You are on page 1of 488

Law 321_Corporation LAW_ Case Digest

In Partial Fulfilment Of the Requirements for the Subject Law 321 (Corporation Law)

Corporation Law Case Digest

Submitted to: Atty. Maria Lulu G. Reyes

Submitted by: ARUMIN, Lesley Jane B. BAGUIDUDOL, Valentin Jr. G. BAGUILAT, Lauriz G. BUENO, Marc Crisante C. CAMSOL, Haryeth M. LUBANTE, Jessica B. ORALLO, Joanna Marie C. ORAS, Phylian Corazon W. SANTOS, Hyacinth B. SECTEL, Florence O. TUGUIC, Joshua B.

Date Submitted: March 8, 2014

1|Page

Law 321_Corporation LAW_ Case Digest

CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Blg. 68)

I. FORMATION AND ORGANIZATION OF CORPORATIONS A. General Principles 1. 2. 3. 4. History of Business Organizations Constitutional Basis, Art. XII, Sec. 16 Definitions of Corporation (Sec. 2) Attributes of Corporation B. Petron v. NCBA, 516 S 168 ___________________________________20 APT v. CA, 300 S 582 ________________________________________21 Mambulao Lumber v. PNB, 22 S 359 Hanil v. CA, 362 S 1 Bache and Co. v. Ruiz , 637 S 823 Sulo ng Bayan v. Araneta, 72 S 347

Classification of Corporations 1. Private v. Public Corporation 2. 3. 4. 5. 6. 7. Boy Scout of the Phil. v. COA, June 7, 2011 ____________________26 Liban v. Gordon, July 15, 2009 Baluyot v. Holganza, 325 S 526 Vet. Fel. Of the Phil. v. Reyes, 483 S 526 MIA v. CA, 495 S 591

Stock (Sec. 3) v. non-Stock (Sec. 3 and 87) Open v. Close Corporation (Sec. 96 et. seq.) Domestic v. foreign Corporation (Sec. 123 et. seq.) Special Charter Corporation Educational (Sec. 106 et. seq.) Religious sole and aggregate (Sec. 109 et. seq.)

C.

Stages in the Formation/Organization of a Corporation 1. Promotion March II Marketing v. Joson, December 12, 2011 _______________32 Cagayan Fishing v. Sandiko, 65 P 223 Caram v. CA, 151 S 372 2|Page

Law 321_Corporation LAW_ Case Digest 2. 3. D. Pioneer Insurance v. CA, 175 S 668 Rizal Light v. Municipality of Morong, 25 S 258

Incorporation Organization

Articles of Incorporation (Sec. 14 and 15): Contents Lanuza v. CA, 454 S 54 ______________________________________37 1. Corporate Name (Sec. 18) Alonso v. Cebu, 417 S 115 ___________________________________38 Industrial Refractories v. CA, 390 S 252 Ang mga Kaanib sa Iglesia ng Diyos v. Iglesia, December 12, 2001 Universal Mills v. Universal Textile Mills, 78 S 62 Lyceum of the Phil. v. CA, 219 S 610 Indiana Aerospace University v. CHED, April 4, 2001 Philips Export BV v. CA, 206 S 457

2.

Primary Purpose (Sec. 14) Gala v. Ellice, 418 S 431 _____________________________________45 Heirs of Pael v. CA, December 7, 2001 Uy Siulong v. Director, 40 P 541 Asuncion v. De Yriarte, 28 P 67

3. 4.

Secondary Purpose/s (Sec. 14) Principal Office/Domicile (Sec. 14) Davao Light and Power Co. v. CA, August 20, 2001 _____________49 Clavecilla Radio Sytem v. Antillon, 19 S 379 Sy v. Tyson Enterprise, 119 S 367 Young Auto Supply v. CA, 223 S 670

5.

Term (Sec. 11 in rel. to Sec. 37, 81 and 120) Alhambra Cigar and Cigarette Mfg. v. SEC, 24 S 269 _____________53

6. 7.

Incorporators (Secs. 10 and 5) Incorporating Directors (Sec. 14)

3|Page

Law 321_Corporation LAW_ Case Digest 8. Capital Stock a) b) c) Authorized (Sec. 12) Subscribed (Sec. 13) Paid-up (Sec 13) MISCI-NACUSIP Local Chapter v. NWPC, 269 S 173 ______________54 d) e) 9. Outstanding (Sec. 143) Minimum Requirements for Incorporation

Classification of Shares (Sec. 6) a) b) c) d) e) f) Common v. Preferred Par value v. No par value shares Voting v. Non-voting Founders Shares (Sec. 7) Redeemable Preferred (Sec. 8) Treasury (Sec. 9)

10. 11. 12.

Subscribers (Sec. 14) Treasurer-in-trust (Sec. 15) Special Provisions a) No Transfer Clause

13.

Amendment and/or rejection of Articles of Incorporation (Secs. 16 and 17) Republic Planters Bank v. CA, 216 S 738 _______________________55

E. F. G.

Commencement of Corporate Existence (Sec. 19)/Theory of Concession Doctrine of Corporate Entity Doctrine of Piercing the Veil of Corporate Fiction: Instances 1. 2. 3. Public Convenience Cases; Fraud Cases; Alter Ego/Instrumentality Cases. PNB v. Hydro Resources, March 13, 2013 ______________________57 Ramirez v. Mar Fishing, Inc., June 13, 2012 Sarona v. NLRC, January 18, 2012 Gold Line Tours v. heirs of Lacsa, June 18, 2012 Hacianda Luisita v. Presidential Agrarian Council, January 22, 2011 Pantranco Employees Assoc., et al. v. NLRC, March 17, 2009 4|Page

Law 321_Corporation LAW_ Case Digest H. Cagayan Valley Drug Corp v. CIR, 545 S 10 Heirs of Pajarillo v. CA, 537 S 96 Petron v. NLRC, 505 S 596 China Banking v. Dyne-Sem, 494 S 493 Marubeni v. Lirag, August 10, 2001 Francisco v. Mejia, August 14, 2001 PNB v. Andrada Electric, 382 S 244 AZCOR Mfg. v. NLRC, 303 S 26 Claparols v. CIR, 65 S 613 CIR v. Norton and Harrison, August 31, 1964 Concept Builders v. NLRC, 257 S 149 Complex Electronics Employees Assoc. v. NLRC, 310 S 403 Cordon v. Balicanta, October 4, 2002 Delpher Trades v. IAC, January 2, 1988 Del Rosario v. NLRC, July 24, 1990 First International Bank v. CA, 252 S 259 Francisco Motors v. CA, 309 S 73 Laguio v. NLRC, 262 S 709 Lim v. CA, 323 S 102 Matuguina Integrated Wood Products v. CA, 263 S 490 Manila Hotel Corp. v. NLRC, October 13, 2000 Norton and Harrison v. Collector, 11 S 74 San Juan Structural v. CA, 296 S 634 Tan Boon Bee v. Jarencio, 163 S 205 Telephone Engg and Service Co. v. WCC, 104 S 354 Umali v. CA, September 13, 1990 Vlason Enterprises v. CA, 310 S 26 Villa Rey transit v. Ferrer, October 29, 1968

De Facto Corporation (Sec. 20) Hall v. Piccio, 86 P 603 ______________________________________90

I.

Corporation by Estoppel (Sec. 21) International Express v. CA, 343 S 74 __________________________91 Lim Tiong v. PFGI, Inc., 317 S 728 Albert v. University Publishing, 13 S 84

J.

Non-user of Charters v. Continuous Inoperation (Sec. 22) Loyola Grand Villas v. CA, 276 S 681 __________________________94

II.

BOARD OF DIRECTORS (SEC. 22 ET. SEQ.) A. Nature of Office 5|Page

Law 321_Corporation LAW_ Case Digest

B.

Requirements 1. Qualifications/Qualifying shares (Sec. 24) 2. Villafuerte v. Moreno, October 2, 2009 ________________________95 Baguio v. CA, 26S 366 Detective and Protective Bureau v. Cloribel, 26 S 255 Grace Christian HS. CA, 281 S 133 Lee v. CA, 205 S 752

Disqualifications (Sec. 27) Brias v. Hord, 24 P 286 _____________________________________100

3. 4. C. 1. 2.

Residence Nationality Quorum Voting Aurbach v. Sanitary Wares, 180 S 131 ________________________101 Bataan Shipyard v. PCGG, 150 S 181

Election (Sec. 24)

D.

Report on Election (Sec. 26) Premium Marble v. CA, 264 S 11 _____________________________103

E.

Term of Office/Holdover Seneres v. COMELEC and Robles, April 16, 2009 _______________104

F.

How removed (Sec. 28) Lambert v. Fox, 26 P 588 ___________________________________105

G.

How Vacancy filled (Sec. 29) Valle Verde Country Club v. Africa, September 4, 209 __________106

H.

How Compensated (Sec. 30) Singson, et al. v. COA, August 9, 2010 ________________________107 Western institute v. Salas, 278 S 216 Central Coop Exchange v. Tibe, 33 S 593 6|Page

Law 321_Corporation LAW_ Case Digest I. Lingayen Gulf v. Baltazar, 93 P 404

Authority of the Board of Directors (Sec. 24)


J.

La Bugaal v. Ramos, 421 S 148 _________________________111 Shipside v. CA, 352 S 334 ABS-CBN v. CA, 301 S 573 Asset Privatization Trust v. CA, 300 S 582 BA Savings Bank v. Sia, 336 S 484 Montelibano v. Bacolod Murcia, 5 S 36 Powers v. Marshall, May 9, 1988 Premium Marble v. CA, 264 S 11
Ramirez v. Orientalist, 38 P 634

Delegation of Authority to Corporate Officers 1. Corporate Officers/meaning of Office vis--vis Employment 2. Real v. Sangu Phil., January 19, 2011 _________________________120 Matling v. Coros, October 13, 2010 Manila Metal v. PNB, 511 S 444 Ongkiko v. NLRC, 270 S 613 Lao v. CA, 325 S 694 De Tevera v. Phil. Tuberculosis Society, 112 S 243

Corporate Officers (Sec. 25); Qualifications and Disqualifications; Authority and Liabilities Matling v. Coros, October 13, 2010 __________________________126 Okol v. Slimmers World, December 11, 2011 Gomez v. PNOC DMC, November 27, 2009 E.B. Villarosa and Partners, Co. v. Benito, 312 S 65 SSPC v. Bardaje, 522 S 155 Cagayan Valley Drug Corp v. CIR, 545 S 10 Pabon v. NLRC, 296 S 8 Vlason Enterprise v. CA, 310 S 26 Prime White Cement v. IAC, 220 S 103 Louis Vuitton SA v. Villanueva, 216 S 121

3. 4.

Executive Committee (Sec. 35) Doctrine of Apparent Authority Banate v. Philippine Countryside, July 13, 2010 ________________136 Sargasso v. PPA, July 5, 2010 Associated Bank v. Sps. Ponstroller, 3 September 2009 Acuna v. Batac Producers, 20 S 326 7|Page

Law 321_Corporation LAW_ Case Digest K. Board of Liquidators v. Kalaw, 20 S 987 Francisco v. GSIS, 7 S 577 Rural Bank v. Ocfemia, 325 S 99

Three-Fold Duties of Directors and Officers: Diligence, Loyalty and Obedience 1. 2. Duties (Sec. 31): Business Judgment Rule Personal Liability of Directors and other Corporate Officers 3. Ever Electrical v. Samahang Manggagawa, 13 June 2012 ________143 Harpoon v. Francisco, 2 March 2011 Ty v. NBI, 15 December 2010 Queensland-Tokyo Commodities v. George, 8 September 2010 Wensha Spa Center v. Yung, 16 August 2010 Cebu Mactan v. Masahiro, 17 July 2009 David v. National Federation of Labor Unions, 21 April 2009 Soriano v. People, BSP and PDIC, 30 June 2009 Cebu Country Club v. Elizagaque, 542 SCRA 65 Caltex Inc. v. NLRC, 536 SCRA 175 Atrium Management v. CA, 353 SCRA 23 ARB Construction v. CA 332 SCRA 426 Lim v. CA, 232 SCRA 102 Francisco v. Mejia, 14 August 2001 DBP v. CA, 16 August 2001 AHS Philippines v. CA, 257 SCRA 319 Complex Electronics v. NLRC, 310 SCRA 403 Crisologo-Jose v. CA, 15 September 1989 FCY Construction v. CA, 324 SCRA 270 Llamado v. CA, 270 SCRA 423 MAM Realty Development v. NLRC, 244 SCRA 797 Naguiat v. NLRC, 269 SCRA 564 Progress Homes v. NLRC, 269 SCRA 274 REAHS Corporation v. NLRC, 271 SCRA 247 Santos v. NLRC, 254 SCRA 673 Sia v. People, 121 SCRA 655 Tramat Mercantile v. CA, 238 SCRA 14

Self-Dealing Director/Officer Cojuangco v. Republic, 12 April 2011 _________________________170 Mead v. McCullough, 21 P 95 Prime White Cement v. IAC, 220 SCRA 103

4.

Contracts between Corporations with Interlocking Directors

8|Page

Law 321_Corporation LAW_ Case Digest 5. Disloyalty Gokongwei Jr. V. SEC, 89 SCRA 336 __________________________175 Strong v. Repide, 41 P 947 Palting v. San Jose Petroleum, 18 SCRA 924 ____________________173 DBP v. CA, 363 SCRA 307

6.

Watered Stocks Lirag Textile Mills v. SSS, 31 August 1987 ______________________177 Nava v. Peers Marketing, 25 November 1976

7.

Derivative Suit: Remedies to Enforce Personal Liability Ang v. Ang, 19 June 2013 __________________________________179 Legaspi Towers 300 v. Muer, et. al, 18 July 2012 Lisam Enterprises v. BDO, 23 April 2012 STRADEC v. Radstock & PNCC, 4 December 2009 Yu v. Yukayguan, 18 June 2009 Gochan v. Young, 12 March 2001 Western Institute v. Salas, 278 SCRA 216 First International Bank v. CA, 252 SCRA 259 Commart Philippines v. SEC, 198 SCRA 73 Chase v. Buencamino, 136 SCRA 367 San Miguel Corporation v. Kahn, 11 August 1989 Everett v. Asia Banking, 49 P 512 Gamboa v. Victoriano, 90 SCRA 40 Reyes v. Tan, 3 SCRA 198 Pascual v. Orozco, 19 P 84

III.

POWERS OF CORPORATION (SECS. 36, ET. SEQ.) A. In General (Sec. 36 in rel. to Arts. 44-46 of the Civil Code of the

Philippines) 1. Theory of Special Capacities v. Theory of General Capacities Acebedo Optical v. CA, 31 March 2000 _______________________193 2. Express, Implied and Incidental Powers, Distinguished Pilipinas v. SEC, 356 SCRA 193 _______________________________194 9|Page

Law 321_Corporation LAW_ Case Digest 3. Luneta Motors v. Santos, 5 SCRA 809 Teresa Electric v. PSC, 21 SCRA 199 Powers v. Marshall, 9 May 1988

Power to Have/Use Corporate Name and Seal Laureano Investment v. CA, 272 SCRA 253 ____________________198

4.

Power to sue and be sued Tam v. Hon. Makasiar, 29 January 2001 _______________________199 Bitong v. CA, 292 SCRA 503 Special Services Corporation v. Centro La Paz, 28 April 1983 R Transport Corporation v. CA, 241 SCRA 76

5.

Power to acquire, dispose, encumber property Art. XII, Section 2-3, 1987 Constitution Director of Lands v. CA, 14 March 1988 _______________________203

6.

Power to Make Donations Pirovano v. Dela Rama Steamship Co., 96 P 335 ________________204

7. B.

Other Powers

To Increase or Decrease Capital Stock (Sec. 38) Madrigal V. Zamora, 51 S 355 ______________________________________205 Philtrust v. Rivera, 44 P 469

C.

To Incur, Create, Or Increase Bonded Indebtedness (Sec. 38)

D.

To Deny Pre-Emptive Rights (Sec. 39) Datu Benito v. SEC, 123 S 722 and __________________________________207 Dee v. SEC, 199 S 238 as clarified through SEC Letter Opinion, 10 March 2000 PCGG v. SEC, 30 June 1988 Republic v. Sandiganbayan, 4 December 2000

E. Assets

To Sell Or Otherwise Dispose Of All or Substantially All Of Corporate (Sec. 40) In relation to Bulk Sales Law 10 | P a g e

Law 321_Corporation LAW_ Case Digest F. PNB v. Andrada Electric, 381 S 244 __________________________________211 Islamic Directorate v. CA, 272 S 454 Edward J. Nell Co. v. Pacific Farms, 15 S 415 Esguerra v. CA, 3 February 1997 Lopez Realty v. Fontecha, 247 S 183

To Invest Corporate Funds In Another Corporation or Business (Sec. 42) Gokongwei v. SEC, 89 S 336 _______________________________________216 Dela Rama v. Ma-ao Sugar, 7 S 247

G.

To Acquire Own Shares (Sec. 41) Boman Environmental v. CA, 22 November 1988 _____________________218 Steinberg v. Velasco, 52 P 953

H.

To Declare Dividends 1. Kinds: Cash, Stock, Property, Scrip Conjuangco v. Republic, 24 April 2009 ________________________220 2. Declaration, Payment and Record Dates Cojuangco, et al v. Sandiganbayan, 24 April 2009 _______supra (220) 3. Limitation on Retention of Surplus Profits Steinberg v. Velasco, 52 P 953 _______________________________222 Nielson v. Lepanto, 26 S 540 CIR v. Manning, 66 S 14 Madrigal v. Zamora, 151 S 355 Republic Planters v. Agana, 269 S 1 Bitong v. CA, 292 S 503 CIR v. CA, 301 S 152

I.

To Enter into a Management Contract (Sec. 44) Aurbach v. Sanitary Wares, 180 S 131 (joint venture) __________________229 PNB v. Producers Warehouse, 42 P 608 Nielson and Co. v. Lepanto Mining, 26 S 541 Tuason v. Bolanos, 28 May 1954

J.

Ultra Vires Acts (Sec. 45)

11 | P a g e

Law 321_Corporation LAW_ Case Digest Heirs of Pael v. CA, 371 S 587 ______________________________________233 Pilipinas Loan v. SEC, 356 S 193 Crisologo v. Ca, 117 S 594 Carlos v. Mindoro Sugar, 57 P 343 Pirovano v. Dela Rama Steamship Co., 96 P 335 Republic v. Acoje Mining, 7 S 361 Republic v. Security Credit and Acceptance Corp., 19 S 58

IV.

BY-LAWS (Sec. 46, et. seq) A. Function B. C. Nakpil v. IBC, 370 S 653 ___________________________________________240 PMI Colleges v. NLRC, 277 S 462 Loyola Grand Villas v. CA, 276 S 681 Citibank NA v. Chua, 220 S 75

Kinds When to adopt and file (Sec. 46) Loyola Grand Villas v. Ca, 276 S 681 _________________________________244

D.

Contents (Sec. 47) 1. 2. SEC policy on date of annual stockholders meeting Authority to elect additional by-laws officers Fleischer v. Botica Nolasco, 47 P 583 __________________________245 Gokongwei Jr. v. SEC, 89 S 336 Government v. El Hogar Filipino, 50 P 399

E.

Amendment and/or rejection of By Laws Salafranca v. PhilAmLife, 300 S 469 _________________________________248

V.

MEETINGS OF STOCKHOLDERS AND THE BOARD OF DIRECTORS A. Kinds (Sec. 49)

Pena v CA, 193 S 717 ________________________________________249


12 | P a g e

Law 321_Corporation LAW_ Case Digest

B. C.

When and where held (Secs. 50, 51 and 52 in rel. to Sec 93) Notice required (Secs. 50 and 53) Board of Liquidators v. Tan, 105 P 426 _______________________________250

D.

Quorum required (Secs. 25 and 52) Javellana v. Tayo, 29 December 1962 _______________________________251

E. F.

Who presides (Sec. 54) Who could attend and vote (Secs. 25 and 58) Sales v. SEC, 13 January 1989 ______________________________________252 Ponce v. Encarnacion, 94 P 81 Lopez v. Ericta, 45 S 539

VI.

VOTING A. Who May Exercise B. C. D. E. F. G. Gamboa v. Teves, 28 June 2011 ____________________________________255 COCOFED, et al. vs. Republic, 11 February 2010 ______________________257 Republic v. COCOFED, 372 S 462 Lee v. CA, 205 S 752 Republic v. Sandiganbayan, 402 S 84

Pledgors, mortgagors, executors, receivers and administrators (Sec. 55) Joint owners of stack, ITF shares, and/or shares (Sec. 56) Non-voting shares (Sec. 6) Treasury Shares (Sec. 57 in rel. to Sec. 9) Proxies (Sec. 58) Voting trust agreement (Sec. 59) Cordon v. Balicanta, 4 October 2002 ________________________________261 NIDC v. Aquino, 163 S 153 Lambert v. Fox, 26 P 588

VII.

CAPITAL STRUCTURE STOCKS AND STOCKHOLDERS A. Capital Stock, Meaning 13 | P a g e

Law 321_Corporation LAW_ Case Digest

1. 2. 3. 4. 5. 6. 7.

Distinguished from Capital Authorized (Sec. 12) Subscribed (Sec. 13) Paid-up (Sec. 13) Outstanding (Sec. 143) Pre-requisites to Incorporation (Sec. 13) As Legal/Stated Capital: Trust Fund Doctrine PLDT v. NTC, 539 S 365 _____________________________________264 NTC v CA, 370 P 538 (1999)

8. 9.

As Nationality Basis: Control Test vs. Grandfather Rule Voting Control Test v. Beneficial Control Test

R.A. 7042, Foreign Investment Act, as amended SEC Letter-Opinion dated 28 November 2007
Gamboa v. Teves, 28 June 2011 and 9 October 2012 ___________266 Express Investment v. BayanTel, 5 December 2012 _____________268 Redmont Consolidated v. McArthur Mining, SEC En Banc Case No. 09-09-177, 25 March 2010 _____________________________________270 Agan v. PIATCO, 21 January 2004 ____________________________271 B. Classification of Shares (Sec. 6) 1. 2. Par Value v. No Par Value Shares Voting v. Non-voting 3. 4. 5. Gamboa v. Teves, 28 June 2011 _______________________supra (266) Castillo v. Balinghasay, 18 October 2004 ______________________272 Sales v. SEC, 169 S 109

Common v. Preferred Kinds of Preferred Shares Founders Shares (Sec. 7) 14 | P a g e

Law 321_Corporation LAW_ Case Digest

6.

Redeemable Preferred (Sec. 8) Republic Planters Bank v. Agana, 269 S 1 _____________________274

7.

Treasury (Sec. 9) CIR v. Manning, 66 S 14 _____________________________________275 San Miguel Corporation v. Sandiganbayan, 14 September 2000

C.

Trust Fund Doctrine National Telecommunications Commission v. SEC, 311 S 509 ________277 Ong v. Tiu, 401 S 1

D. E.

What is an issue What is a subscription (Sec. 60) Ong v. Tiu, 401 S 1 ____________________________________________279 Bayla v. Silang Traffic, 73 P 557 Salmon, Dexter and Co. v. Unson, 47 P 649 Sunset View Condominium v. Campos, 104 S 295 Velasco v. Poizat, 37 P 802

F. Proprietary

Acquisition and Ownership of Shares in a Corporation; Extent of Right/Doctrine of Limited Liability Cojuangco v. Republic, 12 April 2011 ____________________________284 Espiritu v. Petron, 24 November 2009 Crisostomo v. SEC, 179 S 146 Garcia v. Lim, 59 P 562 Magsaysay-Labrador v. CA, 180 S 266 Nicolas v. CA, 27 March 1998 Ramos v. CA, 179 S 719 Saw v. CA, 195 S 740

G. H.

Pre-incorporation Subscriptions (Sec. 61) Consideration for Stocks (Sec. 62) Apodaca v. NLRC, 172 S 442 ____________________________________292 Fua Cun v. Summers, 44 P 705 15 | P a g e

Law 321_Corporation LAW_ Case Digest I. National Exchange Co. v. Dexter, 51 P 601 Nielson and Co. v. Lepanto Mining, 26 S 541 Trillana v. Quezon College, 93 P 383

Unpaid Subscriptions 1. 2. 3. Interest on unpaid subscriptions (Sec. 66) Right of unpaid shares (Sec. 72) Collection of unpaid subscription a) Call: When necessary (Sec. 67) b) Garcia v. Suarez, 67 P 441 _________________________297 PNB v. Bitulok Sawmill, 23 S 1366 Velasco v. Poizat, 37 P 802

Court action (Sec. 70) Lumanlan v. Cura, 59 P 746 ________________________300 Edward Keller v. COB Group Marketing, 16 January 1986

4. 5.

How shares become delinquent (Sec. 67) Effect of Delinquency (Sec. 71 in rel. to Sec. 43) Valley Golf & Country Club, Inc. v. Caram, 16 April 2009 ______302 Calatagan Golf Club, Inc. v. Clemente, Jr., 16 April 2009

6. 7. J.

Delinquency Sale (Sec. 68) Grounds to Question Delinquency Sale (Sec. 69)

Issuance of Certificates of Stock (Sec. 64) Fua Cun v. Summers, 44 P 705 as compared with __________________304 Baltazar v. Lingayen Gulf, 14 S 522 Tan v. SEC, 206 S 740 Embassy Farms v. CA, 188 S 492

K. rel. to S15)

Right to Transfer of Shares/Validity of Restrictions on Right (Sec. 98 in Makati Sports Club v. Cheng, 16 June 2010 _______________________308 Fleischer v. Botica Nolasco, 47 P 583 Padgett and Babcock v. Templeton, 59 P 232 Rural Bank of Salinas v. CA, 210 S 510 16 | P a g e

Law 321_Corporation LAW_ Case Digest L. Thompson v. CA, 298 S 280 Yuchengco v. Velayo, 115 S 307 Lim Tay v. CA, 293 S 634

Transfer of Shares of Stock and Registration (Sec. 63) Musni Puno v. Puno Enterprises, 11 September 2009 _______________315 Cojuangco, et al v. Sandiganbayan, 24 April 2009 Republic v. Sandiganbayan, 402 S 84 Rural Bank of LIpa v. CA, 366 S 188 BLTB v. Bitanga, 10 August 2001 Abejo v. Dela Cruz, 149 S 643 Batong Buhay Gold Mines v. CA, 147 S 4 Chemphil Export v. CA, 251 S 257 Chua Guan v. Samahang Magsasaka , 62 P 472 CIR v. Anglo-California Bank, 106 P 903 Delos Santos v. Republic, 96 P 577 De Erquiaga v. CA, 27 September 1989 Garcia v. Jomouad, 26 January 2000 Lopez v. CA, 114 S 671 Monserrat v. Ceron, 58 P 469 Puyat v. De Guzman, 113 S 31 Razon v. IAC, 207 S 234 Rivera v. Florendo, 144 S643 Santamaria v. Hongkong and Shanghai Bank, 89 P781 Torres v. CA, 278 S 793 Won v. Wack-wack Golf and Country Club, 104 P 466

M.

Lost or Destroy Certificates (Sec. 73) PHILEX Mining v. Reyes, 118 S602 _______________________________336

VIII.

CORPORATE BOOKS AND RECORDS A. Books to be kept (Sec. 74) 1. Stock and transfer book Bitong v. CA, 292 S 503 __________________________________337 2. 3. 4. B. Stock transfer agent (Sec. 74) Minutes book Record of Business transactions

Inspection of corporate books and records (Sec. 74)

17 | P a g e

Law 321_Corporation LAW_ Case Digest C. Sy, et al. v. 30 March 2009 ______________________________________338 Africa v. PCGG, 205 S39 RP V. Sandiganbayan, 199 S 39 Gokongwei v. SEC, 89 S 336 Gonzales v. PNB, 122 S 489 Pardo v. Hercules Lumber, 47 P 964 Philpotts v. Philippine Manufacturing Co, 40 P 471 Republic v. Sandiganbayan, 199 S 39

Right to financial statements (Sec. 75)

IX.

MERGER AND CONSOLIDATION A. B. C. D. E. F. Corporate Combinations, Purposes and Methods Constituent corporation vs. consolidated corporation (Sec. 76) Corporate approvals required (Sec. 77) Plan of merger or consolidation (Sec. 76) Articles of merger or consolidation (Sec. 78) Effects of merger or consolidation (Sec. 80) BPI v. BPI Employees Union, 18 August 2010 ______________________346 PNB v. Andrada Electric, 381 S 244 Babst v. CA, 135 S 37 Associated Bank v. CA, 290 S 639 Alger Electric v. CA, 135 S 37 CIR v. Norton and Harrison, 11 S 714 CIR v. Rufino, 27 February 1987 CIR v. Bio Hong, 8 April 1991

X.

APPRAISAL RIGHT A. B. C. D. E. Instances of appraisal right (Sec. 81) Requirements of exercise of appraisal right (Sec. 82 and 86) Effect of demand (Sec. 83) Who bears costs of appraisal (Sec. 85) Notation on stock certificates of dissenting stockholders (Sec. 86) NON-STOCK CORPORATIONS A. Purposes (Sec. 88) Chinese YMCA v. Ching, S 460 __________________________________354 CIR v. Club Filipino, 5 S 321 18 | P a g e

XI.

Law 321_Corporation LAW_ Case Digest

B. C. D.

Distribution of Income (Sec. 87) Scope to right to vote (Sec. 89) Voting (Sec. 89) Litonjua v. CA, 286 S136 _______________________________________356 PPSTA v. Apostol, 55 S 743

E. F.

Transferability of interest or membership (Sec. 90) Governing Board (Sec. 92) 1. 2. Number Term

G. H. I. XII.

Election of Officers (Sec. 92) Place of meetings (Sec. 93) Distribution of assets in case of dissolution (Sec. 94)

CLOSE CORPORATIONS A. Requirements for formation (Sec. 96) B. C. Dulay Enterprises v. CA, 225 S 658 _______________________________358 San Juan Structural Steel v. CA, 296 S 63 Naguiat v. NLRC, 269 S 54

Restrictions on formation of close corporations (Sec. 96) Distinctions from regular corporations 1. 2. 3. 4. 5. 6. 7. 8. Management (Sec. 97) Meetings (Sec. 101) Voting (Sec. 97) Quorum (Sec. 97) Board authority (Sec. 97) Pre-emptive rights (Sec. 102) Buy back of shares Resolutions of deadlocks (Sec. 104)

D. E.

Provisional director (Sec. 104) Appraisal right in regular corporations vs. withdrawal right of a close corporation (Sec. 105)

stockholder of a XIII. SPECIAL CORPORATIONS A.

Educational corporations 1. Distinguished from ordinary stocks / Non-Stock Corporations 19 | P a g e

Law 321_Corporation LAW_ Case Digest 2. Constitution B. Religious corporations 1. Art. IV, Sec. 28 (3) and Art. 29 (2), 1987 Constitution 2. 3. RP v. IAC, 15 January 1988 _______________________________361 Director of Lands v. CA, 14 March 1988 Art. IV, Sec. 28 (3) in rel. to Art. XIV, Sec. 4 (2)(3)(4), 1987

Corporation sole Corporation aggregate IEMELIF, Inc., et al. v. Bishop Lazaro, et al., 6 July 2010 _______363 IEMELIF, Inc., et al. v. Juane, 18 September 2009

XIV.

DISSOLUTION OF CORPORATIONS A. Methods 1. Voluntary a. Where creditors are not affected (Sec. 118) Vesagas v. CA, 5 December 2001 ___________________365 b. Where creditors are affected (Sec. 119) 2. Avon Dale Garments v. NLRC, 246 S 733 ____________366 Daguhoy Enterprises v. Ponce, 96 P 15

Involuntary (Sec. 121 in rel. to Sec. 6, par. N, PD 902-A) PNB v. CFI of Pasig, 209 S 294 ____________________________368

3. B.

Shortening of corporate term (Sec. 120 in rel. to Secs. 16 and 37)

Liquidation (Sec. 122) 1. Methods Metropolitan v. Centro Development, 13 June 2012 _________369 Metropolitan Bank Inc. v. Riverside Mills, 8 September 2010 Yam v. CA, 303 S 1 Alhambra Cigar and Cigarette Mfg. v. 24 S 269 Chungka Bio v. IAC, 26 July 1988 20 | P a g e

Law 321_Corporation LAW_ Case Digest 2. Republic v. Marsman Dev., 27 April 1972 Tan Tiong Bio v. CIR, 4S 986

Duration Reynolds, Phil. V. ca, 169 s 220 ___________________________376 Mambulao v. PNB, 22 S 359

3.

Powers of corporation at liquidation Aguirre v. FQB7, 9 January 2013 __________________________378 Catmon Sales v. Liquidator, 15 January 2010 Knecht v. United Cigarette, 384 S 45 Chua v. NLRC, 190 S 558 Clemente v. CA, 242 S 717 Gelano v. CA, 103 S 90 Reburian v. CA, 301 S 344 Republic Planters Bank v. CA, 216 S 738

XV.

FOREIGN CORPORATIONS A. Definition and Rights B. Avon v. Court of Appeals, August 29, 1997 ________________________386 San Jose Petroleum v. Court of Appeals, 18 SCRA 591

Requirements for the Establishment of a Branch/License to do Business in Philippines 1. Documentary Georg Grotjahn vs. Isnani, 235 SCRA 216 __________________388 2. 3. Deposit Appointment of Resident Agent New York Marine Managers vs. CA, 249 S 417 ______________389

the

C. D.

Applicable laws Amendment of License Aetna Casualty vs. Pacific Star, 29 December 1977 __________________390 Bulakhidas vs. Navarro, 7 April 1986 21 | P a g e

Law 321_Corporation LAW_ Case Digest E. Corporation AM No. 11-3-6-SC New Rule on Service Summons on Foreign Juridical Entities Steelcase, Inc. vs. Desing International, 18 April 2012 _______________393 PDIC vs. Citibank, 11 April 2012 Cargill, Inc. vs. Intra Strata, 15 March 2010 Sehwani vs. In and Out Burger, 536 S 225 MR Holdings vs. Bajar, 380 S 617 Commissioner of Customs vs. KMK Gani, 182 S 591 Communications an Materials Designs vs. CA, 260 S 144 Columbia Pictures vs. Court of Appeals, 261 S 144 Eriks PTE Ltd. Vs. CA, 276 S 567 Far East International vs. Nnkai Kogyo, 6 S 725 Facilities Management vs. Dela Osa, 89 S 131 HB Zachray and Co. vs. Court of Appeals, 232 S 29 Hutchison Ports vs. SBMA, 31 August 2000 La Chemise Lacoste vs. Fernandez, 129 S 373 Marubeni Nederlands vs. Tensuan, 28 September 1990 Phil. Columbia vs. Lantin, 39 S 376 Philip Morris vs. Fortune Tobacco, 493 S 333 Puma vs. IAC, 158 S 233 SBMA vs. Universal International, 14 September 2000 Tibe vs. Reyes, 39 S 304 Universal Rubber vs. Court of Appeals, 130 S 104 Van Zuiden vs. GTVL Industries, 523 S 233 Shmid and Oberly vs RJL, 18 October 1988

Doing business with or without license: Suits By or Against Foreign

SECURITIES AND EXCHANGE COMMISSION LAW (P.D. No. 902-A, as Amended by R.A. No. 8799 or Securities Regulation Code)
I. II. SEC STRUCTURE OF THE SECURITIES AND EXCHANGE COMMISSION ENTITIES UNDER ABSOLUTE JURISDICTION, SUPERVISION AND CONTROL OF THE

A.
B. C.

Corporations, partnerships or associations which are grantees of primary franchises Investment Houses Financing Companies

III.

POWERS AND FUNCTIONS OF THE SEC SEC vs. PFEC, 495 S 579 _______________________________________________415 Arranza vs. B.F. Homes, Inc., 19 June 2000 22 | P a g e

Law 321_Corporation LAW_ Case Digest IV. Quasha vs. SEC, 83 S 557 Traders Royal Bank vs. Court of Appeals, 26 September 1989 VICMAR Development vs. Court of Appeals, 185 S 634

ORIGINAL AND EXCLUSIVE JURISDICTION OF THE REGIONAL TRIAL COURTS A. Orendain vs. BF Homes, 506 S 634 _____________________________________420 Pascual vs. Court of Appeals, 339 S 117 Devices of schemes amounting to fraud of misrepresentation B. Fabia vs. Court of Appeals, 388 S 574 ____________________________422 A & A continental vs. SEC, 225 S 314 Alleje vs. Court of Appeals, 240 S 495 Banez vs. Dimensional Construction , 140 S 249 Sesbreno vs. Court of Appeals, 240 S 606

Controversies arising out of intra-corporate of partnership relations Aguirre vs. FQB7, 9 January 2013 _______________________________427 Go, Lim, et al. vs. Distinction Properties, 25 April 2012 Strategic Alliance vs. Star Infrastructure, 17 November 2010 GD Express vs. Court of Appeals, 8 May 2009 Iglesia vs. Juane 18 September 2009 GD Express Worldwide N.V. vs. Court of Appeals, 8 May 2009 Intestate Estate of Ty vs. Court of Appeals, 356 S 661 Fabia vs. Court of Appeals, 363 S 427 Vesagas vs. Court of Appeals, 371 S 508 Abejo vs. Dela Cruz, 149 S 654 Aguinaldo vs. SEC, 163 S 262 Pereyra vs. IAC, 181 S 244 Mainland Construction vs. Molvilla, 250 S 290 SEC vs. Court of Appeals, 201 S 124 Sunsetview Condominum vs. Campos, 104 S 295 Western Institute of Technology vs. Salas, 21 August 1997

C.

Controversies in the Election or appointment of corporate officers Real v. Sangu Phil., 19 January 2011 _____________________________442 March II marketing v. Joson, 12 December 2011 Matling v. Coros, 13 October 2010 Garcia v. Eastern Telecom, 1 April 2009 De Rossi v. NLRC, 314 S 245 Espino v. NRC, 240 S 52 Estrada v. NLRC, 262 S 709 Islamic Directorate v. CA 272 S 454 Ongkiko v. NLRC, 270 S 613 23 | P a g e

Law 321_Corporation LAW_ Case Digest D. Paguio v. NLRC, 253 S 166 Pearson and George v. NLRC, 253 S 136 Apodaca v. NLRC, 172 S 442 PSBA v. Leano, 127 S 778 Tabang v. NLRC, 266 S 462 Union Motors v. NLRC, 314 S 531

Petitions for declaration in the state of suspension of payments R.A. 10142 The Financial Rehabilitation and Insolvency Act of 2010 A.M. No. 12-12-11-SC 2013 Financial Rehabilitation Rules of Procedure Express Investment v. Bayantel, 5 December 2012 _________________457 Advent Capital v. Alcantara, 25 January 2012 Siochi Fichery v. BPI, 19 October 2011 Panililio v. RTC, 2 February 2011 Castillo v. Uniwide Warehouse, 30 April 2010 Pacific Wide v. Puerto Asul, 25 November 2009 PNB and ECPIB v. CA, 20 January 2009 Pryce Corp. v. CA, 543 S 657 Uniwide v. Jandecs Corp. 541 S 158 BPI v. SEC, 541 S 294 Ching v. Land Bank of the Philippines, 201 S 191 PCIB v. CA, 18 April 1989 Radiola-Toshiba v. IAC, 18 July 1991 RCBC v. IAC, 213 S 223 Rubberworld v. NLRC, 305 S 722 Union Bank v. CA, 19 May 1998

24 | P a g e

Law 321_Corporation LAW_ Case Digest

SECURITIES REGULATIONS CODE (Republic Act No. 8799)


I. OVERVIEW OF THE FINANCIAL MARKETS A. Capital Markets 1. 2. B. Equities Capital (e.g. stock market) Debt Capital (e.g. money market or bond market)

Non-Capital Markets 1. 2. 3. Commodities Market Foreign Exchange Market Options Market

II.

REGISTRATION OF SECURITIES A. B. Securities Defined (Sec. 3.1) Elements of an Investment Contract C. Securities and Exchange Commission v. W.J. howey Co., 328 U.S. 293 (1946) Securities and Exchange Commission v. prosperity.Com, Inc., 25 January 2012 Power homes Unlimited v. SEC and Manero, 2 February 2008 SFC v. Performance, 495 S 579 Suzuki v. De Guzman, 496 S 651 Baviera v. Paglinawan, 515 S 170

What securities are required to be registered (Sec. 8) Timeshare Realty v. Lao, 544 S 254 Makati Stock Exchange v. SEC, 14 S 620 La Orden v. Stiver and Philtrust, 93 P 341 25 | P a g e

Law 321_Corporation LAW_ Case Digest D. E. Philippine Stock Exchenge v. SEC, 281 S 232

Exempt Securities (Sec. 9) Exempt Transactions 9Sec 10) Timeshare Realty Co. v. Lao, 522 S 254 Nestle Phils. V. CA, 203 S 504

F.

Public Companies Philippine Veterans Bank v. Callangan, 3 August 2011

G.

Registration Statement (Sec. 12) 1. 2. 3. Contents (Sec. 12.1-2.3) Attachments Signature (Sec. 12.4)

H. I. J.

Grounds for Rejection of Registration Statement (Sec. 13) False Registration (Sec. 56) Limitations on Actions for False Registration Statement (Sec. 62)

III.

TRADING IN SECURITIES A. Margin Requirements (Sec. 48) and Restrictions on Borrowings (Sec. 49) B. C. Carolina Industries v. CMS Stock Brokerage, 97 S 734

Brokers/Dealers: Chinese Wall; Self-Regulatory Organizations; Stock Exchange Regulation of Options Trading (Sec. 25) 1. 2. 3. 4. Option Put Call Straddle or Spread

D.

Manipulations of Security Prices; Devices and Practices (Sec. 24) 1. 2. 3. 4. 5. 6. 7. 8. 9. Boiler Room Operations Wash Sales Daisy Chain Painting the Tape Marketing the Close Hype and Dump Short Sale Matched Order Stop-Loss Order 26 | P a g e

Law 321_Corporation LAW_ Case Digest

E.

Fraudulent Transactions (Sec. 26) Phil. Asso. Of Stock Transfer and Agencies v. CA SEC v. CA, 246 S 738 Onapal v. CA, 218 S 281

F.

Insiders Duty to Disclose When Trading (Sec. 27) 1. 2. Insider Defined Material or Significant Facts

3.

Strong v. Repide, 41 P 947

Disclosure Regulations for Publicly-Listed Shares

IV.

Union Bank of the Phil. v. SEC, June 2001

PROTECTION OF SHAREHOLDERS INTEREST A. B. Tender Offers (Sec. 19) CEMCO v. National Life, 7 August 2007 Transactions of Directors, Officers and Principal Stockholders (Sec 23)

V.

LIABILITIES A. B. Administrative Sanctions (Sec. 54) Civil Liabilities (Secs. 58-61) 1. 2. 3. C. D. Amount and Kinds of Damages (Sec. 63.1) Solidary Liability (Secs. 63.2 and 63.3) Limitation of Actions (Sec. 62)

Criminal Liabilities (Sec. 73) Settlements/Nolo Contendere or Consent Decree (Sec. 55)

CORPORATION CODE (Batas Pambansa Blg. 68)

27 | P a g e

Law 321_Corporation LAW_ Case Digest

Formation and Organization of Corporations Attributes of Corporation


PETRON CORPORATION vs. NATIONAL COLLEGE OF BUSINESS AND ARTS G.R. No. 155683. February 16, 2007 FACTS: The V. Mapa properties owned by Felipe and Enrique Monserrat, Jr., were mortgaged to DBP as part of the security for the loan of P5.2 million by MYTC and Monserrat Co. MYTC mortgaged four parcels of land located in Manila. One-half of Felipes undivided interest in the V. Mapa properties was levied upon in execution of a money judgment rendered by the RTC in the Manila case. DBP challenged the levy through a third-party claim asserting that the V. Mapa properties were mortgaged to it and were, for that reason, exempt from levy or attachment. The RTC quashed it. MYTC and the Monserrats got DBP to accept a dacion en pago arrangement whereby MYTC conveyed to the bank the four mortgaged Quiapo properties as full settlement of their loan obligation. But despite this agreement, DBP did not release the V. Mapa properties from the mortgage. Felipe, acting for himself and as Enriques attorney -infact, sold the V. Mapa properties to respondent NCBA. The Monserrats failed to comply with this undertaking. This instigated the civil action filed by NCBA. During the pendency of the case, of Enriques undivided interest in the V. Mapa properties was levied on in execution of a judgment of the Makati case holding him liable to Petron on a 1972 promissory note. Petron, the highest bidder, acquired both Felipes and Enriques undivided interests in the property. Petron intervened in the NCBA case. ISSUE: Whether or not Petron should be held liable for exemplary damages and attorneys fees. RULING: NO. Article 2208(5) contemplates a situation where one refuses unjustifiably and in evident bad faith to satisfy anothers plainly valid, just and demandable claim, compelling the latter needlessly to seek redress from the courts. In such a case, the law allows recovery of money the plaintiff had to spend for a lawyers assistance in suing the defendant expenses the plaintiff would not have incurred if not for the defendants refusal to comply with the most basic rules of fair dealing. It does not mean, however, that the losing party should be made to pay attorneys fees merely because the court finds his legal position to be erroneous and upholds that of the other party, for that would be an intolerable transgression of the policy that no one should be penalized for exercising the right to have contending claims settled by a court of law. In fact, even a clearly untenable defense does not justify an award of attorneys fees unless it amounts to gross and evident bad faith. No gross and evident bad faith could be imputed to Petron merely for intervening in NCBAs suit against DBP and the Monserrats in order to assert what it believed and had good reason to believe. The rule in this jurisdiction is that the plaintiff must show that he is entitled to moral, temperate or compensatory damages before the court may even consider the question of whether exemplary damages should be awarded. No exemplary damages may be awarded without the plaintiffs right to moral, temperate, liquidated or compensatory damages having first been established. ASSET PRIVATIZATION TRUST vs.

