Topic: General Principles, Attributes of Corporation which includes a discussion on the Doctrine of Limited

Liability

Case No. 1

PHILIPPINE NATIONAL BANK vs. HYDRO RESOURCES CONTRACTORS CORPORATION

G.R. No. 167530, March 13, 2013

Facts:

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties
of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB
acquired substantially all the assets of MMIC and resumed the business operations of the defunct
MMIC by organizing NMIC. DBP and PNB owned 57% and 43% of the shares of NMIC, respectively,
except for five qualifying shares. As of September 1984, the members of the Board of Directors of
NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada,
were either from DBP or PNB. Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s
Mine Stripping and Road Construction Program in 1985 for a total contract price of ₱35,770,120. After
computing the payments already made by NMIC under the program and crediting the NMIC’s
receivables from Hercon, Inc., the latter found that NMIC still has an unpaid balance of ₱8,370,934.74.
Hercon, Inc. made several demands on NMIC, including a letter of final demand dated August 12, 1986,
and when these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch
136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc. Thereafter, on
December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT for
the expeditious disposition and privatization of certain government corporations and/or the assets
thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB executed their
respective deeds of transfer in favor of the National Government assigning, transferring and
conveying certain assets and liabilities, including their respective stakes in NMIC. In turn and on even
date, the National Government transferred the said assets and liabilities to the APT as trustee under a
Trust Agreement. NMIC and DPB claimed that HRCC had no cause of action and asserted that the
contract with HRCC was entered into by its President without any authority. It also failed to comply
with the rules and regulations concerning government of contracts. DBP asserts that it is not a privy
to the contact with NMIC and NMIC’s juridical personality id separate from DBP.

Issue:

Whether or not NMIC is a corporate entity with a juridical personality separate and distinct from both
PNB and DBP

Held:
A corporation is an artificial entity created by operation of law. It possesses the right of succession and
such powers, attributes, and properties expressly authorized by law or incident to its existence. It has
a personality separate and distinct from that of its stockholders and from that of other corporations
to which it may be connected. As a consequence of its status as a distinct legal entity and as a result
of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and
is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical
personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder.
This protection from liability for shareholders is the principle of limited liability.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation. For reasons
of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third persons. Piercing the
corporate veil based on the alter ego theory requires the concurrence of three elements: control of
the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed
on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the
corporation. The absence of any of these elements prevents piercing the corporate veil.

While ownership by one corporation of all or a great majority of stocks of another corporation and
their interlocking directorates may serve as indicia of control, by themselves and without more,
however, these circumstances are insufficient to establish an alter ego relationship or connection
between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing
of the latter’s corporate cover. The Court has declared that "mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality." It was likewise ruled that the
"existence of interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy considerations."

In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC
were dominated by DBP and PNB in such a way that NMIC could be considered to have no separate
mind, will or existence of its own but a mere conduit for DBP and PNB. On the contrary, the evidence
establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with
NMIC’s stockholders. The letter proposal of Hercon, Inc., HRCC’s predecessor-in-interest, regarding
the contract for NMIC’s mine stripping and road construction program was addressed to and accepted
by NMIC. The various billing reports, progress reports, statements of accounts and communications
of Hercon, Inc./HRCC regarding NMIC’s mine stripping and road construction program in 1985
concerned NMIC and NMIC’s officers, without any indication of or reference to the control exercised
by DBP and/or PNB over NMIC’s affairs, policies and practices.

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against
HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC was a mere alter
ego of DBP and PNB.
Topic: Classification of Corporation

Case No. 20

FRANCISCA S. BALUYOT vs. PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN (VISAYAS)
represented by its Deputy Ombudsman for the Visayas ARTURO C. MOJICA, Director VIRGINIA
PALANCA-SANTIAGO, and Graft Investigation Officer I ANNA MARIE P. MILITANTE

G.R. No. 136374, February 9, 2000

Facts:

During a spot audit conducted on March 21, 1977 by a team of auditors from the Philippine National
Red Cross (PNRC) headquarters, a cash shortage of P154,350.13 was discovered in the funds of its
Bohol chapter. The chapter administrator, petitioner Francisca S. Baluyot, was held accountable for
the shortage. Thereafter, Paul E. Holganza, in his capacity as a member of the board of directors of the
Bohol chapter, filed an affidavit-complaint before the Office of the Ombudsman charging petitioner
of malversation under Article 217 of the Revised Penal Code.

Baluyot filed her counter-affidavit, raising principally the defense that public respondent had no
jurisdiction over the controversy. She argued that the Ombudsman had authority only over
government-owned or controlled corporations, which the PNRC was not.

The following circumstances, she insists, are indicative of the private character of the organization: (1)
the PNRC does not receive any budgetary support from the government, and that all money given to
it by the latter and its instrumentalities become private funds of the organization; (2) funds for the
payment of personnel's salaries and other emoluments come from yearly fund campaigns, private
contributions and rentals from its properties; and (3) it is not audited by the Commission on Audit.
Petitioner states that the PNRC falls under the International Federation of Red Cross, a Switzerland-
based organization, and that the power to discipline employees accused of misconduct, malfeasance,
or immorality belongs to the PNRC Secretary General by virtue of Section "G", Article IX of its by-laws.
She threatens that "to classify the PNRC as a government-owned or controlled corporation would
create a dangerous precedent as it would lose its neutrality, independence and impartiality.

Issue:

Whether or not the Ombudsman has no jurisdiction over the subject matter of the controversy since
the PNRC is allegedly a private voluntary organization

Held:

It was already upheld in the case Camporedondo v. National Labor Relations Commission, et. al.,
having the same issue with the present case, that the Philippine National Red Cross (PNRC) is a
government owned and controlled corporation, with an original charter under Republic Act No. 95, as
amended. The test to determine whether a corporation is government owned or controlled, or private
in nature is simple. Is it created by its own charter for the exercise of a public function, or by
incorporation under the general corporation law? Those with special charters are government
corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service
Commission, and are compulsory members of the Government Service Insurance System. The PNRC
was not "impliedly converted to a private corporation" simply because its charter was amended to
vest in it the authority to secure loans, be exempted from payment of all duties, taxes, fees and other
charges of all kinds on all importations and purchases for its exclusive use, on donations for its disaster
relief work and other services and in its benefits and fund raising drives, and be allotted one lottery
draw a year by the Philippine Charity Sweepstakes Office for the support of its disaster relief operation
in addition to its existing lottery draws for blood program.

Clearly then, public respondent has jurisdiction over the matter, pursuant to Section 13, of Republic
Act No. 6770, otherwise known as "The Ombudsman Act of 1989", to wit:

Sec. 13. Mandate. — The Ombudsman and his Deputies, as protectors of the people, shall act promptly
on complaints filed in any form or manner against officers or employees of the Government, or of any
subdivision, agency or instrumentality thereof, including government-owned or controlled
corporations, and enforce their administrative, civil and criminal liability in every case where the
evidence warrants in order to promote efficient service by the Government to the people.
Topic: Doctrine of Separate Juridical Personality: Doctrine of Corporate Entity

Case No: 39

MARIANO A. ALBERT vs. UNIVERSITY PUBLISHING CO., INC.

G.R. No. L-19118, January 30, 1965

Facts:

Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego, its
President, whereby University would pay plaintiff for the exclusive right to publish his revised
Commentaries on the Revised Penal Code. The contract stipulated that failure to pay one installment
would render the rest of the payments due. When University failed to pay the second installment,
Albert sued for collection and won. However, upon execution, it was found that University was not
registered with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego as the real
defendant. University opposed, on the ground that Aruego was not a party to the case.

