[G.R. No. 51765.

March 3, 1997]

REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. AGANA, SR., as Presiding
Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO
REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES, respondents.

DECISION

HERMOSISIMA, JR., J.:

This is a petition for certiorari seeking the annulment of the Decisioni[1] of the then Court of
First Instance of Rizalii[2] for having been rendered in grave abuse of discretion. Private
respondents Robes-Francisco Realty and Development Corporation (hereafter, "the
Corporation") and Adalia F. Robes filed in the court a quo, an action for specific performance to
compel petitioner to redeem 800 preferred shares of stock with a face value of P8,000.00 and to
pay 1% quarterly interest thereon as quarterly dividend owing them under the terms and
conditions of the certificates of stock.

The court a quo rendered judgment in favor of private respondents; hence, this instant petition.

Herein parties debate only legal issues, no issues of fact having been raised by them in the court
a quo. For ready reference, however, the following narration of pertinent transactions and events
is in order:

On September 18, 1961, private respondent Corporation secured a loan from petitioner in the
amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were
issued to private respondent Corporation(robes realty), through its officers then, private
respondent Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal
tender totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount
partially in the form of money and partially in the form of stock certificates numbered 3204 and
3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total
of P8,000.00. Said stock certificates were in the name of private respondent Adalia F. Robes and
Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions:

"The Preferred Stock shall have the following rights, preferences, qualifications and limitations,
to wit:

1. Of the right to receive a quarterly dividend of One Per Centum

(1%), cumulative and participating.
xxx
2. That such preferred shares may be redeemed, by the system of
drawing lots, at any time after two (2) years from the date of issue
at the option of the Corporation. x x x."
On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint
anchored on private respondents' alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms and conditions of the stock
certificates. Private respondents attached to their complaint, a letter-demand dated January 5,
1979 which, significantly, was not formally offered in evidence.

Petitioner filed a Motion to Dismissiii[3] private respondents' Complaint on the following grounds:
(1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that the action
was unenforceable under substantive law; and (3) that the action was barred by the statute of
limitations and/or laches.

Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March 16, 1979.iv
v
[4] Petitioner then filed its Answer on May 2, 1979. [5] Thereafter, the trial court gave the parties
ten (10) days from July 30, 1979 to submit their respective memoranda after the submission of
which the case would be deemed submitted for resolution.vi[6]

On September 7, 1979, the trial court rendered the herein assailed decision in favor of
private respondents. In ordering petitioner to pay private respondents the face value of the
stock certificates as redemption price, plus 1% quarterly interest thereon until full
payment, the trial court ruled:

"There being no issue of fact raised by either of the parties who filed their respective memoranda
delineating their respective contentions, a judgment on the pleadings, conformably with an
earlier order of the Court, appears to be in order.

From a further perusal of the pleadings, it appears that the provision of the stock certificates in
question to the effect that the plaintiffs shall have the right to receive a quarterly dividend of One
Per Centum (1%), cumulative and participating, clearly and unequivocably [sic] indicates that
the same are 'interest bearing stocks' which are stocks issued by a corporation under an
agreement to pay a certain rate of interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs
become entitled to the payment thereof as a matter of right without necessity of a prior
declaration of dividend.

On the question of the redemption by the defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock certificates clearly allows the same.

To allow the herein defendant not to redeem said preferred shares of stock and/or pay the interest
due thereon despite the clear import of said provisions by the mere invocation of alleged Central
Bank Circulars prohibiting the same is tantamount to an impairment of the obligation of
contracts enshrined in no less than the fundamental law itself.

Moreover, the herein defendant is considered in estoppel from taking shelter behind a General
Banking Act provision to the effect that it cannot buy its own shares of stocks considering that
the very terms and conditions in said stock certificates allowing their redemption are its own
handiwork.
As to the claim by the defendant that plaintiffs' cause of action is barred by prescription, suffice
it to state that the running of the prescriptive period was considered interrupted by the written
extrajudicial demands made by the plaintiffs from the defendant."vii[7]

Aggrieved by the decision of the trial court, petitioner elevated the case before us essentially on
pure questions of law. Petitioner's statement of the issues that it submits for us to adjudicate
upon, is as follows:

"A.RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION

AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING
PETITIONER TO PAY RESPONDENT ADALIA F. ROBES THE AMOUNT OF
P8,213.69 AS INTERESTS FROM 1961 To 1979 ON HER PREFERRED
SHARES.

