Bod Cases In Corporation Law.docx

Board of Directors Cases

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I. POWER/AUTHORITY OF THE BOD AS CORPORATE AGENTS T A B L E

O F

C O N T E N T S

(Sec. 24) 20. RIOSA v. TABACO LA SUERTE CORP., GR 203786 ........................................................ 17

A. NATURE OF OFFICE

21. LA BUGA’AL v. RAMOS ......................................................................................................... 18

B. REQUIREMENTS

22. SHIPSIDE INCORPORATED vs. CA .................................................................................... 20

1. Qualifications/Qualifying Shares (Sec. 24)

23. CEBU MACTAN VS. MASAHIRA.......................................................................................... 21

1. VILLAFUERTE v. MORENO ...................................................................................................... 4

24. ABS-CBN v. CA....................................................................................................................... 22

2. BAGUIO v. CA ............................................................................................................................. 4

25. YAO KA SIN v. CA .................................................................................................................. 22

3. DETECTIVE & PROTECTIVE BUREAU, INC. vs. CLORIBEL and ALBERTO..................... 5

26. APT v. CA................................................................................................................................. 24

4. GRACE CHRISTIAN HIGH SCHOOL v. CA, GRACE VILLAGE ASSOCIATION, Inc., BELTRAN and GO 5

27. BA SAVINGS BANK vs. SIA and JOHN DOE ..................................................................... 24

5. LEE and LACDAO v. CA............................................................................................................. 6

28. MONTELIBANO v. BACOLOD MURCIA.............................................................................. 25

2. Requirements: Disqualifications

29. POWERS v. MARSHALL ....................................................................................................... 25

6. BRIAS v. HORD........................................................................................................................... 7

30. PREMIUM MARBLE v. CA and INTERNATIONAL CORPORATE BANK ........................ 26

C. ELECTION

31. RAMIREZ v. THE ORIENTALIST CORPORATION ............................................................ 27

1. Quorum

J. DELEGATION OF AUTHORITY TO CORPORATE OFFICERS

2. Voting

1. Corporate Officers/Meaning of "Office" vis-à-vis "Employment"

7. AURBACH v. SANITARY WARES ............................................................................................ 7

32. REAL v. SANGU PHIL ............................................................................................................ 28

8. BATAAN SHIPYARD v. PCGG .................................................................................................. 8

33. MATLING v. COROS ............................................................................................................. 28

3. Election Contests

34. MANILA METAL CONTAINER CORP. v PNB, GR 166862 ............................................... 29

9. RICAFORT v. DICDICAN ........................................................................................................... 8

35. ONGKINGCO v. NLRC........................................................................................................... 30

D. REPORT ON ELECTION (Sec. 26)

36. LAO vs. CA .............................................................................................................................. 31

10. PREMIUM MARBLE v. CA and INTERNATIONAL CORPORATE BANK ........................ 10

37. DE TAVERA v. PHIL. TUBERCULOSIS SOCIETY ............................................................. 31

E. TERM OF OFFICE/HOLDOVER

2. Corporate Officers (Sec. 25); Qualifications and Disqualifications; Authority and Liabilities

11. SEC v. BAGUIO COUNTRY CLUB ....................................................................................... 10

38. MATLING INDUSTRIAL and COMMERCIAL CORPORATION, et al. v. COROS ........... 33

12. SEÑERES v. COMELEC ........................................................................................................ 12

39. OKOL v. SLIMMERS WORLD and MOY.............................................................................. 33

F. HOW REMOVED (Sec. 28)

40. GOMEZ v. PNOC DMC .......................................................................................................... 34

13. BERNAS, et. al. v. CINCO, et. al............................................................................................. 12

Section 11, Rule 14, 1997 Rules of Civil Procedure

14. LAMBERT v. FOX .................................................................................................................. 14

41. E.B. VILLAROSA & PARTNER., Ltd V. HON. BENITO...................................................... 35

G. HOW VACANCY FILLED (Sec. 29)

42. CAGAYAN VALLEY DRUG CORPORATION v. CIR.......................................................... 36

15. VALLE VERDE COUNTRY CLUB v. AFRICA...................................................................... 15

43. BOI v. SR METALS, Inc. ......................................................................................................... 36

H. HOW COMPENSATED (Sec. 30)

44. SSPC v. BARDAJE ................................................................................................................. 37

16. SINGSON et al. v. COA........................................................................................................... 15

45. PABON & CAMONAYAN v. NLRC ....................................................................................... 37

17. WESTERN INSTITUTE v. SALAS ......................................................................................... 16

46. VLASON ENTERPRISES CORP. v CA and DURAPROOF SERVICES.......................... 37

18. CENTRAL COOP EXCHANGE v. TIBE................................................................................ 17

47. PRIME WHITE CEMENT CORPORATION v. IAC .............................................................. 38

19. LINGAYEN GULF ELECTRIC POWER COMPANY, Inc. V. BALTAZAR.......................... 17

48. LOUIS VUITTON S.A. vs. JUDGE FRANCISCO DIAZ VILLANUEVA .............................. 39 1

Board of Directors Cases

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3. Executive Committee (Sec. 35)

74. QUEENSLAND-TOKYO COMMODITIES v. GEORGE...................................................... 63

4. "Doctrine of Apparent Authority"

75. GERALDO vs. BILL SENDER ............................................................................................... 64

49. AYALA LAND v. ASB .............................................................................................................. 39

76. WENSHA SPA CENTER and/or XU ZHI JIE v. YUNG........................................................ 65

50. BANATE v. PHILIPPINE COUNTRYSIDE ............................................................................ 41

77. CEBU MACTAN v. MASAHIRO ............................................................................................ 65

51. SARGASSO v. PPA ................................................................................................................ 41

78. ARMANDO DAVID v. NAFLU ................................................................................................ 66

52. ASSOCIATED BANK (now UOB) v. SPOUSES PRONSTROLLER.................................. 42

79. HILARIO P. SORIANO and ROSALINDA ILAGAN vs. PEOPLE, BSP and PDIC ............ 66

53. ACUÑA v. BATAC ................................................................................................................... 44

80. CEBU COUNTRY CLUB v. ELIZAGAQUE .......................................................................... 67

54. BOARD OF LIQUIDATORS v. KALAW................................................................................. 45

81. CALTEX vs. NLRC and STO. TOMAS.................................................................................. 68

55. TRINIDAD J. FRANCISCO vs. GOVERNMENT SERVICE INSURANCE SYSTEM ....... 45

82. ATRIUM MANAGEMENT v. CA ............................................................................................ 69

56. RURAL BANK OF MILAOR (Camarines Sur) v. FRANCISCA OCFEMIA, et.al. ............... 47

83. ARB CONSTRUCTION CO. INC. and MARK MOLINA v. CA............................................ 69

K. THREE-FOLD FIDUCIARY DUTIES (Sec. 31)

84. LIM v. CA.................................................................................................................................. 70

1. Duty of Obedience

85. FRANCISCO v. MEJIA ........................................................................................................... 70

57. ARNEL TY, MARIE TY, JASON ONG, WILLY DY, AND ALVIN TY v. NBI ....................... 48

86. DBP v. CA ................................................................................................................................ 71

2. Duty of Diligence: Business Judgment Rule

87. ATRIUM MANAGEMENT CORPORATION v. COURT OF APPEALS............................. 72

58. STEINBERG v. VELASCO ..................................................................................................... 48

88. AMERICAN HOSPITAL SUPPLIES/PHILIPPINES et al. vs. CA ........................................ 73

59. BALINGHASAY v. CASTILLO................................................................................................ 49

89. COMPLEX ELECTRONICS v. NLRC ................................................................................... 73

60. PHILIPPINE STOCK EXCHANGE Inc. vs COURT OF APPEALS..................................... 49

90. ERNESTINA CRISOLOGO-JOSE v. CA .............................................................................. 75

61. ONG YONG, et al. v. DAVID S. TIU, et al. ............................................................................ 50

91. FCY CONSTRUCTION and FRANCIS YU v. CA and LEY CONSTRUCTION ................ 75

3. Duty of Loyalty

92. LLAMADO v. CA ..................................................................................................................... 76

62. IENT and SCHULZE v. TULLETT PREBON (Philippines), Inc., .......................................... 51

93. MAM REALTY DEV’T CORPORATION and CENTENO v. NLRC and BALBASTRO..... 77

3.1 Self-Dealing Director/Officer (Sec. 32)

94. NAGUIAT, et al. v. NLRC........................................................................................................ 77

63. REPUBLIC v. COJUANGCO.................................................................................................. 52

95. PROGRESS HOMES and ALMEDA v. NLRC ..................................................................... 78

64. MEAD v. E. C. MCCULLOUGH, et al..................................................................................... 54

96. REAHS CORP v. NLRC ......................................................................................................... 79

65. PRIME WHITE CEMENT v. IAC and TE ............................................................................... 55

97. SANTOS vs. NLRC ................................................................................................................. 79

3.2 Interlocking Directors (Sec. 33)

98. SIA v PEOPLE......................................................................................................................... 80

66. PATLING v. SAN JOSE PETROLEUM ................................................................................. 56

99. TRAMAT MERCANTILE v. COURT OF APPEALS............................................................. 80

67. DBP v. CA ................................................................................................................................ 58

5. Watered Stocks (Sec. 65)

3.3 Doctrine of Corporate Opportunity (Sec. 34)

100. LIRAG TEXTILE MILLS and BASILIO LIRAG vs. SSS, HON. DE CASTRO .................. 81

68. GOKONGWEI, JR. v. SEC ..................................................................................................... 58

101. NAVA v. PEERS MARKETING ........................................................................................... 81

69. STRONG v. REPIDE............................................................................................................... 59

6. Derivative Suit

4. Personal Liability of Directors and other Corporate Officers/Liability of Corporation for Acts of Officers

102. JUANITO ANG (in behalf of SUNRISE) v. SPS. ROBERTO and RACHEL ANG ........... 82

70. SPI TECHNOLOGIES v. MAPUA .......................................................................................... 60

103. VILLAMOR v. UMALE .......................................................................................................... 83

71. HEIRS OF UY v. INTERNATIONAL EXCHANGE BANK.................................................... 61

104. CHING v. SUBIC ................................................................................................................... 84

72. EVER ELECTRICAL MANUFACTURING CORP. v SMEE-NAMAWU ............................. 62

105. LEGASPI TOWERS 300 v. MUER, et. al. ........................................................................... 85

73. HARPOON MARINE SERVICES v. FRANCSICO............................................................... 63

106. LISAM ENTERPRISES v. BDO ........................................................................................... 86 2

Board of Directors Cases

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107. STRADEC v. RADSTOCK & PNCC.................................................................................... 87 108. YU v. YUKAYGUAN.............................................................................................................. 90 109. GOCHAN et. al. v. YOUNG et. al ......................................................................................... 91 110. WESTERN INSTITUTE v. SALAS....................................................................................... 92 111. FIRST INTERNATIONAL BANK v. CA................................................................................ 92 112. COMMART PHILS v. SEC ................................................................................................... 93 113. CHASE v. BUENCAMINO .................................................................................................... 94 114. SMC v. KAHN ........................................................................................................................ 95 115. EVERETT v. ASIA BANKING............................................................................................... 95 116. RICARDO L. GAMBOA, et al. v. Hon. OSCAR R. VICTORIANO, et al. ........................... 96 117. REYES v. TAN....................................................................................................................... 96 118. PASCUAL v. OROZCO ........................................................................................................ 97

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Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

1. VILLAFUERTE v. MORENO G.R. No. 186566 October 2, 2009 FACTS: On 28 August 2006, at the sideline of the 18th FIBA World Congress held at Tokyo, Japan, a Joint Communique ("Tokyo Communique") was entered into by the feuding Basketball Association of the Philippines ("BAP") and the newly formed Pilipinas Basketbol ("PB"), through their then incumbent Presidents, Jose D. Lina, Jr. and Bernardo Gabriel L. Atienza, respectively, and as witnessed not only by their other representatives but also by the representative of the Philippine Olympic Committee ("POC") and the FIBA Secretary General Patrick Baumann. The main objectives of the Tokyo Communique are (1) to unify said rival basketball associations and (2) to facilitate the lifting of the suspension imposed by the Federation Internationale de Basketball ("FIBA"), which prevented the country from participating in any international basketball competitions. The merger of the two associations will create a three man panel with the task to (1) writing and finalizing the organization’s constitution and by-laws; (2) reviewing, verifying and validating the list of members as submitted by BAP and PB to the FIBA Central Board Special Commission based on agreed set of criteria for membership as formulated by the panel; and (3) convening the National Congress of the united organization and to oversee the election of officers. Jose De Lina, Bernardo Atienza and Manual Pangilinan composed of the three man panel. On 17 September 2006, in keeping with the merger and unification efforts as embodied in the Tokyo Communique, the Samahang Basketbol ng Pilipinas, Inc. ("SBP") was established and its constitutive documents consisting of the Articles of Incorporation were signed by the five (5) incorporators, which include petitioner Pangilinan. On the same day, the incorporators likewise passed and signed its by-laws. February 4, 2007, the panel met in Bangkok, Thailand where they executed a MOA containing the terms and conditions as well as the renaming of "Samahang Basketbol ng Pilipinas, Inc." to "BAP-Samahang Basketbol ng Pilipinas, Inc." ("BAP-SBP"). February 5 2007, the first trustees of the SBP attended the unity congress where the officers were elected. Villafuerte was elected as chairman while Pangilinan was elected as President. However, the association was divided into two factions. Said dispute evolved from the resolve of petitioner Pangilinan not to recognize the election of respondent Villafuerte as Chairman of BAP-SBP on account of the alleged failure of the latter to qualify for the said position.

Villafuerte and the other officers issued a Notice of National Elections to be held on 4 June 2008, the agenda of which included the election of officers, organization of standing committees, accreditation of new applicants for membership, financial report, report on program for Nationwide Development of Basketball and other matters.

National Congress was held, therefore he was unqualified to hold the position of Chairman. A motion for reconsideration was filed but was denied. ISSUE:

June 4 2008, respondents and the BAP-SBP members sympathetic to their faction attended the National Congress, wherein the regular trustees and the executive officers of SBP were elected.

Whether or not Villafuerte is not qualified to be the chairman. HELD:

June 12 2008, the members of the Board of Trustees were then elected for the term of 2008 to 2012 and until their successors shall have been duly elected and qualified. June 27, 2008, Petitioners filed before the Regional Trial Court of Manila a petition for declaration of nullity of the election of respondents as members of the Board of Trustees and Officers of BAP-SBP. Petitioners alleged that the June 12, 2008 election was a sham, illegal, and void. They also claimed to be the rightful and legally elected trustees and officers of the BAP-SBP and thus prayed that the corporate reins of BAPSBP be turned over to them. Respondents argued that petitioners have no cause of action; that Villafuerte never assumed the position of Chairman of the BAP-SBP because he failed to qualify for the same; that before Villafuerte could legally assume the Chairmanship of BAP-SBP, he must first be elected a member of the Board of Trustees. September 3, 2008, the trial court ruled in favor of petitioners stating that the June 12 election was null and void. The respondents appealed the case under a Petition for review under Rule 43 of the Rules of Court. November 18, 2008, the Court of Appeals rendered decision reversing and setting aside the Decision of the trial court and dismissing the petition for declaration of nullity of elections. As quoted the Bangkok Agreement should not be exploited as to clothe petitioners with the authority to convene the National Congress and conduct themselves as trustees and officers of the BAP-SBP because the attendees of said June 4, 2008 National Congress did not constitute a quorum; that only six of the attendees were active and voting members, while the rest were associates, or non-voting members, or even non-members.

Yes. The Tokyo Communique’s directive to the three-man panel is for it to review, verify, and validate the list of members as submitted by PB and BAP to the FIBA Central Board Special Commission created to hear the Philippine Case based on an agreed set of criteria for membership as formulated by said three-man panel. In other words, there is a given process for validation of membership rather than the automatic grant of voting or active membership status being insisted upon by petitioners. The membership validation resulted in the conferment of active membership status upon 19 BAP-SBP members, 17 of which participated in the June 12, 2008 meeting. Petitioners even constituted the majority of the Committee that undertook the task; they actively participated in the formulation of the validation rules based on the by-laws providing for this. Respondents, who were elected by 17 of the 19 active and voting members of the BAP-SBP during the meeting held on June 12, 2008, are the legitimate officers of the organization, their election in accordance with the applicable rules on the said exercise. Villafuerte’s nomination must of necessity be understood as being subject to or in accordance with the qualifications set forth in the By-Laws of the BAP-SBP. Since the said by-laws require the Chairman of the Board of Trustees to be a trustee himself, petitioner Villafuerte was not qualified since he had neither been elected nor appointed as one of the trustees of BAP-SBP. In other words, petitioner Villafuerte never validly assumed the position of Chairman because he failed in the first place to qualify therefor. 2. BAGUIO v. CA CONSTANCIO BAGUIO vs CA, LAS PALMAS MANPOWER CORP., SPS. DONALDO & CONSUELO PALMA GR No. 93417 September 14, 1983 Quiason, J.

The Court of Appeals found Villafuerte not qualified to hold the position of Chairman of BAP-SBP. It held that the organization’s By-laws require that the Chairman of the Board of Trustees must first be a trustee. Since Villafuerte was not yet named as a trustee of the BAP-SBP when the 4

FACTS: In April 1982, Constancio Baguio was offered by the spouses Palmas a director position as vice-president of Las Palmas Manpower

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

Corporations. Along with the offer are shareholdings of 600 shares at par value of 100 pesos per share, for a total of 60,000 pesos. After paying for the amount, the spouses assured that a resolution has been issued and a secretary’s certification has been drawn and that it will be delivered to Baguio on December 1982. Baguio asked the spouses to issue a receipt establishing his proof of payment of the shares, however the spouses assured him that the resolution and certification is sufficient proof of receipt of such payment. December 1982 arrived and the Board Resolution and Secretary’s Certificate was not yet delivered, Baguio inquired into the corporate books and he found out that the said Resolution and Certificate were not recorded therein. This prompted Baguio to file a collection suit against the corporation and the spouses for non-delivery of the shares and the return of the 60,000 pesos he paid. In their defense, the spouses and Las Palamas alleged that there is no ground for them to give the amount to Baguio as he was not able to present a receipt establishing the proof of payment. As a counter to the defense, Baguio presented the Board Resolution and Secretary’s Certificate establishing that he is a holder of 600 shares in the corporation and contended that such holdings will constitute proof of payment. The RTC favored Baguio, the CA reversed the RTC and favored the Palamas, and Baguio appealed to the SC. Issue: Is the fact of being a director/VP in a corporation, and therefore a holder of shares as such, tantamount as proof having paid for the said shares as held? Ruling: No, the fact of being a director/VP and a shareholder does not signify proof of payment. The Supreme Court ruled that what Baguio presented purporting to be the Board Resolution and the Secretary’s Certificate merely established the fact that he is a shareholder of 600 shares and that he is a director and vice-president of Las Palmas Manpower Corporation. It further ruled that inclusion as a director/VP does not itself constitute proof of payment for the shares so-held. Thus, though Baguio presents a cause of action, he failed to substantiate the same through sufficient evidence. Directorship in a corporation does not require that the shares soheld must be paid in order to be qualified; what is only required is that at least one (1) share is held in the corporation as he is appointed as director. The CA is thereby affirmed. N.B. If you are the counsel for Baguio, how would you prove payment of the shares? (PLEASE research, the decision is dubious, if not, unfair for Baguio. Is it sound corporate practice, to allow an unpaid shareholder become a director/VP of a corporation?)

3. DETECTIVE & PROTECTIVE BUREAU, INC. vs. THE HONORABLE GAUDENCIO CLORIBEL and FAUSTINO S. ALBERTO G.R. No. L-23428 November 29, 1968

ISSUE: Should the writ of preliminary injunction against respondent be granted?

FACTS: RULING: The complaint, in Civil Case No. 56949 of the Court of First Instance of Manila, dated May 4, 1964, filed by Detective and Protective Bureau, Inc., therein plaintiff (petitioner herein) against Fausto S. Alberto, therein defendant (respondent herein), for accounting with preliminary injunction and receivership, alleged that Detective & Protective Bureau, Inc. was a corporation duly organized and existing under the laws of the Philippines. Faustino S. Alberto was managing director of plaintiff corporation from 1952 until January 14, 1964 In June, 1963, Alberto illegally seized and took control of all the assets as well as the books, records, vouchers and receipts of the corporation from the accountant-cashier, concealed them illegally and refused to allow any member of the corporation to see and examine the same On January 14, 1964, the stockholders, in a meeting, removed Alberto as managing director and elected Jose de la Rosa in his stead. However, Alberto not only had refused to vacate his office and to deliver the assets and books to Jose de la Rosa, but also continued to perform unauthorized acts for and in behalf of plaintiff corporation. Alberto had been required to submit a financial statement and to render an accounting of his administration from 1952 but defendant has failed to do so. Alberto, contrary to a resolution adopted by the Board of Directors on November 24, 1963, had been illegally disposing of corporate funds; that defendant, unless immediately restrained ex-parte, would continue discharging the functions of managing director; and that it was necessary to appoint a receiver to take charge of the assets and receive the income of the corporation. Plaintiff prayed that a preliminary injunction ex-parte be issued restraining defendant from exercising the functions of managing director and from disbursing and disposing of its funds; that Jose M. Barredo be appointed receiver; that, after judgment, the injunction be made permanent and defendant be ordered to render an accounting. On June 18, 1964, respondent Judge granted the writ of preliminary injunction prayed for, conditioned upon plaintiff's filing a bond of P5,000.00. Plaintiff filed the bond, but while the same was pending approval defendant Fausto S. Alberto filed, on July 1, 1964, a motion to admit a counter-bond for the purpose of lifting the order granting the writ of preliminary injunction. Inspite of the opposition filed by plaintiff, respondent Judge issued, on August 5, 1964, an order admitting the counterbond and setting aside the writ of preliminary injunction. 5

Petitioner in support of its stand alleged that public interest demanded that the writ enjoining respondent Fausto Alberto from exercising the functions of managing director be maintained. Petitioner contended that respondent Alberto had arrogated to himself the power of the Board of Directors of the corporation because he refused to vacate the office and surrender the same to Jose de la Rosa who had been elected managing director by the Board to succeed him. This assertion, however, was disputed by respondent Alberto who stated that Jose de la Rosa could not be elected managing director because he did not own any stock in the corporation. There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part provides: Sec. 30. Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporations.... If he could not be a director, he could also not be a managing director of the corporation, pursuant to Article V, Section 3 of the By-Laws of the Corporation which provides that: The manager shall be elected by the Board of Directors from among its members.... (Record, p. 48) If the managing director-elect was not qualified to become managing director, respondent Fausto Alberto could not be compelled to vacate his office and cede the same to the managing director-elect because the bylaws of the corporation provides in Article IV, Section 1 that "Directors shall serve until the election and qualification of their duly qualified successor." 4. GRACE CHRISTIAN HIGH SCHOOL v. THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO G.R. No. 108905. October 23, 1997 Facts: Grace Christian High School (Grace Christian) is an educational institution offering preparatory up to secondary courses at Grace Christian Village Quezon City while Grace Christian Village Association, Inc. (The

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

Association) is an organization composed of lot/building owners, lessees, and residents of Grace Christian Village. The 1968 by-laws of the Village provides that the members will have an annual meeting and election of the board of directors composed of 11 members that will serve for one year by plurality vote and by secret balloting to be held every first Sunday of January at 2:00 pm.

ruled that the 1975 draft of by-laws is invalid since it does not comply with the requirements for valid amendment under the law. Hence, this petition with the Supreme Court. Arguments/Issues: Grace Christian: a.

Sometime in December 20, 1975, a committee of the board of directors prepared a draft of the by-laws (1975 draft of by-laws) which provides that the number of directors will be increased to fifteen (15), fourteen (14) thereof will be elected while the representative of Grace Christian will be given a permanent position as one of the directors of The Association. However, such draft was never presented to the general membership for approval. Nevertheless, from 1975 to 1990, the representative of Grace Christian was given a permanent seat in the board of directors of The Association. In February 1990, The Association sent a letter to principal James Tan of Grace Christian informing him their permanent seat in the board of directors of the association would be reconsidered and further discussed that all 15 members of the board should be elected by members of association and if they let a person or entity seat as a permanent director, that would deprive the right of voters to vote for fifteen (15) members of the Board, and it is undemocratic for a person or entity to hold office in perpetuity. Hence, notices were sent to the members of the association informing them that the 1968 by-laws will be followed for the election of the board.

b.

c.

The 1975 draft of by-laws is valid and binding because there is really no provision of law prohibiting unelected members of boards of directors of corporations, citing as example is the Archbishop of Manila, that according to the by-laws of Pius XII Catholic Center, Inc. and Cardinal Santos Memorial Hospital, Inc., whoever sits as the Archbishop of Manila is considered as member of the Board of trustees without the benefit of an election.

It already acquired a vested right to a permanent seat in the Board of Directors of Grace Village Association since the right of the petitioner to an automatic membership in the board of the Association was granted by the members of the Association themselves and this grant has been implemented by members of the board themselves all through the years. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board of Directors of the Association without the benefit of election is allowed under the law.

Ruling: Grace Christian filed for a petition for mandamus to the Home Insurance and Guaranty Corporation (HIGC) to compel the association to recognize the right of its representative to a permanent seat in the board basing its claim under the 1975 draft of by-laws of The Association. The Association in its answer cited the opinion of the SEC which said that the practice of allowing unelected members in the board was contrary to the existing bylaws of the association and to 92 of the Corporation Code and that the basis of the petition of Grace Christian was merely proposed by-laws of the association which have not been voted for by the members and was not yet approved by SEC. The hearing officer of HIGC dismissed the petition for mandamus and adopted the argument of The Association. Upon appeal, the appeals board of HIGC affirmed the ruling of the hearing officer of HIGC and further ruled that the long standing practice of giving Grace Christian a permanent seat has no legal basis. Grace Christian appealed with the Court of Appeals (CA), but the CA affirmed the ruling of HIGC and

a.

The 1975 draft of by-laws is not valid and binding, since the same is contrary to Section 23 of B.P. 68, or the corporation code of the Philippines, to wit: The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified.

In sum, the law provides that the board of directors of corporations must be elected from among the stockholders or 6

members. There may be corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. But in the case of Grace Christian, there is no reason at all for its representative to be given a seat in the boar,nor does Grace Christian claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one. b.

It is probable that, in allowing Grace Christan’s representative to sit on the board, the members of The Association were not aware that this was contrary to law. It should be noted that they did not actually implement the provision in question except perhaps insofar as it increased the number of directors from 11 to 15, but certainly not the allowance of Grace Christian’s representative as an unelected member of the board of directors. It is more accurate to say that the members merely tolerated Grace Christian’s representative and tolerance cannot be considered ratification.

c.

Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of The Association cannot forestall a later challenge to its validity. Neither can it attain validity through acceptance because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. 5. RAMON LEE AND ANTONIO LACDAO V. CA G.R. No. 93695 February 4, 1992

Facts: On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank, Inc. against the private respondents who, in turn, filed a third party complaint against ALFA and the petitioners The trial court issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

erroneously served upon them considering that the management of ALFA had been transferred to the DBP.

In order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation. The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA.

The DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence. The petitioners filed a motion for reconsideration submitting that Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents should have availed of another mode of service under Rule 14, Section 16 of the said Rules. The petitioners maintain that with the execution of the voting trust agreement between them and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of the voting trust agreement the petitioners can no longer be considered directors of ALFA. The private respondents argued that the voting trust agreement dated March 11, 1981 did not divest the petitioners of their positions as president and executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate officers was proper. The trial court upheld the validity of the service of summons on ALFA through the petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to file its answer through the petitioners as its corporate officers. Issues: 1.

2. Ruling: a.

Is the execution of the voting trust agreement by a stockholders whereby all his shares to the corporation have been transferred to the trustee deprives the stockholders of their position as directors of the corporation? Is there a proper service of summons? Yes. Under section 59 of the Corporation Code, a voting trust agreement is an agreement in writing whereby one or more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The five yearperiod may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan.

b.

No. Section 13 of Rule 14 of the Revised Rules of Court provides that 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. The petitioners in this case do not fall under any of the enumerated officers. The service of summons upon ALFA, through the petitioners, therefore, is not valid.

6. BRIAS v. HORD G.R. No. L-8387; February 5, 1913 (Sorry di ko alam ano kinalaman nito sa DQs. Read at your own risk.) FACTS: Enrique Brias was a duly elected member of the Board of Directors of BPI, and also a member of the committee of credits. John Hord is the acting president of said corporation. On August 15, 1912, Brias, acting as a member of the Board and the committee of credits, sought authority from Hord to examine and inspect the books of account of BPI, which is in Hord’s possession and control. Hord refused and denied Brias repeatedly. Later on, Hord and the other Board Members declared Brias’ position as vacant by reason of Brias’ alleged resignation they said to have happened during a board meeting where heated exchanges occurred dated September 26, 1912. Brias instituted a complaint against Hord and the Board of BPI praying that he be allowed tot eh use, exercise and enjoyment of his office as a member of the Board and the committee of credits. ISSUE: Did Brias resign as a member of the Board of Directors of BPI? HELD: No. 7

It is not disputed that a resignation per verba is just as effective and binding as a resignation per scripta. But it appears that the minutes of the proceedings of the meeting on September 26, kept by the Secretary, were destroyed. The minutes of the transactions, prepared by its secretary or some person named or appointed for the purpose of keeping a record of the proceedings, are generally accepted, once approved by the Board, as prima facie evidence of what actually took place during that meeting. In this case, the minutes were not prepared by the secretary. His minutes had been destroyed. The minutes presented in evidence was prepared by the board itself in the absence of Brias, and after the alleged resignation took place. Brias maintains that he did not resign. It will be noted that no words are here attributed to him which indicate that he then and there absolutely and unequivocably resigned. The most that can be said is that he “ceased to attend its meetings.” No words are attributed to him, even by said minutes which show conclusively that he did then and there resign. The Court finds that there is a marked and irreconcilable conflict in the statements of the different members of the board. Some say that Brias said that “he was resigning,” others say that he was “going to resign,” while the minutes say that “he could not continue to belong to a corporation” etc., and that “therefore, he withdrew from it and ceased to attend its meetings.” The Court finds that the members are not clear in their understanding of just exactly what Brias said with reference to the alleged resignation. That members of boards become momentarily disgusted with the method of procedure of their associates and withdraw, is not an infrequent occurrence. For the associates to take advantage of this common weakness of men and distort the momentary action into a meaning not really intended or justified by actual words would be to do great injustice to their fellows.

7. AURBACH v. SANITARY WARES G.R. No. 75875, December 15, 1989 Facts: Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners, European or American who could help in its expansion plans. ASI, a foreign corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary wares.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

The parties agreed that the business operations in the Philippines shall be carried on by an incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation." The Agreement has the following provisions relevant to the issues in these cases on the nomination and election of the directors of the corporation: "3. Articles of Incorporation (a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically provide for

Agreement as well as the testimonial evidence shows that the parties agreed to establish a joint venture and not a corporation. The history of the organization of Saniwares and the unusual arrangements which govern its policy making body are all consistent with a joint venture and not with an ordinary corporation. Under the Agreement there are two groups of stockholders who established a corporation with provisions for a special contractual relationship between the parties, i. e., ASI and the other stockholders. Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the board.

(1) Cumulative voting for directors: xxxxxxxxx "5. Management (a) The management of the Corporation shall be vested in a Board of Directors, which shall consist of nine individuals. As long as American-Standard shall own at least 30% of the outstanding stock of the Corporation, three of the nine directors shall be designated by American-Standard, and the other six shall be designated by the other stockholders of the Corporation. At the request of ASI, the agreement contained provisions designed to protect it as a minority group, including the grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a member of the Executive Committee whose vote was required for important corporate transactions. The annual stockholders' meeting was held. The stockholders then proceeded to the election of the members of the board of directors. The ASI group nominated three persons while the Philippine investors nominated six. The chairman, Baldwin Young ruled the last two nominations out of order on the basis of section 5 (a) of the Agreement, the consistent practice of the parties during the past annual stockholders' meetings to nominate only nine persons as nominees for the nine-member board of directors, and the legal advice of Saniwares' legal counsel. Issue/s: 1) Was the business of the parties a joint venture or a corporation? 2) May the ASI Group may vote their additional 10% equity during elections of Saniwares' board of directors? Ruling: The business is a joint venture. The rule is that whether the parties to a particular contract have thereby established among themselves a joint venture or some other relation depends upon their actual intention which is determined in accordance with the rules governing the interpretation and construction of contracts. our examination of important provisions of the

Moreover, ASI in its communications referred to the enterprise as joint venture. Philippine Corporation Code itself recognizes the right of stockholders to enter into agreements regarding the exercise of their voting rights. Saniwares is technically not a close corporation because it has more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely, appellants cannot honestly claim that Saniwares is a public- issue or a widely held corporation. Express arrangements between corporate joint ventures should be construed with less emphasis on the ordinary rules of law usually applied to corporate entities and with more consideration given to the nature of the agreement between the joint venturers. In addition, paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that agreements regarding the exercise of voting rights are allowed only in close corporations. Having entered into a well-defined contractual relationship, it is imperative that the parties should honor and adhere to their respective rights and obligations thereunder. Clearly established minority position of ASI and the contractual allocation of board seats cannot be disregarded and the rights of the stockholders to cumulative voting should also be protected. Section 5 (a) of the Agreement relates to the manner of nominating the members of the board of directors while Section 3 (a) (1) relates to the manner of voting for these nominees. Consideration of the contractual intent of the parties is the consideration as regards the possible domination by the foreign investors of the enterprise in violation of the nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. It is to be noted that the same law also limits the election of aliens as members of the board of directors in proportion to their allowance participation of said entity.

2. Give certain shareholders or groups of shareholders power to select a specified number of directors; 3. Give to the shareholders control over the selection and retention of employees; and 4. Set up a procedure for the settlement of disputes by arbitration

8. BATAAN SHIPYARD v. PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT May 27, G.R. No. 75885 FACTS: This case arose from a sequestration order issued by the PCGG under authority given by the president. Such sequestration order was sent and received by petitioner. Pursuant to this sequestration orders, take over orders were also issued to protect public interest and to prevent the disposal or dissipation of business enterprises and properties taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the appropriate authorities. However, among other facts, the petitioner questions the exercise of PCGGs right of ownership and management when it terminated several contracts without the consent of both parties, to enter contracts, and to operate its quarry business, and especially its right to vote during stockholders‘meetings. ISSUE: Whether or not PCGG may vote in stockholders ‘meetings. RULING: YES. PCGG may properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG, pending the outcome of proceedings to determine the ownership of sequestered shares of stock, to vote such shares of stock as it may have sequestered in corporations at all stockholders' meetings called for the election of directors, declaration of dividends, amendment of the Articles of Incorporation, etc. Moreover, in the case at bar, there was adequate justification to vote the incumbent directors out of office and elect others in their stead because the evidence showed prima facie that the former were just tools of President Marcos and were no longer owners of any stock in the firm, if they ever were at all. 9. CORAZON H. RICAFORT v. ISAIAS P. DICDICAN GR Nos. 202647-50, Mar 09, 2016 (REYES, J.:)

Thus, such stipulations are valid: 1. Require greater than majority vote for shareholder and director action; DOCTRINE: 8

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

“An election contest refers to any controversy or dispute involving title or claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles of incorporation or by-laws so provide.” FACTS: The NADECOR is a domestic company which was first registered with the Securities and Exchange Commission (SEC) on September 6, 1956 is the holder of a Mining Production Sharing Agreement (MPSA). with the Department of Environment and Natural Resources (DENR), which covers the King-king Gold and Copper Project (King-king Project), a 1,656-hectare gold and copper mining concession in Barangay King-king, Municipality of Pantukan, Province of Compostela Valley in Mindanao. The King-king Project is the second largest copper and gold mine in the country with proven copper deposits of 5.4 billion pounds and gold deposits of 10.3 million troy ounces. Pursuant to Section 1, Article I of NADECOR's Amended ByLaws, its regular annual stockholders' meeting (ASM) was held on August 15, 2011 to elect its Board of Directors for Fiscal Year (FY) 2011-2012. Gatmaitan, NADECOR Corporate Secretary, attested to the presence of a quorum representing 94.81% of NADECOR's outstanding shares of stock, and the election of new set of its Board of Directors, namely, Calalang, Jose G. Ricafort (JG Ricafort), Jose P. De Jesus (De Jesus), Romulo, Ayala, Victor P. Lazatin (Lazatin), Ethelwoldo E. Fernandez (Fernandez), Nitorreda and Engle. On October 20, 2011, Corazon H. Ricafort, wife of JG Ricafort, along with their children (Jose,Marie, Maria Theresa) – stockholders in record, filed a complaint to declare null and void "the 15 August 2011 [ASM] of NADECOR, including all proceedings taken thereat, all the consequences thereof, and all acts carried out pursuant thereto," as well as the election of the members of its Board of Directors. The Ricaforts alleged that: a. they had no knowledge or prior notice of, and were thus unable to attend, participate in, and vote at, the said [ASM]" - since they received the notice of the ASM only on August 16, 2011, or one day late, in violation of the three-day notice provided in NADECOR's By-Laws. b. that due to lack of notice, they failed to attend the said ASM and to exercise their right as stocldiolders to participate in the management and control of NADECOR. c. the notice announced a time and venue different from those set forth in the By-Laws.

Gaitman, however, contended that: a. the complaint must be barred by prescription( it was filed more than two months after the ASM complained of,) because the complaint involved an election contest - since in effect it sought to nullify the election of the Board of Directors of NADECOR for FY2011-2012, under Section 3, Rule 6 of the Interim Rules of Procedure Governing Intra-Corporate Controversies (Interim Rules) - it should have been filed within 15 days from the date of the election. b. That as shown in the affidavit of the NADECOR messenger, Mario S. San Juan who mailed the notices on August 11, 2011 or four days prior to the scheduled ASM. c. that the plaintiffs although physically absent were in fact represented by their proxy, JG Ricafort, by virtue of irrevocable proxies which they executed; that JG Ricafort attended and signed the attendance sheet as the plaintiffs' proxy and participated in the ASM for himself as well as in the plaintiffs' behalf; that the true and beneficial owner of the shares of stock issued in the plaintiffs' names is JG Ricafort, not the plaintiffs, as shown in the Nominee Agreements which they executed; that aided by the irrevocable proxies and Nominee Agreements, JG Ricafort won election to the NADECOR Board. Ricaforts countered that - not being an election contest, because: a. they are not claiming any elective office in NADECOR b. Neither are they questioning the manner and validity of the elections, and qualifications of the candidates for directorship. c. Their prayer is clear that they seek to have the August 15, 2011 [ASM] declared null and void due to fatal defects committed prior to said meeting. The nullification of the proceedings, including the elections is not only incidental or the logical consequence of a declaration of nullity of the [ASM]. ISSUE: Does the case involve an election contest, which shall be subject to the 15 day period prescription? RULING: YES. Under SEC. 2 of Rule 6 of the Interim Rules, “An election contest refers to any controversy or dispute involving title or claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles of incorporation or by-laws so provide. ” 9

Indeed, the Ricaforts are: (a) asserting their "right to choose the persons who will direct, manage and operate the corporation is significant because it is the primary way in which a stockholder can have a voice in the management of corporate affairs,"; and (b) by praying for the voiding of the August 15, 2011 ASM, and for "other just and equitable reliefs," – but such act clearly shows that the Ricaforts were really seeking the holding of a new election for members of the Board of Directors of NADECOR for FY2011-2012. As the CA noted, by seeking to nullify the August 15, 2011 ASM of NADECOR, "including all proceedings taken thereat, all the consequences thereof, and all acts carried out pursuant thereto" - the petitioners were clearly challenging the validity of the election of the new Board of Directors. As the NADECOR's Amended By-Laws itself expressly provides, the purpose of the ASM is "for the election of Directors and for the transaction of general business of its office." To nullify the August 15, 2011 ASM would have had no practical effect except to void the election of the Board of Directors. In the case of Yujuico, the Court expressly ruled that where one of the reliefs sought in the complaint is to nullify the election of the Board of Directors at the ASM, the complaint involves an election contest. Both cases put in issue the validity of the ASM and, expressly in Yujuico, the election of the members of the Board of Directors. The ostensible difference is that in the present case, the Ricaforts invoked lack of notice of the August 15, 2011 ASM, while in Yujuico the ground invoked was improper venue. Additional: On alleged deprivation to participate 1) they were in fact represented by JG Ricafort under an irrevocable proxy which they executed on April 26, 2010. Gatmaitan, NADECOR Corporate Secretary, categorically declared under oath that JG Ricafort held a valid irrevocable proxy from the Ricaforts to attend and vote their shares at all meetings of the stockholders, and that JG Ricafort signed the attendance sheet for and in behalf of the plaintiffs as shown by his signatures in the rows in the said attendance sheet for the names of the plaintiffs who had appointed him as his proxy. Content of the Irrevocable Proxy expressly authorized JG Ricafortto: “xxx… to attend and represent the undersigned at [any and all meetings of the shareholders of the Company], and for and on behalf of the undersigned, to vote upon any and all matters to be taken up at said meeting, according to the number of share(s) of stock of the Company of which the undersigned are the lawful record and beneficial owners,and which they would be entitled to vote if personally present…. xxx” Thus, not

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

only did the SPA acknowledge JG Ricafort's proxy authority from the petitioners, it even expanded his authority to include naming another person as proxy of the petitioners. 2) Also, Corazon Ricafort misled the trial court into thinking that they had an inherent right to vote as an incident of their ownership of corporate stock, although they always knew that JG Ricafort was the real and beneficial owner(under the Nominee Agreements) and that he himself attended the stockholders' meeting and voted as their "proxy" the shares in their names. 3) It defies reason, too, that he could not have informed his wife and children, who live in the same house with him, of the scheduled ASM. Lack/late notice 1) As shown in the Affidavit dated October 13, 2011 of San Juan, NADECOR's messenger, he mailed the notices for the August 15, 2011 ASM to the petitioners' address at the Ortigas Post Office on August 11, 2011, four days prior to the ASM. 2) under Article I, Section 3 of NADECOR's Amended By-Laws, what is required is the mailing out of notices by registered mail at least three days before the ASM – “xxx… or by mailing it … at least three days before such meeting … Failure to give notice of annual meeting, or any irregularity in such notice, shall not affect the validity of such annual meeting or of any proceedings at such meeting ..xxx” 3) The shorter notice of three days instead of two weeks for stockholders' regular or special meeting is clearly allowed under Section 50 of the Corporation Code “…That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws…. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member….”

10. PREMIUM MARBLE RESOURCES, INC., vs. THE COURT OF APPEALS and INTERNATIONAL CORPORATE BANK G.R. No. 96551 November 4, 1996 FACTS:

Premium Marble Resources, Inc., assisted by Atty. Arnulfo Dumadag as counsel, filed an action for damages against International Corporate Bank.

is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities & Exchange Commission.

The complaint alleges that Ayala Investment and Development Corporation issued three checks in the aggregate amount of P31,663.88 payable to the plaintiff and drawn against Citibank. That former officers of the plaintiff corporation headed by Saturnino G. Belen, Jr., without any authority whatsoever from the plaintiff deposited the above-mentioned checks to the current account of his conduit corporation, Intervest Merchant Finance which the latter maintained with the defendant bank

11. SEC v. BAGUIO COUNTRY CLUB

Although the checks were clearly payable to the plaintiff corporation and crossed on their face and for payees account only, defendant bank accepted the checks to be deposited to the current account of Intervest and thereafter presented the same for collection from the drawee bank which subsequently cleared the same thus allowing Intervest to make use of the funds to the prejudice of the plaintiff. Meantime, the same corporation, i.e., Premium, but this time represented by Siguion Reyna, Montecillio and Ongsiako Law Office as counsel, filed a motion to dismiss on the ground that the filing of the case was without authority from its duly constituted board of directors as shown by the excerpt of the minutes of the Premiums board of directors meeting. ISSUE: Whether or not Premium through Atty. Dumadag was authorized to file the present case RULING: No. Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing of the case against private respondent was authorized by the Board. However, While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show proof that this election was reported to the SEC. In fact, the last entry in their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 1981. We agree with the finding of public respondent Court of Appeals, that in the absence of any board resolution from its board of directors the authority to act for and in behalf of the corporation, the present action must necessarily fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellants subscription which 10

G.R. No. 165146, August 12, 2015 SECURITIES AND EXCHANGE COMMISSION AND VERNETTE G. UMALI, Petitioners, v. BAGUIO COUNTRY CLUB CORPORATION, Respondent. [G.R. N0. 165209] RAMON K. ILUSORIO AND ERLINDA K. ILUSORIO, Petitioners, v. BAGUIO COUNTRY CLUB CORPORATION, Respondent. On December 17, 1998, the Securities and Exchange Commission (SEC) approved the amended by-laws submitted by the Baguio Country Club Corporation (BCCC). Article 5, Section 2 thereof reads: Election and Term. The Board of Directors shall be elected at the regular meetings or stockholders and shall hold office for two (2) years and until their successors are elected and qualified

On September 27, 2002, Atty. Manuel R. Singson, acting for and in behalf of Ramon K. Ilusorio and Erlinda Ilusorio (the Ilusorios) requested the SEC, via a letter-complaint, to compel BCCC to hold the annual election of the board of directors for 2002 in view of the nullity of the abovequoted provision in the amended by-laws.4 He informed the SEC that sometime in 2001, a stockholder of BCCC requested for the opinion of the SEC on the validity of the amendment, particularly the two (2) year term of the board of directors; and that in response, the SEC opined that the amendment increasing the term of office to two (2) years is contrary to law, particularly Section 23 of the Corporation Code which limits the term of office to only one (1) year. On November 13, 2002, the SEC, through the Corporation Registration and Monitoring Department, issued an Order6 ruling that Article 5, Section 2 of the amended by-laws of BCCC violates Section 23 of the Corporation Code on the term of office of members of the board of directors and should be amended to conform to the rules. The SEC also ordered BCCC to conduct the annual election of members of the board. On March 18, 2003, Ramon Ilusorio, as stockholder of BCCC, formalized Atty. Singson 's letter-request through a petition with the

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

SEC.9 He alleged among others, that the BCCC refused to conduct a stockholders' meeting for the election of board members, and that the individuals claiming to be officers of the BCCC used their positions to manipulate stockholders' meeting to their advantage and harass those who have opposed them. The petition prayed for the SEC to call and conduct, under its control and supervision, a stockholder's meeting in the BCCC for the election of the members of the board of directors. In its August 15, 2003 Order,11 the SEC observed that the only issue that must be resolved is whether or not the SEC can call a stockholders' meeting for the purpose of conducting an election of the BCCC board of directors.12 It ruled that under the Corporation Code, it has the power to call such a meeting and to order the conduct of an election of new board members in the BCCC.13 Thus it ordered, among others, the calling and conduct of a stockholders meeting for the election of the members of the board under the control and supervision of the SEC. On September 26, 2003, BCCC filed a petition15 for certiorari and prohibition with the Court of Appeals (CA). It added that the matter is within the exclusive jurisdiction of the trial court, being an intra-corporate dispute. In its Decision16 dated March 26, 2004, the CA granted the petition, set aside the SEC's Orders and dismissed the letter-complaint of Ramon Ilusorio. According to the CA, the matter between the parties is an intra corporate dispute, being between a stockholder and the corporation itself, as well as other stockholders, particularly those occupying positions in the board of directors. Further, the SEC's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A, including intra-corporate controversies has been transferred to the appropriate Regional Trial Courts by virtue of Republic Act (RA) No. 8799 (The Securities Regulation Code). Thus, the dispute pertains to the regular courts. On September 1, 2004, the CA denied the SEC's motion for reconsideration for lack of merit.21 Hence, these petitions. G.R. No. 165146 In G.R. No. 165146, the petitioner SEC, through the Office of the Solicitor General (OSG), According to the OSG, the one (1) year term rule for members of the board of directors is mandatory, and cannot be shortened or extended by agreement of the parties or by those interested in the position, thus BCCC's amended by-laws granting its board of directors a two (2) year term is void, notwithstanding the SEC's prior approval.23 Pursuant to Section 5 of the Securities Regulation Code, the SEC has the authority to compel BCCC to amend its by-laws to conform with Section 23 of the Corporation Code, and to impose sanction on the recalcitrant BCCC officers and board members.

The OSG argues that the matter at hand is not an intra-corporate dispute. The authority to accept, reject, or order the modification or amendment of BCCC's by-laws and direct the performance of an act relative thereto is administrative in nature and does not partake of a quasijudicial function.

In its Comment, BCCC claims that it was subjected to grave and oppressive acts by the SEC when it issued a series of patently void orders. These orders were not issued in the exercise of SEC's regulatory powers, but rather in the nature of quasi-judicial powers, which the SEC no longer possesses in view of the transfer of said quasi-judicial power to the RTCs as provided in RA No. 8799. BCCC also maintains that there is an intracorporate dispute because the unverified letter and the petition in the SEC alleged that Erlinda and Ramon Ilusorio are stockholders. According to the BCCC, the SEC's authority to order the conduct of an election of directors is limited to situations when there is no person authorized to call a meeting or if no meeting is being called in contravention of the by-laws. In this case, however, the SEC is aware and is always notified by BCCC of its regular and annual stockholders' meeting conducted by authorized officers of the BCCC. In addition, there is a need for a valid petition for the holding of a stockholders' meeting filed by a valid stockholder before the SEC may compel the same. In their Reply, the Ilusorios maintain that the SEC's act of calling for an election is not exercise of its quasi-judicial power, but rather its regulatory power against a corporation to ensure compliance with the Corporation Code. Moreover, they clarify that contrary to BCCC's insistence that there is an intra-corporate dispute, there is in fact no dispute at all, since they are not asserting any right against the respondent, nor seeking any positive relief for their personal benefit. For all intents and purposes, the controversy is limited to the non-compliance of BCCC's bylaws to the Corporation Code. Defending its actions, the SEC maintained that it merely implemented the statutory term of office provided in Section 23 of the Corporation Code. The law being clear and categorical, there is no room for interpretation nor construction; there is only room for application. The SEC clarifies that calling for a meeting and ordering the conduct of elections is necessary in view of the expired term of the members of the BCCC board of directors; hence there is no one authorized to call a meeting except the SEC G.R. No. 165209 In G.R. No. 165209, The Ilusorios maintain that the SEC is empowered under RA No. 8799 (The Securities Regulation Code) to call for a meeting for the conduct of an election, even if there are authorized persons to call such a meeting.37 In any case, pursuant to the Corporation Code and the Securities Regulation Code, the SEC Can act and exercise 11

its regulatory powers motu propio, without the complaint or initiative of anyone, although it may exercise its regulatory powers upon the complaint or initiative of private parties. In its Comment, BCCC further argues that inasmuch as the SEC is powerless to nullify BCCC's by-laws, any act in connection thereof, such as the calling a meeting for the purpose of an election is also necessarily void.48 Finally, BCCC states that there was no need for the CA to discuss the other collateral issues raised by the Ilusorios, since in any case, all proceedings before the SEC are null and void. Meanwhile, the Ilusorios tiled their Urgent Manifestation and Motion dated October 28, 2004, stating that the Corporate Secretary of BCCC issued a Notice of Annual Meeting of Stockholders, said meeting to be held on November 11, 2004. According to the Ilusorios, the scheduled stockholders' meeting would prejudice the instant petition. On November 10, 2004, the Court issued a resolution directing the parties to maintain the status quo. Nonetheless, BCCC and its counsel were made aware of the status quo order only in the afternoon of November 11, 2004; way after it conducted the stockholders' meeting in the morning of the same date. BCCC sought reconsideration of the status quo order52 but its motion was denied by the Court on December 15, 2004. On January 10, 2005, we ordered the consolidation of the two (2) cases. On July 19, 2005, BCCC filed a Motion for Leave to Admit Manifestation with Manifestation, stating that in a meeting held on June 29, 2005, the board of directors of BCCC approved the amendment to its bylaws, modifying the term of its directors from two (2) years to one ( 1) year. According to the BCCC, the amendment was made "to reciprocate the humble gesture" of the SEC who admitted that the approval of the two-year term of the BCCC's board of directors was an honest and inadvertent mistake. BCCC prayed that in view of the amendment of BCCC's by-laws to reflect a term of one year for its board of directors, the primary legal contention of the petitioners should now be deemed moot and academic. We denied the manifestation due to BCCC's failure to attach its annexes. On September 21, 2005, BCCC filed another Motion for Leave to Admit Manifestation with Manifestation, stating that on August 8, 2005 the SEC issued a certificate approving BCCC's amended by-laws (modifying the term of office of its directors from two [2] years to one [1] year). It added that the SEC also approved the amendments to BCCC's articles of incorporation59 extending its corporate life and converting BCCC from a stock to a non-stock corporation. BCCC reiterated that the SEC's approval of its amended by-laws has caused the petition to be moot and academic.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

Banking on the same amended by-laws and articles of incorporation, the SEC tiled a Manifestation and Motion praying that the petition be considered terminated on the ground of mootness

the signature of Robles as BUHAY president. On March 29, 2007, Robles signed and filed a Certificate of Nomination of BUHAYs nominees for the 2007 elections.

prohibit a hold-over situation. As such, since no successor was ever elected or qualified, Robles remained the President of BUHAY in a holdover capacity.

For their part, petitioners Ramon and Erlinda Ilusorio maintain that the amendment of the by-laws did not render the petition moot since the validity of the amendment is not the only subject matter of the assailed SEC Order.62 They claim that they also raised other issues63 in their memorandum before the CA. Further, even assuming, without conceding that the petition covers only the validity of the amendment extending the term of directors to two (2) years, the amendment restoring the term to one (1) year did not render the petition moot because the fundamental issue decided by the CA is the jurisdiction of the SEC in issuing the assailed SEC Order.

Earlier, however, or on March 27, 2007, petitioner Hans Christian Señeres, holding himself up as acting president and secretary-general of BUHAY, also filed a Certificate of Nomination with the COMELEC, and including himself in the nominees. Señeres filed with the COMELEC a Petition to Deny Due Course to Certificates of Nomination. He alleged that he was the acting president and secretary-general of BUHAY, having assumed that position since August 17, 2004 when Robles vacated the position. Pushing the point, Señeres would claim that the nominations made by Robles were, for lack of authority, null and void owing to the expiration of the latter’s term as party president. However, the National Council of BUHAY adopted a resolution expelling Señeres as party member for his act of submitting a Certificate of Nomination for the party.

Authorities are almost unanimous that one who continues with the discharge of the functions of an office after the expiration of his or her legal termno successor having, in the meantime, been appointed or chosenis commonly regarded as a de facto officer, even where no provision is made by law for his holding over and there is nothing to indicate the contrary. By fiction of law, the acts of such de facto officer are considered valid and effective. So it must be for the acts of Robles while serving as a hold-over Buhay President.

ISSUE: Whether or not the Commission can call a stockholders' meeting for the purpose of conducting an election of the BCCC board of directors. RULING: The petitions have been rendered moot by the 2005 amendment of the by-laws. The validity of the two (2) year term provision and the calling of meeting for the election of members of the board of directors to replace those holding a two (2) year term should no longer be in issue. A moot and academic case is one that ceases to present a justiciable controversy by virtue of supervening events, so that a declaration thereon would be of no practical use or value. As can be gleaned from the SEC's Order, the calling of the meeting for the conduct of an election was made to rectify the inadvertent approval of the two (2) year term for the members of the board. With the return of the one (1) year term, there is no more actual controversy that warrants the exercise of our judicial power. An actual case or controversy exists when there is a conflict of legal rights or an assertion of opposite legal claims, which can be resolved on the basis of existing law and jurisprudence.

On July 2007, the COMELEC issued two resolutions proclaiming BUHAY as a winning party-list organization for the May 2007 elections entitled to three (3) House seats. This was followed by the en banc COMELEC of a Resolution recognizing and declaring Robles as the president of BUHAY and, as such, was the one duly authorized to sign documents. Explaining its action, COMELEC stated that since no party election was held to replace Robles as party president, then he was holding the position in a hold-over capacity. Aggrieved, petitioner filed the instant petition. ISSUE: Is Robles the duly authorized representative of BUHAY? RULING: Yes.

12. Dr. Hans Christian M. SEÑERES v. COMELEC G.R. No. 178678 April 16, 2009 FACTS: In 1999, private respondent Robles was elected president and chairperson of BUHAY, a party-list group. The constitution of BUHAY provides for a three-year term for all its party officers, without re-election. BUHAY participated in the 2001 and 2004 elections, with Robles as its president. As in the past two elections, the manifestation to participate bore

3. BERNAS, et. al. v. CINCO, et. al. G.R. Nos. 163356 & 163357 CINCO, et. al. v. BERNAS, et.al. G.R. Nos. 163368 & 163368 July 10, 2015

Robles filed an Urgent Motion to Declare Null and Void the Certificate of Nomination and Certificates of Acceptance filed by Hans Christian M. Señeres.

As a general rule, officers and directors of a corporation hold over after the expiration of their terms until such time as their successors are elected or appointed. The holdover doctrine accords validity to what would otherwise be deemed as dubious corporate acts and gives continuity to a corporate enterprise in its relation to outsiders. This is the analogical situation obtaining in the present case. The voting members of BUHAY duly elected Robles as party President in October 1999. And although his regular term as such President expired in October 2002, no election was held to replace him and the other original set of officers. Further, the constitution and by-laws of BUHAY do not expressly or impliedly 12

FACTS: Makati Sports Club (MSC) is a domestic corporation duly organized for the social, cultural, recreational and athletic activities among its members. Bernas, Cheng, Africa, Maramara, Frondoso, Macrohon and Lim (Bernas Group) were the members of the BOD of MSC whose terms were to expire either on 1998 and 1999. Because of rumored anomalies in handling the corporate funds by the Bernas Group, stockholders composing of at least 100 shares sought the assistance of the MSC Oversight Committee (MSCOC), who are composed of the past presidents of MSC. The request was granted and the MSCOC called for Special Stockholders Meeting and sent notices to stockholders thereto. For failure of the Bernas Group to secure an injunction before the SEC, Cinco, Librea and Pardo (Cinco Group) were elected new members of the BOD during the questioned 17 December 1997 Special Stockholders Meeting. Thus, the Bernas Group were removed from office. Bernas Group filed an action for nullification of the 1997 Special Meeting before the SEC on the ground that it was improperly called (SEC Case 5840). Arguments: Bernas Group: They cite Section 28 of the Corporation Code (CC) arguing that the authority to call a meeting lies with the Corporate Secretary and

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

not with the MSCOC which functions merely as an oversight committee and is not vested with the power to call corporate meetings. Hence, their removal and the election of the new ones should be nullified. Cinco Group: They insisted that the meeting is sanctioned by the CC and the MSC By-laws. They cite Section 25 of the same arguing that the Corporate Secretary is merely authorized to issue notices of meetings and nowhere does it state that such authority solely belongs to him. Moreover, it is useless to request a call thru the Secretary because he refused to call a special stockholders meeting. Meanwhile, the Cinco Group also found that Bernas was guilty of irregularities, hence, the new BOD expelled him from the club and also sold his shares at public auction. Prior to the resolution of the SEC Case 5840, an Annual Stockholder’s Meeting was held on 20 April 1998. It was attended by 1,017 stockholders representing 2/3 of the outstanding shares. They ratified, among others, the calling and holding of the 1997 Special Stockholders Meeting, including the removal of Bernas Group and the election of the Cinco Group. Due to the filing of several petitions for and against the removal of the Bernas Group, the SEC En Banc supervised the holding of the 1999 Annual Stockholders Meeting. Once again, they ratified and confirmed the holding of the 1997 Special Stockholders Meeting. It was also the same in the 2000 Annual Stockholders Meeting. ISSUES: 1. 2. 3. 4. 5.

Is the 1997 Special Stockholders Meeting initiated by the MSCOC valid? If not valid, did the subsequent ratifications made during the Annual Stockholders Meeting make it valid? Can the Cinco Group invoke the de facto officership doctrine? If not, what is the proper recourse to remove the BOD? Are the 1998 and 1999 Annual Stockholders Meeting valid? Can the Bernas Group invoke the hold-over principle?

non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code.” Further, under MSC by-laws, only the President and the BOD are authorized to call a special meeting. If they refuse, fail or neglect to call a meeting, then stockholders who composed of at least 100 shares, upon written request, may file a petition to call a special meeting. In this case, the 1997 Special Stockholders Meeting was called neither by the President nor the BOD but by the MSCOC. It is nowhere in the law or MSC By-Laws that the MSCOC is authorized to call for a meeting, rather it is solely vested on the President and the BOD.

RULING: 1.

No, the 1997 Special Stockholders Meeting was not valid.

Section 28 of the Corporation Code states that: “Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a

Moreover, relative to the powers of the BOD, it is nowhere can it be gathered that the Oversight Committee is authorized to step in wherever there is breach of fiduciary duty and call a special meeting for the purpose of removing the existing offices and electing their replacements even if such call was made upon the request of shareholders. 2.

No, the subsequent ratifications made by the stockholders did not cure the defect.

The defect was in the authority of the persons who called for it. 13

Illegal acts of a corporation which are contrary to law, morals or public order, or public policy are, like similar transaction between individuals, are void. They cannot serve as basis of a court action nor acquire validity by performance, ratification or estoppel. While, those which are merely ultra vires, or those which are not illegal or void ab initio, are merely voidable and may become binding and enforceable when ratified by the stockholders. The 17 December 1997 Meeting belongs to the former, that it is void ab initio and cannot be validated/ratified. Hence, the 1997 Meeting cannot have any legal effect. The removal and election is void, and since the Cinco Group has no legal right to sit in the BOD, the act of expelling Bernas as member and the selling of his shares, are likewise invalid. 3.

The Cinco Group cannot invoke the application of de facto officership doctrine. The proper recourse is to file a petition to the SEC.