Issue:

Whether or not Aruego can be held personally liable to the plaintiff

Held:

The Supreme Court found that Aruego represented a non-existent entity and induced not only but
court to believe in such representation. Aruego, acting as representative of such non-existent
principal, was the real party to the contract sued upon, and thus assumed such privileges and
obligations and became personally liable for the contract entered into or for other acts performed as
such agent . One who has induced nor act upon his willful misrepresentation that a corporation was
duly organized and existing under the law, cannot thereafter set up against his victim the principle of
corporation by estoppel. The Supreme Court likewise held that the doctrine of corporation by estoppel
cannot be set up against Albert since it was Aruego who had induced him to act upon his (Aruego's)
willful representation to the University had been duly organized and was existing under the law.
Topic: Doctrine of Piercing the Veil of Corporate Fiction: Alter Ego/Instrumentality

Case No. 77

CONCEPT BUILDERS, INC. vs. THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and
Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro
Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea,
Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana,
Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos

G.R. No. 108734, May 29, 1996

Facts:

Petitioner Concept Builders, Inc., is a domestic corporation. Private respondents were employed by
said company as laborers, carpenters and riggers. On November, 1981, private respondents were
served individual written notices of termination of employment by petitioner, effective on November
30, 1981. It was stated in the individual notices that their contracts of employment had expired and the
project in which they were hired had been completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private
respondents employment, the project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents. Aggrieved, private respondents filed a complaint for illegal dismissal,
unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month
pay against petitioner.

The Labor Arbiter and NLRC ruled in favor of the private respondents. In the course of executing the
final order, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the
properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which
he is the Vice-President.

On November 23, 1989, private respondents filed a Motion for Issuance of a Break-Open Order,
alleging that HPPI and petitioner corporation were owned by the same incorporator stockholders.
They also alleged that petitioner temporarily suspended its business operations in order to evade its
legal obligations to them and that private respondents were willing to post an indemnity bond to
answer for any damages which petitioner and HPPI may suffer because of the issuance of the break-
open order.

HPPI filed an Opposition to private respondents motion for issuance of a break-open order,
contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also alleged
that the two corporations are engaged in two different kinds of businesses, i.e., HPPI is a
manufacturing firm while petitioner was then engaged in construction.

Issue:
Whether or not HPPI is a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner corporation

Held:

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected. But, this separate
and distinct personality of a corporation is merely a fiction created by law for convenience and to
promote justice. So, when the notion of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor
laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction
pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter
ego of another corporation.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:

a. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

b. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty or dishonest and
unjust act in contravention of plaintiff's legal rights; and

c. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. HPPI is obviously
a business conduit of Petitioner Corporation and its emergence was skillfully orchestrated to avoid the
financial liability that already attached to Petitioner Corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose
veil in the present case could, and should, be pierced as it was deliberately and maliciously designed
to evade its financial obligation to its employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the
execution, private respondents had no other recourse but to apply for a break-open order after the
third-party claim of HPPI was dismissed for lack of merit by the NLRC.
Topic: Doctrine of Piercing the Veil of Corporate Fiction: Test in Determining Applicability

Case No. 96

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION vs. ANDRADA
ELECTRIC & ENGINEERING COMPANY

G.R. No. 142936, April 17, 2002

Facts:

On 26 August 1975, the Philippine national Bank (PNB) acquired the assets of the Pampanga Sugar
Mills (PASUMIL) that were earlier foreclosed by the Development Bank of the Philippines (DBP) under
LOI 311. The PNB organized the ational Sugar Development Corporation (NASUDECO) in September
1975, to take ownership and possession of the assets and ultimately to nationalize and consolidate its
interest in other PNB controlled sugar mills. Prior to 29 October 1971, PASUMIL engaged the services
of the Andrada Electric & Engineering Company (AEEC) for electrical rewinding and repair, most of
which were partially paid by PASUMIL, leaving several unpaid accounts with AEEC. On 29 October 1971,
AEEC and PASUMIL entered into a contract for AEEC to perform the (a) Construction of a power house
building; 3 reinforced concrete foundation for 3 units 350 KW diesel engine generating sets, 3
reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets, among others.
Aside from the work contract, PASUMIL required AEEC to perform extra work, and provide electrical
equipment and spare parts. Out of the total obligation of P777,263.80, PASUMIL had paid only
P250,000.00, leaving an unpaid balance, as of 27 June 1973, amounting to P527,263.80. Out of said
unpaid balance of P527,263.80, PASUMIL made a partial payment to AEEC of P14,000.00, in broken
amounts, covering the period from 5 January 1974 up to 23 May 1974, leaving an unpaid balance of
P513,263.80. PASUMIL and PNB, and now NASUDECO, allegedly failed and refused to pay AEEC their
just, valid and demandable obligation (The President of the NASUDECO is also the Vice-President of
the PNB. AEEC besought said official to pay the outstanding obligation of PASUMIL, inasmuch as PNB
and NASUDECO now owned and possessed the assets of PASUMIL, and these defendants all benefited
from the works, and the electrical, as well as the engineering and repairs, performed by AEEC).

Because of the failure and refusal of PNB, PASUMIL and/or NASUDECO to pay their obligations, AEEC
allegedly suffered actual damages in the total amount of P513,263.80; and that in order to recover
these sums, AEEC was compelled to engage the professional services of counsel, to whom AEEC
agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of attorney's fees.
PNB and NASUDECO filed a joint motion to dismiss on the ground that the complaint failed to state
sufficient allegations to establish a cause of action against PNB and NASUDECO, inasmuch as there is
lack or want of privity of contract between the them and AEEC. Said motion was denied by the trial
court

Issue:

Whether or not corporate veil may be lifted

Held:
Any application of the doctrine of piercing the corporate veil should be done with caution. A court
should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was committed against another, in
disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may result from an erroneous
application.

Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control
-- not mere stock control, but complete domination -- not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been such that the corporate entity as to
this transaction had at the time no separate mind, will or existence of its own; (2) such control must
have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a
statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiffs
legal right; and (3) the said control and breach of duty must have proximately caused the injury or
unjust loss complained of.

The absence of the foregoing elements in the present case precludes the piercing of the corporate
veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no showing
that their control over it warrants the disregard of corporate personalities. Second, there is no
evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the
separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality
of another entity or person. Third, respondent was not defrauded or injured when petitioners acquired
the assets of PASUMIL.
Topic: Incorporation and Organization Proper: Subscription Contract

Case No. 115

MIGUEL VELASCO, assignee of The Philippine Chemical Product Co. (Ltd.) vs. JEAN M. POIZAT

G.R. No. L-11528, March 15, 1918

Facts:

From the amended complaint filed in this cause upon February 5, 1915, it appears that the plaintiff, as
assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of
the defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the corporate
stock of said company. It appears that the corporation in question was originally organized by several
residents of the city of Manila, where the company had its principal place of business, with a capital of
P50,000, divided into 500 shares. The defendant subscribed for 20 shares of the stock of the company,
and paid in upon his subscription the sum of P500, the par value of 5 shares. The action was brought
to recover the amount subscribed upon the remaining shares.

It appears that the defendant was a stock holder in the company from the inception of the enterprise,
and for some time acted as its treasurer and manager. While serving in this capacity he called in and
collected all subscriptions to the capital stock of the company, except the aforesaid 15 shares
subscribed by himself and another 15 shares owned by Jose R. Infante.

