Decoy-5.docx

CASE #19 [ G.R. No. 157479, November 24, 2010 ] PHILIP TURNER AND ELNORA TURNER, PETITIONERS, VS. LORENZO SHIPPING CORPORATION, RESPONDENT. FACTS The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of incorporation to remove the stockholders' pre-emptive rights to newly issued shares of stock. Feeling that the corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the amendment and demanded payment of their shares at the rate of P2.276/share based on the book value of the shares, or a total of P2,298,760.00. The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted that the market value on the date before the action to remove the preemptive right was taken should be the value, or P0.41/share (or a total of P414,100.00), considering that its shares were listed in the Philippine Stock Exchange, and that the payment could be made only if the respondent had unrestricted retained earnings in its books to cover the value of the shares, which was not the case. The disagreement on the valuation of the shares led the parties to constitute an appraisal committee pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who together then nominated the third member who would be chairman of the appraisal committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco, the petitioners' nominee; Atty. Antonio Acyatan, the respondent's nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third member/chairman. On October 27, 2000, the appraisal committee reported its valuation of P2.54/share, for an aggregate value of P2,565,400.00 for the petitioners. Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee, plus 2%/month penalty from the date of their original demand for payment, as well as the reimbursement of the amounts advanced as professional fees to the appraisers. In its letter to the petitioners dated January 2, 2001, the respondent refused the petitioners' demand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value of the shares, but that it had no retained earnings at the time of the petitioners' demand, as borne out by its Financial Statements for Fiscal Year 1999 showing a deficit of P72,973,114.00 as of December 31, 1999. Upon the respondent's refusal to pay, the petitioners sued the respondent for collection and damages in the RTC in Makati City on January 22, 2001. In the stockholders' suit to recover the value of their shareholdings from the corporation, the Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation, herein respondent, to pay. Execution was partially carried out against the respondent. On the respondent's petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners' suit on the ground that their cause of action for collection had not yet accrued due to the lack of unrestricted retained earnings in the books of the respondent.

ISSUE: Whether or not the Corporation shall made the payment to any dissenting stockholder even it has no unrestricted retained earning in its books to cover such payment Whether the Trust Fund Doctrine protects the capital stock, property and assets of a Corporation

SUPREME COURT RULING A corporation can purchase its own shares, provided payment is made out of surplus profits and the acquisition is for a legitimate corporate purpose. In the Philippines, this new rule is embodied in Section 41 of the Corporation Code, to wit: Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets. The creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void.

Legaspi Towers 300 v Amelia Muer, et al. G.R. No. 170783, 18 June 2012 Digested by: ROSARIO, Hannah Jezel I. FACTS:

Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners Lilia Marquinez Palanca, Rosanna D. Imai, Gloria Domingo and Ray Vincent, the incumbent Board of Directors, set the annual meeting of the members of the condominium corporation and the election of the new Board of Directors for the years 2004-2005 on April 2, 2004 at 5:00 p.m. at the lobby of Legaspi Towers 300, Inc. 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). The Committee on Elections of Legaspi Towers 300, Inc., however, found most of the proxy votes, at its face value, irregular, thus, questionable; and for lack of time to authenticate the same, petitioners adjourned the meeting for lack of quorum. 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. Petitioners filed a motion to amend complaint to implead Legaspi Towers 300, Inc. as plaintiff. This was denied by the RTC. The Court of Appeals affirmed the same and held that as the right to vote is a personal right of a stockholder of a corporation, such right can only be enforced through a direct action; hence, Legaspi Towers 300, Inc. cannot be impleaded as plaintiff in this case. ISSUE: Is derivative suit proper in this case? RULING: NO. 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.

In this case, petitioners, as members of the Board of Directors of the condominium corporation before the election in question, filed a complaint against the newly-elected members of the Board of Directors for the years 2004-2005, questioning the validity of the

election held on April 2, 2004, as it was allegedly marred by lack of quorum, and praying for the nullification of the said election. Petitioners’ complaint seek to nullify the said election, and to protect and enforce their individual right to vote. Petitioners seek the nullification of the election of the Board of Directors for the years 2004-2005, composed of herein respondents, who pushed through with the election even if petitioners had adjourned the meeting allegedly due to lack of quorum. Petitioners are the injured party, whose rights to vote and to be voted upon were directly affected by the election of the new set of board of directors. 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 in behalf of the condominium corporation in the Second Amended Complaint is improper.