The doctrine cannot justify the action taken after the invalid election since the operation of the principle is limited to third person who were originally not part of the corporation but became such by reason of voting of government-sequestered shares. The case would have been different if the petitioning stockholders went directly to the SEC and sought its assistance to call a meeting citing the refusal of the Secretary to call a meeting. Section 50 of the Corporation Code provides: “Regular and special meetings of stockholders or members. - Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

Whenever, for any cause, there is no person authorized to call a meeting, the Secretaries and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer. (24, 26)” Given the broad administrative and regulatory powers of the SEC, the Cinco Group cannot claim that it was left without recourse after the Secretary refused to heed the demands. Even if it is true that the Secretary refused, the remedy of the Stockholders would have been to file a petition to the SEC. 4.

“SEC. 8. Annual Meetings. The annual meeting of stockholder shall be held at the Clubhouse on the third Monday of April of every year x x x” Second, the 1999 Annual Meeting was also valid because in addition to the fact that it was sanctioned by Section of the MSC by-laws, such meeting was supervised by the SEC in the exercise of its regulatory and administrative powers to implement the CC. Hence, it gave rise to the presumption that the officers who won the elected during the Annual Meeting can be rightfully considered as de jure officers. As de jure officials, they can lawfully perform acts that are within the scope of the business of the corporation except ratification of actions that are void ab initio. No, the Bernas Group cannot use the hold-over principle.

Considering that a new set of officers were duly elected during the 1998 and 1999 Annual Meetings, the Bernas Group cannot be permitted to use the holdover principle as a shield to perpetuate office, unless they were reelected. They had no right to hold-over because they fail to perform the duty incumbent to them. To summarize everything:

Defendant’s defense: the stipulation in the contract suspending the power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends public policy.

ISSUE: Was the contract violated by Defendant Fox or not?

RULING: The contract was violated by the Defendant Fox.

14. LAMBERT v. FOX G.R. No. L-7991

Yes, the subsequent Annual Meetings are valid.

First, the 1998 Annual Meeting was valid because it was sanctioned by Section 8 of the by-laws:

5.

1. The 1997 Special Meeting was prematurely or invalidly called by the Cinco Group. Thus, it had no legal effect and did not effectively remove the Bernas Group as directors of the Makati Sports Club. 2. The expulsion of Bernas as a member and the sale of his shares in a public auction is void because the Cinco Group was not authorized to perform corporate acts as their election as new BOD is void. 3. The ratification of the removal of Bernas Group, the expulsion of Bernas and the sale of his shares in the regular 1998, 1999 and 2000 Annual Meetings, is void because they were not the proper party to cause the ratification. 4. However, all actions of the Cinco Group and stockholders during the regular 1998, 1999 and 2000 Annual Meetings, including the election of the Cinco Group as BOD after the expiration of the term of office of Bernas Group, are valid.

January 29, 1914

FACTS: Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery business, found itself in such condition financially that its creditors, including the plaintiff and the defendant, together with many others, agreed to take over the business, incorporate it and accept stock therein in payment of their respective credits. This was done, the plaintiff and the defendant becoming the two largest stockholders in the new corporation called John R. Edgar & Co., Incorporated. A few days after the incorporation was completed plaintiff and defendant entered into na agreement of mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one year. Defendant Fox sold his stock to E. C. McCullough. 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. The trial court decided the case in favor of the defendant upon the ground that the intention of the parties as it appeared from the contract in question was to the effect that the agreement should be good and continue only until the corporation reached a sound financial basis, and that that event having occurred some time before the expiration of the year mentioned in the contract, the purpose for which the contract was made and had been fulfilled and the defendant accordingly discharged of his obligation thereunder. The complaint was dismissed upon the merits. 14

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.

Construction and interpretation come only after it has been demonstrated that application is impossible or inadequate without them. They are the very last functions which a court should exercise. The majority of the law need no interpretation or construction. They require only application, and if there were more application and less construction, there would be more stability in the law, and more people would know what the law is." What we said in that case is equally applicable to contracts between persons. In the case at bar the parties expressly stipulated that the contract should last one year. No reason is shown for saying that it shall last only nine months. Whatever the object was in specifying the year, it was their agreement that the contract should last a year and it was their judgment and conviction that their purposes would not be subversed in any less time. What reason can give for refusing to follow the plain words of the men who made the contract? We see none. 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.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

15. VALLE VERDE COUNTRY CLUB v. VICTORIA AFRICA GR No. 151969, September 4, 2009

Section 23 of the Corporation Code states that term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. Thus, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term.

Facts: On February 27, 1996, during the Annual Stockholders' Meeting of petitioner Valle Verde Country Club, Inc., the following were elected as members of the VVCC Board of Directors: Dinglasan, Makalintal, Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa. In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders' meeting could not be obtained. Consequently, the above-named directors continued to serve in the VVCC Board in a hold-over capacity. On September 1, 1998, Dinglasan resigned. In a meeting, the remaining directors, still constituting a quorum of VVCC's nine-member board, elected Roxas to fill in the vacancy created by the resignation of Dinglasan. A year later, Makalintal also resigned. He was replaced by Ramirez, who was elected by the remaining members of the VVCC Board. Respondent Africa a member of VVCC, questioned the election of Roxas and Ramirez as members of the VVCC Board with the SEC and the Regional Trial Court. In his nullification complaint before the RTC, Africa alleged that the election of Roxas was contrary to Section 29. Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. xxx. Africa claimed that a year after Makalintal's election as member of the VVCC Board in 1996, as well as those of the other members of the VVCC Board should be considered to have already expired. Thus, according to Africa, the resulting vacancy should have been filled by the stockholders in a regular or special meeting called for that purpose, and not by the remaining members of the VVCC Board, as was done in this case. SEC and RTC ruled in favor of Africa. Issue: Can the remaining directors in fill in a vacancy caused by the resignation of a hold-over director?

The word "term" is defined as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. Term is distinguished from tenure in that an officer's "tenure" represents the term during which the incumbent actually holds office. The term of office is not affected by the holdover. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify. After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals term as well as those of other directors of VVCC board is deemed to have already expired. That they continued to serve in the VVCC Board in a holdover capacity cannot be considered as extending his term. This holdover period, however, is not to be considered as part of his term, which, as declared, had already expired. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation's stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member's term.

6. GABRIEL C. SINGSON et al. v. COMMISSION ON AUDIT G.R. No. 159355 August 9, 2010 Facts: The Philippine International Convention Center, Inc. (PICCI) is a government corporation whose sole stockholder is the Bangko Sentral ng Pilipinas (BSP). Petitioner Araceli E. Villanueva was then a member of the PICCI Board of Directors and Officer-in-Charge (OIC) of PICCI together with his co-petitioners who were then members of the PICCI BOD and officials of the BSP. By virtue of the PICCI By-Laws, petitioners were authorized to receive P1,000.00 per diem each for every meeting attended. Pursuant to its Monetary Board (MB) Resolution No. 15, as amended, the BSP MB granted additional monthly RATA, in the amount of P1,500.00, to each of the petitioners, as members of the BOD of PICCI. Consequently,

Ruling: No. 15

from January 1996 to December 1998, petitioners received their corresponding RATA in the total amount of P1,565,000.00. The then PICCI Corporate Auditor addressed to petitioner Villanueva disallowing in audit the payment of petitioners’ Representation and Transportation Allowance (RATA) in the total amount of P1,565,000.00, and directing them to settle immediately the said disallowances, due to the following reasons: (a) As to petitioner Villanueva, there was double payment of RATA to her as member of the PICCI Board and as OIC of PICCI, which was in violation of Section 8, Article IX-B of the 1987 Constitution and, moreover, Compensation Policy Guideline No. 6 provides that an official already granted commutable RATA and designated by competent authority to perform duties in concurrent capacity as OIC of another position whether or not in the same agency and entitled to similar benefits, shall not be granted said similar benefits, except where said similar allowances are higher in rates than those of his regular position, in which case he may be allowed to collect the difference thereof; and (b) As to her co-petitioners, there was double payment of RATA to them as members of the PICCI Board and as officers of BSP, which was in violation of the Constitution and PICCI By-laws. The Director of the Corporate Audit Office I of COA affirmed the disallowance of the RATA received by petitioners in their capacity as Directors of the PICCI Board. He stated that except for per diems, the PICCI By-Laws prohibits the payment of salary to directors in the form of compensation or reimbursement of expenses, based upon the principle expression unius est exclusio alterius (the express mention of one thing in a law means the exclusion of others not expressly mentioned). Neither can the payment of RATA be legally founded on Section 30 of the Corporation Code where it bears stressing that the directors of a corporation shall not receive any compensation for being members of the board of directors, except for reasonable per diems. The power to fix the compensation which the directors shall receive, if any, is left to the corporation, to be determined in its by-laws or by the vote of stockholders. The PICCI By-Laws allows only the payment of per diem to the directors. Thus, the BSP board resolution granting RATA of P1,500.00 to petitioners violated the PICCI ByLaws. Although MB Resolution No. 15, as amended, would have the effect of amending the PICCI By-laws, and may render the grant of RATA valid, such amendment, however, had no effect because it failed to comply with the procedural requirements set forth under Section 48 of the Corporation Code. COA confirmed the Notice of Disallowance and ruled that petitioners’ receipt of the P1, 500.00 RATA from the BSP for every meeting they attended as members of the PICCI Board of Directors was not valid. Petitioners contend that since PICCI was incorporated with SEC and has no original charter, it should be governed by Section 30 of the Corporation Code. According to petitioners, their receipt of RATA as directors of PICCI was sanctioned by PICCI’s sole stockholder, BSP, per MB Resolution No. 15. Respondent counters that said provision does not apply to petitioners as the PICCI By-laws provides that the compensation of the members of

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

the PICCI Board of Directors shall be given only through per diems and not RATA. Moreover, respondent maintains that there is double payment of RATA which violated National Compensation Circular (NCC) No. 67, since petitioners membership in the PICCI Board is a mere adjunct of their positions as BSP officials; petitioners were already drawing RATA from their mother agencies and, hence, their receipt of RATA from PICCI was without legal basis and constituted double compensation of RATA; that double compensation refers to two sets of compensations for two different offices held concurrently by one officer; and that while there is no general prohibition against holding two offices which are not incompatible, when an officer accepts a second office, he can draw the salary attached to such second office only when he is specifically authorized by law which does not exist in the present case.

limited only to per diem of P1,000.00 for every meeting attended, by virtue of the PICCI By-Laws. In the same vein, it also clarifies that there has been no double compensation despite the fact that, apart from the RATA they have been receiving from the BSP, petitioners have been granted the RATA of P1,500.00 for every board meeting they attended, in their capacity as members of the BOD of PICCI, pursuant to MB Resolution No. 15 of the BSP. In this regard, the Court took into consideration the good faith of petitioners. As petitioners believed in good faith that they are entitled to the RATA of P1,500.00 for every board meeting they attended, in their capacity as members of the BOD of PICCI, pursuant to MB Resolution No. 15, the Court sees no need for them to refund their RATA respectively, in the total amount of P1,565,000.00, covering the period from 1996-1998.

Issue:

17. WESTERN INSTITUTE V SALAS G.R. No. 113032. August 21, 1997

Was there double compensation of RATA to the petitioners? Held:

FACTS: NONE.

In all cases, commutable and reimbursable RATA shall be paid from the amount appropriated for the purpose and other personal services savings of the agency or project from where the officials and employees covered under this Circular draw their salaries. No one shall be allowed to collect RATA from more than one source. National Compensation Circular (NCC) No. 67 seeks to prevent the dual collection of RATA by a national official from the budgets of more than one national agency. It is emphasized that the other source referred to in the prohibition is another national agency. Stated otherwise, when a national official is on detail with another national agency, he should get his RATA only from his parent national agency and not from the other national agency he is detailed to. Moreover, Section 6 of The New Central Bank Act defines that the powers and functions of the BSP shall be exercised by the BSP Monetary Board. MB Resolution No. 15, as amended, are valid corporate acts of petitioners that became the bases for granting them additional monthly RATA of P1,500.00, as members of the Board of Directors of PICCI. The RATA is distinct from salary (as a form of compensation). Unlike salary which is paid for services rendered, the RATA is a form of allowance intended to defray expenses deemed unavoidable in the discharge of office. Hence, the RATA is paid only to certain officials who, by the nature of their offices, incur representation and transportation expenses. Indeed, aside from the RATA that they have been receiving from the BSP, the grant of P1,500.00 RATA to each of the petitioners for every board meeting they attended, in their capacity as members of the Board of Directors of PICCI, in addition to their P1,000.00 per diem, does not run afoul the constitutional proscription against double compensation. The Court upholds the findings of respondent that petitioners’ right to compensation as members of the PICCI Board of Directors is

Private respondents: Ricardo, Salvador, Soledad, Antonio (lahat Salas) are the majority stockholders and members of the board of trustees of Western Institute, an educational institution. Petitioners the minority stockholders of WIT. A meeting was held on June 1, 1986; in said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting monthly compensation to the private respondents as corporate officers retroactive June 1, 1985. In 1991, petitioners filed a complaint against private respondents for falsification of a public document and for estafa. The charge for falsification of public document was anchored on the private respondents submission of WITs income statement for the fiscal year 1985-1986 with the 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 corporations fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986).The charge for estafa was anchored on the argument that respondents disbursed the corporations funds to themselves which is without legal basis. Petitioners maintain that this grant of compensation to private respondents is proscribed under Section 30 of the Corporation Code. Thus, private respondents are obliged to return these amounts to the corporation with interest. The trial court acquitted the respondents without imposing any civil liability against the accused therein. Petitioners want to make private respondents civilly liable despite their acquittal, hence this case.

RULING: 16

1. Are the respondents entitled to compensation? Yes. There is no argument that directors or trustees, as the case may be, are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This proscription, however, against granting compensation to directors/trustees of a corporation is not a sweeping rule. The unambiguous implication in the law is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. In the case at bench, Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology The Articles of Incorporation of the Panay Educational Institution, Inc., now the Western Institute of Technology, Inc. provides that the officers of the corporation shall receive such compensation as the Board of Directors may provide. The grant of compensation or salary to the accused in their capacity as officers of the corporation is authorized by both the Articles of Incorporation and the By-Laws of the Corporation. To state otherwise is to depart from the clear terms of the said articles and by-laws 2. Was there falsification? No. The prosecution omitted to submit the complete minutes of the regular meeting of the Board of Trustees on March 30, 1986; it only presented the 5th page. Had the complete minutes consisting of five (5) pages, been submitted, it can readily be seen and understood that Resolution No. 48, Series of 1986 giving compensation to corporate officers, was indeed taken up and passed on March 30, 1986. This evidence by implication presented cannot prevail over the Minutes and cannot ripen into proof beyond reasonable doubt. 3. Did respondents commit estafa? No. The grant of compensation or salary to the respondents is authorized by both the Articles of Incorporation and the By-Laws of the Corporation. To state otherwise is to depart from the clear terms of the said articles and by-laws. 4. Is the case a derivative suit? No. It is merely an appeal on the civil aspect of Criminal Cases filed. 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 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

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

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.

18. CENTRAL COOP EXCHANGE v. CONCORDIO TIBE & CA Jun 30, G.R. No. L-27972 FACTS: The petitioner is a national federation of farmers' cooperative marketing associations, or FACOMAS, scattered throughout the country. Under its by- laws "The compensation, if any, and the per diems for attendance at meetings of the members of the Board of Directors shall be determined by the members at any annual meeting in special meeting of the Exchange called for the purpose." In the annual stockholders‘ meeting it was resolved that the members of the Board of Directors attending the CCE board meetings be entitled to actual transportation expenses plus the per diems of P30.00 and actual expenses while waiting. In this regard, Tibe collected the said amounts however the petitioner refused to give on the ground that the resolutions are invalid. The trial court ruled in favor of Tibe. ISSUE: Whether or not the resolutions are valid. RULING: NO. The Court ruled that resolutions are contrary to the By-Laws of the federation and, therefore, are not within the power of the board of directors to enact. The ByLaws, in the aforequoted Section 8, explicitly reserved unto the stockholders the power to determine the compensation of members of the board of directors, and the stockholders did restrict such compensation to "actual transportation expenses plus the per diems of P30.00 and actual expenses while waiting." Even without the express reservation of said power, the directors are not entitled to compensation under the Corporation Code. The directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as expressed in the ByLaws.

19. LINGAYEN GULF ELECTRIC POWER COMPANY, INC. V. BALTAZAR G.R. No. L-6244; June 30, 1953

Lingayen Gulf Electric Power Company is a domestic corporation with an authorized capital stock of P300,000 divided into 3,000 shares with a par value of P100 per share. Irineo Baltazar appears to have subscribed for 600 shares on account of which he had paid upon the organization of the corporation the sum of P15,000. After incorporation, the defendant made further payments on account of his subscription, leaving a balance of P18,500 unpaid for, which amount, the plaintiff now claims in this action. On July 23, 1946, a majority of the stockholders of the corporation, among them the herein defendant, held a meeting and adopted stockholders' resolution No. 17. By said resolution, it was agreed upon by the stockholders present to call the balance of all unpaid subscribed capital stock as of July 23, 1946, the first 50 per cent payable within 60 days beginnning August 1, 1946, and the remaining 50 per cent payable within 60 days beginning October 1, 1946. The resolution also provided, that all unpaid subscription after the due dates of both calls would be subject to 12 per cent interest per annum. Lastly, the resolution provided, that after the expiration of 60 days' grace which would be on December 1, 1946, for the first call, and on February 1, 1947, for the second call, all subscribed stocks remaining unpaid would revert to the corporation. Lingayen Gulf wrote a letter to the defendant reminding him that the first 50 per cent of his unpaid subscription. The Baltazar requested to "kindly advise the company thru the undersigned your decision regarding this matter.” Baltazar answered asking the corporation that he be allowed to pay his unpaid subscriptiona at a later date. However, he made no paymenrs hence his unpaid subscription would be reverted to the corporation. Baltazar subsequently wrote another letter to the members of the Board of Directors of the plaintiff corporation, offering to withdraw completely from the corporation by selling out to the corporation all his shares of stock in the total amount of P23,000. Apparently this offer of the defendant was left unacted upon by the plaintiff. The Board of Directors of the Lingayen Gulf held a meeting, and in the course of the said meeting they adopted Resolution No. 17. This resolution in effect set aside the stockholders resolution approved on June 23, 1946, on the ground that said stockholders' resolution was null and void, and because the plaintiff corporation was not in a financial position to absorb the unpaid balance of the subscribed capital stock. The legal counsel of the Lingayen Gulf wrote a letter to the Baltazar, demanding the payment of the unpaid balance of his subscription amounting to P18,500. Baltazar ignored the said demand. Hence an action was instituted. By way of counterclaim, the Baltazar also claims from Lingayen Gulf a reasonable compensation at the rate of P700 per month as president of the company, for the period from March 1, 1946 to December 31, 1948. ISSUE: Is Baltazar entitled to salary as president during his term?

FACTS: RULING: 17

No. As regards the compensation of President claimed by defendant and appellant, it is clear that he is not entitled to the same. The by-laws of the company are silent as to the salary of the President. And, while resolutions of the incorporators and stockholders provide salaries for the general manager, secretary-treasurer and other employees, there was no provision for the salary of the President. On the other hand, other resolutions provide for per diems to be paid to the President and the directors of each meeting attended, P10 for the President and P8 for each director, which were later increased to P25 and P15, respectively. This leads to the conclusions that the President and the board of directors were expected to serve without salary, and that the per diems paid to them were sufficient compensation for their services. Furthermore, for defendant's several years of service as President and up to the filing of the action against him, he never filed a claim for salary. He thought of claiming it only when this suit was brought against him

20. RIOSA v TABACO LA SUERTE CORP., GR 203786 OCTOBER 23, 2013 J. MENDOZA FACTS: In his complaint, Aquiles alleged that he was the owner and in actual possession of a 52-square meter commercial lot situated in Barangay Quinale, Tabaco City, Albay; that he acquired the said property through a deed of cession and quitclaim executed by his parents, Pablo Riosa, Sr. and Sabiniana Biron; that he declared the property in his name and had been religiously paying the realty tax on the said property; that thereafter, his daughter, Annie Lyn Riosa Zampelis, renovated the commercial building on the lot and introduced improvements costing no less than ₱300,000.00; that subsequently, on three (3) occasions, he obtained loans from Sia Ko Pio in the total amount of ₱50,000.00; that as a security for the payment of loans, Sia Ko Pio requested from him a photocopy of the deed of cession and quitclaim; that Sia Ko Pio presented to him a document purportedly a receipt for the ₱50,000.00 loan with an undertaking to pay the total amount of ₱52,000.00 including the ₱2,000.00 attorney’s fees; that without reading the document, he affixed his signature thereon; and that in September 2001, to his surprise, he received a letter from La Suerte informing him that the subject lot was already registered in its name. Aquiles claimed that by means of fraud, misrepresentation and deceit employed by Sia Ko Pio, he was made to sign the document which he thought was a receipt and undertaking to pay the loan, only to find out later that it was a document of sale. Aquiles averred that he did not appear before the notary public to acknowledge the sale, and that the notary

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

public, a municipal judge, was not authorized to notarize a deed of conveyance. He further claimed that he could not have sold the commercial building on the lot as he had no transmissible right over it, as it was not included in the deed of cession and quitclaim. He, thus, prayed for the nullification of the deed of sale and certificate of title in the name of La Suerte and the reconveyance of the subject property to him. In its Answer, La Suerte averred that it was the actual and lawful owner of the commercial property, after purchasing it from Aquiles on December 7, 1990; that it allowed Aquiles to remain in possession of the property to avoid the ire of his father from whom he had acquired property inter vivos, subject to his obligation to vacate the premises anytime upon demand; that on February 13, 1991, the Register of Deeds of Albay issued Transfer Certificate of Title (TCT) No. T-80054 covering the subject property in its name; that Aquiles necessarily undertook the cost of repairs and did not pay rent for using the premises; that Aquiles transacted with it, through Sia Ko Pio, now deceased, who was then its Chief Executive Officer; that his opinion that only the land was sold was absurd because the sale of the principal included its accessories, not to mention that he did not make any reservation at the time the deed was executed; that it repeatedly asked Aquiles to vacate the premises but to no avail; that, instead, he tried to renovate the building in 2001 which prompted it to lodge a complaint with the Office of the Mayor on the ground that the renovation work was without a building permit; and that Aquiles’ complaint was barred by prescription, laches, estoppel and indefeasibility of La Suerte’s title. ISSUE/S: WHETHER THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR OF LAW IN HOLDING THAT THE PERSONAL LOAN OF PETITIONER OBTAINED AND GRANTED BY SIA KO PIO IS A CONSIDERATION OF SALE OF THE PROPERTY IN FAVOR OF THE RESPONDENT CORPORATION LA SUERTE CORPORATION. RULING: And for said reasons, the CA should not have favorably considered the validity of the deed of absolute sale absent any written authority from La Suerte’s board of directors for Sia Ko Pio to negotiate and purchase Aquiles property on its behalf and to use its money to pay the purchase price. The Court notes that when Sia Ko Pio’s son, Juan was presented as an officer of La Suerte, he admitted that he could not find in the records of the corporation any board resolution authorizing his father to purchase disputed property.20 In Spouses Firme v. Bukal Enterprises and Development Corporation,21 it was written:

It is the board of directors or trustees which exercises almost all the corporate powers in a corporation. Thus, the Corporation Code provides: SEC. 23. The board of directors or trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stock, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. x x x SEC. 36. Corporate powers and capacity. — Every corporation incorporated under this Code has the power and capacity: xxxx 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of a lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by the law and the Constitution. xxxx Under these provisions, the power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. A corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or its by-laws. As held in AF Realty & Development, Inc. v. Dieselman Freight Services, Co.: Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are held not binding on the corporation.22 [Emphases supplied] In the case at bench, Sia Ko Pio, although an officer of La Suerte, had no authority from its Board of Directors to enter into a contract of sale of 18

Aquiles’ property. It is, thus, clear that the loan obtained by Aquiles from Sia Ko Pio was a personal loan from the latter, not a transaction between Aquiles and La Suerte. There was no evidence to show that Sia Ko Pio was clothed with authority to use his personal fund for the benefit of La Suerte. Evidently, La Suerte was never in the picture.

21. LA BUGA’AL TRIBAL ASSOCIATION INC. v. RAMOS GR No. 127882 December 1, 2004 FACTS: The Petition for Prohibition and Mandamus before the Court challenges the constitutionality of (1) Republic Act No. [RA] 7942 (The Philippine Mining Act of 1995); (2) its Implementing Rules and Regulations (DENR Administrative Order No. [DAO] 96-40); and (3) the FTAA dated March 30, 1995,6 executed by the government with Western Mining Corporation (Philippines), Inc. (WMCP). On January 27, 2004, the Court en banc promulgated its Decision granting the Petition and declaring the unconstitutionality of certain provisions of RA 7942, DAO 96-40, as well as of the entire FTAA executed between the government and WMCP, mainly on the finding that FTAAs are service contracts prohibited by the 1987 Constitution. The Decision struck down the subject FTAA for being similar to service contracts, which, though permitted under the 1973 Constitution, were subsequently denounced for being antithetical to the principle of sovereignty over our natural resources, because they allowed foreign control over the exploitation of our natural resources, to the prejudice of the Filipino nation. According to the Decision, the 1987 Constitution (Section 2 of Article XII) effectively banned such service contracts. Subsequently, respondents filed separate Motions for Reconsideration. ISSUE: Did the Philippine Mining Act and the WMCP FTAA divest the State of control and ownership over the natural resources? RULING: No. All mineral resources are owned by the State. Their exploration, development and utilization (EDU) must always be subject to the full control and supervision of the State. More specifically, given the inadequacy of Filipino capital and technology in large-scale EDU activities, the State may secure the help of foreign companies in all relevant matters -- especially financial and technical assistance -- provided that, at all times, the State maintains its right of full control.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

Full control is not anathematic to day-to-day management by the contractor, provided that the State retains the power to direct overall strategy; and to set aside, reverse or modify plans and actions of the contractor. The idea of full control is similar to that which is exercised by the board of directors of a private corporation: the performance of managerial, operational, financial, marketing and other functions may be delegated to subordinate officers or given to contractual entities, but the board retains full residual control of the business. Who or what organ of government actually exercises this power of control on behalf of the State? The Constitution is crystal clear: the President. Indeed, the Chief Executive is the official constitutionally mandated to enter into agreements with foreign owned corporations. On the other hand, Congress may review the action of the President once it is notified of every contract entered into in accordance with this [constitutional] provision within thirty days from its execution. In contrast to this express mandate of the President and Congress in the EDU of natural resources, Article XII of the Constitution is silent on the role of the judiciary. However, should the President and/or Congress gravely abuse their discretion in this regard, the courts may -- in a proper case -- exercise their residual duty under Article VIII. Clearly then, the judiciary should not inordinately interfere in the exercise of this presidential power of control over the EDU of our natural resources. On the basis of this control standard, this Court upholds the constitutionality of the Philippine Mining Law, its Implementing Rules and Regulations -insofar as they relate to financial and technical agreements -- as well as the subject Financial and Technical Assistance Agreement (FTAA). RA 7942 provides for the State’s control and supervision over mining operations. The setup under RA 7942 and DAO 96-40 hardly relegates the State to the role of a passive regulator dependent on submitted plans and reports. On the contrary, the government agencies concerned are empowered to approve or disapprove -- hence, to influence, direct and change -- the various work programs and the corresponding minimum expenditure commitments for each of the exploration, development and utilization phases of the mining enterprise. In other words, the FTAA contractor is not free to do whatever it pleases and get away with it; on the contrary, it will have to follow the government line if it wants to stay in the enterprise. Ineluctably then, RA 7942 and DAO 96-40 vest in the government more than a sufficient degree of control and supervision over the conduct of mining operations. WMCP FTAA Likewise Gives the State Full Control and Supervision The WMCP FTAA obligates the contractor to account for the value of production and sale of minerals (Clause 1.4); requires that the contractors work program, activities and budgets be approved by the State (Clause 2.1); gives the DENR secretary power to extend the exploration period

(Clause 3.2-a); requires approval by the State for incorporation of lands into the contract area (Clause 4.3-c); requires Bureau of Forest Development approval for inclusion of forest reserves as part of the FTAA contract area (Clause 4.5); obligates the contractor to periodically relinquish parts of the contract area not needed for exploration and development (Clause 4.6); requires submission of a declaration of mining feasibility for approval by the State (Clause 4.6-b); obligates the contractor to report to the State the results of its exploration activities (Clause 4.9); requires the contractor to obtain State approval for its work programs for the succeeding two year periods, containing the proposed work activities and expenditures budget related to exploration (Clause 5.1); requires the contractor to obtain State approval for its proposed expenditures for exploration activities (Clause 5.2); requires the contractor to submit an annual report on geological, geophysical, geochemical and other information relating to its explorations within the FTAA area (Clause 5.3-a); requires the contractor to submit within six months after expiration of exploration period a final report on all its findings in the contract area (Clause 5.3-b); requires the contractor after conducting feasibility studies to submit a declaration of mining feasibility, along with a description of the area to be developed and mined, a description of the proposed mining operations and the technology to be employed, and the proposed work program for the development phase, for approval by the DENR secretary (Clause 5.4); obligates the contractor to complete the development of the mine, including construction of the production facilities, within the period stated in the approved work program (Clause 6.1); requires the contractor to submit for approval a work program covering each period of three fiscal years (Clause 6.2); requires the contractor to submit reports to the secretary on the production, ore reserves, work accomplished and work in progress, profile of its work force and management staff, and other technical information (Clause 6.3); subjects any expansions, modifications, improvements and replacements of mining facilities to the approval of the secretary (Clause 6.4); subjects to State control the amount of funds that the contractor may borrow within the Philippines (Clause 7.2); subjects to State supervisory power any technical, financial and marketing issues (Clause 10.1-a); obligates the contractor to ensure 60 percent Filipino equity in the contractor within ten years of recovering specified expenditures unless not so required by subsequent legislation (Clause 10.1); gives the State the right to terminate the FTAA for unremedied substantial breach thereof by the contractor (Clause 13.2); requires State approval for any assignment of the FTAA by the contractor to an entity other than an affiliate (Clause 14.1). In short, the aforementioned provisions of the WMCP FTAA, far from constituting a surrender of control and a grant of beneficial ownership of mineral resources to the contractor in question, vest the State with control and supervision over practically all aspects of the operations of the FTAA contractor, including the charging of pre-operating and operating expenses, and the disposition of mineral products. There is likewise no relinquishment of control on account of specific provisions of the WMCP FTAA. Clause 8.2 provides a mechanism to 19

prevent the mining operations from grinding to a complete halt as a result of possible delays of more than 60 days in the governments processing and approval of submitted work programs and budgets. Clause 8.3 seeks to provide a temporary, stop-gap solution in case a disagreement between the State and the contractor (over the proposed work program or budget submitted by the contractor) should result in a deadlock or impasse, to avoid unreasonably long delays in the performance of the works. The State, despite Clause 8.3, still has control over the contract area, and it may, as sovereign authority, prohibit work thereon until the dispute is resolved, or it may terminate the FTAA, citing substantial breach thereof. Hence, the State clearly retains full and effective control. Clause 8.5, which allows the contractor to make changes to approved work programs and budgets without the prior approval of the DENR secretary, subject to certain limitations with respect to the variance/s, merely provides the contractor a certain amount of flexibility to meet unexpected situations, while still guaranteeing that the approved work programs and budgets are not abandoned altogether. And if the secretary disagrees with the actions taken by the contractor in this instance, he may also resort to cancellation/termination of the FTAA as the ultimate sanction. Clause 4.6 of the WMCP FTAA gives the contractor discretion to select parts of the contract area to be relinquished. The State is not in a position to substitute its judgment for that of the contractor, who knows exactly which portions of the contract area do not contain minerals in commercial quantities and should be relinquished. Also, since the annual occupation fees paid to government are based on the total hectarage of the contract area, net of the areas relinquished, the contractors self-interest will assure proper and efficient relinquishment. Clause 10.2(e) of the WMCP FTAA does not mean that the contractor can compel government to use its power of eminent domain. It contemplates a situation in which the contractor is a foreign-owned corporation, hence, not qualified to own land. The contractor identifies the surface areas needed for it to construct the infrastructure for mining operations, and the State then acquires the surface rights on behalf of the former. The provision does not call for the exercise of the power of eminent domain (or determination of just compensation); it seeks to avoid a violation of the anti-dummy law. Clause 10.2(l) of the WMCP FTAA giving the contractor the right to mortgage and encumber the mineral products extracted may have been a result of conditions imposed by creditor-banks to secure the loan obligations of WMCP. Banks lend also upon the security of encumbrances on goods produced, which can be easily sold and converted into cash and applied to the repayment of loans. Thus, Clause 10.2(l) is not something out of the ordinary. Neither is it objectionable, because even though the contractor is allowed to mortgage or encumber the mineral end-products themselves, the contractor is not thereby relieved of its obligation to pay the government its basic and additional shares in the net mining revenue. The

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

contractors ability to mortgage the minerals does not negate the States right to receive its share of net mining revenues. Clause 10.2(k) which gives the contractor authority to change its equity structure at any time, means that WMCP, which was then 100 percent foreign owned, could permit Filipino equity ownership. Moreover, what is important is that the contractor, regardless of its ownership, is always in a position to render the services required under the FTAA, under the direction and control of the government. Clauses 10.4(e) and (i) bind government to allow amendments to the FTAA if required by banks and other financial institutions as part of the conditions of new lendings. There is nothing objectionable here, since Clause 10.4(e) also provides that such financing arrangements should in no event reduce the contractors obligations or the governments rights under the FTAA. Clause 10.4(i) provides that government shall favourably consider any request for amendments of this agreement necessary for the contractor to successfully obtain financing. There is no renunciation of control, as the proviso does not say that government shall automatically grant any such request. Also, it is up to the contractor to prove the need for the requested changes. The government always has the final say on whether to approve or disapprove such requests.

cumulative net mining revenue. Whichever option or computation is used, the additional government share has nothing to do with taxes, duties, fees or charges. The portion of revenues remaining after the deduction of the basic and additional government shares is what goes to the contractor. The basic government share and the additional government share do not yet take into account the indirect taxes and other financial contributions of mining projects, which are real and actual benefits enjoyed by the Filipino people; if these are taken into account, total government share increases to 60 percent or higher (as much as 77 percent, and 89 percent in one instance) of the net present value of total benefits from the project. The third or last paragraph of Section 81 of RA 7942 is slammed for deferring the payment of the government share in FTAAs until after the contractor shall have recovered its pre-operating expenses, exploration and development expenditures. Allegedly, the collection of the States share is rendered uncertain, as there is no time limit in RA 7942 for this grace period or recovery period. But although RA 7942 did not limit the grace period, the concerned agencies (DENR and MGB) in formulating the 1995 and 1996 Implementing Rules and Regulations provided that the period of recovery, reckoned from the date of commercial operation, shall be for a period not exceeding five years, or until the date of actual recovery, whichever comes earlier.

In fine, the FTAA provisions do not reduce or abdicate State control. No Surrender of Financial Benefits The second paragraph of Section 81 of RA 7942 has been denounced for allegedly limiting the States share in FTAAs with foreign contractors to just taxes, fees and duties, and depriving the State of a share in the after-tax income of the enterprise. However, the inclusion of the phrase among other things in the second paragraph of Section 81 clearly and unmistakably reveals the legislative intent to have the State collect more than just the usual taxes, duties and fees. Thus, DAO 99-56, the Guidelines Establishing the Fiscal Regime of Financial or Technical Assistance Agreements, spells out the financial benefits government will receive from an FTAA, as consisting of not only a basic government share, comprised of all direct taxes, fees and royalties, as well as other payments made by the contractor during the term of the FTAA, but also an additional government share, being a share in the earnings or cash flows of the mining enterprise, so as to achieve a fifty-fifty sharing of net benefits from mining between the government and the contractor. The additional government share is computed using one of three (3) options or schemes detailed in DAO 99-56, viz., (1) the fifty-fifty sharing of cumulative present value of cash flows; (2) the excess profit-related additional government share; and (3) the additional sharing based on the

In fine, the challenged provisions of RA 7942 cannot be said to surrender financial benefits from an FTAA to the foreign contractors. Moreover, there is no concrete basis for the view that, in FTAAs with a foreign contractor, the State must receive at least 60 percent of the aftertax income from the exploitation of its mineral resources, and that such share is the equivalent of the constitutional requirement that at least 60 percent of the capital, and hence 60 percent of the income, of mining companies should remain in Filipino hands. Even if the State is entitled to a 60 percent share from other mineral agreements (CPA, JVA and MPSA), that would not create a parallel or analogous situation for FTAAs. We are dealing with an essentially different equation. Here we have the old apples and oranges syndrome. The Charter did not intend to fix an iron-clad rule of 60 percent share, applicable to all situations, regardless of circumstances. There is no indication of such an intention on the part of the framers. Moreover, the terms and conditions of petroleum FTAAs cannot serve as standards for mineral mining FTAAs, because the technical and operational requirements, cost structures and investment needs of off-shore petroleum exploration and drilling companies do not have the remotest resemblance to those of on-shore mining companies. To take the position that governments share must be not less than 60 percent of after-tax income of FTAA contractors is nothing short of this Court dictating upon the government. The State resultantly ends up losing 20

control. To avoid compromising the States full control and supervision over the exploitation of mineral resources, there must be no attempt to impose a minimum 60 percent rule. It is sufficient that the State has the power and means, should it so decide, to get a 60 percent share (or greater); and it is not necessary that the State does so in every case.

22. SHIPSIDE INCORPORATED vs. THE HON. COURT OF APPEALS, HON. REGIONAL TRIAL COURT, BRANCH 26 & the REPUBLIC OF THE PHILIPPINES G.R. No. 143377, February 20, 2001 FACTS Originally four lots were owned Rafael Galvez. He subsequently sold lot 1 and 4 in favor of Filipina Mamaril, Cleopatra Llana, Regina Bustos, and Erlinda Balatbat in a deed of sale. Mamaril later sold lot 1 to Lepanto Consolidated Mining Company. Later, unknown to Lepanto, the RTC declared the OCT registered in the name of Galvez as null and void and ordered the cancellation thereof. On October 28, 1963, Lepanto Consolidated Mining Company sold to herein petitioner Lots No. 1 and 4. Meanwhile the decision of the CA became final and executory and a writ was issued, however said writ remained unsatisfied for 24 years. Office of the Solicitor General filed a complaint for revival of judgment and cancellation of titles before the Regional Trial Court of the First Judicial Region against the successors of Galvez and herein petitioner and its motion for reconsideration was likewise turned down. The CA affirmed the same, hence this petition.

ISSUE Whether or not the filing of the petition was authorized by the BOD of petitioner.

RULING YES. The Court of Appeals dismissed the petition for certiorari on the ground that Lorenzo Balbin, the resident manager for petitioner, who was the signatory in the verification and certification on non-forum shopping, failed to show proof that he was authorized by petitioner's board of directors to file such a petition.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

It was clear from the record that when the general manager filed the petition, there was no proof attached as to the authorization by the Board. However, when the petitioner filed its motion for reconsideration a resolution or secretary‘s certification stating that that on October 11, 1999, or ten days prior to the filing of the petition, Balbin had been authorized by petitioner's board of directors to file said petition. The Court accepted this certification, although belatedly presented, as a valid authorization. The Court was reiterated that belated submission of a verification is allowed the same being not a mandatory and jurisdictional requirement, and as to the non-forum shopping the same was considered to be valid because the case of the petitioner must be litigated based on its merit and must not be dismissed based on technical and procedural infirmities, which were actually cured.

to sign, endorse and deliver all checks and promissory notes on behalf of the corporation. CMMCI, on the other hand, denied borrowing the amount from Tsukahara, and claimed that both loans were personal loans of Sugimoto. The company also contended that if the loans were those of CMMCI, the same should have been supported by resolutions issued by CMMCIs Board of Directors. The RTC, ruled in favor of the plaintiff, and ordered the defendants to pay jointly and severally the plaintiffs. The CA affirmed the decision of the RTC.

Issue: 23. CEBU MACTAN VS. MASAHIRA GR No. 159624 July 17, 2009

Is CMMCI liable for the loan contracted by its President without a resolution by the CMMI Board of Directors.

or acquiescence in the general course of business. This Court has held, thus: A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that [the] authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred. In this case, the corporate by-laws of CMMCI provide:

ARTICLE III Facts:

Held:

In February 1994, petitioner Cebu Mactan Members Center, Inc. (CMMCI), through Mitsumasa Sugimoto (Sugimoto), the President and Chairman of the Board of Directors of CMMCI, obtained a loan amounting to P6,500,000 from respondent Masahiro Tsukahara. As payment for the loan, CMMCI issued seven postdated checks of CMMCI payable to Tsukahara.

A corporation, being a juridical entity, may act through its board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. Section 23 of the Corporation Code of the Philippines provides:

Officers

On 13 April 1994, CMMCI, through Sugimoto, obtained another loan amounting to P10,000,000 from Tsukahara. Sugimoto executed and signed a promissory note in his capacity as CMMCI President and Chairman, as well as in his personal capacity. Upon maturity, the seven checks were presented for payment by Tsukahara, but the same were dishonored by PNB, the drawee bank. After several failed attempts to collect the loan amount totaling P16,500,000, Tsukahara filed the instant case for collection of sum of money against CMMCI and Sugimoto. Tsukahara alleged that the amount of P16,500,000 was used by CMMCI for the improvement of its beach resort, which included the construction of a wave fence, the purchase of airconditioners and curtains, and the provision of salaries of resort employees. He also asserted that Sugimoto, as the President of CMMCI, has the power to borrow money for said corporation by any legal means whatsoever and

SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees x x x. In Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals, we held that under Section 23, the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are lodged in the board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom 21

xxx 2. President. The President shall be elected by the Board of Directors from their own number. He shall have the following powers and duties: xxx c. Borrow money for the company by any legal means whatsoever, including the arrangement of letters of credit and overdrafts with any and all banking institutions; d. Execute on behalf of the company all contracts and agreements which the said company may enter into; e. Sign, indorse, and deliver all checks, drafts, bill of exchange, promissory notes and orders of payment of sum of money in the name and on behalf of the corporation;

It is clear from the foregoing that the president of CMMCI is given the power to borrow money, execute contracts, and sign and indorse

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

checks and promissory notes, in the name and on behalf of CMMCI. With such powers expressly conferred under the corporate by-laws, the CMMCI president, in exercising such powers, need not secure a resolution from the companys board of directors. We quote with approval the ruling of the appellate court, viz: x x x The court a quo correctly ruled that a board resolution in this case is a superfluity given the express provision of the corporate by-laws. To insist that a board resolution is still required in order to bind the corporation with respect to the obligations contracted by its president is to defeat the purpose of the by-laws. By-laws of a corporation should be construed and given effect according to the general rules governing the construction of contracts. They, as the self-imposed private laws of a corporation, have, when valid, substantially the same force and effect as laws of the corporation, as have the provisions of its charter insofar as the corporation and the persons within it are concerned. They are in effect written into the charter and in this sense, they become part of the fundamental law of the corporation. And the corporation and its directors (or trustees) and officers are bound by and must comply with them. The corporation is now estopped from denying the authority of its president to bind the former into contractual relations. x x x

ABS-CBN and VIVA executed a Film Exhibition Agreement whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films. In accordance with the said agreement stating that- ABS-CBN shall have the right of first refusal to the next twenty-four Viva films for TV telecast under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall be exercised by ABS-CBN from the actual offer in writing. In a letter, Mrs. Concio signified her refusal of 8 films. Subsequently, Del Rosario and ABS-CBNs general manager, Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the package proposal of VIVA. What transpired in that lunch meeting is the subject of conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed that ABS-CBN was granted exclusive film rights to fourteen films for a total consideration of P36 million; that he allegedly put this agreement as to the price and number of films in a napkin and signed it and gave it to Mr. Del Rosario. On the other hand. Del Rosario denied having made any agreement with Lopez regarding the 14 Viva films; denied the existence of a napkin in which Lopez wrote something; and insisted that what he and Lopez discussed at the lunch meeting was Vivas film package offer of 104 films (52 originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising to make a counter proposal which came in the form of a proposal contract Annex C of the complaint. Viva made an agreement with Republic Broadcasting Corporation (referred to as RBS – or GMA 7) which gave exclusive rights to RBS to air 104 Viva films including the 14 films initially requested by ABS-CBN. ABS-CBN now filed a complaint for specific performance against Viva as it alleged that there is already a perfected contract between Viva and ABS-CBN in the meeting. Lopez testified that Del Rosario agreed to the counterproposal and he (Lopez) even put the agreement in a napkin which was signed and given to Del Rosario. ABS-CBN also filed an injunction against RBS to enjoin the latter from airing the films.

into loan transactions on CMMCIs behalf. Accordingly, the loans obtained by Sugimoto from Tsukahara on behalf of CMMCI are valid and binding against the latter, and CMMCI may be held liable to pay such loans.

24. ABS-CBN v. CA G.R. No. 1286904; January 21,1999 FACTS:

As a rule, corporate powers, such as the power; to enter into contracts; are exercised by the Board of Directors. But this power may be delegated to a corporate committee, a corporate officer or corporate manager. Such a delegation must be clear and specific. In the case at bar, there was no such delegation to Del Rosario. The fact that he has to present the counteroffer to the Board of Directors of Viva is proof that the contract must be accepted first by the Viva’s Board. Hence, even if Del Rosario accepted the counter-offer, it did not result to a contract because it will not bind Viva sans authorization.

ISSUE: Was the contract made between Del Rosario and Lopez valid?

Thus, given the presidents express powers under the CMMCIs by-laws, Sugimoto, as the president of CMMCI, was more than equipped to enter

for specific purposes. Delegation to officers makes the latter agents of the corporation; accordingly, the general rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. That Del Rosario did not have the authority to accept ABS-CBNs counter-offer was best evidenced by his submission of the draft contract to VIVAs Board of Directors for the latter’s approval. In any event, there was between Del Rosario and Lopez III no meeting of minds. The following findings of the trial court are instructive: A number of considerations militate against ABS-CBNs claim that a contract was perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill. There is no proof that a contract was perfected in the said meeting. Lopez’ testimony about the contract being written in a napkin is not corroborated because the napkin was never produced in court. Further, there is no meeting of the minds because Del Rosario’s offer was of 104 films for P60 million was not accepted. And that the alleged counter-offer made by Lopez on the same day was not also accepted because there’s no proof of such. The counter offer can only be deemed to have been made days after the April 2 meeting when Santos-Concio sent a letter to Del Rosario containing the counter-offer. Regardless, there was no showing that Del Rosario accepted. But even if he did accept, such acceptance will not bloom into a perfected contract because Del Rosario has no authority to do so.

25. YAO KA SIN v. CA 15 June 1992

RULING: No. In the case at bar, ABS-CBN made no unqualified acceptance of VIVAs offer hence, they underwent period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft contract. VIVA through its Board of Directors, rejected such counter-offer. Even if it be conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to do so. Under the Corporation Code, unless otherwise provided by said Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers. The delegation, except for the executive committee, must be 22

Facts: The root of this controversy is the undated letter-offer of Constancio B. Maglana, President and Chairman of the Board of private respondent Prime White Cement Corporation, hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter referred to as YKS, which describes itself as "a business concern of single proprietorship," and is represented by its manager, Mr. Henry Yao. In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the signing of Exhibit "A", the Board of Directors of PWCC disapproved the same; the rejection is evidenced by the following Minutes (Exhibit "10"):

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

"the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not because of the alleged letter-contract adhered to by them, but must be understood as a new and separate contract, and has in no way to do with the letter-offer which they (sic) distinct consideration, as the letter-contract which they now hang on (sic) as consummated is by this resolution, totally disapproved and is unacceptable to the corporation." On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the disapproval of Exhibit "A". Pursuant, however, to its decision with respect to the 10,000 bags of cement, it issued the corresponding Delivery Order (Exhibit "4") and Official Receipt No. 0394 (Exhibit "5") for the payment of the same in the amount of P243,000.00. This is the same amount received and acknowledged by Maglana in Exhibit "A". YKS accepted without protest both the Delivery and Official Receipts. On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's 4 August 1973 letter stating that it is "withdrawing or taking delivery of not less than 10,000 bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru M/V Taurus." In said reply, PWCC reminded YKS of its (PWCC's) 5 July 1973 letter (Exhibit "1") and told the latter that PWCC "only committed to you and which you correspondingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 1, 1973."Unfortunately, no copy of the said 4 August 1973 letter of YKS was presented in evidence. On 10 September 1973, YKS, through Henry Yao, wrote a letter to PWCC as a follow-up to the letter of 15 August 1973; YKS insisted on the delivery of 45,000 bags of white cement. As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement. On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last time, compliance by the latter with its obligation under Exhibit "A". On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned letter of 9 February 1974; PWCC reiterated the unenforceability of Exhibit "A". On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a complaint for Specific Performance with Damages against PWCC. PWCC denied under oath the material averments in the complaint and alleged that: (a) YKS "has no legal personality to sue having no legal personality even by fiction to represent itself;" (b) Mr. Maglana, its President and Chairman, was lured into signing Exhibit "A"; (c) such signing was subject to the condition that Exhibit "A" be approved by the Board of Directors of PWCC, as corporate commitments are made through it; (d) the latter disapproved it, hence Exhibit "A" was never consummated and is not enforceable against PWCC; (e) it agreed to sell 10,000 bags of white

cement, not under Exhibit "A", but under a separate contract prepared by the Board; (f) the rejection by the Board of Exhibit "A" was made known to YKS through various letters sent to it, copies of which were attached to the Answer as Annexes 1, 2 and 3; (g) YKS knew, per Delivery Order and Official Receipt issued by PWCC, that only 10,000 bags were sold to it, without any terms or conditions, at P24.30 per bag FOB Asturias, Cebu; (h) YKS is solely to blame for the failure to take complete delivery of 10,000 bags for it did not send its boat or truck to PWCC's plant; and (i) YKS has, therefore, no cause of action. PWCC presented evidence to prove that Exhibit "A" is not binding upon it because Mr. Maglana was not authorized to make the offer and sign the contract in behalf of the corporation. Per its By-Laws (Exhibit "8"), only the Board of Directors has the power "x x x (7) To enter into (sic) agreement or contract of any kind with any person in the name and for and in behalf of the corporation through its President, subject only to the declared objects and purpose of the corporation and the existing provisions of law." Per standard practice of the corporation, contracts should first pass through the marketing and intelligence unit before they are finalized. Because of its interest in the PWCC, the NIDC, through its comptroller, goes over contracts involving funds of and white cement produced by the PWCC. Finally, among the duties of its legal counsel is to review proposed contracts before they are submitted to the Board. While the president may be tasked with the preparation of a contract, it must first pass through the legal counsel and the comptroller of the corporation. The trial court interpreted the provision of the By-Laws -- granting its Board of Directors the power to enter into an agreement or contract of any kind with any person through the President -- to mean that the latter may enter into such contract or agreement at any time and that the same is not subject to the ratification of the board of directors but "subject only to the declared objects and purpose of the corporation and existing laws." Hence, Exhibit "A" was validly entered into by Maglana and thus binds the corporation. The Court of Appeals reversed the decision of the Trial Court First, the defendant corporation is supervised and principally financed by the National Investment and Development Corporation (NIDC), a subsidiary investment of the Philippine National Bank (PNB), with cash financial exposure of some P10,000,000.00. PNB is a government financial institution whose Board is chairmaned (sic) by the Minister of National Defense. This fact is very material to the issue of whether defendant corporation's president can bind the corporation with his own act. Second, for failure to deny under oath the following actionable documents in support of defendant's counterclaim:

1. The resolution contained in defendant's letter to plaintiff dated July 5, 1973, on the 10,000 bags of white cement delivered to plaintiff was not by reason of the letter contract, Exhibit "A", which was totally disapproved by defendant corporation's board of directors, clearly stating that 'If within ten (10) days from date hereof, we will not hear from you but you will withdraw cement at P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per instruction of the Board.' (Annex "1" to defendant's Answer). 2. Letter of defendant to plaintiff dated August 4, 1973 that defendant 'only committed to you and which you accordingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 1, 1973' (Annex "2" of defendant's Answer). 3. Letter dated August 21, 1973 to plaintiff reiterating defendant's letter of August 4, 1973 (Annex "3" to defendant's Answer). 4. Letter to stores dated August 21, 1973, 5. Receipt from plaintiff (sic) P243,000.00 in payment of 10,000 bags of white cement at 24.30 per bag (Annex "5" to defendant's Answer). Plaintiff is deemed to have admitted, not only the due execution and genuiness (sic) of said documents, (Rule 8, Sec. 8, Rules of Court) but also the allegations therein (Rule 9, Sec. 1, Rules of Court). All of the foregoing documents tend to prove that the letter-offer, Exhibit "A", was rejected by defendant corporation's Board of Directors and plaintiff was duly notified thereof and that the P243,000.00 check was considered by both parties as payment of the 10,000 bags of cement under a separate transaction. Third. Maglana's signing the letter-offer prepared for him in the Solidbank was made clearly upon the condition that it was subject to the approval of the board of directors of defendant corporation. We find consistency herein because according to the Corporation Law, and the By-Laws of defendant corporation, all corporate commitments and business are conducted by, and contracts entered into through, the express authority of the Board of Directors (Sec. 28, Corp. Law, Exh "I" or "8"). Fourth. What Henry Yao and Maglana agreed upon as embodied in Exhibit "A", insofar as defendant corporation is concerned, was an unauthorized contract (Arts. 1317 and 1403 (1), Civil Code). And because Maglana was not authorized by the Board of Directors of defendant corporation nor was his actuation ratified by the Board, the agreement is unenforceable (Art. 1403 (1), Civil Code; Raquiza et al. vs. Lilles et al., 13 CA Rep. 343; Gana vs. Archbishop of Manila, 43 O.G. 3224). It clearly results from the foregoing that the judgment appealed from is untenable. Having no cause of action against defendant corporation, plaintiff is not entitled to any relief. Issue:

23

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

Whether or not the letter-offer (Exhibit A) is binding upon the private respondent. Ruling: No. The letter-offer is not binding. Mr. Maglana, its President and Chairman, was not empowered to execute it. Since a corporation, such as the private respondent, can act only through its officers and agents, "all acts within the powers of said corporation may be performed by agents of its selection; and, except so far as limitations or restrictions 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 when 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.” Moreover, "x x x a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally, conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred.” While there can be no question that Mr. Maglana was an officer -- the President and Chairman -- of private respondent corporation at the time he signed Exhibit "A", the above provisions of said private respondent's ByLaws do not in any way confer upon the President the authority to enter into contracts for the corporation independently of the Board of Directors. That power is exclusively lodged in the latter. Nevertheless, to expedite or facilitate the execution of the contract, only the President -- and not all the members of the Board, or so much thereof as are required for the act -shall sign it for the corporation. This is the import of the words through the president in Exhibit "8-A" and the clear intent of the power of the chairman "to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may enter into" in Exhibit "I-1". Both powers presuppose a prior act of the corporation exercised through the Board of Directors. No greater power can be implied from such express, but limited, delegated authority. Neither can it be logically claimed that any power greater than that expressly conferred is inherent in Mr. Maglana's position as president and chairman of the corporation. We note that the private corporation has a general manager who, under its By-Laws has, inter alia, the following powers: "(a) to have the active and direct management of the business and operation of the corporation,

conducting the same according to the order, directives or resolutions of the Board of Directors or of the president." It goes without saying then that Mr. Maglana did not have a direct and active hand in the management of the business and operations of the corporation. Besides, no evidence was adduced to show that Mr. Maglana had, in the past, entered into contracts similar to that of Exhibit "A" either with the petitioner or with other parties.

26. APT v. CA G.R. No. 121171. December 29, 1998 FACTS: Marinduque Mining and Industrial Corporation (MMIC) is a domestic corporation engaged in mining with respondents Jesus S. Cabarrus, Sr. as President. In 1968, the government undertook to support the financing of MMIC and it then issued debenture bonds which enable the latter to take out loans from the DBP and PNB. The loans were mortgaged by MMIC’s assets. MMIC had trouble paying and this exposed the government, because of the debenture bonds, that reached P22 billion obligation. In order to mitigate MMIC’s loan liability, FRP was drafted in the presence of MMIC’s representatives as well as representatives from DBP and PNB. The two banks however never formally approved the said FRP. Eventually, the staggering loans became overdue and PNB and DBP chose to foreclose MMIC’s assets, FRP no longer feasible at that point. So the assets were foreclosed and were eventually assigned to the Asset Privatization Trust (APT). Later, Jesus Cabarrus, Sr., a stockholder of MMIC initiated a derivative suit against PNB and DBP with APT being impleaded as the successor in interest of the two banks. He alleged that the foreclosure was invalid because the FRP was adopted by PNB and DBP because of the presence of its representatives when the said FRP was drafted. The suit was filed in the RTC but while the case was pending, the parties agreed to submit the case for arbitration. Arbitration Committee ruled in favor of MMIC and declared that (a) FRP is valid; (b) in awarded damages to MMIC; and (c) in awarded moral damages to Jesus S. Cabarrus, Sr. ISSUE: Was the foreclosure made by the 2 banks valid? RULING: PNB and DBP had the legitimate right to foreclose the mortgages of MMIC whose obligations were past due. The mere fact that MMIC adopted the FRP does not mean that DBPPNB lost the option to foreclose. Neither does it mean that the FRP is 24

legally binding and implementable. As in all other contracts, there must be a meeting of minds of the parties; the PNB and DBP must have to validly adopt and ratify such FRP before they can be bound by it. In this case, PLAINTIFFS simply relied on a legal doctrine of promissory estoppel to support its allegation. The doctrine of promissory estoppel can hardly find application here. The representatives of PNB and DBP are separate and distinct from the said bans. As a rule, a corporation has the power to appoint agents to enter into a contract in its behalf, ,but the agent, should not exceed his authority. In the case at bar, the plaintiffs failed to show that the representatives of PNB and DBP had the authority to enter into the FRP contract. And if they had such authority, there was no showing that the banks had ratified the FRP. MMIC DAMAGES MMICs credit reputation was no longer a desirable one. The company was already suffering from serious financial crisis which projects an image not compatible with good and wholesome reputation. So it could not be said that there was a besmirched reputation by the act of foreclosure. The case being a derivative suit, MMIC should have been impleaded as a party. It was not joined as a party plaintiff or party defendant at any stage of the proceedings. As it is, the award of damages to MMIC, which was not a party before the Arbitration Committee, is a complete nullity. in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporations behalf is only nominal party. CABBARIUS DAMAGES It is a basic postulate that s corporation has a personality separate and distinct from its stockholders. The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong was committed in the foreclosure, it was done against the corporation. NOTE: A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer.

27. BA SAVINGS BANK vs. ROGER T. SIA, TACIANA U. SIA and JOHN DOE G.R. No. 131214 July 27, 2000 FACTS:

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

August 6, 1997, the Court of Appeals issued a Resolution denying due course to a Petition for Certiorari filed by BA Savings Bank, on the ground that the Certification on anti-forum shopping incorporated in the petition was signed not by the duly authorized representative of the petitioner, as required under Supreme Court Circular No. 28-91, but by its counsel, in contravention of said circular. A Motion for Reconsideration was subsequently filed by the petitioner, attached to which was a BA Savings Bank Corporate Secretary’s Certificate, dated August 14, 1997. The Certificate showed that the petitioners Board of Directors approved a Resolution on May 21, 1996, authorizing the petitioners lawyers to represent it in any action or proceeding before any court, tribunal or agency; and to sign, execute and deliver the Certificate of Non-forum Shopping, among others. October 24, 1997, the Motion for Reconsideration was denied by the Court of Appeals on the ground that Supreme Court Revised Circular No. 28-91 requires that it is the petitioner, not the counsel, who must certify under oath to all of the facts and undertakings required therein. ISSUE: Whether or not a corporation is allowed to authorize its counsel to execute a certificate of non-forum shopping for its behalf. HELD: Yes. A 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 bylaws or by a 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. The corporation’s board of directors issued a Resolution specifically authorizing its lawyers to act as their agents in any action or proceeding before the Supreme Court, the Court of Appeals, or any other tribunal or agency[;] and to sign, execute and deliver in connection therewith the necessary pleadings, motions, verification, affidavit of merit, certificate of

non-forum shopping and other instruments necessary for such action and proceeding. The Resolution was sufficient to vest such persons with the authority to bind the corporation and was specific enough as to the acts they were empowered to do. Circular 28-91 was prescribed by the Supreme Court to prohibit and penalize the evils of forum shopping. There is no circumvention of this rationale if the certificate was signed by the corporations specifically authorized counsel, who had personal knowledge of the matters required in the Circular.

from Bacolod-Murcia the modification of the concession shares pursuant to the 1936 Board Resolution. In its defense, the Resolution is void for being patently defective. It adopted an amendment of the 1919 Milling Contract when the same was only signed after the issuance of the Board Resolution. The amended concessions given to the planters under the resolution is in the form of a donation since it was unilaterally given to them, which is thus, beyond the powers of the corporation, and therefore, ultra vires. The trial court favored the milling company, hence the appeal to the SC. Issue:

28. MONTELIBANO v. BACOLOD MURCIA ALFREDO MONTELIBANO, ET AL. vs. BACOLOD-MURCIA MILLING CO., INC. GR No. L-15092 May 18, 1962

Is the Board of Directors vested with the authority to adopt the amended contract that was not perfected? Ruling: Yes, the Board of Directors has such authority. The Supreme Court ruled that the adoption of the amended concession agreement on August 20, 1936 operates as a supplement to the said amendment; in fact, the Court held that the resolution amended the 1936 agreement.

