Digest-2.docx

NHA v. Court of Appeals, 456 SCRA 17 (2005) Notes:

LIFE of USUFRUCT

The law clearly limits any usufruct constituted in favor of a corporation or association to 50 years. A usufruct is meant only as a lifetime grant. Unlike a natural person, a corporation or association’s lifetime may be extended indefinitely. The usufruct would then be perpetual. This is especially invidious in cases where the usufruct given to a corporation or association covers public land. Proclamation No. 1670 was issued 19 September 1977, or 28 years ago. Hence, under Article 605, the usufruct in favor of MSBF has 22 years left.

Salafranca v. Philamlife (Pamplona) Village Homeownerd, 200 SCRA 469 (1998) Facts: Philamlife Village Homeowners Association amended its by-laws. The position of administrative officer, which Salafranca holds, was made coterminus with the BOD. Later Salafranca was terminated which prompted him to file a complaint for illegal dismissal. Issue: Whether Philamlife validly terminated Salafranca. Ruling: No. The right to amend the by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment. However this right, extensive as it may be, cannot impair the obligation of existing contracts or rights. Salafranca, as a regular employee, is entitled to security of tenure, hence, his services may only be terminated for causes provided by law. A contrary interpretation would enable an employer to remove any employee from his employment by the simple expediency of amending its by-laws and providing that his/her position shall cease to exist upon the occurrence of a specified event.

Pena v. Court of Appeals, 193 SCRA 717 (1991) Facts: PAMBUSCO’s lots were foreclosed and were sold to Pena as the highest bidder. PAMBUSCO assigned its right of redemption to Enriquez through the vote of 3 out of 5 directors. Issue: Whether the assignment to Enriquez was valid. Ruling: No. The by-laws of PAMBUSCO requires that at least 4 members must be present to constitute a quorum in a special meeting of the BOD. Under Section 25 of the Corporation Code of the Philippines, the articles of incorporation or by-laws of the corporation may fix a greater number than the majority of the number of board members to constitute the quorum necessary for the valid transaction of business. Any number less than the number provided in the articles or by-laws therein cannot constitute a quorum and any act therein would not bind the corporation. Note:

Also note that PAMBUSCO was already insolvent so that its only remaining asset was its right of redemption over the subject properties. Corp code requires that the sale or disposition of all or substantially all properties of the corporation requires: 1. 2.

a proper board resolution; and the affirmative votes of the stockholders holding at least two-thirds (2/3) of the voting power in the corporation in a meeting duly called for that purpose.

China Banking Corporation v. Court of Appeals, 270 SCRA 503 (1997) Facts: Calapatia pledged his Stock Certificate of VGCCI to China Bank. Due to Calapatia's failure to pay China Bank which prompted the latter to file a a petition for extrajudicial foreclosure.

China Bank informed VGCCI of the foreclosure proceedings and requested that the pledged stock be transferred to its name, as the highest bidder, which VGCI refused on the ground that Calapatia has unsettled accounts with VGCI. VGCI later auctioned Calapatia’s stock. VGCI it has prior right over China Bank for its by-laws provides that the Board may sell a members’ share to satisfy the claims of the Club. Issue: Whether vGCI’s by-laws are binding to China Bank. Ruling: No. In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. Third persons are not bound by by-laws, except when they have knowledge of the provisions either: 1. 2.

actually; or constructively.

Central Textile Mills, Inc. v. NWPC, 260 SCRA 368 (1996) Facts: RTWPB granted an increase in the in the minimum daily wage. It, however, granted exemption to employers whose capital has been impaired (loss) by at least 25%. The guidelines defined capital as the "paid-up capital at the end of the last full accounting period. CTM’s authorized capital stock registered with SEC amounts to 128m. Its FS, however, showed a total paid-up capital of 300m, which was brought about by subscriptions and payments on a proposed increase on capital stock. Issue: What should be the basis for computing the capital impairment Ruling: 128m. These payments cannot as yet be deemed part of petitioner's paid-up capital, technically speaking, because its capital stock has not yet been legally increased. Such payments constitute deposits on future subscriptions, money which the corporation will hold in trust for the subscribers until it files a petition to increase its capitalization and a certificate of filing of increase of capital stock is approved and issued by the SEC. If a certificate of increase has not yet been issued by the SEC, the subscribers to the unauthorized issuance are not to be deemed as stockholders possessed of such legal rights as the rights to vote and dividends.

Dela Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 (1969) Facts: Defendants invested in shares of stock of Philippine Fiber, a company engaged in the manufacture of sugar bags. This was later ratified by the BOD. Plaintiff questions the same being ultra vires, not having been authorized by 2/3 of the voting power of the stockholders. Issue: Whether the 2/3 vote is necessary to validate the investment made by the defendants. Ruling: No. A private corporation’s investment in stocks, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. When the investment is necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the approval of the stockholders is not necessary. Note:

In sum, the approval of stockholders in investing in stocks of other company:

1. 2.

