyance Facts: Guanzon and Sons, through its five stockholders executed a certificate of liquidation of the assets of the corporation reciting that by virtue of the resolution, they are dissolving the corporation and are seeking to have the assets and real properties distributed among themselves. Such certificate of liquidation was presented to the Registry of Deeds of Manila, but it was denied registration on the ground that the number of parcels need be certified, the registration fees need be paid, documentary stamps need be attached, and a judgment of the court approving the dissolution and directing the disposition need be presented. In their defense, the commissioner of land registration asserts that the certificate of liquidation in question, although it involves a distribution of assets, is actually a transfer of said assets from the corporation to the stockholders. Hence, a deed of conveyance need be presented in order to be permitted registration. On the other hand, the corporation claims that it is merely a distribution of assets. Hence, there need not be a deed of conveyance and contain a statement of the number of parcel of land involved. Issue: Whether or not the liquidation and distribution of assets is actually a transfer or conveyance. Ratio: It is a transfer or conveyance. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. The corporation has property of its own which consists chiefly of real estate. A share of stock is an aliquot part of the corporation's property or the right to share in its proceeds to that extent. The holder thereof is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any
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Corporation Law Midterms Case Digests (Atty. Quimson)


definite portion of its property or assets. He is not a co-owner or tenant. Hence, it is in the nature of a transfer, not a partition. The purpose of liquidation and distribution is to transfer the title from the corporation to the stockholders in proportion to their shareholdings. It is fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance. Remo v. IAC Doctrine: A corporation is an entity separate and distinct from its stockholders. The law treats it as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. The corporate fiction may be disregarded when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime in which instances, the law will regard the corporation as an association of persons, or in case of 2 corporations, will merge them into one. It may also be disregarded when it is the mere alter ego or business conduit of a person. Facts: The Board of Directors of Akron Customs, composed of petitioner Remo and Coprada (as president), among others, adopted a resolution authorizing the purchase of 13 trucks for use in its business to be paid out of a loan the corporation may secure from any lending institution from Marcha Transport. In their contract, it is stated that in the event that Akron fails to pay the balance of the purchase price within 60 days, the balance shall constitute as a chattel mortgage lien covering the cargo trucks and the parties are to be allowed an extension of 30 days and thereafter, the private respondent may ask for a revocation of the contract and the reconveyance of all said trucks. Such obligation was further secured by a promissory note executed by Coprada in favor of Akron. For failure to comply with their obligations, Marcha Transpo filed a complaint for the recovery of the amount or the return of the 13 trucks with damages against Akron and its officers and directors. Meanwhile, Remo sold all his shared in Akron to Coprada and it appears that Akron amended its articles of incorporation thereby changing its name to Akron Transport International which assumed the liability of Akron private respondent. The intermediate appellate court thereafter rendered
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a decision ordering the stockholders to jointly and severally pay Marcha Transpo the amount of the contract plus damages. Issue: Whether or not the corporate fiction should be disregarded in this case and hold Remo personally liable for the obligation of the Corporation Ratio: There is no cogent basis to pierce the corporate veil of Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that at the time the contract was entered into, Remo was a member of the Board of the corporation and that he participated in the adoption of the resolution, it does not appear that said resolution was intended to defraud anyone and more particularly private respondent. It was Coprada who negotiated with said respondent for the purchase of the trucks and it was also Coprada who signed the promissory note to secure the obligation. If there was any fraud or misrepresentation, it is Coprada who should account for the same and not Remo. Fraud must be established by clear and convincing evidence. If at all, the principal character on whom fault should be attributed is Coprada, whom private respondent dealt with personally all through out. As to the amendment of the articles of incorporation, the new corporation confirmed and assumed the obligation of the old corporation. There is no indication that Akron did this in order to evade the payment of its obligation to private respondent. Pamplona Plantation Company v. Tinghil Doctrine: The corporate mask may be removes and the corporate veil pierced when a corporation is the mere alter ego of another. Where badges of fraud exist, where public convenience is defeated, where a wrong is sought to be justified thereby, or where a separate corporate identity is used to evade financial obligations to employees or to third parties, the notion of separate legal entity should be set aside and the factual truth upheld.

Corporation Law Midterms Case Digests (Atty. Quimson)


Facts: Pamplona Plantations Company Inc. (Pamplona company for brevity) was organized for the purpose of taking over the operations of the coconut and sugar plantation of Hacienda Pamplona. When it took over the operations, it did not absorb all the workers of the hacienda. Some, however, were hired by the company during harvest season to perform works related to harvesting. Thereafter, the Pamplona Plantation Leisure Corporation (Pamplona corporation for brevity) was established for the purpose of engaging in the business of operating golf courses, and other complimentary facilities, among others. The union workers conducted an organizational meeting. Upon learning this, the manager of the Pamplona Company did not allow the workers to work anymore in the plantation. For this reason, the workers filed a complaint with the NLRC against the Pamplona Company. However, Tinghil(one of the workers) amended his complaint and impleaded Pamplona Corporation. The NLRC issued a decision and stated that the respondent workers, except Tinghil, failed to implead the Pamplona Corporation, which was an indispensable party to the case. The case was dismissed. Issue: Whether or not the case should be dismissed for the non-joinder of the Pamplona Corporation. Ratio: The corporations herein basically have the same incorporators and directors and are headed by the same official. Both use only one office and one payroll and are under one management. The courts therefore may see through the protective shroud that distinguishes one corporation from a seemingly separate one. The corporate mask may be removes and the corporate veil pierced when a corporation is the mere alter ego of another. Where badges of fraud exist, where public convenience is defeated, where a wrong is sought to be justified thereby, or where a separate corporate identity is used to evade financial obligations to employees or to third parties, the notion of separate legal entity should be set aside and the factual truth upheld. The attempt to make the two corporations appear as two separate entities, insofar as the workers are concerned, should be viewed as a devious means to defeat the ends of the law. It is clear in the facts of the case that there was a confusion on the part of the workers as to who their true and real employer was. In sum, the courts concluded that, insofar as the workers are concerned, the company and the corporation were one and the same. In any case, there is, in fact, no need to implead the leisure corporation because they are one and the same entity insofar as the workers are concerned. As to the issue of whether or not there is an employeremployee relationship, the court ruled that there is a relationship. Documents of assignment of tasks prove that there is an exercise of control and supervision. Proof of existence of such power is enough. Hence, they were not mere independent contractors. Jardine Davies, Inc. v. JRB Realty, Inc. Doctrine: The doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. A subsidiary has an independent and separate juridical personality distinct from that of its parent company. Hence, any claim or suit against the latter does not bind the former and vice versa. To apply said doctrine, there must be 1) control; 2) control was used to commit fraud or wrong; 3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The existence of interlocking directors, corporate officers and shareholders, which the respondent court considered, is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Facts: JRB Realty was a builder of a 9-storey building named Blanco Center which needed an air conditioning system for the Blanco Law firm at the second floor of the building. Aircon and Refrigeration Industries (Aircon) was contracted by JRB for the installation of the airconditioners. Upon installation, it was found that the said units could not bring about the desired cooling temperature. The parties thereby agreed to replace the units with reciprocating compressors instead.
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Corporation Law Midterms Case Digests (Atty. Quimson)


Upon delivery of the replacement compressors, TempControl (subsidiary of Aircon) undertook the maintenance of the units. Considering that the prescription period was fast approaching, JRB filed an action for specific performance with damages against Aircon with damages impleading Jardine Davies Inc. The reason why they impleaded Jardine Davies was because at the time the contract was entered into, Aircon was a subsidiary of Jardine Davies as evidenced by documents and the fact that 4 out of the 7 members of the Board of Aircon, 4 are also of Jardine. The RTC rendered a decision finding Jardine Davies and Aircon jointly and severally liable for the obligation. CA affirmed the decision in toto. Issue: Whether or not Jardine Davies should be held jointly and severally liable with Aircon considering that it is not a party to the contract. Ratio: While it is true that Aircon is a subsidiary of Jardine Davies, it does not necessarily follow that Aircon's corporate legal existence can be disregarded. Aircon is only a subsidiary of Jardine Davies because Jardine acquired Aircon's majority of capital stock. However, Jardine does not exercise complete control over Aircon. Nowhere can it be gathered that the petitioner manages the business affairs of Aircon. There exists no management agreement between the 2. They are entirely different entities with different purposes and natures. The doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. To warrant the resort of this remedy, it should be proven that the corporation is being used as a cloak or cover for fraud or illegality or to work injustice. In this case, there is no evidence that Aircon was utilized with the intention of defrauding its creditors. In fact, Aircon complied with its obligation in good faith pursuant to the contract and even replaced the defective aircons with compressors (with consent of JRB) when it failed to reach the desired cooling temperature. After enjoying 10 years of cooling power, JRB cannot now complain about the performance of these units nor can it demand a replacement thereof. Jardine Davies has a separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable. Collector of Internal Revenue v. Club Filipino de Cebu Doctrine: For a stock corporation to exist there must be a compliance with the following requisites: 1) a capital stock divided into shares; 2) authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held. A tax is a burden and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, non-stock organizations, unless the intent to the contrary is manifest and patent. Facts: Club Filipino de Cebu is a civic corporation organized under the laws of the Philippines with an authorized capital stock of P22,000 which was subsequently increased to P200,000. There is no provision relative to dividends and their distribution although it is covenanted that upon dissolution, the remaining assets shall be donated to a charitable Philippine institution in Cebu. The Club operates a bar restaurant which was a necessary incident to the operation of the club and its golf course. The club is operated mainly from the funds derived from membership, fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve the golf course. As a result of their capital surplus, their stocks increased. The Club, then, received a letter form the CIR stating that the club has never paid percentage taxes (which, according to the CIR, the Club was required to pay as a keeper of restaurant and bars) and was then asked to pay. Hence, this instant petition for review of the assessment of the CIR. Issue: Whether or not the Club is required to pay percentage taxes under the Tax Code. Whether or not the Club is a stock corporation. Ratio: The Club derive profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary
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Corporation Law Midterms Case Digests (Atty. Quimson)


adjuncts of the main purpose of the Club. That a club makes profit does not make it a profit making club. The Club is not a stock corporation. What is determinative of whether it is a stock corporation business it its actual object or purpose as stated in the articles and by-laws. For a stock corporation to exist there must be a compliance with the following requisites: 1) a capital stock divided into shares; 2) authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held. In this case, there is nothing in the articles or by-laws which speaks of the distribution of dividends or surplus. It cannot, therefore, be considered as a stock corporation, within the contemplation of the corporation law. Gonzales v. Philippine National Bank Doctrine: The right of inspection granted to a stockholder are the following: 1) records must be kept at the principal office of the corporation; 2) inspection must be made on business days; 3) he may demand a copy of the excerpts of the records or minutes; 4) refusal to allow such inspection shall subject the erring officer to civil and criminal liabilities. However, it is now expressly required as a condition that one requesting must not have been guilty of using improperly any information secured and that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand. The Philippine National bank is not an ordinary corporation. Having a charter of its own, it is not governed by the Corporation Code of the Philippines. Corporations shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the Corporation Code insofar as they are applicable. Facts: Ramon Gonzales requested the Philippine National Bank to allow him to look into the books and records of the respondent bank in order to satisfy himself as to the truth of published reports that the respondent bank has guaranteed the obligation of Southern Negros Development Corporation, that the bank is a financer of the construction of the Cebu-Mactan bridge, and the construction of a certain Sugar Mill in Iloilo. He stated that his request is for the reason that he wants to inquire into the validity of the transactions, as a stockholder of the said bank. Having been denied this request, he filed a petition for mandamus in court, which was also denied for the reason that he has an improper motive in asking for an examination of the books and records which disqualifies him to such right. Issue: Whether or not he has the right, solely as a stockholder, to an examination of the books and records of the bank. Ratio: Under the old law, BP 68, the right of inspection is granted to a stockholder. However, this has been modified under the present Corporation Code. The right of inspection granted to a stockholder are the following: 1) records must be kept at the principal office of the corporation; 2) inspection must be made on business days; 3) he may demand a copy of the excerpts of the records or minutes; 4) refusal to allow such inspection shall subject the erring officer to civil and criminal liabilities. However, it is now expressly required as a condition that one requesting must not have been guilty of using improperly any information secured and that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand. Being so, he is disqualified from inspecting the books and records. Admittedly, he sought to be a stockholder in order to pry into the transactions entered into by the bank. His obvious purpose was to arm himself with materials which he can use against the bank for acts done by the latter when he was a total stranger to the same. Also, the Philippine National Bank is not governed by the Corporation Code since it has its own charter. According to its charter, it is not allowed to disclose information relative to the fund in its custody to any person except the President of the Philippines or the Secretary of Finance and the Board of Directors. They are only compelled to disclose when there is an order issued by a court of competent jurisdiction. The Philippine National bank is not an ordinary corporation. Having a charter of its own, it is not governed by the Corporation Code of the Philippines. Corporations shall be governed primarily by the provisions of the special law or
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Corporation Law Midterms Case Digests (Atty. Quimson)


charter creating them or applicable to them, supplemented by the Corporation Code insofar as they are applicable. Sunset View Condominium Corporation v. Campos Jr. Doctrine: Persons who have not fully paid the purchase price of their units and are consequently not owners of their units are not members or shareholders of the petitioner condominium corporation. Facts: Sunset View Corporation is a condominium corporation within the meaning of the law holding title to all the common and limited common areas of said condominium. Aguilar Bernas Realty and Lim Siu Leng are assignees of units in the condominium. For failure to pay the price of the condominium, Sunset filed a case for collection of assessments levied on the units. However, in both cases, the courts dismissed it and the parties were directed to ventilate their controversy with the SEC (allegedly because it is the commission who has jurisdiction over their intra-corporate dispute). Respondents herein claim that the courts do not have jurisdiction over the dispute since, as purchasers of the condominium unit, they are considered as stockholders of the corporation as provided for in the Condominium Act. Hence, it is an intra-corporate dispute under the exclusive jurisdiction of the SEC, not the regular courts. Issue: Whether or not the issue at hand is intra-corporate hence, under the jurisdiction of the Securities and Exchanges Commission. Ratio: Not every purchaser of a condominium unit is a shareholder of the condominium corporation. The Condominium Act leaves to the Master Deed the determination when the shareholding will be transferred to the purchaser of a unit. The shareholding in the corporation is inseparable from the unit to which it is only an appurtenant, and that only the owner of a unit is a shareholder in the corporation. Furthermore, the share of stock appurtenant to the unit will be transferred accordingly to the purchaser of the unit only upon full payment of the purchase price at which time he will also become the owner of the unit. It is only the owner who is a shareholder. A purchaser of a unit who has not paid the full purchase price thereof is not the owner of the unit and consequently is not a shareholder of the condominium corporation. This is not an intra-corporate dispute, the buyers not being shareholders. Hence, falls under the jurisdiction of the regular courts. Castillo v. Balinghasay Doctrine: Unless the class of shares are clearly categorized to be "preferred" or "redeemable", the shareholders of such class of stocks may not be deprived of their voting rights. Facts: MCPI is a domestic corporation with Class A and Class B shares. At the time of its incorporation, the old corporation law was still in force and effect. Under their original articles of incorporation, as approved by the SEC, only holders of Class A shares can have the right to vote and the right to be elected as directors or as corporate officers. Subsequently, the articles went under a number of amendments. On the third amendment, the last sentence was amended to read "Except when otherwise provided by law, only holders of class A shares have the right to vote and the right to be elected as directors or as corporate officers". At a shareholders meeting, there were objections as to the prohibition of holders of Class B shares to vote and B elected. According to petitioner herein, despite the provisions in the Articles of Incorporation, it has been the practice in the past to allow holders of Class B shares to participate in the voting and election. Moreover, according to them, since the class B shareholders are not classified as holders of either preferred or redeemable shares, then it necessarily follows that they are entitled to vote and to be voted for as directors or officers as owners of stocks. It was only at that time that they were prohibited to do so. Nonetheless, the winners in the elections were all Class A holders at the end of the meeting. They protested and filed a complaint for injunction, accounting and damages with the RTC and prayed for the annulment of the declaration of directors. They also challenged the validity of the prohibition in the articles of incorporation. The RTC rendered a decision stating that Class B holders are not entitled to vote, as stated in the articles.
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Corporation Law Midterms Case Digests (Atty. Quimson)


Issue: Whether or not Class B holders are entitled to vote and be voted for despite the prohibition in the Articles of Incorporation. Ratio: One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is inherent and incidental to the ownership of the stock and as such is a proprietary right. He cannot be deprived of his right to vote nor may the right be essentially impaired, either by legislative or by corporation, without his consent, through amending the charter or the by-laws. No share may be deprived of voting rights except those classified as preferred or redeemable shares unless provided in the Code. Clearly, as seen in the articles of incorporation, there is nothing on record to show that Class B shares were categorized as preferred or redeemable shares. Thus, falling under neither, they are allowed to exercise their right to vote. Alhambra Cigar & Cigarette Manufacturing Co v. SEC Doctrine: No corporation in a state of liquidation can act in any way, much less amend its articles for the purpose of continuing the business for which it was established since as a rule, the corporation is ipso facto dissolved as soon as that time expires. Facts: Alhambra Cigar and Cigarette Manufacturing Company (Alhambra for brevity) was duly incorporated under Philippine laws. It was set to exist for a period of 50 years from incorporation which already expired. On the date of expiration, it entered into a state of liquidation. In order to carry out its business, a new corporation, Alhambra Industries was formed (for liquidation purposes). At the time of the 3-year statutory period for liquidation RA 3531 was enacted into law which amended the law in force and effect. It empowered domestic private corporations to extend their period of corporate life beyond the 50 year period fixed by their articles of incorporation. Seeking to extend the life of Alhambra, its board adopted a resolution which amended their articles of incorporation and extended the life of the corporation to a period of 50 years. Such amended was denied by the SEC on the ground that its term of existence already expired at the time the law allowing such amendment took effect. Issue: Whether or not a corporation may extend its life by amendment of the articles of incorporation during the 3-year statutory period for liquidation when its original term of existence already expired? Ratio: No. Such new provision is a privilege given to prolong corporate life under the amendment must be exercised before the expiry of the term fixed in the articles of incorporation. A dissolved corporation as a body corporate for 3 years has for its purpose the final closure of its affairs and no other; the corporation is specially enjoined from continuing the business for which it is established. Upon dissolution, a corporation became legally dead for all purposes except for limited and specified purposes incident to complete liquidation of its affairs. Thus, a moment a corporation's right to exist ceases, its corporate powers are terminated just as powers of a natural person to take part in mundane affairs cease to exist upon his death. The filing and recording of the certificate of extension after that time cannot relate back to the date of passage of a resolution by stockholders in favor of the extension to save the life of the corporation. When the corporate life was ended, there was nothing left to extend. It only existed for the purpose of winding up its affairs. The privilege of extension is purely statutory and generally, these conditions must be complied with, and the steps necessary to effect the extension must be taken, during the life of the corporation and before the expiration of its terms of existence as originally fixed by its charter or the general law, since, as a rule, the corporation is ipso facto dissolved as soon as that time expires. There is a broad distinction between the extension of a charter and the grant of a new one. To renew a charter is to revive a charter which has expired. Our law limits itself to extension of corporate existence. At the time of the passage of the law, Alhambra's corporate life already expired. It had overstepped the limits of its limited existence. No life is there to prolong.