BITONG VS CA

Facts: Petitioner Bitong allegedly acting for the benefit of Mr. & Ms. Co. filed a derivative suit before the SEC against respondent spouses Apostol, who were officers in said corporation, to hold them liable for fraud and mismanagement in directing its affairs. Respondent spouses moved to dismiss on the ground that petitioner had no legal standing to bring the suit as she was merely a holderin-trust of shares of JAKA Investments which continued to be the true stockholder of Mr. & Ms. Petitioner contends that she was a holder of proper stock certificates and that the transfer was recorded. She further contends that even in the absence of the actual certificate, mere recording will suffice for her to exercise all stockholder rights, including the right to file a derivative suit in the name of the corporation. The SEC Hearing Panel dismissed the suit. On appeal, the SEC En Banc found for petitioner. CA reversed the SEC En Banc decision. Issue: Whether or not petitioner is the true holder of stock certificates to be able institute a derivative suit. Ruling: NO. Sec 63 of the Corporation Code envisions a formal certificate of stock which can be issued only upon compliance with certain requisites. First, the certificates must be signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a stockholder of the extent of his

ownership in a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. Second, delivery of the certificate is an essential element of its issuance. Hence, there is no issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the company. Third, the par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid. Fourth, the original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder.

The certificate of stock itself once issued is a continuing affirmation or representation that the stock described therein is valid and genuine and is at least prima facie evidence that it was legally issued in the absence of evidence to the contrary. However, this presumption may be rebutted. Aside from petitioner’s own admissions, several corporate documents disclose that the true party-in-interest is not petitioner but JAKA. It should be emphasized that JAKA executed, a deed of sale over 1,000 Mr. & Ms. shares in favor of respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a declaration of trust stating that she was the registered owner of 1,000 Mr. & Ms. shares covered by a Certificate of Stock. And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on respondent Eugenia D. Apostol. Neither was there any evidence that the principal had requested her to assign and transfer the shares of stock to petitioner. In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of JAKA.

Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and, (c) to be valid against third parties, the transfer must be recorded in the books of the corporation. At most, in the instant case, petitioner has satisfied only the third requirement. Compliance with the first two requisites has not been clearly and sufficiently shown.

*The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution. The most important of these is the bona fide ownership by a stockholder of a stock in his own right at the time of the transaction complained of which invests him with standing to institute a derivative action for the benefit of the corporation.

AGDAO LANDLESS RESIDENTS ASSOCIATION INC., ET. AL v. ROLANDO MARAMION, ET. AL G.R. No. 188642 & 189425, OCTOBER 17, 2016 Facts: Petitioners are Agdao Landless Residents Association, Inc. (ALRAI), a nonstock, non-profit corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines; through its board it transferred 46 titled lots to different members and non-members of the corporation. The respondent members of the corporation were removed as members of the corporation by the board for absences in the meetings regarding the transfer of said lots. Respondents question the validity of their removal as members and the transfer of said lots through individual suits filed with the court. Issues: 1. Whether or not the members were removed validly 2. Whether or not the individual suits are proper 3. Whether or not the transfer of the lots are valid Held: 1. Section 91 58 of the Corporation Code of the Philippines (Corporation Code) provides that membership in a non-stock, non-profit corporation (as in petitioner ALRAI in this case) shall be terminated in the manner and for the cases provided in its articles of incorporation or the by-laws. Agdao’s constitution provides that in the removal of members “The Secretary shall give or cause to be given written notice of all meetings, regular or special to all members of the association at least three (3) days before the date of each meetings either by mail or personally.” For failing to meet said notice requirements the removal of the respondents as members is invalid. 2. Individual suits are filed when the cause of action belongs to the stockholder personally, and not to the stockholders as a group, or to the corporation, e.g. denial of right to inspection and denial of dividends to a stockholder. If the cause of action belongs to a group of stockholders, such as when the rights violated belong to preferred stockholders, a class or representative suit may be filed to protect the stockholders in the group. A derivative suit, on the other hand, is one which is instituted by a shareholder or a member of a corporation, for and in behalf of the corporation for its protection from acts committed by directors, trustees, corporate officers, and even third persons. Even though the