NOT NEEDED - when the investment is necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the approval of the stockholders is not necessary; NEEDED - for any purpose other than the main purpose for which it was organized or is done solely for investment.

BUT in both cases, authorization by the BOD is necessary. Pirovano v. De la Rama Steamship Co., Inc., 96 Phil 335 Facts: The BOD of De la Rama Steampship executed a board resolution granting the children of Pirovano the proceeds of life insurance policies for the life of Pirovano. This was later ratified by the stockholders of the said company. The donation, however, was later rescinded on the ground that it was ultra vires for the corporation to dispose of its assets by gift. Issue: Whether the donation was ultra vires. Ruling: No. The corporation was given broad and almost unlimited powers to carry out the purposes for which it was organized among them, (1) "To invest and deal with the moneys of the company not immediately required, in such manner as from time to time may be determined" and, (2) "to aid in any other manner any person, association, or corporation of which any obligation or in which any interest is held by this corporation or in the affairs or prosperity of which this corporation has a lawful interest." The donation in question undoubtedly comes within the scope of this broad power. Note:

The case was easily resolved by the court for the donation made by the corporation was well within its power as provided in the corporation’s purpose in the articles of incorporation. But even if the act were ultra vires said donation would remain valid. ULTRA VIRES acts is defined as acts performed beyond the powers conferred upon the corporation either by law or by its articles of incorporation. This includes acts which are; 1. 2.

ILLEGAL – those contrary to law, morals, or public policy or public. These acts are VOID; MERELY ultra vires – those which are not within the scope of the corporations AOI but are not illegal. It is merely voidable and may become binding and enforceable when ratified by the stockholders.

Said donation, even if ultra vires is not void, and if voidable its infirmity has been cured by ratification and subsequent acts of the defendant corporation.

Filipinas Port Services v. Go, 518 SCRA 453 (2007) Facts: The BOD of Filipinas Port Services created an executive committee. Cruz questioned the said acts as mismanagement detrimental to the interest of the corporation and the same was not sanctioned by the corporate by-laws. Issue: Whether the BOD may do the above acts. Ruling: Yes. The Board of Directors has the power to create positions not provided for in Filport’s bylaws since the board is the corporation’s governing body, clearly upholding the power of its board to exercise its prerogatives in managing the business affairs of the corporation. Note:

Even if there was mismanagement resulting to corporate damages and/or business losses, still the respondents may not be held liable in the absence of a showing of bad faith in doing the acts complained of. If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable. For them to be held accountable, the mismanagement and the resulting losses on account thereof, it is

necessary to show that the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud.

Tan v. Sycip, 499 SCRA 216 (2006) Facts: Grace Christian High School (GCHS) is composed of 15 regular members, who also constitute the board of trustees. During their annual members’ meeting there were only 11 member-trustees present, as 4 had already died, 7 of which were represented by proxies. In the meeting several persons were voted to replace the four deceased member-trustees. Pacis questioned the meeting arguing that there was no quorum. Issues: 1. 2.

Whether the election of trustees was valid. Whether the election was valid.

Ruling: No. 1.

Whether there was quorum.

Yes. 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. Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. 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 6 members present, was valid. 2.

Whether the election was valid

No. Trustees may fill vacancies in the board, provided that those remaining still constitute a quorum. Corporations may choose how vacancies in their respective boards may be filled up; a. b.

by the remaining directors constituting a quorum; or by the stockholders or members in a regular or special meeting called for the purpose.

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a majority vote of the remaining members of the board. The "election" of the four trustees cannot be legally upheld for the reason that it was held in an annual meeting of the members, not of the board of trustees. The by-laws of GCHS require that the remaining member-trustees must sit as a board in order to validly elect the new ones. Note:

QOURUM 1.

Stock Corporations – stockholders representing a majority of the outstanding capital stock. Outstanding capital stock – total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. Note that quorum should be based on the number of outstanding voting stocks.

2.

Non-stock Corporations – majority of the members representing the actual number of voting rights. Majority means 50% + 1 vote.

Note further, that in Pena v. CA SC held that the articles of incorporation or by-laws of the corporation may fix a greater number than the majority of the number of board members to constitute the quorum necessary for the valid transaction of business. Any number less than the number provided in the articles or by-laws therein cannot constitute a quorum and any act therein would not bind the corporation. RIGHT TO VOTE 1.

Stock Corporations Section 6 – xxxx… no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" These non-voting shares, however, is entitled to vote in those cases enumerated in Section 6.

2.

Non-stock 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.

EFFECT OF DEATH 1.

Stock Corporations 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.