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Corporation Law Midterms Case Digests (Atty. Quimson)


Lanuza v. Court of Appeals Doctrine: The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders. A stock and transfer book is not in any sense a public record and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein. It may be impeached or even contradicted by other competent evidence. Facts: PMMSi was incorporated with 770 founder's shares and 76 common shares as its initial capital stock subscription reflected in the articles of incorporation (total of 776 shares). However, private respondents herein (Nolasco et. al) registered the company's stock and transfer book for the first time recording only 33 common shares as the only issued and outstanding shared of PMMSI (contrary to the articles of incorporation). Based on the record in the transfer book, a special stockholders meeting was held where a quorum of 27 common shares were present which represented more than 2/3 of the common shares issued and outstanding, based on the record in the transfer book, not the articles of incorporation. Petitioners Lanuza thereafter filed a petition with the SEC questioning the validity of the said meeting alleging that the quorum should not be based on the transfer book records, but on the initial subscribed capital stock of 776 shares as reflected in the Articles of Incorporation. Issue: Whether or not the basis of the quorum should be the articles of incorporation and not the transfer book. Ratio: The stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares and outstanding as compared to that listed in the stock and transfer book. A quorum is based on the totality of shares which have been subscribed to and issued whether it be founder's or common shares. The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders. PMMSI's articles being in compliance with the requirements of law, the contents of the articles are binding not only on the corporation, but also on the shareholders. At the time of incorporation, the corporation had 77 issued and outstanding shares. To base the shares on the transfer book, completely disregarding the articles would work injustice to the owners and successors in interest of the said shares. One who is a stockholder cannot be denied his right to vote by the corporation merely because the corporate officers failed to keep its records accurately. Philippine First Insurance Co v. Hartigan Doctrine: The changing of a name of a corporation is no more the creation of a corporation than the changing of the name of a natural person is the begetting of a natural person. It is a mere change of name, not a change of being. The change of a name of a corporation does not affect its right to bring an action on a note given to the corporation under its former name. For a change of name to be effective, a copy of the articles of incorporation as amended, duly certified to be correct by the president, secretary and a majority of the board of directors or trustees shall be filed with the SEC. Only upon such time shall the amendment take effect. Facts: Originally, the corporation subject of this case was named Yu Tek Lin Fire and Marine Insurance Co. Ltd. (YTLFM for brevity). In 1961, its articles of incorporation were amended pursuant to a certificate of the Directors, changing the name of the corporation to Philippine First Insurance. Prior to this amendment, YTLFM, as co-maker, signed a promissory note with Hartigan in favor of ChinaBank payable within 30 days after the date of the promissory note with the usual banking interest. The defendant failed to pay the amount in full. Hence, a complaint was filed against Hartigan and Philippine First Insurance and the court held them jointly and severally liable for the sum of the note. On
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Corporation Law Midterms Case Digests (Atty. Quimson)


appeal, they claim that there is no privity of contract between them considering that the complaint does not allege that the Philippine First Insurance are one and the same or that it has acquired the rights of YTLFM. Issue: Whether or not a corporation is allowed to change its name. Assuming that the answer to the first issue is in the affirmative, whether or not the plaintiff Philippine First Insurance is the real party in interest that may be validly sued on the indemnity agreement signed by the defendants YTLFM. Ratio: Section 18 of the Code explicitly permits the articles of incorporation to be amended and there is no prohibition therein against the change in the name. Such a change is allowed for if it is prohibited, the legislature would have expressly stated it in the provision of the law. However, in order for the name to be changed, it must follow the procedure prescribed by law for the purpose. Philippine First Insurance is a real party in interest and may validly be sued on the indemnity agreement. An authorized change in the name of the corporation has no more effect upon its identity as a corporation than a change in the name of a natural person has upon his identity. It does not affect the rights of a corporation or lessen or add to its obligations. Upon such change in name, there is no new corporation nor is there a successor to the original one. It remains and continues to be the original corporation, only with a different name. Even assuming that it the change in name changed the corporation, to be effective, it requires that the articles be filed with the SEC. Only upon such time of filing does the amendment take effect. In this case, the transaction was entered into in May 15, 1961, prior to their filing with the SEC of the amendment. Hence, only after the filing with the SEC, on May 26, 1961, did they acquire its new name. PC Javier Sons v. Court of Appeals Doctrine: The changing of a name of a corporation is no more the creation of a corporation than the changing of the name of a natural person is the begetting of a natural person. It is a mere change of name, not a change of being. The change of a name of a corporation does not affect its right to bring an action on a note given to the corporation under its former name. Facts: PC Javier applied with First Summa Savings and Mortgage Bank (First Summa), later on renamed as PAIC Savings a loan accommodation under the IGLF Fund for 1.5 Million pesos. Such loan was approved and was forwarded to the Central Bank for processing and release. The first tranche and second tranches were released to PC Javier. From the second tranche, the amount of P250,000 was deducted from the amount and was deposited under a time deposit. PC Javier now claims that the second tranche release was delayed and that he was never allowed to withdraw the proceeds of the time deposit because the bank intended this time deposit as automatic payments on the accrued principal and interest due on the loan. The bank, on the other hand, claims that the time deposit was with the knowledge of PC Javier. In fact, he even executed an additional security of a chattel mortgage over some machineries in favor of the Bank. PC Javier defaulted in payments to the bank, hence an action for extrajudicial foreclosure was initiated. In order to forestall such foreclosure, PC Javier initiated this action seeking the nullification of the mortgages it entered into with First Summa which was now renamed to PAIC Savings on the ground that these 2 corporations were separate entities. Issue: Whether or not First Summa and PAIC Savings are one and the same entity. Ratio: There is no requirement that a change in the name of a corporation requires notification to the debtors of such change absent any law, circular, or regulation requiring it. In fact, PC Javier knew fully well of the change in the name of the bank. Hence, there is no valid reason as to why he is not to pay the loans. They are one and the same bank to which PC Javier is indebted. The changing of a name of a corporation is no more the creation of a corporation than the changing of the name of a natural person is the begetting of a natural person. It is a mere change of name, not a
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Corporation Law Midterms Case Digests (Atty. Quimson)


change of being. The change of a name of a corporation does not affect its right to bring an action on a note given to the corporation under its former name. Clearly, this defense was merely an excuse of the plaintiff to renege on its obligations to pay its loans after they became due and after demands for payment were made, claiming that it never obtained the loans from the respondent bank. Cagayan Fishing Development v. Teodoro Sadiko Doctrine: Before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing of the articles of incorporation. Corporations are creatures of the law and can only come into existence in the manner prescribed by law. If conditions precedent are prescribed in the statute, or certain acts are required to be done, they are terms of the offer and must be complied with substantially before legal corporate existence can be acquired. Facts: Manuel Tabora is the registered owner of 4 parcels of land. To guarantee the payment of a loan from Philippine National Bank, he executed 3 mortgages in favor of the former which were registered and annotated. Thereafter, on May 31, 1930, by virtue of a public document, the 4 parcels of land were sold to Cagayan Fishing Development (where only Tabora, his wife were stockholders) in consideration of 1 peso under the condition that the title to said lands shall not be transferred in the name of the company until the company has fully and completely paid Tabora's indebtedness to the Philippine National Bank. It should be stressed that it was only in October of 1930 when the articles of incorporation were filed with the Bureau of Commerce. A year later, the parcels of land were sold, through its president (Ventura), to Teodoro Sadiko. Teodoro Sadiko failed to pay purchase price of the parcels of land but the lower court absolved the defendant of liabilities. Hence this case. Issue: Whether or not the court erred in absolving the defendant from liabilities. Ratio: No. The transfer from Tabora to the company herein was made almost five months before the incorporation of the company. It was not yet in existence at the time it entered into the contract. It was not even a de facto corporation at that time. Not being in legal existence, it did not possess juridical capacity to enter into the contract. Obviously, if the plaintiff corporation did not acquire the parcels of land, it follows that it did not possess any reluctant right to dispose of them by sale to Sadiko. Pilipinas Loan Company v. SEC Doctrine: The certificate of incorporation gives juridical personality to a corporation and places it within the jurisdiction of the SEC. Facts: Filipinas Pawnshop is a duly organized corporation registered with the SEC. Its articles of incorporation states that its primary purpose is to extend loans at legal interest on the security of either personal properties or on the security of real properties and to finance installment sales of motor vehicles, home appliances and other chattels. On the other hand, petitioner Pilipinas Loan is a lending corporation duly registered with the purpose of lending money or extending loans without however, engaging in pawn broking as defined in PD 114. Filipinas filed a complaint against Pilipinas with the PED of the SEC alleging that Pilipinas has been operating as a pawnbroker in violation of its primary purpose and without the imprimatur of the Central Bank to engage in pawn broking. It also seeks to have its name changed since it causes confusion and unfair competition to Filipinas. In its answer, Pilipinas contends that the SEC has no authority to determine whether or not there is a violation of PD 114 (pawn broking) since such is under the jurisdiction, solely, of the Central Bank. Issue: Whether or not the issue falls within the jurisdiction of the SEC. Ratio: Yes. It should be noted that the complaint filed was based ion the violation of Pilipinas of its articles of incorporation.
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Corporation Law Midterms Case Digests (Atty. Quimson)


Without question, the complaint filed against Pilipinas called upon the SEC to exercise its adjudicatory and supervisory powers based on the violation of the articles of incorporation. By law, the SEC has jurisdiction over all corporations that are enfranchised to act as corporate entities. A violation of its franchise is properly within the jurisdiction of the SEC. The determination of the violation of PD 114 was merely incidental to the regulatory powers of the SEC to see to it that a corporation does not go beyond the powers granted to it by its articles of incorporation. The certificate of incorporation gives juridical personality to a corporation and places it within the jurisdiction of the SEC. In the complaint, it is alleged that Pilipinas is engaged in the pawnshop business when it is not authorized to do so by the articles amounts to fraud, detrimental not only to the corporation, but also to the stockholders and the public. The relationship involved in this controversy is a category of relationship over which the SEC has exclusive jurisdiction. Hall v. Piccio Doctrine: Unless there has been an evident attempt to comply with the law, the claim to be a corporation under this act could not be made in good faith. Not having obtained the certificate of corporation, the "corporation", even the stockholders, may not probably claim in good faith to be a corporation. Facts: Petitioners Hall and the respondents Browns signed and acknowledges the articles of incorporation of the Far Eastern Lumber and Commercial Corporation organized to engage in a general lumber business to carry on as general contractors, operators and managers, etc. with the certification of shares of stock, subscribed to and fully paid with certain properties transferred to the corporation. Immediately after its execution, the parties filed said articles with the SEC for the issuance of the certificate of incorporation. However, respondents, pending the approval of their certificate of incorporation, filed a case in court alleging that the "corporation" was an unregistered partnership and that they wished to have it dissolved because of the bitter dissension among the member, mismanagement and fraud by the managers and heavy financial losses. In counter, the petitioners contested the court's jurisdiction. However, the trial court granted the dissolution of the company. Issue: Whether or not the court had jurisdiction to decree the dissolution of the company, being a de facto corporation, the dissolution thereof may only be ordered in quo warranto proceedings instituted in accordance with the Corporation Law. Ratio: The personality of a corporation begins to exist only from the moment such certificate is issued, not before. Consequently, the principle of estoppel herein does not apply. This is not a case where the parties are trying to enforce a contract with the corporation through estoppel. The proposition that the "corporation" is a de facto corporation under the Corporation Law and hence, dissolution can only be had through a quo warranto proceeding cannot be sustained. The reasons for this being that Far Eastern Lumber and Commercial Co. still hasn't obtained the certificate of incorporation. Hence, it cannot claim in good faith that it was acting as a corporation. The immunity from collateral attack is granted only to corporations claiming in good faith to be a corporation and under our statute, that can only be so if there is an issued certificate of incorporation. As stated, this is not a case where the corporation is made a party. It is a mere litigation between stockholders of the alleged corporation for the purpose of obtaining dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without intervention of the state.