Upon July 13, 1914, a meeting of the board of directors of the company was held at which a majority of
the stock was presented. Upon this occasion two resolutions, important to be here noted, were
adopted. The first was a proposal that the directors, or shareholders, of the company should make
good by new subscriptions, in proportion to their respective holdings, 15 shares which had been
surrendered by Infante.

Issue:

Whether or not Poizat is liable upon this subscription

Held:

Poizat is liable upon this subscription. A stock subscription is a contract between the corporation on
one side, and the subscriber on the other, and courts will enforce it for or against either. It is a rule,
accepted by the Supreme Court of the United States that a subscription for shares of stock does not
require an express promise to pay the amount subscribed, as the law implies a promise to pay on the
part of the subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription
is subsisting liability from the time the subscription is made, since it requires the subscriber to pay
interest quarterly from that date unless he is relieved from such liability by the by-laws of the
corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he
would be to pay any other debt, and the right of the company to demand payment is no less
incontestable.
The provisions of the Corporation Law (Act No. 1459) given recognition of two remedies for the
enforcement of stock subscriptions. The first and most special remedy given by the statute consists in
permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the
delinquent subscriber. In this case the provisions of section 38 to 48, inclusive , of the Corporation Law
are applicable and must be followed. The other remedy is by action in court, concerning which we find
in section 49 the following provision:

Nothing in this Act shall prevent the directors from collecting, by action in any court of
proper jurisdiction, the amount due on any unpaid subscription, together with accrued
interest and costs and expenses incurred.

It is generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a
remedy in addition to that which proceeds by action in court; and it has been held that the ordinary
legal remedy by action exists even though no express mention thereof is made in the statute.

The circumstance that the board of directors in their meeting of July 13, 1914, resolved to release
Infante from his obligation upon a subscription for 15 shares is no wise prejudicial to the right of the
corporation or its assignee to recover from Poizat upon a subscription made by him. In releasing
Infante the board transcended its powers, and he no doubt still remained liable on such of his shares
as were not taken up and paid for by other persons.

The general doctrine is that the corporation has no legal capacity to release an original subscriber to
its capital stock from the obligation of paying for his shares, in whole or in part.
Topic: Incorporation and Organization Proper: Articles of Incorporation: Non-amendable Items:
Contents: Principal Office

Case No. 134

DAVAO LIGHT & POWER CO., INC. vs. THE HON. COURT OF APPEALS, HON. RODOLFO M.
BELLAFLOR, Presiding Judge of Branch 11, RTC-Cebu and FRANCISCO TESORERO

G.R. No. 111685, August 20, 2001

Facts:

In 1992 Davao Light & Power Co., Inc. filed a complaint for damages against private respondent
Francisco Tesorero before the Regional Trial Court of Cebu for damages in the amount of P11,
000,000.00. In turn, the latter filed a motion to dismiss claiming among others that the venue was
improperly laid since the principal place of business of the plaintiff is Davao City as indicated in the
lease executed by petitioner, and the same determines the venue of the action, instead of Banilad City
which the company indicated in its complaint. The trial court granted the said motion. Petitioner’s
motion for reconsideration was denied, as well as its appeal to the Court of Appeals.

It is private respondent’s contention that the proper venue is Davao City, and not Cebu City where
petitioner filed Civil Case No. CEB-11578. Private respondent argues that petitioner is estopped from
claiming that its residence is in Cebu City, in view of contradictory statements made by petitioner prior
to the filing of the action for damages. First, private respondent adverts to several contracts entered
into by petitioner with the National Power Corporation (NAPOCOR) where in the description of
personal circumstances, the former states that its principal office is at 163-165 P. Reyes St., Davao City.
According to private respondent the petitioners address in Davao City, as given in the contracts, is an
admission which should bind petitioner.

Issue:

Whether or not Davao City is the principal place of business

Held:

Davao City is the Principal place of business which determines venue. A corporation has no residence
in the same sense in which this term is applied to a natural person. But for practical purposes, a
corporation is in a metaphysical sense a resident of the place where its principal office is located as
stated in the articles of incorporation. The Corporation Code precisely requires each corporation to
specify in its articles of incorporation the "place where the principal office of the corporation is to be
located which must be within the Philippines". The purpose of this requirement is to fix the residence
of a corporation in a definite place, instead of allowing it to be ambulatory.

The same considerations apply to the instant case. It cannot be disputed that petitioner's principal
office is in Cebu City, per its amended articles of incorporation and by-laws. However, Tesorero is not
a party to any of the contracts presented before the court. Those documents were between the
petitioner and NAPOCOR and therefore estoppel may not lie against the private respondent. He is a
stranger to those documents even if he says that by being a member of the public for whose benefit
the electric generating contracts were entered into. There is no estoppel because there is no showing
that he relied on the representations made by the petitioner.
Topic: Incorporation and Organization Proper: Adoption of By-laws: Functions

Case No. 153

PMI COLLEGES vs. THE NATIONAL LABOR RELATIONS COMMISSION and ALEJANDRO GALVAN

G.R. No. 121466. August 15, 1997

Facts:

On July 7, 1991, petitioner, an educational institution offering courses on basic seaman’s training and
other marine-related courses, hired private respondent as contractual instructor with an agreement
that the latter shall be paid at an hourly rate of P30.00 to P50.00, depending on the description of load
subjects and on the schedule for teaching the same. Pursuant to this engagement, private respondent
then organized classes in marine engineering.

Initially, private respondent and other instructors were compensated for services rendered during the
first three periods of the abovementioned contract. However, for reasons unknown to private
respondent, he stopped receiving payment for the succeeding rendition of services. This claim of non-
payment was embodied in a letter dated March 3, 1992, written by petitioners Acting Director,
Casimiro A. Aguinaldo, addressed to its President, Atty. Santiago Pastor, calling attention to and
appealing for the early approval and release of the salaries of its instructors including that of private
respondent. It appeared further in said letter that the salary of private respondent corresponding to
the shipyard and plant visits and the ongoing on-the-job training of Class 41 on board MV Sweet Glory
of Sweet Lines, Inc. was not yet included. This request of the Acting Director apparently went
unheeded. Repeated demands having likewise failed, private respondent was soon constrained to file
a complaint.

PMI Colleges manifested that Mr. Tomas Cloma Jr., a member of the board of trustees write a letter
to the Chairman of the Board, clarifying the case of Galvan and stating therein, inter alia, that under
PMI’s by-laws only the Chairman is authorized to sign any contract and that Galvan, in any event, failed
to submit documents on the alleged shipyard and plant visits in Cavite Naval Base.