28 | P a g e

Law 321_Corporation LAW_ Case Digest COURT OF APPEALS, JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T. CABARRUS, JOSE MIGUEL CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M. ANTONIO, as Minority Stock-Holders of Marinduque Mining and Industrial Corporation G.R. No. 121171. December 29, 1998 FACTS: MMIC, PNB and DBP executed a Mortgage Trust Agreement whereby MMIC, as mortgagor, agreed to constitute a mortgage in favor or PNB and DBP as mortgagees, over all MMIC's assets. Article IV of the Mortgage Trust Agreement provides for Events of Default, which expressly includes the event that the MORTGAGOR shall fail to pay any amount secured by this Mortgage Trust Agreement when due. In various requests for advances/remittances of loans if huge amounts, Deeds of Undertaking, Promissory Notes, Loan Documents, Deeds of Real Estate Mortgages, MMIC invariably committed to pay either on demand or under certain terms the loans and accommodations secured from or guaranteed by both DBP and PNB. Because of the tremendous loans obtained, a financial restructuring plan (FRP) designed to reduce MMIC's interest expense through debt conversion to equity was drafted SGV, however, it was never adopted. The various loans and advances made by DBP and PNB to MMIC had become overdue and since any restructuring program relative to the loans was no longer feasible, and in compliance with the directive of Presidential Decree No. 385, DBP and PNB as mortgagees of MMIC assets, decided to exercise their right to extrajudicially foreclose the mortgages in accordance with the Mortgage Trust Agreement. The assets were eventually transferred to APT. SHs of MMIC thereafter filed a derivative suit against DBP and PNB praying that the foreclosure be annulled, that the FRP be followed and damages. In arbitration proceedings, MMIC obtained a favorable decision. Court of Appeals denied due course and dismissed the petition for certiorari. ISSUE: Whether or not the MMIC is entitled to moral damages. RULING: NO. As a rule, a corporation exercises its powers, including the power to enter into contracts, through its board of directors. While a corporation may appoint agents to enter into a contract in its behalf, the agent should not exceed his authority. In the case at bar, there was no showing that the representatives of PNB and DBP in MMIC even had the requisite authority to enter into a debt-for-equity swap. And if they had such authority, there was no showing that the banks, through their board of directors, had ratified the FRP. Further, how the MMIC could be entitled to a big amount of moral damages when its credit reputation was not exactly something to be considered sound and wholesome. Under Article 2217 of the Civil Code, moral damages include besmirched reputation which a corporation may possibly suffer. A corporation whose overdue and unpaid debts to the Government alone reached a tremendous amount of P22 Billion Pesos cannot certainly have a solid business reputation to brag about.

MAMBULAO LUMBER COMPANY vs. 29 | P a g e

Law 321_Corporation LAW_ Case Digest PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines Norte G.R. No.L-22973.January 30, 1968 FACTS: Plaintiff applied for an industrial loan of P155, 000.00 with the PNB and the former offered real estate, machinery, logging and transportation equipment as collaterals. The application was approved for a loan of P100, 000.00 only. To secure the payment of the loan, the plaintiff mortgaged to defendant PNB a parcel of land, together with the buildings and improvements existing thereon, situated in the province of Camarines Norte, and covered by TCT No. 381 of the land records of said province, as well as various sawmill equipment, rolling unit and other fixed assets of the plaintiff, all situated in its compound in the aforementioned municipality. PNB released from the approved loan the sum of P27, 500.00, for which the plaintiff signed a promissory note wherein it promised to pay to the PNB. PNB made another release of P15, 500.00 as part of the approved loan granted to the plaintiff and so on the said date, the latter executed another promissory note. Plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated demands were made upon the plaintiff to pay its obligation but it failed or otherwise refused to do so. Upon inspection and verification made by employees of the PNB, it was found that the plaintiff had already stopped operation. PNB initiated steps to have the properties extrajudicially foreclosed. The Plaintiff opposed. The foreclosure sale of the parcel of land, together with the buildings and improvements thereon, was held and the said property was sold to the PNB for the sum of P56, 908.00, subject to the right of the plaintiff to redeem the same within a period of one year. PNB sold the properties to Mariano Bundok. The Security guard of the properties refused to let PNBs successor in interest to retrieve properties inside the premises of the property bought by them. RTC sentenced the Mambulao Lumber Company to pay to the defendant PNB. Mambulao therefore appealed. ISSUE: Whether or not a corporation can be awarded moral damages. RULING: NO. An artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis or moral damages. A Corporation may have a good reputation if besmirched, may also be a ground for the award of moral damages. The same cannot be considered under the facts of this case, however, not only because it is admitted that herein appellant had already ceased in its business operation at the time of the foreclosure sale of the chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels could have upon its reputation or business standing would undoubtedly be the same whether the sale was conducted at Camarines Norte, or in Manila which is the place agreed upon by the parties in the mortgage contract. But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in proceeding with the sale in utter disregard of the agreement to have the chattels sold in Manila as provided for in the mortgage contract, to which their attentions were timely called by herein appellant, and in disposing of the chattels in gross for the miserable amount of P4, 200.00, herein appellant should be awarded exemplary damages in the sum of P10, 000.00. The circumstances of the case also warrant the award of P3, 000.00 as attorney's fees for herein appellant. HANIL DEVELOPMENT CO., LTD. vs. 30 | P a g e

Law 321_Corporation LAW_ Case Digest COURT OF APPEALS AND M.R. ESCOBAR EXPLOSIVE ENGINEERS, INC. G.R. No. 113176.July 30, 2001 FACTS: MPWH awarded petitioner Hanil the contract to construct the 200-kilometer Iligan-Cagayan de Oro-Butuan Highway Project. Hanil sub-let the rock-blasting work portion of the contract to private respondent Escobar. For the duration of the contract, it worked on the segments of the construction undertaking designated in the agreement as A-2, B-2, B-3, B-4, and C-1. It was fully paid for the areas A-2 and B-4. It claimed, however, that Hanil still partially owes it one million three hundred forty one thousand seven hundred twenty-seven and 40/100 (P1, 341, 727.40) pesos for blastings done in the B-2, B-3 and C-1 areas. The claim was predicated on the theory that the rocks it caused to explode in the contested areas were solid in nature, and therefore the volume should be computed using the cross-section approach. Escobar filed an action for recovery of a sum of money with damages against Hanil in the CFI. CFI ordered Hanil to pay P1, 341, 727.40 for the value of rocks blasted by Escobar; 10% of the amount due for attorney's fees; and the costs of suit. CFI garnished the bank accounts of Hanil and levied its equipment. CFI also granted Escobar's Ex-parte Motion to Deposit Cash praying that the Finance Manager of the NAPOCOR be directed to withdraw Hanil's funds from the NAPOCOR and deposit the same with the Clerk of Court. Hanil challenged the Orders before the CA, who voided said orders. ISSUE: Whether or not Hanil should be awarded a much higher grant of nominal damages and attorneys fees and whether they are entitled to moral and exemplary damages. RULING: NO. As to the temperate damages in form of nominal damages, Hanil is not entitled for it failed to prove that it deserves a grant of a higher amount. Thus, P20, 000.00 is just. Hanil failed to prove the actual value of pecuniary injury which it sustained as a consequence of Escobar's institution of an unfounded civil suit. The testimony of one of its witnesses presented in the CFI, to the effect that "the filing of the complaint affected Hanil's reputation and that it affected the management and engineers working in the site," is not enough proof. The institution of the suit, unfounded though it may be, does not always lead to pecuniary loss as to warrant an award of actual or temperate damages. The link between the cause (the suit) and the effect (the loss) must be established by the required proof. Its demand for payment of moral damages must also fail. The rule is that moral damages cannot be granted in favor of a corporation. Being an artificial person and having existence only in legal contemplation, a corporation has no feelings, no emotions, and no senses. It cannot, therefore, experience physical suffering, mental anguish, fright, serious anxiety, wounded feelings or moral shock or social humiliation, which can be suffered only by one having a nervous system. Hanil's prayer for exemplary damages must likewise be denied. It must be remembered that this kind of damages cannot be recovered as a matter of right. Its allowance rests in the sound discretion of the court, and only upon a showing of its legal foundation. Under the Civil Code, the claimant must first establish that he is entitled to moral, temperate, compensatory or liquidated damages before it may be imposed in his favor. Hanil failed to do so, hence, it cannot claim exemplary damages.

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN vs. 31 | P a g e

Law 321_Corporation LAW_ Case Digest HON. JUDGE VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, et al. G.R. No.L-32409. February 27, 1971 FACTS: Misael P. Vera, CIR wrote a letter to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant against petitioners for violation of Section 46(a) of the National Internal Revenue Code, in relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents, to make and file the application for search warrant which was attached to the letter. De Leon and his witness, respondent Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them the following papers: respondent Veras aforesaid letter-request; an application for search warrant already filled up but still unsigned by respondent De Leon; an affidavit of respondent Logronio subscribed before respondent De Leon; a deposition in printed form of respondent Logronio already accomplished and signed by him but not yet subscribed; and a search warrant already accomplished but still unsigned by respondent Judge. Judge was hearing a certain case so he instructed his Deputy Clerk of Court to take the depositions of respondents De Leon and Logronio. After the session had adjourned, respondent Judge was informed that the depositions had already been taken. Respondent Judge signed respondent de Leons application for search warrant and respondent Logronios deposition, Search Warrant No. 2 -M-70 was then sign by respondent Judge and accordingly issued. BIR agents served the search warrant petitioners at the offices of petitioner corporation. Petitioners lawyers protested the search on the ground that no formal complaint or transcript of testimony was attached to the warrant. The agents nevertheless proceeded with their search which yielded six boxes of documents. ISSUES: Whether or not a corporation is entitled to protection against unreasonable search and seizures. RULING: YES. Although, for the reasons above stated, the Supreme Court is of the opinion that an officer of a corporation which is charged with a violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its constitutional powers, cannot refuse to produce the books and papers of such corporation, the Court does not wish to be understood as holding that a corporation is not entitled to immunity against unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected against unlawful discrimination.

SULO NG BAYAN INC. vs. 32 | P a g e

Law 321_Corporation LAW_ Case Digest GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS & SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF BULACAN G.R. No.L-31061. August 17, 1976 FACTS: Sulo ng Bayan, Inc. filed an accion de revindicacion with the CFI against defendants-appellees to recover the ownership and possession of a large tract of land. The complaint specifically alleged that plaintiff is a corporation organized and existing under the laws of the Philippines, with its principal office and place of business at San Jose del Monte, Bulacan; that its membership is composed of natural persons residing at San Jose del Monte, Bulacan; that the members of the plaintiff corporation, through themselves and their predecessors-in-interest, had pioneered in the clearing of the fore-mentioned tract of land, cultivated the same since the Spanish regime and continuously possessed the said property openly and public under concept of ownership adverse against the whole world. ISSUE: Whether or not plaintiff corporation may institute an action in behalf of its individual members for the recovery of certain parcels of land allegedly owned by said members; for the nullification of the transfer certificates of title issued in favor of defendants appellees covering the aforesaid parcels of land; for a declaration of "plaintiff's members as absolute owners of the property" and the issuance of the corresponding certificate of title; and for damages. RULING: NO. It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members. The property of the corporation is its property and not that of the stockholders, as owners, although they have equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless transferred to the corporation, "even in the case of a one-man corporation. The mere fact that one is president of a corporation does not render the property which he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate similarities. Similarly, stockholders in a corporation engaged in buying and dealing in real estate whose certificates of stock entitled the holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their stock certificates were considered not to have such legal or equitable title or interest in the land, as would support a suit for title, especially against parties other than the corporation. It must be noted, however, that the juridical personality of the corporation, as separate and distinct from the persons composing it, is but a legal fiction introduced for the purpose of convenience and to subserve the ends of justice. This separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary to achieve equity. Clearly, no right of action exists in favor of plaintiff corporation, for as shown heretofore it does not have any interest in the subject matter of the case which is material and, direct so as to entitle it to file the suit as a real party in interest.

Private v. Public Corporation


33 | P a g e

Law 321_Corporation LAW_ Case Digest

BOY SCOUTS OF THE PHILIPPINES vs. COMMISSION ON AUDIT G.R. No. 177131.June 7, 2011 FACTS: The COA maintains that the functions of the BSP that include, among others, the teaching to the youth of patriotism, courage, self-reliance, and kindred virtues, are undeniably sovereign functions enshrined under the Constitution and discussed by the Court in Boy Scouts of the Philippines v. National Labor Relations Commission. The COA contends that any attempt to classify the BSP as a private corporation would be incomprehensible since no less than the law which created it had designated it as a public corporation and its statutory mandate embraces performance of sovereign functions. The COA claims that the only reason why the BSP employees fell within the scope of the Civil Service Commission even before the 1987 Constitution was the fact that it was a government-owned or controlled corporation; that as an attached agency of the Department of Education, Culture and Sports (DECS), the BSP is an agency of the government; and that the BSP is a chartered institution under Section 1(12) of the Revised Administrative Code of 1987, embraced under the term government instrumentality. The COA concludes that being a government agency, the funds and property owned or held by the BSP are subject to the audit authority of the COA pursuant to Section 2(1), Article IX (D) of the 1987 Constitution. BSP claims that it has a unique characteristic which "neither classifies it as a purely public nor a purely private corporation"; that it is not a quasi-public corporation; and that it may belong to a different class altogether. ISSUE: Whether or not the BSP is public corporation. RULING: YES. BSP is a public corporation and its funds are subject to the COAs audit jurisdiction. It is a public corporation or a government agency or instrumentality with juridical personality, which does not fall within the constitutional prohibition in Article XII, Section 16, notwithstanding the amendments to its charter. Not all corporations, which are not government owned or controlled, are ipso facto to be considered private corporations as there exist another distinct class of corporations or chartered institutions which are otherwise known as "public corporations." These corporations are treated by law as agencies or instrumentalities of the government which are not subject to the tests of ownership or control and economic viability but to different criteria relating to their public purposes/interests or constitutional policies and objectives and their administrative relationship to the government or any of its Departments or Offices. Note that the Administrative Code of 1987 designates the BSP as one of the attached agencies of the Department of Education, Culture and Sports ("DECS"). An "agency of the Government" is defined as referring to any of the various units of the Government including a department, bureau, office, and instrumentality, governmentowned or -controlled corporation, or local government or distinct unit therein. BSP still remains an instrumentality of the national government. It is a public corporation created by law for a public purpose, attached to the DECS pursuant to its Charter and the Administrative Code of 1987. It is not a private corporation which is required to be owned or controlled by the government and be economically viable to justify its existence under a special law.

34 | P a g e

Law 321_Corporation LAW_ Case Digest DANTE V. LIBAN, REYNALDO M. BERNARDO, and SALVADOR M. VIARI vs. RICHARD J. GORDON G.R. No. 175352.July 15, 2009 FACTS: Petitioners filed with this Court a Petition to Declare Richard J. Gordon as Having Forfeited His Seat in the Senate. Petitioners are officers of the Board of Directors of the Quezon City Red Cross Chapter while respondent is Chairman of the Philippine National Red Cross (PNRC) Board of Governors. During respondents incumbency as a member of the Senate of the Philippines, he was elected Chairman of the PNRC during the February 23, 2006 meeting of the PNRC Board of Governors. Petitioners allege that by accepting the chairmanship of the PNRC Board of Governors, respondent has ceased to be a member of the Senate as provided in Section 13, Article VI of the Constitution, which reads: No Senator or Member of the House of Representatives may hold any other office or employment in the Government, or any subdivision, agency, or instrumentality thereof, including government-owned or controlled corporations or their subsidiaries, during his term without forfeiting his seat. Neither shall he be appointed to any office which may have been created or the emoluments thereof increased during the term for which he was elected. ISSUE: Whether or not the office of the PNRC Chairman is a government office or an office in a government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the Constitution. RULING: NO. PNRC is a Private Organization Performing Public Functions. The Republic of the Philippines, adhering to the Geneva Conventions, established the PNRC as a voluntary organization for the purpose contemplated in the Geneva Convention of 27 July 1929. The PNRC must not appear to be an instrument or agency that implements government policy; otherwise, it cannot merit the trust of all and cannot effectively carry out its mission as a National Red Cross Society. It is imperative that the PNRC must be autonomous, neutral, and independent in relation to the State. To ensure and maintain its autonomy, neutrality, and independence, the PNRC cannot be owned or controlled by the government. Indeed, the Philippine government does not own the PNRC. The PNRC does not have government assets and does not receive any appropriation from the Philippine Congress. The PNRC is financed primarily by contributions from private individuals and private entities obtained through solicitation campaigns organized by its Board of Governors. The government does not control the PNRC. Under the PNRC Charter, as amended, only six of the thirty members of the PNRC Board of Governors are appointed by the President of the Philippines. The PNRC is not government-owned but privately owned. The vast majority of the thousands of PNRC members are private individuals, including students. Under the PNRC Charter, those who contribute to the annual fund campaign of the PNRC are entitled to membership in the PNRC for one year. Thus, the PNRC is a privately owned, privately funded, and privately run charitable organization. Hence, the office of the PNRC Chairman is not a government office or an office in a government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the 1987 Constitution. However, since the PNRC Charter is void insofar as it creates the PNRC as a private corporation, the PNRC should incorporate under the Corporation Code and register with the Securities and Exchange Commission if it wants to be a private corporation.

35 | P a g e

Law 321_Corporation LAW_ Case Digest DANTE V. LIBAN, REYNALDO M. BERNARDO and SALVADOR M. VIARI vs. RICHARD J. GORDON G. R. No. 175352.January 18, 2011 ISSUE: Whether or not considering the PNRCs structure is sui generis; it is a class of its own, while it is performing humanitarian functions as an auxiliary to government, it is a neutral entity separate and independent of government control, yet it does not qualify as strictly private in character. RULING: YES. A National Society partakes of a sui generis character. It is a protected component of the Red Cross movement under Articles 24 and 26 of the First Geneva Convention, especially in times of armed conflict. These provisions require that the staff of a National Society shall be respected and protected in all circumstances. Such protection is not ordinarily afforded by an international treaty to ordinary private entities or even non-governmental organizations (NGOs). This sui generis character is also emphasized by the Fourth Geneva Convention which holds that an Occupying Power cannot require any change in the personnel or structure of a National Society. National societies are therefore organizations that are directly regulated by international humanitarian law, in contrast to other ordinary private entities, including NGOs. The PNRC, as a National Society of the International Red Cross and Red Crescent Movement, can neither "be classified as an instrumentality of the State, so as not to lose its character of neutrality" as well as its independence, nor strictly as a private corporation since it is regulated by international humanitarian law and is treated as an auxiliary of the State. The PNRC is one of the National Red Cross and Red Crescent Societies, which, together with the International Committee of the Red Cross (ICRC) and the IFRC and RCS, make up the International Red Cross and Red Crescent Movement (the Movement). They constitute a worldwide humanitarian movement. Based on the above, the sui generis status of the PNRC is now sufficiently established. Although it is neither a subdivision, agency, or instrumentality of the government, nor a government-owned or -controlled corporation or a subsidiary thereof, as succinctly explained in the Decision of July 15, 2009, so much so that respondent, under the Decision, was correctly allowed to hold his position as Chairman thereof concurrently while he served as a Senator, such a conclusion does not ipso facto imply that the PNRC is a "private corporation" within the contemplation of the provision of the Constitution, that must be organized under the Corporation Code. As correctly mentioned by Justice Roberto A. Abad, the sui generis character of PNRC requires us to approach controversies involving the PNRC on a case-to-case basis. In sum, the PNRC enjoys a special status as an important ally and auxiliary of the government in the humanitarian field in accordance with its commitments under international law. This Court cannot all of a sudden refuse to recognize its existence, especially since the issue of the constitutionality of the PNRC Charter was never raised by the parties. Thus, Respondent Richard J. Gordons Motion for Clarification and/or for Reconsideration and movant-intervenor PNRCs Motion for Partial Reconsideration of the Decision in G.R. No. 175352 dated July 15, 2009 are GRANTED. The constitutionality of R.A. No. 95, as amended, the charter of the Philippine National Red Cross, was not raised by the parties as an issue and should not have been passed upon by this Court. The structure of the PNRC is sui generis being neither strictly private nor public in nature. R.A. No. 95 remains valid and constitutional in its entirety.

36 | P a g e

Law 321_Corporation LAW_ Case Digest FRANCISCA S. BALUYOT vs. PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN (VISAYAS) represented by its Deputy Ombudsman for the Visayas ARTURO C. MOJICA, Director VIRGINIA PALANCA-SANTIAGO, and Graft Investigation Officer I ANNA MARIE P. MILITANTE G.R. No. 136374.February 9, 2000 FACTS: During a spot audit in 1977, the auditors from the Philippine National Red Cross (PNRC) headquarters discovered a case shortage in the funds of its Bohol chapter. The chapter administrator, petitioner Baluyot, was held accountable and thereafter, respondent Holganza as member of the board Bohol chapter, filed a complaint with the Ofc. of the Ombudsman for malversation. Upon recommendation of respondent Militante, an administratiave docket of dishonesty was also opened against Baluyot. Baluyot raised the defense that the Ombudsman had no jurisdiction as he had authority only over government owned or controlled corporations which the PNRC was not. She gives as evidence of its private character 1) it does not receive budgetary support from the government and all money given to it by the latter and its instrumentalities become private funds of the organization. 2) funds for the payment of personnels salaries and other emoluments come from yearly fund campaigns, private contributions and rentals from its properties. 3) it is not audited by COA. PNRC, petitioner claims falls under the International Federation of Red Cross, Swissbased organization. ISSUE: Whether or not PNRC is a government owned or controlled corporation. RULING: YES. PNRC is a government owned and controlled corporation, with an original charter under RA No. 95, as amended. The test to determine whether a corporation is government owned or controlled or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the GSIS. The PNRC was not impliedly converted to a private corporation simply because its charter was amended to vest in it the authority to secure loans, be exempted from payment of all duties, taxes, fees and other charges of all kinds on all importations and purchases for its exclusive use, on donations for its disaster relief work and other services and in its benefits and fund raising drives. Clearly then, public respondent has jurisdiction over the matter.

37 | P a g e

Law 321_Corporation LAW_ Case Digest THE VETERANS FEDERATION OF THE PHILIPPINES represented by Esmeraldo R. Acorda vs. Hon. ANGELO T. REYES in his capacity as Secretary of National Defense; and Hon. EDGARDO E. BATENGA in his capacity as Undersecretary for Civil Relations and Administration of the Department of National Defense G. R. No. 155027.February 28, 2006 FACTS: Petitioner claims that it is not a public nor a governmental entity but a private organization, and advances this claim to prove that the issuance of DND Department Circular No. 04 is an invalid exercise of respondent Secretarys control and supervision. Petitioner claims that its funds are not public funds because no budgetary appropriations or government funds have been released to the VFP directly or indirectly from the DBM, and because VFP funds come from membership dues and lease rentals earned from administering government lands reserved for the VFP. ISSUE: Whether or not the VFPA is a private corporation. RULING: NO. The functions of petitioner corporation enshrined in Section 4 of Rep. Act No. 2640 should most certainly fall within the category of sovereign functions. The protection of the interests of war veterans is not only meant to promote social justice, but is also intended to reward patriotism. All of the functions in Section 4 concern the well-being of war veterans, our countrymen who risked their lives and lost their limbs in fighting for and defending our nation. It would be injustice of catastrophic proportions to say that it is beyond sovereigntys power to reward the people who defended her. Like the holding of the National Centennial Celebrations, the functions of the VFP are executive functions, designed to implement not just the provisions of Rep. Act No. 2640, but also, and more importantly, the Constitutional mandate for the State to provide immediate and adequate care, benefits and other forms of assistance to war veterans and veterans of military campaigns, their surviving spouses and orphans. The fact that no budgetary appropriations have been released to the VFP does not prove that it is a private corporation. The DBM indeed did not see it fit to propose budgetary appropriations to the VFP, having itself believed that the VFP is a private corporation. If the DBM, however, is mistaken as to its conclusion regarding the nature of VFPs incorporation, its previous assertions will not prevent future budgetary appropriations to the VFP. The erroneous application of the law by public officers does not bar a subsequent correct application of the law. Since petitioner VFP is a public corporation. As such, it can be placed under the control and supervision of the Secretary of National Defense, who consequently has the power to conduct an extensive management audit of Petitioner Corporation.

38 | P a g e

Law 321_Corporation LAW_ Case Digest MANILA INTERNATIONAL AIRPORT AUTHORITY vs. COURT OF APPEALS, CITY OF PARAAQUE, CITY MAYOR OF PARAAQUE, SANGGUNIANG PANGLUNGSOD NG PARAAQUE, CITY ASSESSOR OF PARAAQUE, and CITY TREASURER OF PARAAQUE G.R. No. 155650. July 20, 2006 FACTS: MIAA operates the Ninoy Aquino International Airport (NAIA) Complex in Paraaque City under E.O. No. 903, otherwise known as the Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently, E.O. Nos. 909 and 298 amended the MIAA Charter. As operator of the international airport, MIAA administers the land, improvements and equipment within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of land, including the runways and buildings and provided that no portion of the land transferred to MIAA shall be disposed of through sale or any other mode unless specifically approved by the President of the Philippines. In 2001, the Paraaque city government issued notices of levy and warrants of levy on MIAAs Airport Lands and Buildings for its failure to pay real estate taxes plus penalties amounting to Php624.5 million for the taxable years 1992 to 2001. The city government then put the subject properties up for sale at a public auction. Thus, MIAA brought a case for prohibition to the Court of Appeals against the City of Paraaque. ISSUES: Whether or not MIAA is a public corporation owned by the State. RULING: YES. MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. MIAA is like any other government instrumentality; the only difference is that MIAA is vested with corporate powers. When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police authority and the levying of fees and charges. At the same time, MIAA exercises "all the powers of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the provisions of this Executive Order." Many government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed a government-owned or controlled corporation. Examples are the Mactan International Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not organized as stock or non-stock corporations as required by Section 2(13) of the Introductory Provisions of the Administrative Code. These government instrumentalities are sometimes loosely called government corporate entities. However, they are not government-owned or controlled corporations in the strict sense as understood under the Administrative Code, which is the law defining the legal relationship and status of government entities.

39 | P a g e

Law 321_Corporation LAW_ Case Digest

Promotion
MARC II MARKETING, INC. and LUCILA V. JOSON vs. ALFREDO M. JOSON G.R. No. 171993.December 12, 2011 FACTS: Marc II Marketing, Inc. and Lucila Joson is assailing the decision of the CA for reversing and settling aside the Resolution of the National Labor Relations Commission. Marc II Marketing, Inc. is a corporation duly organized and existing under and by virtue of the laws of the Philippines. It is primarily engaged in buying, marketing, selling and distributing in retail or wholesale for export or import household appliances and products and other items. Petitioner Lucila is the President and majority stockholder of the corporation. Before Marc II Marketing, Inc. was officially incorporated, Alfredo has already been engaged by Lucila, in her capacity as President, to work as General Manager of the corporation and it was formalized through the execution of a Management Contract dated in 1994 under Marc Marketing, Inc., as Marc II Marketing, Inc. was yet to be incorporated. For occupying the said position, respondent was among the corporations corporate officers by the express provision of Section 1, Article IV of its by-laws. Alfredo was appointed as one of its officers with the designation or title of General Manager to function as a managing director with other duties and responsibilities that the Board may provide and authorized. However, in 1997, Marc II Marketing Inc. decided to stop and cease its operation as evidenced by an Affidavit of Non-Operation due to poor sales collection aggravated by the inefficient management of its affairs. Alfredo was informed of the cessation of its business operations and the termination of his services as General Manager. He filed action for reinstatement and money claim against petitioners. ISSUE: Whether or not Marc II Marketing Inc.s Board of Directors could create a position for corporate officers through an enabling clause found in its corporate bylaws. RULING: YES. The Court held that in the context of PD 902-A, corporate officers are those officers of a corporation who are given that character either by the Corporation Code or by the corporations by-laws. Section 25 of the Corporation Code specifically enumerated who are these corporate officers, namely: president, secretary, treasurer and such other officers as may be provided for in the by-laws. A careful examination of Marc II Marketing Inc.s by-laws, particularly paragraph 1, Section 1of Article IV explicitly revealed that its corporate officers are composed only of chairman, president, one/more vice president, treasurer and secretary. The position of general manager was not among those enumerated. Meanwhile, paragraph 2, Section 1 of Article IV of the corporations by-laws empowered its Board of Directors to appoint such officers as it may determine necessary or proper, making this an enabling provision for approving a resolution to make the position of general manager a corporate officer. All of these acts were done without first amending its by-laws so as to include the General Manager in its roster of corporate officers. Though the Board of Directors may create appointive positions other than the positions of corporate officers, the persons occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation Code. The said provision of the Corporation Code safeguards the constitutionally enshrined right of every employee to security of tenure and prevents the creation of a corporate officer position by a simple inclusion in the corporate by-laws of an enabling clause empowering the Board of Directors. 40 | P a g e

Law 321_Corporation LAW_ Case Digest CAGAYAN FISHING DEVELOPMENT CO., INC. vs. TEODORO SANDIKO G.R. No. L-43350. December 23, 1937 FACTS: Manuel Tabora is the registered owner of four parcels of land. To guarantee the payment of a loan in the sum of P8,000, Manuel Tabora executed in favor of the Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same bank was executed by Tabora over the same lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the same lands was executed in favor of Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These mortgages were registered and annotations thereof appear at the back of transfer certificate of title No. 217. The board of directors of plaintiff adopted a resolution authorizing its president, Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. The defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this action in the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum of P25,300, with interest at legal rate from the date of the filing of the complaint, and the costs of the suits. ISSUE: Whether or not the transfers were valid. RULING: NO. The contract here was entered into not between Manuel Tabora and a nonexistent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized. There are, of course, but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary. If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko. Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a condition precedent ( condicion suspensiva), namely, the payment of the mortgage debt of said Tabora to the Philippine National Bank, and that this condition not having been complied with by the Cagayan Fishing Development Company, Inc., the transfer was ineffective. However, having arrived at the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the time it was affected the corporation was non-existent, we deem it unnecessary to discuss this point.

41 | P a g e

Law 321_Corporation LAW_ Case Digest FERMIN Z. CARAM, JR. and ROSA O. DE CARAM vs. THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO G.R. No. L-48627. June 30, 1987 FACTS: The petitioners claim that this order has no support in fact and law because they had no contract whatsoever with the private respondent regarding the abovementioned services. Their position is that as mere subsequent investors in the corporation that was later created, they should not be held solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and Garcia, their co-defendants in the lower court, ** who were the ones who requested the said services from the private respondent. ISSUE: Whether or not the petitioners should be held liable. RULING: NO. The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corporation and did not have a separate juridical personality to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corporation, the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioner for the claims of the private respondent. Petitioners cannot be held personally liable for the compensation claimed by the private respondent for the services performed by him in the organization of the corporation. To repeat, the petitioners did not contract such services. It was only the results of such services that Barretto and Garcia presented to them and which persuaded them to invest in the proposed airline. The most that can be said is that they benefited from such services, but that surely is no justification to hold them personally liable therefor. A promoter could not have acted as agent for a corporation that had no legal existence. A corporation, until organized, has no life therefore no faculties. The corporation had no juridical personality to enter into a contract.

42 | P a g e

Law 321_Corporation LAW_ Case Digest PIONEER INSURANCE & SURETY CORPORATION vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM G.R. No. 84197. July 28, 1989 FACTS: In 1965, Jacob S. Lim, owner-operator of Southern Airlines (SAL), a single proprietorship entered into a sales contract with regarding Japan Domestic Airlines (JDA) regarding 2 DC-#A type aircrafts, 1 set of necessary spare parts where a Total of $ 190,000 in instalments are to be paid. Pioneer Insurance and Surety Corp. as surety executed its surety bond in favor of JDA on behalf of its principal Lim. Border Machinery and Heavy Equipment Co, Inc. of Francisco and Modesto Cervantes and Constancio Maglana contributed funds for the transaction based on the misrepresentation of Lim that they will form a new corporation to expand his business. Lim as owner operator for SAL executed in favor of Pioneer a deed of chattel mortgage as security. A restructuring of obligation to change the maturity was done twice without the knowledge of other defendants made the surety of JDA prescribed so not entitled to reimbursement. Upon default on the 2/8 payments, Pioneer paid for him and filed a petition for the foreclosure of chattel mortgage as security. CA affirmed Trial of Merits: Only Lim is liable to pay ISSUE: Whether or not there is failure of respondents to incorporate leading to a de facto partnership. RULING: NO. Partnership inter se does not necessarily exist, for ordinarily CANNOT be made to assume the relation of partners as between themselves, when their purpose is that no partnership shall exists. It should be implied only when necessary to do justice between the parties (i.e. only pretend to make others liable). Lim never intended to form a corporation.

43 | P a g e

Law 321_Corporation LAW_ Case Digest RIZAL LIGHT & ICE CO., INC. vs. THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE COMMISSION G.R. No. L-20993.September 28, 1968 FACTS: The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the proposition that since a franchise is a contract, 23 at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. Hence, it is contended that until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission. ISSUE: Whether the lack or corporate existence on the part of Morong rendered the franchise valid. RULING: YES. The incorporation of (Morong) and its acceptance of the franchise as shown by this action in prosecuting the application filed with the Commission for approval of said franchise, not only perfected a contract between the municipality and Morong but also cured the deficiency pointed out by the petition. The fact that Morong did not have a corporate existence on the day the franchise was granted does not render the franchise invalid, as Morong later obtained its certificate of incorporation and accepted the franchise. The two decisions of the Public Service Commission, appealed from, should be, as they are hereby affirmed, with costs in the two cases against petitioner Rizal Light & Ice Co., Inc.

44 | P a g e

Law 321_Corporation LAW_ Case Digest

Articles of Incorporation
JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL, INC. G.R. No. 131394.March 28, 2005 FACTS: Philippine Merchant Marine School, Inc. (PMMSI) had seven hundred founders shares and seventy-six common shares as its initial capital stock subscription reflected in the articles of incorporation. However, private respondents and their predecessors who were in control of PMMSI registered the companys stock and transfer book for the first time in 1978, recording thirty-three (33) common shares as the only issued and outstanding shares of PMMSI. Sometime in 1979, a special stockholders meeting was called and held on the basis of what was considered as a quorum of twenty-seven common shares, representing more than two-thirds of the common shares issued and outstanding. In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the SEC for the registration of their property rights over one hundred (120) founders shares and twelve (12) common shares owned by their father. The SEC held that the heirs were entitled to the claimed shares and called for a special stockhol ders meeting to elect a new set of officers. As a result, the shares of Acayan were recorded in the stock and transfer book. A special stockholders meeting was held to elect a new set of directors. Private respondents thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders meeting, alleging that the quorum for the said meeting should not be based on the 165 issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation. ISSUE: Whether or not the basis of quorum for a stockholders meeting is the outstanding capital stock as indicated in the articles of incorporation. RULING: YES. The stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book. A stock and transfer book is one which records the names and addresses of all stockholders arranged alphabetically, the instalments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof; a statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom made; and such other entries as may be prescribed by law. To base the computation of quorum solely on the deficient stock and transfer book, and completely disregarding the issued and outstanding shares as indicated in the articles of incorporation would work injustice to the owners and/or successors in interest of the said shares. It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the Stock and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the company of its own shares, in which it becomes treasury shares, would not affect the total number of shares in the Stock and Transfer Book. All that will change are the entries as to the owners of the shares but not as to the amount of shares already subscribed. 45 | P a g e

Law 321_Corporation LAW_ Case Digest

Corporate Name
FRANCISCO M. ALONSO, substituted by his heirs vs. CEBU COUNTRY CLUB, INC. G.R. No. 130876.January 31, 2002 FACTS: Petitioner died pendente lite and substituted by his legal heirs, a lawyer by profession, the only son and sole heir of the late Tomas N. Alonso and Asuncion Medalle, who died on June 16, 1962 and August 18, 1963, respectively. Cebu Country Club, Inc. is a non-stock, non-profit corporation duly organized and existing under Philippine Laws the purpose of which is to cater to the recreation and leisure of its members. Sometime in 1992, petitioner discovered documents and records of Friar Lands Sale Certificate Register/Instalment Record Certificate No. 734, Sales Certificate No. 734 and Assignment of Sales Certificate showing that his father acquired Lot No. 727 of the Banilad Friar Lands Estate from the Government of the Philippine Islands in or about the year 1911 in accordance with the Friar Lands Act (Act No. 1120). The documents show that one Leoncio Alburo, the original vendee of Lot No. 727, assigned his sales certificate to petitioners father on December 18, 1911, who completed the required instalment payments thereon under Act No. 1120 and was consequently issued Patent No. 14353 on March 24, 1926. On March 27, 1926, the Director of Lands, acting for and in behalf of the government, executed a final deed of sale in favor of petitioners father Tomas N. Alonso. It appears, however, that the deed was not registered with the Register of Deeds because of lack of technical requirements, among them the approval of the deed of sale by the Secretary of Agriculture and Natural Resources, as required by law. ISSUE: Whether or not the Court of Appeals erred in sustaining respondents claim of ownership over Lot No. 727. RULING: YES. Under Act No. 1120, which governs the administration and disposition of friar lands, the purchase by an actual and bona fide settler or occupant of any portion of friar land shall be "agreed upon between the purchaser and the Director of Lands, subject to the approval of the Secretary of Agriculture and Natural Resources (mutatis mutandis)." The instruments do not bear the signature of the Director of Lands and the Secretary of the Interior. They also do not bear the approval of the Secretary of Agriculture and Natural Resources. The approval by the Secretary of Agriculture and Commerce of the sale of friar lands is indispensable for its validity, hence, the absence of such approval made the sale null and void ab initio. Necessarily, there can be no valid titles issued on the basis of such sale or assignment. Consequently, petitioner Franciscos father did not have any registered title to the land in question. Having none, he could not transmit anything to his sole heir, petitioner Francisco Alonso or the latters heirs. Hence, the Court ruled that neither Tomas N. Alonso nor his son Francisco M. Alonso or the latters heirs are the lawful owners of Lot No. 727 in dispute. Neither has the respondent Cebu Country Club, Inc. been able to establish a clear title over the contested estate. The reconstitution of a title is simply the re-issuance of a lost duplicate certificate of title in its original form and condition. It does not determine or resolve the ownership of the land covered by the lost or destroyed title. A reconstituted title, like the original certificate of title, by itself does not vest ownership of the land or estate covered thereby. 46 | P a g e

Law 321_Corporation LAW_ Case Digest INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and REFRACTORIES CORPORATION OF THE PHILIPPINES G.R. No. 122174.October 3, 2002 FACTS: Refractories Corporation of the Philippines (RCP) is a corporation duly organized for the purpose of engaging in the business of manufacturing, producing, selling, exporting and otherwise dealing in any and all refractory bricks, its by-products and derivatives. On June 22, 1977, it registered its corporate and business name with the Bureau of Domestic Trade. IRCP was originally under the name "Synclaire Manufacturing Corporation". It amended its Articles of Incorporation on August 23, 1985 to change its corporate name to "Industrial Refractories Corp. of the Philippines". It is engaged in the business of manufacturing all kinds of ceramics and other products, except paints and zincs. Both companies are the only local suppliers of monolithic gunning mix. Discovering that petitioner was using such corporate name, respondent RCP filed on April 14, 1988 with the Securities and Exchange Commission (SEC) a petition to compel petitioner to change its corporate name on the ground that its corporate name is confusingly similar with that of petitioners such that the public may be confused or deceived into believing that they are one and the same corporation. ISSUE: Whether or not the corporate names are confusingly similar. RULING: YES. "Refractories are structural materials used at high temperatures to industrial furnaces. They are supplied mainly in the form of brick of standard sizes and of special shapes. Refractories also include refractory cements, bonding mortars, plastic firebrick, castables, ramming mixtures, and other bulk materials such as dead-burned grain magneside, chrome or ground ganister and special clay." As regards the first requisite, it has been held that the right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption. In this case, respondent RCP was incorporated on October 13, 1976 and since then has been using the corporate name "Refractories Corp. of the Philippines". Meanwhile, petitioner was incorporated on August 23, 1979 originally under the name "Synclaire Manufacturing Corporation". It only started using the name "Industrial Refractories Corp. of the Philippines" when it amended its Articles of Incorporation on August 23, 1985, or nine (9) years after respondent RCP started using its name. Thus, being the prior registrant, respondent RCP has acquired the right to use the word "Refractories" as part of its corporate name. Anent the second requisite, in determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination and the Court must look to the record as well as the names themselves. Petitioners corporate name is "Industrial Refractories Corp. of the Phils.", while respondents is "Refractories Corp. of the Phils." Obviously, both names contain the identical words "Refractories", "Corporation" and "Philippines". The only word that distinguishes petitioner from respondent RCP is the word "Industrial" which merely identifies a corporations general field of activities or operations. We need not linger on these two corporate names to conclude that they are patently similar that even with reasonable care and observation, confusion might arise. It must be noted that both cater to the same clientele, i.e. the steel industry. In fact, the SEC found that there were instances when different steel companies were actually confused between the two, especially since they also have similar product packaging.

47 | P a g e

Law 321_Corporation LAW_ Case Digest ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, HSK SA BANSANG PILIPINAS INC. vs. IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG KATOTOHANAN GR 137592, 12 DECEMBER 2001 FACTS: The Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (IDCJHSK; Church of God in Christ Jesus, the Pillar and Ground of Truth), is a non-stock religious society or corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members of said corporation disassociated themselves from the latter and succeeded in registering on 30 March 1977 a new non-stock religious society or corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan (IDKJ-HSK). On 16 July 1979, IDCJ-HSK filed with the SEC a petition to compel IDKJ-HSK to change its corporate name. The SEC rendered judgment in favor of IDCJ-HSK, ordering IDKJ-HSK to change its corporate name to another name that is not similar or identical to any name already used by a corporation, partnership or association registered with the Commission. ISSUE: Whether the corporate names of AK[IDKH-HSK]BP and IDCH-HSK are confusingly similar. RULING: YES. The additional words "Ang Mga Kaanib " and "Sa Bansang Pilipinas, Inc." in AK[IDKH-HSK]BP's name are merely descriptive of and also referring to the members, or kaanib, of IDCH-HSK who are likewise residing in the Philippines. These words can hardly serve as an effective differentiating medium necessary to avoid confusion or difficulty in distinguishing AK[IDKH-HSK]BP from IDCH-HSK. This is especially so, since both AK[IDKH-HSK]BP and IDCH-HSK are using the same acronym H.S.K.; not to mention the fact that both are espousing religious beliefs and operating in the same place. Parenthetically, it is well to mention that the acronym H.S.K. used by AK[IDKH-HSK]BP stands for "Haligi at Saligan ng Katotohanan." Then, too, the records reveal that in holding out their corporate name to the public, AK[IDKH-HSK]BP highlights the dominant words "IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN NG KATOTOHANAN," which is strikingly similar to IDCH-HSK's corporate name, thus making it even more evident that the additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are merely descriptive of and pertaining to the members of IDCH-HSK. Significantly, the only difference between the corporate names of AK[IDKH-HSK]BP and IDCH-HSK are the words SALIGAN and SUHAY. These words are synonymous both mean ground, foundation or support. Hence, the Court ruled that the corporate names Universal are indisputably so similar that even under the test of "reasonable care and observation" confusion may arise. The wholesale appropriation by AK[IDKH-HSK]BP of IDCH-HSK's corporate name cannot find justification under the generic word rule. A contrary ruling would encourage other corporations to adopt verbatim and register an existing and protected corporate name, to the detriment of the public. The fact that there are other non-stock religious societies or corporations using the names Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not authorize the use by AK[IDKH-HSK]BP of the essential and distinguishing feature of IDCH-HSK's registered and protected corporate name.

48 | P a g e

Law 321_Corporation LAW_ Case Digest UNIVERSAL MILLS CORPORATION vs. UNIVERSAL TEXTILE MILLS, INC. G.R. No. L-28351, July 28, 1977 FACTS: Universal Textile Mills, Inc. was organized on December 29, 1953, as a textile manufacturing firm for which it was issued a certificate of registration on January 8, 1954. The Universal Mills Corporation, on the other hand, was registered with the Commission on October 27, 1954, under its original name, Universal Hosiery Mills Corporation, having as its primary purposes the "manufacture and production of hosieries and wearing apparel of all kinds." On May 24, 1963, it filed an amendment to its articles of incorporation changing its name to Universal Mills Corporation, its present name, for which it was issued the certificate of approval on June 10, 1963. The immediate cause of this complaint was the occurrence of a fire which gutted petitioners spinning mills in Pasig, Rizal. Universal Textile Mills, Inc. alleged that as a result of this fire and because of the similarity of petitioner's name to that of the former, the news items appearing in the various metropolitan newspapers carrying reports on the fire created uncertainty and confusion among its bankers, friends, stockholders and customers prompting respondent to make announcements, clarifying the real Identity of the corporation whose property was burned. The Commission then issued an order enjoining Universal Mills Corporation from using its present corporate name because it is confusingly and deceptively similar with Universal Textile Mills, Inc. ISSUE: Whether or not the order of the SEC is proper. RULING: YES. The corporate names in question are not Identical, but they are indisputably so similar that even under the test of "reasonable care and observation as the public generally are capable of using and may be expected to exercise" invoked by appellant. The Supreme Court ruled that confusion will usually arise, considering that under the second amendment of its articles of incorporation on August 14, 1964, appellant included among its primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of all kinds" in which respondent had been engaged for more than a decade ahead of petitioner. And since respondent is not claiming damages in this proceeding, it is, of course, immaterial whether or not appellant has acted in good faith, but the SC cannot perceive why of all names, petitioner had to choose a name already being used by another firm engaged in practically the same business for more than a decade enjoying well-earned patronage and goodwill, when there are so many other appropriate names it could possibly adopt without arousing any suspicion as to its motive and, more importantly, any degree of confusion in the mind of the public which could mislead even its own customers, existing or prospective.

49 | P a g e

Law 321_Corporation LAW_ Case Digest LYCEUM OF THE PHILIPPINES, INC. vs. COURT OF APPEALS, ET AL. G.R. No. 101897 March 5, 1993 FACTS: Lyceum of the Philippines is an educational institution duly registered with the Securities and Exchange Commission. Petitioner instituted proceedings before the SEC to compel the private respondents, which are also educational institutions, to delete the word "Lyceum" from their corporate names and permanently to enjoin them from using "Lyceum" as part of their respective names. The SEC hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case and held that the word "Lyceum" was capable of appropriation and that petitioner had acquired an enforceable exclusive right to the use of that word. On appeal, however, by private respondents the SEC En Banc did not consider the word "Lyceum" to have become so identified with petitioner as to render use thereof by other institutions as productive of confusion about the identity of the schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently to distinguish the schools from one another, especially in view of the fact that the campuses of petitioner and those of the private respondents were physically quite remote from each other. ISSUE: Whether or not the word Lyceum has not acquired a secondary meaning. RULING: NO. The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. "Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce. The appellant failed to satisfy the requisites. No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant.