B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION

AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING
PETITIONER TO REDEEM RESPONDENT ADALIA F. ROBES' PREFERRED
SHARES FOR P8,000.00

C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
DISREGARDING THE ORDER OF THE CENTRAL BANK TO PETITIONER
TO DESIST FROM REDEEMING ITS PREFERRED SHARES AND FROM
PAYING DIVIDENDS THEREON x x x.

D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE

COMPLAINT DOES NOT STATE A CAUSE OF ACTION.

E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM

OF RESPONDENT ADALIA F. ROBES IS BARRED BY PRESCRIPTION OR
LACHES."viii[8]

The petition is meritorious.

Before passing upon the merits of this petition, it may be pertinent to provide an overview on the
nature of preferred shares and the redemption thereof, considering that these issues lie at the
heart of the dispute.

A preferred share of stock, on one hand, is one which entitles the holder thereof to certain
preferences over the holders of common stock. The preferences are designed to induce persons to
subscribe for shares of a corporation.ix[9] Preferred shares take a multiplicity of forms. The most
common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred
shares as to dividends. The former is a share which gives the holder thereof preference in the
distribution of the assets of the corporation in case of liquidation;x[10] the latter is a share the
holder of which is entitled to receive dividends on said share to the extent agreed upon before
any dividends at all are paid to the holders of common stock.xi[11] There is no guaranty, however,
that the share will receive any dividends. Under the old Corporation Law in force at the time
the contract between the petitioner and the private respondents was entered into, it was
provided that "no corporation shall make or declare any dividend except from the surplus
profits arising from its business, or distribute its capital stock or property other than actual
profits among its members or stockholders until after the payment of its debts and the
termination of its existence by limitation or lawful dissolution."xii[12] Similarly, the present
Corporation Codexiii[13] provides that the board of directors of a stock corporation may declare
dividends only out of unrestricted retained earnings .xiv[14] The Code, in Section 43, adopting the
change made in accounting terminology, substituted the phrase unrestricted retained earnings ,"
which may be a more precise term, in place of "surplus profits arising from its business" in the
former law. Thus, the declaration of dividends is dependent upon the availability of surplus
profit or unrestricted retained earnings , as the case may be. Preferences granted to
preferred stockholders, moreover, do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right of the former being
always subordinate to the latter. Dividends are thus payable only when there are profits
earned by the corporation and as a general rule, even if there are existing profits, the board
of directors has the discretion to determine whether or not dividends are to be declared. xv[15]
Shareholders, both common and preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts and liabilities are fully
paid.xvi[16]

Redeemable shares, on the other hand, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or
both at a certain redemption price.xvii[17] A redemption by the corporation of its stock is, in a
sense, a repurchase of it for cancellation.xviii[18] The present Code allows redemption of shares
even if there are no unrestricted retained earnings on the books of the corporation. This is a
new provision which in effect qualifies the general rule that the corporation cannot purchase its
own shares except out of current retained earnings .xix[19] However, while redeemable shares
may be redeemed regardless of the existence of unrestricted retained earnings, this is
subject to the condition that the corporation has, after such redemption, assets in its books
to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be
made where the corporation is insolvent or if such redemption will cause insolvency or inability
of the corporation to meet its debts as they mature.xx[20]

We come now to the merits of the case. The petitioner argues that it cannot be compelled to
redeem the preferred shares issued to the private respondent. We agree. Respondent judge,
in ruling that petitioner must redeem the shares in question, stated that:

"On the question of the redemption by the defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock certificates clearly allows the same."xxi[21]

What respondent Judge failed to recognize was that while the stock certificate does allow
redemption, the option to do so was clearly vested in the petitioner bank. The redemption
therefore is clearly the type known as "optional". Thus, except as otherwise provided in the
stock certificate, the redemption rests entirely with the corporation and the stockholder is
without right to either compel or refuse the redemption of its stock.xxii[22] Furthermore, the
terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and cannot be construed as having a
mandatory effect. We fail to see how respondent judge can ignore what, in his words, are the
"very wordings of the terms and conditions in said stock certificates" and construe what is clearly
a mere option to be his legal basis for compelling the petitioner to redeem the shares in question.