Issue:

Whether or not the contract of employment of Galvan valid

Held:

The contract of employment is valid. The contract remained valid even if the signatory thereon was
not the chairman of the board which allegedly violated petitioner’s by-laws. Since by-laws operate
merely as internal rules among the stockholders, they cannot affect or prejudice third persons who
deal with the corporation, unless they have knowledge of the same. PMI Colleges never even
presented a copy of the by-laws to prove the existence of such provision. But even if it did, the
employment contract cannot be rendered invalid just because it does not bear the signature of the
Chairman of the Board of PMI. By-Laws operate merely as internal rules among the stockholders, they
cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge
of the same. In this case, PMI was not able to prove that Galvan knew of said provision in the by-laws
when he was employed by PMI.
Topic: Corporate Powers: General Powers

Case No. 172

R. TRANSPORT CORPORATION vs. HON. COURT OF APPEALS, Former 15th Division, Manila, HON.
SALVADOR S. ABAD SANTOS, as Presiding Judge, Regional Trial Court of, Metro Manila, Branch 65
and FLOSERIDA L. CASTAÑEDA

G.R. No. 111187, February 1, 1995

Facts:

Private respondent filed a complaint for damages arising from breach of contract of carriage against
petitioner with the Regional Trial Court, Branch 65, Makati Manila (docketed as Civil Case No. 91-3242).
Summons addressed to "R. Transport Corporation, Sucat Road, Parañaque" was prepared. The
process server of the trial court submitted his Officer's Return on December 6, 1991 stating:

This is to certify that on the 4th day of December 1991, copy of the summons together with
complaint and all its annexes attached thereto issued by this Honorable Court in the above-
entitled case has been duly served upon the defendant R. Transport, Inc., of Sucat Road,
Parañaque and receipt was acknowledge (sic) by Mr. Cesar Pasquin who identified himself
as the operation manager of said company as evidence of his signature that appears at the
lower right portion of the original copy of the summons.

Wherefore, the original copy of this summons is respectfully returned to the Honorable
Court of origin for its record and information, DULY SERVED

In an Order, the trial court upon ex parte motion of private respondent, declared petitioner in default
and appointed a commissioner to receive evidence ex parte. Petitioner filed a Motion to Dismiss and
to Stop Ex Parte Reception of Evidence, It asserted that it was not properly served with summons and
consequently, the trial court did not acquire jurisdiction over its person. It argued that none of the
officers enumerated in Section 13, Rule 14 of the Revised Rules of Court (namely, the corporation's
president, manager, secretary, cashier, agent or any of its directors) received any summons in Civil
Case No. 91-3242.

Issue:

Whether or not the operation manager is empowered to validly receive summons

Held:

As a general rule, service of summons must be made on the persons named in Section 13, Rule 14 of
the Revised Rules of Court which provides:

Service upon private domestic corporation or partnership. — If the defendant is a

corporation organized under the laws of the Philippines or a partnership duly
 registered, service may be made on the president, manager, secretary, cashier, agent
or any of its directors.

Thus service on persons other than those mentioned in said Rule has been held as improper.

Through the years, the rule on service of summons has been liberalized. Such liberalization is to give
life to the rationale behind Section 13 of Rule 14. Thus service of summons on persons other than those
enumerated in Section 13 of Rule 14 have been held proper on the theory that those persons served
were holding positions of responsibility and could appreciate the importance of the papers handed
them, and could be expected to deliver the papers to the proper officer. These persons ranged from
ordinary clerks, private secretaries of corporate executives, retained counsel, officials who had charge
or control of the operations of the corporation, like the Assistant General Manager, and the
corporation's Chief of Finance and Administrative Officer. These individuals were considered "agents"
within the contemplation of Section 13 of Rule 14.

Service of summons on petitioner's Operations Manager was valid. He is an officer who may be relied
upon to appreciate the importance of the papers served on him. The purpose of Section 13 of Rule 14
was served. The fact that service was made at petitioner's bus terminal at the address stated in the
summons and not at its office in Makati does not render the service of summons invalid.
Topic: Corporate Powers: Specific Powers: Power of Pre-emptive Rights

Case No. 191

MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION v. MIGUEL LIM et al.

G.R. No. 165887, June 7, 2011

Facts:

Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing. Reeling
from severe liquidity problems beginning in 1980, RUBY filed on December 13, 1983a petition for
suspension of payments with the Securities and Exchange Commission (SEC) docketed as SEC Case
No. 2556.On December 20, 1983, the SEC issued an order declaring RUBY under suspension of
payments and enjoining the disposition of its properties pending hearing of the petition, except
insofar as necessary in its ordinary operations, and making payments outside of the necessary or
legitimate expenses of its business.

On August 10, 1984, the SEC Hearing Panel created the management committee (MANCOM) for RUBY,
composed of representatives from Allied Leasing and Finance Corporation (ALFC), Philippine Bank of
Communications (PBCOM), China Banking Corporation (China Bank), Pilipinas Shell Petroleum
Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang. The MANCOM was tasked
to perform the following functions: (1) undertake the management of RUBY; (2) take custody and
control over all existing assets and liabilities of RUBY; (3) evaluate RUBYs existing assets and liabilities,
earnings and operations; (4) determine the best way to salvage and protect the interest of its investors
and creditors; and (5) study, review and evaluate the proposed rehabilitation plan for RUBY.

Subsequently, two (2) rehabilitation plans were submitted to the SEC: the BENHAR/RUBY
Rehabilitation Plan of the majority stockholders led by Yu Kim Giang, and the Alternative Plan of the
minority stockholders represented by Miguel Lim (Lim). Both plans were endorsed by the SEC to the
MANCOM for evaluation.

On April 26, 1991, over ninety percent (90%) of RUBYs creditors objected to the Revised BENHAR/RUBY
Plan and the creation of a new management committee. Instead, they endorsed the minority
stockholders Alternative Plan. At the hearing of the petition for the creation of a new management
committee, three (3) members of the original management committee (Lim, ALFC and Pilipinas Shell)
opposed the Revised BENHAR/RUBY Plan on grounds that:(1) it would legitimize the entry of BENHAR,
a total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY;(2) it would put
RUBYs assets beyond the reach of the unsecured creditors and the minority stockholders; and (3) it
was not approved by RUBYs stockholders in a meeting called for the purpose.

Notwithstanding the objections of 90% of RUBYs creditors and three members of the MANCOM, the
SEC Hearing Panel approved on September 18, 1991the Revised BENHAR/RUBY Plan and dissolved the
existing management committee.It also created a new management committee and appointed
BENHAR as one of its members. In addition to the powers originally conferred to the management
committee under Presidential Decree (P.D.) No. 902-A, the new management committee was tasked
to oversee the implementation by the Board of Directors of the revised rehabilitation plan for RUBY.
ISSUE:

Whether the minoritys pre-emptive rights were violated

HELD:

Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock
corporation to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. The right may be restricted or denied under the articles of incorporation,
and subject to certain exceptions and limitations. The stockholder must be given a reasonable time
within which to exercise their preemptive rights. Upon the expiration of said period, any stockholder
who has not exercised such right will be deemed to have waived it.

The validity of issuance of additional shares may be questioned if done in breach of trust by the
controlling stockholders. Thus, even if the pre-emptive right does not exist, either because the issue
comes within the exceptions in Section 39 or because it is denied or limited in the articles of
incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and
their primary purpose is to perpetuate or shift control of the corporation, or to "freeze out" the
minority interest. In this case, the following relevant observations should have signaled greater
circumspection on the part of the SEC -- upon the third and last remand to it pursuant to our January
20, 1998 decision -- to demand transparency and accountability from the majority stockholders, in view
of the illegal assignments and objectionable features of the Revised BENHAR/RUBY Plan, as found by
the CA and as affirmed by this Court:

There can be no gainsaying the well-established rule in corporate practice and procedure that the will
of the majority shall govern in all matters within the limits of the act of incorporation and lawfully
enacted by-laws not proscribed by law. It is, however, equally true that other stockholders are
afforded the right to intervene especially during critical periods in the life of a corporation like
reorganization, or in this case, suspension of payments, more so, when the majority seek to impose
their will and through fraudulent means, attempt to siphon off Ruby’s valuable assets to the great
prejudice of Ruby itself, as well as the minority stockholders and the unsecured creditors.