action should have been brought up through a derivative suit, the individual suits are treated as individual suits based on the following: a. The RTC, where the case was originally filed, has jurisdiction over the controversy; b. Petitioners did not object to the institution of the case (on the ground that a derivative suit should have been lodged instead of an individual suit) in any of the proceedings before the court a quo or before the CA. c. a reading of the complaint shows that respondents do not pray for reliefs for their personal benefit; but in fact, for the benefit of the corporation. 3. Javonillo, as a director, signed the Board Resolutions133 confirming the transfer of the corporate properties to himself, and to Armentano. Petitioners cannot argue that the transfer of the corporate properties to them is valid by virtue of the Resolution 134 by the general membership of Agdao confirming the transfer for tJ-iree reasons. “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 of the following conditions are present: 1. 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; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors.” Section 32 requires that the contract should be ratified by a vote representing at least two-thirds of the members in a meeting called for the purpose. Records of this case do not show whether the Resolution was indeed voted by the required percentage of membership. There is also no showing that there was full disclosure of the adverse interest of the directors involved when the Resolution was approved. Full disclosure is required under the aforecited

Section 32 of the Corporation Code. Section 32 requires that the contract be fair and reasonable under the circumstances. As previously discussed, the transfer of the corporate properties to the individual petitioners is not fair and reasonable for ( 1) want of legitimate corporate purpose, and for (2) the breach of the fiduciary nature of the positions held by Javonillo and Armentano. Lacking any of these (full disclosure and a showing that the contract is fair and reasonable), ratification by the two-thirds vote would be of no avail.

Intra-corporate controversy; fraud. It is essential for the complaint to show on its face what are claimed to be the fraudulent corporate acts if the complainant wishes to invoke the court’s special commercial jurisdiction. This is because fraud in intra-corporate controversies must be based on “devises and schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of any corporation, partnership, or association,” as stated under Rule 1, Section 1 (a)(1) of the Interim Rules. The act of fraud or misrepresentation complained of becomes a criterion in determining whether the complaint on its face has merits, or within the jurisdiction of special commercial court, or merely a nuisance suit. Simny G. Guy, Geraldine G. Guy, Gladys G. Yao and the Heirs of the late Grace G. Cheu vs. Gilbert Guy/Simny G. Guy, Geraldine G. Guy, Gladys G. Yao and the heirs of the late Grace G. Cheu vs. The Hon. Ofelia C. Calo, in her capacity as Presiding Judge of the RTC-Mandaluyong City-Branch 211 and Gilbert Guy G.R. No. 189486/G.R. No. 189699. September 5, 2012

Gokongwei vs. SEC Case Digest Facts: [SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. As a first cause of action, Gokongwei alleged that on 18 September 1976, Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on 13 March 1961, when the outstanding capital stock of the corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,043, with a total par value of P301,270,430.00.

It was contended that according to section 22 of the Corporation Law and Article VIII of the bylaws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, Gokongwei contended that the Board acted without authority and in usurpation of the power of the stockholders. As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist. As a third cause of action, Gokongwei averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being 6 new directors. As a fourth cause of action, it was claimed that prior to the questioned amendment, Gokogwei had all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that as a stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as afore-mentioned, hence the amended bylaws are null and void. As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with the corporation, which was avowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended by-laws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore,

void; and that the portion of the amended by-laws which requires that "all nominations for election of directors shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive. It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that Soriano, et. al. be made to pay damages, in specified amounts, to Gokongwei. On 28 October 1976, in connection with the same case, Gokongwei filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of the corporation refused to allow him to inspect its records despite request made by Gokongwei for production of certain documents enumerated in the request, and that the 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.

The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and their opposition to the petition, respectively. Meanwhile, on 10 December 1976, while the petition was yet to be heard, the corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws", setting such meeting for 10 February 1977. This prompted Gokongwei to ask the SEC for a summary judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, Soriano, et. al. admitted the invalidity of the amendments of 18 September 1976. The motion for summary judgment was opposed by Soriano, et. al. Pending action on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of Gokongwei's application for the issuance of a preliminary injunction and or Gokongwei's motion for summary judgment, a temporary restraining order be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as scheduled. This motion was duly opposed by Soriano, et. al. On 10 February 1977, Cremation issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, Soriano, et. al. conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. On 14 February 1977, Gokongwei filed a consolidated motion for contempt and for nullification of the special stockholders' meeting. A motion for reconsideration of the order denying Gokongwei's motion for summary judgment was filed by Gokongwei before the SEC on 10 March 1977.