50 | P a g e

Law 321_Corporation LAW_ Case Digest INDIANA AEROSPACE UNIVERSITY vs. COMMISSION ON HIGHER EDUCATION G.R. NO. 139371, 04 APRIL 2001 FACTS: In 1996, Dr. Reynaldo B. Vera, Chairman, Technical Panel for Engineering, Architecture, and Maritime Education (TPRAM) of [CHED], received a letter dated October 18, 1998 (Annex 'C') from Douglas R. Macias, Chairman, Board of Aeronautical Engineering, Professional Regulatory Commission (PRC) and Chairman, Technical Committee for Aeronautical Engineering (TPRAME) inquiring whether petitioner had already acquired University status in view of the latter's advertisement in the Manila Bulletin. In a letter dated October 24, 1996, Dr. Vera formally referred the aforesaid letter to Chairman Alcala with a request that the concerned Regional Office of [CHED] be directed to conduct appropriate investigation on the alleged misrepresentation by petitioner. Thereafter, CHED referred the matter to its Regional Director in Cebu City, requesting said office to conduct an investigation and submit its report. The Report stated that there was a violation [committed by] his institution when it used the term university unless the school had complied [with] the basic requirement of being a university as prescribed in CHED Memorandum Order No. 48, s. 1996.' ISSUE: Whether or not the Petitioner can use the word University. RULING: YES. The Court found that there was no grave abuse of discretion in the RTC's denial of the Motion to Dismiss, as contained in the August 14, 1998 Order. The CA erred in ruling otherwise. The trial court stated in its Decision that petitioner was an educational institution, originally registered with the Securities and Exchange Commission as the "Indiana School of Aeronautics, Inc." That name was subsequently changed to "Indiana Aerospace University" after the Department of Education, Culture and Sports had interposed no objection to such change. Respondent issued a formal Cease and Desist Order directing petitioner to stop using the word "university" in its corporate name. The former also published an announcement in the March 21, 1998 issue of Freeman, a local newspaper in Cebu City, that there was no institution of learning by that name. The counsel of respondent was quoted as saying in the March 28, 1998 issue of the newspaper Today that petitioner had been ordered closed by the respondent for illegal advertisement, fraud and misrepresentation of itself as a university. Such acts, according to the RTC undermined the public's confidence in petitioner as an educational institution. This was a clear statement of a sufficient cause of action. When a motion to dismiss is grounded on the failure to state a cause of action, a ruling thereon should be based only on the facts alleged in the complaint. The court must pass upon this issue based solely on such allegations, assuming them to be true. For it to do otherwise would be a procedural error and a denial of plaintiff's right to due process.

51 | P a g e

Law 321_Corporation LAW_ Case Digest PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS,INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. vs. COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS CORPORATION G.R. No. 96161. February 21, 1992 FACTS: Petitioner is a foreign corporation organized under the laws of Netherlands although not engaged in any business here in the Philippines, is the registered owner of the trademarks Philips and Philips Shield Emblem. Petitioners Philips Electrical Lamps, Inc, and Philips Industrial Development Inc are the authorized users of the trademark of petitioner Philips BV. All petitioner corporations belong to the Philips Group of Companies. Private respondent Standard Philips Corporation was issued a certificate of registration by the respondent Securities and Exchange Commission. Petitioner filed a letter complaint with the SEC asking for the cancellation of the word Philips from private respondents corporate name in view of its prior registration with the Bureau of Patent alleging that private respondents use of the word Philips amounts to an infringement and clear violation of petitioners exclusive right to use the same considering that both parties are engaged in the same business. ISSUE: Whether or not Standard Philips use of the word PHILIPS amounts to an infringement and clear violation of Petitioner's exclusive right to use the same considering that both parties engage in the same business. RULING: YES. The requisite no less exists in this case. In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination. In so doing, the Court must look to the record as well as the names themselves. While the corporate names of Petitioners and Private Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of Companies. It is settled that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. Under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the proposed name "should not be similar to one already used by another corporation or partnership. If the proposed name contains a word already used as part of the firm name or style of a registered company, the proposed name must contain two other words different from the company already registered". Private Respondents' name, however, contains only a single word, that is, "STANDARD", different from that of Petitioners inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the purpose of distinguishing the corporation from partnerships and other business organizations. It is obvious that private respondents choice of Philips as part of its corporate name tends to show said respondents intention to ride on the popularity and established goodwill of the said petitioners business throughout the world. The subsequent appropriator of the name or one-confusingly similar thereto usually seeks an unfair advantage, a free ride on anothers goodwill. Besides, there is showing that private respondent not only manufactured and sold ballasts for fluorescent lamps with their corporate name printed thereon but also advertised the same as Standard Philips. 52 | P a g e

Law 321_Corporation LAW_ Case Digest

Primary Purpose
ALICIA E. GALA, GUIA G. DOMINGO and RITA G. BENSON vs. ELLICE AGRO-INDUSTRIAL CORPORATION, MARGO MANAGEMENT AND DEVELOPMENT CORPORATION, RAUL E. GALA, VITALIANO N. AGUIRRE II, ADNAN V. ALONTO, ELIAS N. CRESENCIO, MOISES S. MANIEGO, RODOLFO B. REYNO, RENATO S. GONZALES, VICENTE C. NOLAN, NESTOR N. BATICULON G.R. No. 156819. December 11, 2003 FACTS: On March 28, 1979, the Ellice Agro-Industrial Corporation was formed and organized. The total subscribed capital stock of the corporation was P3.5 Million with 35,000 shares. Additional shares were acquired and subscribed from said corporation. Subsequently, on September 16, 1982, the Margo Management and Development Corporation (Margo) was incorporated. The total subscribed capital stock of Margo was 20,000 shares at P200, 000.00. Several transfers of shares of Ellice to Margo were made by the stockholders and some payments of subscription were made by transferring parcels of land by the Gala Spouses. In essence, petitioners want this Court to disregard the separate juridical personalities of Ellice and Margo for the purpose of treating all property purportedly owned by said corporations as property solely owned by the Gala spouses. The petitioners contention in support of this theory is that the purposes for which Ellice and Margo were organized should be declared as illegal and contrary to public policy. They claim that the respondents never pursued exemption from land reform coverage in good faith and instead merely used the corporations as tools to circumvent land reform laws and to avoid estate taxes. Specifically, they point out that respondents have not shown that the transfers of the land in favor of Ellice were executed in compliance with the requirements of Section 13 of R.A. 3844. Furthermore, they alleged that respondent corporations were run without any of the conventional corporate formalities. ISSUE: Whether or not the purpose of the creation of the two corporations is illegal and against public policy. RULING: NO. Impugning the legality of the purposes for which Ellice and Margo were organized, amount to collateral attacks which are prohibited in this jurisdiction. The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. A perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the allegedly illegal purposes that petitioners are complaining of. If a corporations purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation. With regard to their claim that Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. Thus, even if Ellice and Margo were organized for the purpose of exempting the properties of the Gala spouses from the coverage of land reform legislation and avoiding estate taxes, the court cannot disregard their separate juridical personalities. 53 | P a g e

Law 321_Corporation LAW_ Case Digest HEIRS OF ANTONIO PAEL and ANDREA ALCANTARA and CRISANTO PAEL vs. COURT OF APPEALS, JORGE H. CHIN and RENATO B. MALLARI G.R. No. 133547.December 7, 2001 FACTS: PFINA acquired the properties from the Heirs of Pael by virtue of a deed of assignment dated January 25, 1983. It filed a motion to intervene before the Court of Appeals; however, before it filed its motion for intervention, or for a long period of fifteen (15) years, PFINA and the Heirs of Pael were totally silent about the alleged deed of assignment. No steps were taken by either of them to register the deed or secure transfer certificate of title evidencing the change of ownership during this long period of time. At the time PFINA acquired the disputed properties in 1983, its corporate name was PFINA Mining and Exploration, Inc., a mining company which had no valid grounds to engage in the highly speculative business of urban real estate development. ISSUE: Whether or not the 1983 transfer produces legal effect. RULING: NO. As correctly ruled by the courts, the alleged transfer in 1983 was not only dubious and fabricated; it could produce no legal effect as the Paels were no longer owners of the land they allegedly assigned. The Court highlighted the citation in the comment of Intervenor U.P., specifically citing the decision in Roberto A. Pael et al. v. Court of Appeals, et al., supra, wherein the title of the Paels was declared to be of dubious origin and a fabrication. Hence, since respondents derive their titles from a defective title, their titles should also be null and void. The motion for intervention of the University of the Philippines is GRANTED. The case is REMANDED to the Court of Appeals for reception of evidence on the conflicting claims over the property covered by TCT Nos. 52928 and 52929 between the intervernor University of the Philippines, on the one hand, and respondents Jorge H. Chin and Renato B. Mallari, on the other hand. The motions for reconsideration filed by petitioners are DENIED for lack of merit. This denial is FINAL and no further pleadings from petitioners will be entertained.

54 | P a g e

Law 321_Corporation LAW_ Case Digest UY SIULIONG, MARIANO LIMJAP, GACU UNG JIENG, EDILBERTO CALIXTO and UY CHO YEE vs. THE DIRECTOR OF COMMERCE AND INDUSTRY G.R. No.L-15429. December 1, 1919 FACTS: Prior to the presentation of the petition the petitioners had been associated together as partners, which partnership was known as "mercantil regular colectiva, under the style and firm name of "Siuliong y Cia. That the petitioners herein, who had theretofore been members of said partnership of "Siuliong y Cia.," desired to dissolve said partnership and to form a corporation composed of the same persons as incorporators, to be known as "Siulong y Compaia, Incorporada. While the articles of incorporation of "Siuliong y Cia., Inc." states that its purpose is to acquire and continue the business, with some of its objects or purposes, of Siuliong & Co., it will be found upon an examination of the purposes enumerated in the proposed articles of incorporation of "Siuliong y Cia., Inc.," that some of the purposes of the original partnership of "Siuliong y Cia." have been omitted. ISSUE: Whether or not a corporation can engage in other purposes other than that stated in the purpose clause of its articles of incorporation. RULING: YES. A corporation may be organized under the laws of the Philippine Islands for mercantile purposes, and to engage in such incidental business as may be necessary and advisable to give effect to, and aid in, the successful operation and conduct of the principal business. All of the power and authority included in the articles of incorporation of "Siuliong y Cia., Inc.," enumerated above in paragraph 4 of the Articles of Incorporation are only incidental to the principal purpose of said proposed incorporation, to wit: "mercantile business." The purchase and sale, importation and exportation of the products of the country, as well as of foreign countries, might make it necessary to purchase and discount promissory notes, bills of exchange, bonds, negotiable instruments, stock, and interest in other mercantile and industrial associations. It might also become important and advisable for the successful operation of the corporation to act as agent for insurance companies as well as to buy, sell and equip boats and to buy and sell other establishments, and industrial and mercantile businesses. The proposed articles of incorporation do not authorize the petitioners to engage in a business with more than one purpose, the Court do not mean to be understood as having decided that corporations under the laws of the Philippine Islands may not engage in a business with more than one purpose. Such an interpretation might work a great injustice to corporations organized under the Philippine laws. Such an interpretation would give foreign corporations, which are permitted to be registered under the laws here and which may be organized for more than one purpose, a great advantage over domestic corporations. It was not the intention of the legislature to give foreign corporations such an advantage over domestic corporations.

55 | P a g e

Law 321_Corporation LAW_ Case Digest NORBERTO ASUNCION, ET AL. vs. MANUEL DE YRIARTE G.R. No. 9321.September 24, 1914 FACTS: This is an action to obtain a writ of mandamus to compel the Chief of the Division of Achieves of the Executive Bureau to file a certain articles of incorporation. The Chief of the Division of Archives refused to file the articles of incorporation upon the ground that the object of the corporation, as stated in the articles, was not lawful and that, in pursuance of section 6 of Act No. 1459, they were not registerable. The proposed incorporators began an action in the CFI of Manila to compel the Chief of the Division of Archives to receive and register said articles of incorporation and to do any and all acts necessary for the complete incorporation of the persons named in the articles. ISSUE: Whether or not the purposes of the corporation as stated in the articles of incorporation are lawful within the meaning of the Corporation Law. RULING: YES. When on the face of the articles of incorporation presented for registration it is shown that it is organized for a purpose contrary to law or public policy, the same may be denied outright registration. The object of the proposed corporation, as appears from the articles offered for registration, is to make of the barrio of Pulo or San Miguel a corporation which will become the owner of and have the right to control and administer any property belonging to the municipality of Pasig found within the limits of that barrio. This clearly cannot be permitted. Otherwise municipalities as now established by law could be deprived of the property which they now own and administer. Each barrio of the municipality would become under the scheme proposed, a separate corporation, would take over the ownership, administration, and control of that portion of the municipal territory within its limits. This would disrupt, in a sense, the municipalities of the Islands by dividing them into a series of smaller municipalities entirely independent of the original municipality. The object of the proposed corporation is clearly repugnant to the provisions of the Municipal Code and the governments of municipalities as they have been organized thereunder.

56 | P a g e

Law 321_Corporation LAW_ Case Digest

Principal Office/Domicile
DAVAO LIGHT & POWER CO., INC. vs. THE HON. COURT OF APPEALS, HON. RODOLFO M. BELLAFLOR, Presiding Judge of Branch 11, RTC-Cebu and FRANCISCO TESORERO G.R. No. 111685.August 20, 2001 FACTS: In 1992 Davao Light & Power Co., Inc. filed a complaint for damages against private respondent Francisco Tesorero before the Regional Trial Court of Cebu for damages in the amount of P11, 000,000.00. In turn, the latter filed a motion to dismiss claiming among others that the venue was improperly laid since the principal place of business of the plaintiff is Davao City as indicated in the lease executed by petitioner, and the same determines the venue of the action, instead of Banilad City which the company indicated in its complaint. The trial court granted the said motion. Petitioners motion for reconsideration was denied, as well as its appeal to the Court of Appeals. Hence, this petition. ISSUE: Whether or not the companys principal place is in Davao City. RULING: YES. Davao City is the Principal place of business which determines venue. A corporation has no residence in the same sense in which this term is applied to a natural person. But for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation. The Corporation Code precisely requires each corporation to specify in its articles of incorporation the "place where the principal office of the corporation is to be located which must be within the Philippines". The purpose of this requirement is to fix the residence of a corporation in a definite place, instead of allowing it to be ambulatory. The same considerations apply to the instant case. It cannot be disputed that petitioner's principal office is in Cebu City, per its amended articles of incorporation and by-laws. However, Tesorero is not a party to any of the contracts presented before the court. Those documents were between the petitioner and NAPOCOR and therefore estoppel may not lie against the private respondent. He is a stranger to those documents even if he says that by being a member of the public for whose benefit the electric generating contracts were entered into. There is no estoppel because there is no showing that he relied on the representations made by the petitioner.

57 | P a g e

Law 321_Corporation LAW_ Case Digest CLAVECILLIA RADIO SYSTEM vs. HON. AGUSTIN ANTILLON, as City Judge of the Municipal Court of Cagayan de Oro Cityand NEW CAGAYAN GROCERY G.R. No.L-22238.February 18, 1967 FACTS: On June 22, 1963, the New Cagayan Grocery filed a complaint against the Clavecilla Radio System alleging, in effect, that on March 12, 1963, the following message, addressed to the former, was filed at the latter's Bacolod Branch Office for transmittal thru its branch office at Cagayan de Oro: NECAGRO CAGAYAN DE ORO (CLAVECILLA): REURTEL WASHED NOT AVAILABLE REFINED TWENTY FIFTY IF AGREEABLE SHALL SHIP LATER REPLY POHANG. The Cagayan de Oro branch office having received the said message omitted, in delivering the same to the New Cagayan Grocery, the word "NOT" between the words "WASHED" and "AVAILABLE," thus changing entirely the contents and purport of the same and causing the said addressee to suffer damages. After service of summons, the Clavecilla Radio System filed a motion to dismiss the complaint on the grounds that it states no cause of action and that the venue is improperly laid. The New Cagayan Grocery interposed an opposition to which the Clavecilla Radio System filed its rejoinder. Thereafter, the City Judge, on September 18, 1963, denied the motion to dismiss for lack of merit and set the case for hearing. Hence, the Clavecilla Radio System filed a petition for prohibition with preliminary injunction with the Court of First Instance praying that the City Judge, Honorable Agustin Antillon, be enjoined from further proceeding with the case on the ground of improper venue. The respondents filed a motion to dismiss the petition but this was opposed by the petitioner. Later, the motion was submitted for resolution on the pleadings. ISSUE: Whether or not the place is the proper venue to sue Clavecilla Radio System? RULING: NO. In this case, the suit for damages filed with the city court is based upon tort and not upon a written contract. Section 1 of Rule 4 of the New Rules of Court, governing venue of actions in inferior courts, provides in its paragraph (b)(3) that when "the action is not upon a written contract, then in the municipality where the defendant or any of the defendants resides or may be served with summons." Settled is the principle in corporation law that the residence of a corporation is the place where its principal office is established. Since it is not disputed that the Clavecilla Radio System has its principal office in Manila, it follows that the suit against it may properly be filed in the City of Manila. The appellee maintain, however, that with the filing of the action in Cagayan de Oro City, venue was properly laid on the principle that the appellant may also be served with summons in that city where it maintains a branch office. The term "may be served with summons" does not apply when the defendant resides in the Philippines for, in such case, he may be sued only in the municipality of his residence, regardless of the place where he may be found and served with summons. As any other corporation, the Clavecilla Radio System maintains a residence which is Manila in this case, and a person can have only one residence at a time (See Alcantara vs. Secretary of the Interior, 61 Phil. 459; Evangelists vs. Santos, 86 Phil. 387). The fact that it maintains branch offices in some parts of the country does not mean that it can be sued in any of these places. To allow an action to be instituted in any place where a corporate entity has its branch offices would create confusion and work untold inconvenience to the corporation.

58 | P a g e

Law 321_Corporation LAW_ Case Digest JOHN SY and UNIVERSAL PARTS SUPPLY CORPORATION vs. TYSON ENTERPRISES, INC., JUDGE GREGORIO G. PINEDA of the Court of First Instance of Rizal, Pasig Branch XXI and COURT OF APPEALS G.R. No.L-56763. December 15, 1982 FACTS: On August 29, 1979, Tyson Enterprises, Inc. filed against John Sy and Universal Parts Supply Corporation, residents of Bacolod, a complaint for the collection of money in Pasig, Rizal. However, there is no allegation in the complaint as to the office or place of business of plaintiff Tyson Enterprises, Inc., which is located in Manila. What is alleged is the postal address or residence of Dominador Ti, the president and general manager of plaintiff firm, which is in San Juan, Rizal. Defendant Sy and Universal Parts Supply Corporation filed a motion to dismiss on the ground of improper venue. The plaintiff opposed the motion to dismiss which the trial court denied. On appeal, the Appellate Court dismissed the petition. It ruled that the parties did not intend Manila as the exclusive venue of the actions arising under their transactions and that since the action was filed in Pasig, which is near Manila, no useful purpose would be served by dismissing the same and ordering that it be filed in Manila. ISSUE: Whether or not venue was improperly laid in this case. RULING: YES. The place of business of plaintiff Tyson Enterprises, Inc., which for purposes of venue is considered as its residence is in Manila and not in Rizal. The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders. Consequently, the collection suit should have been filed in Manila, the residence of plaintiff corporation and the place designated in its sales invoice, or it could have been filed also in Bacolod City, the residence of defendant Sy. The decision of the Court of Appeals and the order of respondent judge denying the motion to dismiss are reversed and set aside. The writ of prohibition is granted. Civil Case No. 34302 should be considered dismissed without prejudice to refiling it in the Court of First Instance of Manila or Bacolod City at the election of plaintiff which should be allowed to withdraw the documentary evidence submitted in that case. All the proceedings in said case, including the decision, were also set aside. The decision of the Court of Appeals and the order of respondent judge denying the motion to dismiss are reversed and set aside.

59 | P a g e

Law 321_Corporation LAW_ Case Digest YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA vs. THE HONORABLE COURT OF APPEALS (THIRTEENTH DIVISION) AND GEORGE CHIONG ROXAS G.R. No. 104175. June 25, 1993 FACTS: On October 28, 1987, Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its president, Nelson Garcia and Vicente Sy, sold all of their shares of stock in Consolidated Marketing & Development Corporation (CMDC) to Roxas. The purchase price was P8,000,000.00 payable as follows: a down payment of P4,000,000.00 and the balance of P4,000,000.00 in four postdated checks of P1,000,000.00 each. The first check of P4, 000,000.00, representing the down payment, was honored by the drawee bank but the four other checks representing the balance of P4, 000,000.00 were dishonored. On June 10, 1988, petitioners filed a complaint against Roxas in the Regional Trial Court, Branch 11, Cebu City, praying that Roxas be ordered to pay petitioners the sum of P3, 400,000.00 or that full control of the three markets be turned over to YASCO and Garcia. The complaint also prayed for the forfeiture of the partial payment of P4, 600,000.00 and the payment of attorney's fees and costs. ISSUE: Whether the proper venue is in Pasay City. RULING: NO. The Court of Appeals erred in holding that the venue was improperly laid in Cebu City. Young Auto Supply Co., Inc. ("YASCO") is a domestic corporation duly organized and existing under Philippine laws with principal place of business at M.J. Cuenco Avenue, Cebu City. It also has a branch office at 1708 Dominga Street, Pasay City, Metro Manila. The Article of Incorporation of YASCO states that the place where the principal office of the corporation is to be established or located is at Cebu City, Philippines. A corporation has no residence in the same sense in which this term is applied to a natural person. But for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation. The Corporation Code precisely requires each corporation to specify in its articles of incorporation the "place where the principal office of the corporation is to be located which must be within the Philippines" The purpose of this requirement is to fix the residence of a corporation in a definite place, instead of allowing it to be ambulatory. With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its principal place of business is located, it becomes unnecessary to decide whether Garcia is also a resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu City as the venue. Hence, it should be in Cebu City.

60 | P a g e

Law 321_Corporation LAW_ Case Digest

Term
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC. vs. SECURITIES & EXCHANGE COMMISSION G.R. No. L-23606.July 29, 1968 FACTS: Incorporated under Philippine laws on January 15, 1912, petitioner Alhambra Cigars Mfg. Co (ACCMI) was to exist for fifty (50) years from incorporation. Its term of existence expired on January 15, 1962. On that date, it ceased transacting business and entered into a state of liquidation. Thereafter, a new corporation Alhambra Industries, Inc. was formed to carry on the business of Alhambra. On May 1, 1962, Alhambra's stockholders, by resolution, named Angel S. Gamboa trustee to take charge of its liquidation. On June 20, 1963,within Alhambra's three-year statutory period for liquidation Republic Act 3531 was enacted into law amending Section 18 of the Corporation Law and enabling domestic private corporations to extend their corporate life beyond the period fixed by the articles of incorporation for a term not to exceed fifty years in any one instance. On July 15, 1963 Alhambra's board of directors resolved to amend paragraph "Fourth" of its articles of incorporation to extend its corporate life for an additional fifty years, or a total of 100 years from its incorporation. Its stockholders, representing more than two-thirds of its subscribed capital stock, voted to approve the foregoing resolution. SEC, however, returned said amended articles of incorporation with the ruling that RA 3531 which took effect only on June 20, 1963, cannot be availed of by the said corporation, for the reason that its term of existence had already expired when the said law took effect; in short, said law has no retroactive effect." ISSUE: Whether or not a corporation may extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired. RULING: NO. Provided by Section 77 of the Corporation Law, the continuance of a "dissolved" corporation as a body corporate for three years has for its purpose the final closure of its affairs, and no other; the corporation is specifically enjoined from continuing the business for which it was established. The liquidation of the corporation's affairs set forth in Section 77 became necessary precisely because its life had ended. For this reason alone, the corporate existence and juridical personality of that corporation to do business may no longer be extended. The provisions of RA 3531 merely empower a corporation to act in liquidation, and not to extend its corporate existence.

61 | P a g e

Law 321_Corporation LAW_ Case Digest

Paid-up Capital Stock


MSCI-NACUSIP Local Chapter vs. NATIONAL WAGES AND PRODUCTIVITY COMMISSION and MONOMER SUGAR CENTRAL, INC. G.R. No. 125198. March 3, 1997 FACTS: On January 11, 1990, Asturias Sugar Central, Inc. (ASCI), executed a Memorandum of Agreement with Monomer Trading Industries, Inc. (MTII), whereby MTII shall acquire the assets of ASCI by way of a Deed of Assignment provided that an entirely new organization in place of MTII shall be organized, which new corporation shall be the assignee of the assets of ASCI. By virtue of this Agreement, a new corporation was organized and incorporated on February 15, 1990 under the corporate name Monomer Sugar Central, Inc. or MSCI, the private respondent herein. On January 16, 1991, MSCI applied for exemption from the coverage of Wage Order No. RO VI-01 issued by the Board on the ground that it is a distressed employer. On January 16, 1991, MSCI applied for exemption from the coverage of Wage Order No. RO VI-01 issued by the Board on the ground that it is a distressed employer. In support thereto, MSCI submitted its audited financial statements and income tax returns duly stamped "received" by the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC) for the period beginning February 15, 1990 and ending August 31, 1990, including the quarterly financial statements and income tax returns for the two quarters ending November 30, 1990 and February 28, 1991. ISSUE: Whether or not the correct paid-up capital of MSCI for the pertinent period covered by the application for exemption is P5 million, not P64,688,528.00. RULING: YES. It is P5 million. The Supreme Court held that in the case under consideration, there is no dispute, and the Board even mentioned in its August 17, 1993 Decision, that MSCI was organized and incorporated on February 15, 1990 with an authorized capital stock of P60 million, P20 million of which was subscribed. Of the P20 million subscribed capital stock, P5 million was paid-up. This fact is only too glaring for the Board to have been misled into believing that MSCI'S paid-up capital stock was P64 million plus and not P5 million. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders' meeting duly called for the purpose, twothirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. The above requirements, which are condition precedents before the capital stock of a corporation may be increased, were unquestionably not observed in this case. Henceforth, the paid-up capital stock of MSCI for the period covered by the application for exemption still stood at P5 million. The losses, therefore, amounting to P3,400,738.00 for the period February 15, 1990 to August 31, 1990 impaired MSCI's paid-up capital of P5 million by as much as 68%. Likewise, the losses incurred by MSCI for the interim period from September 1, 1990 to November 30, 1990, as found by the Commission, per MSCI's quarterly income statements, amounting to P13,554,337.33 impaired the company's paid-up capital of P5 million by a whopping 271.08%, more than enough to qualify MSCI as a distressed employer. 62 | P a g e

Law 321_Corporation LAW_ Case Digest

Amendment and/or Rejection of Articles of Incorporation


REPUBLIC PLANTERS BANK vs. COURT OF APPEALS and FERMIN CANLAS G.R. No. 93073. December 21, 1992 FACTS: On September 18, 1961, private respondent Corporation secured a loan from petitioner in the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to private respondent Corporation, through its officers then, private respondent Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in the form of money and partially in the form of stock certificates. Said stock certificates were in the name of private respondent Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes. Said certificates of stock bear the following terms and conditions: The Preferred Stock shall have the following rights, preferences, qualifications and limitations, to wit: Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating. That such preferred shares may be redeemed, by the system of drawing lots, at any time after two (2) years from the date of issue at the option of the Corporation On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint anchored on private respondents' alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates. ISSUES: Whether or not there is a difference between a preferred share from a redeemable share. Whether or not petitioner can be compelled by defendant to redeem the preferred shares issued to the private respondent. RULING: YES. A preferred share of stock is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends. Under the old Corporation Law in force at the time the contract between the petitioner and the private respondents was entered into, it was provided that "no corporation shall make or declare any dividend except from the surplus profits arising from its business, or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution." Similarly, the present Corporation Code provides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase "unrestricted retained earnings," which may be a more precise term, in place of "surplus profits arising from its business" in the former law. 63 | P a g e

Law 321_Corporation LAW_ Case Digest Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. Redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. YES. While it is true that the very wordings of the terms and conditions in said stock certificates clearly allows redemption, the option to do was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as having a mandatory effect. CA decision is reversed and set aside. Judgement is hereby rendered declaring private respondent Fermin Canlas jointly and severally liable on all the nine promissory notes with the following sums and at 16% interest per annum from the dates indicated.

64 | P a g e

Law 321_Corporation LAW_ Case Digest

Alter Ego/Instrumentality Cases


PHILIPPINE NATIONAL BANK vs. HYDRO RESOURCES CONTRACTORS CORPORATION G.R. No. 167561 ASSET PRIVATIZATION TRUST vs. HYDRO RESOURCES CONTRACTORS CORPORATION G.R. No. 167603 DEVELOPMENT BANK OF THE PHILIPPINES vs. HYDRO RESOURCES CONTRACTORS CORPORATION G.R. No. 167530. March 13, 2013 FACTS: A contract was entered into between Hydro and NIA for the project of the latter. The contract price is to be payable partly in Philippine peso and US dollars. Once the project was being executed, there was depreciation in value of Peso resulting to price differential. In order to resolve the issue, the administrator of NIA, Mr Tek, and Hydro made a joint computation of the amount corresponding to the foreign currency differential. The computation showed that NIA owed Hydro for the differential. When a demand was made by Hydro against NIA, NIA refused to pay contending that Mr Tek has no authority to participate into a joint computation of the foreign currency differential and that Mr Tek has no authority to bind NIA. ISSUE: Whether or not the corporate entity of PNB and DBP must be pierced. RULING: NO. A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations.40 In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the principle of limited liability. Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons. However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous application. Thus, cutting through the corporate cover requires an approach characterized by due care and caution. Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed.

65 | P a g e

Law 321_Corporation LAW_ Case Digest VIVIAN T. RAMIREZ, ALBERTO B. DIGNO, DANILO M. CASQUITE, JUMADIYA A. KADIL, FAUJIA SALIH, ANTONIO FABIAN, ROMEL DANAG, et.al. vs. MAR FISHING CO., INC., MIRAMAR FISHING CO., INC., ROBERT BUEHS AND JEROME SPITZ G.R. No. 168208. June 13, 2012 FACTS: Mar Fishing Co., Inc. (Mar Fishing), engaged in the business of fishing and canning of tuna, sold its principal assets to co-respondent Miramar through public bidding. Proceeds of the sale were paid to the Trade and Investment Corp. to cover Mar Fishings outstanding obligation in the amount of 897,560,041.00. In view of that transfer, Mar Fishing issued a Memorandum informing all its workers that the company would cease to operate by the end of the month. It notified the DOLE of the closure of its business operations. Then, Mar Fishings labor union, Mar Fishing Workers Union NFL and Miramar entered into a Memorandum of Agreement for the acquiring company, Miramar, to absorb Mar Fishings regular rank and file employees whose performance was satisfactory, without loss of seniority rights and privileges previously enjoyed. Unfortunately, petitioners, who worked as rank and file employees, were not hired or given separation pay by Miramar, so they filed Complaints for illegal dismissal with money claims before the Arbitration Branch of the NLRC. ISSUE: Whether or not Mar Fishing and Miramar are solidarily liable to the employees. RULING: NO. Mar Fishing, and not Miramar, is required to compensate petitioners. Indeed, the back wages and retirement pay earned from the former employer cannot be filed against the new owners or operators of an enterprise. Miramar and Mar Fishing are separate and distinct entities, based on the marked differences in their stock ownership. Also, the fact that Mar Fishings officers remained as such in Miramar does not by itself warrant a conclusion that the two companies are one and the same. The mere showing that the corporations had a common director sitting in all the boards without more does not authorize disregarding their separate juridical personalities. Neither can the veil of corporate fiction between the two companies be pierced by the rest of petitioners submissions, namely, the alleged take-over by Miramar of Mar Fishings operations and the evident similarity of their businesses. Since piercing the veil of corporate fiction is frowned upon, those who seek to pierce the veil must clearly establish that the separate and distinct personalities of the corporations are set up to justify a wrong, protect a fraud, or perpetrate a deception. This, unfortunately, petitioners have failed to do.

66 | P a g e

Law 321_Corporation LAW_ Case Digest TIMOTEO H. SARONA vs. NATIONAL LABOR RELATIONS COMMISSION, ROYALE SECURITY AGENCY (FORMERLY SCEPTRE SECURITY AGENCY) and CESAR S. TAN G.R. No. 185280. January 18, 2012 FACTS: Petitioner, a security guard in Sceptre since April 1976, was asked by Sceptres operations manager to submit a resignation letter as a requirement for an application in Royale and to fill up an employment application form for the said company. He was then assigned at Highlight Metal Craft Inc. from July 29 to August 8, 2003 and was later transferred to Wide Wide World Express Inc. On September 2003, he was informed that his assignment at WWWE Inc. was withdrawn because Royale has been allegedly replaced by another security agency which he later discovered to be untrue. Nevertheless, he was once again assigned at Highlight Metal sometime in September 2003and when he reported at Royales o ffice on October 1, 2003, he was informed that he would no longer be given any assignment as instructed by Sceptres general manager. He thus filed a complaint for illegal dismissal. ISSUE: Whether or not Royales corporate fiction should be pierced for the purpose of compelling it to recognize the petitioners length of service with Sceptre and for holding it liable for the benefits that have accrued to him arising from his employment with Sceptre. RULING: YES. The doctrine of piercing the corporate veil is applicable on alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. The respondents scheme reeks of bad faith and fraud and compassionate justice dictates that Royale and Sceptre be merged as a single entity, compelling Royale to credit and recognize the petitioners length of service with Sceptre. The respondents cannot use the legal fiction of a separate corporate personality for ends subversive of the policy and purpose behind its creation or which could not have been intended by law to which it owed its being. Also, Sceptre and Royale have the same principal place of business. As early as October 14, 1994, Aida and Wilfredo became the owners of the property used by Sceptre as its principal place of business by virtue of a Deed of Absolute Sale they executed with Roso. Royale, shortly after its incorporation, started to hold office in the same property. These, the respondents failed to dispute. Royale also claimed a right to the cash bond which the petitioner posted when he was still with Sceptre. If Sceptre and Royale are indeed separate entities, Sceptre should have released the petitioners cash bond when he resigned and Royale would have required the petitioner to post a new cash bond in its favor. The way on how petitioner was made to resign from Sceptre then later on made an employee of Royale, reflects the use of the legal fiction of the separate corporate personality and is an implication of continued employment. Royale is a continuation or successor or Sceptre since the employees of Sceptre and of Royale are the same and said companies have the same principal place of business.

67 | P a g e

Law 321_Corporation LAW_ Case Digest GOLD LINE TOURS, INC. vs. HEIRS OF MARIA CONCEPCION LACSA G.R. No. 159108. June 18, 2012 FACTS: Concepcion boarded a Gold Line passenger bus owned and operated by Travel & Tours Advisers, Inc. Before reaching their destination, the Gold Line bus collided with a passenger jeepney and as a result, a metal part of the jeepney was detached and struck Concepcion in the chest, causing her instant death. Then, Concepcions heirs, represented by Teodoro Lacsa, instituted in the RTC a suit against Travel & Tours Advisers Inc. to recover damages arising from breach of contract of carriage. ISSUE: Whether or not the proposition of the third party claimant by the petitioner where Travel & Tours Advises, Inc. has an existence separate and/or distinct from Gold Line Tours, Inc. RULING: NO. The two corporations are liable to the death of Ma. Concepcion Lacsa. The Court was not persuaded by the proposition of the third party claimant that a corporation has an existence separate and/or distinct from its members insofar as this case at bar is concerned, for the reason that whenever necessary for the interest of the public or for the protection of enforcement of their rights, the notion of legal entity should not and is not to be used to defeat public convenience, justify wrong, protect fraud or defend crime. Where the main purpose in forming the corporation was to evade ones subsidiary liability for damages in a criminal case, the corporation may not be heard to say that it has a personality separate and distinct from its members, because to allow it to do so would be to sanction the use of fiction of corporate entity as a shield to further an end subversive of justice. This is what the third party claimant wants to do including the defendant in this case, to use the separate and distinct personality of the two corporations as a shield to further an end subversive of justice by avoiding the execution of a final judgment of the court. The RTC thus rightly ruled that petitioner might not be shielded from liability under the final judgment through the use of the doctrine of separate corporate identity. Truly, this fiction of law could not be employed to defeat the ends of justice.

68 | P a g e

Law 321_Corporation LAW_ Case Digest HACIENDA LUISITA, INCORPORATED LUISITA INDUSTRIAL PARK CORPORATION and RIZAL COMMERCIAL BANKING CORPORATION vs. PRESIDENTIAL AGRARIAN REFORM COUNCIL; SECRETARY NASSER PANGANDAMAN OF THE DEPARTMENT OF AGRARIAN REFORM; ALYANSA NG MGA MANGGAGAWANG BUKID NG HACIENDA LUISITA, RENE GALANG, NOEL MALLARI, and JULIO SUNIGA1 and his SUPERVISORY GROUP OF THE HACIENDA LUISITA, INC. and WINDSOR ANDAYA G.R. No. 171101. November 22, 2011 FACTS: On March 17, 1988, during the administration of President Corazon Cojuangco Aquino, the Office of the Solicitor General moved to withdraw the governments case against Tadeco, et al. The CA dismissed the case, subject to the PARCs approval of Tadecos proposed stock distribution plan (SDP) in favor of its farmworkers. [Under EO 229 and later RA 6657, Tadeco had the option of availing stock distribution as an alternative modality to actual land transfer to the farmworkers.] On August 23, 1988, Tadeco organized a spin-off corporation, herein petitioner HLI, as vehicle to facilitate stock acquisition by the farmworkers. For this purpose, Tadeco conveyed to HLI the agricultural land portion (4,915.75 hectares) and other farm-related properties of Hacienda Luisita in exchange for HLI shares of stock. On May 9, 1989, some 93% of the then farmworker-beneficiaries (FWBs) complement of Hacienda Luisita signified in a referendum their acceptance of the proposed HLIs Stock Distribution Option Plan (SODP). On May 11, 1989, the SDOA was formally entered into by Tadeco, HLI, and the 5,848 qualified FWBs. This attested to by then DAR Secretary Philip Juico. The SDOA embodied the basis and mechanics of HLIs SDP, which was eventually approved by the PARC after a follow -up referendum conducted by the DAR on October 14, 1989, in which 5,117 FWBs, out of 5,315 who participated, opted to receive shares in HLI. On August 15, 1995, HLI applied for the conversion of 500 hectares of land of the hacienda from agricultural to industrial use, pursuant to Sec. 65 of RA 6657. The DAR approved the application on August 14, 1996, subject to payment of three percent (3%) of the gross selling price to the FWBs and to HLIs continued compliance with its undertakings under the SDP, among other conditions. ISSUE: Whether or not the revocation of the HLIs SDP valid. RULING: YES. The PARC did NOT gravely abuse its discretion in revoking the subject SDP and placing the hacienda under CARPs compulsory acquisition and distribution scheme. The revocation of the approval of the SDP is valid: (1) the mechanics and timelines of HLIs stock distribution violate DAO 10 because the minimum individual allocation of each original FWB of 18,804.32 shares was diluted as a result of the use of man days and the hiring of additional farmworkers; (2) the 30-year timeframe for HLI-to-FWBs stock transfer is contrary to what Sec. 11 of DAO 10 prescribes. It is clear as day that the original 6,296 FWBs, who were qualified beneficiaries at the time of the approval of the SDP, suffered from watering down of shares. As determined earlier, each original FWB is entitled to 18,804.32 HLI shares. The original FWBs got less than the guaranteed 18,804.32 HLI shares per beneficiary, because the acquisition and distribution of the HLI shares were based on man days or number of days worked by the FWB in a years time.

69 | P a g e

Law 321_Corporation LAW_ Case Digest PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION (PANREA) vs. NATIONAL LABOR RELATIONS COMMISSION (NLRC), PANTRANCO NORTH EXPRESS, INC. (PNEI), PHILIPPINE NATIONAL BANK (PNB), PHILIPPINE NATIONAL BANK-MANAGEMENT AND DEVELOPMENT CORPORATION (PNBMADECOR), and MEGA PRIME REALTY AND HOLDINGS CORPORATION (MEGA PRIME) G.R. No. 170689. March 17, 2009 FACTS: The Gonzales family owned two corporations, namely, the PNEI and Macris Realty Corporation. PNEI provided transportation services to the public, and had its bus terminal at the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood on four valuable pieces of real estate registered under the name of Macris. The Gonzales family later incurred huge financial losses despite attempts of rehabilitation and loan infusion. In March 1975, their creditors took over the management of PNEI and Macris. By 1978, full ownership was transferred to one of their creditors, the National Investment Development Corporation (NIDC), a subsidiary of the PNB. In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by Gregorio Araneta III. In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension of payments. ISSUE: Whether PNEI employees can attach the properties (specifically the Pantranco properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI. RULING: NO. First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere in the records was it shown that PNEI owned the Pantranco properties. Settled is the rule that the power of the court in executing judgments extends only to properties unquestionably belonging to the judgment debtor alone. To be sure, one mans goods shall not be sold for another mans debts. A sheriff is not authorized to attach or levy on property not belonging to the judgment debtor, and even incurs liability if he wrongfully levies upon the property of a third person. Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from that of PNEI. PNB is sought to be held liable because it acquired PNEI through NIDC at the time when PNEI was suffering financial reverses. PNB-Madecor is being made to answer for petitioners labor claims as the owner of the subject Pantranco properties and as a subsidiary of PNB. Mega Prime is also included for having acquired PNBs shares over PNB-Madecor. The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected. This is a fiction created by law for convenience and to prevent injustice. Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI are corporations with their own personalities. Neither can we merge the personality of PNEI with PNB simply because the latter acquired the former. Settled is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor. Lastly, while we recognize that there are peculiar circumstances or valid grounds that may exist to warrant the piercing of the corporate veil, none applies in the present case whether between PNB and PNEI; or PNB and PNB-Madecor.

70 | P a g e

Law 321_Corporation LAW_ Case Digest CAGAYAN VALLEY DRUG CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE G.R. No. 151413. February 13, 2008 FACTS: Petitioner granted 20% sales discounts to qualified senior citizens on purchases of medicine pursuant to RA 7432 and its IRR. Petitioner filed with the BIR a claim for tax refund/tax credit of the full amount of the 20% sales discount it granted to senior citizens for the year 1995, in accordance with RA 7432. The BIRs inaction on petitioners claim for refund/tax credit compelled petitioner to file a petition for review before the CTA, until the case reached the CA. The CA dismissed the petition because the person who signed the verification and certification of absence of forum shopping, a certain Jacinto J. Concepcion, President of petitioner, failed to adduce proof that he was duly authorized by the board of directors to do so. ISSUE: Whether or not it is valid when the petitioners president signs the subject verification and certification sans the approval of its Board of Directors. RULING: NO. A corporation has a separate and distinct personality from its directors and officers and can only exercise its corporate powers through the board of directors. Thus, it is clear that an individual corporate officer cannot solely exercise any corporate power pertaining to the corporation without authority from the board of directors. Only individuals vested with authority by a valid board resolution may sign the certificate of non-forum shopping on behalf of a corporation. The action can be dismissed if the certification was submitted unaccompanied by proof of the signatorys authority. Hence, the power to sue and be sued in any court or quasi-judicial tribunal is necessarily lodged with the said board. There is a complete listing of authorized signatories to the verification and certification required by the rules, the determination of the sufficiency of the authority was done on a case to case basis. The rationale applied in the foregoing cases is to justify the authority of corporate officers or representatives of the corporation to sign the verification or certificate against forum shopping, being in a position to verify the truthfulness and correctness of the allegations in the petition.

71 | P a g e

Law 321_Corporation LAW_ Case Digest THE HEIRS OF THE LATE PANFILO vs. PAJARILLO VS. CA, NLRC, et al. G.R. No. 155056-57. October 19, 2007 FACTS: Private respondents were employed as drivers, conductors and conductresses by Panfilo. In sum, each of the private respondents earned an average daily commission of about P150.00 a day. They were not given emergency cost of living allowance, 13th month pay, legal holiday pay and service incentive leave pay.The following were deducted from the private respondents daily commissions. Thereafter, private respondents and several co-employees formed a union called SAMAHAN NG MGA MANGGAGAWA NG PANFILO V. PAJARILLO. The Department of Labor and Employment issued a Certificate of Registration in favor of the respondent union. Upon learning of the formation of respondent union, Panfilo and his children ordered some of the private respondents to sign a document affirming their trust and confidence in Panfilo and denying any irregularities on his part. Other private respondents were directed to sign a blank document which turned out to be a resignation letter. Private respondents refused to sign the said documents; hence, they were barred from working or were dismissed without hearing and notice. Panfilo and his children and relatives also formed a company union where they acted as its directors and officers. On 25 August 1987, respondent union and several employees filed a Complaint for unfair labor practice and illegal deduction before the Labor Arbiter with Panfilo V. Pajarillo Liner as party-respondent. After hearing and submission by both parties of their respective position papers and memoranda, Labor Arbiter Manuel P. Asuncion rendered a Decision dated 28 December 1992, dismissing the consolidated complaints for lack of merit. Respondent union appealed to the NLRC. On 18 June 1996, the NLRC reversed the decision of Arbiter Asuncion and ordered the reinstatement and payment of backwages, ECOLA, 13th month pay, legal holiday pay and service incentive leave pay to, private respondents. ISSUE: Whether the Honorable Court of Appeals seriously erred in piercing the veil of corporate entity of Pvp Pajarillo Liner Inc. RULING: NO. Hence, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat labor laws, this separate personality of the corporation may be disregarded or the veil of the corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. The corporate mask may be lifted and the corporate veil may be pierced when a corporation is but the alter ego of a person or another corporation. It is clear from the foregoing that P.V. Pajarillo Liner Inc. was a mere continuation and successor of the sole proprietorship of Panfilo. It is also quite obvious that Panfilo transformed his sole proprietorship into a family corporation in a surreptitious attempt to evade the charges of respondent union. Given these considerations, Panfilo and P.V. Pajarillo Liner Inc. should be treated as one and the same person for purposes of liability.