Certainly, the minority stockholders and the unsecured creditors are given some measure of
protection by the law from the abuses and impositions of the majority, more so in this case,
considering the give-away signs of private respondents perfidy strewn all over the factual landscape.
Indeed, equity cannot deprive the minority of a remedy against the abuses of the majority, and the
present action has been instituted precisely for the purpose of protecting the true and legitimate
interests of Ruby against the Majority Stockholders. On this score, the Supreme Court, has ruled that:

"Generally speaking, the voice of the majority of the stockholders is the law of the corporation, but
there are exceptions to this rule. There must necessarily be a limit upon the power of the majority.
Without such a limit the will of the majority will be absolute and irresistible and might easily
degenerate into absolute tyranny. x x x"

Lamentably, the SEC refused to heed the plea of the minority stockholders and MANCOM for the SEC
to order RUBY to commence liquidation proceedings, which is allowed under Sec. 4-9 of the Rules on
Corporate Recovery. Under the circumstances, liquidation was the only hope of the minority
stockholders for effecting an orderly and equitable settlement of RUBYs obligations, and compelling
the majority stockholders to account for all funds, properties and documents in their possession, and
make full disclosure on the nullified credit assignments. Oblivious to these pending incidents so crucial
to the protection of the interest of the majority of creditors and minority shareholders, the SEC simply
stated that in the interim, RUBYs corporate term was validly extended, as if such extension would
provide the solution to RUBYs myriad problems.

Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a stockholders
meeting called for the purpose. The actual percentage of shareholdings in RUBY as of September 3,
1996 -- when the majority stockholders allegedly ratified the board resolution approving the extension
of RUBY's corporate life to another 25 years was seriously disputed by the minority stockholders, and
we find the evidence of compliance with the notice and quorum requirements submitted by the
majority stockholders insufficient and doubtful. Consequently, the SEC had no basis for its ruling
denying the motion of the minority stockholders to declare as without force and effect the extension
of RUBY's corporate existence.
Topic: Specific Powers: Power to Declare Dividends: Limitation on Retention of Surplus

Case No. 210

Nielson & Co. Inc. vs. Lepanto Consolidated Mining Co.

GR L-21601, 28 December 1968

Facts:

An operating agreement was executed before World War II (on 30 January 1937) between Nielson &
Co. Inc. and the Lepanto Consolidated Mining Co. whereby the former operated and managed the
mining properties owned by the latter for a management fee of P2,500.00 a month and a 10%
participation in the net profits resulting from the operation of the mining properties, for a period of 5
years. In 1940, a dispute arose regarding the computation of the 10% share of Nielson in the profits.
The Board of Directors of Lepanto, realizing that the mechanics of the contract was unfair to Nielson,
authorized its President to enter into an agreement with Nielson modifying the pertinent provision of
the contract effective 1 January 1940 in such a way that Nielson shall receive (1) 10% of the dividends
declared and paid, when and as paid, during the period of the contract and at the end of each year, (2)
10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the year
out of surplus earnings for capital account. In the latter part of 1941, the parties agreed to renew the
contract for another period of 5 years, but in the meantime, the Pacific War broke out in December
1941. In January 1942 operation of the mining properties was disrupted on account of the war. In
February 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and mines,
were destroyed upon orders of the United States Army, to prevent their utilization by the invading
Japanese Army.

The Japanese forces thereafter occupied the mining properties, operated the mines during the
continuance of the war, and who were ousted from the mining properties only in August 1945. After
the mining properties were liberated from the Japanese forces, LEPANTO took possession thereof and
embarked in rebuilding and reconstructing the mines and mill; setting up new organization; clearing
the mill site; repairing the mines; erecting staff quarters and bodegas and repairing existing structures;
installing new machinery and equipment; repairing roads and maintaining the same; salvaging
equipment and storing the same within the bodegas; doing police work necessary to take care of the
materials and equipment recovered; repairing and renewing the water system; and retimbering. The
rehabilitation and reconstruction of the mine and mill was not completed until 1948. On 26 June 1948
the mines resumed operation under the exclusive management of LEPANTO. Shortly after the mines
were liberated from the Japanese invaders in 1945, a disagreement arose between NIELSON and
LEPANTO over the status of the operating contract which as renewed expired in 1947. Under the terms
thereof, the management contract shall remain in suspense in case fortuitous event or force majeure,
such as war or civil commotion, adversely affects the work of mining and milling. On 6 February 1958,
NIELSON brought an action against LEPANTO before the Court of First Instance of Manila to recover
certain sums of money representing damages allegedly suffered by the former in view of the refusal
of the latter to comply with the terms of a management contract entered into between them on 30
January 1937, including attorney's fees and costs. LEPANTO in its answer denied the material
allegations of the complaint and set up certain special defenses, among them, prescription and laches,
as bars against the institution of the action.
After trial, the court a quo rendered a decision dismissing the complaint with costs. The court stated
that it did not find sufficient evidence to establish LEPANTO's counterclaim and so it likewise dismissed
the same. NIELSON appealed. The Supreme Court reversed the decision of the trial court and enter in
lieu thereof another, ordering Lepanto to pay Nielson (1) 10% share of cash dividends of December,
1941 in the amount of P17,500.00, with legal interest thereon from the date of the filing of the
complaint; (2) management fee for January, 1942 in the amount of P2,500.00, with legal interest
thereon from the date of the filing of the complaint; (3) management fees for the sixty-month period
of extension of the management contract, amounting to P150,000.00, with legal interest from the
date of the filing of the complaint; (4) 10% share in the cash dividends during the period of extension
of the management contract, amounting to P1,400,000.00, with legal interest thereon from the date
of the filing of the complaint; (5) 10% of the depletion reserve set up during the period of extension,
amounting to P53,928.88, with legal interest thereon from the date of the filing of the complaint; (6)
10% of the expenses for capital account during the period of extension, amounting to P694,364.76,
with legal interest thereon from the date of the filing of the complaint; (7) to issue and deliver to
Nielson and Co. Inc. shares of stock of Lepanto Consolidated Mining Co. at par value equivalent to the
total of Nielson's 10% share in the stock dividends declared on November 28, 1949 and August 22, 1950,
together with all cash and stock dividends, if any, as may have been declared and issued subsequent
to November 28, 1949 and August 22, 1950, as fruits that accrued to said shares; provided that if
sufficient shares of stock of Lepanto's are not available to satisfy this judgment, Lepanto shall pay
Nielson an amount in cash equivalent to the market value of said shares at the time of default, that is,
all shares of stock that should have been delivered to Nielson before the filing of the complaint must
be paid at their market value as of the date of the filing of the complaint; and all shares, if any, that
should have been delivered after the filing of the complaint at the market value of the shares at the
time Lepanto disposed of all its available shares, for it is only then that Lepanto placed itself in
condition of not being able to perform its obligation; (8) the sum of P50,000.00 as attorney's fees; and
(9) the costs.

Lepanto seeks the reconsideration of the decision rendered on 17 December 1966.