[SEC Case 1423] Gokongwei alleged that, having discovered that the corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he filed with SEC, on 20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and Jose M. Soriano, as well as the corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages. On 4 February 1977, motions to dismiss were filed by Soriano, et. al., to which a consolidated motion to strike and to declare Soriano, et. al. in default and an

opposition ad abundantiorem cautelam were filed by Gokongwei. Despite the fact that said motions were filed as early as 4 February 1977, the Commission acted thereon only on 25 April 1977, when it denied Soriano, et. al.'s motions to dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April 29 and May 3, 1977. Soriano, et. al. issued notices of the annual stockholders' meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting on 20 March 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto." By reason of the foregoing, on 28 April 1977, Gokongwei filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain Soriano, et. al. from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on 3 May 1977, the date set for the second hearing of the case on the merits. The SEC, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, Gokongwei filed an urgent manifestation on 3 May 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition.

Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, with the Supreme Court, alleging that there appears a deliberate and concerted inability on the part of the SEC to act.

Issue: Whether the corporation has the power to provide for the (additional) qualifications of its directors. Whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority. Whether the SEC gravely abused its discretion in denying Gokongwei's request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation. Whether the SEC gravely abused its discretion in allowing the stockholders of San Miguel Corporation to ratify the investment of corporate funds in a foreign corporation. Held:

1. It is recognized by all authorities that "every corporation has the inherent power to adopt bylaws '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.'" In this jurisdiction under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees." This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director." Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." 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 can not 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 Gokongwei 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.

2. Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." "The ordinary trust relationship of directors of a corporation and stockholders is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof." A director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against

serving two masters. He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. 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 not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. The offer and assurance of Gokongwei 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 involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with Gokongwei'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.

3. Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours." The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership,

a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of selfprotection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. The "general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing. Stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors. herein, considering that the foreign subsidiary is wholly owned by San Miguel Corporation and, therefore, under Its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly owned subsidiary which are in the corporation's possession and control.

4. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. As stated by the corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization. Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. This is true because the questioned investment is neither contrary to

law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that the corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of 10 May 1977 cannot be construed as an admission that the corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the ratification of their stockholders the acts of their directors, officers and managers.

G.R. No. 93695 February 4, 1992 lee vs ca Lessons Applicable: Voting Trust Agreements (Corporate Law) FACTS:  November 15, 1985: a complaint for a sum of money was filed by the International Corporate Bank, Inc. (ICB) against the private respondents 

March 17, 1986: private respondents, in turn, filed a 3rd-party complaint against ALFA and ICB

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September 17, 1987: petitioners filed a motion to dismiss the third party complaint - denied

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July 12, 1988: trial court issued an order requiring the issuance of an alias summons upon ALFA through the DBP

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consequence of the petitioner's letter that ALFA management was transferred to DBP

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July 22, 1988: DBP claimed that it was not authorized to receive summons on behalf of ALFA

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August 4, 1988: trial court issued an order advising the private respondents to take the appropriate steps to serve the summons to ALFA

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September 12, 1988: petitioners filed a motion for reconsideration submitting that Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e., through publication to effect proper service upon ALFA - denied

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January 19, 1989: 2nd motion for reconsideration was filed by the petitioners reiterating their stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA

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attached a copy of the voting trust agreement between all the stockholders of ALFA and the DBP whereby the management and control of ALFA became vested upon the DBP

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April 25, 1989: trial court reversed itself by setting aside its previous Order dated January 2, 1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA

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October 17, 1989: trial court (NOT notified of the petition for certiorari) declared final its decision on April 25, 1989

ISSUE: W/N the voting trust agreement is valid despite being contrary to the general principle that a corporation can only be bound by such acts which are within the scope of its officers' or agents' authority HELD:  voting trust 

trust created by an agreement between a group of the stockholders of a corporation and the trustee or by a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, either for certain purposes or for all purposes, is to be lodged in the trustee, either with or without a reservation to the owners, or persons designated by them, of the power to direct how such control shall be used (Ballentine's Law Dictionary)

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Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the share for a period rights pertaining to the shares for a period not exceeding 5 years at any one time: Provided, that in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding 5 years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement.