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Corporation Law Midterms Case Digests (Atty. Quimson)


Sawadjaan v. Court of Appeals Doctrine: A corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of Registration of Corporations, details the procedures and remedies that may be availed of before an order of revocation can be issued. Facts: Sawadjaan was an employee of Philippine Amanah Bank (PAB), now AIIBP, when it was created by virtue of a Presidential decree. He rose through the ranks, working his way up from his initial designation as security guard, to appraiser/investigator, to now loans analyst. While he was designated as an appraiser, he was assigned to inspect properties (2 parcels of land) offered as collaterals to the bank by CAMEC (a corporation) for a credit line. On the basis of his inspection and appraisal report, the PAB granted the loan application. However, subsequently, it was later found out that the properties used as collaterals by CAMEC were problematic (one was inexistent and the other had a prior existing mortgage). Consequently, because of CAMEC's failure to pay, the bank suffered losses amounting to 6M. He was charged with dishonesty in the performance of his official duties and conduct prejudicial to the best interest of the service. When he was informed of this, he sent a memorandum questioning the fairness and impartiality of the members of the committee and refused to recognize their jurisdiction on the ground of partiality. Hence, he was declared in default and a decision was rendered finding him guilty of the administrative offense of conduct prejudicial to the best interest of the service. On appeal, the CSC affirmed said decision. His motion for reconsideration to the CSC was also denied. On petition for certiorari, Sawadjaan raised the issue of the failure of the AIIBP to promulgate rules of procedure governing the adjudication and disposition of administrative case involving its personnel. However, the court held that such issue cannot be raised for the first time on appeal. RA 6848 gives the Board of Directors of the Bank the broadest powers to manage the Islamic Bank. Hence, the power to discipline its employees by imposing a suspension or a dismissal is within its powers. Also on certiorari, the petitioner assails the jurisdiction of the CSC to take cognizance of the case, allegedly because the appeal was filed with the Merit System Protection board, not the CSC. However, the court held that, by filing its motion for reconsideration with the CRC, he cannot later on impugn its jurisdiction. Also, jurisdictional issued in a case can be raised only during the proceedings and during the appeal of said case. This case at hand is a petition for certiorari, not an appeal. In sum, the SC dismissed the certiorari case and affirmed the resolutions of the CSC holding respondent liable for the losses of the bank due to his negligence as an appraiser. However, Sawadjaan filed a Motion for New trial based on the ground that it was later discovered that at the time his employment was terminated, the AIIBP has not yet adopted its corporate bylaws. He asserts that since there was a failure to file the by-laws of the bank within 60 days from the passage of RA 6848 as required by Section 51 of the said law, the bank and its stockholders already forfeited its franchise or charter, including the license to exist and operate as a corporation and thus, the assailed resolutions of the CSC and the board of directors are a nullity. Issue: Whether or not the bank has lost its juridical personality as a corporation when it failed to file its by-laws within 60 days as required by law. Consequently, whether or not the board of directors had no jurisdiction to act on the manner they did, absent the by-laws. Ratio: AIIBP, at least, is considered to be a de facto corporation whose right to exercise corporate powers may not be inquired to collaterally in any private suit to which such corporation may be a party. AIIBP was created by a law and has a main office where it conducts it business. It has shareholders, corporate officers, and a board of directors, assets and personnel. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. A corporation which failed to submit its by-laws within the specified time prescribed does not ipso facto lose its powers as such. A suspension or revocation case, as provided for in the Rules on
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Corporation Law Midterms Case Digests (Atty. Quimson)


Suspension/Revocation of Certificate by the SEC must be initiated. Moreover, this case is a mere labor dispute and not a corporate controversy. It is an employer's basic right to freely select or discharge its employees as a measure of self protection against acts inimical to its interest, as in this case. Cagayan Fishing Development v. Teodoro Sadiko Doctrine: Before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing of the articles of incorporation. Corporations are creatures of the law and can only come into existence in the manner prescribed by law. If conditions precedent are prescribed in the statute, or certain acts are required to be done, they are terms of the offer and must be complied with substantially before legal corporate existence can be acquired. Facts: Manuel Tabora is the registered owner of 4 parcels of land. To guarantee the payment of a loan from Philippine National Bank, he executed 3 mortgages in favor of the former which were registered and annotated. Thereafter, on May 31, 1930, by virtue of a public document, the 4 parcels of land were sold to Cagayan Fishing Development (where only Tabora, his wife were stockholders) in consideration of 1 peso under the condition that the title to said lands shall not be transferred in the name of the company until the company has fully and completely paid Tabora's indebtedness to the Philippine National Bank. It should be stressed that it was only in October of 1930 when the articles of incorporation were filed with the Bureau of Commerce. A year later, the parcels of land were sold, through its president (Ventura), to Teodoro Sadiko. Teodoro Sadiko failed to pay purchase price of the parcels of land but the lower court absolved the defendant of liabilities. Hence this case. Issue: Whether or not the court erred in absolving the defendant from liabilities. Ratio: No. The transfer from Tabora to the company herein was made almost five months before the incorporation of the company. It was not yet in existence at the time it entered into the contract. It was not even a de facto corporation at that time. Not being in legal existence, it did not possess juridical capacity to enter into the contract. Obviously, if the plaintiff corporation did not acquire the parcels of land, it follows that it did not possess any reluctant right to dispose of them by sale to Sadiko. Muncipality of Malabang v. Benito Doctrine: The rule disallowing collateral attacks applies only where the municipal corporation is at least a de facto corporation. For when it is neither a de facto or a de jure but a nullity, the rules is that its existence may be questioned collaterally or directly in any action or proceeding by any one whose rights or interests are affected thereby, including the citizens of the territory incorporated unless they are estopped by their conduct from doing so. The color of authority requisite to the organization of a de facto municipal corporation may be: 1) a valid law; 2) an unconstitutional law, valid on its face, which has either (a) been upheld for a time by the courts or (b) not yet declared void; provided that a warrant for its creation can be found in some other valid law or in the recognition of its potential existence by the general laws or constitution of the state. The actual existence of a statute, prior to such determination, is an operative fact and may have consequences which cannot justly be ignored. The past cannot be erased by a new judicial declaration. Facts: Respondent herein is the Mayor of the Municipality of Balabagan which was formerly a part of Malabang. It was created by Executive Order 386 of the President which was already declared void by the courts (in the case of Pelaez) for being unconstitutional on the ground that the enabling law creating it, RA 2730 and Section 68 of the Administrative are in violation of the principle of non-delegation of legislative powers by vesting powers to create barrios on the provincial board and municipalities on the president. Thus, the municipality of Balabahan argues that it is at least a de facto corporation having been organized under a color of statute before it was declared unconstitutional its officers having been elected or appointed and the municipality itself having discharged corporate functions for the past 5 years. Hence, being a de

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Corporation Law Midterms Case Digests (Atty. Quimson)


facto corporation, its existence can only be inquired to in a proceeding quo warranto. Issue: Whether or not the municipality is at least a de facto corporation. Ratio: The color of authority requisite to the organization of a de facto municipal corporation may be: 1) a valid law; 2) an unconstitutional law, valid on its face, which has either (a) been upheld for a time by the courts or (b) not yet declared void; provided that a warrant for its creation can be found in some other valid law or in the recognition of its potential existence by the general laws or constitution of the state. In this case, the MERE FACT that Balabagan was organized at a time when the statute had not been invalidated cannot make it a de facto corporation since there is no other valid statute to give color of authority to its creation. Hence, the executive order creating it, created no office. However, this is not to say that the acts done by the municipality are a nullity. For the existence of the Executive Order is an operative fact which cannot justly be ignored. The actual existence of a statute, prior to such determination, is an operative fact and may have consequences which cannot justly be ignored. The past cannot be erased by a new judicial declaration. Separate Opinions: Fernando: Although the general rule is that an unconstitutional statute confers no right, creates no office, affords no protection and justifies no acts performed under it, there are several instances wherein courts, out of equity, have relaxed its operation or qualified its effects since the actual existence of a statute prior to such declaration is an operative fact and may have consequences which cannot be ignored. Albert v. University Publishing Doctrine: A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts and becomes personally liable for contracts entered into or for other acts performed as such agent. Facts: Mariano Albert entered into a contract with University Publishing through its president, Jose Aruego for the publishing of the former's books on the Revised Penal Code and for his share in previous sale of the book's first edition. When the defendant failed to pay the second installment under the terms of their contract, Albert filed a suit impleading University Publishing as corporation. Albert died pending suit hence, Justo Albert, as his estate administrator was substituted for him. Judgment was rendered in court holding University liable and was ordered to pay Albert a sum of money. Pursuant to this the court ordered the issuance of a writ of execution against the University but it was discovered that there was no such entity registered, either as a corporation or a partnership, in the SEC. Issue: Whether the judgment may be executed against Jose Aruego (as president) as the real party defendant, not being impleaded in the suit. Ratio: Yes. In this case, University Publishing is not even a de facto corporation, not having been registered with the SEC. University Publishing is, therefore, only a name and has no independent personality. Since in reality, it was Jose Aruego who answered and litigated, although not named as real party defendant in the suit, having had his day in court, then due process has been substantially served. Acting as a representative of a noexistent principal, he was the real party defendant. Perforce, in line with the ends of justice, responsibility under the judgment falls on him. Due process contemplates notice and opportunity to be heard before judgment is rendered. It is designed to secure justice as a living reality;

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Corporation Law Midterms Case Digests (Atty. Quimson)


not to sacrifice it paying homage to formality. For substance must prevail over form. Lozano v. Delos Santos Doctrine: Corporation by estoppel applies when persons assume to form a corporation and exercise corporate function and enter into business relations with third persons. Where there is no such third person, and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. Consolidation becomes effecting not upon mere agreement of the members, but only upon issuance of the certificate of consolidation by the SEC. Jurisdiction is determined by a concurrence of 2 elements: 1) the status or relationship of the parties; 2) the nature of the question that is the subject of their controversy. Facts: Parties in this case are presidents of separate jeepney drivers' association. Lozano was the president of KAMAJDA and Anda was the president of SAMAJODA. Both jeepney associations decided to consolidate their respective associations to form UMAJODA. They held elections for officers who are to be given the authority to collect daily dues from the members of the consolidated association. When Lozano won the elections, Anda cited fraud and refused to recognize and abide by their agreement. The latter continued to collect dues from the members despite demands to resist. Hence, a case was filed in court. Lozano moved to dismiss the case on the ground that the SEC has exclusive jurisdiction over their controversy, it being an intracorporate dispute. MCTC denied said motion. On petition for certiorari to the RTC, the trial court held that the SEC had jurisdiction. Issue: Whether or not the SEC has jurisdiction over the instant case. Ratio: The SEC has no jurisdiction over the complaint. The controversy herein is between members of separate and distinct associations. They have no intracorporate relation much less do they have an intracorporate dispute. The controversy between them arose from their plan to consolidate their associations. However, this was still a proposal. It was not yet approved by the SEC, neither had its officers and members submitted their articles of consolidation in accordance with the corporation code. Their consolidation becomes effective only upon issuance of a certificate of consolidation by the SEC. There is no corporation by estoppel herein since there is no third person involved and the conflict arises only among them assuming to have formed a corporation. Knowing that it has not been registered, there is no corporation by estoppel. Asia Banking Corporation v. Standard Products Doctrine: In the absence of fraud, a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such a contract or dealing unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. Facts: A promissory note was issued in favor of Asia Banking Corporation by Standard Products. In an action to recover the sum of said note, the court rendered judgment in favor of Asia Banking. Standard Products assert that since Asia Banking failed to prove the corporate existence of the parties, the court erred in finding that the parties were corporations with juridical personalities and assigns the same as reversible error. Issue: Whether or not the court erred in finding that the corporations are with separate juridical personalities. Ratio: The defendant, having recognized the corporate existence of the plaintiff by making a promissory note and making partial payments on the same is therefore estopped to deny said plaintiff's existence also its own.

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Corporation Law Midterms Case Digests (Atty. Quimson)


Salvatierra v. Garlitos Doctrine: A person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped form denying the same in an action arising out of such transaction or dealing. Yet this doctrine may not be held to be applicable where fraud takes place in the transaction. A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such, agent. Facts: Salvatierra was an owner of a parcel of land which it leased to Philippine Fibers Producers (PFP) allegedly a corporation under the laws of the Philippines through its president. Under the terms of their lease, 30% of the net income accruing from the harvest of any crop was entitled to Salvatierra. The lessee was further bound to declare at the earliest possible time, the income derived therefrom and to deliver the corresponding share due the lessor. The obligations under said contract were not complied with. Hence, a complaint for accounting, rescission and damages was instituted against PFP and president Refuerzo. The trial court rendered a decision in favor of Salvatierra. When a writ of execution was issued, it was found that PFP had no property to be executed hence, the sheriff executed on the properties of Refuerzo. On plaintiff's opposition, the court released all his properties attached after finding that the evidence on record made no mention or referred to any fact which might hold movant personally liable. Issue: Whether or not Refuerzo is personally liable for the obligations. Ratio: Yes. In this case, Salvatierra was unaware of the fact that PFP had no juridical personality. Since there was neither a denial nor confirmation from Refuerzo The court is lead to the inescapable conclusion that the plaintiff was really made to believe that such corporation was duly organized in accordance with the law. Considering that the defendant, as president of the unregistered corporation was the moving spirit behind the consummation of the lease agreement by acting as its representative, his liability cannot be restricted or limited. In acting in behalf of the corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising from such transaction. Ramirez v. Orientalist Doctrine: The power to make corporate contracts resides primarily in the company's board of directors; but the board may ratify an unauthorized contract made by an officer of the corporation. Ratification in this case is held to have occurred when the board, with knowledge that the contract had been made, adopted a resolution recognizing the existence of the contract and directing that steps betaken to enable the corporation to utilize its benefits. The authority of the subordinate agent of a corporation often depends on the course of dealings which the company or its directors have sanctioned. It may be established b proof of the usage which the company had permitted to grow up in business and of the acquiescence of the board charged with the duty of supervising and controlling the business. Facts: Orientalist, a corporation in the Philippines, became apprised of the fact that JF Ramirez had control of the agencies for 2 different marks of files (clair Films and Milano Films). Negotiations for the acquisition of the files were begun and one person who was actively participating in acquiring said films was Fernandez since he believes that these films were necessary for the success of their company. Ramirez sent Fernandez an offer for the importation of the Films and was given a period to reply. As the deadline for the response was nearing, it became important for the Orientalist Company to act on the matter speedily in order to take advantage of said offer. Hence, Fernandez had an informal conference with the members of the company. Thereafter, a letter of acceptance of the offer was sent to Ramirez for the importation of the said films. In these letters, Fernandez seemingly signed as an individual apart from the signature of the Orientalist Company in his capacity as treasurer. Drafts sent by Ramirez were dishonored for nonpayment by Orientalist. Hence, a suit was filed in court for the determination of amount of damages Ramirez was entitled to recover.

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Issue: Whether or not the corporation is bound by the contract. Ratio: Yes. The power to make corporate contracts resides primarily in the company's board of directors; but the board may ratify an unauthorized contract made by an officer of the corporation. Ratification in this case is held to have occurred when the board, with knowledge that the contract had been made, adopted a resolution recognizing the existence of the contract and directing that steps betaken to enable the corporation to utilize its benefits. The authority of the subordinate agent of a corporation often depends on the course of dealings which the company or its directors have sanctioned. It may be established b proof of the usage which the company had permitted to grow up in business and of the acquiescence of the board charged with the duty of supervising and controlling the business. In this case, as evidenced by the minutes of the stockholders meeting, it was evident that the corporation was cognizant that the officer (Fernandez) has already been accepted in the name of Orientalist Company and that the films were then expected to arrive and were being imported by virtue of such acceptance. The letter accepting the officer had been sent with their knowledge and consent. However, this is not the pressing reason as to why the company is bound. It must be remembered that actions of stockholders, must be ignored. Their functions in a corporation are of a limited nature. The complete management of the enterprise are in the hands of the directors/trustees. In conformity with this idea, it is settled that a contract between a corporation and a third person must be made by the director and not the stockholders. The corporation is represented by the former and not the latter. Resolutions of the stockholders are merely advisory and not binding. It appears in this case that the board of directors had already recognized the contract as being in existence and had proceeded to take the steps necessary to utilize the films. Particularly suggestive is the direction given at the meeting for the publication and announcements in the newspapers to the effect that the company was engaged in importing films. Thus, the o contracts herein were inferentially approved by the board of directors and that the company is bound. Gokongwei v. SEC (1979) Facts: John Gokongwei was a stockholder of SMC. He filed a petition for declaration of nullity of amended by-laws, cancellation of certificate of filing of the amended-by laws, injunction and damages against the majority of the members of the Board of Directors of the SMC on the ground that: o In 1976, the board of directors amended the by laws of the corporation basing their authority to do so on a resolution of the stockholders adopted way back in 1961 (when the outstanding capital stock was lower). Gokongwei asserts that under the Corporation Law and the bylaws of the corporation itself, the power to amend or adopt new by-laws may be delegated to the Board only by affirmative vote at least 2/3 of the subscribed paid up capital stock of the corporation which should have been computed on the basis of the capitalization at the time of the amendment. Since based on the 1961 authorization, he contends that the board was without the power to amend. Furthermore, he asserts that the 1961 authority has already been exercised hence, it can no longer be exercised again. As another cause of action, Gokongwei posits that prior to the amendment, he had all the qualifications to be a director of the corporation as a stockholder thereof (right to vote and be voted for) and that in amending the by-laws they purposely provided for disqualifications and deprived him of his vested right. He contends that corporations have no inherent power to disqualify a stockholder from being elected. He also asserts that Andres and Jose Soriano (members of the Board), while representing other corporations, entered into a management contract with the corporation which was avowed because the questioned amendment gave the Board itself the prerogative to determine whether they or other persons are engaged in a competitive business with the SMC.