Quiason, J. Facts: Montelibano, et al. and the limited co-partnership of Gonzaga and Company, had been sugar planters and in the sugar industry, and has adhered to the concessions of Bacolod-Murcia Milling Co. The sequence of relevant events as established is as follows: 1919: the parties entered into a milling contract for a term of 30 years beginning from the crop year 1920-1921. The shares of the planters and mill will be divided into 45% for the mill and 55% for the planters 1936: the parties drafted a proposed amendment of the 1919 Milling contract, which provided among others, the extension of the term to 45 years and modifying the shares into 40% for the mill and 60% for the planters August 20, 1936: The Board issued a Resolution providing that the Board shall adopt the terms and conditions of the 1936 Amendment. Section 9.a also provides that it shall synchronize its concession shares with that of the shares established by the Negros sugar centrals, namely (La Carlota, Binalbagan-Isabela, and San Carlos) September 10, 1936: the Amended Milling Contract was signed. In 1953, the concessions of the Negros Sugar Centrals declared a standardized share of 62.5% in favor of the planters. This prompted herein respondents to demand, through an action for specific performance, 25

By the time the amendment was signed in September 10, 1936, the act of signing the same by both parties already signifies the meeting of the minds of both parties as to the agreement. The Supreme Court presumed that both parties understood that the Proposed Amended Concession and the Resolution, purporting to have amended the former, contain the controlling terms for both parties. The Resolution does not pertain to a different transaction, in fact, the reference to the amended concessions was clear: the term of the concessions was the same; the cause and consideration were likewise the same; it reiterated the rights and obligations of the planters and it reiterated the 15-year extension of the 1919 Milling Contract. Thus, the Supreme Court held in favor of Montelibano the appeal is granted and hereby reversing the trial court decision.

29. POWERS v. MARSHALL ANTHONY POWERS, BERTEL FASSNACHT, RICHARD I GUARDIAN, JOANN KELLY, LANDLESS, AMADO MACASAET, JAVIER MACICIORATUSHI NAKAI KAY NG, JAMES ROBERSON, FREDERICK SEGGERMAN, ARTHUR YANG, EZRA TOEG, ISIDRO CO, In behalf of themselves and 316 other Associate Members all other Associate Members similarly situated, and in behalf of and for the benefit of the INTERNATIONAL SCHOOL, INC., vs. DONALD I. MARSHALL, CHARLES ANGEVINE, CARLOS D. ARGUELLES, BRYCE F. BASTIAN, GABRIEL DIMACHE, JOSE FLORENTO,

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

JAMES T. HODGE, ROSEMARY IYAS, EUSEBIO R. LUZURIAGA, THOMAS C. NIBLOCK Board of Trustees of the International School, Inc., and MAX SNYDER Superintendent, International School, Inc. FACTS: On July 16, 1975, the fourteen (14) plaintiffs, all associate members of the International School, Inc., brought an action for injunction in the Court of First Instance of Rizal, against the ten (10) members of the Board of Trustees of the school, praying that said Trustees be enjoined from collecting a "development fee" of P2,625.00 per child-enrollee per school year for a period of twelve (12) years, beginning with the school year 19751976, as a pre-requisite for re-enrollment in said school. On May 19, 1975, Donald I. Marshall, president of the Board of Trustees of the International School in Makati, Metro Manila, sent a letter addressed to the parents of the students, giving notice that the Board of Trustees had decided to embark on a program to construct new buildings and remodel existing ones to accommodate the increasing enrollment in the school, and that it was necessary for the school to raise P35,000,000.00 for this purpose. The Board intended to raise the needed funds primarily through subscriptions to capital notes and prepayment certificates, and any deficiency from these sources would be covered by collecting a so-called "development fees" of P2,625 from each enrollee starting with the school year 1975-1976 and continuing up to the school year 1986-1987. On June 11, 1975, the school superintendent, Dr. Max Snyder, acting under instructions from the Board of Trustees, wrote a letter to the parents of returning students, enclosing an Application for Admission which specifically advised that the payment of the development fee was a prerequisite for re-enrollment. The plaintiffs, who are associate members of the International School, Inc., protested against the imposition of the development fee of P2,625.00 per student per year for twelve (12) years. In a petition dated June 18, 1975, they requested the Board of Trustees "to suspend the implementation of the requirement of payment of the development fee as a pre-requisite to final enrollment or re-enrollment for the school year 1975-1976. On July 7, 1975, Donald Marshall, signing for the Board of Trustees and as President of the School: 1. extended the deadline for the selection of the option by whch the Development Fee is to be paid from July 15 to July 22, 1975; 2. allowed deferred payment thereof from August 1, 1975 to October 13, 1975 (beginning of the second quarter) and allowing quarterly payment thereof; 3. granted "assistance" on a case to case basis.

On July 16, 1975 the plaintiffs filed a complaint for injunction against the school. The trial court issued an order temporarily restraining the defendants or their authorized representatives and agents: from executing and/or enforcing in any manner the development program that they had adopted for the raising of funds to put up new building and provide for the remodelling of existing ones belonging to the International School, Inc., or from otherwise requiring as a pre-requisite to the re-enrollment for the school year 1975-1976 of the children of the plaintiffs and other similarly situated the payment of the development fee or charge imposed under the said development plan; and from requiring the payment of the matriculation fee likewise imposed pursuant to said development as a pre-requisite for the enrollment for the first time of the children of the associate members of the International School, Inc. After the submission of the parties' memoranda the trial court issued an order on November 18, 1975, dismissing the complaint for lack of valid cause of action, and dissolved the restraining order of July 17, 1975. ISSUE: Was Board of Trustees of the International School authorized to adopt the development plan for which the disputed fee was being collected from the students? RULING: Section 2 of Article 3 of the By-Laws of the International School, Inc. provides: Section 2. Powers and Duties. — The Board of Trustees, in addition to the powers conferred by these By-Laws, shall have the right to such powers and do such acts as may be lawfully exercised or performed by the corporation, subject to applicable laws and to the provisions of the articles of incorporation and the By-Laws x x x (Article III,By-Laws.) Section 2 (b) of P.D. No. 732 granting certain rights to the International School, Inc., expressly authorized the Board of Trustees "upon consultation with the Secretary of Education and Culture, ... to determine the amount of fees and assessments which may be reasonably imposed upon its students, to maintain or conform to the school standard of education." Such consultation had been made with the Secretary of Education and Culture who expressed his conformity with the reasonableness of the assessment of P2,625.00 per student for the whole school year to carry out its development program. The expansion of the school facilities, which is to be done by improving old buildings and/or constructing new ones, is an ordinary business transaction well within competence of the Board of Trustees to act upon, ... Being directly related to the purpose of elevating and maintaining the 26

school's standard of instruction, which is ordained in fact by Presidential Decree No. 732, the expansion cannot result in any radical or fundamental change in the kind of activity being conducted by the school that might require the consent of the members composing it. Since the collection of the development fee had been approved by the Board of Trustees of the International School, Inc., it was a valid exercise of corporate power by the Board, and said assessment was binding upon all the members of the corporation. Their action to stop the collection of said fee was correcty dismissed by the trial court for lack of a valid cause of action against the school.

30. PREMIUM MARBLE V. CA AND INTERNATIONAL CORPORATE BANK G.R. No. 96551, November 4, 1996 Facts: Premium Marble Resources, Inc. (Premium), assisted by Atty. Arnulfo Dumadag (Atty. Dumadag) as counsel, filed an action for damages against International Corporate Bank (The Bank). The case started when Ayala Investment and Development Corporation issued three (3) checks payable to Premium and drawn against Citibank. Then, former officers of Premium headed by Saturnino Belen, Jr. (Belen, Jr.) without any authority from Premium deposited the said checks to the current account of his conduit corporation, Intervest Merchant Finance (Intervest). Although the check was a cross check payable only to Premium, The Bank accepted the checks and deposit the same with the account of Intervest, thus allowing the latter to use the funds to the prejudice of Premium. Premium then demanded from The Bank to restitute the amount representing the value of the check but The Bank refused to do so. Hence, Premium filed the case. In the meantime, the same corporation Premium, but this time represented by Siguion Reyna, Montecillio and Ongsiako Law Office (Siguion Reyna Law Firm) as counsel, filed a motion to dismiss on the ground that the filing of the case was without authority from its duly constituted board of directors. Premium thru Atty. Dumadag, in its opposition to the motion to dismiss contended that the persons who signed the board resolution namely Belen, Jr., Alberto Nograles, & Jose Reyes, are not directors of the corporation and were allegedly former officers and stockholders of Premium who were dismissed for various irregularities and fraudulent acts; that Siguion Reyna Law office is the lawyer of Belen and Nograles and not of Premium and that the Articles of Incorporation of Premium shows that Belen, Nograles and

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

Reyes are not majority stockholders. Siguion Reyna Law Firm as counsel of Premium asserted that it is the general information sheet filed with the Securities and Exchange Commission, among others, that is the best evidence that would show who are the stockholders of a corporation and not the Articles of Incorporation since the latter does not keep track of the many changes that take place after new stockholders subscribe to corporate shares of stocks. The Bank filed its manifestation adopting the motion to dismiss filed by premium thru Atty. Dumadag. The RTC granted the motion to dismiss and ruled that the persons represented by Atty. Dumadag do not yet have the legal capacity to sue for and in behalf of the Premium and for filing of the case for damages. It found that Alberto Nograles, Fernando Hilario, Augusto Galace, Jose L.R. Reyes, Pido Aguilar and Saturnino Belen, Jr., are presumably the officers of the Premium as indicated in its Articles of Incorporation. On appeal, the Court of Appeals affirmed the trial court’s order.

Augusto I. Galace Treasurer Jose L.R. Reyes Secretary/Director Pido E. Aguilar Director Saturnino G. Belen, Jr. Chairman of the Board. While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare, Premium failed to show proof that this election was reported to the SEC. In fact, the last entry in their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 4, 1981. The claim, therefore, of Premium as represented by Atty. Dumadag, that Zaballa, et al., are the incumbent officers of Premium has not been fully substantiated. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation.

Issue: Was the filing of the case for damages against The Bank was authorized by a duly constituted Board of Directors of the petitioner corporation? Ruling:

31. J.F. RAMIREZ V. THE ORIENTALIST CORPORATION G.R. No. 11897 September 24, 1918 Facts:

No. The filing for damages against The Bank was not authorized. In the absence of any board resolution from its board of directors of the authority to act for and in behalf of the corporation, the action for damages must necessarily fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiffappellants subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities & Exchange Commission Following the general information sheet and the Certification issued by the SEC on August 19, 1986 that as of March 4, 1981, the officers and members of the board of directors of the Premium Marble Resources, Inc. were: Alberto C. Nograles President/Director Fernando D. Hilario Vice President/Director

The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands. It is engaged in the business of maintaining and conducting a theatre in the city of Manila for the exhibition of cinematographic films. The plaintiff J. F. Ramirez was, a resident of the city of Paris, France, and was engaged in the business of marketing films for manufacturers, there engaged in the production or distribution of cinematographic material.

Jose Ramirez, as representative of his father, placed in the hands of Ramon J. Fernandez an offer stating detail the terms upon which the plaintiff would undertake to supply from Paris the aforesaid films. Accordingly, Ramon J. Fernandez had an informal conference with all the members of the company's board of directors except one, and with approval of those with whom he had communicated, addressed a letter to Jose Ramirez accepting the offer contained in the memorandum for the exclusive agency of the Eclair films. A few days later, he addressed another letter couched in the same terms, likewise accepting the office of the exclusive agency for the Milano Films. These communications were signed in which it will be noted the separate signature of R. J. Fernandez, as an individual, is placed somewhat below and to the left of the signature of the Orientalist Company as singed by R. J. Fernandez, in the capacity of treasurer. However, when the films arrived, Orientalist was without fund to pay the cost and expenses incident to each shipment. In effect the company‘s president B. Hernandez paid said obligations and treated the films by him as his own property; and they in fact never came into the actual possession of the Orientalist Company as owner at all, though it is true Hernandez rented the films to the Orientalist Company and they were exhibited by it in the Oriental Theater under an arrangement which was made between him and the theater's manager. However, subsequent deliveries were no longer paid by any of the concerned party. Thereupon this action was instituted by the plaintiff against the Orientalist Company, and Ramon J. Fernandez. As the films which accompanied the dishonored were liable to deteriorate, the court, upon application of the plaintiff, and apparently without opposition on the part of the defendants, appointed a receiver who took charge of the films and sold them. The amount of P6018.93 was realized from this sale and was applied to the satisfaction of the plaintiff's claim and was accordingly delivered to him in part payment thereof. Issue: 1.

Certain of the directors of the Orientalist Company became apprised of the fact that the plaintiff in Paris had control of the agencies for two different marks of films, namely, the "Eclair Films" and the "Milano Films;" and negotiations were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of the plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the Orientalist Company. The defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was chiefly active in this matter. 27

2. Ruling: 1.

Is Orientalist Co. liable for the acts of Ramon Fernandez, its treasurer? Whether Jose Ramirez is considered a guarantor

Yes. Section 28 of the Corporation Law provides that the corporate power shall be exercised by the board of directors including the power to make contracts. However, Section 103 of the Code of Civil Procedures provides that if the foundation of the suit is a written instrument and it is not denied upon oath, it

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

shall be deemed to be admitted. It requires that the Answer setting up the defense of lack of authority of an officer of a corporation to bind it by a contract should be verified and the denial contemplated must be specific.

The Labor Arbiter, in its decision, declared Real as having been illegally dismissed. The LA found no convincing proof of the causes for which Real was terminated and that there was complete absence of due process.

claim that he is a corporate officer. Having said this, we find that there is no intra-corporate relationship between the parties insofar as Real’s complaint for illegal dismissal is concerned and that same does not satisfy the relationship test.

In this case, the failure of the defendant corporation to make any issue in its answer with regard to the authority of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the genuineness and due execution of the contracts sued upon, have the effect of eliminating the question of his authority from the case.

Sangu appealed to the NLRC citing lack of jurisdiction claiming that Real is both a stockholder and a corporate officer of Sangu, hence, the action is an intra-corporate controversy to which the LA has no jurisdiction.

ISSUE: Does the case involve an intra-corporate controversy?

While admitting that he is indeed a stockholder of Sangu, Real nevertheless posited that his being a stockholder and his being a managerial employee do not ipso facto confer upon him the status of a corporate officer. He argues that a corporate officer is one who holds an elective position as provided in the Articles or one who is appointed to such other positions as provided in the By-Laws. He says he was neither elected nor appointed but rather he was hired to be the manager of Sangu by another board member.

To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the branches of the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (a) the status or relationship of the parties, and (2) the nature of the question that is the subject of their controversy.

Moreover, if a corporation knowingly permits one of its officers, or any other agent, to do acts within the scope of an apparent authority and thus holds him out to the public as possessing power to do those acts, the corporation will, as against anyone who has in good faith dealt with the corporation through such agent, be estopped from denying his authority. In this case, it will be observed that Ramon J. Fernandez was the particular officer and member of the board of directors who was most active in the effort to secure the films for the corporation. The negotiations were conducted by him with the knowledge and consent of other members of the board; and the contract was made with their prior approval. As appears from the papers in this record, Fernandez was the person to who keeping was confided the printed stationery bearing the official style of the corporation, as well as rubber stencil with which the name of the corporation could be signed to documents bearing its name. 2.

Yes. As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is not in line with the signature of the Orientalist Company, but is set off to the left of the company's signature and somewhat who sign contracts in some capacity other than that of principal obligor to place their signature alone would justify a court in holding that Fernandez here took upon himself the responsibility of a guarantor rather than that of a principal obligor.

32. RENATO REAL v. SANGU PHILS. G.R. No. 168757; January 19, 2011 FACTS: Renato Real was the manager of Sangu Phils. Corp. In 2001, Real was terminated by Sangu from his position as manager thru a board resolution. Real complained that he was not notified of such meeting. He just received a letter stating that he had been terminated for the following reasons: (1) continuous absences; (2) loss of trust and confidence; and (3) to cut down on operational expenses.

ISSUE: Is Real a corporate officer? HELD: No. "‘Corporate officers’ in the context of Presidential Decree No. 902-A are those officers of the corporation who are given that character by the Corporation Code or by the corporation’s by-laws. There are three specific officers whom a corporation must have under Section 25 of the Corporation Code. These are the president, secretary and the treasurer. The number of officers is not limited to these three. A corporation may have such other officers as may be provided for by its by-laws like, but not limited to, the vice-president, cashier, auditor or general manager. The number of corporate officers is thus limited by law and by the corporation’s by-laws." Sangu claims Real was appointed by virtue of Section 1, Article IV of the Sangu By-Laws which says “The Board, may from time to time, appoint such other officers as it may determine to be necessary or proper.” An examination of the records show that there is no copy of any board resolution or any other document evidencing that the board appointed Real as manager. While Sangu repeatedly claims that Real was appointed as Manager pursuant to the corporation’s By-Laws, the inconsistencies in their allegations as to how Real was placed in said position, coupled by the fact that they failed to produce any documentary evidence to prove that he was appointed thereto by action or with approval of the board, only leads this Court to believe otherwise. It has been consistently held that "[a]n ‘office’ is created by the charter of the corporation and the officer is elected (or appointed) by the directors or stockholders." Clearly here, Sangu failed to prove that Real was appointed by the board of directors. Thus, we cannot subscribe to their 28

SC: No.

From the previous issue, we have determined that there is no intra-corporate relationship between Sangu and Real as it has been settled that Real was neither elected nor appointed to his position as manager, but was rather hired, and thus, a mere employee. We now go to the nature of controversy test. As earlier stated, respondents terminated the services of petitioner for the following reasons: (1) continuous absences; (2) loss of trust and confidence; and, (3) to cut down operational expenses. From these, it is not difficult to see that the reasons given by Sangu for dismissing Real have something to do with his being a Manager of the corporation and nothing with his being a director or stockholder. Thus, when Real sought for reinstatement, he wanted to recover his position as Manager, a position which we have, however, earlier declared to be not a corporate position. He is not trying to recover a seat in the board of directors or to any appointive or elective corporate position which has been declared vacant by the board. Certainly, what we have here is a case of termination of employment which is a labor controversy and not an intra-corporate dispute. In sum, we hold that Real’s complaint likewise does not satisfy the nature of controversy test. With the elements of intra-corporate controversy being absent in this case, we thus hold that petitioner’s complaint for illegal dismissal against Sangu is not intra-corporate. Real’s termination thru a board resolution does not satisfy the requirement of due process, and thus, he was illegally dismissed.

33. MATLING v. COROS 13 October 2010 Facts: After his dismissal by Matling as its Vice President for Finance and Administration, the Ricardo R. Coros filed a complaint for illegal suspension and illegal dismissal against Matling and some of its corporate officers in

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

the NLRC. Matling moved to dismiss the complaint, raising the ground, among others, that the complaint pertained to the jurisdiction of the Securities and Exchange Commission (SEC) due to the controversy being intra-corporate inasmuch as the respondent was a member of Matling's Board of Directors aside from being its Vice-President for Finance and Administration prior to his termination. Ricardo insisted that his status as a member of Matling's Board of Directors was doubtful, considering that he had not been formally elected as such; that he did not own a single share of stock in Matling, considering that he had been made to sign in blank an undated indorsement of the certificate of stock he had been given in 1992; that Matling had taken back and retained the certificate of stock in its custody; and that even assuming that he had been a Director of Matling, he had been removed as the Vice President for Finance and Administration, not as a Director, a fact that the notice of his termination. LA: Ricardo was a corporate officer because he was occupying the position of Vice President for Finance and Administration and at the same time was a Member of the Board of Directors of Matling; and that, consequently, his removal was a corporate act of Matling and the controversy resulting from such removal was under the jurisdiction of the SEC, pursuant to Section 5, paragraph (c) of Presidential Decree No. 902. NLRC: Ricardo’s complaint for illegal dismissal was properly cognizable by the LA, not by the SEC, because he was not a corporate officer by virtue of his position in Matling, albeit high ranking and managerial, not being among the positions listed in Matling's Constitution and By-Laws. CA: Coros' alleged illegal dismissal therefrom is, therefore, within the jurisdiction of the labor arbiter.

Section 25. Corporate officers, quorum.--Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. Conformably with Section 25, a position must be expressly mentioned in the By-Laws in order to be considered as a corporate office. Thus, the creation of an office pursuant to or under a By-Law enabling provision is not enough to make a position a corporate office. An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee.

Matling's President to create non-corporate offices to be occupied by ordinary employees of Matling. Such powers were incidental to the President's duties as the executive head of Matling to assist him in the daily operations of the business. Not every conflict between a corporation and its stockholders involves corporate matters that only the SEC can resolve in the exercise of its adjudicatory or quasi-judicial powers. If, for example, a person leases an apartment owned by a corporation of which he is a stockholder, there should be no question that a complaint for his ejectment for non-payment of rentals would still come under the jurisdiction of the regular courts and not of the SEC. By the same token, if one person injures another in a vehicular accident, the complaint for damages filed by the victim will not come under the jurisdiction of the SEC simply because of the happenstance that both parties are stockholders of the same corporation. A contrary interpretation would dissipate the powers of the regular courts and distort the meaning and intent of PD No. 902-A. The circumstances surrounding his appointment to office must be fully considered to determine whether the dismissal constituted an intracorporate controversy or a labor termination dispute. Obviously enough, the respondent was not appointed as Vice President for Finance and Administration because of his being a stockholder or Director of Matling. his promotion to the position of Vice President for Finance and Administration in 1987 was by virtue of the length of quality service he had rendered as an employee of Matling. His subsequent acquisition of the status of Director/stockholder had no relation to his promotion.

34. MANILA METAL CONTAINER CORP. v PNB, GR 166862 DECEMBER 20, 2006 J. CALLEJO SR.

Issue: Was Ricardo a corporate officer of Matling? Held: No. Matling's By-Laws did not list his position as Vice President for Finance and Administration as one of the corporate offices; that Matling's By-Law No. III listed only four corporate officers, namely: President, Executive Vice President, Secretary, and Treasurer; that the corporate offices contemplated in the phrase "and such other officers as may be provided for in the by-laws" found in Section 25 of the Corporation Code should be clearly and expressly stated in the By-Laws; that the fact that Matling's By-Law No. III dealt with Directors & Officers while its By-Law No. V dealt with Officers proved that there was a differentiation between the officers mentioned in the two provisions, with those classified under ByLaw No. V being ordinary or non-corporate officers; and that the officer, to be considered as a corporate officer, must be elected by the Board of Directors or the stockholders, for the President could only appoint an employee to a position pursuant to By-Law No. V. Section 25 of the Corporation Code provides:

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that the corporate officers are the President, Secretary, Treasurer and such other officers as may be provided for in the By-Laws. Accordingly, the corporate officers in the context of PD No. 902A are exclusively those who are given that character either by the Corporation Code or by the corporation's By-Laws. Moreover, the Board of Directors of Matling could not validly delegate the power to create a corporate office to the President, in light of Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers was a discretionary power that the law exclusively vested in the Board of Directors, and could not be delegated to subordinate officers or agents. The office of Vice President for Finance and Administration created by Matling's President pursuant to By Law No. V was an ordinary, not a corporate, office. To emphasize, the power to create new offices and the power to appoint the officers to occupy them vested by By-Law No. V merely allowed 29

FACTS: Petitioner was the owner of a 8,015 square meter parcel of land located in Mandaluyong (now a City), Metro Manila. The property was covered by Transfer Certificate of Title (TCT) No. 332098 of the Registry of Deeds of Rizal. To secure a P900,000.00 loan it had obtained from respondent Philippine National Bank (PNB), petitioner executed a real estate mortgage over the lot. Respondent PNB later granted petitioner a new credit accommodation of P1,000,000.00; and, on November 16, 1973, petitioner executed an Amendment4 of Real Estate Mortgage over its property. On March 31, 1981, petitioner secured another loan of P653,000.00 from respondent PNB, payable in quarterly installments of P32,650.00, plus interests and other charges.5 On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the real estate mortgage and sought to have the property sold at public auction for P911,532.21, petitioner's outstanding obligation to respondent PNB as of

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

June 30, 1982,6 plus interests and attorney's fees. After due notice and publication, the property was sold at public auction on September 28, 1982 where respondent PNB was declared the winning bidder for P1,000,000.00. The Certificate of Sale7 issued in its favor was registered with the Office of the Register of Deeds of Rizal, and was annotated at the dorsal portion of the title on February 17, 1983. Thus, the period to redeem the property was to expire on February 17, 1984. Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it be granted an extension of time to redeem/repurchase the property.8 In its reply dated August 30, 1983, respondent PNB informed petitioner that the request had been referred to its Pasay City Branch for appropriate action and recommendation.9 In a letter10 dated February 10, 1984, petitioner reiterated its request for a one year extension from February 17, 1984 within which to redeem/repurchase the property on installment basis. It reiterated its request to repurchase the property on installment.11 Meanwhile, some PNB Pasay City Branch personnel informed petitioner that as a matter of policy, the bank does not accept "partial redemption."12 Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT No. 32098 on June 1, 1984, and issued a new title in favor of respondent PNB.13 Petitioner's offers had not yet been acted upon by respondent PNB. Meanwhile, the Special Assets Management Department (SAMD) had prepared a statement of account, and as of June 25, 1984 petitioner's obligation amounted to P1,574,560.47. This included the bid price of P1,056,924.50, interest, advances of insurance premiums, advances on realty taxes, registration expenses, miscellaneous expenses and publication cost.14 When apprised of the statement of account, petitioner remitted P725,000.00 to respondent PNB as "deposit to repurchase," and Official Receipt No. 978191 was issued to it.15 In the meantime, the SAMD recommended to the management of respondent PNB that petitioner be allowed to repurchase the property for P1,574,560.00. In a letter dated November 14, 1984, the PNB management informed petitioner that it was rejecting the offer and the recommendation of the SAMD. It was suggested that petitioner purchase the property for P2,660,000.00, its minimum market value. Respondent PNB gave petitioner until December 15, 1984 to act on the proposal; otherwise, its P725,000.00 deposit would be returned and the property would be sold to other interested buyers.16 Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote another letter dated December 12, 1984 requesting for a reconsideration. Respondent PNB replied in a letter dated December 28, 1984, wherein it reiterated its proposal that petitioner purchase the property for P2,660,000.00. PNB again informed petitioner that it would return the deposit should petitioner desire to withdraw its offer to purchase the property.17 On February 25, 1985, petitioner, through counsel, requested that PNB reconsider its letter dated December 28, 1984. Petitioner declared that it had already agreed to the SAMD's offer to purchase the property for P1,574,560.47, and that

was why it had paid P725,000.00. Petitioner warned respondent PNB that it would seek judicial recourse should PNB insist on the position.18 On June 4, 1985, respondent PNB informed petitioner that the PNB Board of Directors had accepted petitioner's offer to purchase the property, but for P1,931,389.53 in cash less the P725,000.00 already deposited with it.19 On page two of the letter was a space above the typewritten name of petitioner's President, Pablo Gabriel, where he was to affix his signature. However, Pablo Gabriel did not conform to the letter but merely indicated therein that he had received it.20 Petitioner did not respond, so PNB requested petitioner in a letter dated June 30, 1988 to submit an amended offer to repurchase. Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It maintained that respondent PNB had agreed to sell the property for P1,574,560.47, and that since its P725,000.00 downpayment had been accepted, respondent PNB was proscribed from increasing the purchase price of the property.21 Petitioner averred that it had a net balance payable in the amount of P643,452.34. Respondent PNB, however, rejected petitioner's offer to pay the balance of P643,452.34 in a letter dated August 1, 1989.22 On August 28, 1989, petitioner filed a complaint against respondent PNB for "Annulment of Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with Damages." While the case was pending, respondent PNB demanded, on September 20, 1989, that petitioner vacate the property within 15 days from notice,27 but petitioners refused to do so. On March 18, 1993, petitioner offered to repurchase the property for P3,500,000.00.28 The offer was however rejected by respondent PNB, in a letter dated April 13, 1993. According to it, the prevailing market value of the property was approximately P30,000,000.00, and as a matter of policy, it could not sell the property for less than its market value.29 On June 21, 1993, petitioner offered to purchase the property for P4,250,000.00 in cash.30 The offer was again rejected by respondent PNB on September 13, 1993.

property for P1,574,560.47. Any acceptance by the SAMD of petitioner's offer would not bind respondent. As this Court ruled in AF Realty Development, Inc. vs. Diesehuan Freight Services, Inc.:60 Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such director, are held not binding on the corporation. Thus, a corporation can only execute its powers and transact its business through its Board of Directors and through its officers and agents when authorized by a board resolution or its by-laws.

35. BIENVENIDO ONGKINGCO, as President and GALERIA DE MAGALLANES CONDOMINIUM ASSOCIATION, INC., v. NLRC G.R. No. 119877. March 31, 1997 (KAPUNAN, J.:) DOCTRINE: “A corporate officer's dismissal is always a corporate act and/or an intra-corporate controversy and that nature is not altered by the reason or wisdom which the Board of Directors may have in taking such action.” FACTS:

ISSUE/S: WHETHER OR NOT PETITIONER AND RESPONDENT PNB HAD ENTERED INTO A PERFECTED CONTRACT FOR PETITIONER TO REPURCHASE THE PROPERTY FROM RESPONDENT.

RULING: There is no evidence that the SAMD was authorized by respondent's Board of Directors to accept petitioner's offer and sell the 30

Petitioner Galeria de Magallanes Condominium Association, Inc. (Galeria) is a non-stock, non-profit corporation formed in accordance with R.A. No. 4726, otherwise known as the Condominium Act, whose primary purpose is to hold title to the common areas of the Galeria de Magallanes Condominium Project and to manage and administer the same for the use and convenience of the residents and/or owners." Petitioner Bienvenido Ongkingco was the president of Galeria at the time private respondent filed his complaint. Galeria's Board of Directors appointed private respondent Federico B. Guilas as Administrator/Superintendent (monthly salary of P10,000). As Administrator, private respondent was tasked with the maintenance of the "performance and elegance of the common areas of the condominium and external appearance of the compound thereof for the convenience and comfort of the residents as well as to keep up the

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

quality image, and hence the value of the investment for the owners thereof." However, on 17 March 1992, through a resolution passed by the Board of Directors of Galeria, private respondent was not re-appointed as Administrator. As a result, Guilas instituted a complaint against petitioners for illegal dismissal and non-payment of salaries with the NLRC. Ongkingco 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. LA granted the motion to dismiss. NLRC reversed the LA. ISSUE: Is Guilas a corporate officer or a mere employee? Does the case fall under the exclusive jurisdiction of the SEC? RULING: Specifically delineated in P.D. 902-A are the cases over which the SEC exercises exclusive jurisdiction: “c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations, partnerships or associations.” Guilas is an officer of petitioner corporation and not its mere employee cannot be questioned. The by-laws of the Galeria de Magallanes Condominium Association specifically includes the Superintendent/Administrator in its roster of corporate officers: “Section 1. Executive Officers The Executive officers of the corporation shall be a President, a Vice President, a Treasurer, all of whom shall be elected by the Board of Directors. They may be removed with or without cause at any meeting by the concurrence of four directors. The Board of Directors may appoint a Superintendent or Administrator and such other officers and employees and delineate their powers and duties as the Board shall find necessary to manage the affairs of the corporation.” Under the recent case of Tabang v. NLRC, the president, vicepresident, secretary and treasurer are commonly regarded as the principal or executive officers of a corporation, and modern corporation statutes usually designate them as the officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may be empowered under the by-laws of a corporation to create additional offices as may be necessary. It has been held that an "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an "employee" usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. Also, under the case of Lozon v. NLRC and Espino v. NLRC, the Court held that acorporate officer's dismissal is always a corporate act and/or an intra-corporate controversy and that nature is not altered by the reason or wisdom which the Board of Directors may have in taking such action.

In the present case, Guilas was indeed a corporate officer. He was appointed directly by the Board of Directors not by any managing officer of the corporation and his salary was, likewise, set by the same Board. Having thus determined, his dismissal or non-appointment is clearly an intra-corporate matter and jurisdiction, therefore, properly belongs to the SEC and not the NLRC. Guilas also attack the SEC's jurisdiction over the instant case on grounds that Guilas was not elected by the Board of Directors but was merely appointed. This particular argument baffles us. P.D. 902-A cannot be any clearer. Sec. 5(c) of said law expressly covers both election and appointment of corporate directors, trustees, officers and managers. It is of no consequence, likewise, that the complaint of private respondent for illegal dismissal includes money claims, jurisdiction remains with the SEC as ruled in the case of Cagayan de Oro Coliseum, Inc. v. Office of the MOLE, a close scrutiny thereof shows that said claims are actually part of the perquisites of his position in, and therefore interlinked with his relations with the corporation. In Dy vs. NLRC, the Court said: "(t)he question of remuneration involving as it does, a person who is not a mere employee but a stockholder and officer, an integral part, it might be said, of the corporation, is not a simple labor problem but a matter that comes within the area of corporate affairs and, management, and is in fact a corporate controversy in contemplation of the Corporation Code."

36. ANDRES LAO vs. COURT OF APPEALS, THE ASSOCIATED ANGLO-AMERICAN TOBACCO CORPORATION and ESTEBAN CO G.R. No. 47013 February 17, 2000 FACTS: The Associated Anglo-American Tobacco Corporation entered into a “Contract of Sales Agent “ with Andres Lao. Under the contract, Lao agrees to sell cigarettes manufactured and shipped by the corporation to his business address in Tacloban City. Lao would in turn remit the sales. However, in February 1968, Lao failed to accomplish his monthly sales report. Since Lao appeared to encounter difficulties in complying with his obligations under the contract of agency, the Corporation sent Ngo Kheng to supervise Lao’s sales operations in Leyte and Samar. Ngo Kheng discovered that, contrary to Lao’s allegation that he still had huge collectibles from his customers, nothing was due the Corporation from Lao’s clients. From then on, Lao no longer received shipments from the Corporation which transferred its vehicles to another compound controlled by Ngo Kheng. Shipments of cigarettes and the corresponding invoices were also placed in the name of Ngo Kheng.

Lao brought a complaint for accounting and damages against the corporation. During the pendency of the said civil case, Esteban co, representing the corporation as its new vice-president filed an estafa case against Lao. Without awaiting the termination of the criminal case, Lao lodged a complaint for malicious prosecution. The court ruled in favor of Lao declaring that the estafa case was filed without probable cause and with malice and orders the corporation and Esteban Co to jointly and severally pay the Laos. ISSUE: Whether or not Esteban Co is solidarily liable with the Corporation in payment of damages against Lao RULING: No. A perusal of Lao’s affidavit-complaint reveals that at the time he filed the same petitioner Co was the vice-president of the Corporation. As a corporate officer, his power to bind the Corporation as its agent must be sought from statute, charter, by-laws, a delegation of authority to a corporate officer, or from the acts of the board of directors formally expressed or implied from a habit or custom of doing business. In this case, no such sources of petitioner’s authority from which to deduce whether or not he was acting beyond the scope of his responsibilities as corporate vice-president are mentioned, much less proven. It is thus logical to conclude that the board of directors or by-laws of the corporation vested petitioner Co with certain executive duties one of which is a case for the Corporation. That petitioner Co was authorized to institute the estafa case is buttressed by the fact that the Corporation failed to make an issue out of his authority to file the case. Upon well-established principles of pleading, lack of authority of an officer of a corporation to bind it by contract executed by him in its name, is a defense which should have been specially pleaded by the corporation. The Corporation’s failure to interpose such a defense could only mean that the filing of the affidavit-complaint by petitioner Co was with the consent and authority of the Corporation. In the same vein, petitioner Co may not be held personally liable for acts performed in pursuance of an authority and therefore, holding him solidarily liable with the Corporation for the damages awarded to respondent Lao does accord with law and jurisprudence. 37. DE TAVERA v. PHIL. TUBERCULOSIS SOCIETY GR. No. L-48928 February 25, 1982 FACTS:

31

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

On March 23, 1976, plaintiff-appellant Mita Pardo de Tavera filed with the Court of First Instance of Rizal a complaint against the Philippine Tuberculosis Society, Inc. (hereinafter referred to as the Society), Miguel Canizares, Ralph Nubla, Bernardo Pardo, Enrique Garcia, Midpantao Adil, Alberto Romulo, and the present Board of Directors of the Philippine Tuberculosis Society, Inc. On April 12, 1976, plaintiff-appellant filed an amended complaint impleading Francisco Ortigas, Jr. as party defendant. The complaint alleged that plaintiff is a doctor of Medicine by profession and a recognized specialist in the treatment of tuberculosis, having been in the continuous practice of her profession since 1945; that she is a member of the Board of Directors of the defendant Society, in representation of the Philippine Charity Sweepstakes Office; that she was duly appointed on April 27, 1973 as Executive Secretary of the Society; that on May 29, 1974, the past Board of Directors removed her summarily from her position, the lawful cause of which she was not informed, through the simple expedient of declaring her position vacant; that immediately thereafter, defendant Alberto Romulo was appointed to the position by an affirmative vote of seven directors, with two abstentions and one objection; and that defendants Pardo, Nubla, Garcia and Adil, not being members of defendant Society when they were elevated to the position of members of the Board of Directors, are not qualified to be elected as such and hence, all their acts in said meeting of May 29, 1974 are null and void. The defendants filed their answer on May 12, 1976, specifically denying that plaintiff was illegally removed from her position as Executive Secretary and averring that under the Code of By-Laws of the Society, said position is held at the pleasure of the Board of Directors and when the pleasure is exercised, it only means that the incumbent has to vacate the same because her term has expired; On the same date, defendant Adil filed a Motion to Dismiss on the ground that the complaint states no cause of action, or if it does, the same has prescribed. Inasmuch as plaintiff seeks reinstatement, he argued that the complaint is an action for quo warranto and hence, the same should be commenced within one year from May 29, 1974 when the plaintiff was ousted from her position. Plaintiff filed an Opposition to Motion to Dismiss on May 28, 1976, stating that the complaint is a suit for damages filed under the authority of Section 6, Article 11 of the present Constitution in relation to Articles 12 and 32(6) of the New Civil Code, On September 3, 1976, the coturt a quo rendered a decision holding that the present suit being one for quo warranto it should be filed within one year from plaintiff's outer from office; that nevertheless, plaintiff was not illegally rendered or used from her position as Executive Secretary in The Society since plaintiff as holding an appointment all the pleasure of the appointing power and hence her appointment in essence was

temporary in nature, terminable at a moment's notice without need to show that the termination was for cause; On October 13, 1976, plaintiff filed a Motion for Reconsideration to which defendants filed an Opposition. On November 25, 1976, the court a quo denied the motion for Reconsideration. Dissatisfied with the decision and the order denying the motion for reconsideration. plaintiff filed a Notice of Appeal and an Urgent Motion for Extension of Time to File Record on Appeal, which was granted in an order dated December 15, 1976. However, on December 20, 1976, the court a quo issued an amended order where it qualified the action as principally one for quo warranto and hence, dispensed with the filing of a record on appeal as the original records of the case are required to be elevated to the Court of Appeals. On August 8, 1978, the Court of Appeals issued a resolution certifying this case to this Court considering that the appeal raises no factual issues and involves only issues of law, The nature of the instant suit is one involving a violation of the rights of the plaintiff under the By-Laws of the Society, the Civil Code and the Constitution, which allegedly renders the individuals responsible therefore, accountable for damages, as may be gleaned from the following allegations in the complaint as constituting the plaintiff's causes of action, ISSUE: Whether or not petitioner was illegally removed from her position as executive secretay in violation of Code of By-Laws of the Society. RULING: Section 7.01. Officers of the Society. — The executed officers f the Society shag be the President a Vice-President, a Treasurer who shall be elected by the Board of Directors, Executive Secretary, and an Auditor, who shall be appointed by the Board of Directors, all of whom shall exercise the functions. powers and prerogatives generally vested upon skich officers, the functions hereinafter set out for their respective offices and such other duties is from time to time, may be prescribed by the Board of Directors. One person may hold more than one office except when the functions thereof are incompatible with each other. It is petitioner's contention that she is subject, to removal pursuant to Section 7.04 of the Code of By-laws which respondents correctly dispute citing Section 7.02 of the same Cede. The aforementioned provisions state as follows: Section 7.02. Tenure of Office. — All executive officers of the Society except the Executive Secretary and the Auditor shall be elected the Board of Directors, for a term of one rear ind shall hold office until their successors are elected and have qualified. The Executive secretary, the Auditor and all other office ers and employees of the Society shall hold office at the pleasure of the Board of Directors, unless their term of 32

employment shall have been fixed in their contract of employment. xxx xxx xxx Section 7.04. Removal of Officers and Employees. — All officers and employees shall be subject to suspension or removal for a sufficient cause at any time by affirmative vote of a majority of an the members of the Board of Directors, except that employees appointed by the President alone or by the other officers alone at the pleasure of the officer appointing him. In the organizational meeting of the Society on April 25, 1973, the minutes of the meeting reveal that the Chairman mentioned the need of appointing a permanent Executive Secretary and stated that the former Executive Secretary, Dr. Jose Y. Buktaw, tendered his application for optional retirement, and while on terminal leave, Dr. Mita Pardo de Tavera was appointed Acting Executive Secretary. In view thereof, Don Francisco Ortigas, Jr. moved, duly seconded, that Dr. Mita Pardo de Tavera be appointed Executive Secretary of the Philippine Tuberculosis Society, Inc. The motion was unanimously approved. Although the minutes of the organizational meeting show that the Chairman mentioned the need of appointing a "permanent" Executive Secretary, such statement alone cannot characterize the appointment of petitioner without a contract of employment definitely fixing her term because of the specific provision of Section 7.02 of the Code of By-Laws The absence of a fixed term in the letter addressed to petitioner informing her of her appointment as Executive Secretary is very significant. This could have no other implication than that petitioner held an appointment at the pleasure of the appointing power. An appointment held at the pleasure of the appointing power is in essence temporary in nature. It is co-extensive with the desire of the Board of Directors. Hence, when the Board opts to replace the incumbent, technically there is no removal but only an expiration of term and in an expiration of term, there is no need of prior notice, due hearing or sufficient grounds before the incumbent can be separated from office. The protection afforded by Section 7.04 of the Code of By-Laws on Removal of Officers and Employees, therefore, cannot be claimed by petitioner. Moreover, the act of the Board in declaring her position as vacant is not only in accordance with the Code of By-Laws of the Society but also meets the exacting standards of honesty and good faith. The meeting of May 29,

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

1974, at which petitioner's position was declared vacant, was caged specifically to take up the unfinished business of the Reorganizational Meeting of the Board of April 30, 1974. Hence, and act cannot be said to impart a dishonest purpose or some moral obliquity and conscious doing to wrong but rather emanates from the desire of the Board to reorganize itself.

removal was a corporate act of Matling and the controversy resulting from such removal was under the jurisdiction of the SEC.

Was Coros’ position of Vice President for Administration and Finance a corporate office? RULING:

38. MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, ET AL. V. COROS G.R. No. 157802 October 13, 2010 FACTS: After his dismissal by Matling as its Vice President for Finance and Administration, respondent Coros filed a complaint for illegal suspension and illegal dismissal against petitioners Matling and some of its corporate officers in the NLRC. The petitioners moved to dismiss the complaint, raising the ground, among others, that the complaint pertained to the jurisdiction of the Securities and Exchange Commission (SEC) due to the controversy being intra-corporate inasmuch as the respondent was a member of Matlings Board of Directors aside from being its Vice-President for Finance and Administration prior to his termination. They contend that the position of Vice President for Finance and Administration was a corporate office, having been created by Matlings President pursuant to By-Law No. V. The respondent counters that Matlings By-Laws did not list his position as Vice President for Finance and Administration as one of the corporate offices; that Matlings By-Law No. III listed only four corporate officers, namely: President, Executive Vice President, Secretary, and Treasurer; that the corporate offices contemplated in the phrase and such other officers as may be provided for in the by-laws found in Section 25 of the Corporation Code should be clearly and expressly stated in the ByLaws; that the fact that Matlings By-Law No. III dealt with Directors & Officers while its By-Law No. V dealt with Officers proved that there was a differentiation between the officers mentioned in the two provisions, with those classified under By-Law No. V being ordinary or noncorporate officers; and that the officer, to be considered as a corporate officer, must be elected by the Board of Directors or the stockholders, for the President could only appoint an employee to a position pursuant to ByLaw No. V. The LA granted the petitioners motion to dismiss, ruling that the respondent was a corporate officer because he was occupying the position of Vice President for Finance and Administration and at the same time was a Member of the Board of Directors of Matling; and that, consequently, his

39. OKOL v. SLIMMERS WORLD and MOY G.R. No. 160146 December 11, 2009

ISSUE:

FACTS:

No.

Slimmers World International (Slimmers) employed Leslie Okol (Okol) as a management trainee on 1992. She rose up the ranks to become Head Office Manager and then Director and VP from 1996 until she was dismissed on September 1999.

Under Section 25 of the Corporation Code, a position must be expressly mentioned in the By-Laws in order to be considered as a corporate office. The creation of an office pursuant to or under a By-Law enabling provision is not enough to make a position a corporate office. The only officers of a corporation were those given that character either by the Corporation Code or by the By-Laws; the rest of the corporate officers could be considered only as employees or subordinate officials.

Prior to Okol’s dismissal, Slimmers preventively suspended Okol, on July 1999, arising from the seizure of the Customs of seven Precor elliptical machines and seven treadmills, belonging to or consigned to Slimmers, because it was undervalued. The shipment was named under Okol.

The corporate officers are the President, Secretary, Treasurer and such other officers as may be provided for in the By-Laws. Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate officers enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no power to create other Offices without amending first the corporate Bylaws. However, the Board may create appointive positions other than the positions of corporate Officers, but the persons occupying such positions are not considered as corporate officers within the meaning of Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate Officers, except those functions lawfully delegated to them. Their functions and duties are to be determined by the Board of Directors/Trustees. Moreover, the Board of Directors of Matling could not validly delegate the power to create a corporate office to the President, in light of Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers was a discretionary power that the law exclusively vested in the Board of Directors, and could not be delegated to subordinate officers or agents. The office of Vice President for Finance and Administration created by Matlings President pursuant to By Law No. V was an ordinary, not a corporate, office. To emphasize, the power to create new offices and the power to appoint the officers to occupy them vested by By-Law No. V merely allowed Matlings President to create non-corporate offices to be occupied by ordinary employees of Matling. Such powers were incidental to the Presidents duties as the executive head of Matling to assist him in the daily operations of the business. 33

On 2 September 1999, she received a memo that her suspension is extended to 1 October pending investigation. She was asked to explain but Slimmers found it unsatisfactory. Hence, a letter dated 22 September signed by its president Ronald Joseph Moy (Moy), Slimmers terminated Okol. Okol filed a complaint with the Arbitration branch of the NLRC against Slimmers and Moy for illegal suspension, illegal dismissal, unpaid commissions and attorney’s fees. Respondents filed a Motion to Dismiss alleging that NLRC had no jurisdiction over the subject matter of the complaint. The Labor Arbiter granted the motion since the issue involved a corporate officer, the dispute was an intra-corporate controversy falling outside the jurisdiction of the arbitration branch. Okol filed an appeal with the NLRC, the NLRC reversed and set aside the order. The Respondents filed an MR, but was denied. It referred the case to the CA, the CA reversed the order of the NLRC and affirmed the order of the Labor Arbiter. Arguments: Okol: She claims that she is not a corporate officer because even as vicepresident, the work that she performed conforms to that of a regular employee, rather than a corporate officer. Mere title or designation will not by itself, determine the existence of an employer-employee relationship. It is the “four-fold” test which must be applied. She claims that she was under the power and control of Moy, Slimmer’s President, because (1) she receives salaries by pay slips, (2) Moy deducted Medicare and SSS, and

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

(3) she was dismissed from employment not through a board resolution but by virtue of a letter from Moy. Slimmers and Moy: Okol is a corporate officer as supported by the General Information Sheet (GIS) and Director’s Affidavit that she was an officer. Absence of any board resolution approving her termination does not constitute that she was not an officer. Moreover, Okol was a stockholder and director; which facts provide further that NLRC has no jurisdiction.

4. Vice-President Like the Chairman of the Board and the President, the Vice-President shall be elected by the Board of Directors from [its] own members. The Vice-President shall be vested with all the powers and authority and is required to perform all the duties of the President during the absence of the latter for any cause.

ISSUE: Is Okol a regular employee or a corporate officer of Slimmers?

The Vice-President will perform such duties as the Board of Directors may impose upon him from time to time.”

RULING: Okol is a corporate officer. Section 25 of the Corporation Code (CC), enumerates corporate officers as the president, secretary, treasurer and such other officers as may be provided for in the by-laws. In Tabang v. NLRC, the Court held that an “office” is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an “employee” usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation. In the present case, the GIS, Minutes of meeting and Secretary’s Certificate, and the Amended By-Laws of Slimmers show that Okol was a corporate officer. It was indicated there that Okol was a member of the BOD, holding one subscribed share of the capital stock and an elected corporate officer. Amended By-Laws: Article II The Board of Directors 1. Qualifications and Election The general management of the corporation shall be vested in a board of five directors who shall be stockholders and who shall be elected annually by the stockholders and who shall serve until the election and qualification of their successors. xxx Article III Officers xxx

Clearly, Okol was a director and officer of Slimmers. Hence, the case falls within the jurisdiction of the SEC. The determination of the rights of a director and corporate officer dismissed from his employment as well as the corresponding liability of a corporation, if any, is an intra-corporate dispute subject to the jurisdiction of the regular courts.

40. GOMEZ v. PNOC DMC GLORIA V. GOMEZ v. PNOC DEVELOPMENT AND MANAGEMENT CORPORATION (PDMC) (formerly known as FILOIL DEVELOPMENT AND MANAGEMENT CORPORATION [FDMC]), G.R. No. 174044, November 27, 2009 FACTS: Petitioner Gloria V. Gomez used to work as Manager of the Legal Department of Petron Corporation. With Petrons privatization, she availed of the companys early retirement program and left that organization on April 30, 1994. On the following day, May 1, 1994, however, Filoil Refinery Corporation (Filoil) appointed her its corporate secretary and legal counsel, with the same managerial rank, compensation, and benefits that she used to enjoy at Petron. But Filoil was later on also identified for privatization. To facilitate its conversion, the Filoil board of directors created a five-member task force headed by petitioner Gomez who had been designated administrator. With the privatization temporarily shelved, Filoil underwent reorganization and was renamed Filoil Development Management Corporation (FDMC), which later became the respondent PNOC Development Management Corporation (PDMC). When this happened, Gomez’s task force was abolished and its members, including Gomez, were given termination notices. In the meantime, petitioner Gomez continued to serve as corporate secretary of respondent PDMC. On September 23, 1996 its president rehired her as administrator and legal counsel of the company. In accordance with company guidelines, it credited her the years she served with the Filoil task force. On May 24, 1998, the next president of PDMC extended her term as administrator beyond her retirement age, pursuant 34

to his authority under the PDMC Approvals Manual. A new board of directors for PDMC took over the company. PDMC’S ALLEGATION: The new board of directors of respondent PDMC removed petitioner Gomez as corporate secretary. The board questioned her continued employment as administrator. In answer, she presented the former presidents letter that extended her term. The Board’s advice from the legal department expressed the view that Gomezs term extension was an ultra vires act of the former president. It reasoned that, since her position was functionally that of a vice-president or general manager, her term could be extended under the companys by-laws only with the approval of the board. The Office of the Government Corporate Counsel (OGCC) held the view that while respondent PDMCs board did not approve the creation of the position of administrator that Gomez held, such action should be deemed ratified since the board had been aware of it since 1994. But the OGCC ventured that the extension of her term beyond retirement age should have been made with the boards approval. PETITIONER GOMEZ’S DEFENSE: Petitioner Gomez for her part conceded that as corporate secretary, she served only as a corporate officer. But, when they named her administrator, she became a regular managerial employee. The respondent PDMCs board did not have to approve either her appointment as such or the extension of her term in 1998. LA and NLRC decisions: The Labor Arbiter granted the motion to dismiss by the respondent upon a finding that Gomez was a corporate officer and that her case involved an intra-corporate dispute that fell under the jurisdiction of the Securities and Exchange Commission (SEC) pursuant to Presidential Decree (P.D.) 902-A. The National Labor Relations Commission (NLRC) Third Division set aside the Labor Arbiters order and remanded the case to the arbitration branch for further proceedings. Gomez was a regular employee, not a corporate officer; CA Ruling: The CA held that since Gomezs appointment as administrator required the approval of the board of directors, she was clearly a corporate officer. ISSUE: Is Petitioner Gomez an ordinary employee or a corporate officer? RULING: Ordinary company employees are generally employed not by action of the directors and stockholders but by that of the managing officer of the corporation who also determines the compensation to be paid such employees. Corporate officers, on the other hand, are elected or appointed[22] by the directors or stockholders, and are those who are given

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

that character either by the Corporation Code or by the corporations bylaws.[23] Here, it was the PDMC president who appointed petitioner Gomez administrator, not its board of directors or the stockholders. The president alone also determined her compensation package. Moreover, the administrator was not among the corporate officers mentioned in the PDMC by-laws. The corporate officers proper were the chairman, president, executive vice-president, vice-president, general manager, treasurer, and secretary. Respondent PDMC claims, however, that since its board had under its by-laws the power to create additional corporate offices, it may be deemed to have simply ratified its presidents creation of the corporate position of administrator. But creating an additional corporate office was definitely not respondent PDMCs intent based on its several actions concerning the position of administrator. Respondent PDMC never told Gomez that she was a corporate officer until the tail-end of her service after the board found legal justification for getting rid of her by consulting its legal department and the OGCC which supplied an answer that the board obviously wanted. Indeed, the PDMC president first hired her as administrator in May 1994 and then as administrator/legal counsel in September 1996 without a board approval. The president even extended her term in May 1998 also without such approval. The companys mindset from the beginning, therefore, was that she was not a corporate officer. Respondent PDMC claims that as administrator petitioner Gomez performed functions that were similar to those of its vice-president or its general manager, corporate positions that were mentioned in the companys by-laws. It points out that Gomez was third in the line of command, next only to the chairman and president, and had been empowered to make major decisions and manage the affairs of the company. But the relationship of a person to a corporation, whether as officer or agent or employee, is not determined by the nature of the services he performs but by the incidents of his relationship with the corporation as they actually exist. Here, respondent PDMC hired petitioner Gomez as an ordinary employee without board approval as was proper for a corporate officer. When the company got her the first time, it agreed to have her retain the managerial rank that she held with Petron. Her appointment paper said that she would be entitled to all the rights, privileges, and benefits that regular PDMC employees enjoyed. This is in sharp contrast to what the former PDMC presidents appointment paper stated: he was elected to the position and his compensation depended on the will of the board of directors.

What is more, respondent PDMC enrolled petitioner Gomez with the Social Security System, the Medicare, and the Pag-Ibig Fund. It even issued certifications dated October 10, 2008 stating that Gomez was a permanent employee and that the company had remitted combined contributions during her tenure. The company also made her a member of the PDMCs savings and provident plan[31] and its retirement plan.[32] It grouped her with the managers covered by the companys group hospitalization insurance.[33] Likewise, she underwent regular employee performance appraisals,[34] purchased stocks through the employee stock option plan,[35] and was entitled to vacation and emergency leaves.[36] PDMC even withheld taxes on her salary and declared her as an employee in the official Bureau of Internal Revenue forms.[37] These are all indicia of an employer-employee relationship which respondent PDMC failed to refute.

office Villa Gonzalo, CDO, and evidenced by the signature on the face of the original copy of the summons."

Estoppel, an equitable principle rooted on natural justice, prevents a person from rejecting his previous acts and representations to the prejudice of others who have relied on them.[38] This principle of law applies to corporations as well. The PDMC in this case is estopped from claiming that despite all the appearances of regular employment that it weaved around petitioner Gomezs position it must have technically hired her only as a corporate officer. The board and its officers made her stay on and work with the company for years under the belief that she held a regular managerial position.

Issue: Can an agent of a corporation can receive summons in behalf of their corporation?

That petitioner Gomez served concurrently as corporate secretary for a time is immaterial. A corporation is not prohibited from hiring a corporate officer to perform services under circumstances which will make him an employee.[39] Indeed, it is possible for one to have a dual role of officer and employee.

41. E.B. VILLAROSA & PARTNER., LTD V. HON. HERMINIO I. BENITO 312 S 65 Facts: E.B. Villarosa& Partners is a limited partnership with principal officeaddress at 102 Juan Luna St., Davao City and with branch offices at Parañaque and Cagayan de Oro City (CDO) . Villarosa and Imperial Development (ID) executed an Agreement wherein Villarosa agreed to develop certain parcels of land in CDO belonging to ID into a housing subdivision. ID, filed a Complaint for Breach of Contract and Damages against Villarosa before the RTC allegedly for failure of the latter to comply with its contractual obligation. Summons, together with the complaint, were served upon Villarosa, through its Branch Manager Wendell Sabulbero at the address at CDO but the Sheriff’s Return of Service stated that the summons was duly served "E.B. Villarosa& Partner thru its Branch Manager at their new 35

Villarosa prayed for the dismissal of the complaint on the ground of improper service of summons and for lack of jurisdiction over the person of the defendant. Villarosa contends that the RTC did not acquire jurisdiction over its person since the summons wasimproperly served upon its employee in its branch office at CDO who is not one of those persons named in Sec. 11, Rule 14 upon whom service of summons may be made. RTC Judge Benito denied the motion to dismiss stating that there was substantial compliance with the rule on service of summons since the summons and the complaint where in fact served to the corporation.

Ruling: NO. The designation of persons or officers who are authorized to accept summons for a domestic corporation or partnership is now limited and more clearly specified in Section 11, Rule 14 of the1997 Rules of Civil Procedure. The rule now states "general manager" instead of only"manager"; "corporate secretary" instead of "secretary"; and "treasurer" instead of "cashier." The phrase "agent, or any of its directors" is conspicuously deleted in the new rule. It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure, strict compliance with the rules has been enjoined. A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. The officer upon whom service is made must be one who is named in the statute; otherwise the service is insufficient. The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure that the summons be served on a representative so integrated with the corporation that such person will know what to do with the legal papers served on him. In other words, "to bring home to the corporation notice of the filing of the action." The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal requirements as to the manner in which summons should be served on a domestic corporation. Accordingly, it is ruled that the service of summons upon the branch manager of petitioner at its branch office at Cagayan de Oro, instead of upon the general manager at its principal office at Davao City is improper. Consequently, the trial court did not acquire jurisdiction over the person of the petitioner. Accordingly, the filing of a motion to dismiss, whether or not belatedly filed by the defendant, his authorized agent or attorney, precisely objecting to the jurisdiction of the court over the person

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

of the defendant can by no means be deemed a submission to the jurisdiction of the court. There being no proper service of summons, the trial court cannot take cognizance of a case for lack of jurisdiction over the person of the defendant. Any proceeding undertaken by the trial court will consequently be null and void.

42. CAGAYAN VALLEY DRUG CORPORATION v. CIR G.R. No. 151413 February 13, 2008 Facts: Petitioner, Cagayan Valley, is a duly licensed retailer of medicine and other pharmaceutical products. It operates two drugstores, one in Tuguegarao, Cagayan, and the other in Roxas, Isabela, under the name and style of “Mercury Drug”. It alleged that in 1995, it granted 20% sales discounts to qualified senior citizens on purchases of medicine pursuant to Republic Act No. (RA) 7432 and its IRR. In compliance with Revenue Regulation No. (RR) 2-94, petitioner treated the 20% sales discounts as deductions from the gross sales in order to arrive at the net sales, instead of treating them as tax credit as provided by Section 4 of RA 7432. In 1996, petitioner filed with the Bureau of Internal Revenue (BIR) a claim for tax refund/tax credit of the full amount of the 20% sales discount it granted to senior citizens for the year 1995, allegedly totaling to PhP 123,083. The BIR’s inaction on petitioners claim for refund/tax credit compelled petitioner to file a petition for review in 1998 before the CTA. CTA dismissed the petition notwithstanding its entitlement to the tax credit due to its net loss in 1995. It also sustained that the 20% sales discounts should be treated as tax credit and not as deductions from the gross sales as erroneously interpreted in RR 2-94. The CTA reiterated its consistent holdings that RR 2-94 is an invalid administrative interpretation of the law; it purports to implement as it contravenes and does not conform to the standards RA 7432 prescribes. The CTA rejected the refund as it is clear that RA 7432 only grants the 20% sales discounts extended to qualified senior citizens as tax credit and not as tax refund. If no tax has been paid or if no amount is due and collectible from the taxpayer, then a tax credit is unavailing. Moreover, it held that before allowing recovery for claims for a refund or tax credit, it must first be established that there was an actual collection and receipt by the government of the tax sought to be recovered. In the instant case, the CTA found that petitioner did not pay any tax by virtue of its net loss position in 1995. The CA dismissed the petition on procedural grounds. The CA held that the person who signed the verification and certification of absence of forum shopping, a certain Jacinto J. Concepcion, President of Cagayan Valley, failed to adduce proof that he was duly authorized by the Board of Directors to do so since the rule is that if there is absence of an authority from the BOD, no person, not even the officers of the corporation, can validly bind the corporation.

Issues: 1)

Can the petitioner corporation’s President sign the subject verification and certification without the approval of its Board of Directors?

2)

Is petitioner entitled to tax refund or tax credit?

for the 20% sales discounts it granted to qualified senior citizens. The law then applicable on this point is clear and without any qualification Sec. 4 (a) of RA 7432. It is thus clear that petitioner is entitled to a tax credit for the full 20% sales discounts it extended to qualified senior citizens for taxable year 1995. Considering that the CTA has not disallowed the PhP 123,083 sales discounts petitioner claimed before the BIR and CTA, the Court is constrained to grant them as tax credit in favor of petitioner.

Held: YES. As a general rule, Sec. 23, in relation to Sec. 25 of the Corporation Code, clearly enunciates that all corporate powers are exercised, all business conducted, and all properties controlled by the board of directors. A corporation has a separate and distinct personality from its directors and officers and can only exercise its corporate powers through the board of directors. Thus, it is clear that an individual corporate officer cannot solely exercise any corporate power pertaining to the corporation without authority from the board of directors. Only individuals vested with authority by a valid board resolution may sign the certificate of non-forum shopping on behalf of a corporation. An action can be dismissed if the certification was submitted unaccompanied by proof of the signatory’s authority. However, the Court have recognized the authority of some corporate officers to sign the verification and certification against forum shopping. It has held that the following officials or employees of the company can sign the verification and certification without need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case. In the case at bar, there was substantial compliance with the Revised Rules on Civil Procedure. First, the requisite board resolution has been submitted albeit belatedly by petitioner. Second, the President of petitioner is in a position to verify the truthfulness and correctness of the allegations in the petition. Third, the President of petitioner has signed the complaint before the CTA at the inception of this judicial claim for refund or tax credit.