VILLAVERDE VS AFRICA

FACTS:  February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa were elected as BOD during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc. (VVCC)  1997 - 2001: Requisite quorum could not be obtained so they continued in a hold   

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over capacity September 1, 1998: Dinglasan resigned, BOD still constituting a quorom elected Eric Roxas (Roxas) November 10, 1998: Makalintal resigned on March 6, 2001: Jose Ramirez (Ramirez) was elected by the remaining BOD Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC) as contrary to: 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 stocks, or where there is no stock, from among the members of the corporation, who shall hold office for 1 year until their successors are elected and qualified. 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. Makalintal's term should have expired after 1996 there being no unexpired term. The vacancy should have been filled by the stockholders in a regular or special meeting called for that purpose

RTC: Favored Africa - Ramirez as Makalintal's replacement = null and void  SEC: Roxas as Vice hold-pver director of Dinglasan = null and void  VVCC appealed in SC for certiorari being partially contrary to law and jurisprudence ISSUES: 1. W/N there is an unexpired term - NO 2. W/N the remaining directors of a corporation’s Board, still constituting a quorum, can elect 

another director to fill in a vacancy caused by the resignation of a hold-over director. - NO

HELD: Petition Denied. RTC Affirmed. 1. NO   

“term” time during which the officer may claim to hold the office as of right not affected by the holdover

  

“tenure” term during which the incumbent actually holds office. Section 23 of the Corporation Code: term of BOD only 1 year - fixed and has expired (1 yr after 1996)

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.

2. NO 

  

underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a board of directors whose members have stood for election, and who have actually been elected by the stockholders, on an annual basis. Only in that way can the directors' continued accountability to shareholders, and the legitimacy of their decisions that bind the corporation's stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of power by the directors or officers over properties that they do not own. theory of delegated power of the board of directors Section 29 contemplates a vacancy occurring within the director’s term of office (unexpired) vacancy caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining members of its board of directors

EXPERT TRAVEL VS CA Expert Travel & Tours vs. CA G.R. No. 152392; May 26, 2005 FACTS: Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and licensed to do business in the Philippines. Its general manager in the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario Aguinaldo and his law firm. KAL, through appointed counsel, filed a complaint against Expert Travel with the RTC for the collection of sum of money. The verification and certification against forum shopping was signed by the same appointed counsel, who indicated therein that he was the resident agent and legal counsel of KAL and had caused the preparation of the complaint. Expert Travel filed a motion to dismiss the complaint on the ground that the appointed counsel was not authorized to execute the verification and certificate of non-forum shopping as required by the Rules of Court. KAL opposed the motion, contending that he is a resident agent and was registered as such with the SEC as required by the Corporation Code. He also claimed that he had been authorized to file the complaint through a resolution of the KAL Board of Directors approved during a special meeting, wherein the board of directors

conducted a special teleconference which he attended. It was also averred that in the same teleconference, the board of directors approved a resolution authorizing him to execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim alleged, however, that the corporation had no written copy of the aforesaid resolution. TC denied motion to dismiss. CA affirms. ISSUE: Can a special teleconference be recognized as legitimate means to approved a board resolution and authorize an agent to execute an act in favor of the corporation? HELD: YES. In this age of modern technology, the courts may take judicial notice that business transactions may be made by individuals through teleconferencing. teleconferencing and videoconferencing of members of board of directors of private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines to be complied with related to such conferences. HOWEVER, in the case at bar, even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference along with the respondent’s Board of Directors, the Court is not convinced that one was conducted; even if there had been one, the Court is not inclined to believe that a board resolution was duly passed specifically authorizing Atty. Aguinaldo to file the complaint and execute the required certification against forum shopping. Facts and circumstances show that there was gross failure on the part of company to prove that there was indeed a special teleconference such as failure to produce a written copy of the board resolution via teleconference. NOTE: Read SEC Memo Circular No. 15-2001, the guidelines for the conduct of teleconferencing and videoconferencing.