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Corporation Law Midterms Case Digests (Atty. Quimson)


Subsequent to this, Gokongwei also filed an urgent motion for production and inspection of documents alleging that the secretary refused to allow him to inspect its records despite the request made. He posits that the corporation had been attempting to suppress information from the stockholders. While the petition was pending to be heard, the corporation, nevertheless, held a special stockholders' meeting for the purpose of ratification and confirmation of the amended by laws. This prompted Gokongwei to ask the SEC for a summary judgment on the ground that by calling a meeting, the board admitted the invalidity of the amendments of 1976. Subsequently, after the denial of the restraining order and summary judgment, the board of directors ratified the by-laws. Later, Gokongwei discovered that the corporation has been investing corporate funds in other corporations and business outside of the primary purpose of the corporation, in violation of the corporation code. Hence, he filed a petition seeking to have the board members be declared guilty of such violation and ordered to account for such investments. Issue: Whether or not the corporation has the power to provide for the additional qualifications/disqualifications of its directors by amending the by-laws. Whether or not the corporation has the power to disqualify a competitor from being elected to the board of directors as a reasonable exercise of corporate authority. Ratio: Yes. Pursuant to the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least 2/3 of the subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right, to object thereto in writing and demand payment for his share. It cannot be said that prior to this, Gokongwei has a vested right to vote and be voted for 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. 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. Under the law, a corporation may prescribe in its by-laws the qualifications, duties and compensation of directors, officers and employees. Such provision in the law is a qualification, in addition to the requirement 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. Hence, every person who buys a stock with a corporation 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. A stockholder is considered to have parted with his personal right or privilege to regulate the disposition of his property and surrendered it to the will of the majority of his fellow incorporators. The corporation has such power to disqualify. A director's relationship with the corporation is of a fiduciary nature. Such springs from the fact that directors have control and guidance of corporate affairs and property hence of the property interests of the stockholders. They are agents entrusted with the management of the corporation for the collective benefit of the stockholders. They occupy a fiduciary relationship and in this sense, the relation is one of trust wherein the directors are the trustees and the stockholders are beneficiaries. He who is in such a fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and disregard of the standards of common decency. The doctrine of corporate opportunity is a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for 2 entities with competing interests. This doctrine rests on 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 unjustly calls for protection. 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
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Corporation Law Midterms Case Digests (Atty. Quimson)


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. Detective and Protective Bureau v. Cloribel Doctrine: 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. The managing director shall be elected by the Board of Directors from among its members. Facts: Detective is a corporation duly organized and existing under the laws of the Philippines and Fausto Alberto was the managing director thereof from 1952 to 1964. When he illegally seized and took control of all assets of the corporation, he was removed as managing director and the board elected one Jose dela Rosa in his stead. However, he refused to vacate his office and continued to perform unauthorized acts for and in behalf of the corporation. A case was filed praying for the issuance of a preliminary injunction to enjoin Alberto from exercising functions as a managing director and from disbursing and disposing its funds. Judge Cloribel granted the writ of preliminary injunction but this was later set aside when the judge admitted the counterbond filed by Fausto Alberto. On petition for certiorari, the corporation prays for the issuance of a preliminary injunction. As counter, Alberto asserts that dela Rosa could not be elected as managing director because he did not own any stock in the corporation. Issue: Whether or not Jose dela Rosa can be elected as managing director Ratio: There is in the record no showing that Jose dela 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 states that every director must in his own right own at least one share of the capital stock of the stock corporation of which he is a director. If he could not be a director, he could also not be a managing director of the corporation since the manager shall be elected by the Board from among its members. In this case, since dela Rosa was not qualified to become managing director, 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 that directors shall serve until the election and qualification of their duly qualified successor. Gokongwei v. SEC (1980) Facts: This is a petition for review of petitioner seeking to nullify and set aside the resolution of the court in the 1979 case sustaining the findings of the SMC that petitioner is engaged in a business competitive with or antagonistic to that of SMC and therefore, ineligible for election as director, pursuant to the amended by-laws. Petitioner alleges that his disqualification should not have been heard in view of the pending motion for reconsideration and that the court failed to consider that the respondent corporation board are precluded from disqualifying petitioner because of the rule of pari delicto and that the resolution of disqualification was an overexertion of corporate power because by this act, the board intended to perpetuate themselves in power. Ratio: The validity of the amended by-laws can no longer be relitigated on the basis that it is already the law of the case and therefore, the enforcement of the amended by-laws could not have been ipso facto stayed by the motion for reconsideration. There is evidence showing that petitioner was engaged in agricultural and poultry business competitive with that of SMC. However, petitioner did not adduce any evidence to rebut the evidence of his disqualification. Findings of fact of administrative bodies will not be interfered with by the courts in the absence of grave abuse of discretion on the part of the agencies or unless the findings are not supported by substantial evidence.

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Corporation Law Midterms Case Digests (Atty. Quimson)


Pascual and Santos v. Tramo Wakas Neighborhood Association Doctrine: Except for powers expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence, a corporation has no powers. It exercises its powers through its board of directors and/or duly authorized officers and agents. Thus, its power to sue and be sued is lodged with the board of directors that exercises its corporate powers. Facts: Members of the Tramo Wakas Neighborhoods Association represented by Domingo Magno lodged an action in court praying for the awarding of parcels of land in their favor on the ground that they have openly, peacefully and continuously occupied it since 1957. The LMB rendered a decision stating that they may file appropriate public land applications over the land they are claiming. Unsatisfied, they elevated the matter to the DENR then to the Office of the President, both offices, affirming the decision of the LMB. On appeal, the CA dismissed their petition on the ground that their verification and certification for non-forum shopping was signed merely by Lombos and Pascual who allegedly are duly authorized agents of the corporation without showing any proof whatsoever of such authority. Thereafter, they filed a motion for reconsideration attaching a certificate showing proof that Lombos and Pascual were incumbent directors of the corporation and are duly authorized representatives who may sign all papers and do such other acts as may be necessary to prosecute the petition for review. Issue: Whether or not their appeal should be given due course, having attached the proof that Lombos and Pascual are directors of the corporation. Ratio: Yes. Upon the filing of the motion for reconsideration accompanied by the certificate stating that Lombos and Pascual were duly authorized and are board of directors, there is justification for the relaxation of the Rules for the purpose of allowing its petition to be given due course. Subsequent proof of authority on behalf of the petitioner corporation justifies the relaxation of the rules. At all events, strict adherence to the rules of procedure must give way to considerations of equity and substantial justice where as in this case, there is evidence showing that the appeal was filed on time. Ong Yong v. Tiu Doctrine: The Corporation Code prohibits the President from acting concurrently as a treasurer of the corporation. The rationale behind this is to ensure the effective monitoring of each officer's separate functions. Facts: The Masagana Citimall in Pasay City was owned by FLADC, a corporation owned by the Tius. When they became heavily indebted to the PNB, and was threatened with foreclosure of the 2 lots where the mall was being built, they invited Ong Yong, et. al (Ong Yong)to invest in said corporation. They entered into a Presubscription Agreement wherein the Ongs and Tius agreed to maintain equal shareholdings in FLADC (The Ongs were to subscribe to 1 million shares; and the Tius were to subscribe an additional 549,800 shares in addition to their already existing subscription. Also under their agreement, the Tius were to nominate the VP and the treasurer plus 5 directors; while the Ongs were to nominate the President, the Secretary and 6 other directors to the board and the right to manage and operate the mall. Under this contract, the Tius contributed a properties and the Ongs agreed to settle the mortgage indebtedness of FLADC to PNB in cash as payment for their subscription. The relationship between the 2 eventually went downhill and Tius opted to rescind the pre-subscription agreement on the ground that the Ongs prevented David and Cely Tiu from assuming the positions of and performing their duties as VP and Treasurer and for refusing to credit to them the FLADC shares covering their real property contributions. The Tius filed a case with the SEC seeking confirmation of the rescission. SEC confirmed the rescission. Issue: Whether or not the proper remedy to cancel the pre-subscription agreement was a rescission.

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Corporation Law Midterms Case Digests (Atty. Quimson)


Ratio: There is evidence in this case that there was a violation of the presubscription agreement when the Ongs prevented the Tius from participating in the management of the corporation by having its president, Wilson Ong act as its Treasurer. The records herein show that the president, supervised the collection and receipt of rentals, he ordered the same to be deposited in the bank, and held on to the cash and properties of the corporation. Such is prohibited under the Corporation code. The rationale behind this is to ensure the effective monitoring of each officer's separate functions. Nevertheless, the court held that rescission is not the proper remedy in this case. The cash and the property sought to be returned already belonged to FLADC by virtue of the pre-subscription agreement which is an innocent third party (having a separate and distinct juridical personality). Said remedy may no longer be availed of under the law. Any contract for acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of the corporation code notwithstanding the fact that the parties refer to it as a purchase or some other contract. The effect of rescission in this case is the return of the capital stocks to the parties to the subscription agreement. However, the law only allows the distribution of the corporate capital in three instances: 1) amendment of the articles to reduce the authorized capital stock; 2) purchase of redeemable shares by the corporation regardless of the existence of unrestricted retained earnings and; 3) dissolution and liquidation of the corporation. Yao Ka Sin Trading v. Court of Appeals Doctrine: A Contract signed by the President/Chairman without authority from the Board of Directors is void. Although the by-laws granting authority to the President "to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may enter into", the same presupposes a prior act of the corporation exercised through its Board of Directors. Facts: Maglana, the president and chairman of the Board of PWCC sent to YKS an offer to sell a minimum of 15,000 bags of white cement. Thereafter, they received an amount of P243,000 pesos from YKS for the purchase price of said white cement. However, 23 days after the signing of the said letter by the President, it was disapproved by the Board of Directors as evidenced by its minutes instead, they sent a letter to YKS allegedly entering into a separate contract of only selling 10,000 bags. Thereafter, Henry Yao (YKS president) wrote to the PWCC a follow up letter insisting on the delivery of the bags of cement they originally agreed to (15,000). Unheeded, YKS filed a case for specific performance with damages against PWCC based on the offer. In its answer, PWCC alleged that when Mr. Maglana, as president and chairman of the company signed the offer it was still subject to the approval of the Board of Directors of PWCC, the board having disapproved it, it was never consummated and it is not enforceable against PWCC. Issue: Whether or not Mr. Maglana had authority to bind PWCC to the contract. Ratio: No. Maglana's signing the letter-offer prepared for him was made clearly upon the condition that it was subject to the approval of the board of directors because according to the corporation code and the corporation's by-laws itself, all corporate commitments and business are conducted by, and contracts entered into through, the express authority of the Board of Directors. Maglana was not authorized by the Board of Directors of defendant corporation nor was his, actuation ratified by the Board, the agreement was unenforceable. While it may be true that he is the president of the corporation, there was nothing in the articles of incorporation or its by-laws that empowered him to enter into any contract all by himself and bind the corporation without first securing the authority and consent of the Board of Directors. Whatever may have must be derived from the Board of defendant corporation. A corporate officers power as an agent must be sought from the law, the articles of incorporation and the by-laws or from a resolution of the Board. The provisions in the by-laws of the corporation which states that "the chairman has the power to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may
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Corporation Law Midterms Case Digests (Atty. Quimson)


enter into. Such power presupposes a prior act of the corporation exercised through the Board of Directors. In this case, since the letter offer was effectively disapproved and rejected by the Board of Directors, the court therefore rules that the petitioner had in fact agreed to a new transaction involving only 10,000 bags of white cement. Board of Liquidators v. Heirs of Kalaw Doctrine: A corporate officer entrusted with the general management and control of its business, has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. As such officer, he may, without any special authority form the Board of Directors perform all acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the corporation by contract in matters arising in the usual course of business. Facts: NACOCO was chartered as a non-profit governmental organization for the protection, preservation and development of the coconut industry of the Philippines. Its general manager and chairman, Kalaw, entered into several contracts involving copra trading activities. Pending fulfillment of these contracts, 4 devastating typhoons visited the Philippines and it became apparent that the contracts would be unprofitable. Nevertheless, they still ventured in the contracts. As was to be expected, NACOCO but partially performed the contracts and the buyers threatened damage suits. Because of the suits initiated against NACOCO, it was made liable (through compromise agreements) and suffered losses. Thus, NACOCO now seeks to recover the sum of its losses from the general manager, Kalaw, for the amount imputing negligence and bad faith and/or breach of trust for having approved said contract. NACOCO herein alleges that under the by-laws of the corporation, the general manager only has the power to perform or execute on behalf of the corporation upon prior approval of the Board, all contracts necessary and essential to the proper accomplishment for which the Corporation was organized. Issue: Whether or not Kalaw, as general manager and chairman, is empowered to enter into said contracts.
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Ratio: Yes. In this case, the movement of the market requires that sales agreement be entered into even though the goods are not yet in the hands of the seller. To NACOCO, forward sales were a necessity. Copra could not stay long in its hands; it would lose weight and its value decreases. Copra contracts had to be executed on short notice at times, even within 24 hours. To be appreciated then is the difficulty of calling a formal meeting of the board. Long before the contracts disputed herein came into being, it ha already been the practice of Kalaw as general manager to sig contracts without prior authority from the Board. Obviously the, the forward sales were left to the sound discretion of NACOCO's general manager. There are even instances in the case where the contracts executed were submitted to the board after their consummation, not before. Where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization by the board of directors. Existence of such authority is established by proof of the course of business, the usage and practices of the company and by the knowledge which the board of director has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. Thus, when in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affairs, his authority to represent the corporation may be implied form the manner in which he has been permitted by the directors to manage its business. In this case, the practice of NACOCO has been to allow the manager to negotiate and execute contracts in its copra trading activities in the corporation's behalf. If the by-laws are to be followed, prior approval on all corporate contracts is required. But that board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval.

Corporation Law Midterms Case Digests (Atty. Quimson)


Premium Marble Resources v. CA Doctrine: The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. By express mandate of the corporation code, all corporations duly organized pursuant thereto are required to submit within the period of 30 days to the SEC the names, nationalities and residences of the directors, trustees and officers elected. This is required so that the persons dealing with the corporation and those who intent to do business with it may know or have the means of knowing facts concerning the corporation's financial resources and business responsibility. Facts: Former officers of the plaintiff corporation, without any authority whatsoever from the plaintiff, deposited a check (which was supposedly for plaintiff corporation) to the current account of his conduit corporation, INTERVEST. Such deposit was accepted. Hence, Premium filed a case in court. In its motion to dismiss, the same corporation, but this time represented by the Siguion Reyna Law Offices, alleged that the filing of the case was done without authority from its duly constituted board of directors as shown by the minutes of the directors' meeting. In his opposition, Premium, through Atty. Duadag contended that the persons who signed said the board resolution are not directors of the corporation and were allegedly former officers and that the Articles of Incorporation of Premium show that Belen, Nograles and Reyes are not majority stockholders. Siguion Law Offices however contend that it is the information sheet that should control over the articles since the latter does not keep track of the many changes that take place after new stockholders subscribe to corporate shares of stocks. Issue: Whether or not the corporation was authorized to file the case for damages. Ratio: In the absence of an authority from the board of directors, no person, not even the officers of the corporation can validly bind the corporation. In this case, it is alleged that the officers of the company have already changed and that Nograles, Belen and Reyes are no longer stockholders. However, petitioner failed to show proof that this election was reported to the SEC as required by the corporation code. In the absence of any board/resolution from the board, the present action must necessarily fail. Roxas v. dela Rosa Doctrine: Where it appears that a corporation already has a duly functioning board of directors, without any existing vacancies, the election of a new board of directors at a called meeting is irregular and the courts have jurisdiction to enjoin the holding of a special meeting of the shareholders called by a committee representing a majority of the shareholders. Facts: Binalbagan Estate is a corporation. In July, the possessors of the majority of the shares of said corporation formed a voting trust composed of 3 members as trustees. Such 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. Heilbronn, as representative of the voting trust, was able to nominate and elect a board of directors to his own liking without opposition form the minority. After the board has been elected and qualified, they chose their officers. However, since the creation of the voting trust, there has been a number of vacancies caused by the resignation or absence from the Philippines. This resulted into various substitutions in the personnel of the voting trust. Thereafter, the present trustees were apparently desirous of ousting the officers of the company without awaiting termination of their official terms at the expiration of 1 year form the date of their election. To this effect, they decided to hold a special general meeting for the election of the board of directors and amendment of the by laws. A case was filed for the purpose of enjoining the meeting. Subsequently, respondent judge herein issued a restraining order.

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Issue: Whether or not the judge acted within his powers when he issued a restraining order enjoining the meeting of the corporation. Ratio: The judge was acting within his legitimate powers. Under the law, the directors of a corporation can only be removed from office by a vote of the stockholders representing at least 2/3 of the subscribed capital stock entitled to vote, while vacancies in the board, when they exist, can be filled by a mere majority vote. The law further requires that the action is to be taken at a special meeting to remove the directors, such purpose shall be indicated in the call. In this case, while the voting trust controls the majority of the stock, it does not have a clear 2/3 majority. It was therefore impolitic for the petitioners, in forcing the call for the meeting to come out frankly and say in the notice that one purpose of the meeting was to remove the directors of the corporation from office. Instead, the call was limited to the election of the board of directors, it being evident that the intention was to elect a new board as if the directorate had been then vacant. Angeles v. Santos Facts: Plaintiffs and defendants in this case are stockholders and members of the board of directors of the Paranaque Rice Mill, a corporation organized for the purpose of operating a rice mill. A complaint was filed by Angeles against Santos for allegedly, among other thins, using the funds of the corporation for purely personal ends and for not rendering any account of his management or for the condition of the business of the corporation. The further assert that since 1932, Santos has called no meeting of the board of directors or the stockholders thus enabling him to continue holding, without any election, the position of present and finally, that of manager. After hearing both parties in this case, the trial court ordered the appointment of a receiver, Emilio Figueroa. Subsequently, the lower court rendered a decision ordering the removal of the defendants from their offices and members of the board of the corporation. Issue: Whether or not the court has the authority to remove a director from the corporation. Ratio: Our Corporation Law does not confer expressly upon the court the power to remove a director of a corporation. There are abundant authorities however which hold that if the court has acquired jurisdiction to appoint a receiver because of the mismanagement of directors these may thereafter be removed and others appointed in their place by the court in the exercise of its equity jurisdiction. IN this case however, the properties and assets of the corporation being amply protected by the appointment of a receiver and view of the statutory provisions, the court is of the opinion that the removal of the directors is, under the circumstances, unnecessary and unwarranted. When the directors are guilty of breach of trust, the court, in the exercise of its equity jurisdiction, and upon showing that an intracorporate remedy is unavailing, will entertain a suit filed by the members to prevent the waste and dissipation and the commission of illegal acts and otherwise redress the injuries the stockholders suffer against the wrongdoing of the majority. Valle Verde Country Club v. Africa Doctrine: Section 29 of the Corporation Code contemplates a vacancy occurring within the director's term of office. When a vacancy is created by expiration of a term, logically, there is no more unexpired term to speak of. Hence, it shall be the corporation's stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member's term. Facts: During an annual stockholders' meeting, the members of the VVCC Board of Directors were elected. However, in the years 1997, 1998, 1999, 2000, and 2001, the requisite quorum for the holding of the stockholders' meeting could not be obtained. Consequently, the directors continued to serve the VVCC Board in a holdover capacity. 3 of the members of said board resigned from position as member of the board. Hence, the remaining directors, still constituting a quorum, filled in the vacancy created by such resignation.