Issue:

Whether the management contract is a contract of agency or a contract of lease of services

Held:

Article 1709 of the Old Civil Code, defining contract of agency, provides that "By the contract of agency,
one person binds himself to render some service or do something for the account or at the request of
another." Article 1544, defining contract of lease of service, provides that "In a lease of work or
services, one of the parties binds himself to make or construct something or to render a service to the
other for a price certain." In both agency and lease of services one of the parties binds himself to
render some service to the other party. Agency, however, is distinguished from lease of work or
services in that the basis of agency is representation, while in the lease of work or services the basis is
employment. The lessor of services does not represent his employer, while the agent represents his
principal. Further, agency is a preparatory contract, as agency "does not stop with the agency because
the purpose is to enter into other contracts." The most characteristic feature of an agency relationship
is the agent's power to bring about business relations between his principal and third persons. "The
agent is destined to execute juridical acts (creation, modification or extinction of relations with third
parties). Lease of services contemplate only material (non-juridical) acts." Herein, the principal and
paramount undertaking of Nielson under the management contract was the operation and
development of the mine and the operation of the mill. All the other undertakings mentioned in the
contract are necessary or incidental to the principal undertaking — these other undertakings being
dependent upon the work on the development of the mine and the operation of the mill. In the
performance of this principal undertaking Nielson was not in any way executing juridical acts for
Lepanto, destined to create, modify or extinguish business relations between Lepanto and third
persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of
Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was
performing material acts for an employer, for a compensation. It is true that the management contract
provides that Nielson would also act as purchasing agent of supplies and enter into contracts
regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase,
or sell the minerals, without the prior approval of Lepanto. It is clear, therefore, that even in these
cases Nielson could not execute juridical acts which would bind Lepanto without first securing the
approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an agent. Further, from
the statements in the annual report for 1936, and from the provision of paragraph XI of the
Management contract, that the employment by Lepanto of Nielson to operate and manage its mines
was principally in consideration of the know-how and technical services that Nielson offered Lepanto.
The contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a
"detailed operating contract". It was not a contract of agency. Nowhere in the record is it shown that
Lepanto considered Nielson as its agent and that Lepanto terminated the management contract
because it had lost its trust and confidence in Nielson.
Topic: Specific Powers: Ultra Vires Acts

Case No. 229

AF Realty & Development, Inc. vs Dieselman Freight Services, Co.

G.R. No. 111448, January 16, 2002

Facts:

In 1988, Manuel Cruz, Jr., a board member of Dieselman Freight Services, Co. (DFS) authorized Cristeta
Polintan to sell a 2,094 sq. m. parcel of land owned by DFS. Polintan in turn authorized Felicisima Noble
to sell the same lot. Noble then offered AF Realty & Development, Co., represented by Zenaida
Ranullo, the land at the rate of P2,500.00 per sq. m. AF Realty accepted the offer and issued a P300,000
check as downpayment.

However, it appeared that DFS did not authorize Cruz, Jr. to sell the said land. Nevertheless, Manuel
Cruz, Sr. (father) and president of DFS, accepted the check but modified the offer. He increased the
selling price to P4,000.00 per sq. m. AF Realty, in its response, did not exactly agree nor disagree with
the counter-offer but only said it is willing to pay the balance (but was not clear at what rate).
Eventually, DFS sold the property to someone else.

Now AF Realty is suing DFS for specific performance. It claims that DFS ratified the contract when it
accepted the check and made a counter-offer.

ISSUE:

Whether or not the sale made through an agent was ratified

HELD:

There was no valid agency created. The Board of Directors of DFS never authorized Cruz, Jr. to sell the
land. Hence, the agreement between Cruz, Jr. and Polintan, as well as the subsequent agreement
between Polintan and Noble, never bound the corporation. Therefore the sale transacted by Noble
purportedly on behalf of Polintan and ultimately purportedly on behalf of DFS is void.

Being a void sale, it cannot be ratified even if Cruz, Sr. accepted the check and made a counter-offer.
(Cruz, Sr. returned the check anyway). Under Article 1409 of the Civil Code, void transactions can never
be ratified because they were void from the very beginning.
Topic: Board of Directors: Removal

Case No.248

LEON J. LAMBERT vs. T. J. FOX

G.R. No. L-7991, January 29, 1914

Facts:

Due to financial crisis the petitioner and the defendant were able to acquire the bulk of the stocks of
John R. Edgar & Co. as the latter’s creditors. Hence, upon incorporating said company, the parties
entered into an agreement that either of them will not sell or transfer their respective shares till after
one year from the date of agreement. However, less than a year, defendant Fox sold his stock in the
said corporation to E. D. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong
competitor of the said John R. Edgar & Co., Inc. This sale was made by the defendant against the
protest of the plaintiff and with the warning that he would be held liable under the contract
hereinabove set forth and in accordance with its terms. In fact, the defendant Fox offered to sell his
shares of stock to the plaintiff for the same sum that McCullough was paying for them less P1, 000,
the penalty specified in the contract.

The trial Court rendered judgment in favor of defendant.

ISSUE:

Whether or not the stipulation not to sell is valid

Held:

The suspension of the power to sell has a beneficial purpose, results in the protection of the
corporation as well as of the individual parties to the contract, and is reasonable as to the length of
time of the suspension.

The intention of parties to a contract must be determined, in the first instance, from the words of the
contract itself. It is to be presumed that persons mean what they say when they speak plain English.
Interpretation and construction should by the instruments last resorted to by a court in determining
what the parties agreed to. Where the language used by the parties is plain, then construction and
interpretation are unnecessary and, if used, result in making a contract for the parties.

In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal
results are concerned. Whatever differences exists between them as a matter of language, they are
treated the same legally. In either case the party to whom payment is to be made is entitled to recover
the sum stipulated without the necessity of proving damages. Indeed one of the primary purposes in
fixing a penalty or in liquidating damages is to avoid such necessity.
Topic: Board of Directors: Delegation of Authority

Case No. 267

BIENVENIDO ONGKINGCO, as President and GALERIA DE MAGALLANES CONDOMINIUM

ASSOCIATION, INC. vs. NATIONAL LABOR RELATIONS COMMISSION and FEDERICO B. GUILAS

G.R. No. 119877, March 31, 1997

FACTS:

Petitioner Galeria de Magallanes Condominium Association, Inc. is a non-stock, non-profit corporation

with a primary purpose of holding title to the common areas of the Galeria de Magallanes
Condominium Project and to manage and administer the same for the use and convenience of the
residents and/or owners. Petitioner Bienvenido Ongkingco was the president of Galeria at the time
private respondent filed his complaint. Subsequently, Galeria's Board of Directors appointed private
respondent Federico B. Guilas as Administrator/Superintendent. Respondent, however, was no longer
re-appointed as Administrator; hence he filed a case for illegal dismissal. Petitioners filed a motion to
dismiss alleging that it is the SEC, and not the labor arbiter, which has jurisdiction over the subject
matter of the complaint. The LA granted the motion to dismiss, which decision was reversed by the
NLRC.

ISSUE:

Whether or not respondent was a corporate officer

Held:

Private respondent is an officer of Petitioner Corporation and not its mere employee. The by-laws of
the Galeria de Magallanes Condominium Association specifically include the
Superintendent/Administrator in its roster of corporate officers. He was appointed directly by the
Board of Directors not by any managing officer of the corporation and his salary was, likewise, set by
the same Board. Having thus determined, his dismissal or non-appointment is clearly an intra-
corporate matter and jurisdiction, therefore, properly belongs to the SEC and not the NLRC. Despite
not being elected, P.D. 902-A Sec. 5(c) expressly covers both election and appointment of corporate
directors, trustees, officers and managers.
Topic: Board of Directors: Doctrine of Apparent Authority

Case No. 286

Francisco vs GSIS

G.R. No. L-18287, March 30, 1963

Facts:

The plaintiff, Trinidad J. Francisco, in consideration of a loan mortgaged in favor of the defendant,
Government Service Insurance System a parcel of land known as Vic-Mari Compound, located at Baesa,
Quezon City. The System extra judicially foreclosed the mortgage on the ground that up to that date
the plaintiff-mortgagor was in arrears on her monthly instalments. The System itself was the buyer of
the property in the foreclosure sale. The plaintiff’s father, Atty. Vicente J. Francisco, sent a letter to
the general manager of the defendant corporation, Mr. Rodolfo P. Andal. And later the System
approved the request of Francisco to redeem the land through a telegram. Defendant received the
payment and it did not, however, take over the administration of the compound. The System then
sent a letter to Francisco informing of his indebtedness and the 1 year period of redemption has been
expired. And the System argued that the telegram sent to Francisco saying that the System has
approved the request in redeeming the property is incorrect due to clerical problems.