FILIPINAS PORT VS GO FACTS:

Sept 4 1992: Eliodoro C. Cruz, Filport’s president from 1968-1991, wrote a letter to the corporation’s BOD questioning the creation and election of the following positions with a monthly remuneration of P13,050.00 each. Cruz requested the board to take necessary

action/actions to recover from those elected to the aforementioned positions the salaries they have received. Jun 4 1993: Cruz, purportedly in representation of Filport and its stockholders, among which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a derivative suit against Filport's BOD for acts of mismanagement detrimental to the interest of the corporation and its shareholders at large. Cruz prayed that the BOD be made to pay Filport, jointly and severally, the sums of money variedly representing the damages incurred as a result of the creation of the offices/positions complained of and the aggregate amount of the questioned increased salaries. RTC: BOD have the power to create positions not in the by-laws and can increase salaries. But Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation the total amount of salaries he received as assistant vice president for corporate planning; and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua under the fourth cause of action to restore to the corporation the salaries they each received as special assistants respectively to the president and board chairman. In case of insolvency of any or all of them, the members of the board who created their positions are subsidiarily liable. Appealed: creation of the positions merely for accommodation purposes - GRANTED ISSUES: W/N there was mismanagement - NO W/N there is a proper derivative suit - YES

HELD: CA Affirmed NO

Section 35 of the Corporation Code, the creation of an executive committee (as powerful as the BOD) must be provided for in the bylaws of the corporation Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the creation of the executive committee by the board of directors is illegal or unlawful. One

reason is the absence of a showing as to the true nature and functions of executive committee But even assuming there was mismanagement resulting to corporate damages and/or business losses, respondents may not be held liable in the absence of a showing of bad faith in doing the acts complained of. ("dishonest purpose","some moral obliquity","conscious doing of a wrong", "partakes of the nature of fraud") determination of the necessity for additional offices and/or positions in a corporation is a management prerogative which courts are not wont to review in the absence of any proof that such prerogative was exercised in bad faith or with malice 2. YES Besides, the requisites before a derivative suit can be filed by a stockholder: - present 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; - a stockholder of Filport 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 - he wrote a letter 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. - wrong against the stockholders of the corporation generally

GRACE CHRISTIAN HS VS CA

Facts: Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and secondary courses at the Grace Village in Quezon City. Private respondent Grace Village Association, Inc., is an organization of lot and/or building owners, lessees and residents at Grace Village, while private respondents Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee on election. It appears that a committee of the board of directors prepared a draft of an amendment to the bylaws which says that Grace Christian High school will have a permanent director of the association. This draft was never presented

to the general membership for approval. Nevertheless, the petitioner was given a permanent seat in the board of directors of the association. The association committee on election informed that the petitoner’s permanent seat in board is invalid because it was never approved by the majority of its members. Hence they will have an election. The petitioner school requested the cancellation of the election, the association denied. So the petitioner school instituted an action to the Home Insurance Guaranty Corporation but their action was denied. The board adopted a resolution declaring the 1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be effective. The petitioner school appealed to the CA but CA ruled that the amended by laws in 1975 is null and void. Issue: WON Grace Christian High school can have permanent seat in board as director? Held: No. The former and present corporation law leave no room for doubt as to their meaning: the board of directors of corporations must be elected from among the stockholders or members. There may be corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. Nor can petitioner claim a vested right to sit in the board on the basis of “practice.” Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioner’s claim that its right is “coterminus with the existence of the association.” PEOPLE AIR CAGRO AND WAREHOUSING COMPANY INC. Vs. COURT OF APPEALS G.R. No.117847 FACTS OF THE CASE Petitioner is a domestic corporation organized in 1986 to operate a customs bonded warehouse at the old Manila International Airport (MIA). To obtain a license from the Bureau of Customs, Antonio Punsalan, Jr., the corporation president, solicited a proposal from private respondent Stefani Sano for the preparation of a feasibility study. Sano submitted a letter proposal dated October 17, 1986 (First Contract) to Punsalan regarding his request for professional engineering consultancy services which services are offered in the amount of P350, 000.00. Initially, Cheng Yang, the majority stockholder of