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Corporation Law Midterms Case Digests (Atty. Quimson)


For this reason, Africa, a member of VVCC questioned the filling in of the vacancies on the ground that the terms of the directors already expired. Hence, the resulting vacancy, should have been filled by the stockholders in a regular or special meeting called for that purpose, and not by the remaining members of the VVCC Board, as provided for in Section 29 of the Code. Africa asserts that the successor serves for the unexpired term of the resigning director and in this case, there was no more unexpired term since the resigning officer was in a holdover capacity. Issue: Whether or not the remaining directors of the VVCC, still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a holdover director. Ratio: No. The holdover period is not a part of the term of office of a member of the board. Term is defined as the time during which the officer may claim to hold office as of right, and fixes the interval after which the several incumbents shall succeed another. The term of office is not affected by the holdover. It is fixed by statute and it does not change simply because the office may become vacant or if the successor fails to qualify. Tenure represents the term during which the incumbent actually holds office. It may be shorter than the term. The term of the members of the board shall be only for 1 year. The holdover period is not part of the term nor is it a new term. It constitutes a part of his tenure. Corollary, when the incumbent member continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired and the incumbent is holding the succeeding term. After the lapse of 1 year, Makalintal's term of office expired. His holdover capacity cannot be considered as extending his term. His term is considered as already expired. Hence, the vacancy must be filled by the stockholders of VVCC in a regular or special meeting called for the purpose. Central Cooperative Exchange v. Tibe Facts: As a member of board of directors, respondent Concordio Tibe drew and collected amounts representing commutable per diem for attending meetings of the Board of Directors in Manila, per diems and transportation expenses for FACOMA visitations, representation expenses and commutable discretionary funds. All of these were disbursed with the approval of the general manager, treasurer and auditor of CCE. It should be noted that the by-laws of the said corporation provides that compensation, if any and the per diems for attendance at meetings of the members of the board shall be determined by the members at any annual meeting or special meeting of the exchange called for the purpose. Resolutions were then passed by the board of directors, from which, Tibe drew the amounts sought to be refunded. Issue: Whether or not the board of directors of CCE had the power and authority to adopt various resolutions which appropriated the funds of the corporation for the above-enumerated expenses for the members of the said board. Ratio: The resolutions are contrary to the by-laws of the federation and therefore, not within the power of the board of directors to enact. The by-laws explicitly reserved the power to determine the compensation of members of the board of directors, and the stockholders did restrict such compensation to "actual transportation expenses plus per diem of P30.00 and actual expenses while waiting". It is well settled that directors of corporations presumptively serve without compensation and in the absence of an express agreement or a resolution in relation thereto, no claim can be asserted therefor. There can be no recovery of compensation, unless expressly provided for, when a director serves as a president, VP, secretary, treasurer or cashier, as a member of an executive committee, as chairman of a building committee or similar offices. In this case, the directors assigned to themselves additional duties, such as the visitation of FACOMAS. They were clearly acting in excess of their authority as expressed by the by-laws.
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Corporation Law Midterms Case Digests (Atty. Quimson)


Western Institute v. Salas Doctrine: 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 director/trustee. Facts: The Salas' are majority and controlling members of the Board of Trustees of WIT, a corporation engaged in operating an educational institution. They called for a special board meeting for the purpose of implementation of the amended by-laws of the WIT on compensation of all officers of the corporation. When such meeting adjourned, a resolution was issued granting monthly compensation to private respondents herein as corporate officers. A few years later, petitioners herein implicated the respondents in a criminal case (falsification of public documents and estafa) for allegedly making it appear that the resolution was passed by the board at an earlier date when in truth, the same was actually passed later, a date not covered by the corporations fiscal year. Respondents were acquitted. Hence, this appeal on the civil aspect of the case. Petitioners maintain that the grant of compensation is proscribed under the Corporation Code. Thus, they are obliged to return the amounts to the corporation with interest. Issue: Whether or not the resolution adopted by the board granting monthly compensation to the private respondents as corporate officers (VP, treasurer, secretary, etc.) is in violation of the corporation code. Ratio: No. The proscription in the code is not a sweeping rule. The directors shall not receive any compensation as such directors. The phrase "as such" 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/trustees. 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 director/trustee. In this case, the members of the board were granted compensation as officers of the corporation, not as directors/trustees. Tramat Mercantile v. Court of Appeals Facts: De La Cuesta, doing business under the name and style of Farmers Machineries sold to TRAMAT one unit of hinomoto tractor powered by a 1.3HP diesel engine. TRAMAT's president, David Ong, issued a check for P33,500 for such purchase. TRAMAT, in turn, sold the tractor, together with an attached lawn mower fabricated by it to the MWSS for P67,000. David Ong caused a "stop payment" of the check when MWSS refused to pay the tractor and mower after discovering that, aside from stated defects of the attached mower, the engine was a reconditioned unit (represented as brand new by De La Cuesta). Hence, De La Cuesta filed a case in court for the recovery of the sum of the check. In his answer, Ong contends that De La Cuesta has no cause of action against him since the transaction was between TRAMAT and De La Cuesta, not with Ong in his personal capacity. The trial court rendered a decision holding Ong jointly and severally liable to pay the plaintiff the sum of the check. On appeal, the CA affirmed. Issue: Whether or not Ong should be jointly and severally liable with TRAMAT. Ratio: It was an error to hold David Ong jointly and severally liable with TRAMAT to De La Cuesta under the transaction. Ong there so acted, not in his personal capacity, but as an officer of a corporation. TRAMAT has a separate and distinct personality. As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon. Personal liability of a corporate director, trustee or officer along with the corporation may so validly attach as a rule only when: 1. He assents to a) patently unlawful act of the corporation or b) bad faith or gross negligence in directing its affairs or c) for conflict of interest, resulting in
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damages to the corporation, its stockholders or other persons. 2. He consents to the issuance of watered stocks or who, having knowledge thereof does not forthwith file with the corporate secretary his written objection thereto 3. He agree to hold himself personally and solidarily liable 4. He is made, by specific provision of law, to personally answer for his corporate action. Uichico v. NLRC Doctrine: A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The general rule is that obligations incurred by the corporation, acting through its directors, officers and employees are its sole liabilities. There are time however, when solidary liabilities may be incurred but only when exceptional circumstances warrant such. Facts: Luzviminda, Shirley and Carmen (employee-respondents for brevity) were employed by Crispa, Inc. for many years in the latter's garments factory. Sometime in September, based on an unsigned and unaudited Profit and Loss Statement, their services were terminated on the ground of retrenchment due to alleged serious business losses suffered by Crispa Inc. By reason of such dismissal, employee respondents filed a case before the NLRC for illegal dismissal against Crispa, Inc., Valeriano (a major stockholder), and Uichico, Floro and Basilio (high ranking officers and directors of the company). The NLRC rendered a decision dismissing the complaint for illegal dismissal. On appeal to the Second Division of the NLRC, the decision was reversed, holding Crispa Inc. liable for illegal dismissal and modified the award of separation pay in the amount of 1 month for every 1 year of service. When employee respondents sought a clarification of the NLRC's resolution insofar as the computation of payment of separation pay is concerned, the NLRC treated the motion as an appeal and thereafter granted the inclusion in the computation, 6 months of backwages. Issue: Whether or not Crispa Inc. is liable for illegal dismissal. Whether or not the officers and directors of the company are jointly and solidarily liable for payment of backwages and separation pay. Ratio: The employer is liable for illegal dismissal. Lay-off is an act of the employer of dismissing employees because of losses in the operation of a business, lack of work, and considerable reduction on the volume of his business. Such is a right consistently recognized and affirmed by the courts. However, the burden falls on the employer to prove economic or business losses with appropriate supporting evidence. In this case, the Statement of Profits and Losses submitted by the employer (Crispa, Inc.) to prove its alleged losses, without the accompanying signature of a certified public accountant or audited y an independent auditor, are nothing but self serving documents which ought to be treated as a mere scrap of paper devoid of any probative value. In view of the failure of the company to prove the alleged financial losses, the company is found to be guilty of illegal dismissal. The corporate directors and officers are solidarily liable with the corporation. In labor cases, particularly, directors and officers are solidarily liable with the corporation for termination of employment of corporate employees done with malice of bad faith. In this case, it is undisputed that the petitioners have a direct hand in the illegal dismissal of the respondent employees. They were the ones who signed the Board Resolution retrenching the employee-respondents on the feigned ground of serious business losses that had no basis. This is indicative of bad faith on the part of petitioners for which they can be held jointly and severally liable with Crispa for all the money claims of the illegally terminated respondent employees in this case. Pascual v. Orozco Facts: Plaintiff Pascual became a stockholder of the corporation on November 13, 1903. It is alleged that the defendant Orozco, as member of the board of directors and board of government, during the years of 1903 1907, did fraudulently, and the great prejudice of the bank and its stockholders, appropriate their own use form
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Corporation Law Midterms Case Digests (Atty. Quimson)


the profits of the bank sums of money amounting to P20,000 per annum. Defendants refuse to refund to the bank the sums so misappropriated or any part therof. It should be stressed that defendants herein 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. Hence, Plaintiff Pascual brought this action before the courts in his own right as a stockholder of the bank, for the benefit of the bank and all other stockholders thereof. Pascual sues on behalf of the corporation, which, even though nominally a defendant, is to all intents and purposes the real plaintiff in this case. Issue: Whether or not the plaintiff has a cause of action for the alleged misappropriation during the years of 1903-1907. Whether or not the plaintiff has a cause of action for the alleged misappropriation during the years of 1899-1902. Ratio: It is the duty and the right of the corporation to bring suit to remedy these wrongs. However, it is apparent in this case that the corporation is helpless and unable to institute such 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. In cases where the 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. 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. In this case, it is evident that the plaintiff was not injured or affected in any manner by the transactions set forth in the years 1899-1902. His vendor could have complained of these transactions but he did not choose to do so. The discretion whether to sue or acquiesce in and agree to them is, in our opinion, incapable of transfer. Pascual out to take things as he found them when he voluntarily acquired his 10 shares. If he was defrauded in the purchase of these shares, he should sue his vendor. 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, cannot 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. Republic Bank v. Cuaderno Facts: Damaso Perez is a stockholder of the Republic Bank, a Philippine banking corporation instituted a derivative suit for and in behalf of the 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. Damaso alleges that respondent Roman granted loans to relatives and selected Cuaderno and Dizon to shield himself from the alleged wrongdoing and from any prosecution that may be instituted against him. The complaint also alleges that the present composition of the board of directors of the bank are constituted by men chosen by respondent Roman so that it was futile to ask them, in the first place, to institute this action on behalf of the bank. Issue: Whether or not the plaintiff can interfere with the corporate acts of Roman. Ratio: 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. The plaintiff 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 brought is a derivative one,
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Corporation Law Midterms Case Digests (Atty. Quimson)


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. The frauds charged by the plaintiff are frauds against the Bank that redounded to its prejudice. That no other stockholder has chosen to make common cause with plaintiff Damaso is irrelevant, since the smallness of plaintiff's holdings is no ground for denying him relief. 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 by the interest of justices. This is also not a quo warranto. Damaso is not claiming title to Dizon's position as head of the 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. San Miguel Corporation v. Khan Facts: A voting trust agreement in favor of Andres Soriano was constituted. When Andres died, Eduardo Cojuangco was elected as the substitute trustee for said voting trust with the power to delegate the trusteeship in writing to Andres Soriano III. Shortly thereafter, Cojuangco left the country. Subsequently, Andres Soriano III (for and in behalf of Neptunia Corporation, a subsidiary of SMC) entered into an agreement with 14 corporations, as sellers, for the purchase by Soriano for himself and as agent of several persons of shares held by the corporations. Allegedly, Soriano wished to purchase the same to institutionalize and stabilize the management of the company and to direct the company towards giving the highest priority to its principal products and extensive support to the agricultural programme of the government. At this point, the SMC shares were sequestered by the PCGG. When SMC suspended payments, the 14 corporations sued for rescission and
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damages. Meanwhile, by virtue of the sequestration, PCGG ordered the issuance of qualified stocks to 7 individuals, including Eduardo de los Angeles from the sequestered shares for them to hold in trust. Therafter, the Board passed a resolution, assuming the loans incurred by Neptunia for the purchase of the aforementioned stocks. They found that there was nothing illegal in such assumption of debt since Neptunia was an indirectly wholly owned subsidiary of SMC and that there was no additional expense or exposure for the SMC. It was for this reason that Eduardo de los Santos brought the present action before the SEC. Respondent directors alleged that de los Angeles has no legal standing having been merely imposed by the PCGG and that the twenty (20) shares owned by him personally cannot fairly and adequately represent the interest of the minority. Issue: Whether or not Eduardo de los Angeles has legal capacity to file this derivative suit. Ratio: Yes. The theory that he has no personality to bring suit in behalf of the corporation because of his miniscule stockholdings and that there is a conflict of interest between him and the PCGG cannot be sustained. The implicit argument herein that a stockholder must hold a substantial interest or significant block of stocks to bring a derivative suit finds no support whatever in law. The requirements of a derivative suit are as follows: 1. That the party bringing the suit should be a shareholder at the time of the act or transaction being complained of, the number of his stocks not being material. 2. He has tried to exhaust the intra-corporate remedies, but to no avail. 3. The cause of action 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.