Issue:

Whether or not the System is liable for the acts of its employees regarding the telegram

Held:

There was nothing in the telegram that hinted at any anomaly, or gave ground to suspect its veracity,
and the plaintiff, therefore, can not be blamed for relying upon it. There is no denying that the
telegram was within Andal’s apparent authority. Hence, even if it were the board secretary who sent
the telegram, the corporation could not evade the binding effect produced by the telegram.
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his
employment, and in relation to matters within the scope of his authority, is notice to the corporation,
whether he communicates such knowledge or not. Yet, notwithstanding this notice, the defendant
System pocketed the amount, and kept silent about the telegram not being in accordance with the
true facts, as it now alleges. This silence, taken together with the unconditional acceptance of three
other subsequent remittances from plaintiff, constitutes in itself a binding ratification of the original
agreement.
Topic: Board of Directors: Meetings: Regular or Special

Case No. 305

EXPERTRAVEL & TOURS, INC. vs. COURT OF APPEALS and KOREAN AIRLINES

G.R. No. 152392. May 26, 2005

Facts:

Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and
licensed to do business in the Philippines. Its general manager in the Philippines is Suk Kyoo Kim, while
its appointed counsel was Atty. Mario Aguinaldo and his law firm. KAL, through Atty. Aguinaldo, filed
a Complaint against ETI for the collection of the principal amount of P260, 150.00, plus attorney’s fees
and exemplary damages. The verification and certification against forum shopping was signed by Atty.
Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL and had
caused the preparation of the complaint.

ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized to
execute the verification and certificate of non-forum shopping as required by Section 5, Rule 7 of the
Rules of Court. KAL opposed the motion, contending that Atty. Aguinaldo was its resident agent and
was registered as such with the Securities and Exchange Commission (SEC) as required by the
Corporation Code of the Philippines. It was further alleged that Atty. Aguinaldo was also the corporate
secretary of KAL. Appended to the said opposition was the identification card of Atty. Aguinaldo,
showing that he was the lawyer of KAL.

Atty. Aguinaldo claimed that he had been authorized to file the complaint through a resolution of the
KAL Board of Directors approved during a special meeting held on June 25, 1999. Upon his motion,
KAL was given a period of 10 days within which to submit a copy of the said resolution. The trial court
granted the motion.

Issue:

Whether or not the board meeting authorizing Atty. Aguinaldo should be considered

Held

It is settled that the requirement to file a certificate of non-forum shopping is mandatory and that the
failure to comply with this requirement cannot be excused. The certification is a peculiar and personal
responsibility of the party, an assurance given to the court or other tribunal that there are no other
pending cases involving basically the same parties, issues and causes of action. Hence, the certification
must be accomplished by the party himself because he has actual knowledge of whether or not he has
initiated similar actions or proceedings in different courts or tribunals. Even his counsel may be
unaware of such facts. Hence, the requisite certification executed by the plaintiffs’ counsel will not
suffice.
In a case where the plaintiff is a private corporation, the certification may be signed, for and on behalf
of the said corporation, by a specifically authorized person, including its retained counsel, who has
personal knowledge of the facts required to be established by the documents. The corporation, such
as the petitioner, has no powers except those expressly conferred on it by the Corporation Code and
those that are implied by or are incidental to its existence. In turn, a corporation exercises said powers
through its board of directors and/or its duly-authorized officers and agents. Physical acts, like the
signing of documents, can be performed only by natural persons duly-authorized for the purpose by
corporate by-laws or by specific act of the board of directors. All acts within the powers of a
corporation may be performed by agents of its selection; and except so far as limitations or restrictions
which may be imposed by special charter, by-law, or statutory provisions, the same general principles
of law which govern the relation of agency for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents
once appointed, or members acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons. For who else knows of the circumstances
required in the Certificate but its own retained counsel. Its regular officers, like its board chairman and
president, may not even know the details required therein.

The RTC took judicial notice that because of the onset of modern technology, persons in one location
may confer with other persons in other places, and, based on the said premise, concluded that Suk
Kyoo Kim and Atty. Aguinaldo had a teleconference with the respondents Board of Directors in South
Korea on June 25, 1999. In this age of modern technology, the courts may take judicial notice that
business transactions may be made by individuals through teleconferencing. Teleconferencing is
interactive group communication (three or more people in two or more locations) through an
electronic medium. In general terms, teleconferencing can bring people together under one roof even
though they are separated by hundreds of miles. This type of group communication may be used in a
number of ways, and have three basic types: (1) video conferencing - television-like communication
augmented with sound; (2) computer conferencing - printed communication through keyboard
terminals, and (3) audio-conferencing-verbal communication via the telephone with optional capacity
for telewriting or telecopying. Thus, the Court agrees with the RTC that persons in the Philippines may
have a teleconference with a group of persons in South Korea relating to business transactions or
corporate governance.

Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference along
with the respondents Board of Directors, the Court is not convinced that one was conducted; even if
there had been one, the Court is not inclined to believe that a board resolution was duly passed
specifically authorizing Atty. Aguinaldo to file the complaint and execute the required certification
against forum shopping. The records show that the petitioner filed a motion to dismiss the complaint
on the ground that the respondent failed to comply with Section 5, Rule 7 of the Rules of Court. The
respondent opposed the motion on December 1, 1999, on its contention that Atty. Aguinaldo, its
resident agent, was duly authorized to sue in its behalf. The respondent, however, failed to establish
its claim that Atty. Aguinaldo was its resident agent in the Philippines. The respondent, through Atty.
Aguinaldo, announced the holding of the teleconference only during the hearing of January 28, 2000;
Atty. Aguinaldo then prayed for ten days, or until February 8, 2000, within which to submit the board
resolution purportedly authorizing him to file the complaint and execute the required certification
against forum shopping. The Court is, thus, more inclined to believe that the alleged teleconference
on June 25, 1999 never took place, and that the resolution allegedly approved by the respondents
Board of Directors during the said teleconference was a mere concoction purposefully foisted on the
RTC, the CA and this Court, to avert the dismissal of its complaint against the petitioner.
Topic: Three Fold Duties of Directors and Officers: Personal Liability of Directors and Other Corporate
Officers

Case No. 324

Adalia Francisco vs. Rita Mejia

G.R. No. 141617, August 14, 2001

Facts:

Adalia Francisco was the Treasurer of Cardale Financing and Realty Corporation (Cardale). Cardale,
through Francisco, contracted with Andrea Gutierrez for the latter to execute a deed of sale over
certain parcels of land in favor of Cardale. It was agreed that Gutierrez shall hand over the titles to
Cardale but Cardale shall only give a downpayment, and later on full payment in installment. As
security, Gutierrez shall retain a lien over the properties by way of mortgage. Nonetheless, Cardale
defaulted in its payment. Gutierrez then filed a petition with the trial court to have the Deed rescinded.