petitioner, objected to say offer as another company can provide for the same service at a lower price. However, Punsalan preferred Sano’s services because of latter are membership in the task force, which task force was supervising the transition of the Bureau from the Marcos to the Aquino government. Petitioner, through Punsalan, thereafter confirmed the contract. On December 4, 1986, upon Punsalan’s request, private respondentsent petitioner another letter-proposal (Second Contract) which offers the same service already at P400, 000.00 instead of the previous P350,000.00 offer. On January 10, 1987, Andy Villaceren, vice-president of petitioner, received the operations manual prepared by Sano and which manual operations were submitted by petitioner to the Bureau in compliance for its application to operate abandoned warehouse. Thereafter, in May 1987, the Bureau issued to it a license to operate. Private respondent also conducted in the third week of January 1987 in the warehouse of petitioner, a three-day training seminar for the petitioner’s employees. On February 9, 1988, private respondent filed a collection suit against petitioner. He alleged that he had prepared an operationsmanual for petitioner, conducted a seminar-workshop for its employees and delivered to it a computer program but that despite demand, petitioner refused to pay him for his services. Petitioner, on its part, denied that Sano had prepared such manual operations and at the same time alleged that the letter-agreement was signed by Punsalan without authority and as such unenforceable. It alleges that the disputed contract was not authorized by its board of directors. ISSUE Whether the Second Contract signed by Punsalan is enforceable and binding against petitioner. RULING Being a juridical entity, a corporation 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, as provided in Section 23 of the Corporation Code. However, it is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, 215 it holds him out to the public as possessing the power to do those acts and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. Thus private respondent shall not be faulted for believing that Punsalan’s conformity to the contract in dispute was also binding on petitioner. In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the First Contract without first securing board approval. Despite such lack of board approval, petitioner did not object to or repudiate said contract, thus "clothing" its president with the power to bind the corporation. The grant of apparent authority to Punsalan is evident in the testimony of Yong — senior vice president, treasurer and major stockholder of petitioner. Furthermore, private respondent prepared an operations manual and conducted a seminar for the employees of petitioner in accordance with their contract. Petitioner accepted the operations manual, submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of its aforementioned actions, petitioner was given by the Bureau of Customs a license to operate a bonded warehouse. Granting arguendo then that

the Second Contract was outside the usual powers of ratification of said contract and acceptance of benefits nonetheless. The enforceability of contracts under Article the acceptance of benefits under them" under Article 1405.

the president, petitioner's have made it binding, 1403(2) is ratified "by

Facts: Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and secondary courses at the Grace Village in Quezon City. Private respondent Grace Village Association, Inc., is an organization of lot and/or building owners, lessees and residents at Grace Village, while private respondents Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee on election. It appears that a committee of the board of directors prepared a draft of an amendment to the by-laws which says that Grace Christian High school will have a permanent director of the association. This draft was never presented to the general membership for approval. Nevertheless, the petitioner was given a permanent seat in the board of directors of the association. The association committee on election informed that the petitoner’s permanent seat in board is invalid because it was never approved by the majority of its members. Hence they will have an election. The petitioner school requested the cancellation of the election, the association denied. So the petitioner school instituted an action to the Home Insurance Guaranty Corporation but their action was denied. The board adopted a resolution declaring the 1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be effective. The petitioner school appealed to the CA but CA ruled that the amended by laws in 1975 is null and void.

Issue: WON Grace Christian High school can have permanent seat in board as director?

Held: No. The former and present corporation law leave no room for doubt as to their meaning: the board of directors of corporations must be elected from among the stockholders or members. There may be corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. Nor can petitioner claim a vested right to sit in the board on the basis of “practice.” Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioner’s claim that its right is “coterminus with the existence of the association.”Tan versus Sycip G.R. No. 153468; August 17, 2006

For stock corporations, the quorum referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members meetings. Dead members shall not be counted.

Facts: Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15) regular members, who also constitute the board of trustees. During the annual members meeting held on April 6, 1998, there were only eleven (11) living member-trustees, as four (4) had already died. Out of the eleven, seven (7) attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees. When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members automatically lost all their rights (including the right to vote) and interests in the corporation. SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She held that the basis for determining the quorum in a meeting of members should be their number as specified in the articles of incorporation, not simply the number of living members. Issue: whether or not in NON-STOCK corporations, dead members should still be counted in determination of quorum for purpose of conducting the Annual Members Meeting. Ruling: The Right to Vote in Nonstock Corporations In nonstock corporations, the voting rights attach to membership. Members vote as persons, in accordance with the law and the bylaws of the corporation. Each member shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or bylaws. We hold that when the principle for determining the quorum for stock corporations is applied by analogy to nonstock corporations, only those who are actual members with voting rights should be counted.

Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights, not the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum. Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of incorporation or the bylaws provide for a greater majority). If the intention of the lawmakers was to base the quorum in the meetings of stockholders or members on their absolute number as fixed in the articles of incorporation, it would have expressly specified so. Otherwise, the only logical conclusion is that the legislature did not have that intention. Effect of the Death of a Member or Shareholder In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor.

On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of whether or not dead members are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws. Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws. Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members meeting, conducted with six members present, was valid.