YES.

43. BOARD OF INVESTMENT v. SR METALS, INC. G.R. No. 219927; October 03, 2018 FACTS: Petitioner Board oflnvestments (BOI) is a government agency created under Republic Act (RA) No. 5186.5 It is an attached agency of the Department of Trade and Industry (DTI) and is the lead government agency responsible for the promotion of investments in the Philippines.6 Respondent SR Metals, Inc., on the other hand, is a corporation engaged in the business of mining in Tubay, Agusan Del Norte. The case arose from a suit initiated by Municipality of Tubay with the BOI for the revocation of respondent’s Certificate of Registration. In acting on said action, the BOI resolved to withdraw the Income Tax Holiday (ITH) of respondent for failing to comply with the requirements set under the 2007 Investment Properties Plan (IPP). The case elevated to the CA where the ITH entitlement of SR Metals was restored. The case was appealed by petitioner. As one of the arguments of respondent, it raised the procedural issue that there is lack of authority of the Officer-in-Charge (OIC), BOI Managing Head, Ma. Corazon HaliliDichosa (OIC Halili-Dichosa), to sign the verification and certification of non-forum shopping as well as the failure of petitioner to attach material portions of the records of the case. Respondent argues that there was nothing in Memorandum Order No. 2015- 080, series of 2015, dated October 9, 2015 to indicate that the OIC is authorized to sign the verification and certification of non-forum shopping as it is not among the list of official documents mentioned in Department Order No. 14-39, series of 2014.

RULING:

The 20% sales discounts petitioner granted to qualified senior citizens should be deducted from petitioner’s income tax due and not from petitioners gross sales as erroneously provided in RR 2-94. However, the CTA erred in denying the tax credit to petitioner on the ground that petitioner had suffered net loss in 1995, and ruling that the tax credit is unavailing. It is true that petitioner did not pay any tax in 1995 since it suffered a net loss for that taxable year. This fact, however, without more, does not preclude petitioner from availing of its statutory right to a tax credit 36

1. Is the OIC authorized to sign the verification and certification for nonforum shopping? Yes. Although it appears that the verification and certification of non-forum shopping was not among the list of official documents mentioned in Department Order No. 14-39, series of 2014, the Court is still inclined to uphold the authority of OIC Halili-Dichosa to sign the same. In Memorandum Order No. 2015-080, Supervising Director Halili-Dichosa

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

was designated OIC of petitioner in the interest of service as the Undersecretary/Managing Head was on an official trip. Considering the rationale of the said Memorandum, the Court finds that any doubt as to the authority of OIC Halili-Dichosa to file the instant case and to sign the verification and certification of non-forum shopping should be resolved in favor of the government. Obviously, OIC Halili-Dichosa caused the filing of the instant Petition in the performance of her duties and in order to protect the interests of the government. Besides, in recent cases, certain officials and employees to were allowed to sign the verification and certification of non-forum shopping on behalf of the company without need of a board resolution. These are the chairperson of the board of directors, the president of a corporation, the general manager or acting general manager, the personnel officer, the employment specialist in a labor case, and other officials and employees who are "in a position to verify the truthfulness and correctness of the allegations in the petition." In this case, the Court considers OIC HaliliDichosa to be in a position to verify the truthfulness and correctness of the allegations stated in the instant Petition.

company rules. He thus filed a case for illegal dismissal. The LA ruled for the respondent, while the NLRC reversed said decision. The CA ruled favoring the LA. ISSUE: Whether or not Regan Sy, the president of SSPC, may be held solidarily liable with the latter. RULING: NO. It appears that respondent impleaded SSPC President Regan Sy only because he is an officer/agent of the company. However, the court ruled that he cannot be made solidarily liable because for the termination of respondent‘s employment, since there is no showing that the dismissal was attended with malice or bad faith. The rule still stand that the liabilities of a corporation should not be directly imputed to its officers and it shall be borne entirely by the corporation itself.

Petitioner claims that the CA erred in setting aside the withdrawal of respondent's ITH incentives since respondent did not build a beneficiation plant. The Sc ruled that a commitment to build a beneficiation plant does not necessarily require the construction of an industrial building or structure, as a beneficiation plant could also be an assemblage of equipment and machineries where the beneficiation process could be done. In this case, respondent was able to prove that it has a beneficiation plant.

FACTS: On May 24, 1994 and June 22, 1994, complaints for illegal dismissal and non-payment of benefits were filed by petitioners Salome Pabon and Vicente Camonayan against private respondent Senior Marketing Corporation (SMC) and its Field Manager, R-Jay Roxas Summons and notices of hearings were sent to Roxas at private respondent's provincial office in 13 Valley Homes, Patul Road, Santiago, Isabela which were received by its bookkeeper, Mina Villanueva. On September 15, 1994, the Labor Arbiter rendered a judgment by default after finding that private respondent tried to evade all the summons and orders of hearing by refusing to claim all the registered mail addressed to it.

ISSUE: Was the bookkeeper authorized to receive summons? 44. SUPREME STEEL PIPE CORPORATION v. ROGELIO BARDAJE G.R. No. 170811, April 24, 2007 FACTS: Petitioner Supreme Steel Pipe Corporation (SSPC) was primarily engaged in the business of manufacturing steel pipes. It employed respondent Rogelio Bardaje as a warehouseman on March 14, 1994. SSPC employees were required to wear a uniform (a yellow t-shirt with a logo and the marking "Supreme") while at work. Due to an incident, his employment was terminated on the ground of multiple infractions of

46. VLASON ENTERPRISES CORP. v CA AND DURAPROOF SERVICES GR 121662-64 JULY 6, 1999 J. PANGANIBAN

45. PABON & CAMONAYAN v. NLRC G.R. No.120457; September 24, 1998 SUBSTANTIAL ISSUE (Just in case)

enterprise" safeguards the corporation from possible fraud being committed adverse to its own corporate interest. Although it may be true that the service of summons was made on a person not authorized to receive the same in behalf of the petitioner, nevertheless since it appears that the summons and complaint were in fact received by the corporation through its said clerk, the Court finds that there was substantial compliance with the rule on service of summons. Indeed, the purpose of said rule as above stated to assure service of summons on the corporation had thereby been attained. The need for speedy justice must prevail over technicality.

RULING: Yes. Bookkeeper can be considered as an agent of private respondent corporation within the purview of Section 13, Rule 14 of the old Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such service must be made to an agent or a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. The bookkeeper's task is one under consideration. The job of a bookkeeper is so integrated with the corporation that his regular recording of the corporation's "business accounts" and "essential facts about the transactions of a business or 37

FACTS: Poro Point Shipping Services, then acting as the local agent of Omega Sea Transport Company of Honduras & Panama, a Panamanian company, (hereafter referred to as Omega), requested permission for its vessel M/V Star Ace, which had engine trouble, to unload its cargo and to store it at the Philippine Ports Authority (PPA) compound in San Fernando, La Union while awaiting transshipment to Hongkong. The request was approved by the Bureau of Customs. 4 Despite the approval, the customs personnel boarded the vessel when it docked on January 7, 1989, on suspicion that it was the hijacked M/V Silver Med owned by Med Line Philippines Co., and that its cargo would be smuggled into the country. 5 The district customs collector seized said vessel and its cargo pursuant to Section 2301, Tariff and Customs Code. A notice of hearing of SFLU Seizure Identification No. 3-89 was served on its consignee, Singkong Trading Co. of Hongkong, and its shipper, Dusit International Co., Ltd. of Thailand.While seizure proceedings were ongoing, La Union was hit by three typhoons, and the vessel ran aground and was abandoned. On June 8, 1989, its authorized representative, Frank Cadacio, entered into a salvage agreement with private respondent to secure and repair the vessel at the agreed consideration of $1 million and "fifty percent (50%) [of] the cargo after all expenses, cost and taxes." 6Finding that no fraud was committed, the District Collector of Customs, Aurelio M. Quiray, lifted the warrant of seizure on July 16, 1989. 7 However, in a Second Indorsement dated November 11, 1989, then Customs Commissioner Salvador M. Mison declined to issue a clearance for Quiray's Decision; instead, he forfeited the vessel and its cargo in accordance with Section 2530 of the Tariff and Customs Code. 8 Accordingly, acting District Collector of Customs John S. Sy issued a Decision decreeing the forfeiture and the sale of the cargo in favor of the government.9To enforce its preferred

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

salvor's lien, herein Private Respondent Duraproof Services filed with the Regional Trial Court of Manila a Petition for Certiorari, Prohibition and Mandamus 10 assailing the actions of Commissioner Mison and District Collector Sy. Also impleaded as respondents were PPA Representative Silverio Mangaoang and Med Line Philippines, Inc. On January 10, 1989, private respondent amended its Petition 11 to include former District Collector Quiray; PPA Port Manager Adolfo Ll. Amor Jr; Petitioner Vlason Enterprises as represented by its president, Vicente Angliongto; Singkong Trading Company as represented by Atty. Eddie Tamondong; Banco Du Brasil; Dusit International Co., Inc.; ThaiNan Enterprises Ltd. and Thai-United Trading Co., Ltd. 12 In both Petitions, private respondent plainly failed to include any allegation pertaining to petitioner, or any prayer for relief against it.1âwphi1.nêtSummonses for the amended Petition were served on Atty. Joseph Capuyan for Med Line Philippines: Angliongto (through his secretary, Betty Bebero), Atty. Tamondong and Commissioner Mison. 13 Upon motion of the private respondent, the trial court allowed summons by publication to be served upon the alien defendants who were not residents and had no direct representatives in the country. 14On January 29, 1990, private respondent moved to declare respondents in default, but the trial court denied the motion in its February 23, 1990 Order, 15 because Mangaoang and Amor had jointly filed a Motion to Dismiss, while Mison and Med Line had moved separately for an extension to file a similar motion. 16 Later it rendered an Order dated July 2, 1990, giving due course to the motions to dismiss filed by Mangaoang and Amor on the ground of litis pendentia, and by the commissioner and district collector of customs on the ground of lack of jurisdiction. 17 In another Order, the trial court dismissed the action against Med Line Philippines on the ground of litis pendentia. 18On two other occasions, private respondent again moved to declare the following in default: petitioner, Quiray, Sy and Mison on March 26, 1990; 19 and Banco Du Brazil, Dusit International Co., Inc., Thai-Nan Enterprises Ltd. and ThaiUnited Trading Co., Ltd. on August 24, 1990. 20 There is no record, however, that the trial court acted upon the motions. On September 18, 1990, petitioner filed another Motion for leave to amend the petition, 21 alleging that its counsel failed to include the following "necessary and/or indispensable parties": Omega represented by Cadacio; and M/V Star Ace represented by Capt. Nahon Rada, relief captain. Aside from impleading these additional respondents, private respondent also alleged in the Second (actually, third) Amended Petition 22 that the owners of the vessel intended to transfer and alienate their rights and interests over the vessel and its cargo, to the detriment of the private respondent. The trial court granted leave to private respondent to amend its Petition, but only to exclude the customs commissioner and the district collector. 23 Instead, private respondent filed the "Second Amended Petition with Supplemental Petition" against Singkong Trading Company; and Omega and M/V Star Ace, 24 to which Cadacio and Rada filed a Joint

Answer. 25Declared in default in an Order issued by the trial court on January 23, 1991, were the following: Singkong Trading Co., Commissioner Mison, M/V Star Ace and Omega. 26 Private respondent filed, and the trial court granted, an ex parte Motion to present evidence against the defaulting respondents. 27 Only private respondent, Atty. Tamondong, Commissioner Mison, Omega and M/V Star Ace appeared in the next pretrial hearing; thus, the trial court declared the other respondents in default and allowed private respondent to present evidence against them. 28 Cesar Urbino, general manager of private respondent, testified and adduced evidence against the other respondents, including herein petitioner. As regards petitioner, he declared: "Vlason Enterprises represented by Atty. Sy and Vicente Angliongto thru constant intimidation and harassment of utilizing the PPA Management of San Fernando, La Union . . . further delayed, and [private respondent] incurred heavy overhead expenses due to direct and incidental expenses . . . causing irreparable damages of about P3,000,000 worth of ship tackles, rigs, and appurtenances including radar antennas and apparatuses, which were taken surreptitiously by persons working for Vlason Enterprises or its agents[.] 29On December 29, 1990, private respondent and Rada, representing Omega, entered into a Memorandum of Agreement stipulating that Rada would write and notify Omega regarding the demand for salvage fees of private respondent; and that if Rada did not receive any instruction from his principal, he would assign the vessel in favor of the salvor.

discretion to realize the importance of the legal papers served and to relay the same to the president or other responsible officer of the corporation being sued. 80 The secretary of the president satisfies this criterion. This rule requires, however, that the secretary should be an employee of the corporation sought to be summoned. Only in this manner can there be an assurance that the secretary will "bring home to the corporation [the] notice of the filing of the action" against it. In the present case, Bebero was the secretary of Angliongto, who was president of both VSI and petitioner, but she was an employee of VSI, not of petitioner. The piercing of the corporate veil cannot be resorted to when serving summons. 81 Doctrinally, a corporation is a legal entity distinct and separate from the members and stockholders who compose it. However, when the corporate fiction is used as a means of perpetrating a fraud, evading an existing obligation, circumventing a statute, achieving or perfecting a monopoly or, in generally perpetrating a crime, the veil will be lifted to expose the individuals composing it. None of the foregoing exceptions has been shown to exist in the present case. Quite the contrary, the piercing of the corporate veil in this case will result in manifest injustice. This we cannot allow. Hence, the corporate fiction remains.

47. PRIME WHITE CEMENT CORPORATION v. IAC G.R. No. 68555, March 19, 1993

ISSUE/S: FACTS: WHETHER/NOT PROPERLY SERVED

SERVICE

OF

SUMMONS

WAS Alejandro Te and Primewhite Cement Corporation (PCC) entered into a dealership agreement whereby Te was obligated to act as the executive dealer and/or distributor of PCC of he latter’s cement products in the entire Mindanao area for a term of five years.

RULING: The sheriff's return shows that Angliongto who was president of petitioner corporation, through his secretary Betty Bebero, was served summons on January 18, 1990. 78 Petitioner claims that this service was defective for two reasons: (1) Bebero was an employee of Vlasons Shipping, Inc., which was an entity separate and distinct from Petitioner Vlason Enterprises Corporation (VEC); and (2) the return pertained to the service of summons for the amended Petition, not for the "Second Amended Petition with Supplemental Petition," the latter pleading having superseded the former. A corporation may be served summons through its agents or officers who under the Rules are designated to accept service of process. A summons addressed to a corporation and served on the secretary of its president binds that corporation. 79 This is based on the rationale that service must be made on a representative so integrated with the corporation sued, that it is safe to assume that said representative had sufficient responsibility and 38

Immediately after, Te placed advertisements in newspapers regarding the cement products. Te then entered into written agreements with several hardware stores dealing in buying and selling white cement. Te was assured by his buyers that 20,000 bags of cement would be bought, hence Te wrote a letter to PCC informing the latter of its duty to comply with the dealership agreement. However, despite demands, PCC refused to comply with the dealership agreement. PCC however, sent a letter-reply stating that the BoD of PCC decided to impose several conditions on the sale of white cement. Te was then forced to cancel the agreements with third parties. Notwithstanding the dealership agreement with Te, PCC entered into an exclusive dealership agreement with Napolean Co., hence the complaint by Te.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said decision. Hence, this petition before the Court. ISSUE: Is there a valid dealership agreement between PCC and Te? RULING: None. All corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. The Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. These rules are basic, but are all general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i.e., a person outside the corporation. The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director. A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders

that in September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without authority from the Board of Directors, void or voidable, although it may have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable.

NO.

As director, specially since he was the other party in interest, respondent Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty.

According to complainant, had respondent judge taken the former motion into account, he would not have acquitted the accused, Jose V. Rosario. Instead, he would have been held guilty for giving others an opportunity engage in unfair competition as prescribed by Article 189 of the Revised Penal Code.

As a result of this action which has been proven to be without legal basis, petitioner corporation's reputation and goodwill have been prejudiced. However, there can be no award for moral damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.

48. LOUIS VUITTON S.A. vs. JUDGE FRANCISCO DIAZ VILLANUEVA A.M. No. MTJ-92-643 November 27, 1992 FACTS

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, We believe that the contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known that within that period of six years, there would be a considerable rise in the price of white cement. In fact, respondent Te's own Memorandum shows

The ground which was relied upon by the trial court in acquitting the accused finds basis in the well-settled doctrine that a corporation has a distinct personality from that of its stockholders/owners. A corporation is vested by law with a personality of its own, separate and distinct from that of its stockholders and from that of its officers who manage and run its affairs. This decision is assailed to be unjust mainly because it did not consider the Prosecution's Memorandum with Motion and Motion for Early Resolution filed by private prosecutor, herein complainant, on February 8, 1991 and February 11, 1991, respectively.

In the first place, it would not have made any difference because Jose v. Rosario was charged as owner/proprietor. COD is not a single proprietorship but one that is run and owned by a corporation, Rosario Bros., Inc., of which the accused is stockholder and Executive VicePresident. A stockholder generally does not have a hand in the management of the corporate affairs. On the other hand, the VicePresident had no inherent power to bind the corporation. As general rule, his duties must be specified in the by-laws. In the criminal case, the information did not specify his duties as Executive VicePresident. The trial court had no basis for holding that as such, the accused entered into a contract with the concessionaire thereby giving the latter an opportunity to practice unfair competition. Whereas, Section 23 of the Corporation Code is explicit that the directors, acting as a body, exercise corporation powers and conduct the corporation's business.

In Criminal Case No. XXXVI-62431, entitled "People of the Philippines vs. Jose V. Rosario", Louis Vuitton, S.A. accused the latter of unfair competition as defined by paragraph 1 of Article 189, Revised Penal Code. Complainant also assailed respondent judge's findings that there was no unfair competition because the elements of the crime were not met, and that he seized articles did not come close to the appearance of a genuine Louis Vuitton product, the counterfeit items having been poorly, done. ISSUE Whether or not respondent judge is guilty of knowingly rendering a manifestly unjust judgment. RULING 39

49. AYALA LAND V. ASB G.R. No. 210043 September 26, 2018 Facts: ALI and ASBRC are domestic corporations engaged in real estate development. On the other hand, EMRASON is a domestic corporation principally organized to manage a 372- hectare property located in Dasmariñas, Cavite (Dasmariñas Property ). The parties' respective versions of the factual antecedents are, as follows:

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

Version

of

the

Petitioner

ALI claimed that, sometime in August 1992, EMRASON's brokers sent a proposal for a joint venture agreement (JVA) between ALI and EMRASON for the development of EMRASON's Dasmariñas Property. ALI initially declined but eventually negotiated with Ramos, Jr., Antonio B. Ramos (Antonio), and Januario to discuss the terms of the JVA. According to ALI, EMRASON made it appear that Ramos, Jr., Antonio, and Januario had full authority to act on EMRASON's behalf in relation to the JVA. ALI alleged that Emerita Ramos, Sr. (Ramos, Sr.), then EMRASON's President and Chairman, wrote to ALI and therein acknowledged that Ramos, Jr. and Antonio were fully authorized to represent EMRASON in the JVA, as shown in Ramos, Sr.'s letter dated August 3, 1993. ALI and the Ramos children subsequently entered into a Contract to Sell dated May 18, 1994, under which ALI agreed to purchase the Dasmariñas Property. ALI alleged that it came to know that a Letter-Agreement dated May 21, 1994 (Letter-Agreement) and a Real Estate Mortgage respecting the Dasmariñas Property had been executed by Ramos, Sr. and Antonio for and in behalf of EMRASON, on one hand, and ASBRC on the other. It also alleged that the Ramos children wrote to Luke C. Roxas, ASBRC's President, informing the latter of the Contract to Sell between ALI and EMRASON. Version of the Respondents For their part, respondents averred that ALI submitted to EMRASON and Ramos, Sr. its proposal to purchase the Dasmariñas Property which proposal was however rejected. On May 17, 1994, EMRASON, through Ramos, Sr., informed ALI that it had decided to accept the proposal of ASBRC because the latter's terms were more beneficial and advantageous to EMRASON. As a result, ASBRC and EMRASON entered into a Letter-Agreement on May 21, 1994. The following day, or on May 22, 1994, EMRASON executed a Real Estate Mortgage in compliance with its obligations under the said Letter-Agreement.

Prior to the execution of the Letter-Agreement, a special stockholders' meeting was held on May 17, 1994 during which EMRASON's stockholders "authorized, approved, confirmed and ratified the Resolution of EMRASON's Board of Directors (Board Resolution). The

Board Resolution, which approved the Letter-Agreement and authorized Ramos, Sr. and Antonio to sign the same, was in tum likewise approved by EMRASON 's stockholders on the same date, May 17, 1994. After ASBRC learned about the Contract to Sell executed between ALI and the Ramos children and the annotation of the Contract to Sell on the transfer certificates of title (TCTs) covering the Dasmariñas Property, ASBRC and EMRASON filed a Complaint for the nullification of Contract to sell and the cancellation of the annotations on the TCTs over the Dasmariñas Property. The RTC declared that the Contract to Sell between ALI and Ramos children void because of the latter’s lack of authority to sign the Contract to Sell on behalf of EMRASON. The RTC held that the Ramos children failed to adduce evidence to show that they have been validly authorized by the BOD of EMRASON to enter into a Contract to Sell with ALI. In addition, the RTC declared valid the Letter-Agreement deeding the Dasmariñas Property to ASBRC. Following this Court's ruling in People's Aircargo and Warehousing Company, Inc. v. Court of Appeals, the RTC held that Ramos, Sr., as President of EMRASON, had the authority to enter into the Letter-Agreement because "the president is presumed to have the authority to act within the domain of the general objectives of [a company's] business and within the scope of [the president's] usual duties. The RTC further explained that, assuming arguendo that the signing of the Letter-Agreement was outside the usual powers of Emerito Ramos, Sr., as president, EMRASON's ratification of the LetterAgreement via a stockholders' meeting on March 6, 1995, cured the defect caused by Ramos, Sr.'s apparent lack of authority. The CA dismissed the appeal and affirmed the RTC's findings. The CA reiterated the RTC's pronouncement that the Ramos children failed to prove their authority to enter into a Contract to Sell on behalf of EMRASON. Citing ALI's letters addressed to Ramos, Sr. and the latter's uncontroverted deposition "that he is the corporation's sole and exclusive authorized representative in the sale of the Dasmariñas Property" vis-a-vis the Ramos children's limited authority to negotiate for the best terms of a sale, the CA then declared that ALI knew or was aware of the Ramos children's lack of authority. In sustaining the validity of the Letter-Agreement between EMRASON and ASBRC, the appellate court effectively held that Ramos, Sr. was invested with the presumed authority to enter into the said Letter-Agreement.

Issue: 1.) Whether or not the Ramos children had the authority to enter into a Contract to Sell on behalf of EMRASON. 2.) Whether or not Ramos Sr. had the authority to execute and enter into the Letter Agreement with ASBRC. Held: 1.) A perusal of the August 3, 1993 letter shows that EMRASON, through Ramos, Sr. authorized Ramos, Jr. and Antonio merely to "collaborate and continue negotiating and discussing with [ALI] terms and conditions that are mutually beneficial to the parties therein. Nothing more, nothing less. To construe the letter as a virtual carte blanche for the Ramos children to enter into a Contract to Sell regarding the Dasmariñas Property would be unduly stretching one's imagination. Acts done by the corporate officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or is estopped from denying them. What is clear from the letter is that EMRASON authorized the Ramos children only to negotiate the terms of a potential sale over the Dasmariñas Property, and not to sell the property in an absolute way or act as signatories in the contract. Equally misplaced is ALI's reliance on our pronouncement in People's Aircargo Warehousing v. Court of Appeals, where we said that the authority of the apparent agents may be expressly or impliedly shown by habit, custom or acquiescence in the general course of business. For, indeed, ALI never mentioned or pointed to certain palpable acts by the Ramos children which were indicative of a habit, custom, or acquiescence in the general course of business that compel the conclusion that EMRASON must be deemed to have been bound thereby implacably and irretrievably. ALI's bare allegation that "the Ramos children submitted corporate documents to ALI to convince it that it was negotiating with the controlling shareholders of EMRASON" is gratuitous and self-serving, hence, does not merit this Court's consideration. As an established business entity engaged in real estate, ALI should know that a corporation acts through its Board of Directors and not through its controlling shareholders. 2.) Here, Ramos, Sr.'s authority to execute and enter into the Letter-Agreement with ASBRC was clearly proven. ALI's

40

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

argument that respondents failed to establish that [Ramos], Sr. had been in the habit of executing contracts on behalf of EMRASON is negated by the fact that correspondences between ALI and EMRASON had always been addressed to Ramos, Sr. In fact, ALI must be deemed to have acknowledged the authority of Ramos, Sr. to act on behalf of EMRASON when ALI relied on the August 3, 1993 letter of Ramos, Sr. In any case, this Court clarified in People's Aircargo that it is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. Together with this Court's pronouncement that "a party dealing with the president of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not violate any statute or rule on public policy," the inevitable conclusion is that Ramos, Sr. was properly authorized to, and validly executed with ASBRC, the said Letter-Agreement.

Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. The power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. In the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to its officers, committees or agents. The authority of these individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. The doctrine of apparent authority, on the other hand, with special reference to banks, had long been recognized in this jurisdiction. The existence of apparent authority may be ascertained through: 1)

0. BANATE v. PHILIPPINE COUNTRYSIDE G.R. No. 163825; July 13, 2010 FACTS: Spouses Maglasang obtained a loan from PCRB which was evidenced by a promissory note payable on January 1998. A mortgage over the properties owned by Sps. Cortel was executed to secure the loan. Two other loans were subsequently obtained from PCRB which were covered by separate PNs and secured by mortgages on their other properties. In 1997, before the loan became due, Sps. Maglasang and Sps. Cortel asked PCRB’s permission to sell the mortgaged properties. According to them, the PCRB Branch Manager, Pancrasio Mondigo, verbally agreed to their request but required the full payment of the 1st loan. Thereafter, the property was sold to Banate. Title over the properties was given to Banate, but with an annotation of mortgage lien in favor of PCRB. PCRB refused to comply with the request to Release Mortgage hence this action for specific performance by the spouses. The RTC ruled in favor of the spouses. CA reversed RTC, hence, this petition. ISSUE: Does the Branch Manager have apparent authority to change the terms and conditions of the contract? RULING: None.

2)

the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers.

Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances when the power was exercised without any objection from its board or shareholders. Under the doctrine of apparent authority, acts and contracts of the agent, as are within the apparent scope of the authority conferred on him, although no actual authority to do such acts or to make such contracts has been conferred, bind the principal. The principals liability, however, is limited only to third persons who have been led reasonably to believe by the conduct of the principal that such actual authority exists, although none was given. In the present case, no proof of the course of business, usages and practices of the bank about, or knowledge that the board had or is presumed to have of, its responsible officers acts regarding bank branch affairs, was ever adduced to establish the branch managers apparent authority to verbally alter the terms of mortgage contracts. Neither was there any allegation, much less proof, that PCRB ratified Mondigos act or is estopped to make a contrary claim. 41

Being a mere branch manager alone is insufficient to support the conclusion that Mondigo has been clothed with apparent authority to verbally alter terms of written contracts, especially when viewed against the telling circumstances of this case: the unequivocal provision in the mortgage contract; PCRBs vigorous denial that any agreement to release the mortgage was ever entered into by it; and, the fact that the purported agreement was not even reduced into writing considering its legal effects on the parties interests. To put it simply, the burden of proving the authority of Mondigo to alter or novate the mortgage contract has not been established.

51. SARGASSO v. PPA Sargasso Construction and Development Corporation, Pick and Shovel, Inc. and Atlantic Erectors, Inc., a joint venture vs Philippine Ports Authority 5 July 2010 Facts: Plaintiff Sargasso was awarded the construction of Pier 2 and the rock causeway (R.C. Pier 2) for the port of San Fernando, La Union, after a public bidding conducted by the defendant PPA. Implementation of the project commenced on August 14, 1990. The port construction was in pursuance of the development of the Northwest Luzon Growth Quadrangle. Adjacent to Pier 2 is an area of P4,280 square meters intended for the reclamation project as part of the overall port development plan. Mr. Melecio J. Go, Executive Director of the consortium, plaintiff offered to undertake the reclamation between the Timber Pier and Pier 2 of the Port of San Fernando, La Union, as an extra work to its existing construction of R.C. Pier 2 and Rock Causeway for a price of P36,294,857.03. Defendant replied thru its Assistant General Manager Teofilo H. Landicho stating that “Your proposal to undertake the project at a total cost of THIRTY SIX MILLION TWO HUNDRED NINETY FOUR THOUSAND EIGHT HUNDRED FIFTY SEVEN AND 03/100 PESOS (P36,294,857.03) is not acceptable to PPA. If you can reduce your offer to THIRTY MILLION SEVEN HUNDRED NINETY FOUR THOUSAND TWO HUNDRED THIRTY AND 89/100 (P30,794,230.89) we may consider favorably award of the project in your favor, subject to the approval of higher authority.” Notice of Award signed by PPA General Manager Rogelio Dayan was sent to plaintiff for the phase I Reclamation Contract in the amount of P30,794,230.89 and instructing it to enter into and execute the contract agreement with this Office and to furnish the documents representing performance security and credit line. Defendant likewise stated [and] made

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

it a condition that fendering of Pier No. 2 Port of San Fernando, and the Port of Tabaco is completed before the approval of the contract for the reclamation project. Installation of the rubber dock fenders in the said ports was accomplished in the year 1994. PPA Management further set a condition [that] the acceptance by the contractor that mobilization/demobilization cost shall not be included in the contract and that escalation shall be reckoned upon approval of the Supplemental Agreement. At its meeting held on September 9, 1994, the Board decided not to approve the contract proposal, as reflected in the following excerpt of the minutes taken during said board meeting: After due deliberation, the Board advised Management to bid the project since there is no strong legal basis for Management to award the supplemental contract through negotiation. The Board noted that the Pier 2 Project was basically for the construction of a pier while the supplemental agreement refers to reclamation. Thus there is no basis to compare the terms and conditions of the reclamation project with the original contract (Pier 2 Project) of Sargasso. Plaintiff learned that the Board was not inclined to favor its Supplemental Agreement, Mr. Go wrote General Manager Agustin requesting that the same be presented again to the Board meeting for approval. However, no reply was received by plaintiff from the defendant. On June 30, 1997, plaintiff filed a complaint for specific performance and damages before the Regional Trial Court of Manila alleging that defendant PPAs unjustified refusal to comply with its undertaking, unnecessarily leading to the delay in the implementation of the award under the August 26, 1993 Notice of Award, has put on hold plaintiffs men and resources earmarked for the project, aside from effectively tying its hands in undertaking other projects for fear that plaintiffs incapacity to undertake work might be spread thinly and it might not be able to function efficiently if the PPA project and other projects should require simultaneous attention. Plaintiff averred that it sought reconsideration of the August 9, 1996 letter of PPA informing it that it did not qualify to bid for the proposed extension of RC Pier No. 2, Port of San Fernando, La Union for not having IAC Registration and Classification and not complying with equipment requirement. In its letter dated September 19, 1996, plaintiff pointed out that the disqualification was clearly unjust and totally without

basis considering that individual contractors of the joint venture have undertaken separately bigger projects, and have been such individual contractors for almost 16 years. Defendant PPA thru the Office of the Government Corporate Counsel (OGCC) filed its Answer with Compulsory Counterclaim contending that the alleged Notice of Award has already been properly revoked when the Supplemental Agreement which should have implemented the award was denied approval by defendants Board of Directors. As to plaintiffs predisqualification from participating in the bidding for the extension of R.C. Pier No. 2 Project the same is based on factual determination by the defendant that plaintiff lacked IAC Registration and Classification and equipment for the said project as communicated in the August 9, 1996 letter. Defendant disclaimed any liability for whatever damages suffered by the plaintiff when it jumped the gun by committing its alleged resources for the reclamation project despite the fact that no Notice to Proceed was issued to plaintiff by the defendant. The lower court rendered a decision in favor of the plaintiff. The trial court added that the tenor of the Notice of Award implied that respondents general manager had been empowered by its Board of Directors to bind respondent by contract. It noted that whereas the letterreply contained the phrase approval of the higher authority, the conspicuous absence of the same in the Notice of Award supported the finding that the general manager had been vested with authority to enter into the contract for and in behalf of respondent. To the trial court, the disapproval by the PPA Board of the supplementary contract for the reclamation on a ground other than the general managers lack of authority was an explicit recognition that the latter was so authorized to enter into the purported contract.

as the power to affect the legal relations of another person by transactions with third persons arising from the others manifestations to such third person such that the liability of the principal for the acts and contracts of his agent extends to those which are within the apparent scope of the authority conferred on him, although no actual authority to do such acts or to make such contracts has been conferred. Apparent authority, or what is sometimes referred to as the holding out theory, or doctrine of ostensible agency, imposes liability, not as the result of the reality of a contractual relationship, but rather because of the actions of a principal or an employer in somehow misleading the public into believing that the relationship or the authority exists. The existence of apparent authority may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. Easily discernible from the foregoing is that apparent authority is determined only by the acts of the principal and not by the acts of the agent. The principal is, therefore, not responsible where the agents own conduct and statements have created the apparent authority. In this case, not a single act of respondent, acting through its Board of Directors, was cited as having clothed its general manager with apparent authority to execute the contract with it.

The CA also found the disapproval of the contract on a ground other than the general managers lack of authority rather inconsequential because Executive Order 380 expressly authorized the governing boards of government-owned or controlled corporations to enter into negotiated infrastructure contracts involving not more than fifty million (P50 million). The CA further noted that the Notice of Award was only one of those documents that comprised the entire contract and, therefore, did not in itself evidence the perfection of a contract.

FACTS: Spouses Vaca executed a REM in favor of the UOB over their parcel of residential land but failed to pay their obligation, the subject property was sold at public auction with the UOB as the highest bidder.

Issue: Whether or not the doctrine of apparent authority is applicable in this case.

The spouses Vaca commenced an action for the nullification of REM and the foreclosure sale. UOB, on the other hand, filed a petition for the issuance of a writ of possession which the CA granted.

Ruling: No. Petitioners invocation of the doctrine of apparent authority is misplaced. This doctrine, in the realm of government contracts, has been restated to mean that the government is NOT bound by unauthorized acts of its agents, even though within the apparent scope of their authority. Under the law on agency, however, apparent authority is defined 42

52. ASSOCIATED BANK (now UOB) v. SPOUSES PRONSTROLLER Gr no. 148444, July 14, 2008

During the pendency of the cases, Respondents Rafael and Monaliza Pronstroller offered to purchase the property for P7,500,000.00. Said offer was made through Atty. Soluta, UOB’s Vice-President, Corporate Secretary and a member of its Board of Directors. UOB accepted it and respondents paid petitioner P750,000.00 as down payment.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

March 18, 1993 UOB, through Atty. Soluta, and respondents, executed a Letter-Agreement that the down payment and remaining balance would be deposited under escrow. The deposit shall be made within ninety (90) days from date hereof. Prior to the expiration of the 90-day period, in view of the pendency of the case between the spouses Vaca and UOB involving the subject property, respondents requested that the balance of the purchase price be made payable only upon service on them of a final decision affirming UOB right to possess the subject property. Atty. Soluta referred respondents proposal to petitioners Asset Recovery and Remedial Management Committee (ARRMC) but the latter deferred action thereon. On July 14, 1993, a month after they made the request and after the payment deadline had lapsed respondents and Atty. Soluta, acting for the petitioner, executed another Letter-Agreement allowing the former to pay the balance of the purchase price upon receipt of a final order from this Court and/or the delivery of the property to them free from occupants. Towards the end of 1993, petitioner reorganized its management. Atty. Dayday became petitioners Assistant Vice-President and Head of the Documentation Section, while Atty. Soluta was relieved of his responsibilities. Atty. Dayday discovered that respondents failed to deposit the balance of the purchase price of the subject property and found that respondents requested for an extension of time within which to pay which late disapproved by ARRMC, hence, the contract was rescinded due to respondents breach of contract.

For failure of the parties to reach an agreement, respondents, through their counsel, informed petitioner that they would be enforcing their agreement dated July 14, 1993.2 Petitioner countered that it was not aware of the existence of the July 14 agreement and that Atty. Soluta was not authorized to sign for and on behalf of the bank. It, likewise, reiterated the rescission of their previous agreement because of the breach committed by respondents. On July 14, 1994, in the Vaca case, this Court upheld petitioners right to possess the subject property. On July 28, 1994, respondents commenced the instant suit by filing a Complaint for Specific Performance before the RTC. Respondents prayed that petitioner be ordered to sell the subject property to them in accordance with their letter-agreement of July 14, 1993. For its part, petitioner contended that their contract had already been rescinded because of respondents failure to deposit in escrow the balance of the purchase price within the stipulated period During the pendency of the case, petitioner sold the subject property to the spouses Vaca, who eventually registered the sale; and As new owners, the spouses Vaca started demolishing the house on the subject property which, however, was not completed by virtue of the writ of preliminary injunction issued by the court.

Naturally, the third person has little or no information as to what occurs in corporate meetings since it is entirely an internal matter. the public has the right to rely on the trustworthiness of bank officers and their acts Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the scope of Atty. Solutas authority. respondents already requested a modification of the earlier agreement such that the full payment should be made upon receipt of this Courts decision confirming petitioners right to the subject property. The matter was brought to the petitioners attention and was in fact discussed by the members of the Board. Instead of acting on said request, the board deferred action on the request. It was only after one year and after the banks reorganization that the board rejected respondents request. We cannot therefore blame the respondents in relying on the July 14, 1993 Letter-Agreement. if a corporation knowingly permits its officer, or any other agent, to perform acts within the scope of an apparent authority, holding him out to the public as possessing power to do those acts, the corporation will, as against any person who has dealt in good faith with the corporation through such agent, be estopped from denying such authority. Was the second-letter agreement validly rescinded by Petitioner UOB?

ISSUE: Is the petitioner bound by the July 14, 1993 Letter-Agreement signed by Atty. Soluta under the doctrine of apparent authority?

No. This is so because there was in the first place, no breach of contract, as the date of full payment had already been

Atty. Dayday informed respondents that their request for extension was disapproved by ARRMC and, in view of their breach of the contract, petitioner was rescinding the same and forfeiting their deposit. Petitioner added that if respondents were still interested in buying the subject property, they had to submit their new proposal. Respondents reiterated the Letter-Agreement of July 14, 1993 to show that they were granted an extension. However, Atty. Dayday claimed that the letter was a mistake and that Atty. Soluta was not authorized to give such extension respondents proposed to pay the balance of the purchase price as follows: P3,000,000.00 and the balance after six (6) months.1 However, the proposal was disapproved petitioner advised respondents that the former would accept the latters proposal only if they would pay interest at the rate of 24.5% per annum on the unpaid balance. Petitioner also allowed respondents a refund of their deposit of P750,000.00 if they would not agree to petitioners new proposal.

RULING: YES. A corporation may authorize another to do certain acts for and on his behalf. The authority of a corporate officer or agent in dealing with third persons may be actual or apparent. Apparent authority may be ascertained through 1) the apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was exercised without any objection from its board or shareholders It is clear that petitioner had previously allowed Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the second letter-agreement.

43

modified by the later agreement. Neither can the July 14, 1993 agreement be considered abandoned by respondents act of making a new offer, which was unfortunately rejected by petitioner. such offer was made only to demonstrate their capacity to purchase the subject property. LITIS PENDENTIA

Admittedly, during the pendency of the case, respondents timely registered a notice of lis pendens to warn the whole world that the property was the subject of a pending litigation.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

This registration, therefore, gives the court clear authority to cancel the title of the spouses Vaca, since the sale of the subject property was made after the notice of lis pendens. Settled is the rule that the notice is not considered a collateral attack on the title,3 for the indefeasibility of the title shall not be used to defraud another especially if the latter performs acts to protect his rights such as the timely registration of a notice of lis pendens.

53. ACUÑA v. BATAC EMILIANO ACUÑA vs. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION, INC., JUSTINO GALANO, TEODORO NARCISO, PABLO BACTIN, (DR.) EMMANUEL BUMANGLAG, VENANCIO DIRIC, MARCOS ESQUIVEL, EVARISTO CAOILI, FIDEL BATTULAYAN, DAMIAN ROSSINI, RAYMUNDO BATALLONES, PLACIDO QUIAOIT, and LEON Q. VERANO defendants-appellees. G.R. No. L-20333

May 6, 1962, all the Board of Directors, President Verano, Vice President Narciso, unanimously authorized Verano, by a formal resolution, "to execute any agreement with any person or entity, on behalf of the corporation, for the purpose of securing additional funds for the corporation, as well as to secure the services of such person or entity, in the collection of all payments due to the corporation from the PVTA for any tobacco sold and delivered to said administration”. Plaintiff was made to understand by all of said defendants that the original understanding between him and defendant Leon Q. Verano was acceptable to the corporation, except that the remuneration for the plaintiff's services would be P0.30 per kilo of tobacco. May 10, 1962, the formal "Agreement" was executed between plaintiff and defendant Leon Q. Verano, as Manager of the defendant corporation, duly authorized by its Board of Directors for such purpose, and signed by defendants Justino Galano and Dr. Emmanuel Bumanglag as instrumental witnesses and acknowledged by Atty. Fernando Alcantara, the Secretary and Legal Counsel of the defendant corporation.

DEFENDANTS CONTENTION: In support of the motion defendants alleged that the contract for services was never perfected because it was not approved or ratified but was instead disapproved by the Board of Directors of defendant Batac Procoma, Inc., and that on the basis of plaintiff's pleadings the contract is void and unenforceable. Defendants further denied the fact that plaintiff had performed his part of the contract, alleging that he had not in any manner intervened in the delivery and payment of tobacco pertaining to the defendant corporation. The trial court ruled in favor of defendants ruling that the agreement was not perfected and was therefore null and void and that the complaint states no cause of action. Plaintiff thus raises the appeal.

ISSUE: May 10, 1962, plaintiff gave and turned over to the defendant corporation, thru its treasurer, Dominador T. Cocson the sum of P20,000.00, in the presence of defendants Verano, Galano, Dr. Bumanglag and Atty. o Alcantara, for which said treasurer issued to plaintiff its corresponding Official Receipt No. 130852.

Whether or not the “agreement” is valid and binding.

HELD: June 30, 1967

FACTS: May 5, 1962 Emiliano Acuña and defendant Leon Q. Verano, as Manager of the defendant Batac Procoma, Inc., that the former would seek and obtain the sum of not less, than P20,000.00 to be advanced to the defendant Batac Procoma, Inc., to be utilized by it as additional funds for its Virginia tobacco buying operations during the current redrying season. Acuna would be constituted as the corporation's representative in Manila to assist in handling and facilitating its continuous shipments of tobacco and their delivery to the redrying plants and in speeding up the prompt payment and collection of all amounts due to the corporation for such shipments. For his services, Acuna will be paid renumeration of P0.50 per kilo of tobacco. This agreement was received by the Board of Directors (names are stated as defendants in title) of Batac Procoma Inc.

From then on, plaintiff diligently and religiously kept his part of the agreement even incurring personal expenses in order to comply with such agreement. June 6, 1962, After the defendant corporation was able to replenish its funds with collections from the tobacco delivered (as serviced by plaintiff) and with a collection of P381,495.00, the Board of Directors disapproved the Agreement. Thus the filing of the complaint by Acuna against Batac Procoma and its officers. August 14, 1962, the trial court ordered the issuance of preliminary attachment against properties of defendant corporation. August 22, 1962, the defendants filed a motion to dismiss the complaint on the ground that it stated no cause of action and to discharge the preliminary attachment on the ground that it was improperly or irregularly issued. August 25, 1962, plaintiff filed a written opposition to the motion to dismiss and to discharge the preliminary attachment.

44

YES. CIVIL PROCEDURE: A MOD based on the ground that the complaint does not state a cause of action, the averments in the complaint are deemed hypothetically admitted and the inquiry is limited to whether or not they make out a case on which relief can be granted. The lower court should not have gone beyond, and it should have limited itself, to the facts alleged in the complaint in considering and resolving said motion to dismiss. CORPO: A perusal of the complaint reveals that it contains sufficient allegations indicating such approval or at least subsequent ratification. On the first point we note the following averments: that on May 9th the plaintiff met with each and all of the individual defendants (who constituted the entire Board of Directors) and discussed with them extensively the tentative agreement and he was made to understand that it was acceptable to them, except as to plaintiff's remuneration; that it was finally agreed between plaintiff and all said Directors that his remuneration would be P0.30 per kilo (of tobacco);

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

and that after the agreement was formally executed he was assured by said Directors that there would be no need of formal approval by the Board. It should be noted in this connection that although the contract required such approval it did not specify just in what manner the same should be given. 1.

plaintiff delivered to the defendant corporation the sum of P20,000.00 as called for in the contract 2. that he rendered the services he was required to do 3. that he furnished said defendant 3,000 sacks at a cost of P6,000.00 and advanced to it the further sum of P5,000.00 4. and that he did all of these things with the full knowledge, acquiescence and consent of each and all of the individual defendants who constitute the Board of Directors of the defendant corporation. There is abundant authority in support of the proposition that ratification may be express or implied, and that implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing there from. Since the undertaking of upgrading tobacco is deemed illegal before the trial court that is why the case was dismissed, it is only incidental to the issue. The affidavit of plaintiff shows that he is not aware of the terminologies of the tobacco industry and thus only relied in good faith of the assurance of the defendant corporation. This is merely incidental and must be tried and heard with facts and evidences presented. Thus the order of dismissal is set aside and the case is remanded to the court a qou for further proceeding.

54. BOARD OF LIQUIDATORS v. KALAW BOARD OF LIQUIDATORS, REPRESENTING THE GOVERNMENT vs. HEIRS OF MAXIMO M. KALAW, ET AL. GR No. L-18805 August 14, 1967 SANCHEZ, J. Facts: This case involves the National Coconut Corporation (NACOCO) and its ill-fated business ventures. Having been established since May 7, 1940 by virtue of its charter, CA 518, it is granted powers to deal in the market with coconut, copra and dessicated coconuts and their by-products. From July to October 1947, NACOCO entered into various contracts through Kalaw involving the trade and industry of copra. Its

ventures took a turn for the worse when The Philippines was hit by four (4) typhoons some time in December 1947. On January 30, 1948, Maximo Kalaw and the board approved the various contracts despite knowing that the same are no longer deemed profitable in light of the disasters the struck in the preceeding month leading to massive damage in the copra agricultural industry. As expected, the said contracts were only partially fulfilled and NACOCO was threatened with suits for the said contracts. Ultimately, the Government abolished NACOCO and subjected the liquidation of its assets through the Board of Liquidators duly appointed by the Government. In a suit for damages, NACOCO sought to recover 1.34 Million pesos from board chairman Maximo Kalaw, now represented by his heirs, and directors Bocar, Garcia (represented by his Estate) and Moll for having allowed Kalaw to enter into contracts that are doomed to fail without board approval. The defendants contend that Kalaw legitimately entered into those contracts in accordance with an established custom within the firm that a general manager’s transactions are no longer subject to board approval. The trial court ruled in favor of Kalaw, et al. and thus this appeal by the Board of Liquidators to the SC.

company without formal authorization from the board. Thus, the Court ruled that there has been established a practice that a corporate officer entrusted with the general management and control of its business has implied authority to make any contract or do any other act which is necessary or appropriate to the ordinary business of the corporation without prior authority from the board. It should be emphasized further that the need for ratification of the said contracts is no longer necessary in light of the established practice as earlier discussed. If anything, ratification of the Kalaw contracts has been reduced to a mere formality. Furthermore, this practice was not questioned in the long years of NACOCO’s existence and it was only questioned when the contracts entered into through that practice were not profitable. Bad faith cannot also be imputed upon Kalaw when he entered into the contracts. There is no proof evidencing that he intended to defraud the government and its contractors. Kalaw and the directors were in good faith. Finally, this is a case of damnum absque injuria (damage without injury) as the losses incurred by NACOCO were attributable to the typhoons that gravely affected the copra industry; were it not for the typhoons, NACOCO could have complied with its contractual obligations.

Issue: Are the contracts entered into by Kalaw during the subsistence of NACOCO’s existence valid, binding, and therefore, enforceable? Ruling: Yes, the contracts entered into Kalaw are valid and binding. The Supreme Court noted that the argument set forth by the Board of Liquidators is banking on the provisions of NACOCO by-laws, stating that the general manager may execute on behalf of the Corporation all contracts necessary for its business with prior board approval. But the Court nonetheless skirted this argument in light of the actual factual milieu of the case. It was found that in the years of corporate existence of NACOCO, its general manager has always entered into contracts in its behalf without board approval. Because of the tedious and volatile nature of the copra industry there has been established a practice of letting a general manager make the forward transactions without the need of board approval to expedite the procedures. It was proven on record that NACOCO left the forward sales of copra to the discretion of Kalaw. It was even found that the predecessors of Kalaw as the general manager also entered into transactions without prior board approval. In light of the circumstances, despite the provisions of the bylaws, this general practice and custom has become a matter of policy that has been established in the course of business thereby binding the 45

55. TRINIDAD J. FRANCISCO vs. GOVERNMENT SERVICE INSURANCE SYSTEM ----------------------------G.R. No. L-18155 March 30, 1963 TRINIDAD J. FRANCISCO vs. GOVERNMENT SERVICE INSURANCE SYSTEM March 30, 1963 FACTS: On 10 October 1956, the plaintiff, Trinidad J. Francisco, in consideration of a loan in the amount of P400,000.00, out of which the sum of P336,100.00 was released to her, mortgaged in favor of the defendant, GSIS a parcel of land known as Vic-Mari Compound, located at Baesa, Quezon City, payable within ten (10) years in monthly installments of P3,902.41, and with interest of 7% per annum compounded monthly. On 6 January 1959, the GSIS extrajudicially foreclosed the mortgage on the ground that up to that date the plaintiff-mortgagor was in arrears on her monthly installments in the amount of P52,000.00. Payments made by the plaintiff at the time of foreclosure amounted to P130,000.00. The System itself was the buyer of the property in the foreclosure sale. On 20 February 1959, the plaintiff's father, Atty. Vicente J. Francisco, sent a letter to the general manager of the defendant corporation, Mr. Rodolfo P. Andal:

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

(a) Atty. Francisco will pay pay said amount of P30,000 to the GSIS if it would agree that after such payment the foreclosure of his daughter's mortgage would be set aside (b) As regards the balance, the following arrangements were proposed: i. for the GSIS to take over the administration of the mortgaged property ii. to collect the monthly installments, amounting to about P5,000, due on the unpaid purchase price of more than 31 lots and houses therein and the monthly installments collected shall be applied to the payment of Miss Francisco's arrearage until the same is fully covered. It is requested, however, that from the amount of the monthly installments collected, the sum of P350.00 be deducted for necessary expenses, such as to pay the security guard, the street-caretaker, the Meralco Bill for the street lights and sundry items. (c) The proposed administration by the GSIS of the mortgaged property will continue even after Miss Francisco's account shall have been kept up to date. However, once the arrears shall have been paid, whatever amount of the monthly installments collected in excess of the amortization due on the loan will be turned over to Miss Francisco. On the same date, 20 February 1959, Atty. Francisco received the following telegram: VICENTE FRANCISCO SAMANILLO BLDG. ESCOLTA. GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF FORECLOSED PROPERTY OF YOUR DAUGHTER ANDAL" On 28 February 1959, Atty. Francisco remitted to the System, through Andal, a check for P30,000.00, with an accompanying letter, which quoted verbatim the telegram sent by Andal The defendant received the amount of P30,000.00, and issued therefor its official receipt No. 1209874, dated 4 March 1959. It did not, however, take over the administration of the compound. In the meantime, the plaintiff received the monthly payments of some of the occupants thereat; then on 4 March 1960, she remitted, through her father, the amount of P44,121.29, representing the total monthly installments that she received from the occupants for the period from March to December 1959 and January to February 1960, minus expenses and real estate taxes. The defendant also received this amount, and issued the corresponding official receipt. Remittances, all accompanied by letters, corresponding to the months of March, April, May, and June, 1960 and totalling P24,604.81 were also sent by the plaintiff to the defendant from time to time, all of which were received and duly receipted for.

Then the System sent three (3) letters asking the plaintiff for a proposal for the payment of her indebtedness, since according to the GSIS the oneyear period for redemption had expired. In reply, Atty. Francisco sent a letter, dated 11 March 1960, protesting against the System's request for proposal of payment and inviting its attention to the concluded contract generated by his offer of 20 February 1959, and its acceptance by telegram of the same date, the compliance of the terms of the offer already commenced by the plaintiff, and the misapplication by the System of the remittances she had made, and requesting the proper corrections. By letter, dated 31 May 1960, the defendant countered the preceding protest that that the telegram should be disregarded in view of its failure to express the contents of the board resolution due to the error of its minor employees in couching the correct wording of the telegram. A copy of the excerpts of the resolution of the Board of Directors (No. 380, February 20, 1959) was attached to the letter, showing the approval of Francisco's offer — ... subject to the condition that Mr. Vicente J. Francisco shall pay all expenses incurred by the GSIS in the foreclosure of the mortgage. Inasmuch as, according to the defendant, the remittances previously made by Atty. Francisco were allegedly not sufficient to pay off her daughter's arrears, including attorney's fees incurred by the defendant in foreclosing the mortgage, and the one-year period for redemption has expired, said defendant, on 5 July 1960, consolidated the title to the compound in its name, and gave notice thereof to the plaintiff on 26 July 1960 and to each occupant of the compound. Hence, the plaintiff instituted the present suit, for specific performance and damages. The defendant answered, pleading that the binding acceptance of Francisco's offer was the resolution of the Board, and that Andal's telegram, being erroneous, should be disregarded. After trial, the court below found that the offer of Atty. Francisco, dated 20 February 1959, made on behalf of his daughter, had been unqualifiedly accepted, and was binding, and rendered judgment as noted at the start of this opinion.

The offer of compromise made by plaintiff in the letter had been validly accepted, and was binding on the defendant. The terms of the offer were clear, and over the signature of defendant's general manager, Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. 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, but the defense is that he did not sign it, but that it was sent by the Board Secretary in his name and without his knowledge. Assuming this to be true, how was appellee to know it? Corporate transactions would speedily come to a standstill were every person dealing with a corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face. It has also been decided that — A very large part of the business of the country is carried on by corporations. It certainly is not the practice of persons dealing with officers or agents who assume to act for such entities to insist on being shown the resolution of the board of directors authorizing the particular officer or agent to transact the particular business which he assumes to conduct. A person who knows that the officer or agent of the corporation habitually transacts certain kinds of business for such corporation under circumstances which necessarily show knowledge on the part of those charged with the conduct of the corporate business assumes, as he has the right to assume, that such agent or officer is acting within the scope of his authority. (Curtis Land & Loan Co. vs. Interior Land Co., 137 Wis. 341, 118 N.W. 853, 129 Am. St. Rep. 1068; as cited in 2 Fletcher's Encyclopedia, Priv. Corp. 263, perm. Ed.) Indeed, it is well-settled that — If a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents. (2 Fletcher's Encyclopedia, Priv. Corp. 255, Perm. Ed.) Hence, even if it were the board secretary who sent the telegram, the corporation could not evade the binding effect produced by the telegram.

ISSUE: Did the telegram generate a contract that is valid and binding upon the parties? RULING:

46

The defendant-appellant does not disown the telegram, and even asserts that it came from its offices, as may be gleaned from the letter, dated 31 May 1960, to Atty. Francisco, and signed "R. P. Andal, general manager by Leovigildo Monasterial, legal counsel", wherein these phrases occur: "the telegram sent ... by this office" and "the telegram we sent your" (emphasis supplied), but it alleges mistake in couching the correct wording.

Delegation of Authority to Corporate Officers | Doctrine of Apparent Authority

This alleged mistake cannot be taken seriously, because while the telegram is dated 20 February 1959, the defendant informed Atty. Francisco of the alleged mistake only on 31 May 1960, and all the while it accepted the various other remittances, starting on 28 February 1959, sent by the plaintiff to it in compliance with her performance of her part of the new contract. The inequity of permitting the System to deny its acceptance become more patent when account is taken of the fact that in remitting the payment of P30,000 advanced by her father, plaintiff's letter to Mr. Andal quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of the terms of the allegedly unauthorized telegram. 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 (Civil Code, Art. 1393). ART. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. Nowhere else do the circumstances call more insistently for the application of the equitable maxim that between two innocent parties, the one who made it possible for the wrong to be done should be the one to bear the resulting loss.

56. RURAL BANK OF MILAOR (Camarines Sur) v. FRANCISCA OCFEMIA, et.al. G.R. No. 137686, February 8, 2000 Facts:

Bank. However, Juanita and Felicisimo were not able to redeem the mortgaged properties hence the properties were foreclosed and was transferred in the name of the Bank. Out of the 7 parcels of land, 5 of them were sold by the Bank to the parents of Marife, who is Francisca and Renato, as evidenced by a Deed of Sale executed by the Bank in favor of Francisca and Renato. However, these 5 parcels of land cannot be transferred in the name of the parents of Marife O. Nino as there is a need to have a document of sale registered with the Register of Deeds. When Marife O. Nino went to the Register of Deeds with the needed document, the Register of Deeds said again that the document of sale cannot be registered without a board resolution executed by the Rural Bank. Marife then went to the Rural Bank and requested for a board resolution so that the property can be transferred to the name of Francisca and Renato.

Yes. In this case, for the property to be transferred in their names, the Register of Deeds required the submission of a board resolution from the bank confirming both the Deed of Sale and the authority of the bank manager, Fe S. Tena, to enter into such transaction. The issue of the case started when the Bank refused to issue the boad resolution.

The Rural Bank then said to Marife that they cannot issue a board resolution because the new manager had no record of the sale. She was requested to furnish the bank a copy of the deed of sale, receipt for payment, and an authority from her parents and siblings which she complied. After two weeks, no actions were taken by the Rural Bank. Marife asked the services of a lawyer and the lawyer wrote a letter to the Rural Bank asking why is there no action taken by them. The bank replied to theletter sent and again requested that a machine copy of the receipt of payment be furnished to the bank which in fact was already complied with by Marife. After several days, Marife reiterated her request for a board resolution but still no actions were taken by the Rural Bank for the reason that they have no records of the sale. This prompted Marife and his lawyer to file a petition for Mandamus with the Regional Trial Court (RTC) to compel the Rural Bank to execute the Board Resolution. By the time the petition was filed, Francisca was already sick with a deteriorating condition and the Ocfemia children were not able to hospitalize their sick mother because of lack of funds. So they needed the property to be able to mortgage the same and have funds for hospitalization.

In this case, the Bank acknowledged, by its own acts or failure to act, the authority of Fe S. Tena to enter into binding contracts. After the execution of the Deed of Sale, The Ocfemia childen occupied the properties in dispute and paid the real estate taxes due thereon. If the bank management believed that it had title to the property, it should have taken some measures to prevent the infringement or invasion of its title thereto and possession thereof.

The RTC granted the petition. The CA affirmed the decision of the RTC. The Respondents in this case, Marife O. Nino(Marife), Rowena Barrogo, Felicisimo Ocfemia, Renato Ocfemia Jr. and Winston Ocfemia (The Ocfemia children), are the children of Francisca Ocfemia and the late Renato Ocfemia (Francisca and Renato) while the petitioner in this case is the Rural Bank of Milaor (Rural Bank), where the subject properties were mortgaged and the one who foreclosed such property. Juanita Arellano Ocfemia(Juanita) and Felicisimo Ocfemia (Felicisimo) are the grandparents of Marife O. Nino and of his co-respondents, were the owners of the 7 parcels of land which is the subject property of this case.The Juanita and Felicisimo mortgaged 7 parcels of land to the Rural

Issue: May the board of directors of a rural banking corporation be compelled to confirm a deed of absolute sale of real property owned by the corporation which deed of sale was executed by the bank manager without prior authority of the board of directors of the rural banking corporation? Ruling:

47

The General rule is that when a bank, by its acts and failure to act, has clearly clothed its manager with apparent authority to sell an acquired asset in the normal course of business, it is legally obliged to confirm the transaction by issuing a board resolution to enable the buyers to register the property in their names. It has a duty to perform necessary and lawful acts to enable the other parties to enjoy all benefits of the contract which it had authorized.

Tena had previously transacted business on behalf of the Bank, and the latter had acknowledged her authority. A bank is liable to innocent third persons where representation is made in the course of its normal business by an agent like Manager Tena, even though such agent is abusing her authority. Clearly, persons dealing with her could not be blamed for believing that she was authorized to transact business for and on behalf of the bank. In this light, the bank is estopped from questioning the authority of the bank manager to enter into the contract of sale.