72 | P a g e

Law 321_Corporation LAW_ Case Digest PETRON CORPORATION AND PETER C. MALIGRO vs. NATIONAL LABOR RELATIONS COMMISSION AND CHITO S. MANTOS G.R. No. 154532. October 27, 2006 FACTS On May 15, 1990, Petron, through its Cebu District Office, hired the herein private respondent Chito S. Mantos, an Industrial Engineer, as a managerial, professional and technical employee with initial designation as a Bulk Plant Engineering Trainee. He attained regular employment status on November 15, 1990 and was later on designated as a Bulk Plant Relief Supervisor, remaining as such for the next five years while being assigned to the different plants and offices of Petron within the Visayas area. It was while assigned at Petrons Cebu District Office with petitioner Peter Maligro as his immediate superior, when Mantos, thru a Notice of Disciplinary Action was suspended for 30 days from November 1 to 30, 1996 for violating company rules and regulations regarding AWOL, not having reported for work during the period August 5 to 27, 1996. Subsequently, his services was terminated effective December 1, 1996, by reason of his continued absences from August 28, 1996 onwards, as well as for Insubordination/Discourtesy for making false accusations against his superior. Meanwhile, contending that he has been constructively dismissed as of August 5, 1996, Mantos filed with the NLRC-RAB, Cebu City, a complaint for illegal dismissal. ISSUES: Whether or not Maligro is solidarily liable with Petron. RULING: NO. The NLRC erred in holding petitioner Peter Maligro jointly and severally liable with petitioner Petron for the money claims of the private respondent. Settled is the rule in this jurisdiction that a corporation is invested by law with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Thus, obligations incurred by corporate officers acting as corporate agents are not theirs but the direct accountabilities of the corporation they represent. True, solidary liabilities may at times be incurred by corporate officers, but only when exceptional circumstances so warrant. In the present case, the apparent basis for the NLRC in holding petitioner Maligro solidarily liable with Petron were its findings that (1) the Investigation Committee was created a day after the summons in NLRC RAB was received, with Maligro no less being the chairman thereof; and (2) the basis for the charge of insubordination was the private respondents alleged making of false accusations against Maligro. Those findings, however, cannot justify a finding of personal liability on the part of Maligro inasmuch as said findings do not point to Maligros extreme personal hatred and animosity with the respondent. It cannot, therefore, be said that Maligro was motivated by malice and bad faith in connection with private respondents dismissal from the service.

73 | P a g e

Law 321_Corporation LAW_ Case Digest CHINA BANKING CORPORATION vs. DYNE-SEM ELECTRONICS CORPORATION G.R. No. 149237. June 11, 2006 FACTS: On June 19 and 26, 1985, Dynetics, Inc. (Dynetics) and Elpidio O. Lim borrowed a total of P8,939,000 from petitioner China Banking Corporation evidenced by six promissory notes. The borrowers failed to pay when the obligations became due prompting the petitioner to institute a complaint for sum of money against them. Summons was not served on Dynetics, however, because it had already closed down. An amended complaint was filed by petitioner impleading respondent Dyne-Sem Electronics Corporation (Dyne-Sem) and its stockholders Vicente Chuidian, Antonio Garcia and Jacob Ratinoff. According to petitioner, respondent was formed and organized to be Dynetics alter ego as established by the following circumstances: (a) Dynetics, Inc. and respondent are both engaged in the same line of business of manufacturing, producing, assembling, processing, importing, exporting, buying, distributing, marketing and testing integrated circuits and semiconductor devices; (b) the principal office and factory site of Dynetics, Inc. located at Avocado Road, FTI Complex, Taguig, Metro Manila, were used by respondent as its principal office and factory site; (c) respondent acquired some of the machineries and equipment of Dynetics, Inc. from banks which acquired the same through foreclosure; (d) respondent retained some of the officers of Dynetics, Inc. ISSUE: Whether the Doctrine of Piercing the Veil of Corporate Fiction is applicable in the present case. RULING: YES. The general rule is that a corporation has a personality separate and distinct from that of its stockholders and other corporations to which it may be connected. This is a fiction created by law for convenience and to prevent injustice. Nevertheless, being a mere fiction of law, peculiar situations or valid grounds may exist to warrant the disregard of its independent being and the piercing of the corporate veil. The veil of separate corporate personality may be lifted when such personality is used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate issues; or when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation; or when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or for the protection of the creditors. In such cases, the corporation will be considered as a mere association of persons. The liability will directly attach to the stockholders or to the other corporation. To disregard the separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly. In this case, petitioner failed to prove that Dyne-Sem was organized and controlled, and its affairs conducted, in a manner that made it merely an instrumentality, agency, conduit or adjunct of Dynetics, or that it was established to defraud Dynetics creditors, including petitioner.

74 | P a g e

Law 321_Corporation LAW_ Case Digest MARUBENI CORPORATION, RYOICHI TANAKA, RYOHEI KIMURA and SHOICHI ONE vs. FELIX LIRAG G.R. No. 130998. August 10, 2001 FACTS: Marubeni Corporation is a foreign corporation organized under the laws of Japan. It was doing business in the Philippines through its duly licensed, wholly owned subsidiary, Marubeni Philippines Corporation. Petitioners Ryoichi Tanaka, Ryohei Kimura and Shoichi One were officers of Marubeni assigned to its Philippine branch. On January 27, 1989, Lirag filed with the RTC of Makati a complaint for specific performance and damages in the sum of P6M as commission pursuant to an oral consultancy agreement with Marubeni for obtaining government contracts of various projects. Lirag claimed that on February 2, 1987, petitioner Ryohei Kimura hired his consultancy group for the purpose of obtaining government contracts of various projects. The agreement was merely oral because of the mutual trust between Marubeni and the Lirag family which dates back to the 1960s. One of the projects handled by respondent Lirag, the Bureau of Post project, amounting to P100,000,000.00 was awarded to the Marubeni-Sanritsu tandem. Despite repeated demands of his 6% commission was never paid. Marubeni claimed that Ryohei Kimura did not have the authority to enter into such agreement in their behalf. Only the general manager, upon issuance of a SPA by the principal office in Tokyo, Japan, could enter into any contract in behalf of the corporation. They also claimed that Marubeni never participated in the Bureau of Post project nor benefited from such project. ISSUE: Whether or not there was a consultancy agreement to make Lirag entitled to commission. RULING: NO. The only basis of Lirag in claiming from Marubeni was because he claims that they are sister companies since Marubeni was the supplier and contractor of the Sanritsu. Not because two foreign companies came from the same country and closely worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction. The separate personality of the corporation may be disregarded only when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary for the protection of creditors. Aside from the self-serving testimony of respondent regarding the existence of a close working relationship between Marubeni and Sanritsu, there was nothing that would support the conclusion that Sanritsu was an agent of Marubeni. Any agreement entered into because of the actual or supposed influence which the party has, engaging him to influence executive officials in the discharge of their duties, which contemplates the use of personal influence and solicitation rather than an appeal to the judgment of the official on the merits of the object sought is contrary to public policy. Consequently, the agreement, assuming that the parties agreed to the consultancy, is null and void as against public policy. Therefore, it is unenforceable before a court of justice.

75 | P a g e

Law 321_Corporation LAW_ Case Digest ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT CORPORATION vs. RITA C. MEJIA, as Executrix of ANDREA CORDOVA VDA. DE GUTIERREZ G.R. No. 141617. August 14, 2001 FACTS: Gutierrez was the registered owner of a parcel of land which was later subdivided into five lots. In 1964, Gutierrez and Cardale Financing and Realty Corporation executed a Deed of Sale with Mortgage relating to the four of the five lots for the consideration of P800,000.00. Upon the execution of the deed, Cardale paid Gutierrez P171,000.00. To secure payment of the balance of the purchase price, Cardale constituted a mortgage on three of the four parcels of land. In 1968, owing to Cardale's failure to settle its mortgage obligation, Gutierrez filed a complaint for rescission of the contract with the Quezon City Regional Trial Court. In 1969, during the pendency of the rescission case, Gutierrez died and was substituted by her executrix, respondent Rita C. Mejia. In the meantime, the mortgaged parcels of land became delinquent in the payment of real estate taxes, which culminated in their levy and auction sale in satisfaction of the tax arrears. The highest bidder for the three parcels of land was petitioner Merryland Development Corporation, whose President and majority stockholder is Francisco. ISSUES: Whether or not the corporate fiction of Cardale will be pierced. Whether or not the corporate entity of Merryland must be pierced. RULING: YES. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the merealter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. NO. Merryland cannot be solidarily liable with Francisco. The only act imputable to Merryland in relation to the mortgaged properties is that it purchased the same and this by itself is not a fraudulent or wrongful act. No evidence has been adduced to establish that Merryland was a mere alter ego or business conduit of Francisco. Time and again it has been reiterated that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification for disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights. Thus, Merryland's separate juridical personality must be upheld. 76 | P a g e

Law 321_Corporation LAW_ Case Digest PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) vs. ANDRADA ELECTRIC & ENGINEERING COMPANY GR No. 142936. April 17, 2002 FACTS: Respondent is a partnership duly organized, existing, and operating under the laws of the Philippines is a semi-government corporation duly organized, existing and operating under the laws of the Philippines; whereas, NASUDECO is also a semigovernment corporation and the sugar arm of the PNB; and the defendant Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating under the 1975 laws of the Philippines; that the plaintiff is engaged in the business of general construction for the repairs and/or construction of different kinds of machineries and buildings. On August 26, 1975, PNB acquired the assets of the defendant PASUMIL that were earlier foreclosed by the DBP. PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to October 29, 1971, the defendant PASUMIL engaged the services of defendant for electrical rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a construction contract. The defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the plaintiff their just, valid and demandable obligation based on the contract. Defendant prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL. ISSUE: Whether or not the Veil of Corporate Fiction should be pierced in this case. RULING: NO. The absence of the elements in the present case precludes the piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate personalities. Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person. Third, respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL. Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. However, it utterly failed to discharge this burden; it failed to establish by competent evidence that petitioners separate corporate veil had been used to conceal fraud, illegality or inequity.

77 | P a g e

Law 321_Corporation LAW_ Case Digest AZCOR MANUFACTURING INC., FILIPINAS PASO and/or ARTURO ZULUAGA/Owner vs. NATIONAL LABOR RELATIONS COMMISSION (NLRC) AND CANDIDO CAPULSO G.R. No. 117963. February 11, 1999 FACTS: Candido Capluso has been working for petitioner for more than 12 years as a ceramics worker. On February 1991, Capulso requested to go on sick leave, it appearing that his illness was directly caused by his occupation. Upon recovering, Capulso was not allowed to resume work and was not reinstated after having tried five times. He filed a complaint for constructive illegal dismissal and illegal deduction against AZCOR and Arturo Zuluaga. AZCOR moved to dismiss the complaint alleging that no employer- employee relationship existed. Petitioner further added that Capulso became an employee of Fil Paso on March 1990 but voluntarily resigned after a year as evidenced by a letter of resignation allegedly tendered by Capulso. The Labor Arbiter dismissed the complaint for lack of merit and ordered AZCOR to refund the deducted salaries. On Appeal, the NLRC ruled that the Contract of Employment stated that the work to be done by Capulso was with Fil Paso and added the fact that the latter denied having executed and signed the said resignation letters. Pending the trial of AZCORs petition for Certiorari, Capulso succumbed to asthma and heart disease. ISSUE: Whether the petitioners are jointly liable for backwages in favor of the heirs being separate and distinct entities. RULING: YES. Capulso was led into believing that while he was working with Filipinas Paso, his real employer was AZCOR. Petitioners never dealt with him openly and in good faith, nor was he informed of the developments within the company, i.e., his alleged transfer to Filipinas Paso and the closure of AZCOR's manufacturing operations beginning 1 March 1990. AZCOR manifested for the first time before the Court that it had already ceased its business operations. Understandably, Capulso sued AZCOR alone and was constrained to implead Filipinas Paso as additional respondent only when it became apparent that the latter also appeared to be his employer. In the case, the corporate fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the legitimate issues. Such corporate fiction would be discarded and the two (2) corporations would be merged as one, the first being merely considered as the instrumentality, agency, conduit or adjunct of the other.

78 | P a g e

Law 321_Corporation LAW_ Case Digest EDUARDO CLAPAROLS, ROMULO AGSAM and/or CLAPAROLS STEEL AND NAIL PLANT vs. COURT OF INDUSTRIAL RELATIONS, ALLIED WORKERS' ASSOCIATION and/or DEMETRIO GARLITOS, et al. G.R. No. L-30822. July 31, 1975 FACTS: In a case filed by private respondents against petitioners for unfair labor practices, CIR held petitioners liable for reinstatement and back wages from the date of their dismissal up to their actual reinstatement. Motion for execution was granted and an examination of petitioners payrolls and other records for the computation of the back wages. When respondents returned to work, the company accountant refused on the ground that there was no order from the plant owner. This was on the ground that the records of Claparols Steel Corp. (CSC) show that it was established on July 1, 1957 succeeding the CSNP which ceased operations on June 30, 1957, and that the CSC stopped operation on Dec. 7, 1962. Petitioners filed an opposition alleging that they cannot personally reinstate respondents because of the present status of the corporation; back wages should only be limited to 3 months; and that since it ceased to operate on Dec. 7, 1962, reinstatement should only be up to that date. Respondents opposed and alleged, among others, that CSNP and CSC is one and the same corporation controlled by petitioner Claparols, with the latter corporation succeeding the former. ISSUE: Whether or not CSNP and CSC is one and the same corporation. RULING: YES. Respondent Courts findings that indeed the CSNP, which ceased operation in June 30, 1957, was succeeded by the CSC effective next day, July 1, 1957 up top December 7, 1962, when the latter finally ceased to operate, were not disputed by petitioners. It is very clear that the latter was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that already attached to its predecessor. Both corporations were owned and controlled by petitioner Eduardo Claparols and there was no break in the succession and continuity of the same business. This avoiding-the-liability scheme is very patent, considering that 90% of the subscribed shares of the CSC were owned by Claparols himself, and all the assets of the dissolved CSNP were turned over to the CSC.

79 | P a g e

Law 321_Corporation LAW_ Case Digest COMMISSIONER OF INTERNAL REVENUE vs. NORTON and HARRISON COMPANY G.R. No. L-17618. August 31, 1964 FACTS: Norton and Harrison is a corporation organized to carry on and conduct a general wholesale and retail mercantile establishment in the Philippines. Jackbilt is, likewise, a corporation organized primarily for the purpose of making, producing and manufacturing concrete blocks. Norton and Jackbilt entered into an agreement whereby Norton was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt. Pursuant to this agreement, whenever an order for concrete blocks was received by the Norton & Harrison Co. from a customer, the order was transmitted to Jackbilt which delivered the merchandise direct to the customer. Apparently, due to this transaction, the CIR, after conducting an investigation, assessed the respondent Norton & Harrison for deficiency sales tax making as basis thereof the sales of Norton to the Public. As Norton and Harrison did not conform with the assessment, the matter was brought to the Court of Tax Appeals. The Commissioner of Internal Revenue contends that since Jackbilt was owned and controlled by Norton & Harrison, the corporate personality of Jackbilt should be disregarded for sales tax purposes, and the sale of Jackbilt blocks by petitioner to the public must be considered as the original sales from which the sales tax should be computed. The Norton & Harrison Company contended otherwise -that is, the transaction subject to tax is the sale from Jackbilt to Norton. ISSUE: Whether or not the corporate personality of Norton and Jackbilt be disregarded. RULING: YES. It has been settled that the ownership of all the stocks of a corporation by another corporation does not necessarily breed an identity of corporate interest between the two companies and be considered as a sufficient ground for disregarding the distinct personalities. However, in the case at bar, we find sufficient grounds to support the theory that the separate identities of the two companies should be disregarded. Among these circumstances are: Norton and Harrison owned all the outstanding stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt, 14,993 shares belonged to Norton and Harrison and one each to seven others; Norton constituted Jackbilt's board of directors in such a way as to enable it to actually direct and manage the other's affairs by making the same officers of the board for both companies; Norton financed the operations of the Jackbilt, and this is shown by the fact that the loans obtained from the RFC and Bank of America were used in the expansion program of Jackbilt, to pay advances for the purchase of equipment, materials rations and salaries of employees of Jackbilt and other sundry expenses; Norton treats Jackbilt employees as its own. Evidence shows that Norton paid the salaries of Jackbilt employees and gave the same privileges as Norton employees, an indication that Jackbilt employees were also Norton's employees. Furthermore services rendered in any one of the two companies were taken into account for purposes of promotion; Compensation given to board members of Jackbilt, indicate that Jackbilt is merely a department of Norton. The offices of Norton and Jackbilt are located in the same compound. Payments were effected by Norton of accounts for Jackbilt and vice versa. Payments were also made to Norton of accounts due or payable to Jackbilt and vice versa. Hence, the corporate personality of the two corporations must be disregarded.

80 | P a g e

Law 321_Corporation LAW_ Case Digest CONCEPT BUILDERS, INC. vs. THE NATIONAL LABOR RELATIONS COMMISSION G.R. No. 108734. May 29, 1996 FACTS: Petitioner, a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed by said company as laborers, carpenters and riggers. Eventually, respondents services were terminated. The Labor Arbiter then rendered judgment ordering petitioner to reinstate private respondents and to pay them back wages. A writ of execution was then issued but was partially satisfied because the sheriff reported all the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc and not by respondent. Subsequently, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. of which he is the Vice-President. Private respondents filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI and petitioner corporation were owned by the same incorporator/stockholders. They also alleged that petitioner temporarily suspended its business operations in order to evade its legal obligations to them and that private respondents were willing to post an indemnity bond to answer for any damages which petitioner and HPPI may suffer because of the issuance of the break-open order. ISSUE: Whether or not petitioner corporation and HPPI are one and the same. RULING: YES. It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: a. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; b. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff's legal rights; and c. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. HPPI is obviously a business conduit of Petitioner Corporation and its emergence was skillfully orchestrated to avoid the financial liability that already attached to Petitioner Corporation.

81 | P a g e

Law 321_Corporation LAW_ Case Digest COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION (CEEA) vs. THE NATIONAL LABOR RELATIONS COMMISSION G.R. No. 121315. July 19, 1999 FACTS: Complex was engaged in the manufacture of electronic products. It was actually a subcontractor of electronic products where its customers gave their job orders, sent their own materials and consigned their equipment to it. Thus, there was the AMS Line for the Adaptive Micro System, Inc., the Heril Line for Heril Co., Ltd., the Lite-On Line for the Lite-On Philippines Electronics Co., etc. The rank and file workers of Complex were organized into a union known as the Complex Electronics Employees Association, herein referred to as the Union. Due to its financial reverses, Complex regretfully informed the employees that it was left with no alternative but to close down the operations of the Lite-On Line. The Union on the other hand filed a notice of strike with the NCMB. In the evening of April 6, 1992, the machinery, equipment and materials being used for production at Complex were pulled-out from the company premises and transferred to the premises of Ionics at Cabuyao, Laguna. The following day, a total closure of company operation was effected at Complex. A complaint was, thereafter, filed with the Labor Arbitration Branch of the NLRC for unfair labor practice. Ionics was impleaded as a party defendant because the officers and management personnel of Complex were also holding office at Ionics with Lawrence Qua as the President of both companies. Complex, on the other hand, averred that since the time the Union filed its notice of strike, there was a significant decline in the quantity and quality of the products in all of the production lines. Fearful that the machinery, equipment and materials would be rendered inoperative and unproductive due to the impending strike of the workers, the customers ordered their pull-out and transfer to Ionics. Ionics contended that it was an entity separate and distinct from Complex and had been in existence 8 years before the labor dispute arose at Complex. While admitting that Lawrence Qua, the President of Complex was also the President of Ionics, the latter denied having Qua as their owner since he had no recorded subscription of P1,200,00.00 in Ionics as claimed by the Union. ISSUE: Whether or not Complex and Ionics are one and the same. RULING: YES. Ionics may be engaged in the same business as that of Complex, but this fact alone is not enough reason to pierce the veil of corporate fiction of the corporation. Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. This fiction of corporate entity can only be disregarded in certain cases such as when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime. To disregard said separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. As to the additional documentary evidence which consisted of a newspaper clipping filed by petitioner Union, we agree with respondent Ionics that the photo/newspaper clipping itself does not prove that Ionics and Complex are one and the same entity. The photo/newspaper clipping merely showed that some plants of Ionics were recertified to ISO 9002 and does not show that there is a relation between Complex and Ionics except for the fact that Lawrence Qua was also the president of Ionics. However, as we have stated above, the mere fact that both of the corporations have the same president is not in itself sufficient to pierce the veil of corporate fiction of the two corporations. 82 | P a g e

Law 321_Corporation LAW_ Case Digest ROSAURA P. CORDON vs. JESUS BALICANTA A.C. No. 2797. October 4, 2002 FACTS: When her husband died, herein complainant Rosaura Cordon and her daughter Rosemarie inherited the properties left by the said decedent. All in all, complainant and her daughter inherited 21 parcels of land located in Zamboanga City. The lawyer who helped her settle the estate of her late husband was respondent Jesus Balicanta. Respondent enticed complainant and her daughter to organize a corporation that would develop the said real properties into a high-scale commercial complex. Relying on these apparently sincere proposals, complainant and her daughter assigned 19 parcels of land to Rosaura Enterprises, Incorporated, a newly-formed and duly registered corporation in which they assumed majority ownership. The subject parcels of land were then registered in the name of the corporation. Thereafter, respondent single-handedly ran the affairs of the corporation in his capacity as Chairman of the Board, President, General Manager and Treasurer. The respondent also made complainant sign a document which turned out to be a voting trust agreement. Respondent likewise succeeded in making complainant sign a special power of attorney to sell and mortgage some of the parcels of land she inherited from her deceased husband. She later discovered that respondent transferred the titles of the properties to a certain Tion Suy Ong who became the new registered owner thereof. Respondent never accounted for the proceeds of said transfers. In 1981, respondent, using a spurious board resolution, contracted a loan from the Land Bank of the Philippines in the amount of P2,220,000 using as collateral 9 of the real properties that the complainant and her daughter contributed to the corporation. The respondent ostensibly intended to use the money to construct the Baliwasan Commercial Center. ISSUE: Whether or not respondens acts will bind the Petitioners. RULING: NO. This Court confirms the duly supported findings of the IBP Board that respondent committed condemnable acts of deceit against his client. The fraudulent acts he carried out against his client followed a well thought of plan to misappropriate the corporate properties and funds entrusted to him. At the very outset, he embarked on his devious scheme by making himself the President, Chairman of the Board, Director and Treasurer of the corporation, although he knew he was prohibited from assuming the position of President and Treasurer at the same time. Also, respondent denies that he acted as Corporate Secretary aside from being the Chairman, President and Treasurer of the corporation. Yet respondent submitted to the investigating commission documents which were supposed to be in the official possession of the Corporate Secretary alone such as the stock and transfer book and minutes of meetings. After a thorough review of the records, we find that respondent committed grave and serious misconduct that casts dishonor on the legal profession. His misdemeanors reveal a deceitful scheme to use the corporation as a means to convert for his own personal benefit properties left to him in trust by complainant and her daughter. Based on the aforementioned findings, this Court believes that the gravity of respondents offenses cannot be adequately matched by mere suspension as recommended by the IBP. Instead, his wrongdoings deserve the severe penalty of disbarment, without prejudice to his criminal and civil liabilities for his dishonest acts.

83 | P a g e

Law 321_Corporation LAW_ Case Digest DELPHER TRADES CORPORATION, and DELPHIN PACHECO vs. INTERMEDIATE APPELLATE COURT G.R. No. L-69259. January 26, 1988 FACTS: Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of real estate property. The said co-owners leased to Construction Components International Inc. the same property and providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under similar conditions. Subsequently, lessee assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. A deed of exchange was executed between Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property for 2,500 shares of stock of defendant corporation with a total value of P1,500,000.00. On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of the property in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco. Respondents on the other hand stated that there was no transfer of ownership over the properties. ISSUE: Whether or not there was an effective transfer of property in this case. RULING: NO. After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof. In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed. It is significant that the Pachecos took no par value shares in exchange for their properties. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.

84 | P a g e

Law 321_Corporation LAW_ Case Digest FRANCISCO V. DEL ROSARIO vs. NATIONAL LABOR RELATIONS COMMISSION G.R. No. 85416. July 24, 1990 FACTS: In POEA Case No. 85-06-0394, the POEA promulgated a decision dismissing the complaint for money claims for lack of merit. The decision was appealed to the NLRC, which reversed the POEA decision and ordered Philsa Construction and Trading Co., Inc., the recruiter and Arieb Enterprises, the foreign employer to jointly and severally pay private respondent their salary differentials and vacation leave benefits. A writ of execution was issued by the POEA but it was returned unsatisfied as Philsa was no longer operating and was financially incapable of satisfying the judgment. Private respondent moved for the issuance of an alias writ against the officers of Philsa. This motion was opposed by the officers, led by petitioner, the president and general manager of the corporation. Petitioner appealed to the NLRC. On September 23, 1988, the NLRC dismissed the appeal on the theory that the corporate personality of Philsa should be disregarded. According to the NLRC, Philsa Construction & Trading Co., Inc. and Philsa International Placement & Services Corp are one and the same because both corporations has the same set of directors and officers. Petitioner's motion for reconsideration was denied. Thus, this petition was filed, alleging that the NLRC gravely abused its discretion. ISSUE: Whether or not the NLRC acted with grave abuse of discretion. RULING: YES. Under the law a corporation is bestowed juridical personality, separate and distinct from its stockholders. But when the juridical personality of the corporation is used to defeat public convenience, justify wrong, protect fraud or defend crime, the corporation shall be considered as a mere association of persons and its responsible officers and/or stockholders shall be held individually liable. For the same reasons, a corporation shall be liable for the obligations of a stockholder, or a corporation and its successor-in-interest shall be considered as one and the liability of the former shall attach to the latter. But for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. Thus, at the time Philsa allowed its license to lapse in 1985 and even at the time it was delisted in 1986, there was yet no judgment in favor of private respondent. An intent to evade payment of his claims cannot therefore be implied from the expiration of Philsa's license and its delisting. Likewise, substantial identity of the incorporators of the two corporations does not necessarily imply fraud. In this case, not only has there been a failure to establish fraud, but it has also not been shown that petitioner is the corporate officer responsible for private respondent's predicament. It must be emphasized that the claim for differentials and benefits was actually directed against the foreign employer. Philsa became liable only because of its undertaking to be jointly and severally bound with the foreign employer, an undertaking required by the rules of the POEA, together with the filing of cash and surety bonds, in order to ensure that overseas workers shall find satisfaction for awards in their favor.

85 | P a g e

Law 321_Corporation LAW_ Case Digest FIRST PHILIPPINE INTERNATIONAL BANK vs. COURT OF APPEALS G.R. No. 115849. January 24, 1996 FACTS: In the course of its banking operations, the defendant Producer Bank of the Philippines acquired six parcels of land. The original plaintiffs, Demetrio Demetria and Jose O. Janolo, wanted to purchase the property and thus initiated negotiations for that purpose. Negotiations happened between the parties. However, petitioner bank reneged their agreement because it offered the same lot to different buyers. Plaintiffs then filed a suit for specific performance with damages against the bank, its Manager Rivers and Acting Conservator Encarnacion. The basis of the suit was that the transaction had with the bank resulted in a perfected contract of sale. Subsequently, Henry L. Co, filed a motion to intervene in the trial court, alleging that as owner of 80% of the Bank's outstanding shares of stock, he had a substantial interest in resisting the complaint. The trial court issued an order denying the motion to intervene on the ground that it was filed after trial had already been concluded. Henry Co did not appeal the denial of his motion for intervention. During the pendency of the proceedings in the Court of Appeals, Henry Co and several other stockholders of the Bank, filed an action purportedly a "derivative suit" with the RTC Branch 134, against Encarnacion, Demetria and Janolo to declare any perfected sale of the property as unenforceable and to stop Ejercito from enforcing or implementing the sale. In his answer, Janolo argued that the Second Case was barred by litis pendentia by virtue of the case then pending in the Court of Appeals. ISSUE: Whether or not the juridical personalities of the two corporations be pierced. RULING: YES. In addition to the many cases where the corporate fiction has been disregarded, we now add the instant case, and declare herewith that the corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forumshopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where, as in this case, the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. To rule otherwise would be to encourage corporate litigants to use their shareholders as fronts to circumvent the stringent rules against forum shopping.

86 | P a g e

Law 321_Corporation LAW_ Case Digest FRANCISCO MOTORS vs. CA and SPOUSES GREGORIO and LIBRADA MANUEL G.R. No. 100812. Jun 25, 1999 Facts: This case arose from the decision o the trial court granting the counter claim of the herein private respondents. Such counterclaim is based from the fact that Gregorio Manuel, while he was petitioners Assistant Legal Officer, he represented members of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, even after the termination of the proceedings, his services were not paid. Said family members, he said, were also incorporators, directors and officers of petitioner. Hence to counter petitioners collection suit, he filed a permissive counterclaim for the unpaid attorneys fees. ISSUE: Whether or not the petitioner corporation is liable for the attorneys fee owing to the respondents. RULING: NO. Petitioner argued that being a corporation, it should not be held liable therefore because these fees were owed by the incorporators, directors and officers of the corporation in their personal capacity as heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation, vis--vis the individual persons who hired the services of private respondent, is separate and distinct, hence, the liability of said individuals did not become an obligation chargeable against petitioner. In this case, the piercing of the corporate veil was not applied because rationale behind piercing a corporations identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Furthermore, according to private respondent Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent them in the intestate proceedings over Benita Trinidads estate. These estate proceedings did not involve any business of petitioner. The personality of the corporation and those of its incorporators, directors and officers in their personal capacities ought to be kept separate in this case. The claim for legal fees against the concerned individual incorporators, officers and directors could not be properly directed against the corporation without violating basic principles governing corporations.

87 | P a g e

Law 321_Corporation LAW_ Case Digest SOL LAGUIO, RENE LAOLAO, ANNALIZA ENSANDO, EDELIZA ASAS, LILIA MARAY, EVELYN UNTALAN,* ROSARIO CHICO, REYNALDO GARCIA, MERLITA DE LOS SANTOS,* JOSEPHINE DERONG,* GEMMA TIBALAO BANTOLO, LUCY ALMONTE,* CRISPINA VANQUARDIA, NARCISA VENZON, NORMA ELEGANTE,* AMELIA MORENO,* ABNER PETILOS, NARCISO HILAPO, DOLORES OLAES, MELINDA LLADOC, ERNA AZARCON, and APRIL TOY, INC. WORKERS UNION ALAB vs. NATIONAL LABOR RELATIONS COMMISSION, WELL WORLD TOYS, INC., APRIL TOYS, INC., YU SHENG LING, JENN L. WANG, EUCLIFF CHENG, CHI SHENG LIN, NENITA C. AGUIRRE, MA. THERESA R. CADIENTE and GLICERIA R. AGUIRRE G.R. No. 108936. October 4, 1996 FACTS: Private respondent April Toy, Inc. is a domestic corporation, for the purpose of "manufacturing, importing, exporting, buying , selling, sub-contracting or otherwise dealing in, at wholesale and retail," stuffed toys. On December 20, 1989, or after almost a year of operation, April posted a memorandum 2 within its premises and circulated a copy of the same among its employees informing them of its dire financial condition. April decided to shorten its corporate term "up to February 28, 1990, In view of April's cessation of operations, petitioners who initially composed of seventy-seven employees below filed a complaint for "illegal shutdown/retrenchment/dismissal and unfair labor practice." On June 21, 1990, petitioners amended their complaint to implead private respondent Well World Toys, Inc. (Well World for brevity), a corporation also engaged in the manufacture of stuffed toys for export. Petitioners further alleged that the original incorporators and principal officers of April were likewise the original incorporators of Well World, thus both corporations should be treated as one corporation liable for their claims. The Labor Arbiter found as valid the closure of April, and treated April and Well World as two distinct corporations. ISSUE: Whether or not April and Well World are two distinct corporations. RULING: YES. The two corporations have two different set of officers managing their respective affairs in two separate offices. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud, 15 nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence that April and Well World's corporate personalities were used to perpetuate fraud, or circumvent the law said corporations were rightly treated as distinct and separate from each other.

88 | P a g e

Law 321_Corporation LAW_ Case Digest RUFINA LUY LIM vs. COURT OF APPEALS, AUTO TRUCK TBA CORPORATION, SPEED DISTRIBUTING, INC., ACTIVE DISTRIBUTORS, ALLIANCE MARKETING CORPORATION, ACTION COMPANY, INC. G.R. No. 124715, January 24, 2000 FACTS: Petitioner Rufina Luy Lim is the surviving spouse of late Pastor Y. Lim whose estate is the subject of probate proceedings. The respondent herein is the owner of the properties subject of this. Said properties were included in the inventory of estate late Pastor Lim. Thus he respondents moved for the exclusion of said properties which was denied by the trial court. Petitioner contended upon filing an amended petition that the properties were actually owned by Pastor Lim and the same were registered under his name, hence they should be included in the inventory of his estate, and that during his lifetime, he organized and wholly-owned the five corporations, which are the private respondents in the instant case. ISSUE: Whether or not the doctrine of piercing the corporate veil is applicable. RULING: NO. The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any of these elements prevents piercing the corporate veil. In this case there is no showing that the elements are present. Furthermore, it was proven that said properties were registered in the name of the corporation, hence the same were owned by the corporation despite the fact that, assuming true, it was Pastor Lim who organized the corporation.

89 | P a g e

Law 321_Corporation LAW_ Case Digest MATUGUINA INTEGRATED WOOD PRODUCTS, INC. vs. The HON. COURT OF APPEALS, DAVAO ENTERPRISES CORPORATION, The HON. MINISTER, (NOW SECRETARY) of NATURAL RESOURCES AND PHILLIP CO. G.R. No. 98310. October 24, 1996 FACTS: On June 28, 1973, the Acting Director of the Bureau of Forest Development issued Provisional Timber License (PTL) No. 30, covering an area of 5,400 hectares to Ms. Milagros Matuguina who was then doing business under the name of MLE, a sole proprietorship venture. A portion, covering 1,900 hectares, of the said area was located within the territorial boundary of Gov. Generoso in Mati, Davao Oriental, and adjoined the timber concession of Davao Enterprises Corporation (DAVENCOR), the private respondent. On July 17, 1975, Milagros Matuguina and petitioner MIWPI executed a Deed of Transfer 5 transferring all of the former's rights, interests, ownership and participation in Provincial Timber License No. 30 to the latter for and in consideration of 148,000 shares of stocks in MIWPI. On July 28, 1975, pending approval of the request to transfer the PTL to MIWPI, DAVENCOR, through its Assistant General Manager, complained to the District Forester at Mati, Davao Oriental that Milagros Matuguina/MLE had encroached into and was conducting logging operations in DAVENCOR's timber concession. ISSUE: Whether or not MLE and MIWPI are separate and distinct corporations. RULING: YES. It is settled that a corporation is clothed with personality separate and distinct from that of the persons composing it. It may not generally be held liable for that of the persons composing it. It may not be held liable for the personal indebtedness of its stockholders or those of the entities connected with it. Conversely, a stockholder cannot be made to answer for any of its financial obligations even if he should be its president. But when the juridical personality of the corporation is used to defeat public convenience, justify wrong, protect fraud or defend crime, the corporation shall be considered as a mere association of persons, and its responsible officers and/or stockholders shall be individually. For the same reasons, a corporation shall be liable for the obligations of a stockholder, or a corporation and its successor-in-interest shall be considered as one and the liability of the former shall attach to the latter. But for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In the case at bar, there is, insufficient basis for the appellate court's ruling that MIWPI is the same as Matuguina. The alleged control of Plaintiff Corporation was not evident in any particular corporate acts of Plaintiff Corporation, wherein Maria Milagros Matuguina Logging Enterprises is using Plaintiff Corporation, executed acts or powers directly involving Plaintiff Corporation. Also, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of the corporation, is not itself a sufficient warrant for disregarding the fiction of separate personality.

90 | P a g e

Law 321_Corporation LAW_ Case Digest THE MANILA HOTEL CORP. AND MANILA HOTEL INTL. LTD. vs. NATIONAL LABOR RELATIONS COMMISSION, ARBITER CEFERINA J. DIOSANA AND MARCELO G. SANTOS G.R. No. 120077. October 13, 2000 FACTS: MHICL is a corporation duly organized and existing under the laws of Hong Kong. MHC is an incorporator of MHICL, owning 50% of its capital stock. By virtue of a management agreement with the Palace Hotel (Wang Fu Company Limited), MHICL trained the personnel and staff of the Palace Hotel at Beijing, China. Respondent Santos accepted an employment offer from Palace Hotel. On November 5, 1988, respondent Santos left for Beijing, China. He started to work at the Palace Hotel. A year later he received a letter stating that his employment is being terminated due to business reverses brought about by the political upheaval in China. On February 20, 1990, respondent Santos filed a complaint for illegal dismissal. ISSUE: Whether or not the doctrine of piercing the corporate veil is available to make MHC liable for damages. RULING: NO. MHC, as a separate and distinct juridical entity cannot be held liable. True, MHC is an incorporator of MHICL and owns fifty percent (50%) of its capital stock. However, this is not enough to pierce the veil of corporate fiction between MHICL and MHC. Piercing the veil of corporate entity is an equitable remedy. It is resorted to when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend a crime. It is done only when a corporation is a mere alter ego or business conduit of a person or another corporation. In Traders Royal Bank v. Court of Appeals, the court held that the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities. The tests in determining whether the corporate veil may be pierced are: First, the defendant must have control or complete domination of the othe r corporations finances, policy and business practices with regard to the transaction attacked. There must be proof that the other corporation had no separate mind, will or existence with respect the act complained of. Second, control must be used by the defendant to commit fraud or wrong. Third, the aforesaid control or breach of duty must be the proximate cause of the injury or loss complained of. The absence of any of the elements prevents the piercing of the corporate veil. It is basic that a corporation has a personality separate and distinct from those composing it as well as from that of any other legal entity to which it may be related. Clear and convincing evidence is needed to pierce the veil of corporate fiction. In this case, the court found no evidence to show that MHICL and MHC are one and the same entity.

91 | P a g e

Law 321_Corporation LAW_ Case Digest SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC. vs. COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP. G.R. No. 129459. September 29, 1998 FACTS: A parcel of land was sold by Nenita Lee Gruenberg, the corporate treasurer of defendant corporation Motorich Sale in favor of San Juan Structural and Steel Fabricators, Inc. However, the latter failed to execute the necessary Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant. Hence a case for damages was filed. The defendant corporation questions the validity of the contract entered by its treasurer in its behalf without authorization from the corporations Board. ISSUE: Whether or not the doctrine of piercing the veil of corporate fiction be applied to Motorich. RULING: NO. The contract cannot bind Motorich, because it never authorized or ratified such sale. A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporations board of directors. The corporation may act only through its board of directors, or, when authorized either by its bylaws or by its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of law. As to the piercing of the corporate veil, the same is not applicable. In the present case, the Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons, like petitioner.

92 | P a g e

Law 321_Corporation LAW_ Case Digest TAN BOON BEE & CO., INC. vs. THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY G.R. No. L-41337. June 30, 1988 FACTS: Petitioner herein, doing business under the name and style of Anchor Supply Co., sold on credit to herein private respondent Graphic Publishing, Inc. (GRAPHIC) paper products amounting to P55,214.73. On December 20, 1972, GRAPHIC made partial payment by check to petitioner in the total amount of P24,848.74; and on December 21, 1972, a promissory note was executed to cover the balance of P30,365.99. In the said promissory note, it was stipulated that the amount will be paid on monthly installments and that failure to pay any installment would make the amount immediately demandable with an interest of 12% per annum. On September 6, 1973, for failure of GRAPHIC to pay any installment, petitioner filed a complaint for collection of Sum of Money. A decision was rendered and became final and executory, where one (1) unit printing machine identified as "Original Heidelberg Cylinder Press" Type H 222, NR 78048, found in the premises of GRAPHIC was levied. However, a third party claim was filed by Philippine American Drug Company (PADCO), hence after trial the levy was rendered to be without force. ISSUE: Whether or not the properties of PADCO could be levied due to the allegation that it is mere an adjunct or conduit of Graphic. RULING: YES. In the instant case, petitioner's evidence established that PADCO was never engaged in the printing business; that the board of directors and the officers of GRAPHIC and PADCO were the same; and that PADCO holds 50% share of stock of GRAPHIC. Petitioner likewise stressed that PADCO's own evidence shows that the printing machine in question had been in the premises of GRAPHIC since May, 1965, long before PADCO even acquired its alleged title on July 11, 1966 from Capitol Publishing. That the said machine was allegedly leased by PADCO to GRAPHIC on January 24, 1966, even before PADCO purchased it from Capital Publishing on July 11, 1966, only serves to show that PADCO's claim of ownership over the printing machine is not only farce and sham but also unbelievable. Considering the aforestated principles and the circumstances established in this case, respondent judge should have pierced PADCO's veil of corporate identity.

93 | P a g e

Law 321_Corporation LAW_ Case Digest TELEPHONE ENGINEERING & SERVICE COMPANY, INC. vs. WORKMEN'S COMPENSATION COMMISSION, PROVINCIAL SHERIFF OF RIZAL and LEONILA SANTOS GATUS, for herself and in behalf of her minor children, Teresita, Antonina and Reynaldo, all surnamed GATUS G.R. No. L-28694. May 13, 1981 FACTS: Utilities Management Corporation (UMACOR), the sister company of the petitioner hired the late Pacifica L. Gatus as Purchasing Agent. The latter died due to liver cirrhosis with malignant degeneration. His widow, respondent Leonila S. Gatus, filed a "Notice and Claim for Compensation" Workmen's Compensation Section, alleging therein that her deceased husband was an employee of TESCO, and that he died of liver cirrhosis. TESCO, in its reply, contended that the cause of the illness contracted by Gatus was in no way aggravated by the nature of his work. TESCO takes the position that there was no employer-employee relationship between them, the deceased having been an employee of UMACOR and not of TESCO. ISSUE: Whether or not the contentions of TESCO is tenable. RULING: NO. The court ruled that indeed TESCO is estopped from raising the defense of nonexistence of employer-employee relationship because such was raised only in the petition for the first time. It was considered by the court as a mere afterthought to evade liability. It was also seen that in its initial pleadings it did not deny that it is the employer of the decedent. Petitioner even admitted that TESCO and UMACOR are sister companies operating under one single management and housed in the same building. Although respect for the corporate personality as such, is the general rule, there are exceptions. In appropriate cases, the veil of corporate fiction may be pierced as when the same is made as a shield to confuse the legitimate issues.

94 | P a g e

Law 321_Corporation LAW_ Case Digest BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAEZ, LEOVINA C. JALBUENA and SANTIAGO M. RIVERA vs. COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC. G.R. No. 89561. September 13, 1990 FACTS: Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo family is the owners of a parcel of land located in Lucena City which was given as security for a loan from the Development Banks of the Philippines. For their failure to pay the amortization, foreclosure of the said property was about to be initiated. This problem was made known to Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of land adjacent to the mortgaged property to raise the necessary fund. The idea was accepted by the Castillo family and to carry out the project, a Memorandum of Agreement was executed by and between Slobec Realty and Development, Inc., represented by its President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum of P70,000.00 immediately after the execution of the agreement and to pay the additional amount of P400,000.00 after the property has been converted into a subdivision. Rivera, armed with the agreement, approached Mr. Modesto Cervantes, President of defendant Bormaheco, and proposed to purchase from Bormaheco two (2) tractors Model D-7 and D-8. Subsequently, a Sales Agreement was executed on December 28, 1970, which was accepted by the latter and executed Sales Agreement. The balance of the consideration was secured by a surety bond from ICP (Insurance Corporation of the Phil.) which was in turn secured by a mortagage, the properties of the Castillos. ISSUE: Whether or not the doctrine of piercing the veil of corporate fiction is applicable. RULING: NO. Petitioners seek to pierce the veil of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners. In the instant case, petitioners do not seek to impose a claim against the individual members of the three corporations involved; on the contrary, it is these corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations personally liable therefore. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter. The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights.

95 | P a g e

Law 321_Corporation LAW_ Case Digest VLASON ENTERPRISES CORPORATION vs. COURT OF APPEALS and DURAPROOF SERVICES, represented by its General Manager, Cesar Urbino Sr. G.R. Nos. 121662-64. July 6, 1999 FACTS: Poro Point Shipping Services, then acting as the local agent of Omega Sea Transport Company of Honduras & Panama, a Panamanian company, (hereafter referred to as Omega), requested permission for its vessel M/V Star Ace, which had engine trouble, to unload its cargo and to store it at the Philippine Ports Authority (PPA) compound in San Fernando, La Union while awaiting transhipment to Hongkong. The request was approved by the Bureau of Customs. Despite the approval, the customs personnel boarded the vessel when it docked on January 7, 1989, on suspicion that it was the hijacked M/V Silver Med owned by Med Line Philippines Co., and that its cargo would be smuggled into the country. The district customs collector seized said vessel and its cargo pursuant to Section 2301, Tariff and Customs Code. They entered into a salvage agreement with private respondent to secure and repair the vessel which was destroyed by the typhoons that hit the province at the agreed consideration of $1 million and fifty percent (50%) of the cargo after all expenses, cost and taxes. Subsequently, the seizure was lifted for want of fraud. To enforce its preferred salvors lien, herein Private Respondent Duraproof Services filed with the Regional Trial Court of Manila a Petition for Certiorari, Prohibition and Mandamus assailing the actions of Commissioner Mison and District Collector Sy. ISSUE: Whether or not the doctrine of piercing the corporate veil is applicable. RULING: NO. In the present case, Bebero was the secretary of Angliongto, who was president of both VSI and petitioner, but she was an employee of VSI, not of petitioner. The piercing of the corporate veil cannot be resorted to when serving summons. Doctrinally, a corporation is a legal entity distinct and separate from the members and stockholders who compose it. However, when the corporate fiction is used as a means of perpetrating a fraud, evading an existing obligation, circumventing a statute, achieving or perfecting a monopoly or, in generally perpetrating a crime, the veil will be lifted to expose the individuals composing it. None of the foregoing exceptions has been shown to exist in the present case. Quite the contrary, the piercing of the corporate veil in this case will result in manifest injustice.