The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central
Bank made a finding that said petitioner has been suffering from chronic reserve
deficiency,xxiii[23] and that such finding resulted in a directive, issued on January 31, 1973 by
then Gov. G. S. Licaros of the Central Bank, to the President and Acting Chairman of the
Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on
the ground that said redemption would reduce the assets of the Bank to the prejudice of its
depositors and creditors.xxiv[24] Redemption of preferred shares was prohibited for a just and
valid reason. The directive issued by the Central Bank Governor was obviously meant to
preserve the status quo, and to prevent the financial ruin of a banking institution that
would have resulted in adverse repercussions, not only to its depositors and creditors, but
also to the banking industry as a whole. The directive, in limiting the exercise of a right
granted by law to a corporate entity, may thus be considered as an exercise of police power. The
respondent judge insists that the directive constitutes an impairment of the obligation of
contracts. It has, however, been settled that the Constitutional guaranty of non-impairment of
obligations of contract is limited by the exercise of the police power of the state, the reason being
that public welfare is superior to private rights.xxv[25]

The respondent judge also stated that since the stock certificate granted the private respondents
the right to receive a quarterly dividend of one Per Centum (1%), cumulative and participating, it
"clearly and unequivocably (sic) indicates that the same are 'interest bearing stocks' or stocks
issued by a corporation under an agreement to pay a certain rate of interest thereon. As such,
plaintiffs (private respondents herein) become entitled to the payment thereof as a matter of right
without necessity of a prior declaration of dividend."xxvi[26] There is no legal basis for this
observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code
prohibit the issuance of any stock dividend without the approval of stockholders, representing
not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly
called for the purpose. These provisions underscore the fact that payment of dividends to a
stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing
stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to
common stockholders, is legal only when construed as requiring payment of interest as dividends
from net earnings or surplus only.xxvii[27] Clearly, the respondent judge, in compelling the
petitioner to redeem the shares in question and to pay the corresponding dividends, committed
grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms
and conditions specified in the stock certificate, as well as the clear mandate of the law.

Anent the issue of prescription, this Court so holds that the claim of private respondent is already
barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that a right of
action that is founded upon a written contract prescribes in ten (10) years. The letter-demand
made by the private respondents to the petitioner was made only on January 5, 1979, or almost
eighteen years after receipt of the written contract in the form of the stock certificate. As noted
earlier, this letter-demand, significantly, was not formally offered in evidence, nor were any other
evidence of demand presented. Therefore, we conclude that the only time the private respondents
saw it fit to assert their rights, if any, to the preferred shares of stock, was after the lapse of
almost eighteen years. The same clearly indicates that the right of the private respondents to any
relief under the law has already prescribed. Moreover, the claim of the private respondents is also
barred by laches. Laches has been defined as the failure or neglect, for an unreasonable length of
time, to do that which by exercising due diligence could or should have been done earlier; it is
negligence or omission to assert a right within a reasonable time, warranting a presumption that
the party entitled to assert it either has abandoned it or declined to assert it.xxviii[28]

Considering that the terms and conditions set forth in the stock certificate clearly indicate that
redemption of the preferred shares may be made at any time after the lapse of two years from the
date of issue, private respondents should have taken it upon themselves, after the lapse of the
said period, to inquire from the petitioner the reason why the said shares have not been
redeemed. As it is, not only two years had lapsed, as agreed upon, but an additional sixteen years
passed before the private respondents saw it fit to demand their right. The petitioner, at the time
it issued said preferred shares to the private respondents in 1961, could not have known that it
would be suffering from chronic reserve deficiency twelve years later. Had the private
respondents been vigilant in asserting their rights, the redemption could have been effected at a
time when the petitioner bank was not suffering from any financial crisis.

WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The
challenged decision of respondent judge is set aside and the complaint against the petitioner is
dismissed.

Costs against the private respondents.

SO ORDERED.