Derivative Suit

57. ARNEL TY, MARIE TY, JASON ONG, WILLY DY, AND ALVIN TY v. NBI G.R. No. 182147 December 15, 2010 Facts: Petitioners are stockholders of Omni Gas Corporation (Omni). Omni is in the business of trading and refilling of Liquefied Petroleum Gas (LPG) cylinders. The case all started when Joaquin Guevara Adarlo & Caoile Law Offices (JGAC Law Offices) sent a letter to the NBI requesting, on behalf of their clients Shellane Dealers Association, Inc., Petron Gasul Dealers Association, Inc., and Totalgaz Dealers Association, Inc., for the surveillance, investigation, and apprehension of persons or establishments in Pasig City that are engaged in alleged illegal trading of petroleum products and underfilling of branded LPG cylinders in violation of Batas Pambansa Blg. (BP) 33, as amended by Presidential Decree No. (PD) 1865. Agents De Jemil and Kawada attested to conducting surveillance of Omni. They brought eight branded LPG cylinders of Shellane, Petron Gasul, Totalgaz, and Superkalan Gaz to Omni for refilling. The NBI’s test-buy yielded positive results for violations of BP 33, Section 2(a) in relation to Secs. 3(c) and 4, and Sec. 2(c) in relation to Sec. 4. Thus, Agent De Jemil filed an Application for Search Warrant resulting in the seizure of several items from Omni’s premises. It was established that Omni is not an authorized refiller of Shellane, Petron Gasul, Totalgaz and Superkalan Gaz LPG cylinders. Sec. 4 of BP 33, as amended, provides that when the offender is a corporation, partnership, or other juridical person, the president, the general manager, managing partner, or such other officer charged with the management of the business affairs thereof, or employee responsible for the violation shall be criminally liable; in case the offender is an alien, he shall be subject to deportation after serving the sentence. Petitioners argue that they cannot be held liable for any perceived violations of BP 33, as amended, since they are mere directors of Omni who are not in charge of the management of its business affairs. Reasoning that criminal liability is personal, liability attaches to a person from his personal act or omission but not from the criminal act or negligence of another. Since Sec. 4 of BP 33, as amended, clearly provides and enumerates who are criminally liable, which do not include members of the board of directors of a corporation, petitioners, as mere members of the board of directors who are not in charge of Omni’s business affairs, maintain that they cannot be held liable for any perceived violations of BP 33, as amended. Issue:

Are the petitioners liable?

the corporation had accounts payable amounting to P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was financial condition, in contemplation of an insolvency and dissolution.

Ruling: No, except as to petitioner Arnel U. Ty who is indisputably the President of Omni. It may be noted that Sec. 4 above enumerates the persons who may be held liable for violations of the law, viz: (1) the president, (2) general manager, (3) managing partner, (4) such other officer charged with the management of the business affairs of the corporation or juridical entity, or (5) the employee responsible for such violation. In this case, it is undisputed that petitioners are members of the board of directors of Omni at the time pertinent. There can be no quibble that the enumeration of persons who may be held liable for corporate violators of BP 33, as amended, excludes the members of the board of directors. The board of directors is not directly engaged or charged with the running of the recurring business affairs of the corporation. Depending on the powers granted to them by the Articles of Incorporation, the members of the board generally do not concern themselves with the day-to-day affairs of the corporation, except those corporate officers who are charged with running the business of the corporation and are concomitantly members of the board, like the President. Section 25 of the Corporation Code requires the president of a corporation to be also a member of the board of directors. Evidently, petitioner Arnel, as President, who manages the business affairs of Omni, can be held liable for probable violations by Omni of BP 33, as amended.

58. C.H. STEINBERG v. GREGORIO VELASCO G.R. No. L-30460; March 12, 1929 FACTS: It was alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company, at a meeting of the board of directors held on July 24, 1922, approved and authorized various unlawful purchases already made of a large portion of the capital stock of the company from its various stockholders, thereby diverting its funds to the injury, damage, and in fraud of the creditors of the corporation. It was also alleged that the total amount of the capital stock unlawfully purchased was P3,300, and that at the time of such purchase, 48

As a second cause of action, Steinberg alleges that on July 24, 1922, the officers and directors of the corporation approved a resolution for the payment of P3,000 as dividends to its stockholders, which was wrongfully done and in bad faith, and to the injury and fraud of its creditors. That at the time the petition for the dissolution of the corporation was presented it had accounts payable in the sum of P9,241.19, "and practically worthless accounts receivable." Defendants allege that the stocks were purchased by virtue of a resolution of the board of directors of the corporation "when the business of the company was going on very well." As to the second cause of action, they admit that the dividends were distributed, but alleged that such distribution was authorized by the board of directors, "and that the amount represented by said dividends really constitutes a surplus profit of the corporation." To summarize, the officers purchased their own stocks and distributed dividends, in the same meeting, while the corporation has outstanding debts. ISSUE: Did the directors exercise due diligence in their actions? HELD: No. It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in declaring the dividends on the stock was all done at the same meeting of the board of directors, and it appears in those minutes that the both Ganzon and Mendaros were formerly directors and resigned before the board approved the purchase and declared the dividends, and that out of the whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of the 330, which were purchased by the corporation, and for which it paid P3,300. In other words, that the directors were permitted to resign so that they could sell their stock to the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their duties. Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, section 454 where it is said:

Derivative Suit

General Duty to Exercise Reasonable Care. — The directors of a corporation are bound to care for its property and manage its affairs in good faith, and for a violation of these duties resulting in waste of its assets or injury to the property they are liable to account the same as other trustees. There can be no doubt that if they do acts clearly beyond their power, whereby loss ensues to the corporation, or dispose of its property or pay away its money without authority, they will be required to make good the loss out of their private estates. This is the rule where the disposition made of money or property of the corporation is one either not within the lawful power of the corporation, or, if within the authority of the particular officer or officers. And section 458 which says: Want of Knowledge, Skill, or Competency. — It has been said that directors are not liable for losses resulting to the corporation from want of knowledge on their part; or for mistake of judgment, provided they were honest, and provided they are fairly within the scope of the powers and discretion confided to the managing body. But the acceptance of the office of a director of a corporation implies a competent knowledge of the duties assumed, and directors cannot excuse imprudence on the ground of their ignorance or inexperience; and if they commit an error of judgment through mere recklessness or want of ordinary prudence or skill, they may be held liable for the consequences. Like a mandatory, to whom he has been likened, a director is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to exercise ordinary skill and judgment, he cannot set up that he did not possess them. Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.

59. BALINGHASAY v. CASTILLO 8 April 2015 Facts: MCPI, a domestic corporation organized in 1977, operates the Medical Center Parañaque (MCP). Castillo, Oscar, Flores, Navarro, and Templo are minority stockholders of MCPI. Each of them holds 25 Class B shares. On the other hand, nine of the herein petitioners, namely, Balinghasay, Bernabe, Alodia, Jimenez, Oblepias, Savet, Villamora, Valdez and Villareal, are holders of Class A shares and were Board Directors of MCPI.

The other eight petitioners are holders of Class B shares. The petitioners are part of a group who invested in the purchase of ultrasound equipment, the operation of and earnings from which gave rise to the instant controversy. The laboratory, physical therapy, pulmonary and ultrasound services in MCP were provided to patients by way of concessions granted to independent entities. When the concessions expired, MCPI decided that it would provide on its own the said services, except ultrasound. MCPI’s Board of Directors awarded the operation of the ultrasound unit to a group of investors (ultrasound investors) composed mostly of ObstetricsGynecology (Ob-gyne) doctors. The ultrasound investors held either Class A or Class B shares of MCPI. Among them were nine of the herein petitioners, who were then, likewise, MCPI Board Directors. The group purchased an ultrasound equipment costing P850,000.00 and operated the same. Albeit awarded by the Board of Directors, the operation was not yet covered by a written contract. In the meeting of the MCPI’s Board of Directors, seven (7) of the twelve (12) Directors present were part of the ultrasound investors. The Board Directors made a counter offer anent the operation of the ultrasound unit. Hence, essentially then, the award of the ultrasound operation still bore no formal stamp of approval. A Memorandum of Agreement (MOA) was entered into by and between MCPInand the ultrasound investors. Per MOA, the gross income to be derived from the operation of the ultrasound unit, minus the sonologists’ professional fees, shall be divided between the ultrasound investors and MCPI, in the proportion of 60% and 40%, respectively. Come April 1, 1999, MCPI’s share would be 45%, while the ultrasound investors would receive 55%. Further, the ownership of the ultrasound machine would eventually be transferred to MCPI. On October 6, 1999, Flores wrote MCPI’s counsel a letter challenging the Board of Directors’ approval of the MOA for being prejudicial to MCPI’s interest. Thereafter, on February 7, 2000, Flores manifested to MCPI’s Board of Directors and President his view regarding the illegality of the MOA, which, therefore, cannot be validly ratified. RTC and CA: MCPI had, in effect, impliedly ratified the MOA by accepting or retaining benefits flowing therefrom. Moreover, the elected MCPI’s Board Directors for the years 1998 to 2000 did not institute legal actions against the petitioners. MCPI slept on its rights for almost four years, and estoppel had already set in before the derivative suit was filed in 2001. The RTC likewise stressed that the sharing agreement, per MOA provisions, was fair, just and reasonable. Issue: Was there an error of law in not applying the “business judgment rule”? 49

Held: Yes. In the case at bar, the majority of the number of directors, if it is indeed thirteen (13), is seven (7), while if it is eleven (11), the majority is six (6). During the meetings held by the MCPI Board of Directors i.e. 1) 14 August 1998 meeting x x x, twelve (12) directors were present, and of said number, seven (7) of them belong to the ultrasound investors x x x, and at which meeting, the Board decided to make a counter-offer x x x to the ultrasound group and; 2) 05 February 1999 meeting x x x, twelve (12) directors were present, and of said number, eight (8) of them belong to the ultrasound investors x x x, and at which meeting, the Board decided to proceed with the signing of the [MOA] x x x. As can be gleaned from the Minutes of said Board meetings, without the presence of the [petitioners] directors/ultrasound investors, there can be no quorum. “Quorum” is defined as that number of members of a body which, when legally assembled in their proper places, will enable the body to transact its proper business. “Majority,” when required to constitute a quorum, means the greater number than half or more than half of any total. It is clear that under the “business judgment rule”, the courts are barred from intruding into the business judgments of the corporation, when the same are made in good faith. All corporate powers and prerogatives are vested directly in the BoD.

60. PHILIPPINE STOCK EXCHANGE Inc. vs COURT OF APPEALS 281 SCRA 232 [GR No. 125469 October 27, 1997]

FACTS The Puerto Azul Land Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the public in order to raise funds allegedly to develop its properties and pay its loans with several banking institutions. In January, 1995, PALI was issued a permit to sell its shares to the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to course the trading of its shares through the Philippine Stock Exchange Inc. (PSEi), for which purpose it filed with the said stock exchange an application to list its shares, with supporting documents attached pending the approval of the PALI’s listing application, a letter was received by PSE from the heirs of Ferdinand Marcos to which the latter claims to be the legal and beneficial owner of some of the properties forming part of PALI’s assets. As a result, PSE denied PALI’s application which caused the latter to file a complaint before the SEC. The SEC issued an order to PSE to grant listing application of

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PALI on the ground that PALI have certificate of title over its assets and properties and that PALI have complied with all the requirements to enlist with PSE.

encouraged and protected and their activities for the promotion of economic development.

the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: a.

ISSUE Whether or not the denial of PALI’s application is proper

RULING YES. This is in accord with the “Business Judgement Rule” whereby the SEC and the courts are barred from intruding into business judgements of corporations, when the same are made in good faith. The same rule precludes the reversal of the decision of the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to accept of reject applications for listing. Thus, even if an issuer has complied with the PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuer’s listing application if the PSE determines that the listing shall not serve the interests of the investing public.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with the markings of a corporate entity, it functions as the primary channel through which the vessels of capital trade ply. The PSEi’s relevance to the continued operation and filtration of the securities transaction in the country gives it a distinct color of importance such that government intervention in its affairs becomes justified, if not necessarily. Indeed, as the only operational stock exchange in the country today, the PSE enjoys monopoly of securities transactions, and as such it yields a monopoly of securities transactions, and as such, it yields an immerse influence upon the country’s economy.

The SEC’s power to look into the subject ruling of the PSE, therefore, may be implied from or be considered as necessary or incidental to the carrying out of the SEC’s express power to insure fair dealing in securities traded upon a stock exchange or to ensure the fair administration of such exchange. It is likewise, observed that the principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and requisites appropriate to such a body as to its corporate and management decisions, therefore, the state will generally not interfere with the same. Questions of policy and management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgements for the judgement of the board of directors. The board is the business manager of the corporation and so long as it acts in good faith, its orders are not reviewable by the courts.

In matters of application for listing in the market the SEC may exercise such power only if the PSE’s judgement is attended by bad faith.

The petitioner was in the right when it refused application of PALI, for a contrary ruling was not to the best interest of the general public.

61. ONG YONG, et al. v. DAVID S. TIU, et al. G.R. No. 144476. April 8, 2003 (CORONA, J.:) DOCTRINE: “ (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a transaction among themselves as will result in serious injury to the plaintiffs stockholders.” FACTS: In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited the Ongs to invest in FLADC. Under 50

b.

the Ongs were to subscribe to 1,000,000 million shares at a par value of P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200 shares. (total of ongs share = 1Million) Tius were entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs were entitled to nominate the President, the Secretary and six directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall.

Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock subscription. The Ongs paid in another P70 million to FLADC and P20 million to the Tius over and above their P100 million investment, the total sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of FLADC to PNB. The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the Tius rescinded the Pre-Subscription Agreement, for the following reasons, that the Ongs: a. b.

c.

Refused to credit to them the FLADC shares covering their real property contributions. Prevented David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as Vice-President and Treasurer, respectively, and Refused to give them the office spaces agreed upon.

Ongs contended that: a. David S. Tiu and Cely Y. Tiu had in fact assumed the positions of Vice-President and Treasurer of FLADC but that it was they who refused to comply with the corporate duties assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the checks of the corporation and undertake their management duties but that the Tius shied away from helping them manage the corporation. b. On the issue of office space, the Ongs pointed out that the Tius did in fact already have existing executive offices in the mall since

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c.

d.

they owned it 100% before the Ongs came in. What the Tius really wanted were new offices which were anyway subsequently provided to them. On the most important issue of their alleged failure to credit the Tius with the FLADC shares commensurate to the Tius property contributions, the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and documentary stamp tax. Without the payment thereof, the SEC would not approve the valuation of the Tius property contribution (as opposed to cash contribution). This, in turn, would make it impossible to secure a new Transfer Certificate of Title (TCT) over the property in FLADCs name. In any event, it was easy for the Tius to simply pay the said transfer taxes and, after the new TCT was issued in FLADCs name, they could then be given the corresponding shares of stocks. On the 151 square-meter property, the Tius never executed a deed of assignment in favor of FLADC. The Tius initially claimed that they could not as yet surrender the TCT because it was still being reconstituted by the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC had in reality owned the property all along, even before their Pre-Subscription Agreement was executed in 1994. This meant that the 151 square-meter property was at that time already the corporate property of FLADC for which the Tius were not entitled to the issuance of new shares of stock.

Tius at the Securities and Exchange Commission (SEC), seek confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the SEC, issued a decision confirming the rescission sought by the Tius. SEC en banc confirmed the decision. The Ongs countered that there was no violation of the PreSubscription Agreement on the part of the Ongs;that, after more than seven years since the mall began its operations, rescission had become not only impractical but would also adversely affect the rights of innocent parties; and that it would be highly inequitable and unfair to simply return the P100 million investment of the Ongs and give the remaining assets now amounting to about P1 billion to the Tius. The Tius maintain that rescinding the subscription contract is not synonymous to corporate liquidation because all rescission will entail would be the simple restoration of the status quo ante and a return to the two groups of their cash and property contributions. The Tius claim that rescission of the agreement will not result in an unauthorized liquidation of the corporation because their case is actually a petition to decrease

capital stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital stock, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. The Tius claim that their case for rescission, being a petition to decrease capital stock, does not violate the liquidation procedures under our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to approve said decrease. ISSUE; Can the Tius legally rescind the Pre-Subscription Agreement?

a transaction among themselves as will result in serious injury to the plaintiffs stockholders.” Reason behind the rule: Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts.

RULING: No. the argument of the Tius has no merit. The Tius case for rescission cannot validly be deemed a petition to decrease capital stock because such action never complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding capital stock was secured. There was no revised treasurers affidavit and no proof that said decrease will not prejudice the creditors rights. On the contrary, all their pleadings contained were alleged acts of violations by the Ongs to justify an order of rescission. Business Judgment rule discussion: Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a corporations authorized capital stock is an amendment of the Articles of Incorporation. It is a decision that only the stockholders and the directors can make, considering that they are the contracting parties thereto. In this case, the Tius are actually not just asking for a review of the legality and fairness of a corporate decision. They want this Court to make a corporate decision for FLADC. We decline to intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and directors. Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs directors and stockholders is a violation of the business judgment rule which states that – “(C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded 51

It is clear that, when the finances of FLADC improved considerably after the equity infusion of the Ongs, the Tius started planning to take over the corporation again and exclude the Ongs from it. It appears that the Tius refusal to pay transfer taxes might not have really been at all unintentional because, by failing to pay that relatively small amount which they could easily afford, the Tius should have expected that they were not going to be given the corresponding shares. It was the perfect excuse for blackballing the Ongs. In other words, the Tius created a problem, then used that same problem as their pretext for showing their partners the door. In the process, they stood to be rewarded with a bonanza of anywhere between P450 million to P900 million in assets (from an investment of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparable damage of the Ongs, FLADC and its creditors. After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs. ithout the Ongs, the Tius would have lost everything they originally invested in said mall.

62. JAMES IENT and MAHARLIKA SCHULZE v TULLETT PREBON (PHILIPPINES), INC., G.R. Nos. 189158 and 189530 January 11, 2017

Commercial Law; Corporation Code; Liability on Sections 31 and 34; SC held that through a thorough scrutinizing of the different provisions in the Corporation Code including Sections 31 and 34, they only impose civil liability aside from Section 74. SC concludes that had it been the intention of the drafters of the la to define Sections 31 and 34 as offenses, they could have easily included similar language as that found in Section 74. The intention can also be gleaned from the floor deliberations of its proponents. FACTS:

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Tradition Group, where petitioners herein are employed, and Tullett are competitors in the inter-dealer broking business. On the Tradition Group's motive of expansion and diversification in Asia, petitioners lent and Schulze were tasked with the establishment Tradition Financial Services Philippines, Inc. However, Tullett, filed a Complaint-Affidavit with the City Prosecution Office of Makati City against the officers/employees of the Tradition Group for violation of Sections 31 and 34 of the Corporation Code which made them criminally liable under Section 144. Impleaded as respondents in the Complaint-Affidavit were petitioners lent and Schulze, Jaime Villalon , who was formerly President and Managing Director of Tullett, Mercedes Chuidian who was formerly a member of Tullett's Board of Directors. Villalon and Chuidian were charged with using their former positions in Tullett to sabotage said company by orchestrating the mass resignation of its entire brokering staff in order for them to join Tradition Philippines which was evident on their conduct of several meetings with the employees. According to Tullett, petitioners lent and Schulze have conspired with Villalon and Chuidian in the latter's acts of disloyalty against the company. Petitioners argued that there could be no violation of Sections 31 and 34 of the Corporation as these sections refer to corporate acts or corporate opportunity, that Section 144 of the same Code cannot be applied to Sections 31 and 34 which already contains the penalties or remedies for their violation; and conspiracy under the Revised Penal Code cannot be applied to the Sections 31 and 34 of the Corporation Code. The city prosecutor dismissed the criminal complaint however, on respondent’s appeal to DOJ, the dismissal was reversed finding the arguments of the respondent proper. CA affirmed the decision of the DOJ secretary. ISSUE: Whether or not Section 144 of the Corporation Code applies to Sections 31 and 34 of the same code, thus, making it a penal offense so that conspiracy can be appreciated and the petitioners can be impleaded RULING: NEGATIVE. The Supreme Court applied rule of lenity as a principle related to liberal interpretation in favor of the accused in criminal cases. The rule applies when the court is faced with two possible interpretations of a penal statute, one that is prejudicial to the accused and another that is favorable to him. The rule calls for the adoption of an interpretation which is more lenient to the accused. According to SC, a close reading Section 144 shows that it is not purely a penal provision because it provides that when the violator is a corporation, an administrative penalty is imposed in form of dissolution, which is not a

criminal sanction. The Court also added that there is no provision in the Corporation Code using an emphatic language to compel the SC to construe the provision as a penal offense. SC held that through a thorough scrutinizing of the different provisions in the Corporation Code including Sections 31 and 34, they only impose civil liability aside from Section 74. SC concludes that had it been the intention of the drafters of the la to define Sections 31 and 34 as offenses, they could have easily included similar language as that found in Section 74. The intention can also be gleaned from the floor deliberations of its proponents. Quite apart that no legislative intent to criminalize Sections 31 and 34 was manifested in the deliberations on the Corporation Code, it is noteworthy from the same deliberations that legislators intended to codify the common law concepts of corporate opportunity and fiduciary obligations of corporate officers as found in American jurisprudence into said provisions. In common law, the remedies available in the event of a breach of director's fiduciary duties to the corporation are civil remedies. If a director or officer is found to have breached his duty of loyalty, an injunction may be issued or damages may be awarded. A corporate officer guilty of fraud or mismanagement may be held liable for lost profits. A disloyal agent may also suffer forfeiture of his compensation. There is nothing in the deliberations to indicate that drafters of the Corporation Code intended to deviate from common law practice and enforce the fiduciary obligations of directors and corporate officers through penal sanction aside from civil liability.

used by him to acquire the block of shares of SMC stock totaling around 16 million at the time of acquisition (representing 20% of the capital stock of SMC) Cojuangco purchased a block of 33 million shares of SMC stock (CIFF block of shares) through the 14 holding companies owned by the CIIF Oil Mills. FACTS: Defendant Eduardo Cojuangco, Jr., (Cojuangco) served as a public officer during the Marcos administration. During his incumbency, he acquired assets, funds, and other property grossly and manifestly disproportionate to his salaries, lawful income and income from legitimately acquired property. By taking undue advantage of his association, influence and connection, acting with the Marcoses, and other defendants, they used schemes, including the use of defendant corporations as fronts, to unjustly enrich themselves at the expense of Plaintiff and the Filipino people, such as when he misused coconut levy funds to buy out majority of the outstanding shares of stocks (OSS) of San Miguel Corporation (SMC) in order to control the largest agri-business, foods and beverage company in the Philippines, to wit: a.

63. REPUBLIC v. COJUANGCO G.R. Nos. 166859, 169203 & 180702 April 12, 2011

b.

The individual defendants were Cojuangco, President Marcos and First Lady Imelda R. Marcos, the ACCRA lawyers, and Ursua.

c.

The corporate defendants were Southern Luzon Oil Mills, Cagayan de Oro Oil Company, Incorporated, Iligan Coconut Industries, Incorporated, San Pablo Manufacturing Corporation, Granexport Manufacturing Corporation, Legaspi Oil Company, Incorporated, (collectively referred to herein as the CIIF Oil Mills), and their 14 holding companies, namely: Soriano Shares, Incorporated, Roxas Shares, Incorporated, Arc Investments, Incorporated, Toda Holdings, Incorporated, ASC Investments, Incorporated, Randy Allied Ventures, Incorporated, AP Holdings, Incorporated, San Miguel Corporation Officers, Incorporated, Te Deum Resources, Incorporated, Anglo Ventures, Incorporated, Rock Steel Resources, Incorporated, Valhalla Properties, Incorporated, and First Meridian Development, Incorporated. The additional corporate defendants (Cojuangco corporations) were several corporations alleged to have been under Cojuangco’s control and 52

d.

e.

f.

g.

He entered SMC in 1983; he bought 20 million shares Zobel. The shares, worth $49 million, represented 20% of SMC; Cojuangco acquired the Soriano stocks through secret agreements i.e. other persons or his heir would proxy over the vote of the shares of Soriano and Cojuangco. This led accounted for 30% of the OSS of SMC; In exchange for an SMC investment of $45 million in non-voting preferred shares in UCPB, Soriano served as the vice-chairman of the bank of the coconut farmers, UCPB, and in return, Cojuangco, for investing funds from the coconut levy, was named vice-chairman of SMC; Cojuangco appointed his nominees to the SMC Board, to which he appointed key members of the ACCRA Law Firm, instead of coconut farmers whose money really funded the sale; All together, Cojuangco purchased 33 million shares of the SMC through the 14 holding companies; the 14 holding companies were owned by the so-called CIIF Companies; Defendant Corporations are but "shell" corporations owned by interlocking shareholders who have admitted that they are just "nominee stockholders" who do not have any proprietary interest over the shares in their names; Cojuangco acquired a total of 16 million shares of SMC from the Ayala group. The AOI of these corporations under the Ayala,

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h.

i.

j.

showed that 99% of the OSS is owned by Atty. Concepcion of ACCRA Law; The other respondent Corporations are owned by interlocking shareholders who are likewise lawyers in the ACCRA and had admitted their status as "nominee stockholders" only; These companies were organized by ACCRA for Cojuangco to be able to control more than 60% of SMC shares, they were funded by institutions which depended upon the coconut levy such as the UCPB, UNICOM, United Coconut Planters Assurance Corp. (COCOLIFE), among others. Cojuangco and his ACCRA lawyers used the funds to borrow money from the UCPB and purchase these holding companies and the SMC stocks. Cojuangco used $150 million from the coconut levy. With this, SMC began to get favors from the Marcos government, the lowering of the excise taxes (sales and specific taxes) on beer;

ISSUE: Whether or not defendant Cojuangco had indeed served in the governing bodies of PC, UCPB and/or CIIF Oil Mills at the time the funds used to purchase the SMC shares were obtained such that he owed a fiduciary duty to render an account to these entities as well as to the coconut farmers. RULING: Cojuangco violated no fiduciary duties. Republic invoked Article 1455 and 1456 of the Civil Code and Section 31 of the Corporation Code, to wit: “Article 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong. Article 1456. If property is acquired through mistake or fraud, the person obtaining it is by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.” “Section 31. Liability of directors, trustees or officers.— Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or

acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation” The Sandiganbayan could not fairly find that Cojuangco had committed breach of any fiduciary duties as an officer and member of the BOD of the UCPB. For one, the Amended Complaint contained no clear factual allegation on which to predicate the application of Articles 1455 and 1456 of the Civil Code, and Section 31 of the Corporation Code. Although the trust relationship supposedly arose from Cojuangco’s being an officer and member of the BOD of the UCPB, the link between this alleged fact and the borrowings or advances was not established. Nor was there evidence on the loans or borrowings, their amounts, the approving authority, etc. As trial court, the Sandiganbayan could not presume his breach of fiduciary duties without evidence showing so, for fraud or breach of trust is never presumed, but must be alleged and proved. The thrust of the Republic that the funds were borrowed or lent might even preclude any consequent trust implication. In a contract of loan, one of the parties delivers money or other consumable thing to another on the condition that the same amount of the same kind and quality shall be paid. Owing to the consumable nature of the thing loaned, the resulting duty of the borrower in a contract of loan is to pay, not to return, to the creditor or lender the very thing loaned. This explains why the ownership of the thing loaned is transferred to the debtor upon perfection of the contract. Ownership of the thing loaned having transferred, the debtor enjoys all the rights conferred to an owner of property, including the right to use and enjoy (jus utendi), to consume the thing by its use (jus abutendi), and to dispose (jus disponendi), subject to such limitations as may be provided by law. Evidently, the resulting relationship between a creditor and debtor in a contract of loan cannot be characterized as fiduciary. Absent any special facts and circumstances proving a higher degree of responsibility, any dealings between a lender and borrower are not fiduciary in nature. 53

Based on the foregoing, a debtor can appropriate the thing loaned without any responsibility or duty to his creditor to return the very thing that was loaned or to report how the proceeds were used. Nor can he be compelled to return the proceeds and fruits of the loan, for there is nothing under our laws that compel a debtor in a contract of loan to do so. As owner, the debtor can dispose of the thing borrowed and his act will not be considered misappropriation of the thing. The only liability on his part is to pay the loan together with the interest that is either stipulated or provided under existing laws. DISSENTING OPINION OF JUSTICE CARPIO-MORALES Self-Dealing Director or Officer In acquiring the loans for himself while he was an officer of UCPB, Cojuangco violated his fiduciary obligation under the Corporation Code and the prohibition on self-dealing under the banking law. It having been established that Cojuangco engaged in prohibited conflictof-interest transactions by buying the SMC shares using coco levy funds being administered by the UCPB and CIIF Oil Mills for his own benefit, it follows that a constructive trust was formed in favor of the coconut farmers who should have benefited from such funds. The Civil Code provides: “Art. 1455. When any trustee, guardian, or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong. (emphasis and underscoring supplied)” A constructive trust is "a right of property, real or personal, held by one party for the benefit of another; that there is a fiduciary relation between a trustee and a cestui que trust as regards certain property, real, personal, money or choses in action." That under Article 1455 there must be a breach of fiduciary relation and profit or gain resulting therefrom in order for a constructive trust to be created in favor of that legally entitled to it/ Fraud in this kind of trust in fact need not even be present. The landmark case of Severino v. Severino enlightens: “A receiver, trustee, attorney, agent, or any other person occupying fiduciary relations respecting property or persons, is utterly disabled from acquiring for his own benefit the property

Derivative Suit

committed to his custody for management. This rule is entirely independent of the fact whether any fraud has intervened. No fraud in fact need be shown, and no excuse will be heard from the trustee. It is to avoid the necessity of any such inquiry that the rule takes so general a form. The rule stands on the moral obligation to refrain from placing one's self in positions which ordinarily excite conflicts between self-interest and integrity. It seeks to remove the temptation that might arise out of such a relation to serve one's self-interest at the expense of one's integrity and duty to another, by making it impossible to profit by yielding to temptation. It applies universally to all who come within its principle. (emphasis and underscoring supplied)” In the present case, whether Cojuangco committed fraud is no longer material, what is material and must be established being the existence of the fiduciary relation and the use of such position and the attendant abuse of the confidence reposed in him by virtue of that position which results in the constructive trust. Even assuming arguendo that fraud is material, the rule on the burden of proof of fraud, as the majority insists, does not apply in the present case. Authorities on evidence cite the existence of a fiduciary relation as an exception: “However, when a fiduciary relation exists between the parties to a transaction, the burden of proof of its fairness is upon the fiduciary. He must show that there was no abuse of confidence, that he has acted in good faith, and the act by which he is benefited was the free, voluntary, and independent act of the other party, done with full knowledge of its purpose and effect. Examples of such relationships may be seen in the case of directors of a corporation and the corporation, or any other relationship of an intimate and fiduciary character. A fiduciary seeking to profit by a transaction with the one who confided in him has the burden of showing that he communicated to the other not only the fact of his interest in the transaction, but all information he had which it was important for the other to know in order to enable him to judge the value of the property. The formal creation of a fiduciary relationship is not essential to the application of this rule. The principles apply to all cases in which confidence is reposed by one party in another, and the trust or confidence is accepted under circumstances which show that it was founded on intimate, personal, and business relations existing between the parties, which give the one advantage or superiority over the other, and impose

the burden of proving that the transaction was fair and just on the person acquiring the benefit. (emphasis and underscoring supplied)” Since Cojuangco was a fiduciary, the burden of evidence on the fairness of the questionable transactions was shifted to him. He failed to discharge this burden. In other words, it was not incumbent upon the Republic to adduce evidence on the particular details of the loans and credit advances for it was Cojuangco’s burden to establish the regularity of these transactions. I am not "second-guessing," as the majority points out, for I am justified to deem the irregularity or illegality thereof as established after Cojuangco refused to discharge his burden. The intentional concealment of facts as to render secretive the assailed loan transactions entered into by a fiduciary must be, as enunciated by the above-cited rule, taken against Cojuangco, he being the fiduciary.

Hence, the assets were transferred to respondent McCullough. However, the latter company failed and incurred losses. Mead learned of this and so he opposed it by filing a complaint before the lower court because the personal properties he contributed were also transferred to respondent McCullough. Primarily, he questioned the power of the stockholders to transfer corporate property to one of the members of the corporation considering that his consent was not obtained to allow such transfer. ISSUE: 1.

2.

Do majority of the stockholders, who were at the same time majority of the directors of the corporation, have the power under the law and its Articles, to sell or transfer to one of its members the assets of said corporation? May officer or directors of the corporation purchase the corporate property?

RULING: 64. MEAD v. E. C. MCCULLOUGH, et al., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY G.R. No. 6217 December 26, 1911

1.

Yes.

To determine this question, it is necessary to examine, first, the provisions of the Civil Code, and second, those provisions (art. 151 to 174) of the Code of Commerce.

FACTS: Petitioner Charles Mead, respondent Edwin McCullough and three others organized the corporation called The Philippine Engineering and Construction Company (PECC). It was engaged in the general engineering and construction work, primarily in the construction of warehouses and wharf for the US and attempted to rise the sunken Spanish Fleet. The 4 organizers, except petitioner Mead, contributed to the majority of the capital stock of PECC, the remaining shares were offered to the public. Petitioner Mead contributed some personal properties and was also assigned as a manager but he resigned when he accepted an engineering job in China. Despite such acceptance, he remained as one of the five directors of the PECC. At that time, the PECC was already incurring losses. Respondent McCullough, the president, proposed that he will buy the assets of the corporation, assume all of its obligations and organize another association named as Manila Salvage Company. The reason why he organized such association was that PECCs creditors agreed that if McCullough would organize a new association, they would give the new association an extension of time to comply with the contract and would reconsider the question of forfeiture of the money deposited by PECC with a bank. The three other directors then voted in favor of this proposal. 54

Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a corporation. There is nothing in these articles which expressly or impliedly prohibits the sale of corporate property to one of its members, nor a dissolution of a corporation in this manner. Neither is there anything in articles 151 to 174 of the Code of Commerce which prohibits the dissolution of a corporation by such sale or transfer. Article XIII of the corporation's statutes expressly provides that "in all the meetings of the stockholders, a majority vote of the stockholders present shall be necessary to determine any question discussed." The sale or transfer to one of its members was a matter which a majority of the stockholders could very properly consider. But it is said that if the acts and resolutions of a majority of the stockholders in a corporation are binding in every case upon the minority, the minority would be completely wiped out and their rights would be wholly at the mercy of the abuses of the majority. The resolutions passed within certain limitations by a majority of the stockholders of a corporation are binding upon the minority. Thus, it is well settled, first, that a private corporation, which owes no special duty to the public and which has not been given the right of eminent domain, has the absolute right and power as against the whole world except the state, to sell and dispose of all of its property; second, that the

Derivative Suit

board of directors, has the power, without reference to the assent or authority of the stockholders, when the corporation is in failing circumstances or insolvent or when it can no longer continue the business with profit, and when it is regarded as an imperative necessity; third, that a majority of the stockholders or directors, even against the protest of the minority, have this power where, from any cause, the business is a failure and the best interest of the corporation and all the stockholders require it. 2.

It depends.

While a corporation remains solvent, we can see no reason why a director or officer, by the authority of a majority of the stockholders or board of managers, may not deal with the corporation, loan it money or buy property from it, in like manner as a stranger. So long as a purely private corporation remains solvent, its directors are agents or trustees for the stockholders. They owe no duties or obligations to others.

c. d.

Right after the execution of the agreement, Te place and ad in a national newspaper the fact of being the exclusive dealer of Prime’s goods in Mindanao area. Thus, he was asked by some of his businessmen friends if they can be his sub-dealer. As such, Te entered into agreements with several hardware stores dealing in buying and selling of cement which would enable him to sell his allocation of 20,000 bags of cement. After execution of such agreement, he informed Prime that he is ready to open LOCs pursuant to the dealership agreement they formed.

FACTS:

These rules apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person i.e. a person outside the corporation. The situation is different where a director or officer is dealing with his own corporation.

a. b. c. d. e. f. g.

Delivery shall commence on November 1970; Only 8,000 bags per month for only a period of 3 months will be delivered; The price per bag is priced at Php 13.30; The price is subject to readjustment unilaterally on the part of Prime; The place of delivery shall be Austurias; The LOC may be opened only with the Prudential Bank, Makati branch; Payment of cement shall be made in advance and it shall be used by Prime as guaranty in the opening of a foreign LOC to cover costs and expenses in the procurement of materials in the manufacture of white cement.

Several demands to comply with the dealership agreement were made by Te to Prime. Prime refused which forced Te to cancel his agreement with third parties. More so, Prime, in violation of the exclusive dealership agreement with Te, entered into an exclusive dealership agreement with a certain Napoleon Co for the marketing of the white cement in Mindanao.

Here, Te was not an ordinary stockholder; he was a member of the BOD and Auditor of Prime. He is a “self-dealing” director (SDD). A director of a corporation holds a position of trust, he owes a duty of loyalty to his corporation. In case of conflict of interest, he cannot sacrifice his duty to his own advantage and benefit. This trust relationship is “not a matter of statutory or technical law. It springs from the act that directors have the control and guidance of corporate affairs and property and hence of the property interest of the stockholders.” A director’s contract with his own corporation is not in all instances void or voidable. If the contract is fair and reasonable, it may be ratified by the stockholders. Section 32 of the Corporation Code provides: “Sec. 32. Dealings of directors, trustees or officers with the corporation.- A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1.

In 1969, Prime White Cement Corporation (Prime), thru its President, Zosimo Falcon (Falcon) and its Chairman, Justo Trazo (Trazo), entered into a dealership agreement where Alejandro Te (Te) was obligated to act as the executive dealer and/or distributor of Prime of its cement products in the entire Mindanao area for a term of five (5) years with the following agreements: a. b.

Under the Corporation Law, all corporate powers shall be exercise by the BOD except as otherwise provided by law. However, the BOD may expressly designate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the BOD should ratify the same expressly or impliedly. Furthermore, even in the absence of ratification, the President, as a general rule, may bind the corporation by a contract in the ordinary course of business, provided that it is reasonable.

However, Prime decided thru its BOD to impose the following conditions:

But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard to their interest; and if they are themselves creditors while the insolvent corporation is under their management, they will not be permitted to secure to themselves by purchasing the corporate property or otherwise any personal advantage over the other creditors. Nevertheless, a director or officer may in good faith and for an adequate consideration purchase from a majority of the directors or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the minority.

65. PRIME WHITE CEMENT v. IAC and TE G.R. No. L-68555 19 March 1993

Te will pay Prime Php 9.70 per bag of white cement, FOB Davaor and Cagayan De Oro; and Te shall, every time Prime is ready to deliver the goods, open with any bank a letter of credit (LOC) in favor of Prime.

The delivery shall commence on September 1970; Prime will sell and supply Te with 20,000 bags of white cement per month;

Te filed a suit. ISSUE: 2. Is the dealership agreement referred by the President and Chairman of the BOD of Prime a valid and enforceable contract?

3.

RULING:

4.

That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; That the vote of such director or trustee was nor necessary for the approval of the contract; That the contract is fair and reasonable under the circumstances; and That in case of an officer, the contract has been previously authorized by the board of directors.

No. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a 55

Derivative Suit

contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.” Even if the dealership agreement was entered into with a third person would be valid, the fact that the other person to the contract was a Director and Auditor of Prime changes the whole situation. First, the contract is not fair nor reasonable. The agreement was contracted in 1969. Te is a businessman, he must have known that the prices of commodities at that time were not stable and were expected to rise. Prime was not even, at that time, starting at the manufacturing of the cement. In fact, it shows in Te’s Memorandum, that the price per bag in September 1970 was Php 14.50, and in 1975, it was already Php 37.50. Despite this, there was no provision for an increase in the price mutually acceptable to the parties. Instead, it was pegged at Php 9.70 from 1970 to 1975. Moreover, when he entered into sub-dealership agreements, he stipulated that “the price shall be mutually determined by us in no less than Php 14.00 per bag”. Meaning, he protected himself from the fluctuation of prices of the certain commodities. However, why didn’t he protect the corporation in the same manner? As member of the BOD, Te’s bounden duty to act in such manner as not to unduly prejudice Prime. Hence, he is guilty of disloyalty to his corporation; he was attempting to enrich himself at the expense of the corporation. Moreover, there is no showing that the “dealership agreement” were ratified by the stockholder, or that they were fully aware of its provisions. The contract was therefore not valid.

66. PATLING v. SAN JOSE PETROLEUM G.R. No. L-14441

December 17, 1966

This is a petition for review of the order of the Securities and Exchange Commission denying the opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of 5,000,000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc.

(hereafter referred to as SAN JOSE PETROLEUM), a corporation organized and existing in the Republic of Panama. FACTS: On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock of a par value of $0.35 a share, at P1.00 per share. It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL) which has 14 petroleum exploration concessions covering an area of a little less than 1,000,000 hectares. It was the express condition of the sale that every purchaser of the securities shall not receive a stock certificate, but a registered or bearer-voting-trust certificate from the voting trustees named therein James L. Buckley and Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second in New York City. While this application for registration was pending consideration by the Securities and Exchange Commission, SAN JOSE PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the shares has also been reduced from $.35 to $.01 per share.1 PALTING: Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission an opposition to registration and licensing of the securities on the ground that the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949. SAN JOSE P.:the registrant SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights under the Ordinance appended to the Constitution, which parity right, with respect to mineral resources in the Philippines, may be exercised, pursuant to the LaurelLangley Agreement, only through the medium of a corporation organized under the laws of the Philippines. Thus, registrant which is allegedly qualified to exercise rights under the Parity Amendment, had to do so through the medium of a domestic corporation, which is the SAN JOSE OIL. It refused the contention that the Corporation Law was being violated, by alleging that Section 13 thereof applies only to foreign corporations doing business in the Philippines, and registrant was not doing business here. The mere fact that it was a holding company of SAN JOSE OIL and that registrant undertook the financing of and giving technical assistance to said corporation did not constitute transaction of 56

business in the Philippines. Registrant also denied that the offering for sale in the Philippines of its shares of capital stock was fraudulent or would work or tend to work fraud on the investors. On August 29, 1958, and on September 9, 1958 the Securities and Exchange Commissioner issued the orders object of the present appeal. ISSUE: Should the registration of the sale be allowed? RULING: NO. The relationship of these corporations involved or affected in this case is admitted and established through the papers and documents which are parts of the records: SAN JOSE OIL, is a domestic mining corporation, 90% of the outstanding capital stock of which is owned by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority interest of which is owned by OIL INVESTMENTS, Inc., another foreign (Panamanian) company. This latter corporation in turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A., both organized and existing under the laws of Venezuela. As of September 30, 1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM found in 49 American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of November 30, 1956, PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373 stockholders scattered in 49 American state. In the two lists of stockholders, there is no indication of the citizenship of these stockholders,7 or of the total number of authorized stocks of each corporation, for the purpose of determining the corresponding percentage of these listed stockholders in relation to the respective capital stock of said corporation. PETITIONER: Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the relationship between herein respondent SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of the Corporation Law, which inhibits a mining corporation from acquiring an interest in another mining corporation. It is respondent's theory, on the other hand, that far from violating the Constitution; such relationship between the two corporations is in accordance with the Laurel-Langley Agreement which implemented the Ordinance Appended to the Constitution, and that Section 13 of the Corporation Law is not applicable because respondent is not licensed to do business, as it is not doing business, in the Philippines.

Derivative Suit

Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for sale in the Philippines, was incorporated under the laws of Panama in April, 1956 with an authorized capital stock of $500,000.00, American currency, divided into 50,000,000 shares at par value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956, respondent was supposed to have received from OIL INVESTMENTS 8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note for $250,000.00 due in 6 months, for which respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital stock, at $0.01 per share or with a value of $160,000.00, plus a note for $230,297.97 maturing in 2 years at 6% per annum interest,9 and the assumption of payment of the unpaid price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).

On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from $500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000 shares, from $0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01 previously issued to OIL INVESTMENTS with a total value of $160,000.00 were changed with 16,000,000 shares of the recapitalized stock at $0.35 per share, or valued at $5,600,000.00. And, to make it appear that cash was received for these re-issued 16,000,000 shares, the board of directors of respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE OIL (still having par value of $0.10 per share) which were received from OIL INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per share. In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged difference between the "value" of the said shares and the subscription price thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00, the subscription price of the SAN JOSE OIL shares, the amount of $319,702.03 was deducted, as allegedly unpaid subscription price, thereby giving a difference of $480,297.97, which was placed as the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN JOSE PETROLEUM appeared to have assets in the sum of $736,814.18. These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears no basis for such valuation other than belief by the board of

directors of respondent that "should San Jose Oil Company be granted the bulk of the concessions applied for upon reasonable terms, that it would have a reasonable value of approximately $10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was deducted and called it "difference between the (above) valuation and the subscription price for the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum of $480,297.97 and the difference was placed as the unpaid portion of the subscription price. In other words, it was made to appear that they paid in $480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement, and a sum of $230,297.97 the amount expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among respondent's liabilities, for $230,297.97 appearing as note payable to Oil Investments, maturing in two (2) years at six percent (6%) per annum. 11 As far as it appears from the records, for the 16,000,000 shares at $0.35 per share issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from OIL INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a total of $1,050,000.00 — the only assets of the corporation. In other words, respondent actually lost $4,550,000.00, which was received by OIL INVESTMENTS. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE PETROLEUM are noteworthy; viz: (1) the directors of the Company need not be shareholders; (2) that in the meetings of the board of directors, any director may be represented and may vote through a proxy who also need not be a director or stockholder; and (3) that no contract or transaction between the corporation and any other association or partnership will be affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is interested in, or is a director or officer of, such other association or partnership, and that no such contract or transaction of the corporation with any other person or persons, firm, association or partnership shall be affected by the fact that any director or officer of the corporation is a party to or has an interest in, such contract or transaction, or has in anyway connected with such other person or persons, firm, association or partnership; and finally, that all and any of the persons who may become director or officer of the corporation shall be relieved from all responsibility for which they may otherwise be liable by reason of any contract entered into with the corporation, whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested.

These provisions are in direct opposition to our corporation law and corporate practices in this country. These provisions alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are directors or officers of such other association or corporation; and that none of such contracts or transactions of this company with any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or transaction or has any connection with such person or persons, firms associations or corporations; and that any and all persons who may become directors or officers of this company are hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this company either for their own benefit, or for the benefit of any person, firm, association or corporation in which they may be interested. The impact of these provisions upon the traditional judiciary relationship between the directors and the stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the interest of investors. The directors and officers of the company can do anything, short of actual fraud, with the affairs of the corporation even to benefit themselves directly or other persons or entities in which they are interested, and with immunity because of the advance condonation or relief from responsibility by reason of such acts. This and the other provision which authorizes the election of non-stockholders as directors, completely disassociate the stockholders from the government and management of the business in which they have invested. To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of the former corporation and acting "on behalf of all future holders of voting trust certificates," entered into a voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby said Trustees were given authority to vote the shares represented by the outstanding trust certificates (including those that may henceforth be issued) in the following manner: (a) At all elections of directors, the Trustees will designate a suitable proxy or proxies to vote for the election of directors designated by the Trustees in their own discretion, having in mind the best interests of the holders of the voting trust certificates, it being understood that any and all of the Trustees shall be eligible for election as directors; (b) On any proposition for removal of a director, the Trustees shall designate a suitable proxy or proxies to vote for or against such

57

Derivative Suit

proposition as the Trustees in their own discretion may determine, having in mind the best interest of the holders of the voting trust certificates;

Maricalum Mining, and the APT as co-defendants warranting the piercing of the veil of corporate fiction since all them are as one and the same entity.

(c) With respect to all other matters arising at any meeting of stockholders, the Trustees will instruct such proxy or proxies attending such meetings to vote the shares of stock held by the Trustees in accordance with the written instructions of each holder of voting trust certificates. (Emphasis supplied.)

Issue: Does Remington has a cause of action against DBP or PNB, nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT?

It was also therein provided that the said Agreement shall be binding upon the parties thereto, their successors, and upon all holders of voting trust certificates.And these are the voting trust certificates that are offered to investors as authorized by Security and Exchange Commissioner. It can not be doubted that the sale of respondent's securities would, to say the least, work or tend to work fraud to Philippine investors.

Where the corporations have directors and officers in common, there may be circumstances under which their interest as officers in one company may disqualify them in equity from representing both corporations in transactions between the two. Thus, where one corporation was ‗insolvent and indebted to another, it has been held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness In the same manner that when the corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantage or preference over other creditors. They cannot thus take advantage of their fiduciary relation and deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the corporation or their representatives, without reference to the question of any actual fraudulent intent on the part of the directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation to the directors.

FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this appeal, is denied and the orders of the Securities and Exchange Commissioner, allowing the registration of Respondent's securities and licensing their sale in the Philippines are hereby set aside. 67. DBP v. CA 363 S 307 Facts: Marinduque Mining obtained from the PNB various loan accommodations. To secure the loans, Marinduque Mining mortgaged all of MarinduqueMinings real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. Also, Marinduque Mining mortgaged all of MarinduqueMinings chattels, as well as assets of whatever kind, nature and description which Marinduque Mining may subsequently acquire. For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted extrajudicial foreclosure proceedings over the mortgaged properties. In the public auction sale PNB and DBP emerged and were declared the highest bidders over the foreclosed properties. PNB and DBP thereafter assigned and transferred to Nonoc Mining and Industrial Corporation and Maricalum Mining Corp. all their rights, interest and participation over the foreclosed properties of MMIC located at Nonoc Island, SurigaodelNorte and Sipalay, Negros Occidental respectively. Then they again assigned, transferred and conveyed to the National Government thru the Asset Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier assigned to Nonoc Mining, Maricalum Mining and Island Cement Corporation. In the meantime, Marinduque Mining purchased from Remignton construction materials but were unpaid. Remington filed a complaint for a sum of money and damages against Marinduque Mining. Remingtons original complaint was amended to include PNB and DBP, Nonoc Mining, Island Cement,

Ruling: No.

In this case, the court did not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil. It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of more than 20% of the total outstanding obligation. Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the subject properties. The banks had no choice but to obey the statutory command. The Court of Appeals made reference to two principles in corporation law. The first pertains to transactions between corporations with interlocking directors resulting in the prejudice to one of the corporations. This rule does not apply in this case, however, since the corporation allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking directors (Marinduque Mining and DBP). The second principle invoked by respondent court involves directors who are creditors which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining. Neither does the court discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in the mining business. The creation of the three 58

corporations was only necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value.

68. JOHN GOKONGWEI, JR. v. SECURITIES AND EXCHANGE COMMISSION G.R. No. L-45911 April 11, 1979 Facts: Petitioner, as stockholder of respondent San Miguel Corporation (SMC), filed with the SEC a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the BOD and SMC. Petitioner alleged that the individual respondents amended the by-laws of the corporation, basing their authority to do so on a resolution of the stockholders in 1961. It was contended that according to section 22 of the Corporation Law and Article VIII of the bylaws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the BOD only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. Petitioner alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist. He also averred that the membership of the BOD had changed since the authority was given in 1961, there being six (6) new directors. It was claimed that prior to the questioned amendment, petitioner had all the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the bylaws, respondents purposely provided for petitioner's disqualification and deprived him of his vested right. It was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the amended by-laws are null and void. Respondents contended that the power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto has never been revoked by San Miguel Corp. and that petitioner has not availed of his intra-corporate remedy for the nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any regular or special meeting, hence the, petition is premature. It also alleged that petitioner is estopped from questioning the amendments on the ground of lack of authority from the Board since he failed to object to other amendments made on the basis of the same 1961 authorization.

Derivative Suit

2) Respondents Jose and Andres Soriano, in their answer, alleged that the Universal Robina Corporation (Robina) and Consolidated Foods Corporation (CFC), both closed corporations engaged in business competitive to that of respondent corporation, where petitioner is the president and controlling shareholder, purchased 5,000 shares of stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina, conducted malevolent and malicious publicity campaign against SMC to generate support from the stockholders in his effort to secure for himself a seat in the Board of Directors of SMC but petitioner was rejected by the stockholders because of the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to grave disadvantages. In 1976, petitioner filed with the SEC an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of respondent corporation refused to allow him to inspect its records despite request made by petitioner for production of certain documents enumerated in the request, and that respondent corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. Respondents opposed the urgent motion due to the fact that it has no legal basis and that it fails to show good cause and constitutes continued harassment, and that some of the information sought are not part of the records of the corporation and, therefore, privileged. While the petition was yet to be heard, respondent corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws". After petitioner’s request for summary judgment on the supposed meeting was opposed, the same filed an Urgent Motion for the Issuance of a TRO restraining respondents from holding the special stockholder's meeting as scheduled which the SEC denied. Subsequently, the meeting proceeded. Petitioner then filed with respondent SEC a Manifestation stating that he intended to run for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with the SEC, submitting a Resolution of the BOD of SMC disqualifying and precluding petitioner from being a candidate for director unless he could submit evidence that he does not come within the disqualifications specified in the amendment to the by-laws. Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act which amounted to grave abuse of its discretion when it failed to act with deliberate dispatch on the motions of petitioner. Issues: 1) Does the respondent corporation have the power to provide for the (additional) qualifications of its directors?

Are the amended by-laws of SMC disqualifying a competitor from nomination or election to the Board of Directors of SMC valid and reasonable exercise of corporate powers?

Held: YES. It is recognized by authorities that every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. At common law, the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. A stockholder has no vested right to be elected as a director. Any person who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted bylaws and not forbidden by law. To this extent, therefore, the stockholder may be considered to have parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed by any act of the former which is authorized by a majority. Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders then the dissenting minority has only one right, viz.: to object thereto in writing and demand payment for his share. Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification.

relation is one of trust. This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment advances the benefit of the corporation and is good. Section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. The doctrine of "corporate opportunity" is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with petitioner's primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management.

YES. An amendment to the corporation by-law which renders a stockholder ineligible to be director, if he be also director in a corporation whose business is in competition with that of the other corporation, has been sustained as valid. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, directors occupy a fiduciary relation, and in this sense the 59

69. STRONG v. REPIDE 213 U.S. 419 May 3, 1909 FACTS:

Derivative Suit

Mrs. Strong was the owner of 800 shares of the capital stock of the Philippine Sugar Estates Development Company. The defendant was the owner of 30,400 of the 42,030 shares of the company and was one of the five directors as elected "with exclusive intervention in the management" of its general business. In 1903 the Philippine government, made an offer of purchase for the total sum of $6,043,219.47 in gold for all the friar lands, though owned by different owners. The offer was rejected by defendant in his capacity as majority shareholder, without any consultation with the other shareholders. The defendant continued his refusal to accept until the other owners consented to pay to his company $335,000 of the purchase price for their land, and until the government consented that a thousand hectares should be excluded from the sale to it of the land of defendant's company. This being agreed to, the contract for the sale was finally signed by the defendant as attorney in fact for his company, December 21, 1903. During the course of said negotiation, on or about October 10, 1903, the agent of Strong, sold the 800 shares of stock for $16,000, Mexican currency to defendant. The defendant thus obtained the 800 shares for about one tenth of the amount they became worth by the sale of the lands between two and three months thereafter. In all the negotiations in regard to the purchase of the stock from Mrs. Strong, not one word of the facts affecting the value of this stock was made known to plaintiff's agent by defendant. The real state of the negotiations with the government was not mentioned, nor was the fact stated that it rested chiefly with the defendant to complete the sale. Moreover, the agent of the plaintiff had no knowledge or suspicion that defendant was the one seeking to purchase the shares.

RULING: 1. Was it the duty of the defendant, acting in good faith, to disclose to the agent of the plaintiff the facts bearing upon or which might affect the value of the stock? No. A director upon whose action the value of the shares depends cannot avail of his knowledge of what his own action will be to acquire shares from those whom he intentionally keeps in ignorance of his expected action and the resulting value of the shares. This is a rule of common law, and also of the Spanish law before the adoption of the Philippine Civil Code; and, under ss. 1261-1269 of that code, a contract obtained under such circumstances can be avoided by the party whose consent would not have been given had he known the facts within the knowledge of the other party.

Even though a director may not be under the obligation of a fiduciary nature to disclose to a shareholder his knowledge affecting the value of the shares, that duty may exist in special cases, and did exist upon the facts in this case. If, under all these facts, he purchased the stock from the plaintiff, the law would indeed be impotent if the sale could not be set aside or the defendant cast in damages for his fraud.

70. SPI TECHNOLOGIES and LEA VILLANUEVA v. VICTORIA MAPUA G.R. No. 191154

April 7, 2014

FACTS: Victoria K. Mapua (Mapua) alleged that she was hired in 2003 by SPI Technologies, Inc. (SPI) and was the Corporate Development’s Research/Business Intelligence Unit Head and Manager of the company. Subsequently in August 2006, the then Vice President and Corporate Development Head, Peter Maquera (Maquera) hired Elizabeth Nolan (Nolan) as Mapua’s supervisor.5 Sometime in October 2006, the hard disk on Mapua’s laptop crashed, causing her to lose files and data. Mapua informed Nolan and her colleagues that she was working on recovering the lost data and asked for their patience for any possible delay on her part in meeting deadlines.6 On November 13, 2006, Mapua retrieved the lost data with the assistance of National Bureau of Investigation Anti-Fraud and Computer Crimes Division. Yet, Nolan informed Mapua that she was realigning Mapua’s position to become a subordinate of co-manager Sameer Raina (Raina) due to her missing a work deadline. Nolan also disclosed that Mapua’s colleagues were "demotivated" [sic] because she was "taking things easy while they were working very hard," and that she was "frequently absent, under timing, and coming in late every time [Maquera] goes on leave or on vacation."7 On November 16, 2006, Mapua obtained a summary of her attendance for the last six months to prove that she did not have frequent absences or under time when Maquera would be on leave or vacation. When shown to Nolan, she was merely told not to give the matter any more importance and to just move on.8 In December 2006, Mapua noticed that her colleagues began to ostracize and avoid her. Nolan and Raina started giving out majority of her research work and other duties under Healthcare and Legal Division to the rank60

and-file staff. Mapua lost about 95% of her work projects and job responsibilities.9 Mapua consulted these work problems with SPI’s Human Resource Director, Lea Villanueva (Villanueva), and asked if she can be transferred to another department within SPI. Subsequently, Villanueva informed Mapua that there is an intra-office opening and that she would schedule an exploratory interview for her. However, due to postponements not made by Mapua, the interview did not materialize. On February 28, 2007, Mapua allegedly saw the new table of organization of the Corporate Development Division which would be renamed as the Marketing Division. The new structure showed that Mapua’s level will be again downgraded because a new manager will be hired and positioned between her rank and Raina’s.10 On March 21, 2007, Raina informed Mapua over the phone that her position was considered redundant and that she is terminated from employment effective immediately. Villanueva notified Mapua that she should cease reporting for work the next day. Her laptop computer and company mobile phone were taken right away and her office phone ceased to function.11 Mapua was shocked and told Raina and Villanueva that she would sue them. Victoria K. Mapua (Mapua) alleged that she was hired in 2003 by SPI Technologies, Inc. (SPI) and was the Corporate Development’s Research/Business Intelligence Unit Head and Manager of the company. Subsequently in August 2006, the then Vice President and Corporate Development Head, Peter Maquera (Maquera) hired Elizabeth Nolan (Nolan) as Mapua’s supervisor.5 Sometime in October 2006, the hard disk on Mapua’s laptop crashed, causing her to lose files and data. Mapua informed Nolan and her colleagues that she was working on recovering the lost data and asked for their patience for any possible delay on her part in meeting deadlines.6 On November 13, 2006, Mapua retrieved the lost data with the assistance of National Bureau of Investigation Anti-Fraud and Computer Crimes Division. Yet, Nolan informed Mapua that she was realigning Mapua’s position to become a subordinate of co-manager Sameer Raina (Raina) due to her missing a work deadline. Nolan also disclosed that Mapua’s colleagues were "demotivated" [sic] because she was "taking things easy while they were working very hard," and that she was "frequently absent, under timing, and coming in late every time [Maquera] goes on leave or on vacation."7

Derivative Suit

On November 16, 2006, Mapua obtained a summary of her attendance for the last six months to prove that she did not have frequent absences or under time when Maquera would be on leave or vacation. When shown to Nolan, she was merely told not to give the matter any more importance and to just move on.8 In December 2006, Mapua noticed that her colleagues began to ostracize and avoid her. Nolan and Raina started giving out majority of her research work and other duties under Healthcare and Legal Division to the rankand-file staff. Mapua lost about 95% of her work projects and job responsibilities.9 Mapua consulted these work problems with SPI’s Human Resource Director, Lea Villanueva (Villanueva), and asked if she can be transferred to another department within SPI. Subsequently, Villanueva informed Mapua that there is an intra-office opening and that she would schedule an exploratory interview for her. However, due to postponements not made by Mapua, the interview did not materialize.

damages to the corporation, its stockholders or other persons; (b) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (c) they agree to hold themselves personally and solidarily liable with the corporation; or (d) they are made by specific provision of law personally answerable for their corporate action." While the Court finds Mapua’s averments against Villanueva, Nolan, Maquera and Raina as detailed and exhaustive, the Court takes notice that these are mostly suppositions on her part. Thus, the Court cannot apply the above-enumerated exceptions when a corporate officer becomes personally liable for the obligation of a corporation to this case.

71. HEIRS OF FE TAN UY v. INTERNATIONAL EXCHANGE BANK G.R. No. 166282; February 13, 2013 FACTS:

On February 28, 2007, Mapua allegedly saw the new table of organization of the Corporate Development Division which would be renamed as the Marketing Division. The new structure showed that Mapua’s level will be again downgraded because a new manager will be hired and positioned between her rank and Raina’s.10 On March 21, 2007, Raina informed Mapua over the phone that her position was considered redundant and that she is terminated from employment effective immediately. Villanueva notified Mapua that she should cease reporting for work the next day. Her laptop computer and company mobile phone were taken right away and her office phone ceased to function.11

International Bank (iBank) granted loans to Hammer Garments Corporation (Hammer), covered by promissory notes and deeds of assignment. The loans were secured by a 9-million-peso real estate mortgage by Goldkey Development Corporation (Goldkey) and a 25million-peso surety agreement signed by Chua and his wife, Fe Tan Uy (Uy). Hammer defaulted in the payment of the loans prompting iBank to foreclose the real estate mortgage leaving an unpaid balance of almost 13.5 million pesos. For failure of Hammer to pay the deficiency, iBank filed a complaint for sum of money against Hammer, Chua, Uy and Goldkey. Chua and Hammer failed to file their answers and were declared in default. Uy claimed that she was not liable to iBank because she never executed a surety agreement in favor of iBank. ISSUE:

Mapua was shocked and told Raina and Villanueva that she would sue them.

Is Uy liable for the corporation because she was an officer, stockholder thereof?