96 | P a g e

Law 321_Corporation LAW_ Case Digest VILLA REY TRANSIT, INC. vs. EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE COMMISSION EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC. PANGASINAN TRANSPORTATION CO., INC. vs. JOSE M. VILLARAMA G.R. No. L-23893. October 29, 1968 FACTS: Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to certificates of public convenience granted him by the Public Service Commission (PSC, for short) in Cases Nos. 44213 and 104651, which authorized him to operate a total of thirty-two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the aforementioned two certificates of public convenience to the Pangasinan Transportation Company, Inc. (Pantranco), for P350,000.00 with the condition, among others, that the seller (Villarama) "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer." Barely three months thereafter, or on March 6, 1959, a corporation called Villa Rey Transit, Inc. was organized. In less than a month after its registration, it bought five certificates of public convenience, forty-nine buses, tools and equipment from one Valentin Fernando. Before the PSC could take final action on said application for approval of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of the five certificates of public convenience involved therein pursuant to a writ of execution issued by the Court of First Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant, judgment debtor. The Sheriff made and entered the levy in the records of the PSC. On July 16, 1959, a public sale was conducted by the Sheriff of the said two certificates of public convenience. ISSUE: Whether or not the doctrine of piercing the corporate veil is applicable. RULING: YES. The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law. 29 When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. Upon the foregoing considerations, the Court so held that the preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and binding against the said Corporation. For the rule is that a seller or promissor may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee.

97 | P a g e

Law 321_Corporation LAW_ Case Digest

De Facto Corporation
C. ARNOLD HALL and BRADLEY P. HALL, petitioners, vs. EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and Commercial Co., Inc., respondents. G.R. No. L-2598. June 29, 1950 FACTS: In 1947, the petitioners and the respondents signed and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation described in a list appended thereto. Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers. In 1947, the said articles of incorporation were filed in the office of the SEC for the issuance of the corresponding certificate of incorporation. Thereafter, pending action on the articles of incorporation by the SEC, the respondents filed before the Court of First Instance of Leyte a civil case, alleging among other things that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. The petitioners alleged that the court had no jurisdiction over the civil case decree the dissolution of the company, because it being a de facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding instituted in accordance with section 19 of the Corporation Law. ISSUES: Whether or not the Far Eastern Lumber and Commercial Co., Inc. is a de facto corporation. RULING: NO. Inasmuch as the Far Eastern Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction to take cognizance of said civil case. There are least two reasons why this section does not govern the situation. (1) First, not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its stockholders may not probably claim "in good faith" to be a corporation. Under our statue it is to be noted that it is the issuance of a certificate of incorporation by the Director of the Bureau of Commerce and Industry (now SEC) which calls a corporation into being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in good faith." (2) Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.

98 | P a g e

Law 321_Corporation LAW_ Case Digest

Corporation by Estoppel
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION G.R. No. 119002. October 19, 2000 FACTS: Petitioner International Express Travel and Tour Services, Inc., through its managing director, wrote a letter to the Philippine Football Federation (Federation), through its president private respondent Henri Kahn, wherein the former offered its services as a travel agency to the latter, which was accepted. Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation which amounted to P449,654.83. For failure to pay the unpaid amount after demands, the petitioner filed a collection case against Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation as an alternative defendant. Kahn denied liability and averred that it merely acted as the agent of the Federation and did not guaranty the payment of the purchased tickets. The trial court ruled against Kahn. ISSUE: Whether or not Kahn is personally liable. RULING: YES. Kahn avers that he should not be made personally liable because it should be the Federation, as a corporation having juridical existence, which must be held liable. He merely acted as an agent of the latter. The Court was not persuaded. It ruled that under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604, for a Federation to acquire juridical existence it is a requirement that the federation must be recognized by the accrediting organization, the Philippine Amateur Athletic Federation. And Kahn failed to prove that such requirement was complied with by the Federation. It is a settled principal in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent.1 As president of the Federation, Henri Kahn is presumed to have known about the corporate existence or non-existence of the Federation.

99 | P a g e

Law 321_Corporation LAW_ Case Digest LIM TONG LIM vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC. 1999 Nov 3, G.R. No. 136448 FACTS: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. They, however, failed to pay; hence, private respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation Yao and Chua admitted liability while Lim filed his answer. Trial court rendered decision ruling that Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent. ISSUE: Whether or not Lim should be made jointly liable with Yao and Chua. RULING: YES. Lim asserts that he should not be made liable because there was no partnership existing between them. The court ruled that there exist a partnership between them. It is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership. Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have proceeded.

100 | P a g e

Law 321_Corporation LAW_ Case Digest MARIANO A. ALBERT vs. UNIVERSITY PUBLISHING CO., INC. G.R. No. L-19118, January 30, 1965 FACTS: In the original case, the court had awarded P P15,000.00 in favor of the petitioner for damages arising out of a breach of contract. Such breach of contract arose when the publishing company failed to pay the petitioner the agreed amount for latter to have the exclusive right to publish his revised Commentaries on the Revised Penal Code and for his share in previous sales of the book's first edition. The order became final and executory. A writ of execution was issued against the company, however the petitioner petitioned for a writ of execution against Jose M. Aruego, as the real defendantstating, plaintiff's counsel and the Sheriff of Manila discovered that there is no such entity as University Publishing Co., Inc. and no such entity is registered with the SEC. This case asks the court whether or not the judgment may be executed against Jose M. Aruego, supposed President of University Publishing Co., Inc., as the real defendant. ISSUE: Whether or not the judgment may be executed against Jose M. Aruego, supposed President of University Publishing Co., Inc., as the real defendant. RULING: NO. The Court ruled that the doctrine of corporation by estoppel was not applicable. Although the rule is that a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent, in this case, Aruego was not named as a defendant. Since he was not named, he could not be served and be made liable for the claim because to do so would violate his right to due process. He was not given the chance to defend himself and be heard during trial. Wherefore, the order was reversed and set aside and was remanded lower court to hold supplementary proceedings for the purpose of carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego.

101 | P a g e

Law 321_Corporation LAW_ Case Digest

Non-User of Charter vs. Continuous Inoperation


LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC. vs. HON. COURT OF APPEALS 1997 Aug 7, G.R. No. 117188 FACTS: LGVHAI was organized as the association of homeowners and residents of the Loyola Grand Villas. It was registered with the Home Financing Corporation. For unknown reasons, however, LGVHAI did not file its corporate by-laws. Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so. They later discovered that there were two other organizations within the subdivision the North Association and the South Association. According to private respondents, a nonresident and Soliven himself respectively headed these associations. They also discovered that these associations had five (5) registered homeowners each who were also the incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as member of the North Association while three (3) members of LGVHAI were listed as members of the South Association. When they inquired as to the status of LGVHAI, the head of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not submit its by-laws within the period required by the Corporation Code and, second, there was non-user of corporate charter because HIGC had not received any report on the association's activities. These prompted the LGVHAI to lodge complaint with HIGC questioning its act of revoking its certificate of registration without due notice and hearing and concomitantly prayed for the cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI. ISSUE: Whether or not the failure of a corporation to file its by-laws within one month from the date of its incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic dissolution. RULING: NO. Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. Even under the express grant of power and authority under Presidential Decree No. 902-A, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same.

102 | P a g e

Law 321_Corporation LAW_ Case Digest

BOARD OF DIRECTORS Qualifications/Qualifying Shares


REP. LUIS R. VILLAFUERTE, et al. vs. GOV. OSCAR S. MORENO, et al. G.R. No. 186566, October 2, 2009 FACTS: As a result of the Tokyo Communique, which unified the feuding Basketball Association of the Philippines ("BAP") and the newly formed Pilipinas Basketbol ("PB"), the Samahang Basketbol ng Pilipinas, Inc. ("SBP") was established and its constitutive documents consisting of the Articles of Incorporation were signed by the five (5) incorporators, which include petitioner Pangilinan. On the same day, the incorporators likewise passed and signed its by-laws. Subsequently, the three-man panel met in Bangkok, Thailand where it forged and executed a Memorandum of Agreement ("Bangkok Agreement") integrating therein the final terms and conditions of the unity and merger of BAP and PB. Then came the nomination and election of its transitory officers for the years 2007-2008 the results of which had led to the proclamation of respondent Villafuerte as Chairman. Petitioner raised its opposition and did not recognize the election of respondent Villafuerte as Chairman of BAP-SBP on account of the alleged failure of the latter to qualify for the said position. As a result of this, two elections were held by the different factions for the positions in the Board of Trustees. Petitioners filed before the Regional Trial Court of Manila a petition 5 for declaration of nullity of the election of respondents as members of the Board of Trustees and Officers of BAP-SBP. The trial court rendered decision in favor of the petitioners. ISSUE: Whether or not Villafuerte is qualified as a Director. RULING: NO. Respondents asserted that Villafuerte never assumed the position of Chairman of the BAP-SBP because he failed to qualify for the same; that before Villafuerte could legally assume the Chairmanship of BAP-SBP, he must first be elected a member of the Board of Trustees. As correctly pointed out by CA, petitioner Villafuertes nomination must of necessity be understood as being subject to or in accordance with the qualifications set forth in the By-Laws of the BAP-SBP. Since the said by-laws require the Chairman of the Board of Trustees to be a trustee himself, petitioner Villafuerte was not qualified since he had neither been elected nor appointed as one of the trustees of BAP-SBP. In other words, petitioner Villafuerte never validly assumed the position of Chairman because he failed in the first place to qualify therefore.

103 | P a g e

Law 321_Corporation LAW_ Case Digest CONSTANCIO T. BAGUIO vs. LAS PALMAS INTERNATIONAL MANPOWER CORPORATION, SPOUSES DONALDO PALMA AND CONSUELO P. PALMA and CYNTHIA C. CALAPRE G.R. No. 93417, September 14, 1993 FACTS: Petitioner claims that he bought 600 shares of stocks from the respondent corporation for the amount of P60, 000.00. He further avers that the respondents failed, for such a long time, to deliver the certificates of stocks corresponding to the stocks he bought. He thus sought for the reimbursement of return of the P60, 000.00 he allegedly paid to the corporation. The respondents denied receiving any payment from the petitioner. Petitioner forwards the fact that the corporation had adopted a resolution recognizing him as being a stockholder owning 600 shares, and was further appointed as vice-president, hence the respondents cannot deny the fact that they have received the payment. There was no receipt presented because when petitioner asked for one, respondents Palmas assured him that the board resolution and the secretary's certificate were better evidence of payment than an ordinary receipt. He was likewise told that the stock certificate would be issued in December 1982, after the board meeting. Respondents Palmas used the money to pay their employees, whose salaries had not been paid for several months. The trial court ruled for the petitioner, but the CA reversed the same. ISSUE: Whether or not petitioner actually paid respondent Palmas the sum of P60,000.00, the price of the shares of stock sold to him. RULING: NO. The court ruled that there was no payment. The resolution adopted by the Board does not speak of any sales transaction and receipt of payment. It merely states that the petitioner was accepted as a stockholder to the corporation. Even assuming that a transaction between the petitioners and the spouses Palma transpired, the corporation had nothing to do with the business transactions entered by its officers in their personal capacity and petitioner. Furthermore, petitioner cannot claim that being a member of the board of directors and occupying the position of Vice-President-International necessarily imply that he must have owned duly-paid shares of stock. The election of a person to the board of directors of a corporation does not necessarily mean that he has paid for the shares recorded in his name. In most cases, nominee directors do not pay for the qualifying shares assigned to them. Likewise, the Corporation Code does not require that one elected or appointed as vice-president of a corporation should be the owner of shares of stock of the corporation.

104 | P a g e

Law 321_Corporation LAW_ Case Digest DETECTIVE & PROTECTIVE BUREAU, INC. vs. HON. CLORIBEL and FAUSTO S. ALBERTO 1968 Nov 29, G.R. No. L-23428 FACTS: Plaintiff filed against herein private defendant a complaint for accounting with preliminary injunction and receivership. It alleged that defendant was managing director of plaintiff corporation from 1952 until January 14, 1964; that in June 1963, defendant illegally seized and took control of all the assets as well as the books, records, vouchers and receipts of the corporation from the accountant-cashier, concealed them illegally and refused to allow any member of the corporation to see and examine the same; that on January 14, 1964, the stockholders, in a meeting, removed defendant as managing director and elected Jose de la Rosa in his stead; that defendant not only had refused to vacate his office and to deliver the assets and books to Jose de la Rosa, but also continued to perform unauthorized acts for and in behalf of plaintiff corporation; that defendant had been required to submit a financial statement and to render an accounting of his administration from 1952 but defendant has failed to do so; and that it continued disposing properties of the corporation contrary to a Board resolution. The writ of preliminary injunction was granted upon posting a bond. However, the respondent filed a counter-bond which was granted, and the order for preliminary injunction was lifted. Hence, petition for certiorari under Rule 65 was filed. ISSUE: Whether or not a writ of preliminary injunction against respondent should be granted. RULING: NO. Petitioner contended that respondent Alberto had arrogated to himself the powers of the Board of Directors of the corporation because he refused to vacate the office and surrender the same to Jose de la Rosa who had been elected managing director by the Board to succeed him. This assertion, however, was disputed by respondent Alberto who stated that Jose de la Rosa could not be elected managing director because he did not own any stock in the corporation. The Court ruled that there is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part provides: "Sec. 30. Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporation." If the managing director-elect was not qualified to become managing director, respondent Fausto Alberto could not be compelled to vacate his office and cede the same to the managing director-elect because the by-laws of the corporation provides in Article IV, Section 1 that "Directors shall serve until the election and qualification of their duly qualified successor."

105 | P a g e

Law 321_Corporation LAW_ Case Digest GRACE CHRISTIAN HIGH SCHOOL vs. THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO 1997 Oct 23, G.R. No. 108905 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., on the other hand, 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. For 15 years the petitioner had been occupying a permanent seat in the Board of Directors of the respondent. However, the latter decided to reexamine the right of petitioner's representative to continue as an unelected member of the board. As the board denied petitioner's request to be allowed representation without election, petitioner brought an action for mandamus in the Home Insurance and Guaranty Corporation. Its action was dismissed by the hearing officer whose decision was subsequently affirmed by the appeals board. Petitioner appealed to the Court of Appeals, which in turn upheld the decision of the HIGC's appeals board. Hence this petition for review. ISSUE: Whether or not the petitioner has acquired a vested right to be a permanent director in the association under the drafted by laws, but which were not submitted to the members for approval. RULING: NO. The present Corporation Code states that 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. But in the case of petitioner, there is no reason at all for its representative to be given a seat in the board. Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in 1975 that a proposed amendment to the bylaws sought to give it one. Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. Also, petitioner cannot 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."

106 | P a g e

Law 321_Corporation LAW_ Case Digest RAMON C. LEE and ANTONIO DM. LACDAO vs. THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS GONZALES G.R. No. 93695, February 4, 1992 FACTS: A complaint for a sum of money was filed by the International Corporate Bank, Inc. against the private respondents who, in turn, filed a third party complaint against ALFA and the petitioners. The trial court denied the motion to dismiss the 3rd party complaint filed by petitioners and ordered the respondents to serve summons to ALFA. Initially the summons was served to ALFA through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the DBP. On the other hand, the DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence. Private respondents filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the trial court granted, and which was opposed by the petitioners contending that there was improper service of summons because they were no longer officers of ALFA by virtue of a voting trust agreement. ISSUE: Whether or not the petitioners are correct. RULING: YES. The petitioners argue that by virtue of the voting trust agreement the petitioners can no longer be considered directors of ALFA. They cited that to be directors, the Corporation Code requires that it must own at least 1 one (1) share of the capital stock of the corporation of which he is a director which share shall stand in his name on the books of the corporation. The voting trust agreement effectively transferred to DBP, as the trustee, legal ownership of the stock covered by the agreement and the latter became the stockholder of record with respect to the said shares of stocks. Since the petitioners no longer had in their names even a single share in the corporation, they ceased to be qualified as directors, hence they are no longer authorized to receive summons. Being so, the service of summons upon the petitioners was invalid.

107 | P a g e

Law 321_Corporation LAW_ Case Digest

Disqualifications
ENRIQUE P. BRIAS Y ROXAS vs. JOHN S. HORD, et al. 1913 Feb 5, G.R. No. 8387 FACTS: The petitioner was a duly elected member of the Board of BPI. When he requested before Hord, the President of the company, an examination of the books and finances of the company, the same was denied, even after repeated demands. Thereafter, he alleged that the respondents made it appear that the petitioner had tendered a resignation and declared that his position was vacant. Hence the latter filed this complaint demanding that he be reinstated from his former office. ISSUE: Whether or not the petitioner is entitled to the relief sought. HELD: YES. Based from the documentary and testimonial evidence there is no clear showing that the petitioner had actually resigned. The testimonies of the respondents posed several and fatal inconsistencies while the testimony of the petitioner more or less proves what really transpired during the meeting. With these, the petitioner is still entitled to his position and his request for examination of the corporate books must be granted.

108 | P a g e

Law 321_Corporation LAW_ Case Digest

Voting
WOLFGANG AURBACH, et al. vs. SANITARY WARES MANUFACTURING CORPORATION, et al. 1989 Dec 15, G.R. No. 75875 FACTS: In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners, European or American who could help in its expansion plans. ASI, a foreign corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on by an incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation." The conflict arose when there had dissentions from ASI for the proposed export expansion by the other stockholders. When the next annual election of the Board came, further conflicts arose on the manner of voting, it resulted to the uncertainty as to who were duly elected. The contending groups of Lagdameo Group and ASI Group claim claimed to be the legitimate directors of the corporation. ISSUE: Whether or not Petitioners were the duly elected members of the Board. HELD: NO. The Court ruled that Wolfgang Aurbach, John Griffin, David P Whittingham, Ernesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the March 8, 1983 annual stockholders meeting were the duly elected members of the Board. Under their agreement, both parties were given the right their shares cumulatively. ASI, however, should not be allowed to interfere in the voting within the Filipino group. Otherwise, ASI would be able to designate more than the three directors it is allowed to designate under the Agreement, and may even be able to get a majority of the board seats, a result which is clearly contrary to the contractual intent of the parties. The foreign Group (ASI) was limited to designate three directors . This is the allowable participation of the ASI Group. Hence, in future dealings, this limitation of six to three board seats should always be maintained as long as the joint venture agreement exists considering that in limiting 3 board seats in the 9-man board of directors there are provisions already agreed upon and embodied in the parties' Agreement to protect the interests arising from the minority status of the foreign investors.

109 | P a g e

Law 321_Corporation LAW_ Case Digest BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO) vs. PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, et al. 1987 May 27, G.R. No. 75885 FACTS: This case arose from a sequestration order issued by the PCGG under authority given by the president. Such sequestration order was sent and received by petitioner. Pursuant to this sequestration orders, take over orders were also issued to protect public interest and to prevent the disposal or dissipation of business enterprises and properties taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the appropriate authorities. However, among other facts, the petitioner questions the exercise of PCGGs right of ownership and management when it terminated several contracts without the consent of both parties, to enter contracts, and to operate its quarry business, and especially its right ot vote during stockholders meetings. ISSUE: Whether or not PCGG may vote in stockholders meetings. RULING: YES. PCGG may properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG, pending the outcome of proceedings to determine the ownership of sequestered shares of stock, to vote such shares of stock as it may have sequestered in corporations at all stockholders' meetings called for the election of directors, declaration of dividends, amendment of the Articles of Incorporation, etc. Moreover, in the case at bar, there was adequate justification to vote the incumbent directors out of office and elect others in their stead because the evidence showed prima facie that the former were just tools of President Marcos and were no longer owners of any stock in the firm, if they ever were at all.

110 | P a g e

Law 321_Corporation LAW_ Case Digest

Report on Election
PREMIUM MARBLE RESOURCES, INC. vs. THE COURT OF APPEALS and INTERNATIONAL CORPORATE BANK 1996 Nov 4, G.R. No. 96551 FACTS: Herein petitioner filed a case for damages against respondent for allowing clearance of checks by unauthorized officers of the former, to the formers prejudice. However this case was opposed by some members of the petitioner on the ground that the filing of the complaint was not authorized by the Board. Hence, a resolution of this case was necessary to litigate the claim of the petitioner for damages against the respondent bank. ISSUE: Whether or not the filing was authorized by a duly constituted Board of Directors of the petitioner corporation. RULING: NO. The petitioners asserted that the Board authorized such filing. However, from the records of the case as well as that of the corporation, no evidence was seen and shown that the results of the election where the supposed members of the Board who allegedly authorized the filing were filed with the Securities and Exchange Commission. The Corporation Code mandates that within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. Failure to comply with such requirement, the elected members cannot be considered as the duly constituted and elected members of the Board. Hence, being not duly constituted, the filing of the case was not authorized by the Board.

111 | P a g e

Law 321_Corporation LAW_ Case Digest

Term of Office/Holdover
DR. HANS CHRISTIAN M. SEERES vs. COMMISSION ON ELECTIONS and MELQUIADES A. ROBLES G.R. No. 178678, April 16, 2009 FACTS: Private respondent Robles was elected president and chairperson of Buhay, a party-list group duly registered with COMELEC. The constitution of BUHAY provides for a three-year term for all its party officers, without re-election. Robles again signed and filed a Certificate of Nomination of BUHAYs nominees for the 2007 elections, however such certificate was denied by petitioner alleging that he was the acting president and secretary-general of BUHAY, having assumed that position since August 17, 2004 when Robles vacated the position. Seeres further claimed that the nominations made by Robles were, for lack of authority, null and void owing to the expiration of the latters term as party president. On May 10, 2007, the National Council of BUHAY adopted a resolution expelling Seeres as party member for his act of submitting a Certificate of Nomination for the party. Subsequently, Robles was adjudged as the duly authorized representative of Buhay. Aggrieved, petitioner filed this complaint. ISSUE: Whether or not respondent Robles is the duly authorized representative of BUHAY. RULING: YES. Petitioner Seeres maintains that at the time the Certificate of Nomination was submitted, Robles term as President of BUHAY had already expired, thus effectively nullifying the Certificate of Nomination and the nomination process. The Court was mot amenable. As a general rule, officers and directors of a corporation hold over after the expiration of their terms until such time as their successors are elected or appointed. Sec. 23 of the Corporation Code contains a provision to this effect, thus: the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. The holdover doctrine accords validity to what would otherwise be deemed as dubious corporate acts and gives continuity to a corporate enterprise in its relation to outsiders. The voting members of BUHAY duly elected Robles as party President in October 1999. And although his regular term as such President expired in October 2002, no election was held to replace him and the other original set of officers. Further, the constitution and by-laws of BUHAY do not expressly or impliedly prohibit a hold-over situation. As such, since no successor was ever elected or qualified, Robles remained the President of BUHAY in a "hold-over" capacity.

112 | P a g e

Law 321_Corporation LAW_ Case Digest

How Removed
LEON J. LAMBERT vs. T. J. FOX 1914 Jan 29, G.R. No. 7991 FACTS: Due to financial crisis the petitioner and the defendant were able to acquire the bulk of the stocks of John R. Edgar & Co. as the latters creditors. Hence, upon incorporating said company, the parties entered into an agreement that either of them will not sell or transfer their respective shares till after one year from the date of agreement. However, less than a year, defendant Fox sold his stock in the said corporation to E. D. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc. This sale was made by the defendant against the protest of the plaintiff and with the warning that he would be held liable under the contract hereinabove set forth and in accordance with its terms. In fact, the defendant Fox offered to sell his shares of stock to the plaintiff for the same sum that McCullough was paying for them less P1, 000, the penalty specified in the contract. The trial Court rendered judgment in favor of defendant. ISSUE: Whether or not the stipulation not to sell is valid. RULING: YES. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. The intention of parties to a contract must be determined, in the first instance, from the words of the contract itself. It is to be presumed that persons mean what they say when they speak plain English. Interpretation and construction should by the instruments last resorted to by a court in determining what the parties agreed to. Where the language used by the parties is plain, then construction and interpretation are unnecessary and, if used, result in making a contract for the parties. In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal results are concerned. Whatever differences exists between them as a matter of language, they are treated the same legally. In either case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity of proving damages. Indeed one of the primary purposes in fixing a penalty or in liquidating damages is to avoid such necessity.

113 | P a g e

Law 321_Corporation LAW_ Case Digest

How Vacancy Filled


VALLE VERDE COUNTRY CLUB, INC., et al. vs. VICTOR AFRICA G.R. No. 151969, September 4, 2009 FACTS: During the Annual Stockholders Meeting of petitioner Valle Verde Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan, Eduardo Makalintal, Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa. In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders meeting could not be obtained. Consequently, the above-named directors continued to serve in the VVCC Board in a hold-over capacity. Two of the said members resigned (Makalintal and Dinglasan). After the resignation of Dinglasan, Eric Roxas was elected. Makalintal was replaced by Jose Ramirez. Respondent 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. Africa alleged that the election of Roxas was contrary to Section 29, in relation to Section 23, of the Corporation Code of the Philippines. The respective trial courts ruled in favor of Africa. ISSUE: Whether or not the elections were valid. RULING: YES. Section 23of the Corporation Code declares that "the board of directors shall hold office for one (1) year until their successors are elected and qualified," we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period that time from the lapse of one year from a members election to the Board and until his successors election and qualification is not part of the directors original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term. After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals term of office is deemed to have already expired. That he continued to serve in the VVCC Board in a holdover capacity cannot be considered as extending his term. This holdover period, however, is not to be considered as part of his term, which, as declared, had already expired. With the expiration of Makalintals term of office, a vacancy resulted which, by the terms of Section 29of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called for the purpose. As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez to replace Makalintal, there was no more unexpired term to speak of, as Makalintals one -year term had already expired. Pursuant to law, the authority to fill in the vacancy caused by Makalintals leaving lies with the VVCCs stockholders, not the remaining members of its board of directors.

114 | P a g e

Law 321_Corporation LAW_ Case Digest

How Compensated
GABRIEL C. SINGSON, et al. vs. COMMISSION ON AUDIT G.R. No. 159355, August 9, 2010 FACTS: Petitioners are the members of the Board of Philippine International Convention Center, Inc. (PICCI). By virtue of the PICCI By-Laws, petitioners were authorized to receive P1,000.00 per diem each for every meeting attended. An amended resolution further granted the Members of the additional monthly RATA, in the amount of P1,500.00, to each of the petitioners. However, payment for such grants were denied. The disallowance was questioned but it was upheld by herein respondent. Hence this petition. ISSUE: Whether or not the grant of the compensation as well as the monthly RATA are valid. RULING: NO. Section 30 of the Corporation Code, which authorizes the stockholders to grant compensation to its directors, states: In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems; Provided, however, that any such compensation (other than per diems) may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. From this, it is clear that the directors of a corporation shall not receive any compensation for being members of the board of directors, except for reasonable per diems. The two instances where the directors are to be entitled to compensation shall be when it is fixed by the corporations by-laws or when the stockholders, representing at least a majority of the outstanding capital stock, vote to grant the same at a regular or special stockholders meeting, subject to the qualification that, in any o f the two situations, the total yearly compensation of directors, as such directors, shall in no case exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. In this regard, the Court upholds the findings of respondent that petitioners right to compensation as members of the PICCI Board of Directors is limited only to per diem of P1,000.00 for every meeting attended, by virtue of the PICCI By-Laws.

115 | P a g e

Law 321_Corporation LAW_ Case Digest WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. HOMERO L. VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS v. RICARDO T. SALAS, et al. 1997 Aug 21, G.R. No. 113032 FACTS: The petitioners are the minority stockholders, while the respondents are the majority stockholders of the corporation. The petitioners alleged that a meeting was held in its principal office and a prior notice was distributed to the members. Subsequently a resolution was passed granting monthly compensation for services rendered by its officers. A complaint was filed against the respondents by the petitioners contending that the grant of compensation is prohibited. The trial court rendered decision in favor of the respondents. ISSUE: Whether or not the grant of compensation was valid. RULING: YES. Under section 30, there are two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders' meeting agree to give it to them. The proscription under said section pertains to compensations granted to members of the Board. But they are not prohibited to be compensated if these members of the Board act as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology.

116 | P a g e

Law 321_Corporation LAW_ Case Digest CENTRAL COOPERATIVE EXCHANGE, INC. vs. CONCORDIO TIBE, SR. and THE HONORABLE COURT OF APPEALS 1970 Jun 30, G.R. No. L-27972 FACTS: The petitioner is a national federation of farmers' cooperative marketing associations, or FACOMAS, scattered throughout the country. Under its by- laws "The compensation, if any, and the per diems for attendance at meetings of the members of the Board of Directors shall be determined by the members at any annual meeting in special meeting of the Exchange called for the purpose." In the annual stockholders meeting it was resolved that the members of the Board of Directors attending the CCE board meetings be entitled to actual transportation expenses plus the per diems of P30.00 and actual expenses while waiting. In this regard, Tibe collected the said amounts however the petitioner refused to give on the ground that the resolutions are invalid. The trial court ruled in favor of Tibe. ISSUE: Whether or not the resolutions are valid. RULING: NO. The Court ruled that resolutions are contrary to the By-Laws of the federation and, therefore, are not within the power of the board of directors to enact. The ByLaws, in the aforequoted Section 8, explicitly reserved unto the stockholders the power to determine the compensation of members of the board of directors, and the stockholders did restrict such compensation to "actual transportation expenses plus the per diems of P30.00 and actual expenses while waiting." Even without the express reservation of said power, the directors are not entitled to compensation under the Corporation Code. The directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as expressed in the ByLaws.

117 | P a g e

Law 321_Corporation LAW_ Case Digest LINGAYEN GULF ELECTRIC POWER COMPANY, INC. vs. IRINEO BALTAZAR G.R. No. L-4824, June 30, 1953 FACTS: The respondent subscribed stocks of the petitioner. After paying several amount, the respondent failed to pay its outstanding balance, even after a demand made by the corporation. The latter hence opted to collect the unpaid balance of the subscription made. However, the respondent refused to pay on the contention that he has been released from his liability under Resolution No. 17. Furthermore, he countered that, as the President of the corporation, he was entitled to compensation. The trial court rendered judgment in favor of respondent. ISSUE: Whether or not the respondent is entitled to compensation. RULING: NO. It is clear that he is not entitled to the same. The by-laws of the company are silent as to the salary of the President. And, while resolutions of the incorporators and stockholders provide salaries for the general manager, secretary-treasurer and other employees, there was no provision for the salary of the President. On the other hand, other resolutions provide for per diems to be paid to the President and the directors of each meeting attended, P10 for the President and P8 for each director, which were later increased to P25 and P15, respectively. This leads to the conclusions that the President and the board of directors were expected to serve without salary, and that the per diems paid to them were sufficient compensation for their services. Furthermore, for defendant's several years of service as President and up to the filing of the action against him, he never filed a claim for salary.

118 | P a g e

Law 321_Corporation LAW_ Case Digest

Authority of the Board of Directors


LA BUGAL-B'LAAN TRIBAL ASSOCIATION, INC., et al. vs. VICTOR O. RAMOS, Secretary, Department of Environment and Natural Resources (DENR); HORACIO RAMOS, Director, Mines and Geosciences Bureau (MGB-DENR); RUBEN TORRES, Executive Secretary; and WMC (PHIL.), INC. G.R. No. 127882. December 1, 2004 FACTS: On July 25, 1987, then President Corazon C. Aquino issued Executive Order (E.O.) No. 279authorizing the DENR Secretary to accept, consider and evaluate proposals from foreign-owned corporations or foreign investors for contracts or agreements involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, which, upon appropriate recommendation of the Secretary, the President may execute with the foreign proponent. Subsequently, then President Fidel V. Ramos approved R.A. No. 7942 to "govern the exploration, development, utilization and processing of all mineral resources."R.A. No. 7942 defines the modes of mineral agreements for mining operations,outlines the procedure for their filing and approval, assignment/transferand withdrawal, and fixes their terms. Similar provisions govern financial or technical assistance agreements. On August 15, 1995, then DENR Secretary Victor O. Ramos issued DENR Administrative Order (DAO) No. 95-23, s. 1995, otherwise known as the Implementing Rules and Regulations of R.A. No. 7942. This was later repealed by DAO No. 96-40, s. 1996 which was adopted on December 20, 1996. On January 10, 1997, counsels for petitioners sent a letter to the DENR Secretary demanding that the DENR stop the implementation of R.A. No. 7942 and DAO No. 96-40. ISSUE: Whether or not the law in force when the WMC FTAA was executed, not come into effect. RULING: YES. It bears noting that there is nothing in E.O. No. 200 that prevents a law from taking effect on a date other than even before the 15-day period after its publication. Where a law provides for its own date of effectivity, such date prevails over that prescribed by E.O. No. 200. Indeed, this is the very essence of the phrase "unless it is otherwise provided" in Section 1 thereof. Section 1, E.O. No. 200, therefore, applies only when a statute does not provide for its own date of effectivity. As noted, "service contracts" is a term that assumes different meanings to different people. The commissioners may have been using the term loosely, and not in its technical and legal sense, to refer, in general, to agreements concerning natural resources entered into by the Government with foreign corporations. These loose statements do not necessarily translate to the adoption of the 1973 Constitution provision allowing service contracts. In any case, the constitutional provision allowing the President to enter into FTAAs with foreign-owned corporations is an exception to the rule that participation in the nation's natural resources is reserved exclusively to Filipinos. Accordingly, such provision must be construed strictly against their enjoyment by non-Filipinos. As Commissioner Villegas emphasized, the provision is "very restrictive."Commissioner Nolledo also remarked that "entering into service contracts is an exception to the rule on protection of natural resources for the interest of the nation and, therefore, being an exception, it should be subject, whenever possible, to stringent rules." Indeed, exceptions should be strictly but reasonably construed. 119 | P a g e

Law 321_Corporation LAW_ Case Digest SHIPSIDE INCORPORATED vs. THE HON. COURT OF APPEALS, HON. REGIONAL TRIAL COURT, BRANCH 26 & the REPUBLIC OF THE PHILIPPINES G.R. No. 143377, February 20, 2001 FACTS: Originally four lots were owned Rafael Galvez. He subsequently sold lot 1 and 4 in favor of Filipina Mamaril, Cleopatra Llana, Regina Bustos, and Erlinda Balatbat in a deed of sale. Mamaril later sold lot 1 to Lepanto Consolidated Mining Company. Later, unknown to Lepanto, the RTC declared the OCT registered in the name of Galvez as null and void and ordered the cancellation thereof. On October 28, 1963, Lepanto Consolidated Mining Company sold to herein petitioner Lots No. 1 and 4. Meanwhile the decision of the CA became final and executory and a writ was issued, however said writ remained unsatisfied for 24 years. Office of the Solicitor General filed a complaint for revival of judgment and cancellation of titles before the Regional Trial Court of the First Judicial Region against the successors of Galvez and herein petitioner and its motion for reconsideration was likewise turned down. The CA affirmed the same, hence this petition. ISSUE: Whether or not the filing of the petition was authorized by the BOD of petitioner. RULING: YES. The Court of Appeals dismissed the petition for certiorari on the ground that Lorenzo Balbin, the resident manager for petitioner, who was the signatory in the verification and certification on non-forum shopping, failed to show proof that he was authorized by petitioner's board of directors to file such a petition. It was clear from the record that when the general manager filed the petition, there was no proof attached as to the authorization by the Board. However, when the petitioner filed its motion for reconsideration a resolution or secretarys certification stating that that on October 11, 1999, or ten days prior to the filing of the petition, Balbin had been authorized by petitioner's board of directors to file said petition. The Court accepted this certification, although belatedly presented, as a valid authorization. The Court was reiterated that belated submission of a verification is allowed the same being not a mandatory and jurisdictional requirement, and as to the non-forum shopping the same was considered to be valid because the case of the petitioner must be litigated based on its merit and must not be dismissed based on technical and procedural infirmities, which were actually cured.

120 | P a g e

Law 321_Corporation LAW_ Case Digest ABS-CBN vs. COURT OF APPEALS G.R. No. 128690. January 21, 1999 FACTS: In 1990, ABS CBN and Viva executed a Film Exhibition Agreement whereby Viva gave ABS CBN an exclusive right to exhibit some Viva films. Said agreement contained a stipulation that ABS shall have the right of first refusal to the next 24 Viva films for TV telecast, provided that such right shall be exercised by ABS from the actual offer in writing. Hence, through this agreement, Viva offered ABS a list of 36 films from which ABS may exercise its right of first refusal. ABS however, through VP Concio, did not accept the list since she could only tick off 10 films. This rejection was embodied in a letter. In 1992, Viva again approached ABS with a list consisting of 52 original films where Viva proposed to sell these airing rights for P60M. Vivas Vic del Rosario and ABS general manager Eugenio Lopez III met at the Tamarind Grill to discuss this package proposal. What transcribed at that meeting was subject to conflicting versions. According to Lopez, he and del Rosario agreed that ABS was granted exclusive film rights to 14 films for P36M, and that this was put in writing in a napkin, signed by Lopez and given to del Rosario. On the other hand, del Rosario denied the existence of the napkin in which Lopez wrote something, and insisted that what he and Lopez discussed was Vivas film package of the 52 original films for P60M stated above, and that Lopez refused said offer, allegedly signifying his intent to send a counter proposal. When the counter proposal arrived, Vivas BoD rejected it; hence, he sold the rights to the 52 original films to RBS. Thus, ABS filed before RTC a complaint for specific performance with prayer for TRO against RBS and Viva. RTC issued the TRO enjoining the airing of the films subject of controversy. After hearing, RTC rendered its decision in favor of RBS and Viva contending that there was no meeting of minds on the price and terms of the offer. The agreement between Lopez and del Rosario was subject to Viva BoD approval, and since this was rejected by the board, then, there was no basis for ABS demand that a contract was entered into between them. That the 1990 Agreement with the right of first refusal was already exercised by Ms. Concio when it rejected the offer, and such 1990 Agreement was an entirely new contract other than the 1992 alleged agreement at the Tamarind Grill. ISSUE: Whether or not there was a perfected contract between Lopez and del Rosario. RULING: NO. Contracts that are consensual in nature are perfected upon mere meeting of the minds. Once there is concurrence between the offer and the acceptance upon the subject matter, consideration, and terms of payment, a contract is produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter offer and is a rejection of the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer. In the case at bar, when Del Rosario met with Lopez at the Tamarind Grill, the package of 52 films was Vivas offer to enter into a new Exhibition Agreement. But ABS, through its counter proposal sent to Viva, actually made a counter offer. Clearly, there was no acceptance. The acceptance should be unqualified. 121 | P a g e

Law 321_Corporation LAW_ Case Digest ASSET PRIVATIZATION TRUSTS vs. COURT OF APPEALS, JESUS S. CABARRUS, SR., et al. G.R. No. 121171. December 29, 1998 FACTS: By virtue of an agreement, the exclusive right to explore, develop and exploit nickel, cobalt and other minerals in the Surigao mineral reservation was granted to Marinduque Mining and Industrial Corporation (MMIC), with respondent Jesus S. Cabarrus, Sr. as President and among its original stockholders. The Philippine Government undertook to support the financing of MMIC by purchase of MMIC debenture bonds and extension of guarantees. Subsequently, MMIC, PNB and DBP executed a Mortgage Trust Agreement 3 whereby MMIC, as mortgagor, agreed to constitute a mortgage in favor or PNB and DBP as mortgagees, over all MMIC's assets. MMIC defaulted in its loans with the bank amounting to more or less P21M. Thus, a financial restructuring plan (FRP) designed to reduce MMIC's interest expense through debt conversion to equity was drafted and was approved by the Board of Directors of the MMIC. However, the proposed FRP had never been formally adopted, approved or ratified by either PNB or DBP. Hence, the properties were foreclosed with PNB as the lone bidder and were assigned to three newly formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial Corporation, and Island Cement Corporation. In 1986, these assets were transferred to the Asset Privatization Trust (APT). , Jesus S. Cabarrus, Sr., together with the other stockholders of MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for Annulment of Foreclosures, Specific Performance and Damages. The parties entered into a compromise agreement. However, when submitted for approval, the Arbitration Committee rendered judgment in favor of MMIC. ISSUE: Whether or not there was a valid foreclosure of the properties. RULING: YES. The FRP was not adopted by PNB and DBP hence there was no valid restructuring program undertaken and the option of the banks to foreclose the properties were never divested. Although there were allegations that representatives of PNB and DBP were part of the drafting of the FRP there was no showing that the representatives of PNB and DBP in MMIC even had the requisite authority to enter into a debt-for-equity swap. And if they had such authority, there was no showing that the banks, through their board of directors, had ratified the FRP. Hence, without such proof, the Court ruled that those representatives, singly or collectively, are not themselves PNB or DBP. They are individuals with personalities separate and distinct from the banks they represent. PNB and DBP have different boards with different members who may have different decisions. And estoppel cannot be used to impose upon them the decision of the board of another company. Otherwise the rights of entirely separate distinct and autonomous legal entities like PNB and DBP with thousands of stockholders will be suppressed and rendered nugatory. Wherefore, the decisions of the appellate court were reversed.

122 | P a g e

Law 321_Corporation LAW_ Case Digest BA SAVINGS BANK vs. ROGER T. SIA, TACIANA U. SIA and JOHN DOE G.R. No. 131214, July 27, 2000 FACTS: A petition for certiorari was filed by herein petitioner bank. However, the CA denied due course the same on the ground that the certificate of non-forum shopping was signed by a lawyer. A Motion for Reconsideration was subsequently filed by the petitioner, attached to which was a BA Savings Bank Corporate Secretarys Certificate. The Certificate showed that the petitioners Board of Directors approved a Resolution on May 21, 1996, authorizing the petitioners lawyers to represent it in any action or proceeding before any court, tribunal or agency; and to sign, execute and deliver the Certificate of Non-forum Shopping, among others. Said motion was denied on the ground that Supreme Court Revised Circular No. 28-91 requires that it is the petitioner, not the counsel, who must certify under oath to all of the facts and undertakings required therein. ISSUE: Whether or not the CA was correct. RULING: YES. A corporation exercises powers through its board of directors and/or its duly authorized officers and agents. Physical acts, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the board of directors. In this case, the corporations board of directors issued a Resolution specifically authorizing its lawyers to act as their agents in any action or proceeding before the Supreme Court, the Court of Appeals, or any other tribunal or agency and to sign, execute and deliver in connection therewith the necessary pleadings, motions, verification, affidavit of merit, certificate of non-forum shopping and other instruments necessary for such action and proceeding. The Resolution was sufficient to vest such persons with the authority to bind the corporation and was specific enough as to the acts they were empowered to do. Circular 28-91 requires the parties themselves to sign the certificate of nonforum shopping. However, such requirement cannot be imposed on artificial persons, like corporations, for the simple reason that they cannot personally do the task themselves. In this case, the corporation very well exercised its power to authorize a representative to act on its behalf.

123 | P a g e

Law 321_Corporation LAW_ Case Digest ALFREDO MONTELIBANO and ALEJANDRO MONTELIBANO vs. THE HON. COURT OF APPEALS and BACOLOD-MURCIA MILLING COMPANY, INC. G.R. No. 85757, July 8, 1991 FACTS: Alfredo and Alejandro Montelibano, together with other planters, entered into contracts with Bacolod-Murcia Milling Co., Inc., for the milling of sugar cane at a sharing ratio of 55% for the planters and 45% for the miller. The contracts were to be in force for thirty (30) years starting with the 1920-21 crops. A proposal was made to amend the milling contracts by increasing the planters' share to 60% of the manufactured sugar and molasses and giving them other concessions besides, but the term of the contracts was extended to 45 years instead of 30. On August 30, 1936, the milling company's Board of Directors adopted a resolution granting further concessions to the planters over and above those contained in the amended milling contract. Subsequently, the Montelibanos sued the milling company alleging that the three other centrals in the province were granting increased participation to their planters; therefore, pursuant to paragraph 9 of the August 20, 1936 Resolution, Bacolod-Murcia Milling Co., Inc. was obligated to grant similar concessions to the Montelibanos. The milling company opposed the claim on the ground that, among others, it was a donation which was not within the power of the Board of Directors to grant. The trial court dismissed the action, but on appeal to the Supreme Court reversed the lower court. ISSUE: Whether or not the reversal was proper. RULING: YES. The Court ruled that the August 20, 1936 resolution, passed in good faith by the board of directors, was valid and binding and formed an integral part of the amended milling contracts, the milling company having agreed to give concessions to the planters, precisely to induce them to agree to an extension of their contracts. Petitioner filed two motions for reconsideration; however, the doctrine of res judicata had set in. Wherefore, the appeal was denied.

124 | P a g e

Law 321_Corporation LAW_ Case Digest ANTHONY POWERS, et al. vs. DONALD I. MARSHALL, et al. G.R. No. L-48064, May 9, 1988 FACTS: A letter was passed to the members of the International School, Inc. indicating that that the Board of Trustees had decided to embark on a program to construct new buildings and remodel existing ones to accommodate the increasing enrollment in the school, and that it was necessary for the school to raise P35,000,000.00 for this purpose. The Board intended to raise the needed funds primarily through subscriptions to capital notes and prepayment certificates, and any deficiency from these sources would be covered by collecting a so-called "development fees" of P2,625 from each enrollee starting with the school year 1975-1976 and continuing up to the school year 1986-1987. An implementing letter was issued indicating therein that the conditions stated are pre-enrollment requirements. Fourteen (14) plaintiffs, all associate members of the International School, Inc., brought an action for injunction in the Court of First Instance of Rizal. A TRO was granted in favor of the defendants. Subsequently a decision was rendered dismissing the complaint for lack of cause of action. ISSUE: Whether or not the actions of the BOT are valid. RULING: YES. Section 2 (b) of P.D. No. 732 granting certain rights to the International School, Inc., expressly authorized the Board of Trustees "upon consultation with the Secretary of Education and Culture, ... to determine the amount of fees and assessments which may be reasonably imposed upon its students, to maintain or conform to the school standard of education." Such consultation had been made with the Secretary of Education and Culture who expressed his conformity with the reasonableness of the assessment of P2,625.00 per student for the whole school year to carry out its development program. Since the collection of the development fee had been approved by the Board of Trustees of the International School, Inc., it was a valid exercise of corporate power by the Board, and said assessment was binding upon all the members of the corporation.