While the case was pending, Gutierrez died, and Rita Mejia, being the executrix of the will of Gutierrez
took over the affairs of the estate.

The case dragged on for 14 years because Francisco lost interest in presenting evidence. And while the
case was pending, Cardale failed to pay real estate taxes over the properties in litigation hence, the
local government subjected said properties to an auction sale to satisfy the tax arrears. The highest
bidder in the auction sale was Merryland Development Corporation (Merryland).

Apparently, Merryland is a corporation in which Francisco was the President and majority stockholder.
Mejia then sought to nullify the auction sale on the ground that Francisco used the two corporations
as dummies to defraud the estate of Gutierrez especially so that these circumstances are present:

Francisco did not inform the lower court that the properties were delinquent in taxes;

1. That there was notice for an auction sale and Francisco did not inform the Gutierrez estate and
as such, the estate was not able to perform appropriate acts to remedy the same;
2. That without knowledge of the auction, the Gutierrez estate cannot exercise their right of
redemption;
3. That Francisco failed to inform the court that the highest bidder in the auction sale was
Merryland, her other company;
4. That thereafter, Cardale was dissolved and the subject properties were divided and sold to
other people.

ISSUE:

Whether or not Merryland and Francisco shall be held solidarily liable

HELD:
Only Francisco shall be held liable to pay the indebtedness to the Gutierrez estate. What was only
proven was that Francisco defrauded the Gutierrez estate as clearly shown by the dubious
circumstances which caused the encumbered properties to be auctioned. By not disclosing the tax
delinquency, Francisco left Gutierrez in the dark. She obviously acted in bad faith. Francisco’s elaborate
act of defaulting payment, disregarding the case, not paying realty taxes (since as treasurer of Cardale,
she’s responsible for paying the real estate taxes for Cardale), and failure to advise Gutierrez of the
tax delinquencies all constitute bad faith. The attendant fraud and bad faith on the part of Francisco
necessitates the piercing of the veil of corporate fiction in so far as Cardale and Francisco are
concerned. Cardale and Francisco cannot escape liability now that Cardale has been dissolved.
Francisco shall then pay Guttierez estate the outstanding balance with interest (total of P4.3 + million).

As regards Merryland however, there was no proof that it is merely an alter ego or a business conduit
of Francisco. Merryland merely bought the properties from the auction sale and such per se is not a
wrongful act or a fraudulent act. Time and again it has been reiterated that mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality. Hence, Merryland can’t be
held solidarily liable with Francisco.
Topic: Three Fold Duties of Directors and Officers: Disloyalty

Case No. 343

ELEANOR ERICA STRONG, ET AL. vs. FRANCISCO GUTIERREZ REPIDE

G.R. No. L-7154, February 21, 1912

Facts:

Eleanor Strong was the owner of 800 shares of the capital stock of Philippine Sugar Estate
Development Company. Gutierrez Rapide, owner of three-fourths shares of the company’s
stock , 1 of the 5 directors of the company and was elected by the board as administrator
general of such company, took steps to purchase the 800 shares owned by Strong, which he
knew were in the possession of F. Stuart Jones, as her agent. Instead of seeing Jones, who
had an office next door, Repide employed one Kauffman. Kaufmann, in turn, employed Mr.
Sloan, a broker, to purchase the stock for him. Kauffman told Sloan that the stock to be
purchased was for a member of his wife’s family. This action by Repide was due to the
negotiations initiated by the government where the latter will purchase the company’s lands
(together with other friar lands) at a price which greatly enhance the value of the stock.

As a result of the negotiations, Jones, assuming he had the power and without consulting
Strong, sold the 800 shares. Strong filed a case to recover the shares from Repide on the
ground that the shares had been sold and delivered by Strong’s agent without authority to
do so and on the ground that Repide fraudulently concealed from Strong’s agent the facts
affecting the value of the stock so sold and delivered.

ISSUE:

Whether or not Repide, acting in good faith, has the duty to disclose to the agent of Strong
the facts bearing upon or which might affect the value of the stocks

Held:

The Court ruled that there is no relationship of a fiduaciary nature exists between a director
and a shareholder in a business corporation. There are cases, however, where, by reason of
special facts, such duty of a director to disclose to a shareholder the knowledge which he may
possess regarding the value of the shares of the company before he purchases any from a
shareholder. Some special facts are present in this case such as the fact the Repide is not only
a director of the corporation but an owner of three-fourths shares of its stock. He was the
chief negotiator for the sale of all the lands and was acting substantially as the agent of the
shareholders by reason of his ownership of the shares. Thus, a purchase of stock in a
corporation by a director and owner of three-fourths of the entire capital stock, who was also
administrator general of the company and engaged in the negotiations which finally led to the
sale of company’s lands to the government at a price which greatly enhanced the value of the
stock, was fraudulent as procured by insidious machination where he employed an agent to
make the purchase, concealing both his identity as purchaser and his knowledge of the state
of the negotiations and their probable successful result.
Topic: Three Fold Duties of Directors and Officers: Derivative Suit: Remedies to Enforce Personal
Liability

Case No: 362

Western Institute of Technology vs Salas

GR 113032, 21 August 1997

Facts:

The minority stockholders of WIT, sometime on June 1, 1986 in the principal office of WIT at
La Paz, Iloilo City, a Special Board Meeting was held. In attendance were other members of
the Board including one of the petitioners Reginald Villasis. Prior to aforesaid Special Board
Meeting, copies of notice thereof, dated May 24, 1986, were distributed to all Board Members,
regarding the compensation of the school’s officers, which was eventually passed.

A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Prestod Villasis,
Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents
before the Office of the City Prosecutor of Iloilo, as a result of which two (2) separate criminal
informations, one for falsification of a public document under Article 171 of the Revised Penal
Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch
33 of the Regional Trial Court of Iloilo City. The charge for falsification of public document was
anchored on the private respondents' submission of WIT's income statement for the fiscal
year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the
disbursement of corporate funds for the compensation of private respondents based on
Resolution No. 4, series of 1986, making it appear that the same was passed by the board on
March 30, 1986, when in truth, the same was actually passed on June 1, 1986, a date not
covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30,
1986).

WIT questioned the legal standing of the petitioners to sue on its behalf, claiming it did not
give them authority to do do. Petitioner, however, contended that the case is a derivative suit.

Issue:

Whether or not the case at bar is a derivative suit

Held:

A derivative suit is an action brought by minority shareholders in the name of the corporation
to redress wrongs committed against it, for which the directors refuse to sue. It is a remedy
designed by equity and has been the principal defense of the minority shareholders against
abuses by the majority. Here, however, the case is not a derivative suit but is merely an appeal
on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa
and falsification of public document. Among the basic requirements for a derivative suit to
prosper is that the minority shareholder who is suing for and on behalf of the corporation
must allege in his complaint before the proper forum that he is suing on a derivative cause of
action on behalf of the corporation and all other shareholders similarly situated who wish to
join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the
allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. This was not complied with by
the petitioners either in their complaint before the court a quo nor in the instant petition
which, in part, merely states that "this is a petition for review on certiorari on pure questions
of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since
the trial court's judgment of acquittal failed to impose any civil liability against the private
respondents. By no amount of equity considerations, if at all deserved, can a mere appeal on
the civil aspect of a criminal case be treated as a derivative suit.