ISSUE:

RULING:

WON the coroporate officers are solidarily liable Held: On the issue of the solidary obligation of the corporate officers impleaded vis-à-vis the corporation for Mapua’s illegal dismissal, "[i]t is hornbook principle that personal liability of corporate directors, trustees or officers attaches only when: (a) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in

No. Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse 61

legitimate issues. This is consistent with the provisions of the Corporation Code of the Philippines, which states: Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. Solidary liability will then attach to the directors, officers or employees of the corporation in certain circumstances, such as: 1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; and (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; 2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or 4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. In this case, it was not alleged that Uy committed an act as an officer of Hammer that would permit the piercing of the corporate veil. A reading of the complaint reveals that with regard to Uy, iBank did not demand that she be held liable for the obligations of Hammer because she was a corporate officer who committed bad faith or gross negligence in the performance of her duties such that the lifting of the corporate mask would be merited. What the complaint simply stated is that she, together with her errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the Surety Agreement which was later found by the RTC to have been forged. Indeed, there is no showing that Uy committed gross negligence. And in the absence of any of the aforementioned requisites for making a corporate officer, director or stockholder personally liable for the obligations of a corporation, Uy, as a treasurer and stockholder of Hammer, cannot be made to answer for the unpaid debts of the corporation.

Derivative Suit

72. EVER ELECTRICAL MANUFACTURING CORP. v SMEENAMAWU G.R. No. 194795 June 13, 2012

and, as a result, EEMI’s employees were prevented from entering the factory.

J. MENDOZA ISSUE/S: FACTS: Petitioner Ever Electrical Manufacturing, Inc. (EEMI) is a corporation engaged in the business of manufacturing electrical parts and supplies. On the other hand, the respondents are members of Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224 (respondents) headed by Felimon Panganiban.The controversy started when EEMI closed its business operations on October 11, 2006 resulting in the termination of the services of its employees. Aggrieved, respondents filed a complaint for illegal dismissal with prayer for payment of 13th month pay, separation pay, damages, and attorney’s fees. Respondents alleged that the closure was made without any warning, notice or memorandum and in full disregard of the requirements of the Labor Code.In its defense, EEMI explained that it had closed the business due to various factors. In 1995, it invested in Orient Commercial Banking Corporation (Orient Bank) the sum of ₱500,000,000.00 and during the Asian Currency crises, various economies in the South East Asian Region were hurt badly. EEMI was one of those who suffered huge losses. In November 1996, it obtained a loan in the amount of ₱121,400,000.00 from United Coconut Planters Bank (UCPB). As security for the loan, EEMI’s land and its improvements, including the factory, were mortgaged to UCPB. EEMI’s business suffered further losses due to the continued entry of cheaper goods from China and other Asian countries. Adding to EEMI’s financial woes was the closure of Orient Bank where most of its resources were invested. As a result, EEMI was not able to meet its loan obligations with UCPB.In an attempt to save the company, EEMI entered into a dacion en pago arrangement with UCPB which, in effect, transferred ownership of the company’s property to UCPB as reflected in TCT No. 429159. Originally, EEMI wanted to lease the premises to continue its business operation but under UCPB’s policy, a previous debtor who failed to settle its loan obligation was not eligible to lease its acquired assets. Thus, UCPB agreed to lease it to an affiliate corporation, EGO Electrical Supply Co, Inc. (EGO), for and in behalf of EEMI. On February 2, 2002, a lease agreement was entered into between UCPB and EGO.4 The said lease came to a halt when UCPB instituted an unlawful detainer suit against EGO before the Metropolitan Trial Court, Branch 5, Makati City (MeTC) docketed as Civil Case No. 88602. On August 11, 2006, the MeTC ruled in favor of UCPB and ordered EGO to vacate the leased premises and pay rentals to UCPB in the amount of ₱21,473,843.65.5 On September 19, 2006, a writ of execution was issued.6 Consequently, on October 11, 2006, the Sheriff implemented the writ by closing the premises

WHETHER THE CA ERRED IN FINDING VICENTE GO SOLIDARILY LIABLE WITH EEMI

RULING: As a general rule, corporate officers should not be held solidarily liable with the corporation for separation pay for it is settled that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 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.17 The LA was of the view that Go, as President of the corporation, actively participated in the management of EEMI’s corporate obligations, and, accordingly, rendered judgment ordering EEMI and Go "in solidum to pay the complainants"18 their due. He explained that "[r]espondent Go’s negligence in not paying the lease rental of the plant in behalf of the lessee EGO Electrical Supply, Inc., where EEMI was operating and reimburse expenses of UCPB for real estate taxes and the like, prompted the bank to file an unlawful detainer case against the lessee, EGO Electrical Supply Co. This evasion of an existing obligation, made respondent Go as liable as respondent EEMI, for complainants’ money awards."19 Added the LA, "being the President and the one actively representing respondent EEMI, in major contracts i.e. Real Estate Mortgage, loans, dacion en pago, respondent Go has to be liable in the case."20 As earlier stated, the CA affirmed the LA decision citing the case of Restaurante Las Conchas v. Llego,21 where it was held that "when the employer corporation is no longer existing and unable to satisfy the judgment in favor of the employees, the officers should be held liable for acting on behalf of the corporation."22 A study of Restaurante Las Conchas case, however, bares that it was an application of the exception rather than the general rule. As stated in the said case, "as a rule, the officers and members of a corporation are not personally liable for acts done in the performance of their duties."23 The Court therein explained that it applied the exception because of the peculiar circumstances of the case. If the rule would be applied, the employees would end up in an empty victory because as the restaurant 62

had been closed for lack of venue, there would be no one to pay its liability as the respondents therein claimed that the restaurant was owned by a different entity, not a party in the case.24 In two subsequent cases, the Court’s ruling in Restaurante Las Conchas was invoked but the Court refused to consider it reasoning out that it was the exception rather than the rule. The two cases were Mandaue Dinghow Dimsum House, Co., Inc. and/or Henry Uytengsu v. National Labor Relations Commission25 and Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission.26 In Mandaue Dinghow Dimsum House, Co., Inc., the Court declined to apply the ruling in Restaurante Las Conchas because there was no evidence that the respondent therein, Henry Uytrengsu, acted in bad faith or in excess of his authority. It stressed that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. For said reason, the doctrine of piercing the veil of corporate fiction must be exercised with caution.27 Citing Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos,28 the Court explained that corporate directors and officers are solidarily liable with the corporation for the termination of employees done with malice or bad faith. It stressed that bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud. In Pantranco Employees Association, the Court also rejected the invocation of Restaurante Las Conchas and refused to pierce the veil of corporate fiction. It explained: As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist that because the company, PNEI, has already ceased operations and there is no other way by which the judgment in favor of the employees can be satisfied, corporate officers can be held jointly and severally liable with the company. Petitioners rely on the pronouncement of this Court in A.C. Ransom Labor Union-CCLU v. NLRC and subsequent cases. This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant case. For one, in the said cases, the persons made liable after the company’s cessation of operations were the officers and agents of the corporation. The rationale is that, since the corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of the employer. The corporation, only in the technical sense, is the employer. In the instant case, what is being made liable is another corporation (PNB) which acquired the debtor corporation (PNEI).Moreover, in the recent cases Carag v. National Labor Relations Commission and McLeod v. National Labor Relations Commission, the Court explained the doctrine laid down in AC Ransom

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relative to the personal liability of the officers and agents of the employer for the debts of the latter. In AC Ransom, the Court imputed liability to the officers of the corporation on the strength of the definition of an employer in Article 212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer includes any person acting in the interest of an employer, directly or indirectly, but does not include any labor organization or any of its officers or agents except when acting as employer. It was clarified in Carag and McLeod that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation. It added that the governing law on personal liability of directors or officers for debts of the corporation is still Section 31 of the Corporation Code.More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom, foreseeing the possibility or probability of payment of backwages to its employees, organized Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their case. The execution could not be implemented against Ransom because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. Hence, the Court sustained the piercing of the corporate veil and made the officers of Ransom personally liable for the debts of the latter. Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.29 [Emphasis supplied]Similarly, in the case at bench, the records do not warrant an application of the exception.1âwphi1 The rule, which requires the presence of malice or bad faith, must still prevail. In the recent case of Wensha Spa Center and/or Xu Zhi Jie v. Yung,30 the Court absolved the corporation’s president from liability in the absence of bad faith or malice. In the said case, the Court stated:In labor cases, corporate directors and officers may be held solidarily liable with the corporation for the termination of employment only if done with malice or in bad faith.31 Bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.32 In the present case, Go may have acted in behalf of EEMI but the company’s failure to operate cannot be equated to bad faith. Cessation of business operation is brought about by various causes like mismanagement, lack of demand, negligence, or lack of business foresight. Unless it can be shown that the closure was deliberate, malicious and in bad faith, the Court must apply the general rule that a corporation

has, by law, a personality separate and distinct from that of its owners. As there is no evidence that Go, as EEMI’s President, acted maliciously or in bad faith in handling their business affairs and in eventually implementing the closure of its business, he cannot be held jointly and solidarily liable with EEMI.

73. HARPOON MARINE SERVICES v. FRANCSICO G.R. No. 167751; March 2, 2011

2.

When the director or officer has consented to the issuance of watered stock or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto.

3.

When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation.

4.

When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.

FACTS: Harpoon is a company engaged in ship building and repair, with Rosit as its president and CEO. Fernan Francisco was hired as yard supervisor in 1992 but he was unceremoniously dismissed by Rosit in 2001. Francisco was only offered his separation pay, hence an illegal dismissal complaint was filed, praying for the payment of his backwages, separation pay, unpaid commission, moral and exemplary damages and attorney’s fees. The Labpr Arbiter decided that there was valid dismissal. NLRC reversed LA. CA affirmed NLRC. Hence, this petition. ISSUE: Should Rosit be held liable for the dismissal of Fernan Francisco? RULING: No. Rosit should not be held solidarily liable with petitioner Harpoon for the payment of respondents backwages and separation pay. As held in the case of MAM Realty Development Corporation v. National Labor Relations Commission, obligations incurred by [corporate officers], acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. As such, they should not be generally held jointly and solidarily liable with the corporation. The Court, however, cited circumstances when solidary liabilities may be imposed, as exceptions: 1.

vote for or assent to [patently] unlawful acts of the corporation;

(c)

In the case at bench, the CA’s basis for petitioner Rosit’s liability was that he acted in bad faith when he approached respondent and told him that the company could no longer afford his salary and that he will be paid instead his separation pay and accrued commissions. This finding, however, could not substantially justify the holding of any personal liability against petitioner Rosit. The records are bereft of any other satisfactory evidence that petitioner Rosit acted in bad faith with gross or inexcusable negligence, or that he acted outside the scope of his authority as company president. Indeed, petitioner Rosit informed respondent that the company wishes to terminate his services since it could no longer afford his salary. Moreover, the promise of separation pay, according to petitioners, was out of goodwill and magnanimity. At the most, petitioner Rosits actuations only show the illegality of the manner of effecting respondents termination from service due to absence of just or valid cause and non-observance of procedural due process but do not point to any malice or bad faith on his part. Besides, good faith is still presumed. In addition, liability only attaches if the officer has assented to patently unlawful acts of the corporation. Thus, it was error for the CA to hold petitioner Rosit solidarily liable with petitioner Harpoon for illegally dismissing respondent.

When directors and trustees or, in appropriate cases, the officers of a corporation

(a) (b)

The general rule is grounded on the theory that a corporation has a legal personality separate and distinct from the persons comprising it. To warrant the piercing of the veil of corporate fiction, the officers bad faith or wrongdoing must be established clearly and convincingly as bad faith is never presumed.

act in bad faith or with gross negligence in directing the corporate affairs; are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons.

74. QUEENSLAND-TOKYO COMMODITIES v. GEORGE GR 172727, 08 September 2010

FACTS QTCI is a duly licensed broker engaged in the trading of commodity futures. In 1995, Guillermo Mendoza, Jr. (Mendoza) and Oniler Lontoc

63

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(Lontoc) of QTCI met with respondent Thomas George (respondent), encouraging the latter to invest with QTCI. On July 7, 1995, upon Mendoza's prodding, respondent finally invested with QTCI. On the same day, Collado, in behalf of QTCI, and respondent signed the Customer's Agreement. Forming part of the agreement was the Special Power of Attorney executed by respondent, appointing Mendoza as his attorney-in-fact with full authority to trade and manage his account. On June 20, 1996, the Securities and Exchange Commission (SEC) issued a Cease-and-Desist Order against QTCI. Alarmed by the issuance of the CDO, respondent demanded from QTCI the return of his investment, but it was not heeded. QTCI claimed that they were not aware of, nor were they privy to, any arrangement which resulted in the account of respondent being handled by unlicensed brokers. They pointed out that respondent transacted business with QTCI for almost a year, without questioning the license or the authority of the traders handling his account, rendering him estopped. It was only after it became apparent that QTCI

as a rule, only when - (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders, or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action. Romeo Lau, as president of [petitioner] QTCI, cannot feign innocence on the existence of these unlawful activities within the company, especially so that Collado, himself a ranking officer of QTCI, is involved in the unlawful execution of customers orders. Lau, being the chief operating officer, cannot escape the fact that had he exercised a modicum of care and discretion in supervising the operations of QTCI, he could have detected and prevented the unlawful acts of Collado and Mendoza.

could no longer resume its business transactions by reason of the CDO that respondent raised the alleged lack of authority of the brokers or traders handling his account.

75. GERALDO vs. BILL SENDER GR No. 222219 October 03, 2018

ISSUE

Facts:

Whether or not QTCI should be held liable for the loss incurred by George in the investment he made with the corporation

On June 20, 1997, respondent The Bill Sender Corporation, engaged in the business of delivering bills and other mail matters for and in behalf of their customers, employed petitioner Reynaldo S. Geraldo as a delivery/messenger man to deliver the bills of its client, the Philippine Long Distance Telephone Company (PLDT). He was paid on a "perpiece basis," the amount of his salary depending on the number of bills he delivered.

RULING YES. It recognized Mendoza and Collado as its brokers. Petitioners did not object to, and in fact recognized, Mendoza's appointment as respondent's attorney-in-fact. Collado, in behalf of QTCI, concluded the Customer's Agreement despite the fact that the appointed attorney-in-fact was not a licensed dealer. Worse, petitioners permitted Mendoza to handle respondent's account. Doctrine dictates that a corporation is invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee, or officer, along (although not necessarily) with the corporation, may validly attach,

On February 6, 2012, Geraldo filed a complaint for illegal dismissal alleging that on August 7, 2011, the company's operations manager, Mr. Nicolas Constantino, suddenly informed him that his employment was being terminated because he failed to deliver certain bills. He explained that he was not the messenger assigned to deliver the said bills but the manager refused to reconsider and proceeded with his termination. Thus, he claims that his dismissal was illegal for being done without the required due process under the law and that the company and its president, respondent Lourdes Ner Cando, be held liable for his monetary claims. The company asserts that he was not illegally dismissed for he was the one who abandoned his job when he no longer reported for 64

work. Thus, the burden was on him to substantiate his claims for illegal dismissal.

Issue: Whether or not respondent Cando the President of Bill Sender Corporation could be made personally and solidarily liable with the corporation for the monetary claims of Geraldo.

Held: It must be noted, however, that respondent Cando cannot be held personally and solidarity liable with the company for the monetary claims of Geraldo. As a general rule, a corporate officer cannot be held liable for acts done in his official capacity because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders, and members. To pierce this fictional veil, it must be shown that the corporate personality was used to perpetuate fraud or an illegal act, or to evade an existing obligation, or to confuse a legitimate issue. In illegal dismissal cases, corporate officers may be held solidarily liable with the corporation if the termination was done with malice or bad faith. To hold a director or officer personally liable for corporate obligations, two requisites must concur, to wit: (1) the complaint must allege that the director or officer assented to the patently unlawful acts of the corporation, or that the director or officer was guilty of gross negligence or bad faith; and (2) there must be proof that the director or officer acted in bad faith. In the instant case, however, there is no showing that Cando, as President of the company, was guilty of malice or bad faith in terminating the employment of Geraldo. Thus, she should not be held personally liable for his monetary claims.

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76. WENSHA SPA CENTER and/or XU ZHI JIE v. LORETA YUNG G.R. No. 185122 August 16, 2010

Is Xu, as the president of Wensha, solidarily liable with the company? RULING:

FACTS:

No.

Xu Zhi Jie (Xu) is the president of Wensha Spa Center, Inc. (Wensha) and the sole owner of the company. Respondent Loreta Yung (Loreta) was its administrative manager at the time of her termination.

Elementary is the rule that a corporation is invested by law with a personality separate and distinct from those of the persons composing it and from that of any other legal entity to which it may be related. "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."

Loreta used to be employed in Manmen Services Co., Ltd. (Manmen) where Xu was a client. Xu was impressed by Loreta, hence, he convinced her to work for him. Loreta was initially reluctant for her work at Manmen was stable and she had been there for seven (7) years. However, she accepted the work from Xu when she was offered a higher salary. She started as a personal assistant of Xu until she was promoted as the administrative manager of Wensha when her performance indicated a positive changes to the company. In August 2004, she was asked to leave her office because Xu and a Feng Shui master was exploring the premises. Thereafter, Xu asked Loreta to go on leave with pay for one (1) month. Upon her return in September 2004, Xu and his wife asked her to resign because according to the Feng Shui Master, her aura did not match that of Xu (lol). Loreta refused but to no avail. Hence, she filed a case for illegal dismissal against Wensha and Xu before the NLRC. She alleged that she has done several improvements in Wensha such as uplifting the morale and efficiency of its employees and increasing respondents’ clientele, and that she was offered twice a promotion but she nevertheless declined. It would be against human experience and contrary to business acumen to let go of someone, who was an asset and has done so much for the company merely on the ground that she is a "mismatch" to the business Wensha and Xu denied illegally terminating Loreta. They claimed that they received various complaints against her from employees, hence, they advised her to take a leave to conduct an investigation. Thereafter, they terminated her due to loss of trust and confidence. The Labor Arbiter dismissed the complaint of Loreta on the sole ground that the ground of “mismatch” aura is hard to believe and was dubious. The ruling was also affirmed by NLRC. However, CA noticed some irregularities and inconsistencies with Wensha’s position. Thus finds the decision in favor of Loreta. It ruled that Xu is solidarily liable with Wensha.

In labor cases, corporate directors and officers may be held solidarily liable with the corporation for the termination of employment only if done with malice or in bad faith. Bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud. In the subject decision, the CA concluded that petitioner Xu and Wensha are jointly and severally liable to Loreta. The Court have read the decision in its entirety but simply failed to come across any finding of bad faith or malice on the part of Xu. There is, therefore, no justification for such a ruling. To sustain such a finding, there should be an evidence on record that an officer or director acted maliciously or in bad faith in terminating the services of an employee. Moreover, the finding or indication that the dismissal was effected with malice or bad faith should be stated in the decision itself. In this case, there was none. Thus, Xu cannot be held solidarily liable with its corporation, Wensha.

77. CEBU MACTAN v. MASAHIRO TSUKAHARA 17 July 2009 Facts: In February 1994, petitioner Cebu Mactan Members Center, Inc. (CMMCI), through Mitsumasa Sugimoto (Sugimoto), the President and Chairman of the Board of Directors of CMMCI, obtained a loan amounting to P6,500,000 from respondent Masahiro Tsukahara. As payment for the loan, CMMCI issued seven postdated checks of CMMCI payable to Tsukahara. CMMCI, through Sugimoto, obtained another loan amounting to P10,000,000 from Tsukahara. Sugimoto executed and signed a promissory note in his capacity as CMMCI President and Chairman, as well as in his personal capacity.

ISSUE: 65

Upon maturity, the seven checks were presented for payment by Tsukahara, but the same were dishonored by PNB, the drawee bank. After several failed attempts to collect the loan amount totaling P16,500,000, Tsukahara filed the instant case for collection of sum of money against CMMCI and Sugimoto. Tsukahara alleged that the amount of P16,500,000 was used by CMMCI for the improvement of its beach resort, which included the construction of a wave fence, the purchase of airconditioners and curtains, and the provision of salaries of resort employees. He also asserted that Sugimoto, as the President of CMMCI, "has the power to borrow money for said corporation by any legal means whatsoever and to sign, endorse and deliver all checks and promissory notes on behalf of the corporation." CMMCI, on the other hand, denied borrowing the amount from Tsukahara, and claimed that both loans were personal loans of Sugimoto. The company also contended that if the loans were those of CMMCI, the same should have been supported by resolutions issued by CMMCI's Board of Directors. Issue: Whether the Court of Appeals erred in holding that CMMCI is liable for the loan contracted by its President without a resolution issued by the CMMCI Board of Directors. Ruling: No. A corporation, being a juridical entity, may act through its board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. Section 23 of the Corporation Code of the Philippines provides: SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees x x x. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. This Court has held, thus:

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A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that [the] authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred. To insist that a board resolution is still required in order to bind the corporation with respect to the obligations contracted by its president is to defeat the purpose of the by-laws. By-laws of a corporation should be construed and given effect according to the general rules governing the construction of contracts. They, as the self-imposed private laws of a corporation, have, when valid, substantially the same force and effect as laws of the corporation, as have the provisions of its charter insofar as the corporation and the persons within it are concerned. They are in effect written into the charter and in this sense, they become part of the fundamental law of the corporation. And the corporation and its directors (or trustees) and officers are bound by and must comply with them. The corporation is now estopped from denying the authority of its president to bind the former into contractual relations.

78. ARMANDO DAVID v. NAFLU April 21, 2009 G.R. Nos. 148263 and 148271-72 FACTS: 1. September 16 1988 Mariveles Apparel Corporation (MAC) hired Armando David (David) as IMPEX and Treasury Manager 2. May 1990 David began serving as MACs President in the nature of a nominee as he did not own any of MACs shares. 3. September 30 1993 David tendered his irrevocable resignation from MAC and took effect on October 15 1993. 4. In a complaint for illegal dismissal National Federation of Labor Unions (NAFLU) and MACLU alleged that MAC ceased operations on July 8 1993 without prior notice to its employees. MAC allegedly gave notice of its closure on the same day that it ceased operations. It further alleged that, at the time of MACs closure, employees who had rendered one to two weeks work were not paid their corresponding salaries. 5. January 3, 1994, MACLU and NAFLU filed their position paper and moved to implead Carag and David to guarantee satisfaction of any

6.

7.

judgment award in its favor. MACs counsel argued that Carag and David should not be held liable because MAC is owned by a consortium of banks. Carags and Davids ownership of MAC shares only served to qualify them as officers in MAC. The LA and NLRC ruled in favor of NAFLU and MACLU. It held that “Normally, officers acting for and in behalf of a corporation are not held personally liable for the obligation of the corporation. However, where corporate officers dismissed employees in bad faith or wantonly violate labor standard laws or when the company had already ceased operations and there is no way by which a judgment in favor of employees could be satisfied, corporate officers can be held jointly and severally liable with the company.”

heard and to present his evidence. Hence, the Labor Arbiter and the NLRC did not have jurisdiction over David and making its decision void. 79. HILARIO P. SORIANO and ROSALINDA ILAGAN vs. PEOPLE, BSP and PDIC G.R. No. 159517-18 June 30, 2009 FACTS: Hilario P. Soriano (Soriano) and Rosalinda Ilagan (Ilagan) were the President and General Manager, respectively, of the Rural Bank of San Miguel (Bulacan), Inc. (RBSM).

ISSUE: 1Is David liable for the obligations of MAC to its employees? 2Was there a violation of the right to due process? RULING: 1. NO. Article 212(e) of the Labor Code does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is the governing law on personal liability of officers for the debts of the corporation. Section 31 of the Corporation Code provides that: “Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal interest in conflict with their duty shall be liable jointly and severally for all damages suffered by the corporation, its stockholders or members and other persons.” In the case, there was no showing of David willingly and knowingly voting for or assenting to patently unlawful acts of the corporation, or that David was guilty of gross negligence or bad faith. The LA based its ruling under Article 212(e) of the Labor Code which provides that an “Employer includes any person acting in the interest of an employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents except when acting as employer.” ---------------------------------------------------------------------------------2. YES. The Court based its ruling pursuant to the Sections 2 3, 4, 5(b), and 11(c) of Rule V of the New Rules of Procedure of the NLRC. The records of the present case fail to show any order from LA summoning David to attend the preliminary conference. Despite this lack of summons, LA not only granted MACLU and NAFLUs motion to implead but also held them solidarily liable with MAC. Moreover, David was not ordered to submit a position paper, was not given the opportunity to be 66

June 27, 1997 and August 21, 1997, during their incumbency as president and manager of the bank, petitioners indirectly obtained loans from RBSM. They falsified the loan applications and other bank records, and made it appear that Virgilio J. Malang and Rogelio Mañaol obtained loans of ₱15,000,000.00 each, when in fact they did not. May 4, 2000, State Prosecutor Josefino A. Subia charged Soriano with violation of the DOSRI rules. An information for estafa thru falsification of commercial document was also filed against Soriano and Ilagan. Another information for violation of Section 83 of R.A. No. 337, as amended, was filed against Soriano, this time, covering the ₱15,000,000.00 loan obtained in the name of Rogelio Mañaol. Soriano and Ilagan were also indicted for estafa thru falsification of commercial document for obtaining said loan. Petitioners moved to quash the informations arguing that the prosecutor charged more than one offense for a single act. Soriano was charged with violation of DOSRI rules and estafa thru falsification of commercial document for allegedly securing fictitious loans. They further argued that the facts as alleged in the information do not constitute an offense. Petitioners also contend that Soriano should be charged with one offense only, because all the charges filed against him proceed from and are based on a single act of obtaining fictitious loans. Thus, Soriano argues that he cannot be charged with estafa thru falsification of commercial document, considering that he is already being prosecuted for obtaining a DOSRI loan. November 15, 2000, RTC Branch 77 denied the motion to quash stating : assuming that the two (2) cases arose from the same facts, if they violate

Derivative Suit

two (2) or more provisions of the law, a prosecution under one will not bar a prosecution under another. All other motions to quash filed by petitioners for the other information was also dismissed by the court. Petitioners appealed the case to the CA via Certiorari but it was also dismissed. Thus the petition before the Supreme Court.

The petition for review is denied.

Is the Country Club and its Directors liable to pay damages to Elizagaque in disapproving his application for proprietary membership? Ruling:

80. CEBU COUNTRY CLUB v. ELIZAGAQUE Cebu Country Club, Inc., Sabino R. Dapat, Ruben D. Almendras, Julius Z. Neri, Douglas L. Luym, Cesar T. Libi, Ramontito* E. Garcia And Jose B. Sala v. Ricardo F. Elizagaque Facts:

ISSUE: Whether or not the dismissal of the motion to quash was proper. HELD: Yes. Soriano was faced not with one information charging more than one offense, but with more than one information, each charging a different offense - violation of DOSRI rules in one, and estafa thru falsification of commercial documents in the others. Ilagan, on the other hand, was charged with estafa thru falsification of commercial documents in separate informations. Thus, petitioners erroneously invoke duplicity of charges as a ground to quash the Informations. There are differences between the two (2) offenses. A DOSRI violation consists in the failure to observe and comply with procedural, reportorial or ceiling requirements prescribed by law in the grant of a loan to a director, officer, stockholder and other related interests in the bank, i.e. lack of written approval of the majority of the directors of the bank and failure to enter such approval into corporate records and to transmit a copy thereof to the BSP supervising department. The elements of abuse of confidence, deceit, fraud or false pretenses, and damage, which are essential to the prosecution for estafa, are not elements of a DOSRI violation. The filing of several charges against Soriano was, therefore, proper. In the criminal cases filed against petitioner, the violation of the DOSRI rules were evident. Soriano and Ilagan were officers of RBSM that during their tenure both were able to indirectly obtain loans without complying with the requisite board approval, reportorial and ceiling requirements. The crime of estafa filed against them were based on separate provisions of the Revised penal code namely Article 315 (1)(b) and Article 315 (2) (a) . both stating different elements. Verily, there is no justification for the quashal of the Information filed against petitioners. The RTC committed no grave abuse of discretion in denying the motions.

Cebu Country Club, Inc.(Country club) is a non-stock, non-profit domestic corporation and a private membership club and its co-petitioners are its board of directors while Ricardo Elizagaque (Elizagaque) is San Miguel Corporation’s Senior Vice President and Operations Manager for the Visayas and Mindanao. In 1987, Elizagaque was designated as a special non-proprietary member of the Country Club and his designation was approved by the Country club’s Board of directors. In 1996, Elizagaque himself filed with CCCI an application for proprietary membership and such application was indorsed by Edmunto Misa (Edmundo). Benito Unchuan, then president of CCCI, offered to sell Elizagaque a share for only P3.5 million. However, Elizagaque purchased the share of a certain Dr. Butalid for only P3 million. Subsequently, a certificate of Proprietary Ownership was issued by CCCI in favor of Elizagaque. During the meeting of the board of directors of the Country Club, Elizagaque’s application for membership was voted upon. Subsequently, Elizacague received a letter from Country Club’s corporate secretary Julius Neri that his application for proprietary membership was disapproved. Edmundo, in behalf of Elizagaque, wrote a letter for reconsideration to the Country Club, and the latter did not answer. Elizagaque wrote another letter to the Country Club, but the latter kept its silence. Elizagaque again wrote another letter, but this time inquiring whether any member of the Board objected to his application. Again, the Country Club did not reply. This prompted Elizacaque to file for an action for damages against the Country Club and its directors with the Regional Trial Court (RTC). The RTC rendered its decision ordering the Country Club and its directors to pay Elizagaque damages. On appeal by the Country Club and its directors, the Court of Appeals affirmed the RTC’s decision but modified the award of damages. Issue: 67

The Country Club and its Directors are liable to pay damages to Elizagaque in the disapproval of his application because it was done in fraud and evident bad faith. According to the Articles of Incorporation of the Country Club, it provides that: Section 3, Article 1 of CCCI’s Amended By-Laws provides: SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the admission of new members of the Club shall be as follows: (a) Any proprietary member, seconded by another voting proprietary member, shall submit to the Secretary a written proposal for the admission of a candidate to the "Eligiblefor-Membership List"; (b) Such proposal shall be posted by the Secretary for a period of thirty (30) days on the Club bulletin board during which time any member may interpose objections to the admission of the applicant by communicating the same to the Board of Directors; (c) After the expiration of the aforesaid thirty (30) days, if no objections have been filed or if there are, the Board considers the objections unmeritorious, the candidate shall be qualified for inclusion in the "Eligible-for-Membership List"; In March 1, 1978, Section 3(c) was amended as follows: (c) After the expiration of the aforesaid thirty (30) days, the Board may, by unanimous vote of all directors present at a regular or special meeting, approve the inclusion of the candidate in the "Eligible-for-Membership List". In the above amended by-laws, the Board adopted a secret balloting known as the "black ball system" of voting wherein each member will drop a ball in the ballot box. A white ball represents conformity to the admission of an applicant, while a black ball means disapproval. When Elizagaque’s

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application for proprietary membership was voted upon during the Board meeting on the ballot box contained one (1) black ball. Thus, for lack of unanimity, his application was disapproved. In accordance with its Articles of Incorporation, the board of directors of the Country Club has the right to approve or disapprove an application for proprietary membership. However, in rejecting Elizagaque’s application, the directors violated Article 19 and 21 of the Civil Code, since they committed fraud and evident bad faith, which is contrary to morals, good customs or public policy. The amendment to Section 3(c) of CCCI’s Amended By-Laws requiring the unanimous vote of the directors present at a special or regular meeting was not printed on the application form that Elizagaque filled up and submitted to the Country Club. What was printed thereon was the original provision of Section 3(c) which was silent on the required number of votes needed for admission of an applicant as a proprietary member. The directors reasoned why it was not printed because of economic reasons. But the Court did not believe such reason and said that how can a prestigious country club did not have enough money to cause the printing of an updated application form. It is thus clear that Elizagaque was left groping in the dark wondering why his application was disapproved. He was not even informed that a unanimous vote of the Board members was required. When he sent a letter for reconsideration and an inquiry whether there was an objection to his application, petitioners apparently ignored him. Certainly, Elizagaque did not deserve this kind of treatment. Having been designated by San Miguel Corporation as a special non-proprietary member of the Country Club, he should have been treated by the Country Club and its directors with courtesy and civility. At the very least, they should have informed him why his application was disapproved.

81. CALTEX (PHILS.), INC. (now CHEVRON PHILIPPINES, INC.) vs. NLRC AND ROMEO T. STO. TOMAS G.R. No. 159641 October 15, 2007

the period starting October 1996 to December 1998. The letter alleged that the redundancy program is a response to the market situation which constrained petitioner to rationalize and simplify its business processes; that petitioner undertook a review, restructuring and streamlining of its organization which resulted in consolidation, abolition and outsourcing of certain functions and in the identification of certain redundant positions. The letter also states that petitioner will provide the DOLE a list of affected employees as it implements each phase of the redundancy program. Caltex, through a letter dated June 30, 1997, notified private respondent of his termination effective July 31, 1997 due to the redundancy of his position and awarded him a separation package in the amount of ₱559,458.90. On June 8, 1998, Sto Tomas filed with the Labor Arbiter a complaint for illegal dismissal against petitioner and its President and Chief Executive Officer, Mr. Clifton Hon, alleging that: being Caltex’s regular employee, he is entitled to security of tenure; he did not commit any serious misconduct, willful disobedience, gross and habitual neglect of duty or fraud and willful breach of trust to warrant the penalty of dismissal from employment; there was no independent proof or evidence presented by Caltex to substantiate its claim of redundancy nor was he afforded due process as he was not given any opportunity to present his side; he was dismissed due to his active participation in union activities; petitioner opened positions for hiring some of which offered jobs that are the same as what private respondent was performing; Caltex failed to give written notice to him and DOLE at least one month before the intended date of termination as required by the Labor Code. Caltex and Mr. Hon averred that private respondent’s dismissal from the service was due to redundancy of his position which was determined after petitioner’s business process re-engineering study and organization review, conducted with private respondent’s knowledge; that redundancy is an authorized cause to terminate an employee which is a management prerogative and cannot be interfered with absent any abuse of discretion; and that there is nothing in the law that requires petitioner to conduct impartial investigation or hearing to terminate an employee due to redundancy.

FACTS: Romeo T. Sto Tomas (private respondent) was a regular employee of petitioner since February 2, 1984. He was a Senior Accounting Analyst receiving a monthly salary of ₱29,860.00 at the time of his termination on July 31, 1997.

The Labor Arbiter rendered a decision dismissing the complaint on the ground that the redundancy was done in good faith and a valid exercise of management prerogative; and that redundancy did not deter the employer to hire additional workers when it is deemed best for proper management. While the LA found that Caltex failed to give notice to DOLE one month before the intended date of private respondent’s termination, the LA ruled that non-compliance with the procedural requirement will not per se make the termination illegal and held that requirement of procedural process was not totally disregarded.

Caltex informed DOLE of its plan to implement a redundancy program in its Marketing Division and some departments in its Batangas Refinery for

The NLRC reversed the decision of the LA, expounding that although Article 283 of the Labor Code authorizes termination due to redundancy, 68

there must be factual basis; that the records did not disclose any evidence to show basis for respondent’s termination; that neither did petitioner send notice to DOLE one month prior to respondent’s dismissal. The CA ruled that there was no reason to deviate from the findings of the NLRC since the pieces of evidence presented by Caltex are not only insufficient but also baseless and self-serving and Caltex failed to send DOLE a written notice of its implementation of the redundancy program one month prior to the intended date thereof since petitioner had admitted such failure in its Answer to respondent’s appeal to the NLRC. ISSUE: Was private respondent illegally dismissed? RULING: Private respondent was dismissed by Caltex on the ground of redundancy, one of the authorized causes for dismissal under Article 283 of the Labor Code. Redundancy in an employer’s personnel force necessarily or even ordinarily refers to duplication of work. That no other person was holding the same position that private respondent held prior to the termination of his services, does not show that his position had not become redundant. Indeed, in any well organized business enterprise, it would be surprising to find duplication of work and two (2) or more people doing the work of one person. We believe that redundancy, for purposes of the Labor Code, exists where the services of an employee are in excess of what is reasonably demanded by the actual requirements of the enterprise. Succinctly put, a position is redundant where it is superfluous, and superfluity of a position or positions may be the outcome of a number of factors, such as overhiring of workers, decrease in volume of business, or dropping of a particular product line or service activity previously manufactured or undertaken by the enterprise. We are mindful of the rule that the characterization of an employee’s services as no longer necessary or sustainable, and therefore, properly terminable, is an exercise of business judgment on the part of the employer, and that the wisdom or soundness of such characterization or decision is not subject to discretionary review. However, such characterization may be rejected if the same is found to be in violation of law or is arbitrary or malicious. We have held that the employer must comply with the following requisites to ensure the validity of the implementation of a redundancy program: 1) a written notice served on both the employees and the Department of Labor and Employment (DOLE) at least one month prior to the intended date of retrenchment; 2) payment of separation pay equivalent to at least one month pay or at least one month pay for every year of service, whichever

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is higher; 3) good faith in abolishing the redundant positions; and 4) fair and reasonable criteria in ascertaining what positions are to be declared redundant and accordingly abolished. In the instant case, we find no reversible error committed by the CA in upholding the findings of the NLRC that there was no substantial evidence presented by Caltex to justify private respondent's dismissal due to redundancy. As correctly found by the CA, petitioner’s evidence to show redundancy merely consisted of a copy of petitioner’s letter to the DOLE informing the latter of its intention to implement a redundancy program and nothing more. The letter which merely stated that petitioner undertook a review, restructuring and streamlining of its organization which resulted in consolidation, abolition and outsourcing of certain functions; and which resulted in identified and redundant positions instead of simplifying its business process restructuring, does not satisfy the requirement of substantial evidence, that is, the amount of evidence which a reasonable mind might accept as adequate to justify a conclusion. Caltex failed to demonstrate the superfluity of private respondent’s position as there was nothing in the records that would establish any concrete and real factors recognized by law and relevant jurisprudence, such as overhiring of workers, decreased volume of business, or dropping of a particular product line or service activity previously manufactured or undertaken by the enterprise, which were adopted by petitioner in implementing the redundancy program.

that petitioner failed to show proof of fair and reasonable criteria for the implementation of a valid redundancy program. Thus, whether it is retrenchment or redundancy, or any of the other authorized causes, no employee may be dismissed without observance of the fundamentals of fair play.

In a letter dated 23 February 1994 ARBC informed TBSS of its desire to terminate the Service Contracts effective thirty (30) days after receipt of the letter. ARBC through its Vice President for Operations, Mark Molina, informed TBSS that it was replacing its security guards with those of Global Security Investigation Agency (GSIA).

Caltex committed a fatal error when it failed to give a written notice to DOLE as required under Article 283 of the Labor Code. All three, the LA, NLRC and the CA, found the absence of notice sent by petitioner to DOLE one month before the intended date of private respondent’s termination. While petitioner claims that it sent a notice to the DOLE through a letter dated June 30, 1997, Caltex failed to show that the same was actually received by DOLE. The purpose of the written notice to the DOLE is to give it the opportunity to ascertain the verity of the alleged authorized cause of termination.

TBSS informed ARBC that the latter could not preterminate the Service Contracts nor could it post security guards from GSIA as it would run counter to the provisions of their Service Contracts. Nevertheless, Molina decreased the security guards to only one. ARBC claimed that it decreased the number of security guards being posted at its establishments to only one (1) as the security guards assigned by TSBB were found to be grossly negligent and inefficient because a Mitsubishi roadgrader of herein defendant was stripped of parts amounting to P58,642.00 and a concrete vibrator and mercury light assembly were stolen from the construction site of the Multipurpose Hall which is worth P2800.

Caltex’s claim that private respondent consented to his termination by accepting his separation pay deserves scant consideration. Private respondent had no other recourse but to accept his separation pay since petitioner’s letter made it clear that his position had been determined to be redundant and his services shall be terminated effective July 31, 1997. As private respondent was dismissed allegedly due to redundancy, he is entitled to separation pay under Article 283 of the Labor Code. And since there was no extra consideration for the private respondent to give up his employment, such undertaking cannot be allowed to bar the action for illegal dismissal.

Caltex also failed to show any fair and reasonable criteria in ascertaining what positions are redundant and how the selection of employees to be dismissed was made. Moreover, Caltex failed to refute private respondent’s assertion that it opened positions of accountants for hiring to which he could have qualified rather than be dismissed. In petitioner’s Memorandum dated May 28, 1997 and July 4, 1997, it declared vacant the positions of Terminal Accountant and Internal Auditor, respectively, the minimum requirements of which are being accountants and having 4-5 years experience in handling accounting and supervisory functions, among others. There is no showing that private respondent could not perform the functions demanded of the vacant positions considering his experience as petitioner’s Senior Accounting Analyst for 13 years and to which he could be transferred instead of being dismissed. We find such hiring of accountants inconsistent with respondent’s termination due to redundancy. There is merit in Caltex’s claim that the CA’s finding "that it (petitioner) failed to provide proof that it truly had an extensive reengineering study on account of business losses arising out of massive oil deregulation" is misplaced considering that Article 283 of the Labor Code does not require that the employer should be suffering financial losses before he can terminate the services of the employee on the ground of redundancy. Nevertheless, the CA finding on this matter does not detract from the fact

82. ATRIUM MANAGEMENT v. CA Case is the same as case #87 Click/Tap here

83. ARB CONSTRUCTION CO. INC. and MARK MOLINA v. CA G.R. No. 126554 May 31, 2000 Facts: TBS Security and Investigation Agency (TBSS) entered into two (2) Service Contracts with ARBC wherein TBSS agreed to provide and post security guards in the five (5) establishments being maintained by ARBC. The contract shall be effective for a period of one (1) year commencing from 15th August 1993 and shall be considered automatically renewed for the same period unless otherwise a written notice of termination shall have been given by one party to the other party thirty (30) days in advance. 69

Molina allegedly applied P171,853.80 payable to private respondent to the losses suffered by petitioner ARB (ARBC) due to the negligence and indifference of the private respondent's security guards. TBSS thereafter filed a case for breach of contract against ARBC and Mark Molina. Issue: Is the complaint sufficient to hold Petitioner Molina liable to Private Respondent in his personal capacity? Ruling: No. A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; to defeat public convenience, justify wrong, protect fraud, or defend crime. Petitioner Molina could not be held jointly and severally liable for any obligation which petitioner ARBC may be held accountable for, absent any proof of bad faith or malice on his part. Corollarily, it is also incorrect on the part of the Court of Appeals to conclude that there was a sufficient cause of action against Molina as to make him personally liable for his actuations as Vice President for Operations of ARBC. A cursory reading of the records of the instant case would reveal that Molina did not summarily withhold certain amounts from the payroll of TBSS.

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84. RUFINA LUY LIM v. CA G.R. No. 124715; January 24, 2000 FACTS: Pastor Y. Lim died intestate. Rufina Luy Lim is the surviving spouse. Auto Truk Corp., Alliance Marketing Corp., Speed Distributing, Inc., Active Distributing, Inc., and Action Company are corporations under Philippine Laws and owned real properties covered under the Torrens system. Their properties were included in the inventory of Pastor’s estate. They filed a motion to have their properties excluded from the estate. Rufina filed a petition which alleged that Pastor owned the subject properties, that even though the respondent corporations present themselves as corporations, all their capital, assets and equity were personally owned by the Pastor Lim, and that they were listed therein only for purposes of registration with the SEC. The probate court denied the motion for exclusion citing the case of Cease v. Court of Appeals which ruled that the corporation is a mere extension of the decedent in that case and that therefore the assets of the corporation are also assets of the estate. ISSUE: Can the properties of the respondent corporations be included in the estate of Pastor Y. Lim? HELD: No. It is settled that a corporation is clothed with personality separate and distinct from that of the persons composing it. It may not generally be held liable for that of the persons composing it. It may not be held liable for the personal indebtedness of its stockholders or those of the entities connected with it. Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation. Where badges of fraud exist, where public convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come to naught. 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 a sufficient reason for disregarding the fiction of separate corporate personalities.

Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed. 85. FRANCISCO v. MEJIA 14 August 2001 Facts: Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of land. Gutierrez and Cardale Financing and Realty Corporation (Cardale) executed a Deed of Sale with Mortgage for the consideration of P800,000.00. Upon the execution of the deed, Cardale paid Gutierrez P171,000.00. It was agreed that the balance of P629,000.00 would be paid in several installments within five years from the date of the deed, at an interest of nine percent per annum “based on the successive unpaid principal balances.” Thereafter, the titles of Gutierrez were cancelled and in lieu thereof TCTs were issued in favor of Cardale. To secure payment of the balance of the purchase price, Cardale constituted a mortgage on three of the four parcels of land. The encumbrance was annotated upon the certificates of title and the owner’s duplicate certificates. The owner’s duplicates were retained by Gutierrez. Owing to Cardale’s failure to settle its mortgage obligation, Gutierrez filed a complaint for rescission of the contract and during the pendency of the rescission case, Gutierrez died and was substituted by her executrix, Rita C. Mejia (Mejia). In 1971, plaintiff’s presentation of evidence was terminated. However, Cardale, which was represented by petitioner Adalia B. Francisco (Francisco) in her capacity as Vice-President and Treasurer of Cardale, lost interest in proceeding with the presentation of its evidence and the case lapsed into inactive status for a period of about fourteen years. In the meantime, the mortgaged parcels of land became delinquent in the payment of real estate taxes which culminated in their levy and auction sale in satisfaction of the tax arrears. The highest bidder for the three parcels of land was Merryland Development Corporation (Merryland), whose President and majority stockholder is Francisco. A memorandum based upon the certificate of sale was then made upon the original copies of the TCTs. Before the expiration of the one year redemption period, Mejia filed a Motion for Decision with the trial court. The hearing of said motion was deferred due to a Motion for Postponement filed by Cardale through Francisco, who signed the motion in her capacity as “officer-in-charge,” claiming that Cardale needed time to hire new counsel. However, Francisco did not mention the tax delinquencies and sale in favor of Merryland. Subsequently, the redemption period expired and Merryland, acting through Francisco, filed petitions for consolidation of title, which culminated in the issuance of certain orders and the issuance of new transfer certificates of title “free from any encumbrance or third-party claim whatsoever” in favor of Merryland. Pursuant to such orders, the Register 70

of Deeds of Caloocan City issued new transfer certificates of title in the name of Merryland which did not bear a memorandum of the mortgage liens in favor of Gutierrez. 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: 1. Francisco did not inform the lower court that the properties were delinquent in taxes; 2. 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; 3. That without knowledge of the auction, the Gutierrez estate cannot exercise their right of redemption; 4. That Francisco failed to inform the court that the highest bidder in the auction sale was Merryland, her other company; 5. That thereafter, Cardale was dissolved and the subject properties were divided and sold to other people. Trial court rendered a decision in favor of the defendants, dismissing the complaint for damages filed by Mejia. The Court of Appeals held that the corporate veil of Cardale and Merryland must be pierced in order to hold Francisco and Merryland solidarily liable since these two corporations were used as dummies by Francisco, who employed fraud in allowing Cardale to default on the realty taxes for the properties mortgaged to Gutierrez so that Merryland could acquire the same free from all liens and encumbrances in the tax delinquency sale and, as a consequence thereof, frustrating Gutierrez’s rights as a mortgagee over the subject properties. Issue: Did Francisco acted in bad faith in her dealings? Held: Yes. The Court, after an assiduous study of this case, is convinced that the totality of the circumstances appertaining conduce to the inevitable conclusion that Francisco acted in bad faith. To reiterate, notwithstanding receipt of the aforesaid notices, appellee Francisco did not inform the Estate of Gutierrez or her executrix about the tax delinquencies and of the impending auction sale of the said properties. Even a modicum of good faith and fair play should have encouraged Francisco to at least advise Gutierrez’s Estate through her executrix and the trial court which was hearing the complaint for rescission and recovery of said properties of such fact, so that the Estate of Gutierrez, which had a real interest on the properties and could at least take steps to forestall the auction sale and thereby preserve the properties and protect its interests thereon. And not only did Francisco allow the auction sale to take place, but she used her other corporation (Merryland) in participating in the auction sale and in acquiring the very properties which her first corporation (Cardale) had mortgaged to Gutierrez. Again, Francisco did not thereafter

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inform the Estate of Gutierrez or its executrix about the auction sale, thus precluding the Estate from exercising its right of redemption. Francisco’s deception is further shown by her concealment of the tax delinquency sale of the properties from the estate or its executrix, thus preventing the latter from availing of the right of redemption of said properties. It is dicta in corporation law that a corporation is a juridical person with a separate and distinct personality from that of the stockholders or members who compose it. However, when the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. With specific regard to corporate officers, the general rule is that the officer cannot be held personally liable with the corporation, whether civilly or otherwise, for the consequences of his acts, if he acted for and in behalf of the corporation, within the scope of his authority and in good faith. In such cases, the officer’s acts are properly attributed to the corporation. However, if it is proven that the officer has used the corporate fiction to defraud a third party, or that he has acted negligently, maliciously or in bad faith, then the corporate veil shall be lifted and he shall be held personally liable for the particular corporate obligation involved. The totality of Franciso’s actions clearly betray an intention to conceal the tax delinquencies, levy and public auction of the subject properties from the estate of Gutierrez and the trial court until after the expiration of the redemption period when the remotest possibility for the recovery of the properties would be extinguished. Consequently, Francisco had effectively deprived the estate of Gutierrez of its rights as mortgagee over the three parcels of land which were sold to Cardale. If Francisco was acting in good faith, then she should have disclosed the status of the mortgaged properties to the trial court - especially after Mejia had filed a Motion for Decision, in response to which she filed a motion for postponement wherein she could easily have mentioned the tax sale - since this action directly affected such properties which were the subject of both the sale and mortgage. That Merryland acquired the property at the public auction only serves to shed more light upon Francisco’s fraudulent purposes. Based on the findings of the Court of Appeals, Francisco is the controlling stockholder and President of Merryland. Thus, aside from the instrumental role she played as an officer of Cardale, in evading that corporation’s legitimate obligations to Gutierrez, it appears that Francisco’s actions were also oriented towards securing advantages for another corporation in which she had a substantial interest.

The only act imputable to Merryland in relation to the mortgaged properties is that it purchased the same and this by itself is not a fraudulent or wrongful act. No evidence has been adduced to establish that Merryland was a mere alter ego or business conduit of Francisco. 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. Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification for disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights. Thus, Merryland’s separate juridical personality must be upheld.

86. DBP v. CA 16 August 2001 Facts: Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation engaged in the manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides, copper ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining mortgaged to PNB and DBP. The mortgage also covered all of Marinduque Minings chattels, as well as assets of whatever kind, nature and description which Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the properties covered by the previous Deed of Real and Chattel Mortgage. For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.The public auction sale conducted on September 18, 1984 on the foreclosed personal properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of P678,772,000.00 In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid 71

construction materials and other merchandise purchased by Marinduque Mining, as well as interest, attorneys fees and the costs of suit. Remington filed an amended complaint including the Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction since: 1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are practically owned wholly by defendants PNB and DBP, and managed by their officers, aside from the fact that the aforesaid codefendants NMIC, Maricalum and Island Cement were organized in such a hurry and in such suspicious circumstances by co-defendants PNB and DBP after the supposed extra-judicial foreclosure of MMICs assets as to make their supposed projects assets, machineries and equipment which were originally owned by co-defendant MMIC beyond the reach of creditors of the latter. 2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement creations of codefendants PNB and DBP were the personnel of co-defendant MMIC such that x x x practically there has only been a change of name for all legal purpose and intents. 3. The places of business not to mention the mining claims and project premises of co-defendants NMIC, Maricalum and Island Cement likewise used to be the places of business, mining claims and project premises of co-defendant MMIC as to make the aforesaid co-defendants NMIC, Maricalum and Island Cement mere adjuncts and subsidiaries of codefendants PNB and DBP, and subject to their control and management. On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all corporations created by the government in the pursuit of business ventures should not be allowed to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x x MMIC whose operations co-defendants PNB and DBP had highly financed before the alleged extrajudicial foreclosure of defendant MMICs assets, machineries and equipment to the extent that major policies of codefendant MMIC were being decided upon by co-defendants PNB and DBP as major financiers who were represented in its board of directors forming part of the majority thereof which through the alleged extrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and DBP bringing about the organization of their co-defendants NMIC, Maricalum and Island Cement to which were transferred all the assets, machineries and pieces of equipment of co-defendant MMIC used in its nickel mining project in Surigao del Norte, copper mining operation in Sipalay, Negros Occidental and cement factory in Antipolo, Rizal to the

Derivative Suit

prejudice of creditors of co-defendant MMIC such as plaintiff Remington Industrial Sales Corporation whose stockholders, officers and rank-and-file workers in the legitimate pursuit of its business activities, invested considerable time, sweat and private money to supply, among others, codefendant MMIC with some of its vital needs for its operation, which codefendant MMIC during the time of the transactions material to this case became x x x co-defendants PNB and DBPs instrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by virtue of which it becomes doubly necessary to disregard the corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement, six (6) distinct and separate entities, when in fact and in law, they should be treated as one and the same at least as far as plaintiffs transactions with co-defendant MMIC are concerned, so as not to defeat public convenience, justify wrong, subvert justice, protect fraud or confuse legitimate issues involving creditors such as plaintiff, a fact which all defendants were as (sic) still are aware of during all the time material to the transactions subject of this case. The Regional Trial Court (RTC) rendered a decision in favor of Remington. Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the Court of Appeals affirmed the decision of the RTC. Petitioner filed a Motion for Reconsideration, which was denied in the Resolution. Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB, nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT. On the other hand, private respondent Remington submits that the transfer of the properties was made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of the corporate veil such that Marinduque Mining and its transferees could be considered as one and the same corporation. The transferees, therefore, are also liable for the value of Marinduque Minings purchases. Issue: Whether or not there is fraud on the part of Marinduque Mining to warrant the piercing of the corporate veil. Ruling: No. This Court has disregarded the separate personality of the corporation where the corporate entity was used to escape liability to third parties. In this case, however, we do not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil. It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of more

than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides: It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of this decree, to foreclose the collateral and/or securities for any loan, credit accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institution of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accomodations and/or guarantees on which the arrearages are less than twenty (20%) percent. Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the subject properties. The banks had no choice but to obey the statutory command. As aptly stated by the appellee in its brief, x x x where the corporations have directors and officers in common, there may be circumstances under which their interest as officers in one company may disqualify them in equity from representing both corporations in transactions between the two. Thus, where one corporation was insolvent and indebted to another, it has been held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness x x x (page 105 of the Appellees Brief). In the same manner that x x x when the corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantage or preference over other creditors. They cannot thus take advantage of their fiduciary relation and deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the corporation or their representatives, without reference to the question of any actual fraudulent intent on the part of the directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation to the directors. xxx. (page 106 of the Appellees Brief.)

indorsers, was questioned by other creditors of the corporation, they should have been classed as instruments rendered void by the legal principle which prevents directors of an insolvent corporation from giving themselves a preference over outside creditors. x x x (page 106-107 of the Appellees Brief.) The second principle invoked by respondent court involves directors who are creditors which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining. Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in the mining business. The creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In the absence of any entity willing to purchase these assets from the bank, what else would it do with these properties in the meantime? Sound business practice required that they be utilized for the purposes for which they were intended.

87. ATRIUM MANAGEMENT CORPORATION v. COURT OF APPEALS G.R. No. 109491. February 28, 2001 (PARDO, J.:) DOCTRINE: “Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by a specific provision of law, to personally answer for his corporate action.” FACTS:

We also concede that x x x directors of insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in the payment of their claims. It is not good morals or good law. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing the payment of his debts in preference to all others. When validity of these mortgages, to secure debts upon which the directors were 72

The case arose when Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de Leon, treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed four checks amounting to 2 million pesos to petitioner Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason payment stopped. Atrium then filed an action for collection of the proceeds of four postdated checks in the total amount of P2 million.

Derivative Suit

According to Atrium, through his witness Carlos C. Syquia that Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-Cement the fact that the checks represented payment for petroleum products which E.T. Henry delivered to Hi-Cement. Respondent Hi-Cement presented as witness Ms. Erlinda Yap, She testified that E.T. Henry offered to give Hi-Cement a loan which the subject checks would secure as collateral.

as treasurer and Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payees account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, that the checks issued to E.T. Henry were in payment of Hydro oil bought by HiCement from E.T. Henry. Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor.

the trial court rendered a decision ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner Atrium, jointly and severally, the amount of P2 million corresponding to the value of the four checks. The CA absolved HiCement Corporation from liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration.

However, the issuance of checks is not a ultra vires act. There is basis to rule that the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. 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 power conferred upon it by law. The term ultra vires is 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.

ISSUE: Is Lourdes as a signatory of the checks is personally liable for the value of the checks, which were declared to be issued without consideration? Is the issuance of the questioned checks an ultra vires act? RULING: Yes. Lourdes is personally liable. “Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by a specific provision of law, to personally answer for his corporate action.” Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks for the corporation. At the time of the issuance of the checks, there were sufficient funds in the bank to cover payment of the amount of P2 million pesos. Lourdes M. de Leon and Antonio de las Alas

88. AMERICAN HOSPITAL SUPPLIES/PHILIPPINES et al. vs. COURT OF APPEALS, ALFONSO BAYANI GR 111807 14 June 1996 FACTS: American Hospital Supplies was engaged in the sale and manufacture of medicines and pharmaceuticals in the country and did substantial business with government hospitals. On 1 June 1970 it hired Alfonso Bayani as an Area Manager for Visayas and Mindanao, and later appointed him Manager of its Cebu branch. On 30 January 1978 private respondent was dismissed from the service. At that time he was receiving a monthly compensation of P3,180.00. On 5 May 1978 private respondent filed a complaint for damages before the trial court alleging that in the course of their business petitioners were directly encouraging, abetting and promoting bribery in the guise of "commissions," "entertainment expenses" and "representation expenses" which were given to various government hospital officials in exchange for favorable recommendations, approvals and actual purchases of medicines and pharmaceuticals. For his refusal to take direct 73

and personal hand in giving "bribe money" he was dismissed. He then implicated AHS President Gervacio Amistoso and Vice President Constancio Halili as responsible for his illegal dismissal. ISSUE: Whether or not Amistoso and Halili be held solidarily liable with the corporation RULING: NO. Corporate officers are not personally liable for money claims of discharged corporate employees unless they acted with evident malice and bad faith in terminating their employment. In the case at bar, while petitioners Amistoso and Halili may have had a hand in the relief of respondent. Bayani, there are no indications of malice and bad faith on their part. We take exception to the conclusion of respondent Court of Appeals that "the manner by which Halili and Amistoso acted is characterized by bad faith and malice, thus binding them personally liable to plaintiff appellee,'' On the contrary it is apparent that the relief order was a business judgment on the part of the officers, with the best interest of the corporation in mind, based on their opinion that respondent Bayani had failed to perform the duties expected of him. Hence both the trial court and respondent Court of Appeals committed a reversible error in holding petitioners Amistoso and Halili jointly and solidarily liable with Petitioner Corporation. 89. COMPLEX ELECTRONICS v. NLRC COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION (CEEA) represented by its union president CECILIA TALAVERA, GEORGE ARSOLA, MARIO DIAGO AND SOCORRO BONCAYAO, petitioners, vs. THE NATIONAL LABOR RELATIONS COMMISSION, COMPLEX ELECTRONICS CORPORATION, IONICS CIRCUIT, INC., LAWRENCE QUA, REMEDIOS DE JESUS, MANUEL GONZAGA, ROMY DELA ROSA, TERESITA ANDINO, ARMAN CABACUNGAN,GERRY GABANA, EUSEBIA MARANAN and BERNADETH GACAD, respondents.July 19, 1999]

Derivative Suit

COMPLEX ELECTRONICS CORPORATION, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION, COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION (CEEA), represented by Union President, CECILIA TALAVERA, respondents. [G.R. No. 121315. July 19, 1999] FACTS: Complex Electronics Corporation (Complex) was engaged in the manufacture of electronic products. It was actually a subcontractor of electronic products where its customers gave their job orders, sent their own materials and consigned their equipment to it. The customers were foreign-based companies with different product lines and specifications requiring the employment of workers with specific skills for each product line. Thus, there was the AMS Line for the Adaptive Micro System, Inc., the Heril Line for Heril Co., Ltd., the Lite-On Line for the Lite-On Philippines Electronics Co., etc The rank and file workers of Complex were organized into a union known as the Complex Electronics Employees Association, herein referred to as the Union. On March 4, 1992, Complex received a facsimile message from Lite-On Philippines Electronics Co., requiring it to lower its price by 10%. Consequently, on March 9, 1992, a meeting was held between Complex and the personnel of the Lite-On Production Line. Complex informed its Lite-On personnel that such request of lowering their selling price by 10% was not feasible as they were already incurring losses at the present prices of their products. Under such circumstances, Complex regretfully informed the employees that it was left with no alternative but to close down the operations of the Lite-On Line. In the evening of April 6, 1992, the machinery, equipment and materials being used for production at Complex were pulled-out from the company premises and transferred to the premises of Ionics Circuit, Inc. (Ionics) at Cabuyao, Laguna. The following day, a total closure of company operation was effected at Complex. A complaint was, thereafter, filed with the Labor Arbitration Branch of the NLRC for unfair labor practice, illegal closure/illegal lockout, money claims for vacation leave, sick leave, unpaid wages, 13th month pay, damages and attorney's fees. The Union alleged that the pull-out of the machinery, equipment and materials from the company premises, which resulted to the sudden closure of the company was in violation of Section 3 and 8, Rule XIII, Book V of the Labor Code of the Philippines[4] and the existing CBA. Ionics was impleaded as a party defendant because the officers and management personnel of Complex were also holding office at Ionics with Lawrence Qua as the President of both companies.