Padilla, (Chairman), Bellosillo, Vitug, and Kapunan, JJ., concur.

i[1] Promulgated on September 7, 1979 in Civil Case No. 6965-P, penned by District Judge
Enrique A. Agana, Sr.; Rollo, pp. 57-59.

ii[2] Branch XXVIII, Seventh Judicial District, Pasay City

iii[3] Dated February 12, 1979.

iv[4] Rollo, p. 37.

v[5] Rollo, pp. 38-40.

vi[6] Order dated July 30, 1979; Rollo, p. 43.

vii[7] Decision dated September 7, 1979, pp. 2-3; Rollo, pp. 58-59.

viii[8] Petition, pp. 10-11; Rollo, pp. 11-12

ix[9] DE LEON, The Corporation Code of the Philippines, p. 62 (1989 ed.).

x[10] Id

xi[11] DE LEON, p. 69, citing 2 Fletcher, p. 44

xii[12] Act No. 1459, Sec. 16, as amended

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xxviiG.R. No. L-18062 February 28, 1963REPUBLIC OF THE PHILIPPINES, plaintiff-

appellee,
vs.
ACOJE MINING COMPANY, INC., defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Jalandoni & Jamir for defendant-appellant.

BAUTISTA ANGELO, J.:

 On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts requesting the
opening of a post, telegraph and money order offices at its mining camp at Sta. Cruz, Zambales, to
service its employees and their families that were living in said camp. Acting on the request, the
Director of Posts wrote in reply stating that if aside from free quarters the company would provide for
all essential equipment and assign a responsible employee to perform the duties of a postmaster without
compensation from his office until such time as funds therefor may be available he would agree to put
up the offices requested. The company in turn replied signifying its willingness to comply with all the
requirements outlined in the letter of the Director of Posts requesting at the same time that it be
furnished with the necessary forms for the early establishment of a post office branch.

On April 11, 1949, the Director of Posts again wrote a letter to the company stating among other
things that "In cases where a post office will be opened under circumstances similar to the present, it is
the policy of this office to have the company assume 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," thereby
suggesting that a resolution be adopted by the board of directors of the company expressing conformity
to the above condition relative to the responsibility to be assumed buy it in the event a post office
branch is opened as requested. On September 2, 1949, the company informed the Director of Posts of
the passage by its board of directors of a resolution of the following tenor: "That the requirement of the
Bureau of Posts that the Company should accept full responsibility for all cash received by the
Postmaster be complied with, and that a copy of this resolution be forwarded to the Bureau of Posts."
The letter further states that the company feels that that resolution fulfills the last condition imposed by
the Director of Posts and that, therefore, it would request that an inspector be sent to the camp for the
purpose of acquainting the postmaster with the details of the operation of the branch office.

The post office branch was opened at the camp on October 13, 1949 with one Hilario M. Sanchez as
postmaster. He is an employee of the company. On May 11, 1954, the postmaster went on a three-day
leave but never returned. The company immediately informed the officials of the Manila Post Office
and the provincial auditor of Zambales of Sanchez' disappearance with the result that the accounts of
the postmaster were checked and a shortage was found in the amount of P13,867.24.

The several demands made upon the company for the payment of the shortage in line with the liability
it has assumed having failed, the government commenced the present action on September 10, 1954
before the Court of First Instance of Manila seeking to recover the amount of Pl3,867.24. The
company in its answer denied liability for said amount contending that the resolution of the
board of directors wherein it assumed responsibility for the act of the postmaster is ultra vires,
and in any event its liability under said resolution is only that of a guarantor who answers only
after the exhaustion of the properties of the principal, aside from the fact that the loss claimed by
the plaintiff is not supported by the office record.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts. 1wph1.t

After trial, the court a quo found that, of the amount claimed by plaintiff totalling P13,867.24, only the
sum of P9,515.25 was supported by the evidence, and so it rendered judgment for the plaintiff only for
the amount last mentioned. The court rejected the contention that the resolution adopted by the
company is ultra vires and that the obligation it has assumed is merely that of a guarantor.

Defendant took the present appeal.