Corporation Law Midterms Case Digests (Atty. Quimson)


The bonafide ownership of a stockholder of stock in his own right suffices to invest with him standing to bring a derivative suit for the benefit of the corporation. Moreover, the contention that there is a conflict of interest because he sits in the SMC board of directors by the grace of PCGG cannot be sustained. It is undisputed that apart from the qualifying shares given to him by the PCGG, it should be noted that Eduardo also owns 20 shares in his own right, as regards which he cannot 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. Prime White Cement v. IAC Facts: Alejandro Te (Te) and PWCC (Prime White Cement Corporation), through its president and chairman of the board, entered into a dealership agreement whereby Te was obligated to act as the exclusive dealer and distributor of PWCC of its cement products in the entire Mindanao Area for the term of 5 years at a fixed price of P9.70 per bag. Relying heavily on said dealership agreement, Te entered into agreements with different hardware stores for the purchase of the white cement. However, PWCC decided to impose a change in the conditions of their dealership agreement (they pegged the price at P13,30 per bag and was further subject to amendment). Moreover, notwithstanding their exclusive dealership agreement, Te later found out that PQCC entered into a dealership agreement with another corporation for the marketing of white cement. Hence this suit. The trial court adjudged that the corporation should be made liable to Te since it appears that the officers who signed the dealership agreement were authorized. Issue: Whether or not the dealership agreement was valid. Ratio: The dealership agreement is not valid. All corporate powers shall be exercised by the Board of Directors as a body except as otherwise provided by law. The Board may expressly delegate specific powers to the President or any of its officers but in the absence of declarations, a contract entered into by the president, on behalf of the corporation, may still bind the corporation if the board ratifies it. Also, the president may, as a general rule, bind the corporation by a contract in the ordinary course of business. These rules apply where the president is dealing with a third person outside the corporation. However, the situation is different, as in this case, when Te was not an ordinary stockholder, he was a member of the Board of directors and auditor of the corporation as well. A director holds a position of trust and as such, he owes a duty of loyalty to his corporation. In cases where a conflict of interests arises, he cannot sacrifice the corporation's interest to his own advantage and benefit. He cannot utilize inside information and his strategic position for his own preferment. However, it is not always true that a director's contract with his corporation is void or voidable. It is valid if the contract is fair and reasonable under the circumstances and if the stockholders ratify it and a full disclosure of his adverse interest is made. In this case, the contract was NOT fair and reasonable. The contract entered into was to sell and supply 20,000 bags of white cement for 5 years at a fixed price of P9.70 per bag. Te must have known himself that at that time, prices of commodities in general and white cement in particular were not stable and were expected to rise. He advanced his own interest and protected himself from the increase in the market price of white cement. Montelibano v. Bacolod Murcia Milling Doctrine: The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. Facts: Alfredo and Alejandro Montelibano and the Limited co-partnership Gonzaga and Company (plaintiffs) had been and are sugar planters adhered to the Bacolod Murcia Milling's sugar central mill under identical milling contracts. Originally executed in 1919, the contracts were stipulated to be in force for 30 years starting with the 1920-1921 crop and provided that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, there was a proposal to
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Corporation Law Midterms Case Digests (Atty. Quimson)


increase the planters' share to 60% of the manufactured sugar and resulting molasses besides other concessions and extending the operation of the milling contract to 45 years. The Board of Directors granted this amended milling contract and issued a resolution therefor as a supplement to the amended milling contract which states that whatever concessions the millers grant to the said planters will also be matched by it. Thereafter they signed and executed the printed amended milling contract but a copy of the resolution signed by the central's general manager was not attached to the printed contract. In 1953, appellants filed the present action citing that under the resolution (with the supplement), the milling company had become obligated to grant concessions to the plaintiffs matching those which it granted to other planters. However, the milling company resisted the claim and defended by urging that the stipulations contained therein were made without consideration, therefore null and void, being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. Issue: Whether or not the resolution was valid. Ratio: It is valid and binding. The Board of Directors of BacolodMurcia Milling had authority to modify the proposed terms of the amended milling contract for the purpose of making its terms more acceptable to the other contracting parties. The controverted resolution was adopted by the appellee corporation as a supplement to, or further amendment for the proposed milling contract. When the milling contract was executed, the concessions granted by the disputed resolution had been incorporated to its terms. There is no reason why the appellants should reject them or consider them as separate and apart from the main amended milling contract, specially taking into account that appellant was the one that agitated for the concessions embodied in said resolution. The resolution formed an integral part of the amended milling contract and not as a separate bargain as can be seen from the fact that a copy of the resolution was attached to the printed contract without special negotiations or agreement between the parties. Hence, the terms in the resolution were supported by the same cause or consideration by the planters. The conclusion that the resolution constituted gratuitous concessions not supported by any consideration is legally untenable. Since there is no rational explanation for the company's assenting to the further concessions asked by the planters before the contracts were signed, except as further inducement for the planters to agree to the extension of the contract period, to allow the company to retract such concessions would be to sanction a fraud upon the planters who relied on such additional stipulations. There is no doubt herein that the directors had authority to modify the proposed terms of the amended milling contract for the purpose of making its terms more acceptable to the other contracting parties. It is a question in each case of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonable tributary to the promotion of those ends, in a substantial and not in a remote fanciful sense, it may fairly be considered within charter powers. The test is whether the act in question is in direct and immediate furtherance of the corporations business, fairly incident to the express powers and reasonable necessary to their exercise. If so, the corporation has the power to do it. In this case, since the resolution in question was passed in good faith by the board of directors, it is valid and binding and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. The appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein. Alhambra Cigar & Cigarette Manufacturing Co v. SEC Doctrine: No corporation in a state of liquidation can act in any way, much less amend its articles for the purpose of continuing the business for which it was established since as a rule, the corporation is ipso facto dissolved as soon as that time expires. Facts: Alhambra Cigar and Cigarette Manufacturing Company (Alhambra for brevity) was duly incorporated under Philippine laws. It was set to exist for a period of 50 years from incorporation which already expired. On the date of expiration, it entered into a state of
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Corporation Law Midterms Case Digests (Atty. Quimson)


liquidation. In order to carry out its business, a new corporation, Alhambra Industries was formed (for liquidation purposes). At the time of the 3-year statutory period for liquidation RA 3531 was enacted into law which amended the law in force and effect. It empowered domestic private corporations to extend their period of corporate life beyond the 50 year period fixed by their articles of incorporation. Seeking to extend the life of Alhambra, its board adopted a resolution which amended their articles of incorporation and extended the life of the corporation to a period of 50 years. Such amended was denied by the SEC on the ground that its term of existence already expired at the time the law allowing such amendment took effect. Issue: Whether or not a corporation may extend its life by amendment of the articles of incorporation during the 3-year statutory period for liquidation when its original term of existence already expired? Ratio: No. Such new provision is a privilege given to prolong corporate life under the amendment must be exercised before the expiry of the term fixed in the articles of incorporation. A dissolved corporation as a body corporate for 3 years has for its purpose the final closure of its affairs and no other; the corporation is specially enjoined from continuing the business for which it is established. Upon dissolution, a corporation became legally dead for all purposes except for limited and specified purposes incident to complete liquidation of its affairs. Thus, a moment a corporation's right to exist ceases, its corporate powers are terminated just as powers of a natural person to take part in mundane affairs cease to exist upon his death. The filing and recording of the certificate of extension after that time cannot relate back to the date of passage of a resolution by stockholders in favor of the extension to save the life of the corporation. When the corporate life was ended, there was nothing left to extend. It only existed for the purpose of winding up its affairs. The privilege of extension is purely statutory and generally, these conditions must be complied with, and the steps necessary to effect the extension must be taken, during the life of the corporation and before the expiration of its terms of existence as originally fixed by its charter or the general law, since, as a rule, the corporation is ipso facto dissolved as soon as that time expires. There is a broad distinction between the extension of a charter and the grant of a new one. To renew a charter is to revive a charter which has expired. Our law limits itself to extension of corporate existence. At the time of the passage of the law, Alhambra's corporate life already expired. It had overstepped the limits of its limited existence. No life is there to prolong. Phil Trust Company v. Rivera Doctrine: A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Facts: Cooperative Naval Filipina was duly incorporated under the laws of the Philippines with a capital of P100,000 divided into one thousand shares of a par value of 100 each. Rivera subscribed 450 shares representing a value of P45,000 to said corporation. In the course of time, the company became insolvent and went into the hands of Philippine Trust as assignee in bankruptcy. Despite Rivera's subscription to the shares, he never paid for the half of his stock subscription by reason of a resolution adopted to that effect by the stockholders to the effect that the capital should be reduced by 50% and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50% of the same. It does not appear that any certificate was at any time filed in the Bureau of Commerce and Industry showing such reduction despite the adopted resolution. Pursuant to Rivera's nonpayment, an action was instituted by PhilTrust for the purpose of recovering the balance of the unpaid subscription. Issue: Whether or not the resolution relied upon by defendant absolving him from his unpaid subscription is valid. Ratio:
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Corporation Law Midterms Case Digests (Atty. Quimson)


The resolution herein releasing shareholders from their obligation to pay 50% of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were entitled ultimately to rely and having been effected without compliance with the statutory requirements, was wholly ineffectual. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Benito v. SEC Doctrine: The general rule is that pre-emptive right is recognized only with respect to new issues of shares and not with respect to additional shares of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later reoffered, he cannot therefore claim a dilution of interest. Note: This ruling appears to no longer be applicable as Section 39 of the new corporation code states that stockholders' have a preemptive right to subscribe to all issues or disposition of shares of any class in proportion to their shareholdings. Facts: Corporation Jamiatul's Articles of Incorporation were filed with the SEC and were approved with an authorized capital stock of P200,000 divided into 20,000 shares at a par value of P10.00 each. Petitioner Benito herein subscribed to 460 shares worth P4,600. Thereafter, the respondent corporation filed a certificate of increase of its capital stock from 200,000 to 1,000,000. Thus, P110,980 worth of shares were subsequently issued by the corporation from the unissued portion of the authorized capital stock of 200,000. Of the increased capital stock of, P160,000 shares were subscribed by Ramos, Lucoman and Alonto. Benito then filed with the SEC a petition alleging that the additional issue worth P110,980 of previously subscribed
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shares of the corporation was made in violation of his preemptive right to said additional issue and that the increase in the authorized capital stock was illegal considering that the stockholders of record were not notified of the meeting wherein the proposed increase was in the agenda. Issue: Whether or not the increase in the authorized capital stock is illegal. Whether or not there was a violation of Benito's pre-emptive right Ratio: The issuance of the unsubscribed portion of the capital stock worth P110,980 is not invalid even if assuming that it was made without notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks in a corporation is lodged in the BOD (Board of Directors) and no stockholders' meeting is necessary to consider it because additional issuance of shares of stocks does not need the approval of stockholders. The fact that he was not able to exercise his pre-emptive right because of the absence of such notice to stockholders cannot serve to invalidate the issuance. The general rule is that a pre-emptive right is recognized only with respect to new issues of shares and not with respect to additional issued or originally authorized shares on the theory that when a corporation at inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. A subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the unsubscribed shares are later reoffered, he cannot therefore claim a dilution of interest. However, since petitioner herein was able to prove the fact that he was not notified of the said meeting and that he never attended the same since he was out of the country at the time, as far as petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so by reason that he was not present at the meeting and had not executed a waiver thereof. Not having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings.

Corporation Law Midterms Case Digests (Atty. Quimson)


Islamic Directorate v. Court of Appeals Doctrine: In a sale or disposition of all the corporate property and assets falling within Section 40 of the Corporation Code, the majority of the legitimate Board of Trustees, concurred in by at least 2/3 of the bona fide members of the corporation should be obtained. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. Facts: The Islamic Directorate of the Philippines (IDP) was incorporated for the purpose of establishing an Islamic Center in QC (construction of a mosque and other religious infrastructures) so as to facilitate the effective practice of Islamic faith in the area. To this end, the Libyan government donated money to the ID to purchase land at Tandang Sora, Quezon City to be used as a center for the Islamic populace. After the purchase of the said land by the Libyan government in the name of IDP, Martial law was declared and most of the members of he board of IDP flew to the Middle East to escape political persecution. Thereafter, 2 muslim groups sprung, the Carpizo Group and the Abbas Group, with both groups claiming to be the legitimate IDP. However, the SEC, in a decision involving the two groups, held that their election was null and void and further ordered them to hold a valid election. No election was ever called. Without having been properly elected as new members of the Board of Trustee, the Carpizo Group caused to be signed an alleged Board Resolution of the IDP authorizing the sale of the subject 2 parcels of land to private respondent INC (Iglesia Ni Cristo) for a consideration, which sale was evidenced by an Absolute Deed of Sale. For this reason, the Tamano Group filed a case before the SEC which sought to nullify the sale made to INC, allegedly because the Carpizo Group was not the legitimate members of the Board of Trustees of the IDP. Pending the SEC case filed by the Tamano Group, for failure to perform its obligations under the consummated sale, the INC filed an action for specific performance with damages in court against the vendor Carpizo Group to compel the group to clear the properties and deliver the full and physical possession of the property to them. In the meantime, the SEC came out with a decision which declared that the sale of the 2 parcels of land in QC to the INC was null and void. However, on appeal, the CA set aside this portion of the decision. Issue: Whether or not the Carpizo Group Resolution is valid and binding. Ratio: All acts carried out by the Carpizo Board, particularly the sale of the property, allegedly in the name of IDP, have to be struck down for having been done without the consent of the IDP through a legitimate Board of Trustees. The SEC made an unequivocal finding that the Carpizo Group is a bogus Board of Trustees and consequently, bereft of any authority to bind the IDP in any kind of transaction including the sale or disposition of the property. In this case, the IDP, owner of the subject parcels of land, never gave its consent thru a legitimate Board of Trustees, to the disputed Absolute Deed of Sale executed in favor of INC. Even assuming that they are legitimately the Board of Trustees, the sale is still deemed void because of the failure to comply with Section 40 of the corporation code which requires that in selling or disposing all the corporate property and assets falling within Section 40 of the Corporation Code, the majority of the legitimate Board of Trustees, concurred in by at least 2/3 of the bona fide members of the corporation should be obtained. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. In this case, since the property herein constitutes the only property of the IDP, its sale to a third party is a sale or disposition of all the corporate property and assets of IDP falling squarely within Section 40. The twin requirements were not met as the Carpizo Group together with the sham board resolution authorizing the negotiation for the sale were from all indications, not bonafide members of the IDP as they were made to appear to be. Apparently, there are only 15 members of the corporation, including 8 members of the Board of Trustees.

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Corporation Law Midterms Case Digests (Atty. Quimson)


Edward J. Nell v. Pacific Farms Doctrine: Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the latter does not become liable for debts and liabilities of the transferor except 1) where the purchaser expressly or impliedly agrees to assume such debts; 2) the transaction amounts to a consolidation or merger of the corporations; 3) where the purchasing corporation is merely a continuation of the selling corporation and ; 4) where the transaction is entered into fraudulently in order to escape liability for such debts. Facts: Nell, appellant, secured in a prior civil case a judgment against Insular Farms representing the sum of an unpaid balance of the price of a pump sold by Nell to Insular Farms. A writ of execution was issued but it was unsatisfied for the reason that Insular Farms had no leviable property. It is for this reason that Nell brought an action against PACIFIC FARMS for the collection of the judgment aforementioned upon the theory that PACIFIC FARMS is the alter ego of Insular Farms because the latter sold all or substantially all of the shares of stock, as well as the real properties of Insular, including the pumping equipment sold by the appellant. Issue: Whether or not Pacific is the alter ego of Insular. Ratio: These facts presented do not prove that Pacific is an alter ego of Insular or is liable for its debts. Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the latter does not become liable for debts and liabilities of the transferor except: 1) where the purchaser expressly or impliedly agrees to assume such debts; 2) the transaction amounts to a consolidation or merger of the corporations; 3) where the purchasing corporation is merely a continuation of the selling corporation and ; 4) where the transaction is entered into fraudulently in order to escape liability for such debts. In this case, there is neither proof nor allegation that Pacific expressly or impliedly agreed to assume the debt of Insular in favor of Nell, or that Pacific is a continuation of Insular or that the sale either the shares of stocks or the assets of Insular Farms to the appellee has been entered into fraudulently in order to escape liability for the debt of Insular in favor of appellant herein. Steinberg v. Velasco Doctrine: The creditors of a corporation have the right to assume that so long as there are debts and liabilities, the board of directors of the corporation will not use its assets to purchase its own stock or to declare dividends to its stockholders when the corporation is insolvent. Facts: As receiver of the Sibugey Trading Company (Trading Company) sued the officers and directors of the corporation for allegedly approving and authorizing various unlawful purchases already made of a large portion of the capital stock of the corporation from its various stockholders and for approving a resolution for the payment of dividends amounting to P3000 to the injury of creditors. Allegedly, the total capital stock unlawfully purchases was P3300 and that allegedly, at the time of such purchase, the corporation had accounts payable amounting to P13,807.50 most of which were unpaid at the time of the petition for the dissolution of the corporation, in contemplation of an insolvency dissolution. These stocks were actually purchased from 2 former directors of the company who resigned before the board of directors approved the purchase and declared dividends. In its defense, the defendants assert that they were purchased by virtue of a resolution of the board of directors of the corporation when the business of the company was going very well. Moreover, they assert that the amount of dividends paid really constituted a surplus profit of the corporation. Issue: Whether or not the corporation legally purchased its own stock. Whether or not the directors legally declared a dividend of P3000. Ratio: From the facts presented, it appears that the board of directors of the corporation authorized the purchase of, purchased and paid for 330 shares of the capital stock of the corporation at the agreed price of P3300 and at the time of the purchase, the corporation was indebted in the sum of P13,807.50.