125 | P a g e

Law 321_Corporation LAW_ Case Digest PREMIUM MARBLE RESOURCES, INC. vs. THE COURT OF APPEALS and INTERNATIONAL CORPORATE BANK 1996 Nov 4, G.R. No. 96551 FACTS: Herein petitioner filed a case for damages against respondent for allowing clearance of checks by unauthorized officers of the former, to the formers prejudice. However this case was opposed by some members of the petitioner on the ground that the filing of the complaint was not authorized by the Board. Hence, a resolution of this case was necessary to litigate the claim of the petitioner for damages against the respondent bank. ISSUE: Whether or not the filing was authorized by a duly constituted Board of Directors of the petitioner corporation. RULING: NO. The petitioners asserted that the Board authorized such filing. However, from the records of the case as well as that of the corporations, no evidence was seen and shown that the results of the election where the supposed members of the Board who allegedly authorized the filing were filed with the Securities and Exchange Commission. The Corporation Code mandates that within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. Failure to comply with such requirement, the elected members cannot be considered as the duly constituted and elected members of the Board. Hence, being not duly constituted, the filing of the case was not authorized by the Board.

126 | P a g e

Law 321_Corporation LAW_ Case Digest J. F. RAMIREZ vs. THE ORIENTALIST CO., and RAMON J. FERNANDEZ G.R. No. 11897, September 24, 1918 FACTS: Orientalist Companywas engaged in the business of maintaining and conducting a theatre in the city of Manila for the exhibition of cinematographic films. Later on it accepted an offer from Jose Ramirez, the son of herein petitioner that the latter will supply films that will be managed by the respondent. However, when the films arrived, Orientalist was without fund to pay the cost and expenses incident to each shipment. In effect the companys president B. Hernandez paid said obligations and treated the films by him as his own property; and they in fact never came into the actual possession of the Orientalist Company as owner at all, though it is true Hernandez rented the films to the Orientalist Company and they were exhibited by it in the Oriental Theater under an arrangement which was made between him and the theater's manager. However, subsequent deliveries were no longer paid by any of the concerned party. ISSUE: Whether or not the contract was entered into with the authorization of its Board. RULING: YES. Although there were no evidence as to the authority of Ramon Fernandez to enter into said contract, the Court had observed that when the defendant corporation failed to question the validity of the contract, it resulted to eliminating the question of his authority from the case. This is a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved. Failure to question such timely and appropriately question such authority results to the admission of such fact.

127 | P a g e

Law 321_Corporation LAW_ Case Digest

Corporate Officers/Meaning of Office vis--vis Employment


RENATO REAL vs. SANGU PHILIPPINES, INC. and/ or KIICHI ABE G.R. No. 168757, January 19, 2011 FACTS: Petitioner Renato Real was the Manager of Respondent Corporation Sangu Philippines, Inc. engaged in the business of providing manpower for general services, like janitors, janitresses and other maintenance personnel, to various clients. Subsequently, the janitors, etc employed by the latter filed their respective complaint for illegal dismissal. Petitioner, on the other hand, was removed from his position via Board resolution, and thus also filed an illegal dismissal case against the corporation. The LA ruled for the petitioner and his co-complainants, which was reversed by the NLRC. The ruling of the NLRC was affirmed by the CA. ISSUE: Whether or not petitioner is a corporate officer of the corporation. RULING: NO. He is not a corporate officer. It has been consistently held that an office is created by the charter of the corporation and the officer is elected (or appointed) by the directors or stockholders. Clearly here, respondents failed to prove that petitioner was appointed by the board of directors. Although they had been reiterating that the petitioner was employed as a manager, there was no indication as to how he was put into such position. For respondents failure to substantiate its claim the petitioner w as deemed to be not a coporate officer, hence jurisdiction properly lies with the LA.

128 | P a g e

Law 321_Corporation LAW_ Case Digest MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, RICHARD K. SPENCER, CATHERINE SPENCER, AND ALEX MANCILLA vs. RICARDO R. COROS G.R. No. 157802, October 13, 2010 FACTS: The respondent filed a case for illegal dismissal against Matling and some of its corporate officers (petitioners) in the NLRC. He was the Vice President for Finance and Administration when he was dismissed. The petitioner opposed said complaint on the ground that the issue at hand is an intra- corporate dispute which falls under the jurisdiction of the SEC. The respondent opposed the same contending that his being in the position was doubtful that he had not been formally elected as such. The LA ruled in favor of petitioner but the same was reversed by the NLRC, and to which the CA affirmed. ISSUE: Whether or not respondent is a corporate officer. RULING: NO. The petitioners contend that the position of Vice President for Finance and Administration was a corporate office, having been created by Matlings President pursuant to the by-Law. However, the Court explained that an "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. In this case, respondent was appointed vice president for nationwide expansion by Malonzo, petitioner's general manager, not by the board of directors of petitioner. Also his compensation was paid by Malonzo. Thus, respondent was an employee, not a "corporate officer. Also, the Board of Directors of Matling could not validly delegate the power to create a corporate office to the President, in light of Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers was a discretionary power that the law exclusively vested in the Board of Directors, and could not be delegated to subordinate officers or agents.The office of Vice President for Finance and Administration created by Matlings President pursuant to the by- law was an ordinary, not a corporate, office.

129 | P a g e

Law 321_Corporation LAW_ Case Digest MANILA METAL CONTAINER CORPORATION, REYNALDO C. TOLENTINO vs. PHILIPPINE NATIONAL BANK, DMCI-PROJECT DEVELOPERS, INC. G.R. No. 166862, December 20, 2006 FACTS: Petitioner is the owner of a parcel of land. To secure a loan he obtained from PNB he executed a REM over said land. For failure to pay the loan, PNB sought the foreclosure of the REM. After the public auction, the petitioner requested PNB to grant him an extension to redeem the property. He failed to redeem the property. Later on, the PNB agreed to let the petitioner purchase the property for a certain amount, and a downpayment was then given. Subsequently, however, the bank informed the petitioner that it was increasing the purchase price. Hence, a case was filed by petitioner. ISSUE: valid. Whether or not the letter by the respondent accepting the petitioners offer was

RULING: NO. There is no evidence that the SAMD was authorized by respondent's Board of Directors to accept petitioner's offer and sell the property. Any acceptance by the SAMD of petitioner's offer would not bind respondent. A corporation can only execute its powers and transact its business through its Board of Directors and through its officers and agents when authorized by a board resolution or its by-laws. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such director, is held not binding on the corporation.

130 | P a g e

Law 321_Corporation LAW_ Case Digest BIENVENIDO ONGKINGCO, as President and GALERIA DE MAGALLANES CONDOMINIUM ASSOCIATION, INC. vs. NATIONAL LABOR RELATIONS COMMISSION and FEDERICO B. GUILAS G.R. No. 119877, March 31, 1997 FACTS: Petitioner Galeria de Magallanes Condominium Association, Inc. is a non-stock, non-profit corporation with a primary purpose of holding title to the common areas of the Galeria de Magallanes Condominium Project and to manage and administer the same for the use and convenience of the residents and/or owners. Petitioner Bienvenido Ongkingco was the president of Galeria at the time private respondent filed his complaint. Subsequently, Galeria's Board of Directors appointed private respondent Federico B. Guilas as Administrator/Superintendent. Respondent, however, was no longer re-appointed as Administrator; hence he filed a case for illegal dismissal. Petitioners filed a motion to dismiss alleging that it is the SEC, and not the labor arbiter, which has jurisdiction over the subject matter of the complaint. The LA granted the motion to dismiss, which decision was reversed by the NLRC. ISSUE: Whether or not respondent was a corporate officer. RULING: YES. Private respondent is an officer of Petitioner Corporation and not its mere employee. The by-laws of the Galeria de Magallanes Condominium Association specifically include the Superintendent/Administrator in its roster of corporate officers. He was appointed directly by the Board of Directors not by any managing officer of the corporation and his salary was, likewise, set by the same Board. Having thus determined, his dismissal or non-appointment is clearly an intra-corporate matter and jurisdiction, therefore, properly belongs to the SEC and not the NLRC. Despite not being elected, P.D. 902-A Sec. 5(c) expressly covers both election and appointment of corporate directors, trustees, officers and managers.

131 | P a g e

Law 321_Corporation LAW_ Case Digest ANDRES LAO vs. COURT OF APPEALS, THE ASSOCIATED ANGLO-AMERICAN TOBACCO CORPORATION and ESTEBAN CO, G.R. No. 47013, February 17, 2000 FACTS: On April 6, 1965, The Associated Anglo-American Tobacco Corporation entered into a "Contract of Sales Agent" with Andres Lao. Under the contract, Lao agreed to sell cigarettes manufactured and shipped by the Corporation to his business. Lao would in turn remit the sales proceeds to the Corporation. For his services, Lao would receive commission depending on the kind of cigarettes sold, fixed monthly salary, and operational allowance. For several months, Lao had religiously complied with his obligations, however until about seven (7) months later, Lao failed to accomplish his monthly sales report. Re was reminded of his enormous accounts and the difficulty of obtaining a tally thereon despite Lao's avowal of regular remittances of his collections. Because of this he was summoned to the office of the corporation where his liability amounted to P525,053.47. The corporation stopped providing Lao with the products. Subsequently, Andres, Jose and Tomas Lao brought a complaint for accounting and damages with writ of preliminary injunction against the Corporation. The CFI rendered judgment in favor of petitioners. Meanwhile, on June 24, 1974 and during the pendency of Civil Case No. 4452, Esteban Co, representing the Corporation as its new vice-president, filed an affidavit of complaint alleging that Lao failed to remit the amount of P224,585.82 which he allegedly misappropriated and converted to his personal use, which resulted to the filing of an estafa case against Lao. In turn Lao filed a case for malicious prosecution against the corporation. In this case, Co was made liable solidarily with the corporation for malicious prosecution. ISSUE: Whether or not Co should be made liable solidarily with the corporation for malicious prosecution. RULING: YES. Co asserted that he should not be held jointly and severally liable with the Corporation because in filing the affidavit-complaint against respondent Lao, he was acting as the executive vice-president of the Corporation and his action was within the scope of his authority as such corporate officer. Based from the records, Co was the vice-president of the corporation when he filed the affidavit- complaint. The corporation failed tomake an issue out of his authority to file said case. Upon wellestablished principles of pleading, lack of authority of an officer of a corporation to bind it by contract executed by him in its name, is a defense which should have been specially pleaded by the Corporation The Corporation's failure to interpose such a defense could only mean that the filing of the affidavit-complaint by petitioner Co was with the consent and authority of the Corporation. In the same vein, petitioner Co may not be held personally liable for acts performed in pursuance of an authority and therefore, holding him solidarily liable with the Corporation for the damages awarded to respondent Lao does accord with law and jurisprudence.

132 | P a g e

Law 321_Corporation LAW_ Case Digest MITA PARDO DE TAVERA vs. PHILIPPINE TUBERCULOSIS SOCIETY, INC., et al GR. No. L-48928, February 25, 1982 FACTS: The plaintiff alleges that she is a doctor of Medicine by profession and a recognized specialist in the treatment of tuberculosis and that she was a member of the Board of Directors of the defendant Society, in representation of the Philippine Charity Sweepstakes Office. She was also duly appointed as Executive Secretary of the Society. However, she was removed from such position without any cause. This was denied by the respondents. The appellate courts rendered decision in favor of respondents. ISSUE: Whether or not the petitioner is an officer of the corporation. RULING: NO. The Court ruled that there was no clear indication that the petitioner was appointed to a permanent position. Although the minutes of the organizational meeting show that the Chairman mentioned the need of appointing a "permanent" Executive Secretary, such statement alone cannot characterize the appointment of petitioner without a contract of employment definitely fixing her term. Without such term, the appointment was deemed to be temporary, and is subject to the pleasure of the Board or of the appointing body. Hence, when the Board opts to replace the incumbent, technically there is no removal but only expiration of term and in an expiration of term, there is no need of prior notice, due hearing or sufficient grounds before the incumbent can be separated from office.

133 | P a g e

Law 321_Corporation LAW_ Case Digest

Corporate Officers; Qualifications and Disqualifications; Authority and Liabilities


MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, RICHARD K. SPENCER, CATHERINE SPENCER, AND ALEX MANCILLA vs. RICARDO R. COROS G.R. No. 157802, October 13, 2010 FACTS: The respondent filed a case for illegal dismissal against Matling and some of its corporate officers (petitioners) in the NLRC. He was the Vice President for Finance and Administration when he was dismissed. The petitioner opposed said complaint on the ground that the issue at hand is an intra- corporate dispute which falls under the jurisdiction of the SEC. The respondent opposed the same contending that his being in the position was doubtful that he had not been formally elected as such. The LA ruled in favor of petitioner but the same was reversed by the NLRC, and to which the CA affirmed. ISSUE: Whether or not respondent is a corporate officer. RULING: NO. The petitioners contend that the position of Vice President for Finance and Administration was a corporate office, having been created by Matlings President pursuant to the by-Law. However, the Court explained that an "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. In this case, respondent was appointed vice president for nationwide expansion by Malonzo, petitioner's general manager, not by the board of directors of petitioner. Also his compensation was paid by Malonzo. Thus, respondent was an employee, not a "corporate officer. Also, the Board of Directors of Matling could not validly delegate the power to create a corporate office to the President, in light of Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers was a discretionary power that the law exclusively vested in the Board of Directors, and could not be delegated to subordinate officers or agents.The office of Vice President for Finance and Administration created by Matlings President pursuant to the by- law was an ordinary, not a corporate, office. In this case the Court enumerated the minimum set of officers who are the president, vice president, secretary and treasurer and modern corporation statutes usually designate them as the officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may be empowered under the by-laws of a corporation to create additional offices as may be necessary.

134 | P a g e

Law 321_Corporation LAW_ Case Digest LESLIE OKOL vs. SLIMMERS WORLD INTERNATIONAL, BEHAVIOR MODIFICATIONS, INC., and RONALD JOSEPH MOY G.R. No. 160146, December 11, 2009 FACTS: Leslie Okol, a Vice President of Slimmers World, was terminated from employment after an incident with the Bureau of Customs regarding equipment belonging to/consigned to Slimmers World. As such, Okolfiled a complaint with the Arbitration branch of the NLRC against Slimmers World for illegal suspension, illegal dismissal, unpaid commissions, damages, and attorneys fees, with prayer for reinstatement and payment of backwages. Slimmers World filed a Motion to Dismiss the case, asserting that the NLRC had no jurisdiction over the subject matter of the complaint. Slimmers Worlds motion was sustained, with the labor arbiter ruling that since Okol was the vice president at the time of her dismissal, being a corporate officer, the dispute was an intra-corporate controversy falling outside the jurisdiction of the arbitration branch. On appeal, the NLRC reversed the LA decision and ordered Slimmers World to reinstate Okol. The CA subsequently set aside the NLRC decision and ruled that the case was an intracorporate controversy, and falls within the jurisdiction of the regular courts pursuant to RA 8799. ISSUE: Whether Okol was a corporate officer of Slimmers World. RULING: YES. Okol was a corporate officer at the time of her dismissal. According to the Amended By-Laws of Slimmers World which enumerate the power of the board of directors as well as the officers of the corporation, the general management of the corporation shall be vested in a board of five directors who shall be stockholders and who shall be elected annually by the stockholders and who shall serve until the election and qualification of their successors and like the Chairman of the Board and the President, the Vice President shall be elected by the Board of Directors from its own members. The Vice President shall be vested with all the powers and authority and is required to perform all the duties of the President during the absence of the latter for any cause. The Vice President will perform such duties as the Board of Directors may impose upon him from time to time. This clearly shows that Okol was a director and officer of Slimmers World. An office is created by the charter of the corporation and the officer is elected by the directors and stockholders. On the other hand, an employee usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee.

135 | P a g e

Law 321_Corporation LAW_ Case Digest GLORIA V. GOMEZ vs. PNOC DEVELOPMENT AND MANAGEMENT CORPORATION (PDMC) - (formerly known as FILOIL DEVELOPMENT AND MANAGEMENT CORPORATION [FDMC]) G.R. No. 174044, November 27, 2009 FACTS: Petitioner Gloria V. Gomez used to work as Manager of the Legal Department of Petron Corporation, then a government-owned corporation. With Petrons privatization, she availed of the companys early retirement program and left that organization on April 30, 1994. On the following day, May 1, 1994, however, Filoil Refinery Corporation (Filoil), also a government-owned corporation, appointed her its corporate secretary and legal counsel, with the same managerial rank, compensation, and benefits that she used to enjoy at Petron. However, the privatization did not materialize so Gomez continued to serve as corporate secretary of respondent PDMC. On March 29, 1999 the new board of directors of respondent PDMC removed petitioner Gomez as corporate secretary. Further, at the boards meeting on October 21, 1999 the board questioned her continued employment as administrator. In answer, she presented the former presidents May 24, 1998 letter that extended her term. Dissatisfied with this, the board sought the advice of its legal department, which expressed the view that Gomezs term extension was an ultra vires act of the former president. It reasoned that, since her position was functionally that of a vicepresident or general manager, her term could be extended under the companys bylaws only with the approval of the board. The legal department held that her de facto tenure could be legally put to an end. Petitioner Gomez for her part conceded that as corporate secretary, she served only as a corporate officer. But, when they named her administrator, she became a regular managerial employee. Consequently, the respondent PDMCs board did not have to approve either her appointment as such or the extension of her term in 1998. ISSUE: Whether or not Gomez is an ordinary employee whose complaint is within the jurisdiction of the NLRC. RULING: YES. The relationship of a person to a corporation, whether as officer or agent or employee, is not determined by the nature of the services he performs but by the incidents of his relationship with the corporation as they actually exist. That the employee served concurrently as corporate secretary for a time is immaterial. A corporation is not prohibited from hiring a corporate officer to perform services under circumstances which will make him an employee. Indeed, it is possible for one to have a dual role of officer and employee. NLRC has jurisdiction over a complaint filed by one who served both as corporate officer and employee, when the money claims were made as an employee and not as a corporate officer.

136 | P a g e

Law 321_Corporation LAW_ Case Digest E. B. VILLAROSA & PARTNER CO., LTD. vs. HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC, Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION G.R. No. 136426, August 6, 1999 FACTS: Petitioner E.B. Villarosa & Partner Co., Ltd. is a limited partnership. Petitioner and private respondent executed a Deed of Sale with Development Agreement wherein the former agreed to develop certain parcels of land belonging to the latter into a housing subdivision for the construction of low cost housing units. They further agreed that in case of litigation regarding any dispute arising therefrom, the venue shall be in the proper courts of Makati. Subsequently, a complaint for breach of contract was filed by the respondent against the plaintiff allegedly for failure of the latter to comply with its contractual obligation in that, other than a few unfinished low cost houses, there were no substantial developments. Summons, together with the complaint, were served upon the defendant, through its Branch Manager Engr. Wendell Sabulbero. The respondent moved for dismissal on the ground that there was improper service of summons. The trial court rendered decision denying the motion to dismiss. Hence this petition. ISSUE: Whether or not there was imporoper service of summons. RULING: YES. Section 13, Rule 14 of the Rules of Court which provided that: Service upon private domestic corporation or partnership, If the defendant is a corporation organized under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent, or any of its directors. The Court ruled that under such provision, it is clear upon whom the service of summons should be made. The designation of persons or officers who are authorized to accept summons for a domestic corporation or partnership is now limited and more clearly specified. The rule now states "general manager" instead of only "manager"; "corporate secretary" instead of "secretary"; and "treasurer" instead of "cashier." The phrase "agent, or any of its directors" is conspicuously deleted in the new rule. In this case, since the summons was served upon a branch manager, who is not authorized to accept the same, there was improper service of summons.

137 | P a g e

Law 321_Corporation LAW_ Case Digest SUPREME STEEL PIPE CORPORATION and REGAN SY vs. ROGELIO BARDAJE G.R. No. 170811, April 24, 2007 FACTS: Petitioner Supreme Steel Pipe Corporation (SSPC) was primarily engaged in the business of manufacturing steel pipes. It employed respondent Rogelio Bardaje as a warehouseman on March 14, 1994. SSPC employees were required to wear a uniform (a yellow t-shirt with a logo and the marking "Supreme") while at work. Due to an incident, his employment was terminated on the ground of multiple infractions of company rules. He thus filed a case for illegal dismissal. The LA ruled for the respondent, while the NLRC reversed said decision. The CA ruled favoring the LA. ISSUE: Whether or not Regan Sy, the president of SSPC, may be held solidarily liable with the latter. RULING: NO. It appears that respondent impleaded SSPC President Regan Sy only because he is an officer/agent of the company. However, the court ruled that he cannot be made solidarily liable because for the termination of respondents employment, since there is no showing that the dismissal was attended with malice or bad faith. The rule still stand that the liabilities of a corporation should not be directly imputed to its officers and it shall be borne entirely by the corporation itself.

138 | P a g e

Law 321_Corporation LAW_ Case Digest CAGAYAN VALLEY DRUG CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE G.R. No. 151413, February 13, 2008 FACTS: Petitioner is a duly licensed retailer of medicine and other pharmaceutical products. In compliance with Revenue Regulation No. (RR) 2-94, petitioner treated the 20% sales discounts granted to qualified senior citizens in 1995 as deductions from the gross sales in order to arrive at the net sales, instead of treating them as tax credit as provided by Section 4 of RA 7432. however, petitioner filed with the Bureau of Internal Revenue (BIR) a claim for tax refund/tax credit of the full amount of the 20% sales discount it granted to senior citizens for the year 1995, allegedly totalling to P123,083.00. Because of the BIRs inaction, the petitioner filed a petition for review before the CTA, which denied its claim. The CA also denied the same on procedural grounds, such that the person who signed the verification and certification of absence of forum shopping, a certain Jacinto J. Concepcion, President of petitioner, failed to adduce proof that he was duly authorized by the board of directors to do so. ISSUE: Whether petitioners president can sign the subject verification and certification without the approval of its Board of Directors. RULING: YES. In several cases the court has recognized the authority of some corporate officers to sign the verification and certification against forum shopping. In these cases, the court allowed the: (1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case, to sign said documents, without need of a board resolution. Also in this case, an authorization was belatedly submitted. Although belated, the court still accepts it as a valid and which it had cured the procedural infirmities of the case.

139 | P a g e

Law 321_Corporation LAW_ Case Digest SALOME PABON and VICENTE CAMONAYAN vs. NATIONAL LABOR RELATIONS COMMISSION and SENIOR MARKETING CORPORATION G.R. No. 120457 September 24, 1998 FACTS: On May 24, 1994 and June 22, 1994, complaints for illegal dismissal and nonpayment of benefits were filed by petitioners Salome Pabon and Vicente Camonayan against private respondent Senior Marketing Corporation (SMC) and its Field Manager, R-Jay Roxas Summons and notices of hearings were sent to Roxas at private respondent's provincial office in 13 Valley Homes, Patul Road, Santiago, Isabela which were received by its bookkeeper, Mina Villanueva. On September 15, 1994, the Labor Arbiter rendered a judgment by default after finding that private respondent tried to evade all the summons and orders of hearing by refusing to claim all the registered mail addressed to it. ISSUE: Whether or not Petitioners herein are authorized to receive summons in behalf of the corporation. RULING: YES. Bookkeeper can be considered as an agent of private respondent corporation within the purview of Section 13, Rule 14 of the old Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such service must be made to an agent or a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. The bookkeeper's task is one under consideration. The job of a bookkeeper is so integrated with the corporation that his regular recording of the corporation's "business accounts" and "essential facts about the transactions of a business or enterprise" safeguards the corporation from possible fraud being committed adverse to its own corporate interest. Although it may be true that the service of summons was made on a person not authorized to receive the same in behalf of the petitioner, nevertheless since it appears that the summons and complaint were in fact received by the corporation through its said clerk, the Court finds that there was substantial compliance with the rule on service of summons. Indeed the purpose of said rule as above stated to assure service of summons on the corporation had thereby been attained. The need for speedy justice must prevail over technicality.

140 | P a g e

Law 321_Corporation LAW_ Case Digest VLASON ENTERPRISES CORPORATION vs. COURT OF APPEALS and DURAPROOF SERVICES, represented by its General Manager, Cesar Urbino Sr. G.R. Nos. 121662-64. July 6, 1999 FACTS: Poro Point Shipping Services, then acting as the local agent of Omega Sea Transport Company of Honduras & Panama, a Panamanian company, (hereafter referred to as Omega), requested permission for its vessel M/V Star Ace, which had engine trouble, to unload its cargo and to store it at the Philippine Ports Authority (PPA) compound in San Fernando, La Union while awaiting transshipment to Hong Kong. The request was approved by the Bureau of Customs. Despite the approval, the customs personnel boarded the vessel when it docked on January 7, 1989, on suspicion that it was the hijacked M/V Silver Med owned by Med Line Philippines Co., and that its cargo would be smuggled into the country. The district customs collector seized said vessel and its cargo pursuant to Section 2301, Tariff and Customs Code. They entered into a salvage agreement with private respondent to secure and repair the vessel which was destroyed by the typhoons that hit the province at the agreed consideration of $1 million and fifty percent (50%) of the cargo after all expenses, cost and taxes. Subsequently, the seizure was lifted for want of fraud. ISSUE: Whether or not summons was properly served with Vlason Corporation. RULING: NO. Sec 4 and 5 of the Rules of Court ideally requires a movant to address and serve on the counsel of the adverse party the notice of hearing of its motion. Service of a copy of a motion must contain a notice of the time and the place of hearing. There are, however, exceptions to the rule: Where a rigid application will result in a manifest failure or miscarriage of justice, especially if a party successfully shows that the alleged defect in the questioned final and executory judgment is not apparent on its face or from the recitals contained therein; Where the interest of substantial justice will be served; Where the resolution of the motion is addressed solely to the sound and judicious discretion of the court; Where the injustice to the adverse party is not commensurate to the degree of his failure to comply with prescribed procedure In this case, Vlason was not informed of any cause of action against it. It was not validly summoned. Its vessels that it used for its salvaging business was levied upon and sold in execution to satisfy a supposed judgment against it. To allow this to happen simply because of its failure to comply with the notice requirement would result into manifest injustice.

141 | P a g e

Law 321_Corporation LAW_ Case Digest Prime White Cement Corporation vs. Intermediate Appellate Court GR 68555, 19 March 1993 FACTS: On or about 16 July 1969, Alejandro Te and Prime White Cement Corporation (PWCC) thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement whereby Te was obligated to act as the exclusive dealer and/or distributor of PWCC of its cement products in the entire Mindanao area for a term of 5 years. Right after Te entered into the dealership agreement, he placed an advertisement in a national, circulating newspaper the fact of his being the exclusive dealer of PWWC's white cement products in Mindanao area, more particularly, in the Manila Chronicle dated 16 August 1969 and was even congratulated by his business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be his sub-dealer in the Mindanao area. ISSUE: Whether the "dealership agreement" referred by the President and Chairman of the Board of PWCC is a valid and enforceable contract. RULING: NO. The dealership agreement is not valid and unenforceable. Under the Corporation Law, which was then in force at the time the case arose, as well as under the present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. Although it cannot completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied ratification may take various forms like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are basic, but are all general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporations, is dealing with a third person, i.e., a person outside the corporation. The situation is quite different where a director or officer is dealing with his own corporation. Herein, Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

142 | P a g e

Law 321_Corporation LAW_ Case Digest LOUIS VUITTON S.A. vs. JUDGE FRANCISCO DIAZ VILLANUEVA, presiding Judge, Branch 36, The Metropolitan Trial Court at Quezon City, Metro Manila A.M. No. MTJ-92-643 November 27, 1992 FACTS: In Criminal Case No. XXXVI-62431, entitled "People of the Philippines vs. Jose V. Rosario", Louis Vuitton, S.A. accused the latter of unfair competition as defined by paragraph 1 of Article 189, Revised Penal Code. Complainant also assailed respondent judge's findings that there was no unfair competition because the elements of the crime were not met, and that he seized articles did not come close to the appearance of a genuine Louis Vuitton product, the counterfeit items having been poorly, done. ISSUE: Whether or not respondent judge is guilty of knowingly rendering a manifestly unjust judgment. RULING: NO. The ground which was relied upon by the trial court in acquitting the accused finds basis in the well-settled doctrine that a corporation has a distinct personality from that of its stockholders/owners. A corporation is vested by law with a personality of its own, separate and distinct from that of its stockholders and from that of its officers who manage and run its affairs. This decision is assailed to be unjust mainly because it did not consider the Prosecution's Memorandum with Motion and Motion for Early Resolution filed by private prosecutor, herein complainant, on February 8, 1991 and February 11, 1991, respectively. According to complainant, had respondent judge taken the former motion into account, he would not have acquitted the accused, Jose V. Rosario. Instead, he would have been held guilty for giving others an opportunity engage in unfair competition as prescribed by Article 189 of the Revised Penal Code. In the first place, it would not have made any difference because Jose v. Rosario was charged as owner/proprietor. COD is not a single proprietorship but one that is run and owned by a corporation, Rosario Bros., Inc., of which the accused is stockholder and Executive Vice-President. A stockholder generally does not have a hand in the management of the corporate affairs. On the other hand, the VicePresident had no inherent power to bind the corporation. As general rule, his duties must be specified in the by-laws. In the criminal case, the information did not specify his duties as Executive Vice-President. The trial court had no basis for holding that as such, the accused entered into a contract with the concessionaire thereby giving the latter an opportunity to practice unfair competition. Whereas, Section 23 of the Corporation Code is explicit that the directors, acting as a body, exercise corporation powers and conduct the corporation's business.

143 | P a g e

Law 321_Corporation LAW_ Case Digest

Doctrine of Apparent Authority


VIOLETA BANATE et. al. vs. PHILIPPINE COUNTRYSIDE RURAL BANK GR 163825, 13 July 2010 FACTS: Sometime in November 1997 the spouses Maglasang and the spouses Cortel asked PCRBs permission to sell the properties which they mortgaged with the bank. They likewise requested that the said properties be released from the mortgage since the two other loans were adequately secured by the other mortgages. The spouses Maglasang and the spouses Cortel claimed that the PCRB, acting through its Branch Manager, Pancrasio Mondigo, verbally agreed to their request but required first the full payment of the subject loan. They thereafter sold to petitioner Violeta Banate the subject properties for P1,750,000.00 and used the amount to pay the subject loan with PCRB. After settling the subject loan, PCRB gave the owners duplicate certificate of title of Lot 12868-H-3-C to Banate, who was able to secure a new title in her name. It, however, carried the mortgage lien in favor of PCRB, prompting the petitioners to request from PCRB a Deed of Release of Mortgage. As PCRB refused to comply with the petitioners request, the petitioners instituted an action for specific performance before the RTC to compel PCRB to execute the release deed. Accordingly, PCRB claimed that full payment of the three loans, obtained by the spouses Maglasang, was necessary before any of the mortgages could be released; the settlement of the subject loan merely constituted partial payment of the total obligation. Thus, the payment does not authorize the release of the subject properties from the mortgage lien. ISSUE: Whether or not Mondigo, as branch manager of PCRB, has the authority to modify the original mortgage contract on behalf of the company. RULING: NO. He is not authorized to modify the mortgage contract that would in effect cause novation. Under the doctrine of apparent authority, acts and contracts of the agent, as are within the apparent scope of the authority conferred on him, although no actual authority to do such acts or to make such contracts has been conferred, bind the principal. The principals liability, however, is limited only to third persons who have been led reasonably to believe by the conduct of the principal that such actual authority exists, although none was given. In other words, apparent authority is determined only by the acts of the principal and not by the acts of the agent. There can be no apparent authority of an agent without acts or conduct on the part of the principal; such acts or conduct must have been known and relied upon in good faith as a result of the exercise of reasonable prudence by a third party as claimant, and such acts or conduct must have produced a change of position to the third partys detriment. In the present case, the decision of the trial court was utterly silent on the manner by which PCRB, as supposed principal, has clothed or held out its branch manager as having the power to enter into an agreement, as claimed by petitioners. No proof of the course of business, usages and practices of the bank about, or knowledge that the board had or is presumed to have of, its responsible officers acts regarding bank branch affairs, was ever adduced to establish the branch managers apparent authority to verbally alter the terms of mortgage contracts. Neither was there any allegation, much less proof, that PCRB ratified Mondigos ac t or is estopped to make a contrary claim.

144 | P a g e

Law 321_Corporation LAW_ Case Digest SARGASSO CONSTRUCTION vs. PHILIPPINE PORTS AUTHORITY GR 170530, 05 July 2010 FACTS: Plaintiff Sargasso Construction and Development Corporation, Pick and Shovel, Inc. and Atlantic Erectors, Inc., a joint venture, was awarded the construction of Pier 2 and the rock causeway (R.C. Pier 2) for the port of San Fernando, La Union, after a public bidding conducted by the defendant PPA. Plaintiff offered to undertake the reclamation between the Timber Pier and Pier 2 of the Port of San Fernando, La Union, as an extra work to its existing construction of R.C. Pier 2 and Rock Causeway for a price of P36,294,857.03. The offer was unacceptable to PPA and thereafter asked for its reduction to P30,794,230.89. On August 26, 1993, a Notice of Award signed by PPA General Manager Rogelio Dayan was sent to plaintiff for the phase I Reclamation Contract in the amount of P30,794,230.89 and instructing it to enter into and execute the contract agreement with this Office and to furnish the documents representing performance security and credit line. PPA Management further set a condition [that] the acceptance by the contractor that mobilization/demobilization cost shall not be included in the contract and that escalation shall be reckoned upon approval of the Supplemental Agreement. Hence, then General Manager Carlos L. Agustin presented for consideration by the PPA Board of Directors the contract proposal for the reclamation project. At its meeting held on September 9, 1994, the Board decided not to approve the contract proposal. The Board noted that the Pier 2 Project was basically for the construction of a pier while the supplemental agreement refers to reclamation. Thus there is no basis to compare the terms and conditions of the reclamation project with the original contract (Pier 2 Project) of Sargasso. Plaintiff filed a complaint for specific performance and damages. ISSUE: Whether or not the Notice of Award made by the General Manager of PPA binding with the entity. RULING: NO. There is no perfected contract between the parties in this case. Likewise, the General Manager of the PPA is not authorized to enter into contracts on behalf of the agency. Petitioners invocation of the doctrine of apparent authority is misplaced. This doctrine, in the realm of government contracts, has been restated to mean that the government is NOT bound by unauthorized acts of its agents, even though within the apparent scope of their authority. Under the law on agency, however, apparent authority is defined as the power to affect the legal relations of another person by transactions with third persons arising from the others manifestations to such third person such that the liability of the principal for the acts and contracts of his agent extendsto those which are within the apparent scope of the authority conferred on him, although no actual authority to do such acts or to make such contracts has been conferred. The existence of apparent authority may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. In this case, not a single act of respondent, acting through its Board of Directors, was cited as having clothed its general manager with apparent authority to execute the contract with it. 145 | P a g e

Law 321_Corporation LAW_ Case Digest ASSOCIATED BANK (now UNITED OVERSEAS BANK [PHILS.]) vs. SPOUSES RAFAEL and MONALIZA PRONSTROLLER, G.R. No. 148444, July 14, 2008 FACTS: On April 21, 1988, spouses Vaca executed a Real Estate Mortgage (REM) in favor of the petitioner over their parcel of residential land located at Quezon City. For failure of the spouses Vaca to pay their obligation, the subject property was sold at public auction with the petitioner as the highest bidder. The spouses Vaca, however, commenced an action for the nullification of the real estate mortgage and the foreclosure sale. During the pendency of the aforesaid cases, Respondents Rafael and Monaliza Pronstroller offered to purchase the property for P7,500,000.00. Said offer was made through Atty. Jose Soluta, Jr., petitioners Vice -President, Corporate Secretary and a member of its Board of Directors. Petitioner accepted respondents offer of P7.5 million. Consequently, respondents paid petitioner P750,000.00, or 10% of the purchase price, as down payment. On March 18, 1993, petitioner, through Atty. Soluta, and respondents, executed a Letter-Agreement. ISSUE: Whether or not the petitioner is bound by the July 14, 1993 Letter-Agreement signed by Atty. Soluta under the doctrine of apparent authority. RULING: YES. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. The power and responsibility todecide whether the corporation should enter into a contract that will bind the corporation islodged in the board of directors. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board may validly delegate some of its functions and powers to officers, committees and agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly, by habit, custom, or acquiescence, in the general course of business.The authority of a corporate officer or agent in dealing with third persons may be actual or apparent. The doctrine of apparent authority, with special reference to banks, had long been recognized in this jurisdiction. Apparent authority is derived not merely from practice. Its existence may be ascertained through 1) the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; 2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was exercised without any objection from its board or shareholders.

146 | P a g e

Law 321_Corporation LAW_ Case Digest EMILIANO ACUA vs. BATAC PRODUCERS GR L-20333, 30 June 1963 FACTS: Acua entered into a contract with Batac wherein he agreed to advance P20,000.00 to the company for its tobacco planting and drying, provided that he shall be assigned as the companys representative in Manila and supervise the transport and delivery of the goods in the said place. Batacs Board of Directors are amenable with the idea and thereafter issued a resolution authorizing Manager Leon Verano to enter into the agreement on behalf of the corporation. The necessary contract between Acua and Verano was entered into, with some of the Board of Directors acting as witness. Acua then inquired if the contract needs to be ratified by the Board, in which the counsel for Batac answered in the negative. Acua thereafter proceeded to perform his part of the contrac, including the advancement of the amount promised, which was accepted by Batac. Batacs BoD, however, disapproved the contract. Acua insisted on its performance, but the corporation refused, stating that the contract is not binding by reason that it was not ratified by the board. ISSUE: Whether or not the contract between Acua and Verano is binding with the corporation. RULING: YES. A perusal of the complaint reveals that it contains sufficient allegations indicating such approval or at least subsequent ratification. On the first point note the following averments: that on May 9th the plaintiff met with each and all of the individual defendants (who constituted the entire Board of Directors) and discussed with them extensively the tentative agreement and he was made to understand that it was acceptable to them, except as to plaintiff's remuneration; that it was finally agreed between plaintiff and all said Directors that his remuneration would be P0.30 per kilo (of tobacco); and that after the agreement was formally executed he was assured by said Directors that there would be no need of formal approval by the Board. It should be noted in this connection that although the contract required such approval it did not specify just in what manner the same should be given. On the question of ratification the complaint alleges that plaintiff delivered to the defendant corporation the sum of P20,000.00 as called for in the contract; that he rendered the services he was required to do; that he furnished said defendant 3,000 sacks at a cost of P6,000.00 and advanced to it the further sum of P5,000.00; and that he did all of these things with the full knowledge, acquiescence and consent of each and all of the individual defendants who constitute the Board of Directors of the defendant corporation. There is abundant authority in support of the proposition that ratification may be expressed or implied, and that implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom.

147 | P a g e

Law 321_Corporation LAW_ Case Digest BOARD OF LIQUIDATORS vs. HEIRS OF MAXIMO KALAW GR L-18805, 14 August 1967 FACTS: National Coconut Corporation (NACOCO) is with Maximo Kalaw as its General Manager and Chairman of the BOD. Under his tenure NACOCO entered into different contracts involving the trade of coconuts. It failed, however, due to natural calamities that greatly affected the production of coconuts. This led to some customers of NACOCO suing the corporation for undelivered coconuts due to them under the contracts that they signed. This was settled by NACOCO by paying the customers. Thereafter, NACOCO seeks to recover the above sum of P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including Kalaw, with bad faith and/or breach trust for having approved the contracts. ISSUE: Whether or not Kalaw may be held liable by NACOCO for the debts the corporation incurred under his administration. RULING: NO. They were done with implied authority from the BOD. These previous contracts, it should be stressed, were signed by Kalaw without prior authority from the board. Said contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to prove one thing. Obviously NACOCO board met the difficulties attendant to forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw. Settled jurisprudence has it that 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 varying language, existence of such authority is established, by proof of the course of business, the usages and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;" and that "[t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time." The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more nor less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority.

148 | P a g e

Law 321_Corporation LAW_ Case Digest TRINIDAD FRANCISCO vs. GOVERNMENT SERVICE INSURANCE SYSTEM GR L-18287, 30 March 1963 FACTS: On 10 October 1956, the plaintiff, Trinidad J. Francisco, in consideration of a loan in the amount of P400,000.00, out of which the sum of P336,100.00 was released to her, mortgaged in favor of the defendant, GSIS, a parcel of land containing an area of 18,232 square meters, with twenty-one (21) bungalows, known as Vic-Mari Compound, located at Baesa, Quezon City, payable within ten (10) years in monthly installments of P3,902.41, and with interest of 7% per annum compounded monthly. On 6 January 1959, the System extrajudicially foreclosed the mortgage on the ground that up to that date the plaintiff-mortgagor was in arrears on her monthly installments in the amount of P52,000.00. Payments made by the plaintiff at the time of foreclosure amounted to P130,000.00. The System itself was the buyer of the property in the foreclosure sale. Trinidads father, Vicente Francisco, offered to pay part of the arrears with P30,000.00 with the remainder of the arrears plus the balance of the loan shall be paid with the proceeds of the rents of the property which shall be administered by GSIS. GSIS informed the plaintiff through a telegraph made its General Manager Rodolfo Andal and accepted the tender of P30,000.00 but did not take over the administration of the property. Meanwhile, Trinidad received the rents amounting to P44,000.00 and remitted the same to GSIS, who issued a receipt thereto. GSIS, however, notified the appellant that the time for redemption is about to expire and requested the Franciscos to offer them a system of payment. Trinidad questioned the action, standing by the validity of the proposal they made with GSIS, whose acceptance of the payment amounted to estoppel. he defendant answered, pleading that the binding acceptance of Francisco's offer was the resolution of the Board, and that Andal's telegram, being erroneous, should be disregarded. ISSUE: Whether or not the approval of the proposal made by GSIS is valid. RULING: YES. The terms of the offer were clear, and over the signature of defendant's general manager, Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. There was nothing in the telegram that hinted at any anomaly, or gave ground to suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying upon it. There is no denying that the telegram was within Andal's apparent authority, but the defense is that he did not sign it, but that it was sent by the Board Secretary in his name and without his knowledge. Assuming this to be true, how was appellee to know it? Corporate transactions would speedily come to a standstill were every person dealing with a corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face If a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents. Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to the corporation, whether he communicates such knowledge or not.

149 | P a g e

Law 321_Corporation LAW_ Case Digest RURAL BANK OF MILAOR (CAMARINES SUR) vs. FRANCISCA OCFEMIA, et. al. GR 137686, 08 February 2000 FACTS: The spouses Felicisimo Ocfemia and Juanita Arellano Ocfemia were not able to redeem the mortgaged properties consisting of seven (7) parcels of land from Milaor and so the mortgage was foreclosed and thereafter ownership thereof was transferred to the bank. Out of the seven (7) parcels that were foreclosed, five (5) of them are in the possession of the Ocfemias because these were sold by the [petitioner] bank to the parents of Marife Ocfemia Nio as evidenced by a Deed of Sale executed in January 1988. Marife went to the Register of Deeds of Camarines Sur with the Deed of Sale (Exh. C) in order to have the same registered. The Register of Deeds, however, informed her that the document of sale cannot be registered without a board resolution of the Bank. Marife then went to the bank, showed to it the Deed of Sale, the tax declaration and receipt of tax payments and requested the bank for a board resolution so that the property can be transferred to the name of Marifes parents Renato Ocfemia and Francisca Ocfemia. The bank, after requiring so many requirements and making so many alibis to Marife, refused to issue the board resolution. It claims that its bank manager Fe Tena did not have authority to sell the properties to the Ocfemias therefore rendering the deed of sale invalid. ISSUE: Whether or not the bank manager has authority to act on behalf of the bank. RULING: YES. There was an apparent authority bestowed with Tena. The bank acknowledged, by its own acts or failure to act, the authority of Fe S. Tena to enter into binding contracts. After the execution of the Deed of Sale, respondents occupied the properties in dispute and paid the real estate taxes due thereon. If the bank management believed that it had title to the property, it should have taken some measures to prevent the infringement or invasion of its title thereto and possession thereof. Likewise, Tena had previously transacted business on behalf of the bank, and the latter had acknowledged her authority. A bank is liable to innocent third persons where representation is made in the course of its normal business by an agent like Manager Tena, even though such agent is abusing her authority. Clearly, persons dealing with her could not be blamed for believing that she was authorized to transact business for and on behalf of the bank. In this light, the bank is estopped from questioning the authority of the bank manager to enter into the contract of sale. If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. More so, the bank is in default for failing to answer the complaint of the Ocfemias within the reglamentary period without any justifiable excuse.

150 | P a g e

Law 321_Corporation LAW_ Case Digest

Personal Liability of Directors and Other Corporate Officers


EVER ELECTRICAL MANUFACTURING, INC., (EEMI) and VICENTE GO vs. SAMAHANG MANGGAGAWA NG EVER ELECTRICAL/NAMAWU LOCAL G.R. No. 194795. June 13, 2012. FACTS: EEMI is a corporation engaged in the business of manufacturing electrical parts and supplies. EEMI was one of those who suffered huge losses during the Asian financial crisis. In 1996, EEMI obtained a loan from UCPB. As security, EEMIs land and improvements, including the factory, were mortgaged to UCPB. EEMIs business suffered further losses due to the continued entry of cheaper goods from China and other Asian countries. Later, Orient Bank, where EEMI invested 500MIO, went out of business. As aresult, EEMI defaulted on its loan with UCPB. In an attempt to save the company, EEMI entered into a dacion en pago arrangement with UCPB which, in effect, transferred ownership of the companys property to UCPB. Since UCPBs policy prohibited EEMI from leasing the premises directly with UCPB, UCPB agreed to lease it to an affiliate corporation, EGO Electrical Supply Co, Inc. (EGO), for and in behalf of EEMI. However, UCPB later instituted an unlawful detainer suit against EGO, wherein UCPB won. The Sheriff implemented the writ of execution by closing the premises and, as a result, EEMIs employees were prevented from entering the factory. Aggrieved, UNION filed a complaint for illegal dismissal with prayer for payment of 13th month pay, separation pay, damages, and attorneys fees. ISSUE: Whether or not Vicente Go should be held solidarily liable with EEMI. RULING: NO. As a general rule, corporate officers should not be held solidarily liable with the corporation for separation pay for it is settled that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Corporate directors and officers become solidarily liable with the corporation for the termination of employees done with malice or bad faith. It stressed that bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.