Ionics contended that it was an entity separate and distinct from Complex and had been in existence since July 5, 1984 or eight (8) years before the labor dispute arose at Complex. Like Complex, it was also engaged in the semi-conductor business where the machinery, equipment and materials were consigned to them by their customers. While admitting that Lawrence Qua, the President of Complex was also the President of Ionics, the latter denied having Qua as their owner since he had no recorded subscription of P1,200,000.00 in Ionics as claimed by the Union. On April 30, 1993, the Labor Arbiter rendered a decision the dispositive portion of which reads: WHEREFORE, all the foregoing premises being considered, judgment is hereby rendered ordering the respondent Complex Electronics Corporation and/or Ionics Circuit Incorporated and/or Lawrence Qua, to reinstate the 531 above-listed employees to their former position with all the rights, privileges and benefits appertaining thereto, and to pay said complainants-employees the aggregate backwages amounting P26,949,891.80 as of April 6, 1993 and to such further backwages until their actual reinstatement. In the event reinstatement is no longer feasible for reasons not attributable to the complainants, said respondents are also liable to pay complainants-employees their separation pay to be computed at the rate of one (1) month pay for every year of service, a fraction of at least six (6) months to be considered as one whole year.

On November 10, 1997, the Union presented additional documentary evidence which consisted of a newspaper clipping in the Manila Bulletin, dated August 18, 1997 bearing the picture of Lawrence Qua with the following inscription: RECERTIFICATION. The Cabuyao (Laguna) operation of Ionic Circuits, Inc. consisting of plants 2, 3, 4 and 5 was recertified to ISO 9002 as electronics contract manufacturer by the TUV, a rating firm with headquarters in Munich, Germany. Lawrence Qua, Ionics president and chief executive officer, holds the plaque of recertification presented by Gunther Theisz (3rd from left), regional manager of TUV Products Services Asia during ceremonies held at Sta. Elena Golf Club. This is the first of its kind in the country that four plants were certified at the same time.[12] The Union claimed that the said clipping showed that both corporations, Ionics and Complex are one and the same. In answer to this allegation, Ionics explained that the photo which appeared at the Manila Bulletin issue of August 18, 1997 pertained only to respondent Ionics recertification of ISO 9002. There was no mention about Complex Electronics Corporation. Ionics claimed that a mere photo is insufficient to conclude that Ionics and Complex are one and the same. ISSUE: 1. Whether or not Ionics was merely a runaway shop. 2.

Separate appeals were filed by Complex, Ionics and Lawrence Qua before the respondent NLRC which rendered the questioned decision on March 10, 1995, the decretal portion of which states: WHEREFORE, premises considered, the assailed decision is hereby ordered vacated and set aside, and a new one entered ordering respondent Complex Electronics Corporation to pay 531 complainants equivalent to one month pay in lieu of notice and separation pay equivalent to one month pay for every year of service and a fraction of six months considered as one whole year. Respondents Ionics Circuit Incorporated and Lawrence Qua are hereby ordered excluded as parties solidarily liable with Complex Electronics Corporation Complex, Ionics and the Union filed their motions for reconsideration of the above decision which were denied by the respondent NLRC. On December 23, 1996, the Union filed a motion for consolidation of G.R. No. 122136 with G.R. No. 121315.[10] The motion was granted by this Court in a Resolution dated June 23, 1997.[11]

74

Whether or not Lawrence Qua is personally Liable to the union.

RULING:

1.

The Union's contentions are untenable.

A runaway shop is defined as an industrial plant moved by its owners from one location to another to escape union labor regulations or state laws, but the term is also used to describe a plant removed to a new location in order to discriminate against employees at the old plant because of their union activities.[14] It is one wherein the employer moves its business to another location or it temporarily closes its business for antiunion purposes.[15] A runaway shop in this sense, is a relocation motivated by anti-union animus rather than for business reasons. In this case, however, Ionics was not set up merely for the purpose of transferring the business of Complex. At the time the labor dispute arose at Complex, Ionics was already existing as an independent company. As earlier mentioned, it has been in existence since July 5, 1984. It cannot, therefore, be said that the temporary closure in Complex and its subsequent transfer of business to Ionics was for anti-union purposes. The Union failed to show that the primary reason for the closure of the establishment was due to the union activities of the employees.

Derivative Suit

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. Ionics may be engaged in the same business as that of Complex, but this fact alone is not enough reason to pierce the veil of corporate fiction of the corporation. Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. This fiction of corporate entity can only be disregarded in certain cases such as when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime.[19] To disregard said separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. we agree with respondent Ionics that the photo/newspaper clipping itself does not prove that Ionics and Complex are one and the same entity. The photo/newspaper clipping merely showed that some plants of Ionics were recertified to ISO 9002 and does not show that there is a relation between Complex and Ionics except for the fact that Lawrence Qua was also the president of Ionics. 2. Going now to the issue of personal liability of Lawrence Qua, it is settled that in the absence of malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities.[25] In the present case, while it may be true that the equipment, materials and machinery were pulled-out of Complex and transferred to Ionics during the night, their action was sufficiently explained by Lawrence Qua in his Comment to the petition filed by the Union. We quote: The fact that the pull-out of the machinery, equipment and materials was effected during nighttime is not per se an indicia of bad faith on the part of respondent Qua since he had no other recourse, and the same was dictated by the prevailing mood of unrest as the laborers were already vandalizing the equipment, bent on picketing the company premises and threats to lock out the company officers were being made. Such acts of respondent Qua were, in fact, made pursuant to the demands of Complex's customers who were already alarmed by the pending labor dispute and imminent strike to be stage by the laborers, to have their equipment, machinery and materials pull out of Complex. As such, these acts were merely done pursuant to his official functions and were not, in any way, made with evident bad faith. We perceive no intention on the part of Lawrence Qua and the other officers of Complex to defraud the employees and the Union. They were compelled to act upon the instructions of their customers who were the real owners of the equipment, materials and machinery. The prevailing labor unrest permeating within the premises of Complex left the officers with no other choice but to pull them out of Complex at night to prevent their destruction. Thus, we see no reason to declare Lawrence Qua personally liable to the Union.

90. ERNESTINA CRISOLOGO-JOSE v. CA G.R. No. 80599 September 15, 1989 FACTS: Respondent Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and sales; and the president of the said corporation was Atty. Oscar Z. Benares. Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong, issued Check drawn against Traders Royal Bank, in the amount of P45,000.00 payable to defendant Ernestina Crisologo-Jose. Since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon Ricardo S. Santos, Jr., to sign the aforesaid check. The check was issued to petitioner Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by said petitioner over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon approval by the GSIS of the compromise agreement with the spouses Ong, the check will be encashed accordingly. However, since the compromise agreement was not approved within the expected period of time, the aforesaid check for P45,000.00 was replaced by Atty. Benares with another Traders Royal Bank check in the same amount of P45,000.00 also payable to Jose. This replacement check was also signed by Atty. Oscar Z. Benares and by the Ricardo S. Santos, Jr. When Jose deposited this replacement, it was dishonored for insufficiency of funds. Hence, petitioner Jose filed a criminal complaint for violation of Batas Pambansa Blg. 22 against Atty. Oscar Z. Benares and Ricardo S. Santos, Jr. Meanwhile, during the preliminary investigation, Santos tried to tender a cashier’s check for the value of the dishonored check but petitioner refused to accept such. This was consigned by Santos with the clerk of court and he instituted charges against petitioner. The trial court held that consignation wasn't applicable to the case at bar but was reversed by the CA. ISSUE: Is Santos personally liable?

Petitioner Jose averred that it is not Santos who is the accommodation party to the instrument but the corporation itself. But assuming arguendo that the corporation is the accommodation party, it cannot be held liable to the check issued in favor of petitioner. The provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of another is ultra vires. Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with the knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation thereon. By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third party only is specifically authorized to do so. Corollarily, corporate officers have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts and transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot be enforced against the corporation, the signatories thereof shall be personally liable therefore, as well as the consequences arising from their acts in connection therewith.

91. FCY CONSTRUCTION and FRANCIS YU v. CA and LEY CONSTRUCTION G.R. No. 123358 February 1, 2000 FACTS: In June 1993, Ley Construction and Development Construction (Ley) filed a complaint for collection of sum of money against FCY Construction Group, Inc. (FCY) and Francis Yu (Yu), the president of FCY. Ley alleged that it had a joint venture agreement with FCY over the Tandang Sora Commonwealth Flyover government project (Project), for which Ley had provided funds and construction materials. The complaint was filed in order to compel FCY to pay its share (half) in the collections it received in the project. They also alleged that petitioners were guilty of fraud in incurring the obligation.

RULING: Yes. 75

Derivative Suit

FCY and Yu claimed that there was no fraud. Moreover, they claimed that it was the DPWH that induced Ley to deliver materials and cash for the Project. They also claim that Yu should be dropped as a party-defendant considering the hornbook law that corporate personality is a shield against personal liability of its officers.

Petitioner Ricardo A. Llamado was Treasurer of Pan Asia Finance Corporation. Together with Jacinto N. Pascual, Sr., President of the same corporation, petitioner Llamado was prosecuted for violation of Batas Pambansa Blg. 22. The two (2) had co-signed a postdated check payable to private respondent Leon Gaw in the amount of P186,500.00, which check was dishonored for lack of sufficient funds.

ISSUES: Can Yu be made liable in his individual capacity if he indeed entered into and signed the contract in his official capacity as President of FCY? RULING: No. The Court held that Francis Yu cannot be made liable in his individual capacity, in the absence of stipulation to that effect, due to the personality of the corporation being separate and distinct from the persons composing it. However, while the Court agrees that Yu cannot be held solidarily liable with FCY merely because he is the President thereof and was involved in the transactions with Ley, the Court also notes that there exists instances when corporate officers may be held personally liable for corporate acts. Such exceptions were outlined in Tramat Mercantile, Inc. vs. Court of Appeals, as follows: 1.

2.

3. 4.

He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; He agrees to hold himself personally and solidarily liable with the corporation; or He is made, by a specific provision of law, to personally answer for his corporate action.

The attendance of these circumstances, however, cannot be determined at this stage and should properly be threshed out during the trial on the merits. Hence, whether Yu should be held personally and solidarily liable with FCY is a matter that should be left to the trial court's discretion, dependent as it is on evidence during trial.

92. LLAMADO v. CA and GAW G.R. No. 84850 June 29, 1989

The trial court convicted the petitioner alone, since jurisdiction over the person of Pascual, who had thoughtfully fled the country, had not been obtained. Petitioner was sentenced to imprisonment and to pay a fine. Petitioner then filed with the Court of Appeals Manifestation and Petition for Probation". Petitioner asked the Court of Appeals to grant his Petition for Probation or, in the alternative, to remand the Petition back to the trial court. In a "Manifestation and Motion" and filed with the Court of Appeals, petitioner formally withdrew his appeal conditioned, however, on the approval of his Petition for Probation. 2 The Office of the Solicitor General filed a Comment stating that it had no objection to petitioner Llamado's application for probation. The Court of Appeals, through Mr. Justice Magsino, denied the Petition for Probation.

Probation may be granted whether the sentence imposes a term of imprisonment or a fine with subsidiary imprisonment in case of insolvency. An application for probation shall be filed with the trial court, with notice to the appellate court if an appeal has been taken from the sentence of conviction. The filing of the application shall be deemed a waiver of the right to appeal, or the automatic withdrawal of a pending appeal. In the latter case, however, if the application is filed on or after the date of the judgment of the appellate court, said application shall be acted upon by the trial court on the basis of the judgment of the appellate court. In its present form, Section 4 establishes a much narrower period during which an application for probation may be filed with the trial court: "after [the trial court] shall have convicted and sentenced a defendant and — within the period for perfecting an appeal — ." As if to provide emphasis, a new proviso was appended to the first paragraph of Section 4 that expressly prohibits the grant of an application for probation "if the defendant has perfected an appeal from the judgment of conviction." It is worthy of note too that Section 4 in its present form has dropped the phrase which said that the filing of an application for probation means "the automatic withdrawal of a pending appeal". The deletion is quite logical since an application for probation can no longer be filed once an appeal is perfected; there can, therefore, be no pending appeal that would have to be withdrawn.

ISSUE: Should the motion for probation be granted? RULING: NO, it should be denied. Probation may be granted whether the sentence imposes a term of imprisonment or a fine only. An application for probation shall be filed with the trial court, with notice to the appellate court if an appeal has been taken from the sentence of conviction. The filing of the application shall be deemed a waiver of the right to appeal, or the automatic withdrawal of a pending appeal. An order granting or denying probation shall not be appealable. It will be noted that under Section 4 of P.D. No. 968, the trial court could grant an application for probation "at any time" "after it shall have convicted and sentenced a defendant" and certainly after "an appeal has been taken from the sentence of conviction." Thus, the filing of the application for probation was "deemed [to constitute] automatic withdrawal of a pending appeal."

In applying Section 4 in the form it exists today (and at the time petitioner Llamado was convicted by the trial court), to the instant case, we must then inquire whether petitioner Llamado had submitted his application for probation "within the period for perfecting an appeal." Put a little differently, the question is whether by the time petitioner Llamado's application was filed, he had already "perfected an appeal" from the judgment of conviction of the Regional Trial Court of Manila. The period for perfecting an appeal from a judgment rendered by the Regional Trial Court, under Section 39 of Batas Pambansa Blg. 129, Section 19 of the Interim Rules and Guidelines for the Implementation of B.P. Blg. 129 and under the 1985 Rules on Criminal Procedure, as amended, or more specifically Section 5 of Rule 122 of the Revised Rules of Court, is fifteen (15) days from the promulgation or notice of the judgment appealed from. It is also clear from Section 3 (a) of Rule 122 that such appeal is taken or perfected by simply filing a notice of appeal with the Regional Trial Court which rendered the judgment appealed from and by serving a copy thereof upon the People of the Philippines. As noted earlier, petitioner Llamado had manifested orally and in open court his intention to appeal at the time of promulgation of the judgment of conviction, a manifestation at least equivalent to a written notice of appeal and treated as such by the Regional Trial Court.

FACTS: PETITIONER’S DEFENSES: Petitioner urges, however, that the phrase "period for perfecting an appeal" and the clause "if the defendant has 76

Derivative Suit

perfected an appeal from the judgment of conviction" found in Section 4 in its current form, should not be interpreted to refer to Rule 122 of the Revised Rules of Court; and that the "whereas" or preambulatory clauses of P.D. No. 1990 did not specify a period of fifteen (15) days for perfecting an appeal. 3 It is also urged that "the true legislative intent of the amendment (P.D. No. 1990) should not apply to petitioner who filed his Petition for probation at the earliest opportunity then prevailing and withdrew his appeal." 4

The trial court lost jurisdiction over the case when petitioner perfected his appeal. The Court of Appeals was not, therefore, in a position to remand the case except for execution of judgment. Moreover, having invoked the jurisdiction of the Court of Appeals, petitioner is not at liberty casually to attack that jurisdiction when exercised adversely to him. In any case, the argument is mooted by the conclusion that we have reached, that is, that petitioner's right to apply for probation was lost when he perfected his appeal from the judgment of conviction.

Petitioner invokes the dissenting opinion rendered by Mr. Justice Bellosillo in the Court of Appeals. Petitioner then asks us to have recourse to "the cardinal rule in statutory construction" that "penal laws [should] be liberally construed in favor of the accused," and to avoid "a too literal and strict application of the proviso in P.D. No. 1990" which would "defeat the manifest purpose or policy for which the [probation law] was enacted-."

93. MAM REALTY DEVELOPMENT CORPORATION and MANUEL CENTENO, v. NLRC and CELSO B. BALBASTRO G.R. No. 114787, June 2, 1995

Section 4 as it now stands, in authorizing the trial court to grant probation "upon application by [the] defendant within the period for perfecting an appeal" and in reiterating in the proviso that no application for probation shall be entertained or granted if the defendant has perfected an appeal from the judgment of conviction. Daid not really mean to refer to the fifteen-day period established, as indicated above, by B.P. Blg. 129, the Interim Rules and Guidelines Implementing B.P. Blg. 129 and the 1985 Rules on Criminal Procedure, but rather to some vague and undefined time, i.e., "the earliest opportunity" to withdraw the defendant's appeal. The whereas clauses invoked by petitioner did not, of course, refer to the fifteen-day period. There was absolutely no reason why they should have so referred to that period for the operative words of Section 4 already do refer, in our view, to such fifteen-day period. Whereas clauses do not form part of a statute, strictly speaking; they are not part of the operative language of the statute. 5 Nonetheless, whereas clauses may be helpful to the extent they articulate the general purpose or reason underlying a new enactment, in the present case, an enactment which drastically but clearly changed the substantive content of Section 4 existing before the promulgation of P.D. No. 1990. Whereas clauses, however, cannot control the specific terms of the statute; in the instant case, the whereas clauses of P.D. No. 1990 do not purport to control or modify the terms of Section 4 as amended. Upon the other hand, the term "period for perfecting an appeal" used in Section 4 may be seen to furnish specification for the loose language "first opportunity" employed in the fourth whereas clause. "Perfection of an appeal" is, of course, a term of art but it is a term of art widely understood by lawyers and judges and Section 4 of the Probation Law addresses itself essentially to judges and lawyers. "Perfecting an appeal" has no sensible meaning apart from the meaning given to those words in our procedural law and so the law-making agency could only have intended to refer to the meaning of those words in the context of procedural law.

Facts: Celso B. Balbastro filed a case against MAM Realty Development Corporation (MAM) and its Vice President Manuel P. Centeno, for unfair labor practice in violation of the Labor Code. Balbastro alleged that he was employed by MAM as a pump operator in 1982 and had since performed such work at its Rancho Estate, Marikina, Metro manila. MAM countered that Balbastro had previously been employed by Francisco Cacho and Co., Inc., the developer of Rancho Estates. Sometime in May 1982, his services were contracted by MAM for the operation of the Rancho Estates' water pump. He was engaged, however, not as an employee, but as a service contractor, at an agreed fee of P1,590.00 a month. Under the agreement, Balbastro was merely made to open and close on a daily basis the water supply system of the different phases of the subdivision in accordance with its water rationing scheme. He worked for only a maximum period of three hours a day, and he made use of his free time by offering plumbing services to the residents of the subdivision. He was not at all subject to the control or supervision of MAM for. Prior to the filing of the complaint, MAM executed a Deed of Transfer, in favor of the Rancho Estates Phase III Homeowners Association, Inc., conveying to the latter all its rights and interests over the water system in the subdivision. NLRC found the corporation guilty as charged, and likewise held Centeno liable together with said corporation. Issue: Should Centeno be held liable together with MAM Realty? Ruling: No. The NLRC erred in holding Centeno jointly and severally liable with MAM. A corporation, being a juridical entity, may act only through its directors, officers and employees. Obligations incurred by them, acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. True, solidary liabilities may at times be 77

incurred but only when exceptional circumstances warrant such as, generally, in the following cases: 1. When directors and trustees or, in appropriate cases, the officers of a corporation (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons. 2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto. 3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the Corporation. 4 When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.1 In labor cases, for instance, the Court has held corporate directors and officers solidarily liable with the corporation for the termination of employment of employees done with malice or in bad faith. In the case at Bench, there is nothing substantial on record that can justify, prescinding from the foregoing, petitioner Centeno's solidary liability with the corporation.

94. SERGIO F. NAGUIAT, doing business under the name and style SERGIO F. NAGUIAT ENT., INC., & CLARK FIELD TAXI, INC. v. NLRC G.R. No. 116123 March 13, 1997 Facts: Petitioner Clark Field Taxi, Inc. (CFTI) held a concessionaire's contract with the Army Air Force Exchange Services ("AAFES") for the operation of taxi services within Clark Air Base. Sergio F. Naguiat was CFTI's president, while Antolin T. Naguiat was its vice-president. Like Sergio F. Naguiat Enterprises, Incorporated (Naguiat Enterprises), a trading firm, it was a family-owned corporation. Respondents were previously employed by CFTI as taxi drivers. They were required to pay a daily "boundary fee" and all incidental expenses for the maintenance of the vehicles they were driving were accounted against them, including gasoline expenses. Subsequently, AAFES was dissolved as a result of the US military bases phase-out in the Philippines and the services of individual respondents were officially terminated in 1991. The AAFES Taxi Drivers Association (driver’s union)held negotiations as regards separation benefits that should be awarded in

Derivative Suit

favor of the drivers. They arrived at an agreement that the separated drivers will be given P500.00 for every year of service as severance pay. Most of the drivers accepted said amount, however, individual respondents herein refused to accept theirs. Instead, after disaffiliating themselves from the drivers' union, individual respondents, through the National Organization of Workingmen (NOWM), a labor organization which they subsequently joined, filed a complaint against Sergio F. Naguiat (Naguiat Enterprises), AAFES and the driver’s union for payment of separation pay due to termination/phase-out. Private respondents alleged that they were regular employees of Naguiat Enterprises, although their individual applications for employment were approved by CFTI. They claimed to have been assigned to Naguiat Enterprises after having been hired by CFTI, and that the former thence managed, controlled and supervised their employment. They averred further that they were entitled to separation pay based on their latest daily earnings of US$15.00 for working sixteen (16) days a month. Petitioners claimed that the cessation of business of CFTI was due to "great financial losses and lost business opportunity" resulting from the phase-out of Clark Air Base brought about by the Mt. Pinatubo eruption and the expiration of the RP-US military bases agreement. They admitted that CFTI had agreed with the drivers' union to grant its taxi driveremployees separation pay equivalent to P500.00 for every year of service. Labor Arbiter ruled in favor of the respondents, ordering CFTI to pay respondents P1,200/year of service for humanitarian consideration. NLRC affirmed LA's decision with modification by granting separation pay $120/year of service, and held that Naguiat Enterprises, S. Naguiat, and A. Naguiat are jointly and severally liable with CFTI. NLRC issued a second resolution denying the MR of the petitioners.

Issue: Are private respondent-employees of petitioner Clark Field Taxi, Inc., who were separated from service due to the closure of Clark Air Base, entitled to separation pay and, if so, in what amount? Held: YES. Well-settled is the rule that business losses or financial reverses, in order to sustain retrenchment of personnel or closure of business and warrant exemption from payment of separation pay, must be proved with clear and satisfactory evidence. The records, however, are devoid of such evidence. The Labor Arbiter; as affirmed by NLRC, correctly found that petitioners stopped their taxi business within Clark Air Base because of the phase-out of U.S. military presence thereat. It was not due to any great financial loss because petitioners' taxi business was earning profitably at the time of its closure. With respect to the amount of separation pay that should be granted, Article 283 of the Labor Code provides that in case of

retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one whole year. The Court found that NLRC did not commit grave abuse of discretion in ruling that individual respondents were entitled to separation pay in the amount $120.00 (one-half of $240.00 monthly pay) or its peso equivalent for every year of service.

Naguiat Enterprises, not liable There is no substantial basis to hold that Naguiat Enterprises is an indirect employer of individual respondents much less a labor only contractor. Private respondents failed to substantiate their claim that Naguiat Enterprises managed, supervised and controlled their employment. It appears that they were confused on the personalities of Sergio F. Naguiat as an individual who was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a separate corporate entity with a separate business. They presumed that Sergio F. Naguiat, who was at the same time a stockholder and director of Sergio F. Naguiat Enterprises, Inc., was managing and controlling the taxi business on behalf of the latter. A closer scrutiny and analysis of the records, however, evince the truth of the matter: that Sergio F. Naguiat, in supervising the-taxi drivers and determining their employment terms, was rather carrying out his responsibilities as president of CFTI. Hence, Naguiat Enterprises as a separate corporation does not appear to be involved at all in the taxi business. CFTI president (Sergio Naguiat), solidarily liable Sergio F. Naguiat, admittedly, was the president of CFTI who actively managed the business. Thus, he falls within the meaning of an "employer" as contemplated by the Labor Code, who may be held jointly and severally liable for the obligations of the corporation to its dismissed employees. Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises were "close family corporations" owned by the Naguiat family. Section 100, paragraph 5 of the Corporation Code which specifically imposes personal liability for corporate torts upon the stockholder actively managing or operating the business and affairs of the close corporation unless the corporation has obtained reasonably adequate liability insurance. CFTI failed to comply with this law-imposed duty or obligation. Consequently, its stockholder who was actively engaged in the management or operation of the business should be held personally liable. CFTI Vice-President (Antolin Naguiat), not personally liable Although he carried the title of "general manager" as well, it had not been shown that he had acted in such capacity. Furthermore, no evidence on the extent of his participation in the management or operation 78

of the business was proffered. In this light, he cannot be held solidarily liable for the obligations of CFTI and Sergio Naguiat to the private respondents.

A corporation, being a juridical entity, may act only through its directors, officers and employees. Obligations incurred by them, acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. True, solidary liabilities may at times be incurred but only when exceptional circumstances warrant such as, generally, in the following cases: 1.

When directors and trustees or, in appropriate cases, the officers of a corporation —

(a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons. 2.

When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto.

3.

When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the Corporation.

4.

When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.

In labor cases, for instance, the Court has held that corporate directors and officers are solidarily liable with the corporation for the termination of employment of employees done with malice or in bad faith.

95. PROGRESS HOMES AND ERMELO ALMEDA v. NLRC 269 SCRA 274 FACTS:

Derivative Suit

Petitioner is a non-stock organization duly registered with the SEC. The other petitioner, Ermelo Almeda, is the President and General Manager of Progress Homes and the owner of the land where the Progress Homes Subdivision is located. Private respondents allegedly were among the workers employed by petitioners in their construction and development of the subdivision from 1986 to 1988. Forty of these workers, including private respondents, filed before the NLRC Arbitration Branch a petition for reinstatement, salary adjustment, ECOLA, overtime pay and 13th month pay. Petitioners amicably settled the case with thirty-three of the laborers, leaving private respondents as the only claimants. Private respondents alleged that they worked as laborers and carpenters for 8.5 hours a day at a salary below the minimum wage and that when they demanded payment of the benefits due them, they were summarily dismissed and barred from entering the workplace. Petitioners seek to set aside the decision of the NLRC which affirmed the decision of the Labor Arbiter declaring them (Progress Homes and Ermelo Almeda) jointly and severally liable to private respondents for their backwages and separation pay.

RULING: 1. Did the NLRC properly held Ermelo Almeda to be solidarily liable with Progress Homes? No. The Court has held that corporate directors and officers are solidarily liable with the corporation for the termination of employment of employees only if the termination is done with malice or in bad faith. The Labor Arbiter's decision failed to disclose why Almeda was made personally liable. There appears no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. Petitioner Almeda, therefore, should not have been made personally answerable for the payment of private respondents' salaries. 2. Was there illegal dismissal? No. The labor arbiter relied solely on the bare allegations of the parties in their position papers. There is nothing in the labor arbiter's decision to show how he arrived at the conclusion that there is employer-employee relationship. The employment contract presented by petitioners, while admittedly defective, did not refer to any of the private respondents. No evidence was presented to show that petitioners engaged the services of private respondents.

96. REAHS CORP, SEVERO CASTULO, et al. v. NLRC, BONIFACIO RED, et al GR 117473, 15 April 1997 FACTS: Private respondents sued Reahs Corp. for unfair labor practice and illegal dismissal. They claim that they were unlawfully dismissed and were not awarded nor given any separation pay. On the other hand, respondents allege that sometime in 1986, a certain Ms Soledad Domingo, the sole proprietress and operator of Rainbow Sauna located at 316 Araneta Avenue, Quezon City, offered to sell her business to respondent Reah's Corporation After the sale, all the assets of Ms Domingo were turned over to respondent Reah's, which put a sing-along coffee shop and massage clinic; that complainant Red started his employment on the first week of December 1988 as a room boy at P50.00/day and was given living quarters inside the premises as he requested; that sometime in March 1989, complainant Red asked permission to go to Bicol for a period of ten (10) days, which was granted, and was given an advance money of P1,200.00 to bring some girls from the province to work as attendants at the respondent's massage clinic, that it was only on January 1, 1990 that complainant Red returned and was re-hired under the same terms and conditions of his previous employment with the understanding that he will have to refund the P1,200.00 cash advance given to him; that due to poor business, increase in the rental cost and the failure of Meralco to reconnect the electrical services in the establishment, it suffered losses leading to its closure. The NLRC ruled in favor of respondents. Together with the corporation, the NLRC also held Castulo, Romeo Pascua, and Daniel Valenzuela solidarily liable due to their capacity as Chairman, Board Member and Accountant, and Acting Manager, respectively. ISSUE: Whether or not Pascua, Castulo, and Valenzuela, may be held liable. RULING: YES. They acted in bad faith in dismissing the respondents. As a general rule established by legal fiction, the corporation has a personality separate and distinct from its officers, stockholders and members. Hence, officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. This fictional veil, however, can be pierced by the very same law which created it when "the notion of the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues". Under the Labor Code, for instance, when a corporation violates a provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the corporation. In the case at 79

bar, the thrust of petitioners' arguments was aimed at confining liability solely to the corporation, as if the entity were an automaton designed to perform functions at the push of a button. The issue, however, is not limited to payment of separation pay under Article 283 but also payment of labor standard benefits such as underpayment of wages, holiday pay and 13th month pay to two of the private respondents. While there is no sufficient evidence to conclude that petitioners have indiscriminately stopped the entity's business, at the same time, petitioners have opted to abstain from presenting sufficient evidence to establish the serious and adverse financial condition of the company. 97. BENJAMIN A. SANTOS vs. NLRC G.R. No. 101699; March 13, 1996 FACTS: Melvin Millena was hired to be the project accountant for MMDCs mining operations in Gatbo, Bacon, Sorsogon. On 12 August 1986, he sent to Mr. Gil Abao, the MMDC corporate treasurer, a memorandum calling the latters attention to the failure of the company to comply with the withholding tax requirements of, and to make the corresponding monthly remittances to the Bureau of Internal Revenue (BIR) on account of delayed payments of accrued salaries to the company’s laborers and employees. In a letter, dated 08 September 1986, Abano advised Millena to resign from the corporation. Millena expressed shock over the termination of his employment. He complained that he would not have resigned from the Sycip, Gorres & Velayo accounting firm, where he was already a senior staff auditor, had it not been for the assurance of a continuous job by MMDCs Engr. Rodillano E. Velasquez. He requested that he be reimbursed the advances he had made for the company and be paid his accrued salaries/claims. The claim was not heeded, hence, Millena filed with the NLRC Regional Arbitration a complaint for illegal dismissal, unpaid salaries, 13th month pay, overtime pay, separation pay, and incentive leave pay against MMDC and its two top officials Benjamin A. Santos ,the President, and Rodillano A. Velasquez ,the executive vice-president,. A copy of the notice and summons was served to MMDC, Santos and Velasquez. At the initial hearing before the Labor Arbiter, only the complainant, Millena, appeared; however, Atty. Romeo Perez, in representation of the respondents, requested by telegram that the hearing be reset. Although the request was granted by the Labor Arbiter, Millena was allowed, nevertheless, to present his evidence ex-parte at that initial hearing. Labor Arbiter Fructouso T. Aurellano, finding no valid cause for terminating complainants employment, ruled, citing this Courts

Derivative Suit

pronouncement in Construction & Development Corporation of the Philippines vs. Leogardo, Jr. that a partial closure of an establishment due to losses was a retrenchment measure that rendered the employer liable for unpaid salaries and other monetary claims. Santos reiterates that he should not have been adjudged personally liable by public respondents, the latter not having validly acquired jurisdiction over his person whether by personal service of summons or by substituted service under Rule 19 of the Rules of Court. His contention is unacceptable. The fact that Atty. Romeo B. Perez has been able to timely ask for a deferment of the initial hearing coupled with his subsequent active participation in the proceedings, should disprove the supposed want of service of legal process. Although as a rule, modes of service of summons are strictly followed in order that the court may acquire jurisdiction over the person of a defendant, such procedural modes, however, are liberally construed in quasi-judicial proceedings, substantial compliance with the same being considered adequate. Moreover, jurisdiction over the person of the defendant in civil cases is acquired not only by service of summons but also by voluntary appearance in court and submission to its authority. Appearance by a legal advocate is such voluntary submission to a courts jurisdiction. It may be made not only by actual physical appearance but likewise by the submission of pleadings in compliance with the order of the court or tribunal. To say that petitioner did not authorize Atty. Perez to represent him in the case is to unduly tax credulity. Like the Solicitor General, the Court likewise considers it unlikely that Atty. Perez would have been so irresponsible as to represent petitioner if he were not, in fact, authorized. Atty. Perez is an officer of the court, and he must be presumed to have acted with due propriety. The employment of a counsel or the authority to employ an attorney, it might be pointed out, need not be proved in writing; such fact could inferred from circumstantial evidence. Santos was not just an ordinary official of the MMDC; he was the President of the company.

situation might arise when a corporation is used to evade a just and due obligation or to justify a wrong, to shield or perpetrate fraud, to carry out similar other unjustifiable aims or intentions, or as a subterfuge to commit injustice and so circumvent the law. In Tramat Mercantile, Inc., vs. Court of Appeals, the Court has collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer; to wit: When (1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; (2) He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) He agrees to hold himself personally and solidarily liable with the corporation; or (4) He is made, by a specific provision of law, to personally answer for his corporate action.

amount of $18,300, Exhibit D; and the goods arrived sometime in July, 1963 according to accused himself, tsn. II:7; now from here on there is some debate on the evidence; according to Complainant Bank, there was permitted delivery of the steel sheets only upon execution of a trust receipt, Exhibit A; while according to the accused, the goods were delivered to him sometime before he executed that trust receipt in fact they had already been converted into steel office equipment by the time he signed said trust receipt, tsn. II:8; but there is no question - and this is not debated - that the bill of exchange issued for the purpose of collecting the unpaid account thereon having fallen due (see Exh. B) neither accused nor his company having made payment thereon notwithstanding demands, Exh. C and C1, dated 17 and 27 December, 1963, and the accounts having reached the sum in pesos of P46,818.68 after deducting his deposit valued at P28,736.47; that was the reason why upon complaint by Continental Bank, the Fiscal filed the information after preliminary investigation as has been said on 22 October, 1964.

The case of petitioner is way off these exceptional instances. It is not even shown that Santos has had a direct hand in the dismissal of private respondent enough to attribute to Millena a patently unlawful act while acting for the corporation. Neither can Article 289 of the Labor Code be applied since this law specifically refers only to the imposition of penalties under the Code. It is undisputed that the termination of petitioner’s employment has, instead, been due, collectively, to the need for a further mitigation of losses, the onset of the rainy season, the insurgency problem in Sorsogon and the lack of funds to further support the mining operation in Gatbo.

ISSUE/S:

RULING: 98. SIA v PEOPLE, G.R. No. L-30896 April 28, 1983

Santos, in any event, argues that public respondents have gravely abused their discretion in finding petitioner solidarily liable with MMDC even in the absence of bad faith and malice on his part. There is merit in this plea. Issue: Is Santos solidarily liable with MMDC even in the absence of bad faith and malice on his part? Held: No. A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit done sparingly, the disregard of its independent being and the lifting of the corporate veil. As a rule, this

WHETHER PETITIONER JOSE O. SIA, HAVING ONLY ACTED FOR AND IN BEHALF OF THE METAL MANUFACTURING COMPANY OF THE PHILIPPINES (METAL COMPANY, FOR SHORT) AS PRESIDENT THEREOF IN DEALING WITH THE COMPLAINANT, THE CONTINENTAL BANK, (BANK FOR SHORT) HE MAY BE LIABLE FOR THE CRIME CHARGED.

J. DE CASTRO

FACTS: There is no debate on certain antecedents: Accused Jose 0. Sia sometime prior to 24 May, 1963, was General Manager of the Metal Manufacturing Company of the Philippines, Inc. engaged in the manufacture of steel office equipment; on 31 May, 1963, because his company was in need of raw materials to be imported from abroad, he applied for a letter of credit to import steel sheets from Mitsui Bussan Kaisha, Ltd. of Tokyo, Japan, the application being directed to the Continental Bank, herein complainant, Exhibit B and his application having been approved, the letter of credit was opened on 5 June, 1963 in the 80

It is worthy of note that the civil liability imposed by the trust receipt is exclusively on the Metal Company. Speaking of such liability alone, as one arising from the contract, as distinguished from the civil liability arising out of a crime, the petitioner was never intended to be equally liable as the corporation. Without being made so liable personally as the corporation is, there would then be no basis for holding him criminally liable, for any violation of the trust receipt. This is made clearly so upon consideration of the fact that in the violation of the trust agreement and in the absence of positive evidence to the contrary, only the corporation benefited, not the petitioner personally, yet, the allegation of the information is to effect that the misappropriation or conversion was for the personal use and benefit of the petitioner, with respect to which there is variance between the allegation and the evidence. 99. TRAMAT MERCANTILE v. COURT OF APPEALS G.R. No. 111008; November 7, 1994

Derivative Suit

FACTS: Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries," sold to Tramat, 1 unit HINOMOTO TRACTOR. David Ong, Tramat's president and manager, issued check for P33,500 payment (apparently replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor, together with an attached lawn mower fabricated by it, to the Metropolitan Waterworks and Sewerage System ("NAWASA") for P67,000.4. David Ong caused a "stop payment" of the check when NAWASA refused to pay the tractor and lawn mower after discovering that, aside from some stated defects of the attached lawn mower, the engine was a reconditioned unit. De la Cuesta filed an action for the recovery of P33,500. ONG averred that de la Cuesta had no cause of action; that the questioned transaction was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal capacity; and that the payment of the check was stopped because the subject tractor had been priced as a brand new, not as a reconditioned unit. The trial court ruled in favor of petitioner. CA affirmed. MR was denied. ISSUE: Should Ong be held jointly and severally liable with Tramat? HELD: No. Ong acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by a specific provision of law, to personally answer for his corporate action. In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under any of the abovementioned cases.

100. LIRAG TEXTILE MILLS and BASILIO LIRAG vs. SSS, HON. PACIFICO DE CASTRO GR L-33205, 31 August 1987

FACTS That on September 4, 1961, the SSS and Lirag Textile Mills, Inc. and Basilio Lirag entered into a Purchase Agreement under which the plaintiff agreed to purchase from the said defendant preferred shares of P1,000,000.00 subject to the conditions set forth in such agreement. Pursuant to the Purchase Agreement of September 4, 1961, SSS, on January 31, 1962, paid Lirag Textile Mills, Inc. the sum of P500,000.00 for which the said defendant issued to plaintiff 5,000 preferred shares with a par value of P100.00 per share. To guarantee the redemption of the stocks purchased by the plaintiff, the payment of dividends, as well as the other obligations of the Lirag Textile Mills, Basilio signed the Purchase Agreement of September 4, 1961 not only as president of the defendant corporation, but also as surety so that should the Lirag Textile Mills, Inc. fail to perform any of its obligations in the said Purchase Agreement, the surety shall immediately pay to the vendee the amounts then outstanding. Notwithstanding such letters of demand to the defendant Basilio L. Lirag, Stock Certificates Nos. 128 and 139 issued to plaintiff are still unredeemed and no dividends have been paid on said stock certificates.

ISSUE Whether or not Lirag Textile is liable to SSS

preferred shares at the specified dates constitutes a debt which is defined "as an obligation to pay money at some fixed future time, or at a time which becomes definite and fixed by acts of either party and which they expressly or impliedly, agree to perform in the contract. A stockholder sinks or swims with the corporation and there is no obligation to return the value of his shares by means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase through a surety. 101. NAVA vs. PEERS MARKETING GR No. L-28120 November 25, 1976 Facts: This is a mandamus case, Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing Corporation at one hundred pesos a share or a total par value of eight thousand pesos. Po paid two thousand pesos or twenty-five percent of the amount of his subscription. No certificate of stock was issued to him or, for that matter, to any incorporator, subscriber or stockholder. On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty shares. In the deed of sale Po represented that he was "the absolute and registered owner of twenty shares" of Peers Marketing Corporation. Nava requested the officers of the corporation to register the sale in the books of the corporation. The request was denied because Po has not paid fully the amount of his subscription. Nava was informed that Po was delinquent in the payment of the balance due on his subscription and that the corporation had a claim on his entire subscription of eighty shares which included the twenty shares that had been sold to Nava. On December 21, 1966 Nava filed this mandamus action in the Court of First Instance of Negros Occidental, Bacolod City Branch to compel the corporation and Renato R. Cusi and Amparo Cusi, its executive vice-president and secretary, respectively, to register the said twenty shares in Nava's name in the corporation's transfer book.

RULING YES. It failed to comply with its contractual stipulations. The Purchase Agreement is, indeed, a debt instrument. Its terms and conditions unmistakably show that the parties intended the repurchase of the preferred shares on the respective scheduled dates to be an absolute obligation which does not depend upon the financial ability of petitioner corporation. This absolute obligation on the part of petitioner corporation is made manifest by the fact that a surety was required to see to it that the obligation is fulfilled in the event of the principal debtor's inability to do so. The unconditional undertaking of petitioner corporation to redeem the 81

The respondents in their answer pleaded the defense that no shares of stock against which the corporation holds an unpaid claim are transferable in the books of the corporation.

Issue:

Derivative Suit

W/N officers of Peers Marketing Corporation can be compelled by mandamus to enter in its stock and transfer book the sale made.

Roberto Ang Rachel Ang Total

8,750 3,750 25,000

President Secretary

Juanito and Roberto are siblings. Anecita is Juanito’s wife and Jeannevie is their daughter. Rachel is Juanito’s wife.

Held: There‘s no certificate of stock issued in favor of Po. Shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof" There should be compliance with the mode of transfer prescribed by law. The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may thereafter be transferred from one person to another. If the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee. That procedure cannot be followed in the instant case because, as already noted, the twenty shares in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a claim on the said shares for the unpaid balance of Po's subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable. In this case no stock certificate was issued to Po. Without the stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction.

102. JUANITO ANG (in behalf of SUNRISE) v. SPS. ROBERTO and RACHEL ANG G.R. No. 201675 June 19, 2013 FACTS: Sunrise Marketing (Bacolod), Inc. (SMBI) is owned by the Ang family. Its current stockholders are the following: Stockholder Juanito Ang Anecita Ang Jeannevie Ang

Number of Share 8,750 1,250 2,500

Position Vice President Treasurer

Nancy Ang (Nancy), the sister of Juanito and Roberto, extended a loan (the contract was not written in view of their close relationship) to settle the obligations of SMBI and other corporations owned by the Ang family, in the amount of $1,000,000 payable to Sps. Roberto and Rachel Ang (Sps. Roberto) and Sps. Juanito and Anecita Ang (Sps. Juanito). Part of the loan was also used to purchase real properties for SMBI, for Juanito and for Roberto. Nancy was a former stockholder of SMBI, but she no longer appears in the General Information Sheet (GIS) of SMBI since 1996. Juanito claimed that payments to Nancy ceased after 2006. Thus, in 2008, Nancy demanded to Sps. Juanito and Sps. Roberto for the payment of the loan. However, Sps. Roberto sent a letter to Nancy saying that they are not complying to anything because they have not personally contracted a loan from Nancy. On the other hand, Sps. Juanito executed a Deed of Acknowledgment and Settlement Agreement (Settlement) and an Extra Judicial REM. They also admitted that they contracted a loan together with Sps. Roberto and such loan shall be secured by the the real properties of Sps. Juanito and Sps. Roberto. Thereafter, Juanito filed a “Stockholder Derivate Suit” against Sps. Roberto. He alleged that “the intentional and malicious refusal of defendant Sps. Roberto to settle their 50% share x x x of the total obligation x x x will definitely affect the financial viability of plaintiff SMBI." In their answer, Rachel claimed that the suit was not a bona fide derivative suit as defined under the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules); that the Complaint, although labelled as a derivative suit, is actually a collection suit since the real party in interest is not SMBI, but Nancy and her husband. She also argued that the Complaint failed to allege that Juanito "exerted all reasonable efforts to exhaust all intra-corporate remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation to obtain the relief he desires," as required by the Interim Rules. Juanito replied that, the requirement for exhaustion of intra-corporate remedies is no longer needed when the corporation itself is "under the complete control of the persons against whom the suit is filed." citing HiYield Realty, Inc. v. CA. He also claimed that Rachel’s Motion is disallowed under the Interim Rules. 82

Rachel replied that the Hi-Yield Case is different because the complaining stockholder was a minority stockholder. However, in the case at bar, Juanito Ang is one of the biggest stockholders of SMBI. He is a member of BOD and is even the VP thereof. ISSUE: Is the nature of the case a derivative suit? RULING: The complaint is not a derivative suit. A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporation’s directors, officers or other insiders. Under Sections 23 and 36 of the Corporation Code, the directors or officers, as provided under the by-laws, have the right to decide whether or not a corporation should sue. Since these directors or officers will never be willing to sue themselves, or impugn their wrongful or fraudulent decisions, stockholders are permitted by law to bring an action in the name of the corporation to hold these directors and officers accountable. In derivative suits, the real party in interest is the corporation, while the stockholder is a mere nominal party. Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative suits: (1) The person filing the suit must be a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; (2) He must have exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit. First, the Complaint failed to show how the acts of Sps. Roberto resulted in any detriment to SMBI. The loan was not a corporate obligation, but a personal debt of the Ang brothers and their spouses. The check was issued to Sps. Juanito and Sps. Roberto, and not SMBI. The proceeds were used for payment of the obligations of the other corporations owned by the Angs as well as the purchase of real properties for the Ang brothers. SMBI was never a party to the Settlement Agreement or the Mortgage. It was never named as a co-debtor or guarantor of the loan. Both instruments were executed by Juanito and Anecita in their personal capacity, and not in their capacity as directors or officers of SMBI. Thus, SMBI is under no legal obligation to satisfy the obligation.

Derivative Suit

Moreover, the fact that Juanito and Anecita attempted to constitute a mortgage over "their" share in a corporate asset cannot affect SMBI. Juanito and Anecita, as stockholders of SMBI, are not co-owners of SMBI assets. They do not own pro-indiviso shares, and therefore, cannot mortgage the same except in their capacity as directors or officers of SMBI. Since damage to the corporation was not sufficiently proven by Juanito, the Complaint cannot be considered a bona fide derivative suit. A derivative suit is one that seeks redress for injury to the corporation, and not the stockholder. No such injury was proven in this case. Second, the Complaint also failed to allege that all available corporate remedies under the articles of incorporation, by-laws, laws or rules governing the corporation were exhausted, as required under the Interim Rules. No written demand was ever made for the BOD to address Juanito’s concerns. The fact that SMBI is a family corporation does not exempt Juanito from complying with the Interim Rules. In the Yu case, the Court held that a family corporation is not exempt from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules which state that there is a distinction between family corporations and other types of corporations in the institution by a stockholder of a derivative suit. Lastly, the complaint is considered as a nuisance or harassment suit under Section 1(b) of the Interim Rules. “Prohibition against nuisance and harassment suits. Nuisance and harassment suits are prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the following: (1) The extent of the shareholding or interest of the initiating stockholder or member; (2) Subject matter of the suit; (3) Legal and factual basis of the complaint; (4) Availability of appraisal rights for the act or acts complained of; and (5) Prejudice or damage to the corporation, partnership, or association in relation to the relief sought. In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss the case.” Records show that Juanito, apart from being VP, owns the highest number of shares, equal to those owned by Roberto. Also, as explained earlier,

there appears to be no damage to SMBI if the loan extended by Nancy and Theodore remains unpaid.

actions, PPC's assets were ". . . not only in imminent danger, but have actually been dissipated, lost, wasted and destroyed."

Thus, a plain reading of the allegations in the Complaint would show that the case was mainly filed to collect a debt allegedly extended by the Nancy to SMBI. Thus, the aggrieved party is not SMBI but Nancy, who are not even stockholders.

Respondent Balmores prayed that a receiver be appointed from his list of nominees. He also prayed for petitioners' prohibition from "selling, encumbering, transferring or disposing in any manner any of [PPC's] properties, including the MC Home [Depot] checks and/or their proceeds." He prayed for the accounting and remittance to PPC of the MC Home Depot checks or their proceeds and for the annulment of the board's resolution "waiving PPC's rights in favor of Villamor's law firm.

103. VILLAMOR v. UMALE 24 September 2014 Facts: MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the area owned by Mid-Pasig Development Corporation (Mid-Pasig). PPC obtained an option to lease portions of MidPasig's property, including the Rockland area. PPC's board of directors issued a resolution waiving all its rights, interests, and participation in the option to lease contract in favor of the law firm of Atty. Alfredo Villamor, Jr. (Villamor), petitioner in G.R. No. 172843. PPC received no consideration for this waiver in favor of Villamor's law firm. On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement (MOA) with MC Home Depot. Under the MOA, MC Home Depot would continue to occupy the area as PPC's sub-lessee for four (4) years, renewable for another four (4) years, at a monthly rental of P4,500,000.00 plus goodwill of P18,000,000.00. In compliance with the terms of the MOA, MC Home Depot issued 20 postdated checks representing rental payments for one year and the goodwill money. The checks were given to Villamor who did not turn these or the equivalent amount over to PPC, upon encashment. Hernando Balmores, respondent in G.R. No. 172843 and G.R. No. 172881 and a stockholder and director of PPC, wrote a letter addressed to PPJC's directors, petitioners in G.R. No. 172881, on April 4, 2005. He informed them that Villamor should be made to deliver to PPC and account for MC Home Depot's checks or their equivalent value. Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial Court an intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-Corporate Controversies (Interim Rules) against petitioners for their alleged devices or schemes amounting to fraud or misrepresentation "detrimental to the interest of the Corporation and its stockholders." Respondent Balmores alleged in his complaint that because of petitioners' 83

According to the trial court, PPC's entitlement to the checks was doubtful. The resolution issued by PPC's board of directors; waiving its rights to the option to lease contract in favor of Villamor's law firm, must be accorded prima facie validity. The trial court also noted that there was a pending case filed by one Leonardo Umale against Villamor, involving the same checks. Umale was also claiming ownership of the checks. This, according to the trial court, weakened respondent Balmores' claim that the checks were properties of PPC. The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage, or destruction of [PPC's] assets . . . [that was] prejudicial to the interest of the minority stockholders, parties-litigants or the general public."26 The board's failure to recover the disputed amounts was not an indication of mismanagement resulting in the dissipation of assets. The trial court noted that PPC was earni The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a derivative suit because there were allegations of fraud or ultra vires acts ... by [PPC's directors]."36cralawlawlibrary According to the Court of Appeals, the trial court abandoned its duty to the stockholders in a derivative suit when it refused to appoint a receiver or create a management committee, all during the pendency of the proceedings. The assailed order of the trial court removed from the stockholders their right, in an intra-corporate controversy, to be allowed the remedy of appointment of a receiver during the pendency of a derivative suit, leaving the corporation under the control of an outsider and its assets prone to dissipation.ng substantial rental income from its other sublessees.

Issue: Whether the Court of Appeals correctly characterized respondent Balmores' action as a derivative suit.

Derivative Suit

Ruling:

(4)

Respondent Balmores' action in the trial court failed to satisfy all the requisites of a derivative suit.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member must be "in the name of [the] corporation or association. ..." This requirement has already been settled in jurisprudence.

Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he tried to communicate with PPC's directors about the checks in Villamor's possession before he filed an action with the trial court, respondent Balmores was not able to show that this comprised -all the remedies available under the articles of incorporation, bylaws, laws, or rules governing PPC. An allegation that appraisal rights were not available for the acts complained of is another requisite for filing derivative suits under Rule 8, Section 1(3) of the Interim Rules. A derivative suit is an action filed by stockholders to enforce a corporate action. It is an exception to the general rule that the corporation's power to sue is exercised only by the board of directors or trustees. Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in control of the corporation. It is allowed when the "directors [or officers] are guilty of breach of . . . trust, [and] not of mere error of judgment." In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party. The Court has recognized that a stockholder's right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. In effect, the suit is an action for specific performance of an obligation, owed by the corporation to the stockholders, to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to adopt suitable measures for its protection. SECTION 1. Derivative action. - A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: (1)

(2)

(3)

He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; No appraisal rights are available for the act or acts complained of; and

The suit is not a nuisance or harassment suit.

Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing on behalf of the corporation. In this case, respondent Balmores filed an individual suit. Respondent Balmores did not bring the action for the benefit of the corporation. Instead, he was alleging that the acts of PPC's directors, specifically the waiver of rights in favor of Villamor's law firm and their failure to take back the MC Home Depot checks from Villamor, were detrimental to his individual interest as a stockholder. In filing an action, therefore, his intention was to vindicate his individual interest and not PPC's or a group of stockholders'. The essence of a derivative suit is that it must be filed on behalf of the corporation. This is because the cause of action belongs, primarily, to the corporation. The stockholder who sues on behalf of a corporation is merely a nominal party.

104. CHING v. SUBIC NESTOR CHING ANDREW WELLINGTON AND THE SUBIC BAY GOLFERS AND SHAREHOLDERS, INC. v. SUBIC BAY GOLF AND COUNTRY CLUB, INC. G.R. No. 174353 September 10, 2014 FACTS: Nestor Ching and Andrew Wellington filed a Complaint with the RTC on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said country club and its Board of Directors and officers under the provisions of PD No. 902-A in relation to Section 5.2 of the SRC. The Subic Bay Golfers and Shareholders Incorporated (SBGSI, plaintiff), a corporation composed of shareholders of the defendant corporation, was also named as plaintiff. The officers impleaded as defendants were the following: (1) President, Susan Hu; (2) its treasurer, Jack Hu; (3) corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui and Hu Tsung Tzu. The complaint alleged that the defendant corporation sold shares to SBGSI at US$22,000.00 per share, presenting to them the AI which contained the following provision: “No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in their favor. Shareholders shall be entitled only to a pro-rata share of the assets of the Club at the time of its dissolution or liquidation.” 84

However, an amendment to the AI was approved by the SEC, which provides “No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in their favor. In accordance with the Lease and Development Agreement by and between Subic Bay Metropolitan Authority and The Universal International Group of Taiwan, where the golf course and clubhouse component thereof was assigned to the Club, the shareholders shall not have proprietary rights or interests over the properties of the Club.” Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above amendment which allegedly makes the shares non-proprietary, as it takes away the right of the shareholders to participate in the pro-rata distribution of the assets of the corporation after its dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the amendment when they filed a case for injunction to restrain the corporation from suspending their rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of Directors and officers of the corporation did not call any stockholders’ meeting from the time of the incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the corporation. Neither did the defendant directors and officers furnish the stockholders with the financial statements of the corporation nor the financial report of the operation of the corporation in violation of Section 75 of the Corporation Code. Petitioners also claim that on August 15, 1997, SBGCCI presented to the SEC an amendment to the By-Laws of the corporation suspending the voting rights of the shareholders except for the five founders’ shares. Said amendment was allegedly passed without any stockholders’ meeting or notices to the stockholders in violation of Section 48 of the Corporation Code. Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the corporation, petitioners prayed in their Complaint for the following: TRO against the defendants from acting as Officers and Board of Directors of the Corporation. After hearing, a writ of preliminary injunction be issued enjoining defendants to act as Board of Directors and Officers of the Corporation. In the meantime a Receiver be appointed by the Court to act as such until a duly constituted Board of Directors and Officers of the Corporation be elected and qualified plus damages. Respondents specifically denied the allegations of the Complaint claiming that petitioners failed (a) to show that it was authorized by SBGSI to file the Complaint on the said corporation’s behalf; (b) to comply with the requisites for filing a derivative suit and an action for receivership; and (c) to justify their prayer for injunctive relief since the Complaint may be considered a nuisance or harassment suit under Section 1(b), Rule 1 of the Interim Rules of Procedure for Intra-Corporate Controversies.16 Thus, prayed for the dismissal of the Complaint. The RTC issued an Order dismissing the Complaint. The RTC held that the action is a derivative suit. The CA affirmed the decision of the RTC. ISSUE: 1. Is the case filed a deivative suit?

Derivative Suit

2. Should the case at hand be dismissed? RULING: 1. YES. In Nelson v. Anderson(1999), the **289 minority shareholder alleged that the other shareholder of the corporation negligently managed the business, resulting in its total failure. The appellate court concluded that the plaintiff could not maintain the suit as a direct action: "Because the gravamen of the complaint is injury to the whole body of its stockholders, it was for the corporation to institute and maintain a remedial action. A derivative action would have been appropriate if its responsible officials had refused or failed to act." The court wenton to note that the damages shown at trial were the loss of corporate profits. Since "shareholders own neither the property nor the earnings of the corporation," any damages that the plaintiff alleged that resulted from such loss of corporate profits "were incidental to the injury to the corporation." In the case, the reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and Board of Directors of the corporation, the appointment of a receiver, and the prayer for damages in the amount of the decrease in the value of the sharesof stock, clearly show that the Complaint was filed to curb the alleged mismanagement of SBGCCI. The causes of action pleaded by petitioners do not accrue to a single shareholder or a class of shareholders but to the corporation itself. However, as minority stockholders, petitioners do not have any statutory right to override the business judgments of SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged lackof qualification to manage a golf course. Contraryto the arguments of petitioners, Presidential Decree No. 902-A, which is entitled REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT, does not grant minority stockholders a cause of action against waste and diversion by the Board of Directors, but merely identifies the jurisdiction of the SEC over actionsalready authorized by law or jurisprudence. It is settled that a stockholder’s right to institute a derivative suit is not based on any express provisionof the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. ----------------------------------------------------------------------------------------------------------------------------------------------------------------2. Yes. However, derivative suit cannot prosper without first complying with the legal requisites for its institution (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit.

In the case, the RTC dismissed the Complaint for failure to comply with the second and fourth requisites above. The Court finds that the same should not have been dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings of petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is enough that a member or a minority of stockholders file a derivative suit for and in behalf of a corporation. With regard, however, to the second requisite, we find that petitioners failed to state with particularity in the Complaint that they had exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, and laws or rules governing the corporation to obtain the relief they desire. The Complaint contained no allegation whatsoever of any effort to avail of intra-corporate remedies. Indeed, even if petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the Complaint and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint, even motu proprio, in accordance with the Interim Rules. The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.

105. LEGASPI TOWERS 300 v. MUER, et. al. LEGASPI TOWERS 300, INC., LILIA MARQUINEZ PALANCA, ROSANNA D. IMAI, GLORIA DOMINGO and RAY VINCENT, Petitioners, vs. AMELIA P. MUER, SAMUEL M. TANCHOCO, ROMEO TANKIANG, RUDEL PANGANIBAN, DOLORES AGBAYANI, ARLENEDAL A. YASUMA, GODOFREDO M. CAGUIOA and EDGARDO M. SALANDANAN,Respondents. G.R. No. 170783 June 18, 2012 Facts: April 2, 2004, pursuant to by-laws of Legaspi Towers 300, Inc., petitioners as Board of Directors set the annual meeting of the members of the corporation and the election of the new Board of Directors for Year 20042005 at the lobby of Legaspi Towers 300 Inc. 85

Out of a total number of 5,723 members who were entitled to vote, 1,358 were supposed to vote through their respective proxies and their votes were critical in determining the existence of a quorum, which was at least 2,863 (50% plus 1). However the Committee on Elections of the corporation found that the proxy votes were irregular and questionable. Since there is lack of time to authenticate such, the BOD adjourned the meeting for lack of quorum. However, respondents challenged the adjournment of the meeting. Despite no quorum was obtained, the respondents pushed through with the scheduled election and were elected as the new Board of Directors and officers of Legaspi Towers 300, Inc. A general information sheet was submitted to SEC with the list of the newly elected officers. April 13, 2004, petitioners filed a Complaint for the Declaration of Nullity of Elections with Prayers for the lssuance of Temporary Restraining Orders and Writ of Preliminary Injunction and Damages against respondents with the RTC of Manila. April 14, 2004 before an answer could be filed, an amended complaint was submitted. April 20, 2004, before respondents could submit an Answer to the Amended Complaint, petitioners again filed an Urgent Ex-Parte Motion to Admit Second Amended Complaint and for the lssuance of Ex-Parte Temporary Restraining Order Effective only for Seventy-Two (72) Hours. Both judges of branch 24 and 46 ( Presiding Judge Antonio Eugenio, Jr. and Presiding Judge Artemio S. Tipon respectively) inhibited from hearing the said case. April 21, 2004, Executive Judge Enrico A. Lanzanas of the RTC of Manila acted on the Motion for the Issuance of an Ex Parte Temporary Restraining Order enjoining respondents from taking over management for 72 hours in order to prevent further irreparable damages and prejudice to the corporation, as day-to-day activities will be disrupted and will be paralyzed due to the legal controversy. April 21, 2004, respondents filed their Answer alleging that the election was lawfully conducted citing the report of SEC counsel Nicanor Patricio who attended the election. Reports would state that since there is no time to authenticate the proxy votes, the BOD adjourned the meeting despite query from the attendees. Proxies were counted and recorded, and there was a declaration of a quorum – out of a total of 5,721 votes, 2,938 were present either in person or proxy. Ballots were prepared and votes cast.

Derivative Suit

April 22, 2004, the case was assigned to Judge Antonio I. De Castro of the RTC of Manila, Branch 3 (trial court). July 21, 2004, the pre trial was initiated and that petitioners motion to inmplead the corporation. However it was denied for being improper. A second order was also issued, reiterating that to implead the corporation is improper. Petitioners filed a motion for reconsideration but was denied. Petition for certiorari before the CA was filed and denied becase the CA stated that the right to vote is to be exercised by the stockholders not the corporation. Hence impleading the corporation is improper. Thus the petition before the SC.

ISSUE: 1. 2.

Whether or not there is grave abuse on the act of the court not impleading the corporation as party-plaintiff to the case. Is a derivative suit proper in this case?