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Corporation Law Midterms Case Digests (Atty. Quimson)


As to dividends, the corporation then, did not have a bona fide surplus from which the dividends could be paid, and that payment of them in full at that time would affect the financial condition of the corporation. In this situation, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their duties. The directors are bound to care for its property and manage its affairs in good faith and for violation of these duties resulting in waste of its assets or injuries to the property, they are liable to account the same as other trustees. If they do acts beyond their power, whereby losses ensue to the corporation or dispose of its property or pay away its money without authority, they will be required to make good the loss out of their private estates. The creditors of a corporation have the right to assume that so long as there are debts and liabilities, the board of directors of the corporation will not use its assets to purchase its own stock or to declare dividends to its stockholders when the corporation is insolvent. Dela Rama v. Ma-Ao Sugar Central Doctrine: Section 42 of the Corporation Code 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 2/3 of the voting power. Facts: This is a derivative suit instituted by 4 minority stockholders against the Ma-Ao Sugar Central (Sugar Central) and Amado Araneta and 3 other directors of the corporation for allegedly committing illegal and ultra vires acts consisting or corporate irregularities and unauthorized investments. The plaintiffs herein allege that the defendants made illegal investments in the Mabuhay Printing and the Acoje Mining, not made in the pursuance of the corporate purpose and without the requisite authority of 2/3 of the stockholders as required by Section 42 of the Corporation Code (then Section 17). They further posit that even assuming that these resolutions were valid, that it is still wanting in legality for no resolution was approved by the affirmative vote of the stockholders holding shares in the corporation entitling them to exercise at least 2/3 of the voting power. Allegedly, the defendants invested P655,000 in shares of stock of the company but was later ratified by the Board of Directors. More than that, the defendants contend that since the company was engaged in the manufacture of sugar bags, it was perfectly legitimate for the sugar central to manufacture sugar bags or invest in another corporation engaged in the said manufacture. Issue: Whether or not the investments made herein were valid. Ratio: A private corporation has the power to invest its corporate funds in any other corporation or business, or to any purpose other than the main purpose for which it was organized, provided 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 2/3 of the voting power on such a proposal at a stockholders' meeting called for that purpose, and provided further that no agricultural or mining corporation shall be in anywise be interested in any other agricultural mining corporation. When the investment is necessary to accomplish its purpose as stated in the Articles of Incorporation, the approval of the stockholders is not necessary. The investment in question does not fall under the purview of the Corporation Law. Sec. 40 of the Corporation Law allows a corporation to "invest its fund 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. Gokongwei v. SEC (1979) Facts: John Gokongwei was a stockholder of SMC. He filed a petition for declaration of nullity of amended by-laws, cancellation of certificate of filing of the amended-by laws, injunction and damages against the majority of the members of the Board of Directors of the SMC on the ground that: o In 1976, the board of directors amended the by laws of the corporation basing their authority to do so on a
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Corporation Law Midterms Case Digests (Atty. Quimson)


resolution of the stockholders adopted way back in 1961 (when the outstanding capital stock was lower). Gokongwei asserts that under the Corporation Law and the bylaws of the corporation itself, the power to amend or adopt new by-laws may be delegated to the Board only by affirmative vote at least 2/3 of the subscribed paid up capital stock of the corporation which should have been computed on the basis of the capitalization at the time of the amendment. Since based on the 1961 authorization, he contends that the board was without the power to amend. Furthermore, he asserts that the 1961 authority has already been exercised hence, it can no longer be exercised again. As another cause of action, Gokongwei posits that prior to the amendment, he had all the qualifications to be a director of the corporation as a stockholder thereof (right to vote and be voted for) and that in amending the by-laws they purposely provided for disqualifications and deprived him of his vested right. He contends that corporations have no inherent power to disqualify a stockholder from being elected. He also asserts that Andres and Jose Soriano (members of the Board), while representing other corporations, entered into a management contract with the corporation which was avowed because the questioned amendment gave the Board itself the prerogative to determine whether they or other persons are engaged in a competitive business with the SMC. Later, Gokongwei discovered that the corporation has been investing corporate funds in other corporations and business outside of the primary purpose of the corporation, in violation of the corporation code. Hence, he filed a petition seeking to have the board members be declared guilty of such violation and ordered to account for such investments. Issue: Whether or not the corporation has the power to provide for the additional qualifications/disqualifications of its directors by amending the by-laws. Whether or not the corporation has the power to disqualify a competitor from being elected to the board of directors as a reasonable exercise of corporate authority. Ratio: Yes. Pursuant to the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least 2/3 of the subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right, to object thereto in writing and demand payment for his share. It cannot be said that prior to this, Gokongwei has a vested right to vote and be voted for 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. 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. Under the law, a corporation may prescribe in its by-laws the qualifications, duties and compensation of directors, officers and employees. Such provision in the law is a qualification, in addition to the requirement 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. Hence, every person who buys a stock with a corporation impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and
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Subsequent to this, Gokongwei also filed an urgent motion for production and inspection of documents alleging that the secretary refused to allow him to inspect its records despite the request made. He posits that the corporation had been attempting to suppress information from the stockholders. While the petition was pending to be heard, the corporation, nevertheless, held a special stockholders' meeting for the purpose of ratification and confirmation of the amended by laws. This prompted Gokongwei to ask the SEC for a summary judgment on the ground that by calling a meeting, the board admitted the invalidity of the amendments of 1976. Subsequently, after the denial of the restraining order and summary judgment, the board of directors ratified the by-laws.

Corporation Law Midterms Case Digests (Atty. Quimson)


lawfully enacted by-laws and not forbidden by law. A stockholder is considered to have parted with his personal right or privilege to regulate the disposition of his property and surrendered it to the will of the majority of his fellow incorporators. The corporation has such power to disqualify. A director's relationship with the corporation is of a fiduciary nature. Such springs from the fact that directors have control and guidance of corporate affairs and property hence of the property interests of the stockholders. They are agents entrusted with the management of the corporation for the collective benefit of the stockholders. They occupy a fiduciary relationship and in this sense, the relation is one of trust wherein the directors are the trustees and the stockholders are beneficiaries. He who is in such a fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and disregard of the standards of common decency. The doctrine of corporate opportunity is a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for 2 entities with competing interests. This doctrine rests on 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 unjustly calls for protection. 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. Gokongwei v. SEC (1980) Facts: This is a petition for review of petitioner seeking to nullify and set aside the resolution of the court in the 1979 case sustaining the findings of the SMC that petitioner is engaged in a business competitive with or antagonistic to that of SMC and therefore, ineligible for election as director, pursuant to the amended by-laws. Petitioner alleges that his disqualification should not have been heard in view of the pending motion for reconsideration and that the court failed to consider that the respondent corporation board are precluded from disqualifying petitioner because of the rule of pari delicto and that the resolution of disqualification was an overexertion of corporate power because by this act, the board intended to perpetuate themselves in power. Ratio: The validity of the amended by-laws can no longer be relitigated on the basis that it is already the law of the case and therefore, the enforcement of the amended by-laws could not have been ipso facto stayed by the motion for reconsideration. There is evidence showing that petitioner was engaged in agricultural and poultry business competitive with that of SMC. However, petitioner did not adduce any evidence to rebut the evidence of his disqualification. Findings of fact of administrative bodies will not be interfered with by the courts in the absence of grave abuse of discretion on the part of the agencies or unless the findings are not supported by substantial evidence. Nielson & Company v. Lepanto Consolidated Mining Co. Facts: A contract was executed between Nielson and Lepanto whereby Nielson operated and managed the mining properties owned by Lepanto for a management fee of 2,500 a month and 10% participation in the net profits resulting from the operation of the mining properties for a period of 5 years, renewable. When the Pacific War broke out, the operation of the mining properties was disrupted on account of the war and the rehabilitation and reconstruction of the mine and mill was not completed until 1948. In that year, the mines resumed operation under the management of Lepanto. Lepanto made a proposal to amend the management contract at the special meeting of the BOD. In this meeting, the BOD of Lepanto authorized its president to enter into an agreement with Nielson modifying the pertinent provision of the contract in such a way that Nielson will receive
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o o o 10% of the dividends declared and paid, when and as paid, during the period of the contract and at the end of each year 10% of any depletion reserve that may be set up 10% of any amount expended during the year out of surplus earnings for capital account increased capitalization, not coming from stock dividends declared (these stock dividends cannot be issued to one who is not a stockholder). A stock dividend implies a distribution of the shares of stock of the corporation among the stockholders as dividends. It is a dividend paid in shares of stock instead of cash and is properly payable only out of the surplus profits. It is a dividend and the enforced use of the dividend money to purchase additional shares of stock at par. Only stockholders are entitled to dividends since they are the only ones who have a right to a proportional share in the part of the surplus which is declared as dividends. Hence, in the case at bar, Nielson cannot be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract. The phrase in the contract was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson in proportion of 10% cash value of the stock dividends declared. It can be inferred from the meeting that the chairman believed that it would be better to tie the computation of the 10% participation of Nielson to the dividend because Nielson would then be able to definitely compute its net participation by the amount of the dividends declared. It does not mean that the compensation of Nielson will be taken from the amount actually declared as cash dividend to be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as stock dividends, but from the other assets or funds of the corporation which are not burdened by the dividends thus declared (ex. if the case dividends declared is P300,000, Nielson is entitled to a compensation of P30,000 but the P30,000 will not be taken from the P300,000 but from some other fund or asset of the corporation which is not included in the amount to answer for the cash dividends thus declared. Pirovana v. Dela Rama Steamship Facts: Enrico Pirovano was the president of the Dela Rama Steamship company. He managed the company until it became a multi-million corporation but by that time, he was executed by the Japanese during the occupation. For this reason, the BOD issued a resolution which sets aside P400,000 for equal division among Enrico's 4
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Pursuant to this management contract, it was shown that Subsequent to this, Lepanto declared stock dividends totaling to P3,000,000. In its decision, the court ordered Lepanto to issue and deliver to Nielson those shares of stocks (amounting to 10%) as well as the fruits or dividends that accrued to said shares. Lepanto, however, contends that this payment to Nielson stock dividends as compensation for its services under the management contract is a violation of the Corporation Code and that it was not, and could not be, the intention of Lepanto and Nielson that the services of Nielson should be paid in shares of stock taken out of stock dividends declared by Lepanto. Issue: Whether or not the court erred in ordering Lepanto to issue and deliver to Nielson 10% of the stock dividends declared. Ratio: Nielson should receive the equivalent of 10% of the amount of the dividends declared and paid not the dividends itself. Under the Corporation Code, the consideration for which shares of stocks may be issued are 1) cash; 2) property; and 3) undistributed profits. Shares of stock are given the name "stock dividends" only if they are issued in lieu of undistributed profits. If the shares are issued in exchange of cash or property then those shares do not fall under the category of stock dividends. A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder or in payment of its indebtedness. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of stock that are originally issued by the corporation forming part of the capital that can be exchanged for cash or services rendered or property that is, if the corporation has original shares of stock unsold or unsubscribed either coming from the original capitalization or from the

Corporation Law Midterms Case Digests (Atty. Quimson)


children convertible into shares of stock of the company. Also in this resolution was the request to present registered stockholders to waive their pre-emptive right to 4,000 shares of the unissued stock of the company in order to enable each of the 4 minor heirs to obtain 1,000 shares at par each. However, subsequently, when the said resolution met protests from the stockholders, the BOD again adopted a resolution changing the form of donation to a renunciation in favor of the children of all the company's right, title interest as beneficiary in and to the proceeds of Enrico's life insurance policies subject to the condition that the proceeds should be retained by the company as a loan drawing interest at 5% per annum and payable to the children after the company shall have first settled in full the balance of its present remaining indebtedness in the sum of P5,000. Sometime in March 1950, the president of the corporation, Sergio Osmena addressed an inquiry to the SEC asking for the opinion regarding the validity o the donation of the proceeds of the insurance policy to the children. The SEC rendered its opinion that the donation was void because the corporation could not dispose of its assets by gift and therefore, the corporation acted beyond the scope of its corporate powers. Because of this SEC opinion, the president held a meeting where he expressed his view that the corporation was not authorized by its charter to make the donation to the children. Thereafter, the majority stockholders voted to revoke the resolution approving the donation to the children. Issue: Whether or not the grant of the proceeds of the insurance policies taken on the life of the late Enrico is a remunerative donation. Whether or not the corporation can give by way of donation the proceeds of the said insurance policies to the minor children under the law or its articles of incorporation or is that donation an ultra vires act? Ratio: It is remunerative in nature or that which is made to a person in consideration of his merits or services rendered to the donor, provided that they do not constitute recoverable debts. Also, said donation can no longer be rescinded even if the corporation wanted to. The same has not only been granted in several resolutions duly adopted by the BOD, but also in all these corporate acts, the concurrence of the representatives of the only creditor whose interest may be affected was expressly given. The donation has already reached the stage of perfection which is valid and binding upon the corporation and as such cannot be rescinded unless there exists legal grounds for doing so. The revocation cannot have the effect of nullifying the donation in question. After a careful perusal of the provisions of the Articles of Incorporation, the court finds that the corporation was given broad and unlimited powers to carry out the purposes for which it was organized among them: 1) to invest and deal with the moneys of the company not immediately required, in such a manner as from time to time may determine and; 2) to aid in any other manner, any person, association, or corporation of which any obligation or in which any interest is held by the corporation or in the affairs of prosperity of which this corporation has a lawful interest. The word deal here is broad enough to include any manner of disposition and refers to moneys not immediately required by the corporation. The donation in question undoubtedly comes within the scope of this broad power for it is a fact appearing in the evidence that the insurance proceeds were not immediately required when they were given away. Under the second broad power, that is, to aid in any other manner ay person in the affairs and prosperity of whom the corporation has a lawful interest, the court doesnt see much distinction between these acts of generosity or benevolence extended to some employees of the corporation, and even to some in whom the corporation was merely interested because of certain moral or political considerations and the donation which the corporation has seen fit to give to the children of the late Enrico from the point of view of the power of the corporation as expressed in its articles of incorporation. Moreover, the gratuity given here is not merely motivated by pure liberality, it was because of a deep sense of recognition of the valuable services rendered by Enrico which had immensely contributed his time to the growth of the corporation to the extent that it blossomed into a multi-million corporation that it is today. Clearly the donation is within the scope of the board's powers. Even assuming that it is ultra vires, since the stockholders themselves expressly ratified the resolution, the infirmity of the corporate act has been cured. Ultra vires acts are not illegal and void ab initio, but are not merely within the scope of the articles of

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Corporation Law Midterms Case Digests (Atty. Quimson)


incorporation. They are merely voidable and may become binding and enforceable when ratified by stockholders. Republic v. Acoje Mining Doctrine: An ultra vires act is not void for it was approved not in contravention of the law, customs, public order or public policy. It is merely voidable which may be enforced by performance, ratification or estoppel. Where an ultra vires transaction has been executed by the other party and the corporation has received the benefit of it, the law interposes an estoppel and will not permit the validity of the transaction to be questioned, and this is especially true where there is nothing in the circumstances to put the other party to the transaction on notice that the corporation has exceeded his powers in entering into it and has in doing so overstepped the line of corporate privileges. Facts: The Acoje Mining Company requested the Director of Posts for the opening of a post, telegraph and money order office at its mining camp in Zambales to service its employees and their families living in said camp. Pursuant to this, the BOD of the mining company passed a resolution stating that the company assumes direct responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by reason of any act of dishonesty, carelessness or negligence on the part of the employee of the company who is assigned to take charge of the post office, as required by the Director of Posts. When Acoje's requests were granted to put up a post office, it appointed one Hilario Sanchez as its postmaster. However, said postmaster went on a 3 day leave and never returned leaving a shortage in the amount due to the Post Office. Thus, the government commenced the present action before the CFI of Manila seeking to recover said amount. In its defense, the corporation claims that the corporate acts were ultra vires. Issue: Whether or not the acts of the mining company were ultra vires. Ratio: The contention that it is ultra vires in character has no factual or legal basis. In the first place, the idea to put of a post
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office in their mining site did not come from the government. The company signified its own willingness to comply with the requirements of the government that it furnish free quarters and all the essential equipment required for the operation including the assignment of an employee who will perform the duties of a postmaster. It is evident that the company cannot now be hear to complain that it is not liable for the irregularity committed by its employee. It cannot now go back on its word on the ground of estoppel. While an ultra vires act is one committed outside the object for which the corporation is created and defined by the law of its organization and therefore beyond the powers conferred upon it by law, there are certain corporate acts that may be performed outside the scope of its powers if they are necessarily to promote the interest or welfare of the corporation. In this case, the post office is a vital improvement in the living conditions of the employees and laborers in the mining camp. Japanese War Notes v. SEC Facts: In this case, the Japanese War Notes (JWNCA) was issued an order by the SEC requiring them to show cause why they should not be proceeded against for making misrepresentations to the public about the need of registering and depositing Japanese war notes. On the investigation, they tried to show that there was actually no misrepresentation and that the representations were made in good faith and was later retracted and rectified. Notwithstanding, the commissioner of the SEC found that petitioner JWNCA, as a civic non-stock corporation, should not engage in business for profit and that it had received war notes for deposit and upon payment of fees, without authority in its articles to do so. Despite this prohibition, the SEC found that it has done so in the guise of service fees. Petitioner however contends that the registration of war notes and the collection of fees therefor (which it committed) is not prohibited by the corporation law and was under the authority implied from its articles of incorporation.