151 | P a g e

Law 321_Corporation LAW_ Case Digest HARPOON MARINE SERVICES, Inc. and JOSE LIDO T. ROSIT vs. FERNAN H. FRANCISCO G.R. No. 167751. March 2, 2011 FACTS: Respondent averred that he was unceremoniously dismissed by petitioner Rosit. He was informed that the company could no longer afford his salary and that he would be paid his separation pay and accrued commissions. Respondent nonetheless continued to report for work. A few days later, however, he was barred from entering the company premises. Relying on the promise of petitioner Rosit, respondent went to the office on June 30, 2001 to receive his separation pay and commissions, but petitioner Rosit offered only his separation pay. Respondent refused to accept it and also declined to sign a quitclaim. After several unheeded requests, respondent, through his counsel, sent a demand letter dated September 24, 2001 to petitioners asking for payment of P70,000.00, which represents his commissions for the seven boats constructed and repaired by the company under his supervision. In a letterreply dated September 28, 2001, petitioners denied that it owed respondent any commission, asserting that they never entered into any contract or agreement for the payment of commissions. Hence, on October 24, 2001, respondent filed an illegal dismissal complaint praying for the payment of his backwages, separation pay, unpaid commissions, moral and exemplary damages and attorneys fees. ISSUE: Whether or not the President is solidarily liable with the corporation. RULING: NO. Though the Court found that Respondent was illegally dismissed, it held that the President of the Petitioner Corporation should not be held solidarily liable with Petitioner Corporation. Obligations incurred by corporate officers, acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. Thus, they should not be generally held jointly and solidarily liable with the corporation. The general rule is grounded on the theory that a corporation has a legal personality separate and distinct from the persons comprising it. As exceptions to the general rule, solidary liability may be imposed: (1) When directors and trustees or, in appropriate cases, the officers of a corporation (a) vote for or assent to [patently] unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; (2) When the director or officer has consented to the issuance of watered stock or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; (3) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; (4) When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. To warrant the piercing of the veil of corporate fiction, the officers bad faith or wrongdoing must be established clearly and convincingly as bad faith is never presumed.

152 | P a g e

Law 321_Corporation LAW_ Case Digest ARNEL TY, et al. vs. NBI AGENT MARTIN JAMIL, et al. GR 182147, 15 December 2010 FACTS: Acting on a complaint filed by various LPG manufacturers, the NBI conducted a surveillance on the activities of Omni Gas, which is being accused of selling LPG tanks without the required permit and below its required standards. Agents De Jemil and Kawada attested to conducting surveillance of Omni and brought eight branded LPG cylinders of Shellane, Petron Gasul, Totalgaz, and Superkalan Gaz to Omni for refilling. The branded LPG cylinders were refilled, for which agents paid P1,582 as evidenced by Sales Invoice No. 90040issued by Omni on April 15, 2004. The refilled LPG cylinders were without LPG valve seals and one of the cylinders was actually underfilled, as found by LPG Inspector Noel N. Navio of the Liquefied Petroleum Gas Industry Association (LPGIA) who inspected the eight branded LPG cylinders. The NBI's test-buy yielded positive results for violations of BP 33, Section 2(a) in relation to Secs. 3(c) and 4, i.e., refilling branded LPG cylinders without authority; and Sec. 2(c) in relation to Sec. 4, i.e., under delivery or under filling of LPG cylinders. Petitioners Arnel Ty, Marie Antonette Ty, Jason Ong, Willy Dy, and Alvin Ty questioned the case against that, claiming that being mere directors, they are not liable to the case filed against Omni for they are not in charge of the management of the said entity. ISSUE: Whether or not petitioners may be held liable for the actions of Omni. RULING: NO. Only Arnel Ty may be held liable in his capacity as president of Omni, but not the other directors. The corporate powers of a corporation are reposed in the board of directors under the first paragraph of Sec. 23 of the Corporation Code, it is of common knowledge and practice that the board of directors is not directly engaged or charged with the running of the recurring business affairs of the corporation. Depending on the powers granted to them by the Articles of Incorporation, the members of the board generally do not concern themselves with the day-to-day affairs of the corporation, except those corporate officers who are charged with running the business of the corporation and are concomitantly members of the board, like the President. Section 25of the Corporation Code requires the president of a corporation to be also a member of the board of directors. Evidently, petitioner Arnel, as President, who manages the business affairs of Omni, can be held liable for probable violations by Omni of BP 33, as amended. The fact that petitioner Arnel is ostensibly the operations manager of Multi-Gas Corporation, a family owned business, does not deter him from managing Omni as well. It is well-settled that where the language of the law is clear and unequivocal, it must be taken to mean exactly what it says. As to the other petitioners, unless otherwise shown that they are situated under the catch-all "such other officer charged with the management of the business affairs," they may not be held liable under BP 33, as amended, for probable violations. Consequently, with the exception of petitioner Arnel, the charges against other petitioners must perforce be dismissed or dropped. Also, under BP 33 (which regulates the production and sale of LPG), Directors are not among those enumerated as criminally liable for the acts of the corporation.

153 | P a g e

Law 321_Corporation LAW_ Case Digest QUEENSLAND-TOKYO COMMODITIES et al. vs. THOMAS GEORGE GR 172727, 08 September 2010 FACTS: QTCI is a duly licensed broker engaged in the trading of commodity futures. In 1995, Guillermo Mendoza, Jr. (Mendoza) and Oniler Lontoc (Lontoc) of QTCI met with respondent Thomas George (respondent), encouraging the latter to invest with QTCI. On July 7, 1995, upon Mendoza's prodding, respondent finally invested with QTCI. On the same day, Collado, in behalf of QTCI, and respondent signed the Customer's Agreement. Forming part of the agreement was the Special Power of Attorney executed by respondent, appointing Mendoza as his attorney-in-fact with full authority to trade and manage his account. On June 20, 1996, the Securities and Exchange Commission (SEC) issued a Cease-and-Desist Order against QTCI. Alarmed by the issuance of the CDO, respondent demanded from QTCI the return of his investment, but it was not heeded. QTCI claimed that they were not aware of, nor were they privy to, any arrangement which resulted in the account of respondent being handled by unlicensed brokers. They pointed out that respondent transacted business with QTCI for almost a year, without questioning the license or the authority of the traders handling his account, rendering him estopped. It was only after it became apparent that QTCI could no longer resume its business transactions by reason of the CDO that respondent raised the alleged lack of authority of the brokers or traders handling his account. ISSUE: Whether or not QTCI should be held liable for the loss incurred by George in the investment he made with the corporation. RULING: YES. It recognized Mendoza and Collado as its brokers. Petitioners did not object to, and in fact recognized, Mendoza's appointment as respondent's attorney-in-fact. Collado, in behalf of QTCI, concluded the Customer's Agreement despite the fact that the appointed attorney-in-fact was not a licensed dealer. Worse, petitioners permitted Mendoza to handle respondent's account. Doctrine dictates that a corporation is invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee, or officer, along (although not necessarily) with the corporation, may validly attach, as a rule, only when - (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders, or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action. Romeo Lau, as president of [petitioner] QTCI, cannot feign innocence on the existence of these unlawful activities within the company, especially so that Collado, himself a ranking officer of QTCI, is involved in the unlawful execution of customers orders. Lau, being the chief operating officer, cannot escape the fact that had he exercised a modicum of care and discretion in supervising the operations of QTCI, he could have detected and prevented the unlawful acts of Collado and Mendoza.

154 | P a g e

Law 321_Corporation LAW_ Case Digest WENSHA SPA CENTER and/or XU ZHI JIE vs. LORETA YUNG GR 185122, 16 August 2010 FACTS: Loreta stated that she used to be employed by Manmen Services Co., Ltd. where Xu was a client. Xu was apparently impressed by Loreta's performance. After he established Wensha, he convinced Loreta to transfer and work at Wensha. Loreta was initially reluctant to accept Xu's offer because her job at Manmen was stable and she had been with Manmen for seven years. But Xu was persistent and offered her a higher pay. Enticed, Loreta resigned from Manmen and transferred to Wensha as Xu's personal assistant and interpreter. Loreta introduced positive changes to Wensha which resulted in increased business. This pleased Xu so that she was promoted to the position of Administrative Manager. Wensha and Xu denied illegally terminating Loreta's employment. They claimed that two months after Loreta was hired, they received various complaints against her from the employees so that on August 10, 2004, they advised her to take a leave of absence for one month while they conducted an investigation on the matter. Based on the results of the investigation, they terminated Loreta's employment on August 31, 2004 for loss of trust and confidence. The Court ruled that indeed Loreta was illegally dismissed because Wensha failed to substantially prove its claim that she committed wrongdoings with Wenshas employees, and that Loretas testimony as to her termination because her feng shui aura does not match that of Xu is consistent. Xu failed to duly prove a valid ground for the loss of trust and confidence with Loreta. Question lies if Xu should be held liable together with Wensha. ISSUE: Whether or not Xu is liable together with the corporation. RULING: NO. Xu is not liable together with the corporation. Elementary is the rule that a corporation is invested by law with a personality separate and distinct from those of the persons composing it and from that of any other legal entity to which it may be related. "Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality." In labor cases, corporate directors and officers may be held solidarily liable with the corporation for the termination of employment only if done with malice or in bad faith.Bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud. There is no finding of bad faith or malice on the part of Xu. There is, therefore, no justification for such a ruling. To sustain such a finding, there should be an evidence on record that an officer or director acted maliciously or in bad faith in terminating the services of an employee.Moreover, the finding or indication that the dismissal was effected with malice or bad faith should be stated in the decision itself.

155 | P a g e

Law 321_Corporation LAW_ Case Digest CEBU MACTAN MEMBERS CENTER vs. MASAHIRO TSUKAHARA GR 159624, 17 July 2009 FACTS: In February 1994, petitioner Cebu Mactan Members Center, Inc. (CMMCI), through Mitsumasa Sugimoto (Sugimoto), the President and Chairman of the Board of Directors of CMMCI, obtained a loan amounting to P6,500,000 from respondent Masahiro Tsukahara. As payment for the loan, CMMCI issued seven postdated checks of CMMCI payable to Tsukahara. On 13 April 1994, CMMCI, through Sugimoto, obtained another loan amounting to P10,000,000 from Tsukahara. Sugimoto executed and signed a promissory note in his capacity as CMMCI President and Chairman, as well as in his personal capacity. Upon maturity, the seven checks were presented for payment by Tsukahara, but the same were dishonored by PNB, the drawee bank. After several failed attempts to collect the loan amount totaling P16,500,000, Tsukahara filed the instant case for collection of sum of money against CMMCI and Sugimoto. Tsukahara alleged that the amount of P16,500,000 was used by CMMCI for the improvement of its beach resort, which included the construction of a wave fence, the purchase of air conditioners and curtains, and the provision of salaries of resort employees. He also asserted that Sugimoto, as the President of CMMCI, "has the power to borrow money for said corporation by any legal means whatsoever and to sign, endorse and deliver all checks and promissory notes on behalf of the corporation." CMMCI, on the other hand, denied borrowing the amount from Tsukahara, and claimed that both loans were personal loans of Sugimoto. The company also contended that if the loans were those of CMMCI, the same should have been supported by resolutions issued by CMMCI's Board of Directors. ISSUE: Whether or not CMMCI is liable to Tsukahara. RULING: YES. It is because Sugimotos actions are binding with CMMCI. A corporation, being a juridical entity, may act through its board of directors which exercises almost all corporate powers, lays down all corporate business policies, and is responsible for the efficiency of management. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. In this case, the corporate by-laws of CMMCI explicitly empowered the President to enter into loans with third persons on behalf of the corporation without the necessity of a board resolution. By-laws of a corporation should be construed and given effect according to the general rules governing the construction of contracts. They, as the self-imposed private laws of a corporation, have, when valid, substantially the same force and effect as laws of the corporation, as have the provisions of its charter insofar as the corporation and the persons within it are concerned. They are in effect written into the charter and in this sense; they become part of the fundamental law of the corporation. And the corporation and its directors (or trustees) and officers are bound by and must comply with them. The corporation is now estopped from denying the authority of its president to bind the former into contractual relations.

156 | P a g e

Law 321_Corporation LAW_ Case Digest ARMANDO DAVID vs. NFLU, MARIVELES APPAREL CORPORATION LABOR UNION GR 148263, 148271-72, 21 April 2009 FACTS: MAC hired David as IMPEX and Treasury Manager on 16 September 1988. David began serving as MAC's President in May 1990. David served as President in the nature of a nominee as he did not own any of MAC's shares. David tendered his irrevocable resignation from MAC on 30 September 1993. David's resignation was made effective on 15 October 1993. In a complaint for illegal dismissal dated 12 August 1993, National Federation of Labor Unions (NAFLU) and Mariveles Apparel Corporation Labor Union (MACLU) alleged that MAC ceased operations on 8 July 1993 without prior notice to its employees. MAC allegedly gave notice of its closure on the same day that it ceased operations. MACLU and NAFLU further alleged that, at the time of MAC's closure, employees who had rendered one to two weeks work were not paid their corresponding salaries. Atty. Joshua Pastores, as MAC's counsel, submitted a position paper dated 21 February 1994 and argued that Carag and David should not be held liable because MAC is owned by a consortium of banks. Carag's and David's ownership of MAC shares only served to qualify them to serve as officers in MAC. ISSUE: Whether or not David may be held liable for the illegal dismissal of MAC employees. RULING: NO. It is improper to hold David liable for MAC's obligations to its employees. However, Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation. Section 31 of the Corporation Code provides: Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. There was no showing of David willingly and knowingly voting for or assenting to patently unlawful acts of the corporation, or that David was guilty of gross negligence or bad faith. Also, the NLRC never gained jurisdiction over David for there was an invalid service of summons.

157 | P a g e

Law 321_Corporation LAW_ Case Digest HILARIO SORIANO AND ROSARIO ILAGAN vs. PEOPLE, BANGKO SENTRAL, PDIC GR 159517-18, 30 June 2009 FACTS: Hilario P. Soriano (Soriano) and Rosalinda Ilagan (Ilagan) were the President and General Manager, respectively, of the Rural Bank of San Miguel (Bulacan), Inc. (RBSM). Allegedly, on June 27, 1997 and August 21, 1997, during their incumbency as president and manager of the bank, petitioners indirectly obtained loans from RBSM. They falsified the loan applications and other bank records, and made it appear that Virgilio J. Malang and Rogelio Maaol obtained loans of P15,000,000.00 each, when in fact they did not. Criminal charges were filed against them. They sought for its dismissal because their action does not amount to any criminal action, and if it does, it will only render them liable civilly. Also, their single act could not amount to multiple offenses. ISSUE: Whether or not the petitions may be held liable for their actions. RULING: YES. They committed grave abuse of discretion in the exercise of their duties. As aptly pointed out by the BSP in its memorandum, there are differences between the two (2) offenses. A DOSRI violation consists in the failure to observe and comply with procedural, reportorial or ceiling requirements prescribed by law in the grant of a loan to a director, officer, stockholder and other related interests in the bank, i.e. lack of written approval of the majority of the directors of the bank and failure to enter such approval into corporate records and to transmit a copy thereof to the BSP supervising department. The elements of abuse of confidence, deceit, fraud or false pretenses, and damage, which are essential to the prosecution for estafa, are not elements of a DOSRI violation. The filing of several charges against Soriano was, therefore, proper.

158 | P a g e

Law 321_Corporation LAW_ Case Digest CEBU COUNTRY CLUB et al. vs. RICARDO ELIZAGAQUE GR 160273, 18 January 2008 FACTS: Sometime in 1987, San Miguel Corporation, a special company proprietary member of CCCI, designated respondent Ricardo F. Elizagaque, its Senior Vice President and Operations Manager for the Visayas and Mindanao, as a special nonproprietary member. The designation was thereafter approved by the CCCIs Board of Directors. In 1996, respondent filed with CCCI an application for proprietary membership. As the price of a proprietary share was around the P5 million range, Benito Unchuan, then president of CCCI, offered to sell respondent a share for only P3.5 million. Respondent, however, purchased the share of a certain Dr. Butalid for only P3 million. Consequently, on September 6, 1996, CCCI issued Proprietary Ownership Certificate No. 1446 to respondent. On August 1, 1997, respondent received a letter from Julius Z. Neri, CCCIs corporate secretary, informing him that the Board disapproved his application for proprietary membership. On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a letter of reconsideration. As CCCI did not answer, respondent, on October 7, 1997, wrote another letter of reconsideration. Still, CCCI kept silent. On November 5, 1997, respondent again sent CCCI a letter inquiring whether any member of the Board objected to his application. Again, CCCI did not reply. ISSUE: Whether or not the Board of Directors of Cebu Country Club are liable to Elizagawue for damages. RULING: YES. There is bad faith among the members of the board. As shown by the records, the Board adopted a secret balloting known as the black ball system of voting wherein each member will drop a ball in the ballot box. A white ball represents conformity to the admission of an applicant, while a black ball means disapproval. Pursuant to Section 3(c), as amended, cited above, a unanimous vote of the directors is required. When respondents application for proprietary membership was voted upon during the Board meeting on July 30, 1997, the ballot box contained one (1) black ball. Thus, for lack of unanimity, his application was disapproved. Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the right to approve or disapprove an application for proprietary membership. But such right should not be exercised arbitrarily. It is thus clear that respondent was left groping in the dark wondering why his application was disapproved. He was not even informed that a unanimous vote of the Board members was required. When he sent a letter for reconsideration and an inquiry whether there was an objection to his application, petitioners apparently ignored him. Certainly, respondent did not deserve this kind of treatment. Having been designated by San Miguel Corporation as a special non-proprietary member of CCCI, he should have been treated by petitioners with courtesy and civility. At the very least, they should have informed him why his application was disapproved. The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper norm. When the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal wrong is committed for which the wrongdoer must be held responsible.

159 | P a g e

Law 321_Corporation LAW_ Case Digest CALTEX (CHEVRON) PHILIPPINES, INC. vs. NLRC and ROMEO STO. TOMAS GR 159641, 15 October 2007 FACTS: In a letter dated October 21, 1996, Caltex informed the Department of Labor and Employment (DOLE) of its plan to implement a redundancy program in its Marketing Division and some departments in its Batangas Refinery for the period starting October 1996 to December 1998. The letter alleged that the redundancy program is a response to the market situation which constrained petitioner to rationalize and simplify its business processes. Santo Tomas was notified of his termination effective July 31, 1997 due to the redundancy of his position and awarded him a separation package in the amount of P559,458.90. On June 8, 1998, respondent filed with the Labor Arbiter a complaint for illegal dismissal against petitioner and its President and Chief Executive Officer, Mr. Clifton Hon. Private respondent alleged that: being petitioners regular employee, he is entitled to security of tenure; he did not commit any serious misconduct, willful disobedience, gross and habitual neglect of duty or fraud and willful breach of trust to warrant the penalty of dismissal from employment; there was no independent proof or evidence presented by petitioner to substantiate its claim of redundancy nor was he afforded due process as he was not given any opportunity to present his side; he was dismissed due to his active participation in union activities; petitioner opened positions for hiring some of which offered jobs that are the same as what private respondent was performing; petitioner failed to give written notice to him and DOLE at least one month before the intended date of termination as required by the Labor Code. ISSUE: Whether or not Santo Tomas was illegally dismissed. RULING: YES. Caltex failed to prove the necessity of the redundancy program. It is the rule that the characterization of an employees services as no longer necessary or sustainable, and therefore, properly terminable, is an exercise of business judgment on the part of the employer, and that the wisdom or soundness of such characterization or decision is not subject to discretionary review. However, such characterization may be rejected if the same is found to be in violation of law or is arbitrary or malicious. In the instant case, there was no substantial evidence presented by petitioner to justify private respondent's dismissal due to redundancy. As correctly found by the CA, petitioners evidence to show redundancy merely consisted of a copy of petitioners letter to the DOLE informing the latter of its intention to implement a redundancy program and nothing more. The letter which merely stated that petitioner undertook a review, restructuring and streamlining of its organization which resulted in consolidation, abolition and outsourcing of certain functions; and which resulted in identified and redundant positions instead of simplifying its business process restructuring, does not satisfy the requirement of substantial evidence, that is, the amount of evidence which a reasonable mind might accept as adequate to justify a conclusion. Petitioner failed to demonstrate the superfluity of private respondents position as there was nothing in the records that would establish any concrete and real factors recognized by law and relevant jurisprudence, such as overhiring of workers, decreased volume of business, or dropping of a particular product line or service activity previously manufactured or undertaken by the enterprise, which were adopted by petitioner in implementing the redundancy program. 160 | P a g e

Law 321_Corporation LAW_ Case Digest ATRIUM MANAGEMENT CORPORATION vs. COURT OF APPEALS, E.T. HENRY AND CO., et al. GR 109491, 28 February 2001 FACTS: Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de Leon, treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to petitioner Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason "payment stopped". Atrium, thus, instituted an action after its demand for payment of the value of the checks was denied. At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-Cement the fact that the checks represented payment for petroleum products which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum products. Lourdes M. de Leon claimed she is not solidarilly liable with Hi-Cement for the amount of the check and that Atrium was an ordinary holder, not a holder in due course of the rediscounted checks. ISSUE: Whether or not de Leon may be held liable. RULING: YES. Due to negligence. Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor. "Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; He agrees to hold himself personally and solidarily liable with the corporation; or He is made, by a specific provision of law, to personally answer for his corporate action. However, as to the claim of Atrium, it cannot be upheld because it is not a holder of the check in due course due to the fact that the same was crossed in favor of E.T. Henry, and therefore only payable to the latters account.

161 | P a g e

Law 321_Corporation LAW_ Case Digest ARB CONSTRUCTION and MARK MOLINA vs. COURT OF APPEALS, TBS SECURITY AND INVESTIGATION GR 126554, 31 May 2000 FACTS: On 15 August 1993 TBS Security and Investigation Agency (TBSS) entered into two (2) Service Contracts with ARBC wherein TBSS agreed to provide and post security guards in the five (5) establishments being maintained by ARBC. The contract shall be effective for one (1) year and shall be considered renewed for the same period unless the same is terminated after a notice is given to the parties thirty (30) days in advance. In a letter dated 23 February 1994 ARBC informed TBSS of its desire to terminate the Service Contracts effective thirty (30) days after receipt of the letter. Also, in a letter dated 22 March 1994, ARBC through its Vice President for Operations, Mark Molina, informed TBSS that it was replacing its security guards with those of Global Security Investigation Agency (GSIA). In response to both letters, TBSS informed ARBC that the latter could not preterminate the Service Contracts nor could it post security guards from GSIA as it would run counter to the provisions of their service contracts. Nevertheless, Molina decreased the security guards to only one (1) as a right provided under the service contract. TBSS thereafter filed a case for breach of contract against ARBC and Mark Molina. ISSUE: Whether or not Mark Molina should be held liable together with ARBC. RULING: NO. He merely acted within his capacity as an officer of the corporation. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. On the basis hereof, petitioner Molina could not be held jointly and severally liable for any obligation which petitioner ARBC may be held accountable for, absent any proof of bad faith or malice on his part. Corollarily, it is also incorrect on the part of the Court of Appeals to conclude that there was a sufficient cause of action against Molina as to make him personally liable for his actuations as Vice President for Operations of ARBC.

162 | P a g e

Law 321_Corporation LAW_ Case Digest RUFINA LUY LIM vs. COURT OF APPEALS, AUTO TRUCK TBA CORP., et al. GR 124715, 24 January 2000 FACTS: On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner, as surviving spouse and duly represented by her nephew George Luy, filed on 17 March 1995, a joint petition for the administration of the estate of Pastor Y. Lim before the Regional Trial Court of Quezon City. Private respondent corporations, whose properties were included in the inventory of the estate of Pastor Y. Lim, then filed a motion6 for the lifting of lis pendens and motion for exclusion of certain properties from the estate of the decedent. Although the defendant corporations dealt and engaged in business with the public as corporations, all their capital, assets and equity were however, personally owned by the late Pastor Y Lim. Hence the alleged stockholders and officers appearing in the respective articles of incorporation of the above business entities were mere dummies of Pastor Y. Lim, and they were listed therein only for purposes of registration with the Securities and Exchange Commission. Petitioner argues that the parcels of land covered under the Torrens system and registered in the name of private respondent corporations should be included in the inventory of the estate of the decedent Pastor Y. Lim, alleging that after all the determination by the probate court of whether these properties should be included or not is merely provisional in nature, thus, not conclusive and subject to a final determination in a separate action brought for the purpose of adjudging once and for all the issue of title. ISSUE: Whether or not the properties of the corporation-defendants be included in the estate of the deceased. RULING: NO. They hold separate personalities from the deceased. In as much as the real properties included in the inventory of the estate of the late Pastor Y. Lim are in the possession of and are registered in the name of private respondent corporations, which under the law possess a personality separate and distinct from their stockholders, and in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of private respondents should stand undisturbed. Notwithstanding that the real properties were duly registered under the Torrens system in the name of private respondents, and as such were to be afforded the presumptive conclusiveness of title, the probate court obviously opted to shut its eyes to this gleamy fact and still proceeded to issue the impugned orders. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities.

163 | P a g e

Law 321_Corporation LAW_ Case Digest ADALIA FRANCISCO and MERRYLAND DEVELOPMENT vs. RITA MEJIA GR 141617, 14 August 2001 FACTS: On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale) executed a Deed of Sale with Mortgage for the consideration of P800,000.00 to be paid in several installments within five years from the date of the deed, at an interest of nine percent per annum based on the successive unpaid principal balances. Thereafter, the titles of Gutierrez were cancelled new ones were issued in favor of Cardale. On 26 August 1968, owing to Cardales failure to settle its mortgage obligation, Gutierrez filed a complaint for rescission of the contract. During the pendency of the rescission case, Gutierrez died and was substituted by her executrix, respondent Rita C. Mejia (Mejia). However, Cardale, which was represented by petitioner Adalia B. Francisco (Francisco) in her capacity as Vice-President and Treasurer of Cardale, lost interest in proceeding with the presentation of its evidence and the case lapsed into inactive status for a period of about fourteen years. In the meantime, the mortgaged parcels of land became delinquent in the payment of real estate taxes, which culminated in their levy and auction sale in satisfaction of the tax arrears. The highest bidder for the three parcels of land was petitioner Merryland Development Corporation, whose President and majority stockholder is Francisco. Mejia filed for damages against Francisco who controlled Cardale and Merryland and that she had employed fraud by intentionally causing Cardale to default in its payment of real property taxes on the mortgaged properties so that Merryland could purchase the same by means of a tax delinquency sale. ISSUE: Whether or not Francisco is liable for damages. RULING: YES. The totality of the circumstances appertaining conduce to the inevitable conclusion that petitioner Francisco acted in bad faith. The events leading up to the loss by the Gutierrez estate of its mortgage security attest to this. It has been established that Cardale failed to comply with its obligation to pay the balance of the purchase price for the four parcels of land it bought from Gutierrez. This prompted Gutierrez to file an action for rescission of the Deed of Sale with Mortgage, but the case dragged on for about fourteen years when Cardale, as represented by Francisco, who was Vice-President and Treasurer of the same, lost interest in completing its presentation of evidence That Merryland acquired the property at the public auction only serves to shed more light upon Franciscos fraudulent purposes. Based on the findings of the Court of Appeals, Francisco is the controlling stockholder and President of Merryland. Thus, aside from the instrumental role she played as an officer of Cardale, in evading that corporations legitimate obligations to Gutierrez, it appears that Franciscos actions were also oriented towards securing advantages for another corporation in which she had a substantial interest. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders.

164 | P a g e

Law 321_Corporation LAW_ Case Digest DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF APPEALS, REMINGTON INDUSTRIAL SALES GR 126200, 16 August 2001 FACTS: Between July 1981 and April 1984, Marinduque Mining entered into 3 mortgage agreements with PNB and DBP involving its real properties located in Surigao del Norte, Negros Occidental, and Rizal, as well as its equipments located therein. Marinduque failed to pay its loans, causing the foreclosure of the said mortgages. PNB and DBP thereafter gained control of the said properties. In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation. The purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid construction materials and other merchandise purchased by Marinduque Mining, as well as interest, attorneys fees and the costs of suit. Remingtons original complaint was amended to include PNB, DBP, Maricalum Mining Corporation and Island Cement Corporation as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction since the personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement creations of codefendants PNB and DBP were the personnel of co-defendant MMIC such that practically there has only been a change of name for all legal purpose and intents. ISSUE: Whether or not the take over of PNB and DBP over Marinduque Mining is in bad faith. RULING: NO. Their actions are mandated under the law. Where the corporations have directors and officers in common, there may be circumstances under which their interest as officers in one company may disqualify them in equity from representing both corporations in transactions between the two. Thus, where one corporation was insolvent and indebted to another, it has been held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness In the same manner that when the corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantage or preference over other creditors. They cannot thus take advantage of their fiduciary relation and deal directly with themselves, to the injury of others in equal right. Directors of insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in the payment of their claims. It is not good morals or good law. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing the payment of his debts in preference to all others. When validity of these mortgages, to secure debts upon which the directors were indorsers, was questioned by other creditors of the corporation, they should have been classed as instruments rendered void by the legal principle which prevents directors of an insolvent corporation from giving themselves a preference over outside creditors.

165 | P a g e

Law 321_Corporation LAW_ Case Digest AMERICAN HOSPITAL SUPPLIES/PHILIPPINES et al. vs. COURT OF APPEALS, ALFONSO BAYANI GR 111807, 14 June 1996 FACTS: American Hospital Supplies was engaged in the sale and manufacture of medicines and pharmaceuticals in the country and did substantial business with government hospitals. On 1 June 1970 it hired Alfonso Bayani as an Area Manager for Visayas and Mindanao, and later appointed him Manager of its Cebu branch. On 30 January 1978 private respondent was dismissed from the service. At that time he was receiving a monthly compensation of P3,180.00. On 5 May 1978 private respondent filed a complaint for damages before the trial court alleging that in the course of their business petitioners were directly encouraging, abetting and promoting bribery in the guise of "commissions," "entertainment expenses" and "representation expenses" which were given to various government hospital officials in exchange for favorable recommendations, approvals and actual purchases of medicines and pharmaceuticals. For his refusal to take direct and personal hand in giving "bribe money" he was dismissed. He then implicated AHS President Gervacio Amistoso and Vice President Constancio Halili as responsible for his illegal dismissal. ISSUE: Whether or not Amistoso and Halili be held solidarily liable with the corporation. RULING: NO. Corporate officers are not personally liable for money claims of discharged corporate employees unless they acted with evident malice and bad faith in terminating their employment. In the case at bar, while petitioners Amistoso and Halili may have had a hand in the relief of respondent. Bayani, there are no indications of malice and bad faith on their part. We take exception to the conclusion of respondent Court of Appeals that "the manner by which Halili and Amistoso acted is characterized by bad faith and malice, thus binding them personally liable to plaintiffappellee,'' On the contrary it is apparent that the relief order was a business judgment on the part of the officers, with the best interest of the corporation in mind, based on their opinion that respondent Bayani had failed to perform the duties expected of him. Hence both the trial court and respondent Court of Appeals committed a reversible error in holding petitioners Amistoso and Halili jointly and solidarily liable with Petitioner Corporation.

166 | P a g e

Law 321_Corporation LAW_ Case Digest COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION vs. NLRC, et al. GR 121315, 19 July 1999 FACTS: Complex informed its Lite-On personnel that a request from Lite On Philippines to lower their selling price by 10% was not feasible as they were already incurring losses at the present prices of their products. Under such circumstances, Complex regretfully informed the employees that it was left with no alternative but to close down the operations of the Lite-On Line. The Union, however, decried the decision and voted to declare a strike. Labor unrest within the company eventually ensued. In the evening of April 6, 1992, the machinery, equipment and materials being used for production at Complex were pulled-out from the company premises and transferred to the premises of Ionics Circuit, Inc. at Cabuyao, Laguna. The following day, a total closure of company operation was effected at Complex. A complaint was, thereafter, filed with the Labor Arbitration Branch of the NLRC for unfair labor practice, illegal closure/illegal lockout, money claims for vacation leave, sick leave, unpaid wages, 13th month pay, damages and attorney's fees. Ionics was impleaded as a party defendant because the officers and management personnel of Complex were also holding office at Ionics with Lawrence Qua as the President of both companies. Ionics contended that it was an entity separate and distinct from Complex and had been in existence since July 5, 1984 or eight (8) years before the labor dispute arose at Complex. Like Complex, it was also engaged in the semi-conductor business where the machinery, equipment and materials were consigned to them by their customers. While admitting that Lawrence Qua, the President of Complex was also the President of Ionics, the latter denied having Qua as their owner since he had no recorded subscription of P1,200,000.00 in Ionics as claimed by the Union. ISSUE: Whether or not Lawrence Qua should be held liable for the alleged illegal transfer of machineries of Complex to Ionics. RULING: NO. It is settled that in the absence of malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. The fact that the pull-out of the machinery, equipment and materials was effected during nighttime is not per se an indicia of bad faith on the part of respondent Qua since he had no other recourse, and the same was dictated by the prevailing mood of unrest as the laborers were already vandalizing the equipment, bent on picketing the company premises and threats to lock out the company officers were being made. Such acts of respondent Qua were, in fact, made pursuant to the demands of Complex's customers who were already alarmed by the pending labor dispute and imminent strike to be stage by the laborers, to have their equipment, machinery and materials pull out of Complex. As such, these acts were merely done pursuant to his official functions and were not, in any way, made with evident bad faith. As to the juridical personality of the corporations, Ionics may be engaged in the same business as that of Complex, but this fact alone is not enough reason to pierce the veil of corporate fiction of the corporation. Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Likewise, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

167 | P a g e

Law 321_Corporation LAW_ Case Digest ERNESTINA CRISOLOGO-JOSE vs. COURT OF APPEALS, RICARDO SANTOS, JR. GR 80599, 15 September, 1989 FACTS: In 1980, Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and sales; and the president of the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong, a check drawn against Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 payable to Ernestina Crisologo-Jose. Since the check was under the account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation. However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon Santos, Jr., to sign the aforesaid check as an alternate signatory, who did sign the same. It appears that the check to Crisologo-Jose in consideration of the waiver or quitclaim by said defendant over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon approval by the GSIS of the compromise agreement with the spouses Ong, the check will be encashed accordingly. However, since the compromise agreement was not approved within the expected period of time, the aforesaid check was replaced by Atty. Benares with another Traders Royal Bank check dated August 10, 1980, in the same amount. This replacement check was also signed by Atty. Benares and by Santos, Jr. When Jose deposited this replacement check with her account, it was dishonored for insufficiency of funds. A subsequent redepositing of the said check was likewise dishonored by the bank for the same reason. ISSUE: Whether or not Movers Enterprises should be held liable to the bounced checks which are personal liabilities of Atty. Baares. RULING: NO. The provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so.. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith. Instead, Jose should direct her claim against Baares and Santos. Santos, however, is exculpated from criminal liability under BP 22 for he successfully and legally consigned the amount of the check with the Court within the reglamentary period.

168 | P a g e

Law 321_Corporation LAW_ Case Digest FCY CONSTRUCTION GROUP and FRANCIS YU vs. COURT OF APPEALS, HON. JOSE DE LA RAMA GR 123358, 01 February 2000 FACTS: On June 29, 1993, Ley Construction and Development Corporation filed a complaint for collection of a sum of money with application for preliminary attachment against petitioner FCY Construction Group, Inc. and Francis C. Yu. Ley alleged that it had a joint venture agreement with petitioner FCY Construction Group, Inc. (wherein petitioner Francis C. Yu served as President) over the Tandang Sora Commonwealth Flyover government project for which it had provided funds and construction materials. The Complaint was filed in order to compel petitioners to pay its half share in the collections received in the project as well as those yet to be received therein. In support of its application for a writ of attachment, private respondent alleged that petitioners were guilty of fraud in incurring the obligation and had fraudulently misapplied or converted the money paid them, to which it had an equal share. FCY denied the allegation, and also moved for the dropping of Francis Yu as one of the defendants, claiming that the hornbook law that corporate personality is a shield against personal liability of its officers. ISSUE: Whether or not Francis Yu may be held solidarily liable with FCY. RULING: NO. FCY has a separate juridical entity from that of Francis. Francis Yu cannot be made liable in his individual capacity if he indeed entered into and signed the contract in his official capacity as President, in the absence of stipulation to that effect, due to the personality of the corporation being separate and distinct from the persons composing it. However, while Yu cannot be held solidarily liable with petitioner corporation merely because he is the President thereof and was involved in the transactions with private corporation, there exists instances when corporate officers may be held personally liable for corporate acts. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule. The attendance of these circumstances, however, cannot be determined at this stage and should properly be threshed out during the trial on the merits. Also, there was no fraud on the part of FCY in the performance of its obligations with Ley, therefore rendering attachment as improper.

169 | P a g e

Law 321_Corporation LAW_ Case Digest RICARDO LLAMADO vs. COURT OF APPEALS, PEOPLE OF THE PHILIPPINES GR 99032, 26 March 1997 FACTS: Private complainant, Leon Gaw, delivered to accused the amount of P180,000.00, with the assurance of Aida Tan, the secretary of the accused in the corporation, that it will be repaid on 4 November 1983. Upon delivery of the money, accused Ricardo Llamado took it and placed it inside a deposit box. Accused Jacinto Pascual and Ricardo Llamado signed Philippine Trust Company Check No. 047809, postdated 4 November 1983, in the amount of P186,500.00 in the presence of private complainant. The aforesaid check was issued in payment of the cash money delivered to the accused by private complainant, plus interests thereon for sixty (60) days in the amount of P6,500.00. On 4 November 1983, private complainant deposited the check in his current account with the Equitable Banking Corporation which later informed the complainant that said check was dishonored by the drawee bank because payment was stopped, and that the check was drawn against insufficient funds. Private complainant was also notified by the Equitable Banking Corporation that his current account was debited for the amount of P186,500.00 because of the dishonor of the said check. Private complainant returned to Aida Tan to inform her of the dishonor of the check. Aida Tan received the check from private complainant with the assurance that she will have said check changed with cash. However, upon his return to Aida Tan, the latter informed him that she had nothing to do with the check. Llamado alleges that he should not be held personally liable for the amount of the check because it was a check of the Pan Asia Finance Corporation and he signed the same in his capacity as Treasurer of the corporation. ISSUE: Whether or not Llamado should be held liable under BP 22. RULING: YES. He is mere act of signing the check held him liable under BP 22. Where the check is drawn by a corporation, company or entity, the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act.

170 | P a g e

Law 321_Corporation LAW_ Case Digest MAM REALTY CORPORATION vs. NLRC, CELSO BALBASTRO GR 114787, 02 June 1995 FACTS: Celso B. Balbastro filed a case against MAM Realty Development Corporation ("MAM") and its Vice President Manuel P. Centeno, for unfair labor practice in violation of the Labor Code. Balbastro alleged that he was employed by MAM as a pump operator in 1982 and had since performed such work at its Rancho Estate, Marikina, Metro manila. MAM countered that Balbastro had previously been employed by Francisco Cacho and co., Inc., the developer of Rancho Estates. Sometime in May 1982, his services were contracted by MAM for the operation of the Rancho Estates' water pump. He was engaged, however, not as an employee, but as a service contractor, at an agreed fee of P1,590.00 a month. Similar arrangements were likewise entered into by MAM with one Rodolfo Mercado and with a security guard of Rancho Estates III Homeowners' Association. Under the agreement, Balbastro was merely made to open and close on a daily basis the water supply system of the different phases of the subdivision in accordance with its water rationing scheme. He worked for only a maximum period of three hours a day, and he made use of his free time by offering plumbing services to the residents of the subdivision. He was not at all subject to the control or supervision of MAM for, in fact, his work could so also be done either by Mercado or by the security guard. On 23 May 1990, prior to the filing of the complaint, MAM executed a Deed of Transfer, 1 effective 01 July 1990, in favor of the Rancho Estates Phase III Homeowners Association, Inc., conveying to the latter all its rights and interests over the water system in the subdivision. NLRC found the corporation guilty as charged, and likewise held Centeno liable together with said corporation. ISSUE: Whether or not Centeno should be held liable together with MAM Realty. RULING: NO. A corporation, being a juridical entity, may act only through its directors, officers and employees. Obligations incurred by them, acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. True, solidarily liabilities may at times be incurred but only when exceptional circumstances. In labor cases, for instance, the Court has held corporate directors and officers solidarily liable with the corporation for the termination of employment of employees done with malice or in bad faith. In the case at bench, there is nothing substantial on record that can justify, prescinding from the foregoing, petitioner Centeno's solidary liability with the corporation. Nothing states that he acted in bad faith. Although the Court found that there is an employer-employee relationship between Balbastro and MAM Realty, the case was remanded to NLRC for the recomputation of Balbastros monetary awards, such as backwages and wage differentials.

171 | P a g e

Law 321_Corporation LAW_ Case Digest SERGIO NAGUIAT vs. CLARK FIELD TAXI, INC. GR 116123, 13 March 1997 FACTS: Petitioner CFTI held a concessionaire's contract with the Army Air Force Exchange Services ("AAFES") for the operation of taxi services within Clark Air Base. Sergio F. Naguiat was CFTI's president, while Antolin T. Naguiat was its vicepresident. Like Sergio F. Naguiat Enterprises, Incorporated ("Naguiat Enterprises"), a trading firm, it was a family-owned corporation. Individual respondents were previously employed by CFTI as taxicab drivers. Due to the phase-out of the US military bases in the Philippines, from which Clark Air Base was not spared, the AAFES was dissolved, and the services of individual respondents were officially terminated on November 26, 1991. The AAFES Taxi Drivers Association ("drivers' union"), through its local president, Eduardo Castillo, and CFTI held negotiations as regards separation benefits that should be awarded in favor of the drivers. They arrived at an agreement that the separated drivers will be given P500.00 for every year of service as severance pay. Most of the drivers accepted said amount in December 1991 and January 1992. However, individual respondents herein refused to accept theirs. Instead, after disaffiliating themselves from the drivers' union and filed a complaint against "Sergio F. Naguiat doing business under the name and style Sergio F. Naguiat Enterprises, Inc., and CFTI with Antolin T. Naguiat as vice president and general manager, as party respondent. ISSUE: Whether or not Sergio Naguiat may be held liable for the claims instituted by the taxi drivers against his company. RULING: YES. As provided for under the fifth paragraph of Section 100 of the Corporation Code specifically imposes personal liability upon the stockholder actively managing or operating the business and affairs of the close corporation. In fact, in posting the surety bond required by this Court for the issuance of a temporary restraining order enjoining the execution of the assailed NLRC Resolutions, only Sergio F. Naguiat, in his individual and personal capacity, principally bound himself to comply with the obligation thereunder, i.e., "to guarantee the payment to private respondents of any damages which they may incur by reason of the issuance of a temporary restraining order sought, if it should be finally adjudged that said principals were not entitled thereto. The Court here finds no application to the rule that a corporate officer cannot be held solidarily liable with a corporation in the absence of evidence that he had acted in bad faith or with malice. In the present case, Sergio Naguiat is held solidarily liable for corporate tort because he had actively engaged in the management and operation of CFTI, a close corporation. Antolin Naguiat, however, could not be held liable. Although he carried the title of "general manager" as well, it had not been shown that he had acted in such capacity. Furthermore, no evidence on the extent of his participation in the management or operation of the business was preferred. In this light, he cannot be held solidarily liable for the obligations of CFTI and Sergio Naguiat to the private respondents.

172 | P a g e

Law 321_Corporation LAW_ Case Digest PROGRESS HOMES and ERMELO ALMEDA vs. NLRC, et al. GR 106212, 07 March 1997 FACTS: Private respondents allegedly were among the workers employed by Progress Homes in their construction and development of the subdivision from 1986 to 1988. They were paid varying salaries. Forty of these workers, including private respondents, filed before the NLRC Arbitration Branch a petition for reinstatement, salary adjustment, ECOLA, overtime pay and 13th month pay. Petitioners amicably settled the case with thirty-three of the laborers, leaving private respondents as the only claimants. Private respondents alleged that they worked as laborers and carpenters for 8.5 hours a day at a salary below the minimum wage and that when they demanded payment of the benefits due them, they were summarily dismissed and barred from entering the workplace. It also denied that private respondents were regular employees claiming that they were only project employees and that there was no employer-employee relationship between them. The Labor Arbiter and the NLRC ruled that Progress is liable to the respondents, with Almeda jointly and severally liable. ISSUE: Whether or not Almeda may be held liable. RULING: NO. It amounted to grave abuse of discretion. The Court has held that corporate directors and officers are solidarily liable with the corporation for the termination of employment of employees only if the termination is done with malice or in bad faith. The Labor Arbiter's decision failed to disclose why Almeda was made personally liable. There appears no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. Almeda, therefore, should not have been made personally answerable for the payment of private respondents' salaries. The decision of the Labor Arbiter and the NLRC, however, should be set aside because of denial of due process on the part of Progress Homes.