2.

Non-stock Corporations 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. The determination of whether or not "dead members" are entitled to exercise their voting rights depends on those articles of incorporation or bylaws.

VACANCY IN BOD or BOT SECTION 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.

Board of Liquidators v. heirs of Kalaw, 20 SCRA 987 (1967) Facts: NACOCO entered into several contracts through its general manager Kalaw. These contracts, due to unforeseen events, turned out to be unprofitable. The Board of Liquidators explained that, as required by the coporation’s by-laws, the approval of the BOD was necessary to enter into said contracts, hence, Kalaw should be made liable for entering into said contracts without prior approval of the BOD. Issue: Whether the contracts entered into by Kalaw were valid. Ruling: Yes, the Kalaw contracts are valid corporate acts. Where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board approval.

The by-laws of NACOCO require prior approval of the board on ALL corporate acts. However, it is the board itself, by its acts and through acquiescence, laid aside the by-law requirement of prior approval. Ratification cleanses the contract from all its defects from the moment it was constituted.

Montelibano v. Bacolod-Murcia Milling Co., Inc. 5 SCRA 36 (1962) Facts: Montelibano and Bacolod-Murcia entered into a milling contract where provides that the resulting product should be divided as follows: 1. 2.

55% - Planters; 45% - Mill.

This agreement was embodied in a printed Amended Milling Contract. Later Montelibano proposed an increase in the Planters’ share to 60%. The BOD of Bacolod-Murcia adopted a resolution granting the same. The increase was, however, denied by Bacolod-Murcia for being in effect a donation which the BOD has no authority to grant, an ultra vires act. Issue: Whether the act in question is ultra vires Ruling: No. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends it may fairly be considered within charter powers. As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors. So long as it acts in good faith its orders are not reviewable by the courts.

Shipside Inc. v. CA, 352 SCRA 334 (2001) Madrigal & Co. v. Zamora Facts: Employees Union, sought for the renewal of its CBA where they proposed several increase in their compensation. Through a board resolution petitioner reduced its capital stock. This was effected through the distribution of the marketable securities owned by the petitioner to its stockholders in exchange for their shares in an equivalent amount in the corporation. Later the petitioner, through retrenchment by reason of alleged business losses, terminated several employees.

Issue: Whether the employees were validly terminated. Ruling: No. The dividends received by the company are corporate earnings arising from corporate investment. The petitioner's capital reduction efforts were a subterfuge, a deception to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in its employee ranks. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. It is an unfair labor practice.

Caltex (Phils) Inc. v. PNOC Shipping and Transport Corp. 498 SCRA 400 (2006) Facts: LUSTEVECO entered into an agreement with PSTC where the former transferred, conveyed and assigned to the latter all of LUSTEVECO’s business, properties and assets pertaining to its tanker and bulk business "together with all the obligations relating to the said business, properties and assets.

Caltex secured a favorable judgment against LUSTEVECO but could not execute the same for the latter had no properties left. Caltex went against PSTC instead. Issue: Whether Caltex may recover from PSTC. Ruling: Yes. 1.

Caltex may recover the judgment debt from PSTC because the Agreement provides that PSTC shall assume all the obligations of LUSTEVECO.

2.

Even without the Agreement, PSTC is still liable to Caltex. The disposition of all or substantially all of the assets of a corporation is allowed IF the transfer should not prejudice the creditors of the assignor. The only way the transfer will not prejudice the creditors is to hold the assignee liable for the obligations of the assignor.

Note:

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets, if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated.

Islamic Directorate v. CA, 272 SCRA 454 (1997) Facts: IDP owns a land which is the only property of IDP. Later, several groups emerged and claimed to be the legitimate IDP, one of which is the Caprizo Group. SEC declared the election of the Carpizo Group to the IDP Board as null and void. Caprizo Group, through a board resolution, sold the land to INC. Issue: Whether the sale was valid. Ruling: No. 1.

SEC has the authority to pass upon the issue as to who among the different contending groups is the legitimate Board of Trustees of the IDP. Hence, Caprizo Group with whom INC contracted is a fake Board. All acts carried out by the Carpizo Board, particularly the sale of the land in the name of the IDP, have to be struck down for having been done without the consent of the IDP thru a legitimate Board of Trustees.

2.

Also, Caprizo Group failed to comply with Section 40 of the Corp Code. The land in question constitutes the only property of the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP. For the sale to be valid: a. b.

the majority vote of the legitimate Board of Trustees; and concurred in by the vote of at least 2/3 of the bona fide members of the corporation

should have been obtained.

Facts: A B

Issue: a B Ruling: a B

C Facts: A B

Issue: a B Ruling: a B C Facts: A B

Issue: a B Ruling: a B C Facts: A B

Issue: a B Ruling: a B C