HELD: 1. No. Why should Legaspi Towers 300, Inc. x x x be included as party-plaintiff when defendants are members thereof too like plaintiffs. Both parties are deemed to be acting in their personal capacities as they both claim to be the lawful board of directors. 2. No. Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder or member is denied the right of inspection, his suit would be individual because the wrong is done to him personally and not to the other stockholders or the corporation. Where the wrong is done to a group of stockholders, as where preferred stockholders' rights are violated, a class or representative suit will be proper for the protection of all stockholders belonging to the same group. But where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to the individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause of action since the corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of suits

as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that should be paid to each individual stockholder. However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves, a stockholder or member may find that he has no redress because the former are vested by law with the right to decide whether or not the corporation should sue, and they will never be willing to sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be an effective remedy of the minority against the abuses of management. Thus, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation as the party-in- interest.

in behalf of the condominium corporation in the Second Amended Complaint is improper. The stockholder’s right to file a derivative suit is not based on any express provision of The Corporation Code, but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties, which is not the issue in this case. Petition is denied. 106. LISAM ENTERPRISES v. BDO LISAM ENTERPRISES INC., REPRESENTED BY LOLITA SORIANO & LOLITA SORIANO vs. BDO (FORMERLY PHILIPPINE COMMERCIAL INTERNATIONAL BANK) & SPS. SORIANO GR No. 143264 April 23, 2012 PERALTA, J. Facts:

Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative suit The requisites for a derivative suit are as follows: a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. The party-in-interest are the petitioners as stockholders, who wield such right to vote. The cause of action devolves on petitioners, not the condominium corporation, which did not have the right to vote. Hence, the complaint for nullification of the election is a direct action by petitioners, who were the members of the Board of Directors of the corporation before the election, against respondents, who are the newly-elected Board of Directors. Under the circumstances, the derivative suit filed by petitioners 86

This case stemmed from an action for annulment of mortgage executed by the defendant spouses Sorianos, subjecting a property owned by Lisam Enterprises Inc. (LEI) as security for their loan from BDO. Lolita Soriano, representing LEI in her capacity as Corporate Secretary, alleged that the spouses, in their personal capacity loaned from BDO the amount of 20 Million pesos; that the spouses in their capacity as President and Treasurer, falsified a resolution and the secretary’s certificate allowing the LEI property to be mortgage by the spouses. Lolita also imputes BDO with gross negligence for not inquiring into the status of the LEI property as corporate property; it should have been acting in circumspect in allowing corporate property as a security for a personal loan. Furthermore, Lolita alleges that in a subsequent arrangement, the Spouses Soriano and BDO colluded to transfer the liability for the loan to the corporation. These facts prompted Lolita to initiate derivative suits for Fraudulent Scheme & Unlawful Machinations with the SEC, and the annulment of mortgage suit in the RTC. The RTC ruled in favor of the Spouses and BDO. Lolita moved for its reconsideration. During the pendency of the MR, Lolita moved for the admission of an amendment of the complaint adding the following portions: “xxx; that plaintiff Lolita A. Soriano likewise made demands upon the Board of Directors of Lisam Enterprises, Inc., to make legal steps to protect the interest of the corporation from said fraudulent

Derivative Suit

transaction, but unfortunately, until now, no such legal step was ever taken by the Board, hence this action for the benefit and in behalf of the corporation; xxx”

a)

The RTC denied the motion to admit amended complaint as it will change the cause of action Lolita, and denied the MR for lack of merit. This decision was appealed to the SC on pure questions of law.

b)

Issues:

c) 1. 2. 3.

Is the denial of the motion to admit amended complaint proper? Is the derivative suit properly initiated? Should the case be dismissed for forum-shopping.

Ruling: 1. The denial of the motion to admit amended complaint is not proper. There is no ground to deny the motion. The RTC’s rationale for the denial is banking on the fact that it changes the cause of action of Lolita. This was, however, the old rule before the 1997 Rules of Civil Procedure. Prior to the 1997 Rules, a motion to amend the complaint is only disallowed if the amendment will “change the cause of action” as expressly provided; however, in the 1997 Rules, that part of the provision is already removed, thereby prompting the interpretation of such rules to shift towards liberality in the interest of higher justice. Since the amendment was done during the MR, it is now an amendment that requires leave of court, but the court must have a reasonable ground to deny such amendment, and it must rule on such motion with liberality to promote higher justice. In this case, there is no reasonable ground for the RTC to deny the motion for amendments since there is no inexcusable delay or there are surreptitious attempts to surprise the spouses or BDO with allegation they cannot refute. The Court therefore allows the amendment

The party bringing the suit should be a shareholder as of the time of the act or transaction complained of, the number of shares not being material The party has tried to exhaust intra-corporate remedies, i.e. he made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and The cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.

A reading of the amended complaint will reveal that the foregoing requisites have been properly alleged by Lolita. Her being a corporate secretary signifies her status as shareholder; she has exhausted her remedies as alleged in the amended complaint; and that the transaction was alleged to be at prejudice of LEI. 3.

No, the case should not be dismissed for forum-shopping

While it is true that a case has been filed each with the SEC and RTC, jurisprudence guided that Court that the causes of action on both suits differ in nature. What is filed before the SEC is questioning the due execution, authenticity or validity of the board resolutions that facilitated the mortgage and assumption of liability by the LEI. This case, initially filed with the RTC, is for the annulment of mortgage, questioning the validity of said mortgage, which is within the jurisdiction of the regular courts. In sum, there is no identity of causes of action.

107. STRADEC v. RADSTOCK & PNCC 2.

Prologue: This case is an anatomy of a ₱6.185 billion1 pillage of the public coffers that ranks among one of the most brazen and hideous in the history of this country. This case answers the questions why our Government perennially runs out of funds to provide basic services to our people, why the great masses of the Filipino people wallow in poverty, and why a very select few amass unimaginable wealth at the expense of the Filipino people. On 1 May 2007, the 30-year old franchise of Philippine National Construction Corporation (PNCC) under Presidential Decree No. 1113 (PD 1113), as amended by Presidential Decree No. 1894 (PD 1894), expired. During the 13th Congress, PNCC sought to extend its franchise. PNCC won approval from the House of Representatives, which passed House Bill No. 57492 renewing PNCC’s franchise for another 25 years. However, PNCC failed to secure approval from the Senate, dooming the extension of PNCC’s franchise. FACTS: PNCC was incorporated in 1966 for a term of fifty years under the Corporation Code with the name Construction Development Corporation of the Philippines (CDCP). PD 1113, issued on 31 March 1977, granted CDCP a 30-year franchise to construct, operate and maintain toll facilities in the North and South Luzon Tollways. PD 1894, issued on 22 December 1983, amended PD 1113 to include in CDCP’s franchise the Metro Manila Expressway, which would "serve as an additional artery in the transportation of trade and commerce in the Metro Manila area." Sometime between 1978 and 1981, Basay Mining Corporation, an affiliate of CDCP, obtained loans from Marubeni Corporation of Japan amounting to 5,460,000,000 yen and US$5 million. A CDCP official issued letters of guarantee for the loans, committing CDCP to pay solidarily for the full amount of the 5,460,000,000 yen loan and to the extent of ₱20 million for the US$5 million loan. However, there was no CDCP Board Resolution authorizing the issuance of the letters of guarantee. Later, Basay Mining changed its name to CDCP Mining Corporation (CDCP Mining). CDCP Mining secured the Marubeni loans when CDCP and CDCP Mining were still privately owned and managed.

Yes, the derivative suit was properly initiated.

Since the amendment is hereby allowed, the complaint now reads with the following allegations: “xxx; that plaintiff Lolita A. Soriano likewise made demands upon the Board of Directors of Lisam Enterprises, Inc., to make legal steps to protect the interest of the corporation from said fraudulent transaction, but unfortunately, until now, no such legal step was ever taken by the Board, hence this action for the benefit and in behalf of the corporation; xxx”

STRATEGIC ALLIANCE DEVELOPMENT CORPORATION vs. RADSTOCK SECURITIES LIMITED and PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, ASIAVEST MERCHANT BANKERS BERHAD, x - - - - - - - - - - - - - - - - - - - - - - -x G.R. No. 180428 LUIS SISON vs. PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and RADSTOCK SECURITIES LIMITED G.R. No. 178158 December 4, 2009

Jurisprudence with establish the requisites for a derivative suit, viz: 87

Subsequently in 1983, CDCP changed its corporate name to PNCC to reflect the extent of the Government's equity investment in the company, which arose when government financial institutions converted their loans to PNCC into equity following PNCC’s inability to pay the loans. In fine, the Government owns 90.3% of the equity of PNCC and only 9.70% of PNCC’s voting equity is under private ownership. Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20 October 2000, during the short-lived Estrada Administration, the PNCC Board of Directors (PNCC Board) passed a Board Resolution admitting PNCC’s liability to Marubeni for ₱10,743,103,388 as of 30 September 1999. This was the first PNCC Board Resolution admitting PNCC’s liability for the Marubeni loans. Previously, for two decades the

Derivative Suit

PNCC Board consistently refused to admit any liability for the Marubeni loans.

annul a final and executory judgment also rendered by the Court of Appeals.

Less than two months later, the PNCC Board passed another Board Resolution amending the first Board which still admitted its obligations for the Marubeni loans but now included a clause which states “…subject to the final determination by the Commission on Audit (COA) of the amount of obligation involved, and subject further to the declaration of the legality of said obligations by the Office of the Government Corporate Counsel (OGCC)…” In January 2001, barely three months after the PNCC Board first admitted liability for the Marubeni loans, Marubeni assigned its entire credit to Radstock for US$2 million or less than ₱100 million. In short, Radstock paid Marubeni less than 10% of the ₱10.743 billion admitted amount. Radstock immediately sent a notice and demand letter to PNCC.

Asiavest, a judgment creditor of PNCC, filed an Urgent Motion for Leave to Intervene and to File the Attached Opposition and Motion-in-Intervention before the Court of Appeals, which was denied.

On 15 January 2001, Radstock filed an action for collection and damages against PNCC before the Regional Trial Court. The trial court issued a writ of preliminary attachment against PNCC, and ordered PNCC’s bank accounts garnished and several of its real properties attached. Meanwhile, on 19 June 2001, at the start of the Arroyo Administration, the PNCC Board, under a new President and Chairman, revoked the Board Resolution admitting liability to the Marubeni loans. The trial court continued to hear the main case. On 10 December 2002, the trial court ruled in favor of Radstock. On 17 August 2006, PNCC and Radstock entered into the Compromise Agreement where they agreed to reduce PNCC’s liability to Radstock, supposedly from ₱17,040,843,968, to ₱6,185,000,000, which was later approved by the court. STRADEC moved for reconsideration alleging that it has a claim against PNCC as a bidder of the National Government’s shares, receivables, securities and interests in PNCC. The matter is subject of a complaint filed by STRADEC against PNCC and the Privatization and Management Office (PMO) for the issuance of a Notice of Award of Sale to Dong-A Consortium of which STRADEC is a partner. The Court of Appeals treated STRADEC’s motion for reconsideration as a motion for intervention and denied it. Rodolfo Cuenca (Cuenca), a stockholder and former PNCC President and Board Chairman, filed an intervention alleging that PNCC had no obligation to pay Radstock, which was denied by the court. Meanwhile, on 20 February 2007, Sison, also a stockholder and former PNCC President and Board Chairman, filed a Petition for Annulment of Judgment Approving Compromise Agreement before the Court of Appeals, which was dismissed on the ground that it had no jurisdiction to

affected by a distribution or other disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to intervene in the action. The Court shall consider whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and whether or not the intervenor’s rights may be fully protected in a separate proceeding.

ISSUE: Do STRADEC, Asiavest, and Sison have legal standing to file suit?

STRADEC’s interest is dependent on the outcome of Civil Case No. 05882. Unless STRADEC can show that RTC Branch 146 had already decided in its favor, its legal interest is simply contingent and expectant.

RULING: The Court of Appeals denied STRADEC’s motion for intervention on the ground that the motion was filed only after the Court of Appeals and the trial court had promulgated their respective decisions. Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides: SECTION 2. Time to intervene.– The motion to intervene may be filed at any time before rendition of judgment by the trial court. A copy of the pleading-in-intervention shall be attached to the motion and served on the original parties. The rule is not absolute. The rule on intervention, like all other rules of procedure, is intended to make the powers of the Court completely available for justice. It is aimed to facilitate a comprehensive adjudication of rival claims, overriding technicalities on the timeliness of the filing of the claims. This Court has ruled: Allowance or disallowance of a motion for intervention rests on the sound discretion of the court after consideration of the appropriate circumstances. Rule 19 of the Rules of Court is a rule of procedure whose object is to make the powers of the court fully and completely available for justice. Its purpose is not to hinder or delay but to facilitate and promote the administration of justice. Thus, interventions have been allowed even beyond the prescribed period in the Rule in the higher interest of justice. Interventions have been granted to afford indispensable parties, who have not been impleaded, the right to be heard even after a decision has been rendered by the trial court, when the petition for review of the judgment was already submitted for decision before the Supreme Court, and even where the assailed order has already become final and executory. In Lim v. Pacquing (310 Phil. 722 (1995)], the motion for intervention filed by the Republic of the Philippines was allowed by this Court to avoid grave injustice and injury and to settle once and for all the substantive issues raised by the parties. Concededly, STRADEC has no legal interest in the subject matter of the Compromise Agreement. Section 1, Rule 19 of the 1997 Rules of Civil Procedure states: SECTION 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely 88

However, Asiavest has a direct and material interest in the approval or disapproval of the Compromise Agreement. Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a writ of execution in its favor. Asiavest’s interest is actual and material, direct and immediate characterized by either gain or loss from the judgment that this Court may render. Considering that the Compromise Agreement involves the disposition of all or substantially all of the assets of PNCC, Asiavest, as PNCC’s judgment creditor, will be greatly prejudiced if the Compromise Agreement is eventually upheld. Sison has legal standing to challenge the Compromise Agreement. Although there was no allegation that Sison filed the case as a derivative suit in the name of PNCC, it could be fairly deduced that Sison was assailing the Compromise Agreement as a stockholder of PNCC. In such a situation, a stockholder of PNCC can sue on behalf of PNCC to annul the Compromise Agreement. A derivative action is a suit by a stockholder to enforce a corporate cause of action.25 Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. However, an individual stockholder may file a derivative suit on behalf of the corporation to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party. In this case, the PNCC Board cannot conceivably be expected to attack the validity of the Compromise Agreement since the PNCC Board itself approved the Compromise Agreement. In fact, the PNCC Board steadfastly defends the Compromise Agreement for allegedly being advantageous to PNCC. Besides, the circumstances in this case are peculiar. Sison, as former PNCC President and Chairman of the PNCC Board, was responsible for the approval of the Board Resolution issued on 19 June 2001 revoking the previous Board Resolution admitting PNCC’s liability for the Marubeni loans. Such revocation, however, came after Radstock had filed an action

Derivative Suit

for collection and damages against PNCC on 15 January 2001. Then, when the trial court rendered its decision on 10 December 2002 in favor of Radstock, Sison was no longer the PNCC President and Chairman, although he remains a stockholder of PNCC. When the case was on appeal before the Court of Appeals, there was no need for Sison to avail of any remedy, until PNCC and Radstock entered into the Compromise Agreement, which disposed of all or substantially all of PNCC’s assets. Sison came to know of the Compromise Agreement only in December 2006. PNCC and Radstock submitted the Compromise Agreement to the Court of Appeals for approval on 10 January 2007. The Court of Appeals approved the Compromise Agreement on 25 January 2007. To require Sison at this stage to exhaust all the remedies within the corporation will render such remedies useless as the Compromise Agreement had already been approved by the Court of Appeals. PNCC’s assets are in danger of being dissipated in favor of a private foreign corporation. Thus, Sison had no recourse but to avail of an extraordinary remedy to protect PNCC’s assets. Besides, in the interest of substantial justice and for compelling reasons, such as the nature and importance of the issues raised in this case, this Court must take cognizance of Sison’s action. This Court should exercise its prerogative to set aside technicalities in the Rules, because after all, the power of this Court to suspend its own rules whenever the interest of justice requires is well recognized. NOTES: 1)

The PNCC Board Acted in Bad Faith and with Gross Negligence in Directing the Affairs of PNCC 



In this jurisdiction, the members of the board of directors have a three-fold duty: duty of obedience, duty of diligence, and duty of loyalty. Accordingly, the members of the board of directors (1) shall direct the affairs of the corporation only in accordance with the purposes for which it was organized; (2) shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation; and (3) shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees In the present case, the PNCC Board blatantly violated its duty of diligence as it miserably failed to act in good faith in handling the affairs of PNCC. (a) For almost two decades, the PNCC Board had consistently refused to admit liability for the Marubeni loans because of the absence of a PNCC Board resolution authorizing the issuance of the letters of guarantee. (b) The PNCC Board admitted liability for the Marubeni loans despite PNCC’s total liabilities far exceeding its assets.

There is no dispute that the Marubeni loans, once recognized, would wipe out the assets of PNCC, "virtually emptying the coffers of the PNCC." (c) In a debilitating self-inflicted injury, the PNCC Board revived what appeared to have been a dead claim by abandoning one of PNCC’s strong defenses, which is the prescription of the action to collect the Marubeni loans. Thus, more than ten years would have already lapsed between Marubeni’s extrajudicial demands in 1984 and 1986 and the acknowledgment by the PNCC Board of the Marubeni loans in 2000. However, the PNCC Board suddenly passed Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni loans. In short, the PNCC Board admitted liability for the Marubeni loans despite the fact that the same might no longer be judicially collectible. Although the legal advantage was obviously on its side, the PNCC Board threw in the towel even before the fight could begin. (d) The basis for the admission of liability for the Marubeni loans, which was an opinion of the Feria Law Office, was not even shown to the PNCC Board.  Atty. Francisco’s act of recommending to the PNCC Board the acknowledgment of the Marubeni loans based only on an opinion of a private law firm, without consulting the OGCC and without showing this opinion to the members of the PNCC Board except to Atty. Valdecantos, reflects how shockingly little his concern was for PNCC, contrary to his claim that "he only had the interest of PNCC at heart." In fact, if what was involved was his own money, Atty. Francisco would have preferred not just two, but at least three different opinions on how to deal with the matter, and he would have maintained his nonliability.  Section 1 of Memorandum Circular No. 9 dated 27 August 1998 issued by the President states: All legal matters pertaining to government-owned or controlled corporations, their subsidiaries, other corporate off-springs and government acquired asset corporations (GOCCs) shall be exclusively referred to and handled by the Office of the Government Corporate Counsel (OGCC).  The PNCC Board acted in bad faith in relying on the opinion of a private lawyer knowing that PNCC is required to rely "exclusively" on the OGCC’s opinion. Worse, the PNCC Board, in admitting liability for ₱10.743 billion, relied on the recommendation of a private lawyer whose opinion the PNCC Board members have not even seen. 89





In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board caused undue injury to the Government and gave unwarranted benefits to Radstock, through manifest partiality, evident bad faith or gross inexcusable negligence of the PNCC Board. Such acts are declared under Section 3(e) of RA 3019 or the Anti-Graft and Corrupt Practices Act, as "corrupt practices xxx and xxx unlawful." Being unlawful and criminal acts, these PNCC Board Resolutions are void ab initio and cannot be implemented or in any way given effect by the Executive or Judicial branch of the Government. Not content with forcing PNCC to commit corporate suicide with the admission of liability for the Marubeni loans under Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board drove the last nail on PNCC’s coffin when the PNCC Board entered into the manifestly and grossly disadvantageous Compromise Agreement with Radstock. This time, the OGCC, headed by Agnes DST Devanadera, reversed itself and recommended approval of the Compromise Agreement to the PNCC Board.

2) The Compromise Agreement is Void for Being Contrary to the Constitution, Existing Laws, and Public Policy 

Under the Compromise Agreement, PNCC shall pay Radstock the reduced amount of ₱6,185,000,000.00 in full settlement of PNCC’s guarantee of CDCP Mining’s debt allegedly totaling ₱17,040,843,968.00 as of 31 July 2006. To satisfy its reduced obligation, PNCC undertakes to (1) "assign to a third party assignee to be designated by Radstock all its rights and interests" to the listed real properties therein; (2) issue to Radstock or its assignee common shares of the capital stock of PNCC issued at par value which shall comprise 20% of the outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCC’s 6% share, for the next 27 years (2008-2035), in the gross toll revenues of the Manila North Tollways Corporation.  The PNCC Board has no power to compromise the ₱6.185 billion amount. Under Section 20(1), Chapter IV, Subtitle B, Title I, Book V of Executive Order No. 292 or the Administrative Code of 1987, the authority to compromise a settled claim or liability exceeding ₱100,000.00 involving a government agency, as in this case where the liability amounts to ₱6.185 billion, is vested not in COA but exclusively in Congress. Congress alone has the power to compromise the ₱6.185 billion purported liability of PNCC. Without congressional approval, the Compromise Agreement between PNCC and Radstock involving ₱6.185 billion is void for being contrary to Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987.

Derivative Suit

PNCC’s toll fees are public funds. PD 1113 granted PNCC a 30-year franchise to construct, operate and maintain toll facilities in the North and South Luzon Expressways. With the expiration of PNCC’s franchise, the assets and facilities of PNCC were automatically turned over, by operation of law, to the government at no cost.  Forming part of the General Fund, the toll fees can only be disposed of in accordance with the fundamental principles governing financial transactions and operations of any government agency, to wit: (1) no money shall be paid out of the Treasury except in pursuance of an appropriation made by law, as expressly mandated by Section 29(1), Article VI of the Constitution; and (2) government funds or property shall be spent or used solely for public purposes, as expressly mandated by Section 4(2) of PD 1445 or the Government Auditing Code.  Applying Section 29(1), Article VI of the Constitution, as implanted in Sections 84 and 85 of the Government Auditing Code, a law must first be enacted by Congress appropriating ₱6.185 billion as compromise money before payment to Radstock can be made. Otherwise, such payment violates a prohibitory law and thus void under Article 5 of the Civil Code which states that "[a]cts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity." Indisputably, funds held in trust by PNCC for the National Government cannot be used by PNCC to pay a private debt of CDCP Mining to Radstock, otherwise the PNCC Board will be liable for malversation of public funds.  Funds held in trust by PNCC for the National Government cannot be used by PNCC to pay a private debt of CDCP Mining to Radstock, otherwise the PNCC Board will be liable for malversation of public funds. In addition, to pay Radstock ₱6.185 billion violates the fundamental public policy, expressly articulated in Section 4(2) of the Government Auditing Code, that government funds or property shall be spent or used solely for public purposes. PNCC cannot use public funds, like toll fees that indisputably form part of the General Fund, to pay a private debt of CDCP Mining to Radstock. Such payment cannot qualify as expenditure for a public purpose. The toll fees are merely held in trust by PNCC for the National Government, which is the owner of the toll fees. Radstock is not qualified to own land in the Philippines.  There is no dispute that Radstock is disqualified to own lands in the Philippines. Consequently, Radstock is also disqualified to own the rights to ownership of lands in the Philippines. Contrary to the OGCC’s claim, Radstock cannot own the rights to ownership of any land in the Philippines because Radstock cannot lawfully own the

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land itself. Otherwise, there will be a blatant circumvention of the Constitution, which prohibits a foreign private corporation from owning land in the Philippines. In addition, Radstock cannot transfer the rights to ownership of land in the Philippines if it cannot own the land itself. It is basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or the rights to the ownership, are to be transferred to the assignee or buyer. PNCC must follow rules on preference of credit.  In giving priority and preference to Radstock, the Compromise Agreement is certainly in fraud of PNCC’s other creditors, including the National Government, and violates the provisions of the Civil Code on concurrence and preference of credits.  This Court has held that while the Corporation Code allows the transfer of all or substantially all of the assets of a corporation, the transfer should not prejudice the creditors of the assignor corporation. Assuming that PNCC may transfer all or substantially all its assets, to allow PNCC to do so without the consent of its creditors or without requiring Radstock to assume PNCC’s debts will defraud the other PNCC creditors since the assignment will place PNCC’s assets beyond the reach of its other creditors.  Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a writ of execution in its favor. Thus, when PNCC entered into the Compromise Agreement conveying several prime lots in favor of Radstock, by way of dacion en pago, there is a legal presumption that such conveyance is fraudulent under Article 1387 of the Civil Code.  In this case, PNCC’s huge negative net worth - at least ₱6 billion as expressly admitted by PNCC’s counsel during the oral arguments, or ₱14 billion based on the 2006 COA Audit Report - necessarily translates to an extremely embarrassing financial situation. With its huge negative net worth arising from unpaid billions of pesos in debt, PNCC cannot claim that it is financially stable. As a consequence, the Compromise Agreement stipulating a transfer in favor of Radstock of substantially all of PNCC’s assets constitutes fraud. To legitimize the Compromise Agreement just because there is still no judicial declaration of PNCC’s insolvency will work fraud on PNCC’s other creditors, the biggest creditor of which is the National Government. To insist that PNCC is very much liquid, given its admitted huge negative net worth, is nothing but denial of the truth. The toll fees that PNCC collects belong to the National Government. Obviously, PNCC cannot claim it is liquid based on its collection of such toll fees, 90

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because PNCC merely holds such toll fees in trust for the National Government. PNCC does not own the toll fees, and such toll fees do not form part of PNCC’s assets. The ₱36 billion debt to the National Government was acknowledged by the PNCC Board in the same board resolution that recognized the Marubeni loans. Since PNCC is clearly insolvent with a huge negative net worth, the government enjoys preference over Radstock in the satisfaction of PNCC’s liability arising from taxes and duties, pursuant to the provisions of the Civil Code on concurrence and preference of credits. Articles 2241, 2242 and 2243 of the Civil Code expressly mandate that taxes and fees due the National Government "shall be preferred" and "shall first be satisfied" over claims like those arising from the Marubeni loans which "shall enjoy no preference" under Article 2244.

108. YU v. YUKAYGUAN Anthony S. Yu, Rosita G. Yu And Jason G. Yu (Petitioners) v. Joseph S. Yukayguan, Nancy L. Yukayguan, Jerald Nerwin L. Yukayguan, And Jill Neslie L. Yukayguan, [On Their Own Behalf And On Behalf Of] Winchester Industrial Supply, Inc., (Respondents) G.R. No. 177549 June 18, 2009 Facts: Petitioners and Respondents herein are all stockholders of Winchester Industrial Supply, Inc.,(Winchester) a domestic corporation engaged in the operation of a general hardware and industrial supply and equipment business. Anthony Yu is the older half brother of Joseph Yukayguan, who is the corporate secretary and treasurer of Winchester. Respondents filed a derivative suit in behalf of Winchester with a verified Complaint for Accounting, Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts on the ground that the petitioners are the ones who actually controlled Winchester and were misappropriating the funds and properties of Winchester, Inc. by understating the sales, charging their personal and family expenses to the said corporation, and withdrawing stocks for their personal use without paying for the same. They prayed for the trial curt to render an accounting of all the funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and family expenses which

Derivative Suit

petitioners charged to Winchester, Inc., as well as the properties of the corporation which petitioners withheld without payment.

Ruling: No. The Respondents failed to do so.

Petitioner contended their Answer an argued that since respondents’ Complaint purportedly constituted a derivative suit, it noticeably failed to allege that respondents exerted effort to exhaust all available remedies in the Articles of Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And third, given that respondents’ Complaint was also for inspection of corporate books, it lacked the allegation that respondents made a previous demand upon petitioners to inspect the corporate books but petitioners refused. The parties went to a mediation and arrived at an amicable settlement. They agreed to a division of the stocks in trade, the real properties, and the other assets of Winchester. However, Respondents repudiated the settlement for failure to divide the remaining assets of Winchester. Hence, the parties submitted their respective memoranda and pleadings reiterating their allegations to each other. The Regional Trial Court (RTC) rendered a decision dismissing the complaint filed by the respondents on the ground that they failed to comply with the essential requisites for filing a derivative suit and noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as such, he was supposed to be the custodian of the corporate books and records; therefore, a court order for respondents’ inspection of the same was no longer necessary. The respondents filed a petition with the Court of Appeals (CA), and the CA initially dismissing the petition. However, by reconsideration, The CA remanded the case back to the RTC to take the necessary proceedings on the ground that since the dispute involves the settlement and the closing of Wichester’s affairs, disposition and distribution of its remaining assets, and there is no board of directors for purposes of dissolution and liquidation, it is the RTC who have jurisdiction to settle the remaining assets of the corporation as conferred by A.M. No. 00-8-10-SC. Hence, this petition for Review on Certiorari filed by the Petitioners with the Supreme Court. Issue: Did Respondents exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing Winchester, to obtain the relief they desire before filing a derivative suit in behalf of the corporation?

Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies provides: Section 1. Derivative action. — A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the acts or acts complained of; and (4) The suits is not a nuisance or harassment suit. In this case, the allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding their dispute does not constitute "all reasonable efforts to exhaust all remedies available. Respondents did not mention at all any other remedy under the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders, which respondents unsuccessfully availed themselves of and the Court does not believe that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such remedies. The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules supporting the distinction between, and the difference in the requirements for, family corporations vis-à-vis other types of corporations, in the institution by a stockholder of a derivative suit With respect to the third and fourth requirements of Section 1, Rule 8, the respondents’ Complaint failed to allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts of petitioners complained of, as well as a categorical statement that the suit was not a nuisance or a harassment suit. 109. GOCHAN et. al. v. YOUNG et. al G.R. No. 131889 March 12, 2001 91

Facts: Felix Gochan and Sons Realty Corporation (Gochan Realty) was registered with the SEC with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban Gochan and Crispo Gochan as its incorporators. Felix Gochan Sr.'s daughter, Alice, mother of the respondents, inherited 50 shares of stock in Gochan Realty from the former. Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr. The Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children, herein respondents Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu and Alexander Thomas Young. Having earned dividends, these stocks numbered 179. Their father John Sr., requested Gochan Realty to partition the shares of his late wife by cancelling the stock certificates in his name and issuing in lieu thereof, new stock certificates in the names of the respondents. However, Gochan Realty refused citing as reason, the right of first refusal granted to the remaining stockholders by the Articles of Incorporation. Cecilia Gochan Uy and Miguel Uy filed a complaint with the SEC for issuance of shares of stock to the rightful owners, nullification of shares of stock, reconveyance of property impressed with trust, accounting, removal of officers and directors and damages against respondents. Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to bring the suit before the SEC on February 8, 1994, because the latter were no longer stockholders at the time. Allegedly, the stocks had already been purchased by the corporation. Issue: Whether or not respondents have the legal personality to file a derivative suit on behalf of the corporation. Ruling: Yes. The respondents have personality to file a derivative suit. Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single

Derivative Suit

stockholder may institute that suit, suing on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. In the present case, the Complaint alleges all the components of a derivative suit. The allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. This cause of action is also included in the Complaint filed before the SEC. Cecilia Uy's averment in the Complaint that the purchase of her stocks by the corporation was null and void ab initio is deemed admitted. It is elementary that a void contract produces no effect either against or in favor of anyone. It cannot create, modify or extinguish the juridical relation to which it refers. Thus, Cecilia remains a stockholder of the corporation in view of the nullity of the Contract of Sale. The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the corporation. The reason is that the allegations of the Complaint make them out as stockholders at the time the questioned transaction occurred, as well as at the time the action was filed and during the pendency of the action.

110. WESTERN INSTITUTE OF TECHNOLOGY v. RICARDO T. SALAS G.R. No. 113032; August 21, 1997 FACTS: Ricardo, Salvador, Soledad, Antonio, and Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of Trustees of Western Institute of Technology, a stock corporation engaged in the operation of an educational institution. According to petitioners, the minority stockholders of WIT, sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In attendance were other members of the Board including one of the petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986, were distributed to all Board Members. The notice allegedly indicated that the meeting to be held on June 1, 1986. In said meeting, the Board of Trustees passed a resolution granting monthly compensation to the private respondents as corporate officers retroactive June 1, 1985.

On March 1991, Villasis and other co-petitioners filed two separate criminal informations, one for falsification of a public document anchored on the private respondents' submission of WIT's income statement for the fiscal year 1985-1986 with the SEC reflecting therein the disbursement of corporate funds for the compensation of corporate officers, 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. On the other hand, an information for estafa was also filed for the private respondents’ alleged fraud committed against WIT and its stockholders for disbursing corporate funds knowing fully well that they have no sufficient, lawful authority to disburse them for the subsequent collective salaries of the corporate officers. The trial court acquitted the accused corporate officers on both charges without imposing any civil liability against them. WIT filed an MR on the civil aspect which was denied, hence, this petition. ISSUE: Is the action a derivative suit? HELD: No. 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 the criminal cases. 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 WIT 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. Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not, the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction 92

to entertain the complaint. The ease should have been filed with the SEC which exercises original and exclusive jurisdiction over derivative suits, they being intra-corporate disputes.

111. FIRST INTERNATIONAL BANK v. CA 252 S 259 G.R. No. 115849, January 24, 1996 Facts: In the course of its banking operations, Producer Bank of the Philippines acquired 6 parcels of land at Laguna. The property used to be owned by BYME Corporation which was mortgaged as collateral for a loan. Demetrio Demetria and Jose O. Janolo wanted to purchase the property and thus initiated negotiations for that purpose. Upon the suggestion of BYME Investment’s legal counsel, Jose Fajardo, met with Mercurio Rivera, Manager of the Property Management Department of the bank. The meeting was held in pursuant to plaintiffs’ plan to buy the property. After the meeting, plaintiff Janolo, following the advice of defendant Rivera, made a formal purchase offer to the bank. Negotiations took place and an offer price was fixed at P5.5million. During the course of the negotiations, the bank was placed under conservatorship and a new conservator (under conservatorship by the Central Bank since 1984) was appointed to which the name has been refused to recognize. It was replaced by Leonida Encarnacionas wherein she sought the repudiation of the agreement as it alleged that Rivera was not authorized to enter into such an agreement, hence there was no valid contract of sale. Demetria and Janolo sued Producers Bank, its Manager Rivera and Acting Conservator Encarnacion. A derivative suit has been filed against Rivera for the damages suffered from the alleged perfect contract of sale involving the 6 parcels of land. The regional trial court ruled in favor of Demetria et al. Issue: May derivative suit lie involving the bank and its stockholders? Held: No. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he hold stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones, to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party with the corporation as the real party in interest. First Philippine International Bank tried to seek refuge in the corporate fiction that the personality of the Bank is separate and distinct from its shareholders. But the rulings of this Court are consistent: When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates

Derivative Suit

the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. In the face of the damaging admissions taken from the complaint in the second case, First Philippine International Bank, quite strangely, sought to deny that the second case was a derivative suit, reasoning that it was brought not by the minority shareholders, but by Henry Co. etal. who not only hold or control over 80% of the outstanding capital stock, but also constitute the majority in the board of directors of petitioners bank. That being so, then they really represent the bank, so whether they sued derivatively or directly, there is undeniably an identity of interest/entity represented. In addition to the many cases, where the corporate fiction has been regarded, we now add the instant case, and declare herewith that the corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forum shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes particularly where, as in this case, the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. To rule otherwise would be to encourage corporate litigants to use their shareholders as fronts to circumvent the stringent rules against forum shopping. From the facts, the official bank price, at any rte, the bank placed its official, Rivera is a position of authority to accept offers to buy and negotiate the sale by having the offer officially acted upon by the bank. The bank cannot turn around and say, as it now does, that what Rivera states as the bank’s action on the matter is not in fact so. It is a familiar doctrine, the doctrine of ostensible authority, that if a corporation on knowingly permits one of its officers, or any other agent, to do acts within the scope of apparent authority, and thus holds him out to the public as possessing power to do those acts, the corporation will, as against any one who has in good faith dealt with the corporation through such agent, he estopped from denying his authority. A bank is liable for wrongful acts of its officers done in the interest of the bank or in he course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they my thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shrink its responsibility for such fraud even through no benefit may accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of its authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate fraud upon his principal or some other person, for his own ultimate benefit.

Section 28-A of BP 68 merely gives the conservator power to revoke contracts that are, under existing law, deemed not to be effective – i.e void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a bank’s board of directors. What the said board cannot do – such as repudiating a contract validly entered into under the doctrine of implied authority – the conservator cannot do either.

112. COMMART PHILS v. SEC COMMART (PHILS.) INC., JESUS, CORAZON, ALBERTO, AND BERNARD all surnamed MAGLUTAC,petitioners, vs. SECURITIES & EXCHANGE COMMISSION and ALICE MAGLUTAC, respondents. G.R. No. 85318 June 3, 1991 FACTS: Commart (Phils.), Inc., (Command for short) is a corporation organized by two brothers, Jesus and Mariano Maglutac, to engage in the brokerage business for the importation of fertilizers and other products/commodities. Commart's principal income came from commissions paid to it in U.S. dollars by foreign suppliers of fertilizers and other commodities imported by Planters Products, Inc. and other local importers. June 1984, the two brothers agreed to go their separate ways, with Mariano being persuaded to sell to Jesus his shareholdings in Commart amounting to 25% of the outstanding capital stock. As part of the deal, a "Cooperative Agreement" was signed, between Commart (represented by Jesus) and Mariano, in which, among others, Commart ceded to Mariano or to an "acceptable entity" he may create, a portion of its business, with a pledge of mutual cooperation for a certain period so as to enable Mariano to get his own corporation off the ground. Mariano's wife, Alice M. Maglutac (private respondent herein) who has been for years a stockholder and director of Commart, did not dispose of her shareholdings, and thus continued as such even after the sale of Mariano's equity.

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Mariano allegedly discovered that for several years, Jesus and his wife Corazon (who was herself a director) had been siphoning and diverting to their private bank accounts in the United States and in Hongkong gargantuan amounts sliced off from commissions due Commart from some foreign suppliers. August 22, 1989, spouses Mariano and Alice Maglutac filed a complaint (SEC Case No. 2673) with the SEC against Jesus T. Maglutac, Victor Cipriano, Clemente Ramos, Carolina de los Reyes, Corazon Maglutac, Alberto Maglutac and Bernardo Maglutac (Jesus as Chairman) and the rest as members of the Board of Directors of Commart. It is alleged that Jesus, by means of secret arrangements with foreign suppliers, has been diverting into his private bank accounts and converting to his own personal benefit and advantage substantial portions of the commission income of the corporation, to the prejudice of the corporation, its stockholders and its creditors. Two motions to dismiss were filed by petitioner stating that Mariano had no capacity to file and that SEC had no jurisdiction. Both were opposed by the complainant spouses. May 10, 1985 Commart filed a Manifestation/Notice of Dismissal, manifesting that "it withdraws and dismisses the action taken in its behalf by complainants Mariano T. Maglutac and Alice M. Maglutac against all respondents. This was opposed by complainants on the ground, among other doctrines, that in a derivative suit the corporation is not allowed to be an active participant and has no control over the suit against the real defendants; that the suing shareholder has the right of control. May 27, 1985, the Hearing Panel issued an Order denying all the motions to dismiss as well as the so called manifestation/notice of dismissal. A motion for reconsideration was filed by Commart and Petitioners. November 12, 1985, the Hearing Panel issued an Order modifying its previous order "by dismissing this case insofar as Mariano T. Maglutac is concerned" but affirming the said order "in all other respects. Petitioners filed a petition for Certiorari, prohibition, Mandamus. The commission en banc issued an order denying the aforesaid petition and remanding the case to the Securities Investigation and Clearing Department for further proceedings. Thus the petition. ISSUE:

Derivative Suit

Whether alice have the legal standing to file the derivative suit.

HELD: Yes. A derivative suit has been the principal defense of the minority shareholder against abuses by the majority.1âwphi1 It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the corporation's rights. Indeed, to grant to Commart the right of withdrawing or dismissing the suit, at the instance of majority stockholders and directors who themselves are the persons alleged to have committed breaches of trust against the interest of the corporation, would be to emasculate the right of minority stockholders to seek redress for the corporation. To consider the Notice of Dismissal filed by Commart as quashing the complaint filed by Alice Maglutac in favor of the corporation would be to defeat the very nature and function of a derivative suit and render the right to institute the action illusory. In any case, the suit is for the benefit of Commart itself, for a judgment in favor of the complainants will necessarily mean recovery by the corporation of the US$2.5 million alleged to have been diverted from its coffers to the private bank accounts of its top managers and directors. Thus, the prayer in the Amended Complaint is for judgment ordering respondents Jesus and Corazon Maglutac, as well as Victor Cipriano, "to account for and to turn over or deliver to the Corporation" the aforesaid sum, with legal interest, and "ordering all the respondent, as members of the Board of Directors to take such remedial steps as would protect the corporation from further depredation of the funds and property."

113. CHASE v. BUENCAMINO ELTON W. CHASE, as minority Stockholder and on behalf of other Stockholders similarly situated and for the benefit of AMERICAN MACHINERY AND PARTS MANUFACTURING, INC., v. DR. VICTOR BUENCAMINO, SR., G.R. No. L-20395 May 13, 1985 (CUEVAS, J.:) DOCTRINE: “An action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, 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. Those brought by one or more stockholders/members in the name and on behalf of the corporation to redress wrongs committed against it, or protect/vindicate corporate rights whenever the officials of the corporation refuse to sue, or the ones to be sued has control of the corporation. ” FACTS: The evidence on record discloses that defendant Dr. Buencamino, Sr., a Filipino and William Cranker, an American, even prior to the year 1954 were already business associates. They owned two firms namely, the Philippine American Machinery and Equipment Corporation (PAMEC) which was organized in 1947 and the BUCRA which means Buencamino and Cranker. While, Plaintiff Elton Chase was the owner of Production Manufacturing Company, of Portland, Oregon, USA, a corporation primarily dedicated to the operation of a machine shop and heat-treating plant for the production of tractor parts.

CONFLICT OF INTEREST RULE ISSUE: On the "conflict of interest" issue, petitioners allege that private respondent Alice Maglutac "is a majority stockholder of M.M. International Sales, a business rival/competitor of Commart and holds only less than one percent (1%) of the entire shareholdings of Commart." According to petitioners, this being the case it is easier to believe that this so called derivative suit was filed because it is to the best interest of the company where she has a bigger and substantial interest, which in this case is M.M. International Sales, Inc.

Sometime in 1954, Chase was notified by the Highway Commission of the State of Oregon that his factory was going to be in the path of a proposed highway. He was then advised to sell or face expropriation and warned to remove his plant within a year. His distributor Craig Carrol told him of a Dr. Buencamino of Manila who he said was interested in establishing a manufacturing plant in the Philippines. Craig Carrol contacted Buencamino who told him to contact his associate William Cranker in the United States.

These negotiations culminated in a final agreement to the effect that-Elton Chase was to be paid One Hundred Thousand Dollars ($100,000.00) and he would also be given a one-third interest in Amparts, with the other two, Dr. Buencamino and Cranker, as the owner of the other two-thirds (2/3) interest, 1/3 interest each; and that in exchange for said $100,000.00 and the 1/3 interest, Chase was to transfer to Amparts his tractor plant, ship his machineries to Manila, assuming all costs of dismantling, preserving and crating for shipment to Manila, install said machineries at Amparts plant with the aid of five technicians and finally, he has to be the production manager of Amparts. But since five were necessary to organize a corporation, Buencamino and Cranker took in their respective wives. Meanwhile, Chase had already shipped his machineries and had them installed in the Amparts plant in Pasig, Rizal. Amparts then began operation with Dr. Buencamino as President, William Cranker as Manager and Elton Chase as Production Manager. For sometime the three maintained harmonious relations but later on distrust came in until finally Chase tendered his letter of resignation as Production Manager. Chase filed an action against Cranker with the Superior Court of Los Angeles seeking to recover the sum of $ 150,000.00 as alleged balance of the purchase price of his plant. This case however died a natural death because Cranker left and was never reached by process from the California Court. Then, sometime in August 1958, Cranker sold out all his interest in Amparts to Dr. Buencamino. Finally, Chase filed this case before the Court of First Instance of Manila, alleging various acts of fraud which he claimed had been committed by both Dr. Buencamino and Cranker. He sought for the dissolution of the corporation.

ISSUE: Is the dissolution of the corporation proper? RULING:

No real prejudice has been inflicted upon petitioners' right to be heard on this matter raised by them, since the same can still be looked into during the hearing of a derivative suit on the merits. There was, therefore, neither error nor grave abuse of discretion in the decision of the Securities & Exchange Commission not to dismiss the case but to remand it instead to the Hearing Panel for further proceedings.

Thus, a series of negotiations took place both here in Manila, and in the United States, between Chase on the one hand, and Cranker and Buencamino, on the other, for the purchase of Chase's factory (Production Manufacturing Company) and the establishment of a new factory in Manila which was to be called the American Machinery Engineering Parts, Inc. (Amparts for short). 94

No. The Court cannot grant dissolution because the action is a derivative one for the benefit of Amparts and not for the personal benefit of Chase, and Amparts cannot be benefited by its extinction. Also, as to the ouster of Dr. Buencamino from management, it should not be forgotten that Dr. Buencamino is not only a manager, but is in fact 2/3 owner of Amparts and to oust him from management would amount to his

Derivative Suit

disenfranchisement as owner of the majority of the enterprise apart from the fact that it is also established in the proofs that Amparts is already picking up and has been a going concern after Cranker left unto him the direction of its affairs. The Court therefore having in mind all these finds that the solution most equitable and just would be to limit its decision to imposing a monetary judgment upon the guilty parties for the benefit of Amparts.

114. SMC v. KAHN SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES vs. ERNEST KAHN et al., G.R. No. 85339. August 11, 1989 FACTS: 33,133,266 shares of the outstanding capital stock of SMC were acquired 14 other corporations, and were placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. However, 33,133,266 SMC shares were sequestered by the PCGG, on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos. SMC promptly suspended payment of the other installments of the price to the 14 seller corporations. On December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined that there was "nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was no additional expense or exposure for the SMC Group, and there were tax and other benefits which would redound to the SMC group of companies. However, at the meeting of the SMC Board, Eduardo de los Angeles, one of the PCGG representatives in the SMC board, impugned said Resolution No. 86-122. ISSUE:

o Whether or not de los Angeles can file a derivative suit in behalf of the corporation. RULING: o YES. The Court ruled that since de los Angeles’ 20 shares represent only .00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the interests of the minority stockholders. The implicit argument — that a stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock — finds no support whatever in the law. The requisites for a derivative suit are as follows: (a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; (b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and (c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation.

115. HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W. ROBINSON v. THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH G.R. No. L-25241 November 3, 1926 Facts:

o

o

o

The plaintiff, by Thomas Cary Welch, complaint of the defendants and for cause of action against them allege: o

That the defendant the Asia Banking Corporation (The Bank), was a foreign banking corporation duly licensed to transact banking business in the Philippines and its principal office and place of business at manila but never has been empowered by law or licensed to do any business other than commercial banking in the Philippine islands. That the defendants Mullen, Alfred f. Kelly, mears and macintosh were officers, agents and employees of the said bank. 95

o

That the teal and company (The Company) was a domestic corporation duly incorporated under the laws of the Philippine and principal office and place of business at manila. The plaintiffs Everett, Clifford, teal and robinson were the principal stockholders in the company that the defendant Barclay was the only other stockholder, owning one share. In 1921, the bank persuaded the company and the said H.W Peabody and Co. and smith, Kirkpatrick and Co. to enter into a so called “creditors agreement” with itself, wherein it mutually agreed that neither of the parties should take action to collect its debt from the Company for the term of two years after the date thereof. The plaintiffs have no copy of said agreement but beg leave to refer to the original of same, in possession of the bank, for greater certainty. In December 1922, said company was solvent and in the enjoyment of a large, growing, and lucrative business and in the possession of a valuable reputation and good-will and had done its banking business and financing almost exclusively thru and with the bank and by reason of the company had acquired trust and confidence in the integrity and good intentions of the said bank and its officers and the other defendants. Towards the end of the year 1922, the bank, through its defendant mullen represented to the Company and its managers that for the protection both of the Bank and the Company it was advisable for them both that the Bank should temporarily obtain control of the management and affairs of the Company in order that the affairs of the Company could be conducted by the Bank without interference or hindrance from outside, and to this end that it would be necessary for the stockholders in the Company to place their shares therein in a Voting Trust to be held by the Bank would then finance the Company under its own supervision and that if and when the same were successful and in position to resume independent operation the said trust would be terminated and the stock returned to its true owners, and in case the Bank decided to discontinue operation under the said trust then the stock also would be so returned. It was also stated by mullen that in order to protect the mutual interests of the Bank and the Company, it was necessary to carry into effect the proposed voting trust without knowledge of the creditors place the Bank in advantageous position with regard to them. The plaintiffs were induced to sign and did sign and deliver to the Bank simultaneously a so-called “Voting Trust Agreement” executed by the plaintiff stockholders and a memorandum of agreement executed by the Company. Subsequently to the execution and delivery of the voting trust and MOA, the defendant mullen caused procured by virtue of the powers delegated in the said voting trust, the displacement and removal from the Board of Directors of the Company of each and every person who

Derivative Suit

o

o

o

o

was at the time of the execution of the said voting trust a stockholder in the Company and the substitution in their places as such directors, the defendants, or employees of the Bank and no subsequent time did the trustee allow to act as a director of the Company any person who was in fact a stockholder in the Company, and the latter has been exclusively controlled and managed by the said defendants. To defraud these plaintiffs, the new so-called directors proceeded to remove from office the Secretary of the Company, and to discharge from employment all of the old managers and the stockholders (plaintiffs, who were also the real owners.) The said defendants gave pledges and mortgages from the Company to the Bank and entered contracts foreclose and to sell the property of the Company without knowing the interests of the Company in which the Company was not represented by anyone. Defendants tricked and deluded the courts into giving judgments in which the rights of the real parties were concealed and unknown to the courts. In august 1923, said defendants, filed in the Bureau of Commerce and Industry of the Philippine Islands, articles of incorporation of a corporation called the “Philippine Motors Corporation” and the defendants were officers or employee of the Bank. Such incorporation was a fraud upon these plaintiffs for the reason that it was intended for the sole purpose of taking over the assets of the Company and said defendants were enabled to effectuate such intent by reason of their positions as officers and employees of the Bank and because each of them were de facto directors of the Company, by reason of their appointments by defendant Mullen, Through the Voting Trustee. Thereafter, said Bank turned over to the Philippine Motors Corporation all of the business and assets of the company of every name, nature and description. Since then, The PMC has continued to conduct and advantage itself of the business of the Company.

ISSUE: Whether or not Plaintiffs have the capacity to sue. RULING: Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the action must be brought by the Board of Directors, the appelles argue- and the court below held that the corporation Teal and Company is a necessary party plaintiff and that the plaintiff stockholders, not having made any demand on the Board to bring the action, are not the proper parties plaintiff. But, like most rule, the rule in question has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation teal and company is under the complete control of the principal defendants in the case, and, in these circumstances, it is obvious that a demand upon the Board of Directors to institute an action and prosecute

the same effectively would been useless, and the law does not require litigants to perform useless acts.

116. RICARDO L. GAMBOA, et al. v. Hon. OSCAR R. VICTORIANO, et al. G.R. No. L-40620 May 5, 1979 FACTS:

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. In the case at bar, however, the plaintiffs are alleging and vindicating their own individual interests or prejudice, and not that of the corporation. At any rate, it is yet too early in the proceedings since the issues have not been joined. Besides, misjoinder of parties is not a ground to dismiss an action.

The herein petitioners were sued by herein defendants to nullify the issuance of 823 shares of stock of the Inocentes de la Rama, Inc. in favor of the petitioners. The respondents, are the owners of 1,328 shares of stock of the Inocentes de la Rama, Inc., a domestic corporation, with an authorized capital stock of 3,000 shares, with a par value of P100.00 per share, 2,177 of which were subscribed and issued, thus leaving 823 shares unissued. Then President and Vice-President of the corporation, respectively, the defendants Mercedes R. Borromeo, Honorio de la Rama, and Ricardo Gamboa, remaining members of the board of directors of the corporation, in order to forestall the takeover by the plaintiffs of the afore-named corporation, surreptitiously met and elected Ricardo L. Gamboa and Honorio de la Rama as president and vice-president of the corporation, respectively, and passed a resolution authorizing the sale of the 823 unissued shares of the corporation to the defendants, at par value, after which the petitioners were elected to the board of directors of the corporation. The respondents claimed that the sale of the unissued 823 shares of stock of the corporation was in violation of the plaintiffs' and pre-emptive rights and made without the approval of the board of directors representing 2/3 of the outstanding capital stock, and is in disregard of the strictest relation of trust existing between the defendants, as stockholders. The respondents prayed that a writ of preliminary injunction be issued restraining the defendants from committing, or continuing the performance of an act tending to prejudice, diminish or otherwise injure the plaintiffs' rights in the corporate properties and funds of the corporation, and from disposing, transferring, selling, or otherwise impairing the value of the 823 shares of stock illegally issued. The respondent court granted the prayer. ISSUE: Is derivative the proper action in this case?

117. REYES v. TAN GR No.L-16982 September 30, 1961 FACTS: The corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June 5, 1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson, for and on behalf of the following primary principals with the following shareholdings: Adelia K. Roxas, 1200 Class A shares; I. Sherman, 900 Class A shares; Robert W. Born, 450 Class A shares and Morris Wilson, 450 Class A shares; that the respondent holds both Class A and Class B shares and number and value thereof are is follows: Class A — 50 shares, Class B — 1,250 shares. On May 8, 1957, the Board of Directors approved a resolution designating one Dayaram as co-manager and Morris Wilson was likewise designated as co-manager with responsibilities for the management of the factory only‘. An office in New York was opened for the purpose of supervising purchases, which purchases must have the unanimous agreement of Cesar K. Roxas, New York resident member of the board of directors, Robert Born and Wadhumal Dalamal or their respective representatives. Several purchases aggregating $289,678.86 were made in New York for raw materials and shipped to the Philippines, which shipment were found out to consist not of raw materials but already finished products, for which reasons the Central Bank of the Philippines stopped all dollar allocations for raw materials for the corporation which necessarily led to the paralyzation of the operation of the textile mill and its business. ISSUE: Whether or not a derivative suit will prosper.

RULING: HELD: Yes. 96

Derivative Suit

No. The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of two years is without merit. During that period of time respondent had the right to assume and expect that the directors would remedy the anomalous situation of the corporation brought about by their own wrong doing. Only after such period of time had elapsed could respondent conclude that the directors were remiss in their duty to protect the corporation property and business. The fraud consisted in importing finished textile instead of raw cotton for the textile mill; the fraud, therefore, was committed by the manager of the business and was consented to by the directors, evidently beyond reach of respondent as treasurer for that period. The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been done to remove the erring purchasing managers. In a way the appointment of a receiver may have been thought of by the court below so that the dollar allocation for raw material may be revived and the textile mill placed on an operating basis. 118. PASCUAL v. OROZCO G.R. No. L-5174 March 17, 1911 FACTS: That during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without the knowledge, consent, or acquiescence of the stockholders, deducted their respective compensation from the gross income instead of from the net profits of the bank, thereby defrauding the bank and its stockholders of approximately P20,000 per annum; that though due demands has been made upon them therefor, defendants refuse to refund to the bank the sums so misappropriated, or any part thereof; that defendants constitute a majority of the present board of directors of the bank, who alone can authorize an action against them in the name of the corporation, and that prior to the filing of the present suit plaintiff exhausted every remedy in the premises within this banking corporation. The second cause of action sets forth that defendants' and appellees' immediate predecessors in office in this bank during the years 1899, 1900, 1901, and 1902, committed the same illegality as to their compensation as is charged against the defendants themselves; that in the four years immediately following the year 1902, the defendants and appellees were the only officials or representatives of the bank who could and should investigate and take action in regard to the sums of money thus fraudulently appropriated by their predecessors; that they were the only persons interested in the bank who knew of the fraudulent appropriation by their predecessors; that they wholly neglected to take any action in the premises or inform the stockholders thereof; that due demand has been made upon defendants to reimburse the bank for this loss; that the bank itself can not bring an action in its own name against the defendants and appellees, for the reason already stated, and that there remains no remedy within the corporation itself.

The court below sustained the demurrer as to the first and second causes of action on the ground that in actions of this character the plaintiff must aver in his complaint that he was the owner of stock in the corporation at the time of the occurrences complained of, or else that the stock has since devolved upon him by operation of law. This action was brought by the plaintiff Pascual, in his own right as a stockholder of the bank, for the benefit of the bank, and all the other stockholders thereof. The plaintiff sues on behalf of the corporation, which, even though nominally a defendant, is to all intents and purposes the real plaintiff in this case. It is alleged in the amended complaint that the only compensation contemplated or provided for the managing officers of the bank was a certain per cent of the net profits resulting from the bank's operations. ISSUE: Does Plaintiff Pascual have the cause of action of file the Derivative Suit? RULING: NO. In suits of this character, the corporation itself and not the plaintiff stockholder is the real party in interest. The rights of the individual stockholder are merged into that of the corporation. It is a universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of these are in the corporation itself for the benefit of all the stockholders. Text writers illustrate this rule by the familiar example of one person or entity owning all the stock and still having no greater or essentially different title than if he owned but one single share. Since, therefore, the stockholder has no title, it is evident that what he does have, with respect to the corporation and his fellow stockholder, are certain rights sui generis. So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank (corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of such a right must depend upon when, how, and for what purpose he acquired the shares which he now owns. It is alleged that the plaintiff became a stockholder on the 13th of November, 1903; that the defendants, as members of the board of directors and board of government, respectively, during each and all the years 1903, 1904, 1905, 1906, and 1907, did fraudulently, and to the great prejudice of the bank and its stockholders, appropriate to their own use from the profits of the bank sums of money amounting approximately to P20,000 per annum. It affirmatively appears from the complaint that the plaintiff was not a stockholder during any of the time in question in this second cause of action. Upon the question whether or not a stockholder can maintain a suit 97

of this character upon a cause of action pertaining to the corporation when it appears that he was not a stockholder at the time of the occurrence of the acts complained of and upon which the action is based, the authorities do not agree. The decision in the Hawes case is that among other necessary averments, the bill should contain "an allegation that the plaintiff was a shareholder at the time of the transaction of which he complains ... and that the suit is not a collusive one to confer jurisdiction on a court of the United States in a case in which it would otherwise have no cognizance ... ." The language of the 94th Equity Rule is practically identical with this. It provides, in terms that a stockholder's bill in cases of this character "must contain an allegation that the plaintiff was a stockholder at the time of the transaction of which he complains ... and that the suit is not a collusive one to confer jurisdiction . . . ." This is, obviously, a mere rule of pleading — it requires averments of facts upon which the plaintiff's cause of action and the jurisdiction of the court rest. It assumes, as the court had already decided, that the ownership of the stock at the time of the transaction is a fact essential to the maintenance of the suit in any event. Unless that fact exists no cause of action exists, whether the suit is collusive or not. Even if the stock was owned prior to the transaction complained of, if the suit is collusive — as it would be, for instance if one of the defendants had acquired a merely colorable domicile in another State to support the allegation of diversity of citizenship — the plaintiff has no right to maintain the action in a Federal court. Consequently, the rule requires that these two facts be distinctly averred. The requirement that they be pleaded is procedural. The necessity of the existence of the facts in order to give rise to the right of action is substantive. As a general proposition, the purchaser of stock in a corporation is not allowed to attack the acts and management of the company prior to the acquisition of his stock; otherwise we might have a case where stock duly represented in a corporation consented to and participated in bad management and waste, and after reaping the benefits from such transaction, could be easily passed into the hands of a subsequent purchaser, who could make his harvest by appearing and contesting the very acts and conducts which his vendor had consented to. Where stock is required for the purpose of bringing suit it has been held that the complainant is a mere interloper and entitled to no consideration. And stockholder suits not brought in good faith in the interest of the corporation have been dismissed on the ground. (Home Fire Ins. Co. vs. Baker, supra, and cases cited therein.) Some of the State courts hold that a purchaser of shares in a corporation acquires all the rights of the vendor. If the transferee purchased the shares in good faith, and without notice of the fact that the prior holder had precluded himself from suing, he would have as just a title to relief as if he had purchased from a shareholder who was under no disability; but if the purchaser was aware that the prior holder

Derivative Suit

had barred his right to relief, neither justice nor public policy would require that the transferee, under these circumstances, should be accorded any greater rights than his transferrer. If a stockholder participates in a wrongful or fraudulent contract, or silently acquiesces until the contract becomes executed, he can not then come into a court of equity to cancel the contract, and more especially if the company, or himself, as a stockholder, has reaped a benefit from the contract; and this rule holds good, although the consideration of the contract may be one expressly prohibited by statute. The same disability would attach to the transferee of his stock who bought with notice. This rule, in the main, is correctly stated, but we think that the latter part of the same should be modified so as to read: "The same disability would attach to the transferee of his stock who bought with or without notice." We base our modification of this rule upon the ground that a transferee could not sue as being a bona fide purchaser in ignorance of the disability attaching to his vendor, because shares of stock, strictly speaking, are not negotiable, and the sale can not pass greater rights than those possessed by the vendor. (Clark vs. American Coal Co., 86 Iowa, 436; 4 Thomp. Corp., 3410.)

whether any case, going as far as this, can be found. No such case has been cited in the argument. Dicta of judges to that effect may undoubtedly be produced, but they are not supported by the facts of the cases under consideration. It seems clear that subsequent creditors have no better right than subsequent purchasers, to question a previous transaction in which the debtor's property was obtained from him by fraud, which he has acquiesced in, and which he has manifested no desire to disturb. Yet, in such a case, subsequent purchasers have no such right. So it seems to be settled by the Supreme Court of the United States, as a matter of substantive law, that a stockholder in a corporation who was not such at the time of the transactions complained of, or whose shares had not devolved upon him since by operation of law, can not maintain suits of this character, unless such transactions continue and are injurious to the stockholder, or affect him especially and specifically in some other way.

It is self-evident that the plaintiff in the case at bar was not, before he acquired in September, 1903, the shares which he now owns, injured or affected in any manner by the transactions set forth in the second cause of action. His vendor could have complained of these transactions, but he did not choose to do so. The discretion whether to sue to set them aside, or to acquiesce in and agree to them, is, in our opinion, incapable of transfer. If the plaintiff himself had been injured by the acts of defendants' predecessors that is another matter. He ought to take things as he found them when he voluntarily acquired his ten shares. If he was defrauded in the purchase of these shares he should sue his vendor. If the party himself, who is the victim of fraud or usury, chooses to waive his remedy and release the party, it does not belong to a subsequent purchaser under him to recall and assume the remedy for him. (Quoted with approval in the case of the Graham vs. La Crosse and Milwaukee R.R. Co., 102., U.S., 148.) But it is contended that this is a case in which the debtor corporation was defrauded of its property, and that as the company had a right of proceeding for its recovery, any of its judgment and execution creditors have an equal right; that it is a property right, and one that inures to the benefit of creditors. Conceding that creditors who were such when the fraudulent procurement of the debtor's property occurred — and cases to that effect have been cited — the question still remains, whether, the debtor being unwilling to disturb the transaction, subsequent creditors have such an interest that they can reach the property for the satisfaction of their debts. We doubt 98