Corporation Law Midterms Case Digests (Atty. Quimson)


Issue: Whether or not the registration of war notes and collection of fees therefor is implied from the corporation's articles of incorporation. Ratio: The articles authorize collection of fees from members; but they do not authorize the corporation to engage in the business of registering and accepting war notes for deposit and collecting fees from such services. Neither do we find any merit in the third contention that the association has authority to accept and collect fees for reparation claims for civilian casualties and other injuries. This is beyond any of the powers of the association as embodied in its articles and have absolutely no relation to the avowed purpose of the association to work for the redemption of war notes. Loyola Grand Villas Homeowners (South) Association v. Court of Appeals Doctrine: The word "must" in a statute, like "shall" is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency is to interpret these as the context or a reasonable construction of the statute in which it is used demands or requires. Thus, if the language of the statute, considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the words "shall" and "must" to be directory, they should be given that meaning. Facts: LGVHAI (Loyola Grand Villas Homeowners Association) is the sole homeowners' association in Loyola Grand Villas, a duly registered subdivision in Quezon City. It was organized in 1983 as the association of the homeowners and residents by its president, Soliven. For unknown reasons, LGVHAI did not file its corporate by-laws. Sometime in 1988, when the officers tried to register its by-laws, they discovered that there were 2 other organizations within the subdivision (the North Association and the South Association). These associations were registered with the HGIC. Thereafter, when Soliven inquired about the status of the LGVHAI, it was informed by the HGIC that it was automatically dissolved already for the reason that it did not submit its by-laws within the required period of time by the Corporation Code, and second, there was non-user of corporate charter because there was no receipt of any report on the association's activities. The LGVHAI lodged a complaint with the HGIC questioning the revocation without due hearing and prayed for the cancellation of the certificates of registration of the North and South Associations by reason of their earlier issuance of registration in favor of LGVHAI. Arguments: Petitioner herein (South Association) contends that the use of the word "must" in the corporation code with respect to the filing of the by-laws implies that noncompliance therewith would result in "selfextinction" either due to non-occurrence of a suspensive condition or occurrence of a resolutory condition under the hypothesis that the issuance of the certificate of registration alone, the corporation personality is deemed already formed. It means that the mandatory nature of the provision is so clear that there can be no doubt as to its being an essential attribute of corporate birth. On the other hand, LGVHAI contends that the non-filing of the by laws is only a ground for suspension or revocation of the certificate of registration of corporations and therefore, it may not result in automatic dissolution of the corporation. The adoption of the by-laws is a condition subsequent and does not affect the corporate personality of a corporation like the LGVHAI. The existence of the corporation begins form the date the SEC issues a certificate of incorporation under its official seal. Even if the by-laws have not yet been filed, a corporation may be considered a de facto corporation. Issue: Whether or not the LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code had the effect of automatically dissolving the said corporation. Ratio: No. There can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. Proper notice and hearing are cardinal components of due process. The incorporators must be given the chance to explain their neglect or omission and remedy the same.

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The word "must" in a statute, like "shall" is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency is to interpret these as the context or a reasonable construction of the statute in which it is used demands or requires. Thus, if the language of the statute, considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the words "shall" and "must" to be directory, they should be given that meaning. The deliberations of the Batasang Pambansa No. 68 demonstrates such legislative intent. Clearly, such was never the intention. Note should be taken of the second paragraph of the Code which allows the filing of the by-laws even prior to incorporation. The provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. It necessarily follows that the failure to file the by laws within that period does not imply the demise of the corporation. The by-laws are necessary for the government of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes. The existence of PD 902-A which empowers the SEC to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of a corporation on the ground of failure to file by-laws within the required period also indicates that there is no automatic dissolution. Every statute must be construed and harmonized with other statutes as to form a uniform system of jurisprudence. Fleischer v. Botica Nolasco Doctrine: By-Laws of a corporation must be reasonable and for a corporate purpose and always within the charter limits. They must be strictly subordinate to the constitution and the general laws of the land. They must not infringe the policy of the state, nor be hostile to public welfare. They must not disturb vested rights or impair the obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create obligations unknown to the law. Facts: Manuel Gonzales was the original owner of the 5 shares of stocks subject of this case. He assigned and delivered said shares of stock to Fleischer in consideration of a large sum of money owed by Gonzales to Fleischer. Thereafter, the corporation, through Dr. Miciano, offered to buy said shares from Fleischer at their par value and insisted that said corporation, under its by-laws, had a preferential right to buy from Manuel Gonzales instead of Fleischer. Fleischer refused to sell the same to the corporation and asked that it be registered in his name but the corporation refused to do so. Thus, this action was commenced against the corporation praying that the such corporation be ordered to register in the books the 5 shares of stock in Fleischer's name. The gist of the case here is that under the by-laws of the corporation, the shares should first be offered to the corporation before it can be sold to someone else. Issue: Whether or not such preferential right given to the corporation in the by-laws is consistent with the corporation code. Ratio: It is inconsistent. In adopting said by-law, the corporation has transferred the limits fixed by the law and has not taken into consideration its provisions. Restrictions upon the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. Every owner of corporate shares has the same uncontrollable right to alienate them which attaches to the ownership of any other species of property. A shareholder is under no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to secure the welfare of the corporation or to enable another shareholder to make gains and profits. The corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. In this case, the only restraint in the Corporation Code upon transfers of shares is in Section 35 of Act No. 1459 which states that "No transfer shall be valid except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the
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Corporation Law Midterms Case Digests (Atty. Quimson)


number of the certificate and the number of shares transferred". As such, any restriction of the nature of that imposed in the by-law now in question is ultra vires, violative of the property rights of the shareholders and in restraint of trade. Salafranca v. Philamlife (Pamplona) Village Homeowners Assoc. Doctrine: The right to amend its by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment. However, this right, extensive as it may be, cannot impair the obligation of existing contracts or rights. Facts: Enrique Salafranca started working with PHILAM as an administrative officer for a period of 6 months. He was reappointed to said position for three more times. As such administrative officer, he was responsible for the management of the village's day to day activities. Upon expiration of his employment contract, he continued to work for PHILAM albeit without the benefit of a renewed contract. Sometime in 1987, the corporation decided to amend its by-laws which included a provision which stated that the position of the administrative officer under which said officer, shall hold office at the pleasure of the Board of Directors. Petitioner herein was therefore informed that his term of office shall be coterminous with the Board of Directors which appointed him to his position. He was terminated in 1992. He now claims that his termination was unlawful. Issue: Whether or not Salafranca was illegally dismissed. Ratio: Yes. At the outset, the petitioner already attained the status of a regular employee, as evidenced by his 11 years of service with the corporation He enjoys the right to security of tenure and his services may be terminated only for causes provided by law. The theory that his holding of the position is coterminous with that of the BOD as provided for in the amended by-laws cannot be sustained. The right to amend its by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment. However, this right, extensive as it may be, cannot impair the obligation of existing contracts or rights. Petitioner, being a regular employee, is entitled to security of tenure. If the court were to rule otherwise, it would enable an employer to remove any employee from his employment by the simple expediency of amending its by-laws and providing that his or her position shall cease to exist upon the occurrence of a specified event. If the corporation wanted to make the position coterminous with that of the BOD, then the amendment must be effective after the petitioner's stay with the private respondent, not during his term. The measure taken in amending its by-laws is nothing but a devious, but crude, attempt to circumvent the right to security of tenure as a regular employee under the Labor Code. Grace Christian High School v. Court of Appeals Doctrine: The Board of Directors of Corporations must be elected from among the stockholders or members. There may be corporations in which there are unelected members in the board but it is clear that the unelected members sit as ex officio members. Facts: GCHS (Grace Christian High School) is an educational institution. Private respondent Grace Village Association, on the other hand, is an organization of lot and/or building owners at Grace Village. In 1968, the by-laws of the association provided that the "board of directors [shall] be composed of 11 members to serve for 1 year until their successors are duly elected and have qualified." However, in 1975, a committee of the board prepared a draft of an amendment of the by-laws which proposed that "GCHS [shall] be a permanent director of the association." After said amendment draft was presumably submitted to the board and up to the year 1990, GCHS was given a permanent seat in the BOD of the association. However subsequently, the association's committee on election sent a letter informing them that all directors should be elected by the members of the association, thereby proposing that the practice of making GCHS a permanent director be reexamined.

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Corporation Law Midterms Case Digests (Atty. Quimson)


As the board denied the request that their permanent director status be continued, they brought an action for mandamus in the HGIC (Home Insurance and Guaranty Corporation). Issue: Whether or not the amended by-laws of the association drafted by a committee which made the GCHS a permanent director valid and binding. Whether or not the GCHS has a vested right to a permanent seat in the BOD. Ratio: No. Section 28 and 29 of the Corporation Law requires that the members of the board of directors of corporations to be elected. Similarly, the present Corporation Code provides that the "board of directors or trustees [are] to be elected form among the holders of stockswho shall hold office for 1 year until their successors are elected and qualified. These provisions leave no room for doubt as to their meaning: the board of directors of corporations must be elected form among the stockholders or members. There may be corporations in which there are unelected members in the board but it is clear that the unelected members sit as ex officio members. In the case of petitioners, however, 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. The fact that it has not been questioned or challenged cannot forestall a later challenge to its validity. It cannot attain validity to acquiescence because, if it is contrary to law, it is beyond the powers of the members of the association to waive its invalidity. For that matters the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. Nor can petitioner claim a vested right since practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Board of Directors v. Tan Doctrine: Notice of a special meeting of members should be given at least 5 days before the date of the meeting. Facts: John del Castillo commenced an action before the CFI of Manila to declare null and void the election of the members of the BOD of SMB Workers Savings and Loan Association and of the members of the Election Committee for the year 1957 and to compel the board of directors of the association to call for and hold another election in accordance with its constitution and by-laws and the Corporation Law. The court in said case rendered a judgment declaring the election null and void and ordered that the defendants call for another election in accordance with the constitution, by-laws and the Corporation Law. Plaintiffs moved for the immediate execution of the judgment and such writ of execution was issued. In compliance with the judgment and writ, the election committee called and set the meeting of the members of the association for March 28 to elect the new members of the BOD. However, this was again attacked by del Castillo, alleging that the election committee was composed of the same people and that the notice was sent only on March 26. Issue: Whether or not there is compliance with the previous notice required. Ratio: The five days previous notice is not complied with. Section 3, Article II of the Constitution and By-Laws of the association provides that "notice of the time and place of holding of any annual meeting or any special meeting of the members shall be given.at least 5 days before the date set for such meeting." It appears herein that the notice was posted on March 26 and the election was set for March 28. Ponce v. Encarnacion and Gapol Doctrine: On the showing of good cause, 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 among them to preside it. And this showing of good
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Corporation Law Midterms Case Digests (Atty. Quimson)


cause therefore 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. Facts: On a meeting duly called, Dagohoy Enterprises agreed to the voluntary dissolution of the said corporation and appointed Potenciano Gapol as receiver. Petitioner Domingo Ponce now avers that instead of filing the petition for voluntary dissolution, the respondent Gapol (receiver and largest stockholder of the company) changed his mind and filed a complaint before the CFI to compel the petitioners to render an accounting of the funds and assets of the corporation and to reimburse funds that were misspent. Moreover, Gapol petitioned the court praying for an order directing him to call a meeting of the stockholders of the corporation and to preside at such meeting in accordance with the Corporation Law. Such order was issued by the court. Issue: Whether or not the said order (direct Gapol to call a meeting for the stockholders) can be issued. Ratio: The relief granted by the respondent court lies within its jurisdiction. Having authority to grant said relief, the court did not act in excess of its jurisdiction, nor did it abuse it. On the showing of good cause, 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 among them to preside it. And this showing of good cause therefore 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. The requirement on showing of good cause therefore, 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. Herein, it was found that there was a showing of good cause for authorizing Gapol for the purpose of electing the BOD as required and provided for in the by-laws because the chairman of the BOD called upon to do so had failed or refused to perform his duty. the alleged illegality of the election of one member of the BOD at the meeting called by the respondent Gapol as authorized by the court being subsequent to the order complained of cannot affect the validity and legality of the order. Commissioner of Internal Revenue v. Manning * I really don't understand this case. Sorry. Read origs Facts: MANTRASCO was a corporation with 25,000 common shares. 24,700 of which was owned by one Reese and the rest were owned by 3 other private respondents. A trust agreement was entered into among them with the manifest intention to make respondents the sole owners of Reese's interest in MANTRASCO upon his death. When Reese died, MANTRASCO made partial payments of Reese's shares and a new certificate was issued in favor of MANTRASCO. Thereafter, MANTRASCO's stockholders issued a resolution declaring that the 24,700 shares to be reverted to the capital account of the company as a stock dividend to be distributed to respondent. Eventually, all the shares were paid and distributed to private respondents. BIR claims that the distribution of the shares was a stock dividend and are taxable as income. On the other hand, the respondents claim that their respective shares remained the same before and after the declaration of the stock dividends and only the number of shares held have changed. Therefore, they are not liable for taxes. In submitting their contentions, both parties are of the assumption that the shares were treasury shares. Issue: Whether or not the stock dividends were treasury shares. Ratio: The said shares were not, or at anytime before or after that date, treasury shares. Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are issued
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Corporation Law Midterms Case Digests (Atty. Quimson)


shares but being treasury shares, they do not have the status of outstanding shares. Although a treasury share, not having been retired by the corporation acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation itself, nor on the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid-for interest in the property of the corporation. In this case, the essential features of a treasury stock are lacking in the questioned shares: 1. Under the trust agreement, the trustees were authorized to vote all stock standing in their names at all meetings and exercise all rights as owners of the said shares. 2. Any dividends paid on said shares after the death of the owner shall be subject to the provisions of the agreement 3. The amount of retained earnings to be declared as dividends was made subject to the approval of the trustees 4. The corporate directors were delegated exclusively as trustees who were also given the authority to transfer qualifying shares to such directors 5. MANTRASCO and its two subsidiaries were expressly prohibited from paying dividends except as may be authorized by the trustees. The manifest intention of the parties of the trust agreement was to treat the shares of Reese as absolutely outstanding shares of Reese's estate until they were fully paid. Such being the true nature of the shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. A stock being dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings. They used the trust instrument as a convenient technical device and bestowed unto themselves the full worth and value of Reese's corporate holdings with the use of the very earnings of the companies. Such device was used exclusively for expanding the capital base of the respondents in MANTRASCO, not to carry out the usual stock dividend purpose of corporate expansion investment. Lee v. Court of Appeals Doctrine: A trust agreement is 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 a certain purpose or for all purposes, is to be lodged in the trustee, either with or without reservation to the owners, or persons designated by them of the power to direct how such control shall be used. To distinguish a voting trust from proxies and other voting pools and agreements it must pass 3 criteria: 1) the voting rights of the stocks are separated form the other attributes of ownership; 2) the voting rights granted are intended to be irrevocable for a definite period of time; 3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. Facts: In a complaint for sum of money filed in court filed by International Corporate Bank (ICB) against the private respondents ALFA, the trial court issued an order requiring the issuance of an alias summons upon ALFA through DBP as a consequence of the letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA has been transferred to DBP (in the trust agreement). However, DBP manifested that it was not authorized to receive the summons since DBP has not taken over the company which had a separate and distinct corporate personality and existence. For this, the trial court issued an order advising the private respondents to take the appropriate steps to serve the summons to ALFA. Arguments: In their comment, the private respondents (ICB) argued that the voting trust agreement did not divest the petitioners of their position as president and executive vice president of ALFA so that the service of summons upon ALFA, through the corporate officers was proper. On the other hand petitioners (corporate officers of ALFA) reiterated that by virtue of the voting trust agreement, they ceased to be officers and directors of ALDA, hence they could no longer receive summons or any court processes for and on behalf of ALFA.

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Corporation Law Midterms Case Digests (Atty. Quimson)


Allegedly, management and control of ALFA became vested upon the DBP. Issue: Whether or not service upon the petitioners of summons who were no longer corporate officers of ALFA can be considered as proper service of summons on ALFA. Ratio: No. Considering that the voting trust agreement between ALFA and DBP transferred legal ownership of the stocks covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks. Petitioners herein can no longer be deemed to have retained their status as officers of ALFA. DBP has taken over full control and management of the firm. By is very nature, a voting trust agreement results in the separation of the voting rights of the stockholder form his other rights such as the receipt of dividends, the right to inspect, the right to sell certain interests and other rights which a stockholder may be entitled until the liquidation of the corporation. Such trust agreement may confer upon the trustee not only the stockholder's voting rights but also other rights pertaining to his shares as long as the 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. It is a legal device whereby a transfer of the stockholder's shares is effected subject to the specific provision of the voting trust agreement. Therefore, the agreement may create a dichotomy between the beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on the other hand. In the old code, the eligibility of a director cannot be adversely affected by the simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (albeit a mere beneficial owner) of the shares subject of the voting trust agreement. There is no disqualification by virtue of the phrase in the provision. "in his own right". However, with the omission of the phrase, the election of trustees and other persons who are in fact not the beneficial owners of the shares becomes formally legalized. In order to be an eligible director, what is material is the legal title to, not the beneficial ownership of the stock as appearing on the books of the corporation. In this case, since their trust agreement disposed of all their shares through assignment and delivery in favor of the DBP as trustee, the petitioners ceased to own at least 2 share standing on their names which is required in order to be a director. The transfer, in effect, created vacancies in their positions as directors of ALFA. DBP became the stockholder of record with respect to the shares of stocks. Also, there can be no reliance on the inference that the 5 year period in the trust agreement would cause the ipso facto reversion of the said stocks to the petitioners. Under Section 59 of the Corporation Code, the voting trust certificates as well as the certificates of stock in the name of the trustee shall be thereby deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. There was no proper service of summons. It should be served with DBP since 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 upon him. Service may only be made on the president, manager, secretary, cashier or any of its directors. The petitioners in this case do not fall under any of the enumeration.

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