The contention that the resolution adopted by the company dated August 31, 1949 is ultra vires in
the sense that it has no authority to act on a matter which may render the company liable as a
guarantor has no factual or legal basis. In the first place, it should be noted that the opening of a post
office branch at the mining camp of appellant corporation was undertaken because of a request
submitted by it to promote the convenience and benefit of its employees. The idea did not come from
the government, and the Director of Posts was prevailed upon to agree to the request only after
studying the necessity for its establishment and after imposing upon the company certain requirements
intended to safeguard and protect the interest of the government. Thus, after the company had signified
its willingness to comply with the requirement of the government that it furnish free quarters and all the
essential equipment that may be necessary for the operation of the office including the assignment of an
employee who will perform the duties of a postmaster, the Director of Posts agreed to the opening of
the post office stating that "In cases where a post office will be opened under circumstances similar to
the present, it is the policy of this office to have the company assume 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," and accepting this condition, the company, thru its board of directors, adopted forthwith a
resolution of the following tenor: "That the requirement of the Bureau of Posts that the company should
accept full responsibility for all cash received by the Postmaster, be complied with, and that a copy of
this resolution be forwarded to the Bureau of Posts." On the basis of the foregoing facts, it is evident
that the company cannot now be heard to complain that it is not liable for the irregularity committed by
its employee upon the technical plea that the resolution approved by its board of directors is ultra vires.
The least that can be said is that it cannot now go back on its plighted word on the ground of estoppel.

The claim that the resolution adopted by the board of directors of appellant company is an ultra
vires act cannot also be entertained it appearing that the same covers a subject which concerns
the benefit, convenience and welfare of its employees and their families. While as a rule an ultra
vires act is one committed outside the object for which a corporation is created as defined by the
law of its organization and therefore beyond the powers conferred upon it by law (19 C.J.S.,
Section 965, p. 419), there are however certain corporate acts that may be performed outside of
the scope of the powers expressly conferred if they are necessary to promote the interest or
welfare of the corporation. Thus, it has been held that "although not expressly authorized to do
so a corporation may become a surety where the particular transaction is reasonably necessary
or proper to the conduct of its business,"1 and here it is undisputed that the establishment of the
local post office is a reasonable and proper adjunct to the conduct of the business of appellant
company. Indeed, such post office is a vital improvement in the living condition of its employees and
laborers who came to settle in its mining camp which is far removed from the postal facilities or means
of communication accorded to people living in a city or municipality..

Even assuming arguendo that the resolution in question constitutes an ultra vires act, the same however
is not void for it was approved not in contravention of law, customs, public order or public policy. The
term ultra vires should be distinguished from an illegal act for the former is merely voidable which
may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be
validated.2 It being merely voidable, an ultra vires act can be enforced or validated if there are equitable
grounds for taking such action. Here it is fair that the resolution be upheld at least on the ground of
estoppel. On this point, the authorities are overwhelming:

The weight of authority in the state courts is to the effect that a transaction which is merely
ultra vires and not malum in se or malum prohibitum, is, if performed by one party, not void as
between the parties to all intents and purposes, and that an action may be brought directly on the
transaction and relief had according to its terms. (19 C.J.S., Section 976, p. 432, citing Nettles v.
Rhett, C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F. Supp. 48)

This rule is based on the consideration that as between private corporations, one party cannot
receive the benefits which are embraced in total performance of a contract made with it by
another party and then set up the invalidity of the transaction as a defense." (London &
Lancashire Indemnity Co. of America v. Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112
Ohio St. 136.)

The defense of ultra vires rests on violation of trust or duty toward stockholders, and should not
be entertained where its allowance will do greater wrong to innocent parties dealing with
corporation..

The acceptance of benefits arising from the performance by the other party may give rise
to an estoppel precluding repudiation of the transaction. (19 C.J.S., Section 976, p. 433.)

The current of modern authorities favors the rule that where the 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 or contract 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 its powers in entering into it and has in
so doing overstepped the line of corporate privileges. (19 C.J.S., Section 977, pp. 435-437,
citing Williams v. Peoples Building & Loan Ass'n, 97 S.W. 2d 930, 193 Ark. 118; Hays v.
Galion Gas Light Co., 29 Ohio St. 330)

Neither can we entertain the claim of appellant that its liability is only that of a guarantor. On this point,
we agree with the following comment of the court a quo: "A mere reading of the resolution of the
Board of Directors dated August 31, 1949, upon which the plaintiff based its claim would show that the
responsibility of the defendant company is not just that of a guarantor. Notice that the phraseology and
the terms employed are so clear and sweeping and that the defendant assumed 'full responsibility for all
cash received by the Postmaster.' Here the responsibility of the defendant is not just that of a guarantor.
It is clearly that of a principal."

WHEREFORE, the decision appealed from is affirmed. No costs.

Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and
Makalintal, JJ. concur.

xxviii