173 | P a g e

Law 321_Corporation LAW_ Case Digest REAHS CORP., SEVERO CASTULO, et al. vs. NLRC, BONIFACIO RED, et al. GR 117473, 15 April 1997 FACTS: Private respondents sued Reahs Corp. for unfair labor practice and illegal dismissal. They claim that they were unlawfully dismissed and were not awarded nor given any separation pay. On the other hand, respondents allege that sometime in 1986, a certain Ms Soledad Domingo, the sole proprietress and operator of Rainbow Sauna located at 316 Araneta Avenue, Quezon City, offered to sell her business to respondent Reah's Corporation After the sale, all the assets of Ms Domingo were turned over to respondent Reah's, which put a sing-along coffee shop and massage clinic; that complainant Red started his employment on the first week of December 1988 as a room boy at P50.00/day and was given living quarters inside the premises as he requested; that sometime in March 1989, complainant Red asked permission to go to Bicol for a period of ten (10) days, which was granted, and was given an advance money of P1,200.00 to bring some girls from the province to work as attendants at the respondent's massage clinic, that it was only on January 1, 1990 that complainant Red returned and was re-hired under the same terms and conditions of his previous employment with the understanding that he will have to refund the P1,200.00 cash advance given to him; that due to poor business, increase in the rental cost and the failure of Meralco to reconnect the electrical services in the establishment, it suffered losses leading to its closure. The NLRC ruled in favor of respondents. Together with the corporation, the NLRC also held Castulo, Romeo Pascua, and Daniel Valenzuela solidarily liable due to their capacity as Chairman, Board Member and Accountant, and Acting Manager, respectively. ISSUE: Whether or not Pascua, Castulo, and Valenzuela, may be held liable. RULING: YES. They acted in bad faith in dismissing the respondents. As a general rule established by legal fiction, the corporation has a personality separate and distinct from its officers, stockholders and members. Hence, officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. This fictional veil, however, can be pierced by the very same law which created it when "the notion of the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues". Under the Labor Code, for instance, when a corporation violates a provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the corporation. In the case at bar, the thrust of petitioners' arguments was aimed at confining liability solely to the corporation, as if the entity were an automaton designed to perform functions at the push of a button. The issue, however, is not limited to payment of separation pay under Article 283 but also payment of labor standard benefits such as underpayment of wages, holiday pay and 13th month pay to two of the private respondents. While there is no sufficient evidence to conclude that petitioners have indiscriminately stopped the entity's business, at the same time, petitioners have opted to abstain from presenting sufficient evidence to establish the serious and adverse financial condition of the company.

174 | P a g e

Law 321_Corporation LAW_ Case Digest BENJAMIN SANTOS vs. NLRC, MELVIN MILLENA GR 101699, 13 March 1996 FACTS: Melvin Millena, on 01 October 1985, was hired to be the project accountant for Mana Mining and Development Corp.s mining operations in Gatbo, Bacon, Sorsogon. On 12 August 1986, private respondent sent to Mr. Gil Abao, the MMDC corporate treasurer, a memorandum calling the latter's attention to the failure of the company to comply with the withholding tax requirements of, and to make the corresponding monthly remittances to, the Bureau of Internal Revenue ("BIR") on account of delayed payments of accrued salaries to the company's laborers and employees. Albao responded that the mining operations in Sorsogon shall be stopped pending the end of the wet season and the normalization of the peace and order situation in the province. Therefore, MMDC is dispensing the services of Millena because of lack of work load. Private respondent expressed "shock" over the termination of his employment. He complained that he would not have resigned from the Sycip, Gorres & Velayo accounting firm, where he was already a senior staff auditor, had it not been for the assurance of a "continuous job" by MMDC's Engr. Rodillano E. Velasquez. Private respondent requested that he be reimbursed the "advances" he had made for the company and be paid his "accrued salaries/claims With his demands left unheeded, Millena filed a complaint for illegal dismissal, unpaid salaries, 13th month pay, overtime pay, separation pay and incentive leave pay against MMDC and its two top officials, namely, herein petitioner Benjamin A. Santos (the President) and Rodillano A. Velasquez (the executive vice-president). ISSUE: Whether or not the impleaded officials of MMDC may be held liable. RULING: NO. It was not proven that they acted in bad faith. A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit done sparingly, the disregard of its independent being and the lifting of the corporate veil. The Court also has collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer. The case of petitioner is way off these exceptional instances. It is not even shown that petitioner has had a direct hand in the dismissal of private respondent enough to attribute to him (petitioner) a patently unlawful act while acting for the corporation. It is undisputed that the termination of petitioner's employment has, instead, been due, collectively, to the need for a further mitigation of losses, the onset of the rainy season, the insurgency problem in Sorsogon and the lack of funds to further support the mining operation in Gatbo.

175 | P a g e

Law 321_Corporation LAW_ Case Digest JOSE SIA vs. PEOPLE OF THE PHILIPPINES GR L-30896, 28 April 1983 FACTS: Jose O. Sia sometime prior to 24 May, 1963, was General Manager of the Metal Manufacturing Company of the Philippines, Inc. engaged in the manufacture of steel office equipment; on 31 May, 1963, because his company was in need of raw materials to be imported from abroad, he applied for a letter of credit to import steel sheets from Mitsui Bussan Kaisha, Ltd. of Tokyo, Japan, the application being directed to the Continental Bank, herein complainant, and his application having been approved, the letter of credit was opened on 5 June, 1963 in the amount of $18,300. The goods arrived sometime in July, 1963 according to accused himself, now from here on there is some debate on the evidence; according to Complainant Bank, there was permitted delivery of the steel sheets only upon execution of a trust receipt, while according to the accused, the goods were delivered to him sometime before he executed that trust receipt in fact they had already been converted into steel office equipment by the time he signed said trust receipt. But there is no question - and this is not debated that the bill of exchange issued for the purpose of collecting the unpaid account thereon having fallen due neither accused nor his company having made payment thereon notwithstanding demands, and the accounts having reached the sum in pesos of P46,818.68 after deducting his deposit valued at P28,736.47. ISSUE: Whether or not Sia should be held liable. RULING: NO. The bank is transacting with Metal Manufacturing and not with him. The case cited by the Court of Appeals in support of its stand - Tan Boon Kong case, supra may however not be squarely applicable to the instant case in that the corporation was directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally. The performance of the act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporation who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability as created by the law would be illusory, and the deterrent effect of the law, negated. In the present case, a distinction is to be found with the Tan Boon Kong case in that the act alleged to be a crime is not in the performance of an act directly ordained by law to be performed by the corporation. The act is imposed by agreement of parties, as a practice observed in the usual pursuit of a business or a commercial transaction. The offense may arise, if at all, from the peculiar terms and condition agreed upon by the parties to the transaction, not by direct provision of the law. The intention of the parties, therefore, is a factor determinant of whether a crime was committed or whether a civil obligation alone intended by the parties. With this explanation, the distinction adverted to between the Tan Boon Kong case and the case at bar should come out clear and meaningful. In the absence of an express provision of law making the petitioner liable for the criminal offense committed by the corporation of which he is a president as in fact there is no such provisions in the Revised Penal Code under which petitioner is being prosecuted, the existence of a criminal liability on his part may not be said to be beyond any doubt. In all criminal prosecutions, the existence of criminal liability for which the accused is made answerable must be clear and certain. The maxim that all doubts must be resolved in favor of the accused is always of compelling force in the prosecution of offenses.

176 | P a g e

Law 321_Corporation LAW_ Case Digest TRAMAT MERCANTILE, INC. and DAVID HONG vs. COURT OF APPEALS, MELCHOR DE LA CUESTA GR 111008, 07 November 1994 FACTS: On 09 April 1984, Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries," sold to Tramat Mercantile, Inc. one unit Hinomoto Tractor Model MB 1100D powered by a 13 H.P. diesel engine. In payment, David Ong, Tramat's president and manager, issued a check for P33,500.00 (apparently replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor, together with an attached lawn mower fabricated by it, to the Metropolitan Waterworks and Sewerage System/NAWASA for P67,000.00. David Ong caused a stop payment of the check when NAWASA refused to pay the tractor and lawn mower after discovering that, aside from some stated defects of the attached lawn mower, the engine (sold by de la Cuesta) was a reconditioned unit. On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his answer, averred, among other things, that de la Cuesta had no cause of action; that the questioned transaction was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal capacity; and that the payment of the check was stopped because the subject tractor had been priced as a brand new, not as a reconditioned unit. ISSUE: Whether or not Ong should be held liable for the unpaid tractor. RULING: NO. It is an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned transaction. Ong had acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon. Tramat, however, should be held liable for the unpaid tractor because at the time of the purchase, the appellants did not reveal to the appellee the true purpose for which the tractor would be used. Granting that the appellants informed the appellee that they would be reselling the unit to the MWSS, an entity admittedly not engaged in farming, and that they ordered the tractor without the power tiller, an indispensable accessory if the tractor would be used in farming, these in themselves would not constitute the required implied notice to the appellee as seller.

177 | P a g e

Law 321_Corporation LAW_ Case Digest

Self-Dealing Director/Officer
REPUBLIC OF THE PHILIPPINES vs. EDUARDO CONJUANGCO GR 166859, 12 April 2011 FACTS: Danding Cojuangco is being accused of using public funds to finance his acquisition of shares in the San Miguel Corporation. Through the coconut levy fund, was is being accused of buying out shareholders in the corporation in order to become a substantial shareholder himself. To carry out his scheme, he used dummy shareholders who shall be trustors of the shares on his behalf. Contention rises on his culpability as a public official during the time that he bought the shares. It is claimed by the Sandiganbayan that he was able to amass vast shares of the corporation through the use of the coconut levy fund, which is public in nature. Therefore, it but apparent that he be held liable for his actions in taking control of the corporation. ISSUE: SMC. Whether or not Conjuangco illegally used ill-gotten wealth to buy shares of

RULING: NO. The funds are in fact loaned from UCPB, which was organized as a depositary of the coconut levy funds of the corporation. Also, the Government failed to adduce substantial evidence linking Cojuangco to the use of Marcos ill-gotten wealth. All these judicial pronouncements demand two concurring elements to be present before assets or properties were considered as ill-gotten wealth, namely: (a) they must have originated from the government itself, and (b) they must have been taken by former President Marcos, his immediate family, relatives, and close associates by illegal means. But settling the sources and the kinds of assets and property covered by E.O. No. 1 and related issuances did not complete the definition of ill-gotten wealth. The further requirement was that the assets and property should have been amassed by former President Marcos, his immediate family, relatives, and close associates both here and abroad. In this regard, identifying former President Marcos, his immediate family, and relatives was not difficult, but identifying other persons who might be the close associates of former President Marcos presented an inherent difficulty, because it was not fair and just to include within the term close associates everyone who had had any association with President Marcos, his immediate family, and relatives. It does not suffice, as in this case, that the respondent is or was a government official or employee during the administration of former Pres. Marcos. There must be a prima facie showing that the respondent unlawfully accumulated wealth by virtue of his close association or relation with former Pres. Marcos and/or his wife. This is so because otherwise the respondents case will fall under existing general law s and procedures on the matter.

178 | P a g e

Law 321_Corporation LAW_ Case Digest CHARLES W. MEAD vs. E.C. MCCULLOUGH, et. al. GR 6217, 26 December 2011 FACTS: On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this opinion unless it is otherwise stated) and the defendant organized the "Philippine Engineering and Construction Company. Shortly after the organization, the directors held a meeting and elected the plaintiff as general manager. The plaintiff held this position with the company for nine months, when he resigned to accept the position of engineer of the Canton and Shanghai Railway Company. The contract and work undertaken by the company during the management of Mead were the wrecking contract with the Navy Department at Cavite for the raising of the Spanish ships sunk by Admiral Dewey; the contract for the construction of certain warehouses for the quartermaster department; the construction of a wharf at Fort McKinley for the Government; The supervision of the construction of the Pacific Oriental Trading Company's warehouse; and some other odd jobs not specifically set out in the record. Shortly after the plaintiff left the Philippine Islands for China, the other directors, the defendants in this case, held a meeting on December 24, 1903, for the purpose of discussing the condition of the company at that time and determining what course to pursue. The assignees of the wrecking contract, including McCullough, formed was not known as the "Manila Salvage Association." This association paid to McCullough $15,000 Mexican Currency cash for the assignment of said contract. In addition to this payment, McCullough retained a one-sixth interest in the new company or association. ISSUE: Whether or not the respondents are self-dealing directors. RULING: NO. While a corporation remains solvent, there is no reason why a director or officer, by the authority of a majority of the stockholders or board of managers, may not deal with the corporation, loan it money or buy property from it, in like manner as a stranger. So long as a purely private corporation remains solvent, its directors are agents or trustees for the stockholders. They owe no duties or obligations to others. But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard to their interest; and if they are themselves creditors while the insolvent corporation is under their management, they will not be permitted to secure to themselves by purchasing the corporate property or otherwise any personal advantage over the other creditors. Nevertheless, a director or officer may in good faith and for an adequate consideration purchase from a majority of the directors or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the minority.

179 | P a g e

Law 321_Corporation LAW_ Case Digest PRIME WHITE CEMENT vs. INTERMEDIATE APPELLATE COURT, ALEJANDRO TE GR 68555, 19 March 1993 FACTS: On the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive dealer and/or distributor of the said defendant corporation of its cement products in the entire Mindanao area. Prime, however, amended the agreement made with Te, forcing the latter to demand the performance of the conditions stated in the original contract. Aside from that, Prime entered into a dealership contract with Napoleon Co, therefore violating the exclusive rights of Te in Mindanao. Te thereafter filed for specific performance against Prime. Prime questioned the validity of the contract, claiming it is null and void due to the fact that Te is a Director and the Auditor of the cement company. ISSUE: Whether or not the dealership contract between Prime and Te is valid. RULING: NO. The requisites for the approval of a contract with a self dealing director was not satisfied. A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." A director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, the contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known that within that period of six years, there would be a considerable rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such a provision.

180 | P a g e

Law 321_Corporation LAW_ Case Digest

Contracts Between Corporations with Interlocking Directors


PEDRO PALTING vs. SAN JOSE PETROLEUM, INC. GR L-14441, 17 December 1966 FACTS: San Jose Petroleum filed with the Philippine Securities and Exchange Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock with a par value of $0.35 a share, at P1.00 per share Pedro R. Palting and others, allegedly prospective investors in the shares of San Jose Petroleum, filed with the Securities and Exchange Commission an opposition to the registration and licensing of the securities on the grounds that (1) the tie-up between the issuer, San Jose Petroleum, a Panamanian corporation, and San Jose Oil, a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not been licensed to transact business in the Philippines; (3) the sale of the share of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4) the issuer as an enterprise, as well as its business, is based upon unsound business principles. ISSUE: Whether or not San Jose Petroleum can validly engage in business in the Philippines. RULING: NO. It does not have the required percentage of Filipino capital to validly exercise its business in the Philippines. In the two lists of stockholders, there is no indication of the citizenship of these stockholders, or of the total number of authorized stocks of each corporation for the purpose of determining the corresponding percentage of these listed stockholders in relation to the respective capital stock of said corporation. These provisions are in direct opposition to the corporation law and corporate practices in this country. These provisions alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are directors or officers of such other association or corporation; and that none of such contracts or transactions of this company with any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or transaction or has any connection with such person or persons, firms, associations or corporations: and that any and all persons who may become directors or officers of this company are hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this company either for their own benefit, or for the benefit of any person, firm, association or corporation in which they may be interested.

181 | P a g e

Law 321_Corporation LAW_ Case Digest DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF APPEALS, REMINGTON INDUSTRIAL SALES GR 126200, 16 August 2001 FACTS: Between July 1981 and April 1984, Marinduque Mining entered into 3 mortgage agreements with PNB and DBP involving its real properties located in Surigao del Norte, Negros Occidental, and Rizal, as well as its equipment located therein. Marinduque failed to pay its loans, causing the foreclosure of the said mortgages. PNB and DBP thereafter gained control of the said properties. In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation. The purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid construction materials and other merchandise purchased by Marinduque Mining, as well as interest, attorneys fees and the costs of suit. Remingtons original complaint was amended to include PNB, DBP, Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction since the personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of co-defendant MMIC such that practically there has only been a change of name for all legal purpose and intents. ISSUE: faith. Whether or not the takeover of PNB and DBP over Marinduque Mining is in bad

RULING: NO. Their actions are mandated under the law. Where the corporations have directors and officers in common, there may be circumstances under which their interest as officers in one company may disqualify them in equity from representing both corporations in transactions between the two. Thus, where one corporation was insolvent and indebted to another, it has been held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness In the same manner that when the corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantage or preference over other creditors. They cannot thus take advantage of their fiduciary relation and deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the corporation or their representatives, without reference to the question of any actual fraudulent intent on the part of the directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation to the directors. Directors of insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in the payment of their claims. It is not good morals or good law. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing the payment of his debts in preference to all others.

182 | P a g e

Law 321_Corporation LAW_ Case Digest

Disloyalty
JOHN GOKONGWEI vs. SEC, ANDRES SORIANO, et al. GR L-45911, 11 April 1979 FACTS: Gokonwei alleged that on September 18, 1976, individual respondents amended by bylaws of San Miguel Corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent 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 by-laws 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, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. It was claimed that prior to the questioned amendment, petitioner had all the qualifications to be a director of respondent corporation, being a substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void. ISSUE: Whether or not SMCs BoD acted in bad faith in making the amendment which disqualified Gokongwei from being elected as Director. RULING: NO. SMC is merely protecting its interest from Gokongwei, who owns companies in direct competition with SMCs business. 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. It springs from the fact that directors have the control and guidance of corporate affairs and property; 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 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.

183 | P a g e

Law 321_Corporation LAW_ Case Digest ELEANOR ERICA STRONG, ET AL. vs. FRANCISCO GUTIERREZ REPIDE G.R. No. L-7154. February 21, 1912 FACTS: Eleanor Strong was the owner of 800 shares of the capital stock of Philippine Sugar Estate Development Company. Gutierrez Rapide, owner of three-fourths shares of the companys stock , 1 of the 5 directors of the company and was elected by the board as administrator general of such company, took steps to purchase the 800 shares owned by Strong, which he knew were in the possession of F. Stuart Jones, as her agent. Instead of seeing Jones, who had an office next door, Repide employed one Kauffman. Kaufmann, in turn, employed Mr. Sloan, a broker, to purchase the stock for him. Kauffman told Sloan that the stock to be purchased was for a member of his wifes family. This action by Repide was due to the negotiations initiated by the government where the latter will purchase the companys lands (together with other friar lands) at a price which greatly enhance the value of the stock. As a result of the negotiations, Jones, assuming he had the power and without consulting Strong, sold the 800 shares. Strong filed a case to recover the shares from Repide on the ground that the shares had been sold and delivered by Strongs agent without authority to do so and on the ground that Repide fraudulently concealed from Strongs agent the facts affecting the value of the stock so sold and delivered. ISSUE: Whether or notRepide, acting in good faith, has the duty to disclose to the agent of Strong the facts bearing upon or which might affect the value of the stocks. RULING: YES. The Court ruled that there is no relationship of a fiduaciary nature exists between a director and a shareholder in a business corporation. There are cases, however, where, by reason of special facts, such duty of a director to disclose to a shareholder the knowledge which he may possess regarding the value of the shares of the company before he purchases any from a shareholder. Some special facts are present in this case such as the fact the Repide is not only a director of the corporation but an owner of three-fourths shares of its stock. He was the chief negotiator for the sale of all the lands and was acting substantially as the agent of the shareholders by reason of his ownership of the shares. Thus, a purchase of stock in a corporation by a director and owner of three-fourths of the entire capital stock, who was also administrator general of the company and engaged in the negotiations which finally led to the sale of companys lands to the government at a price which greatly enhanced the value of the stock, was fraudulent as procured by insidious machination where he employed an agent to make the purchase, concealing both his identity as purchaser and his knowledge of the state of the negotiations and their probable successful result

184 | P a g e

Law 321_Corporation LAW_ Case Digest

Watered Stocks
LIRAG TEXTILE MILLS and BASILIO LIRAG vs. SSS, HON. PACIFICO DE CASTRO GR L-33205, 31 August 1987 FACTS: That on September 4, 1961, the SSS and Lirag Textile Mills, Inc. and Basilio Lirag entered into a Purchase Agreement under which the plaintiff agreed to purchase from the said defendant preferred shares of P1,000,000.00 subject to the conditions set forth in such agreement. Pursuant to the Purchase Agreement of September 4, 1961, SSS, on January 31, 1962, paid Lirag Textile Mills, Inc. the sum of P500,000.00 for which the said defendant issued to plaintiff 5,000 preferred shares with a par value of P100.00 per share. To guarantee the redemption of the stocks purchased by the plaintiff, the payment of dividends, as well as the other obligations of the Lirag Textile Mills, Basilio signed the Purchase Agreement of September 4, 1961 not only as president of the defendant corporation, but also as surety so that should the Lirag Textile Mills, Inc. fail to perform any of its obligations in the said Purchase Agreement, the surety shall immediately pay to the vendee the amounts then outstanding. Notwithstanding such letters of demand to the defendant Basilio L. Lirag, Stock Certificates Nos. 128 and 139 issued to plaintiff are still unredeemed and no dividends have been paid on said stock certificates; ISSUE: Whether or not Lirag Textile is liable to SSS. RULING: YES. It failed to comply with its contractual stipulations. The Purchase Agreement is, indeed, a debt instrument. Its terms and conditions unmistakably show that the parties intended the repurchase of the preferred shares on the respective scheduled dates to be an absolute obligation which does not depend upon the financial ability of petitioner corporation. This absolute obligation on the part of petitioner corporation is made manifest by the fact that a surety was required to see to it that the obligation is fulfilled in the event of the principal debtor's inability to do so. The unconditional undertaking of petitioner corporation to redeem the preferred shares at the specified dates constitutes a debt which is defined "as an obligation to pay money at some fixed future time, or at a time which becomes definite and fixed by acts of either party and which they expressly or impliedly, agree to perform in the contract. A stockholder sinks or swims with the corporation and there is no obligation to return the value of his shares by means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase through a surety.

185 | P a g e

Law 321_Corporation LAW_ Case Digest RICARDO NAVA vs. PEERS MARKETING CORP., RENATO CUSI and AMPARO CUSI GR L-28120, 25 November 1976 FACTS: Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing Corporation at one hundred pesos a share or a total par value of eight thousand pesos. Po paid two thousand pesos or twenty-five percent of the amount of his subscription. No certificate of stock was issued to him or, for that matter, to any incorporator, subscriber or stockholder. On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty shares. In the deed of sale Po represented that he was "the absolute and registered owner of twenty shares" of Peers Marketing Corporation. Nava requested the officers of the corporation to register the sale in the books of the corporation. The request was denied because Po has not paid fully the amount of his subscription. Nava was informed that Po was delinquent in the payment of the balance due on his subscription and that the corporation had a claim on his entire subscription of eighty shares which included the twenty shares that had been sold to Nava. ISSUE: Whether or not Peers may be compelled by mandamus to register the stocks in Navas name. RULING: NO. Theres no certificate of stock issued in favor of Po. Shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof" There should be compliance with the mode of transfer prescribed by law. The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may thereafter be transferred from one person to another. If the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee. That procedure cannot be followed in the instant case because, as already noted, the twenty shares in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a claim on the said shares for the unpaid balance of Po's subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable. In this case no stock certificate was issued to Po. Without the stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction.

186 | P a g e

Law 321_Corporation LAW_ Case Digest

Derivative Suit: Remedies to Enforce Personal Liability


JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD), INC. vs. SPOUSES ROBERTO and RACHEL ANG G.R. No. 201675. June 19, 2013 FACTS: Sps. Roberto and Rachel Ang took over the active management of [SMBI]. Through the employment of sugar coated words, they were able to successfully manipulate the stocks sharings between themselves at 50-50 under the condition that the procedures mandated by the Corporation Code on increase of capital stock be strictly observed (valid Board Meeting). No such meeting of the Board to increase capital stock materialized. It was more of an accommodation to buy peace. Juanito claimed that payments to Nancy and Theodore ceased sometime after 2006. On 24 November 2008, Nancy and Theodore, through their counsel here in the Philippines, sent a demand letter to "Spouses Juanito L. Ang/Anecita L. Ang and Spouses Roberto L. Ang/Rachel L. Ang" for payment of the principal amounting to $1,000,000.00 plus interest at ten percent (10%) per annum, for a total of $2,585,577.37 within ten days from receipt of the letter. 12 Roberto and Rachel then sent a letter to Nancy and Theodores counsel on 5 January 2009, saying that they are not complying with the demand letter because they have not personally contracted a loan from Nancy and Theodore. ISSUE: Whether or not the Honorable Court of Appeals erred in ordering the dismissal of the Complaint on the ground that the case is not a derivative suit. RULING: NO. The Complaint is not a derivative suit. A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporations directors, officers or other insiders. Under Sections 23 and 36 of the Corporation Code, the directors or officers, as provided under the by-laws, have the right to decide whether or not a corporation should sue. Since these directors or officers will never be willing to sue themselves, or impugn their wrongful or fraudulent decisions, stockholders are permitted by law to bring an action in the name of the corporation to hold these directors and officers accountable. In derivative suits, the real party ininterest is the corporation, while the stockholder is a mere nominal party.

187 | P a g e

Law 321_Corporation LAW_ Case Digest LISAM ENTERPRISES, INC. represented by LOLITA A. SORIANO, and LOLITA A. SORIANO vs. BANCO DE ORO UNIBANK, INC. (formerly PHILIPPINE COMMERCIAL INTERNATIONAL BANK),* LILIAN S. SORIANO, ESTATE OF LEANDRO A. SORIANO, JR., REGISTER OF DEEDS OF LEGASPI CITY, and JESUS L. SARTE G.R. No. 143264 April 23, 2012 FACTS: On August 13, 1999, petitioners filed a Complaint against respondents for Annulment of Mortgage with Prayer for Temporary Restraining Order & Preliminary Injunction with Damages with the RTC of Legaspi City. Petitioner Lolita A. Soriano alleged that she is a stockholder of petitioner Lisam Enterprises, Inc. (LEI) and a member of its Board of Directors, designated as its Corporate Secretary. On or about 28 March 1996, defendant Lilian S. Soriano and the late Leandro A. Soriano, Jr., as husband and wife Spouses Soriano, in their personal capacity and for their own use and benefit, obtained a loan from defendant PCIB (Legaspi Branch) (Banco de Oro Unibank, Inc.) in the total amount of P20 Million. ISSUE: Whether or not the case will prosper. RULING: YES. The courts should be liberal in allowing amendments to pleadings to avoid a multiplicity of suits and in order that the real controversies between the parties are presented, their rights determined, and the case decided on the merits without unnecessary delay. This liberality is greatest in the early stages of a lawsuit, especially in this case where the amendment was made before the trial of the case, thereby giving the petitioners all the time allowed by law to answer and to prepare for trial. The Court enumerated the requisites for filing a derivative suit, as follows: a) the party bringing the 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. A reading of the amended complaint will reveal that all the foregoing requisites had been alleged therein. Hence, the amended complaint remedied the defect in the original complaint and now sufficiently states a cause of action.

188 | P a g e

Law 321_Corporation LAW_ Case Digest STRATEGIC ALLIANCE DEV. CORPORATION vs. RADSTOCK SECURITIES GR 178158, 04 December 2009 FACTS: CCDCP Mining Corporation (CDCP Mining), an affiliate of CDCP, obtained loans from Marubeni Corporation of Japan (Marubeni). A CDCP official issued letters of guarantee for the loans although there was no CDCP Board Resolution authorizing the issuance of such letters of guarantee. CDCP Mining secured the Marubeni loans when CDCP and CDCP Mining were still privately owned and managed. In 1983, CDCPs name was changed to Philippine National Construction Corporation (PNCC) in order to reflect that the Government already owned 90.3% of PNCC and only 9.70% is under private ownership. Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20 October 2000 and 22 November 2000, the PNCC Board of Directors (PNCC Board) passed Board Resolutions admitting PNCCs liability to Marubeni. Previously, for two decades the PNCC Board consistently refused to admit any liability for the Marubeni loans. In January 2001, Marubeni assigned its entire credit to Radstock Securities Limited (Radstock), a foreign corporation. Radstock immediately sent a notice and demand letter to PNCC. PNCC and Radstock entered into a Compromise Agreement. Under this agreement, PNCC shall pay Radstock the reduced amount of P6,185,000,000.00 in full settlement of PNCCs guarantee of CDCP Minings debt allegedly totaling P17,040,843,968.00 (judgment debt as of 31 July 2006). To satisfy its reduced obligation, PNCC undertakes to (1) "assign to a third party assignee to be designated by Radstock all its rights and interests" to the listed real properties of PNCC; (2) issue to Radstock or its assignee common shares of the capital stock of PNCC issued at par value which shall comprise 20% of the outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCCs 6% share, for the next 27 years, in the gross toll revenues of the Manila North Tollways Corporation. Luis Sison, a stockholder and former PNCC President and Chairman, filed a derivative suit questioning the legality of the compromise agreement. ISSUE: Whether or not Sisons derivative suit is valid. RULING: YES. Sison has legal standing to challenge the Compromise Agreement. Although there was no allegation that Sison filed the case as a derivative suit in the name of PNCC, it could be fairly deduced that Sison was assailing the Compromise Agreement as a stockholder of PNCC. A derivative action is a suit by a stockholder to enforce a corporate cause of action. Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. However, an individual stockholder may file a derivative suit on behalf of the corporation to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party. In this case, the PNCC Board cannot conceivably be expected to attack the validity of the Compromise Agreement since the PNCC Board itself approved the Compromise Agreement. In fact, the PNCC Board steadfastly defends the Compromise Agreement for allegedly being advantageous to PNCC.

189 | P a g e

Law 321_Corporation LAW_ Case Digest ANTHONY YU et al. vs. JOSEPH YUKAYGUAN et al. GR 177549, 18 June 2009 FACTS: Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. On 15 October 2002, respondents filed against petitioners a verified Complaint forAccounting, Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts2[6] before the RTC of Cebu. The said Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background of the Complaint was stated in the attached Affidavit executed by respondent Joseph. According to respondents, Winchester, Inc. was established and incorporated on 12 September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares of stock worth P100,000.00. Petitioner Anthony paid for the said shares of stock with respondent Josephs money, thus, making the former a mere trustee of the shares for the latter. The case at bar was initiated before the RTC by respondents as a derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said corporation the corporate assets and funds which the latter allegedly misappropriated for their personal benefit. ISSUE: Whether or not the derivative suit is valid. RULING: YES. The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc. While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents themselves repudiated said amicable settlement before the RTC, even after the same had been partially implemented; and moved that their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties before the Court of Appeals were unsuccessful.

190 | P a g e

Law 321_Corporation LAW_ Case Digest VIRGINIA GOCHAN et al. vs. RICHARD YOUNG, et al. GR 131889, 12 March 2001 FACTS: Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban Gochan and Crispo Gochan as its incorporators. Felix Gochan Sr.'s daughter, Alice, mother of respondents, inherited 50 shares of stock in Gochan Realty from the former. She died in 1955, leaving the 50 shares to her husband, John Young, Sr. In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children, Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu and Alexander Thomas Young. Having earned dividends, these stocks numbered 179 by 20 September 1979. Five days later (25 September), at which time all the children had reached the age of majority, their father John Sr., requested Gochan Realty to partition the shares of his late wife by cancelling the stock certificates in his name and issuing in lieu thereof, new stock certificates in the names of the children. ISSUE: Whether or not respondents have the legal personality to file a derivative suit on behalf of the corporation. RULING: NO. Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single stockholder may institute that suit, suing on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. In the present case, the Complaint alleges all the components of a derivative suit. The allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. This cause of action is also included in the Complaint filed before the SEC. The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the corporation. The reason is that, as earlier discussed, the allegations of the Complaint make them out as stockholders at the time the questioned transaction occurred, as well as at the time the action was filed and during the pendency of the action. As to the Intestate Estate of John Young, Sr., permitting an executor or administrator to represent or to bring suits on behalf of the deceased, do not prohibit the heirs from representing the deceased. These rules are easily applicable to cases in which an administrator has already been appointed. But no rule categorically addresses the situation in which special proceedings for the settlement of an estate have already been instituted, yet no administrator has been appointed. In such instances, the heirs cannot be expected to wait for the appointment of an administrator; then wait further to see if the administrator appointed would care enough to file a suit to protect the rights and the interests of the deceased; and in the meantime do nothing while the rights and the properties of the decedent are violated or dissipated.

191 | P a g e

Law 321_Corporation LAW_ Case Digest WESTERN INSTITUTE OF TECHNOLOGY, et al. vs. RICARDO SALAS GR 113032, 21 August 1997 FACTS: The minority stockholders of WIT, sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In attendance were other members of the Board including one of the petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986, were distributed to all Board Members, regarding the compensation of the schools officers, which was eventually passed. A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents before the Office of the City Prosecutor of Iloilo, as a result of which two (2) separate criminal informations, one for falsification of a public document under Article 171 of the Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for falsification of public document was anchored on the private respondents' submission of WIT's income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the disbursement of corporate funds for the compensation of private respondents based on Resolution No. 4, series of 1986, making it appear that the same was passed by the board on March 30, 1986, when in truth, the same was actually passed on June 1, 1986, a date not covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986). WIT questioned the legal standing of the petitioners to sue on its behalf, claiming it did not give them authority to do do. Petitioner, however, contended that the case is a derivative suit. ISSUE: Whether or not the case at bar is a derivative suit. RULING: NO. A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasijudicial body concerned over the subject matter and nature of the action. This was not complied with by the petitioners either in their complaint before the court a quo nor in the instant petition which, in part, merely states that "this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since the trial court's judgment of acquittal failed to impose any civil liability against the private respondents. By no amount of equity considerations, if at all deserved, can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit.

192 | P a g e

Law 321_Corporation LAW_ Case Digest FIRST PHILIPPINE INTERNATIONAL BANK vs. COURT OF APPEALS, CARLOS EJERCITO, et al. GR 115849, 24 January 1996 FACTS: Janolo and Demetria and Producers Bank, through its bank manager Mercurio Rivera, entered into a contract to sell involving parcels of land in Laguna owned by the bank. The sale, however, was disapproved by the banks conservator (the bank is under receivership). Ejercito insisted that there was already a perfected contract between him and the bank, considering that the offer that he made was already approved by the banks board of directors. He then instituted a case for specific performance against the bank. On July 11, 1992, during the pendency of the proceedings in the Court of Appeals, Henry Co and several other stockholders of the Bank filed an action, purportedly a derivative suit, against Encarnacion, Demetria and Janolo to declare any perfected sale of the property as unenforceable and to stop Ejercito from enforcing or implementing the sale. In his answer, Janolo argued that the Second Case was barred by litis pendentia by virtue of the case then pending in the Court of Appeals. During the pre-trial conference in the Second Case, plaintiffs filed a Motion for Leave of Court to Dismiss the Case Without Prejudice. Private respondent opposed this motion on the ground, among others, that plaintiffs act of forum shopping justifies the dismissal of both cases, with prejudice. ISSUE: Whether or not the case filed by the stockholders of the bank is a derivative suit. RULING: NO. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. In the face of the damaging admissions taken from the complaint, petitioners, quite strangely, sought to deny that the Second Case was a derivative suit, reasoning that it was brought, not by the minority shareholders, but by Henry Co et al., who not only own, hold or control over 80% of the outstanding capital stock, but also constitute the majority in the Board of Directors of petitioner Bank. That being so, then they really represent the Bank. So, whether they sued derivatively or directly, there is undeniably an identity of interests/entity represented.

193 | P a g e

Law 321_Corporation LAW_ Case Digest COMMART PHILIPPINES, INC. vs. SEC, ALICE MAGLUTAC GR 85318, 03 June 1991 FACTS: Commart (Phils.), Inc., (Commart for short) is a corporation organized by two brothers, Jesus and Mariano Maglutac, to engage in the brokerage business for the importation of fertilizers and other products/commodities. Sometime in June 1984, the two brothers agreed to go their separate ways, with Mariano being persuaded to sell to Jesus his shareholdings in Commart amounting to 25% of the outstanding capital stock. As part of the deal, a "Cooperative Agreement" was signed, between Commart (represented by Jesus) and Mariano, in which, among others, Commart ceded to Mariano or to an "acceptable entity" he may create, a portion of its business, with a pledge of mutual cooperation for a certain period so as to enable Mariano to get his own corporation off the ground, so to speak. Mariano's wife, Alice M. Maglutac, has been for years a stockholder and director of Commart, did not dispose of her shareholdings, and thus continued as such even after the sale of Mariano's equity. As broker and indentor, Commart's principal income came from commissions paid to it in U.S. dollars by foreign suppliers of fertilizers and other commodities imported by Planters Products, Inc. and other local importers. ISSUE: Whether or not Alice has the legal standing to file the derivative suit. RULING: YES. A derivative suit has been the principal defense of the minority shareholder against abuses by the majority. It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the corporation's rights. Indeed, to grant to Commart the light of withdrawing or dismissing the suit, at the instance of majority stockholders and directors who themselves are the persons alleged to have committed breaches of trust against the interest of the corporation, would be to emasculate the right of minority stockholders to seek redress for the corporation. To consider the Notice of Dismissal filed by Commart as quashing the complaint filed by Alice Maglutac in favor of the corporation would be to defeat the very nature and function of a derivative suit and render the right to institute the action illusory.

194 | P a g e

Law 321_Corporation LAW_ Case Digest ELTON CHASE vs. DR. VICTOR BUENCAMINO GR L-20395, 13 May 1985 FACTS: Plaintiff Elton Chase, on the other hand, was the owner of Production Manufacturing Company, of Portland, Oregon, USA, a corporation primarily dedicated to the operation of a machine shop and heat-treating plant for the production of tractor parts. Sometime in 1954, Chase was notified by the Highway Commission of the State of Oregon that his factory was going to be in the path of a proposed highway. He was then advised to sell or face expropriation and warned to remove his plant within a year. His distributor Craig Carrol told him of a Dr. Buencamino of Manila who he said was interested in establishing a manufacturing plant in the Philippines. Craig Carrol contacted Buencamino who told him to contact his associate William Cranker in the United States. 8 Thereafter, a series of negotiations took place both here in Manila, and in the United States, between Chase on the one hand, and Cranker and Buencamino, on the other, for the purchase of Chase's factory (Production Manufacturing Company) and the establishment of a new factory in Manila which was to be called the American Machinery Engineering Parts, Inc. (Amparts for short). These negotiations culminated in a final agreement to the effect that - Elton Chase was to be paid One Hundred Thousand Dollars ($100,000.00) and he would also be given a onethird interest in Amparts, with the other two, Dr. Buencamino and Cranker, as the owner of the other two-thirds (2/3) interest, 1/3 interest each; that in exchange for said $100,000.00 and the 1/3 interest, Chase was to transfer to Amparts his tractor plant, ship his machineries to Manila, assuming all costs of dismantling, preserving and crating for shipment to Manila, install said machineries at Amparts plant with the aid of five technicians and finally, he has to be the production manager of Amparts. Chase had shipped his machineries and had them installed in the Amparts plant in Pasig, Rizal. Amparts then began operation with Dr. Buencamino as President, William Cranker as Manager and Elton Chase as Production Manager. For sometime the three maintained harmonious relations but later on distrust came in until finally Chase tendered his letter of resignation as Production Manager. He then filed a derivative suit against Buencamino and Chase, who allegedly stole from the corporation. He sought for the dissolution of the corporation. ISSUE: Whether or not the corporation may be dissolved. RULING: NO. The case is of derivative in nature, therefore, it was filed for the benefit of the corporation. The Court grant a dissolution because the action is a derivative one for the benefit of Amparts and not for the personal benefit of Chase, and Amparts can not be benefited by its extinction; as to the ouster of Dr. Buencamino from management, it should not be forgotten that Dr. Buencamino is not only a manager, but is in fact 2/3 owner of Amparts and to oust him from management would amount to his disenfranchisement as owner of the majority of the enterprise apart from the fact that it is also established in the proofs that Amparts is already picking up and has been a going concern after Cranker left unto him the direction of its affairs; the Court therefore having in mind all these finds that the solution most equitable and just would be to limit its decision to imposing a monetary judgment upon the guilty parties for the benefit of Amparts.

195 | P a g e

Law 321_Corporation LAW_ Case Digest SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES vs. ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR. G.R. No. 85339. August 11, 1989 FACTS: 33,133,266 shares of the outstanding capital stock of SMC were acquired 14 other corporations, and were placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. However, 33,133,266 SMC shares were sequestered by the PCGG, on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos. SMC promptly suspended payment of the other installments of the price to the 14 seller corporations. On December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined that there was "nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was no additional expense or exposure for the SMC Group, and there were tax and other benefits which would redound to the SMC group of companies. However, at the meeting of the SMC Board, Eduardo de los Angeles, one of the PCGG representatives in the SMC board, impugned said Resolution No. 86-122. ISSUE: Whether or not de los Angeles can file a derivative suit in behalf of the corporation. RULING: YES. The Court ruled that it is claimed that since de los Angeles 20 shares represent only .00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the interests of the minority stockholders. The implicit argument that a stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock finds no support whatever in the law. The requisites for a derivative suit are as follows: (a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; (b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and (c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation.

196 | P a g e

Law 321_Corporation LAW_ Case Digest HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W. ROBINSON vs. THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH G.R. No. L-25241. November 3, 1926 FACTS: In order more effectually to plunder the Company and to defraud these plaintiffs the said defendants, Mullen, Barclay, Mears and Macintosh, made, executed and filed in the Bureau of Commerce and Industry of the Philippine Islands, articles of incorporation of a corporation called the "Philippine Motors Corporation," having its principal office in the City of Manila, a capital stock of P25,000, of which the sum of P5,000, was alleged to have been subscribed and paid as follows: the defendant Barclay P200, defendant Mears P1,200, defendant Kelly P1,200, defendant Macintosh P1,200, defendant Mullen P1,200, the treasurer thereof being the defendant Mears. And these plaintiffs beg leave to refer to the original articles of Incorporation on file in the said Bureau for greater certainty. That at the time of such incorporation each and every one of the last above named defendants was an officer or employee of the defendant Bank. That these plaintiffs have nor information nor means of obtaining information as to whether the money alleged to have been described by them for their shares of stock was of their personal funds and property or whether it was money furnished them by the Bank of purpose moneys such incorporation was a fraud upon these plaintiffs for the reason that it was intended for the sole purpose of taking over the assets of the Company and said defendants were enabled to effectuate such intent by reason of their positions as officers and employees of the Bank. ISSUE: Whether or not plaintiffs have the capacity to sue. RULING: YES. Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the action must be brought by the Board of Directors, the appellees argue and the court below held that the corporation Teal and Company is a necessary party plaintiff and that the plaintiff stockholders, not having made any demand on the Board to bring the action, are not the proper parties plaintiff. But, like most rules, the rule in question has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation Teal and Company is under the complete control of the principal defendants in the case, and, in these circumstances, it is obvious that a demand upon the Board of Directors to institute an action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors Corporation, had no legal right to proceed against that corporation in the manner suggested in the complaint evidently rest upon a misconception of the character of the action. In this proceeding it was necessary for the plaintiffs to set forth in full the history of the various transactions which eventually led to the alleged loss of their property and, in making a full disclosure, references to the Philippine Motors Corporation appear to have been inevitable. It is to be noted that the plaintiffs seek no judgment against the corporation itself at this stage of the proceedings.

197 | P a g e

Law 321_Corporation LAW_ Case Digest RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-BORROMEO vs. HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES G.R. No. L-40620. May 5, 1979 FACTS: The herein petitioners were sued by herein defendants to nullify the issuance of 823 shares of stock of the Inocentes de la Rama, Inc. in favor of the petitioners. On April 4, 1972, the respondents, are the owners of 1,328 shares of stock of the Inocentes de la Rama, Inc., a domestic corporation, with an authorized capital stock of 3,000 shares, with a par value of P100.00 per share, 2,177 of which were subscribed and issued, thus leaving 823 shares unissued. Then President and VicePresident of the corporation, respectively, the defendants Mercedes R. Borromeo, Honorio de la Rama, and Ricardo Gamboa, remaining members of the board of directors of the corporation, in order to forestall the takeover by the plaintiffs of the afore-named corporation, surreptitiously met and elected Ricardo L. Gamboa and Honorio de la Rama as president and vice-president of the corporation, respectively, and passed a resolution authorizing the sale of the 823 unissued shares of the corporation to the defendants, at par value, after which the petitioners were elected to the board of directors of the corporation. The respondents claimed that the sale of the unissued 823 shares of stock of the corporation was in violation of the plaintiffs' and pre-emptive rights and made without the approval of the board of directors representing 2/3 of the outstanding capital stock, and is in disregard of the strictest relation of trust existing between the defendants, as stockholders. The respondents prayed that a writ of preliminary injunction be issued restraining the defendants from committing, or continuing the performance of an act tending to prejudice, diminish or otherwise injure the plaintiffs' rights in the corporate properties and funds of the corporation, and from disposing, transferring, selling, or otherwise impairing the value of the 823 shares of stock illegally issued. The respondent court granted the prayer. ISSUES: Whether or not the proper action is a derivative suit. RULING: YES. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. 12 In the case at bar, however, the plaintiffs are alleging and vindicating their own individual interests or prejudice, and not that of the corporation. At any rate, it is yet too early in the proceedings since the issues have not been joined. Besides, misjoinder of parties is not a ground to dismiss an action.

198 | P a g e

Law 321_Corporation LAW_ Case Digest CATALINA R. REYES vs. HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila, Branch XIII and FRANCISCA R. JUSTINIANI G.R. No. L-16982. September 30, 1961 FACTS: The corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June 5, 1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson, for and on behalf of the following primary principals with the following shareholdings: Adelia K. Roxas, 1200 Class A shares; I. Sherman, 900 Class A shares; Robert W. Born, 450 Class A shares and Morris Wilson, 450 Class A shares; that the respondent holds both Class A and Class B shares and number and value thereof are is follows: Class A 50 shares, Class B 1,250 shares. On May 8, 1957, the Board of Directors approved a resolution designating one Dayaram as co-manager and Morris Wilson was likewise designated as co-manager with responsibilities for the management of the factory only. An office in New York was opened for the purpose of supervising purchases, which purchases must have the unanimous agreement of Cesar K. Roxas, New York resident member of the board of directors, Robert Born and Wadhumal Dalamal or their respective representatives. Several purchases aggregating $289,678.86 were made in New York for raw materials and shipped to the Philippines, which shipment were found out to consist not of raw materials but already finished products, for which reasons the Central Bank of the Philippines stopped all dollar allocations for raw materials for the corporation which necessarily led to the paralyzation of the operation of the textile mill and its business. ISSUES: Whether or not a derivative suit will prosper. RULING: NO. The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of two years is without merit. During that period of time respondent had the right to assume and expect that the directors would remedy the anomalous situation of the corporation brought about by their own wrong doing. Only after such period of time had elapsed could respondent conclude that the directors were remiss in their duty to protect the corporation property and business. The fraud consisted in importing finished textile instead of raw cotton for the textile mill; the fraud, therefore, was committed by the manager of the business and was consented to by the directors, evidently beyond reach of respondent as treasurer for that period. The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been done to remove the erring purchasing managers. In a way the appointment of a receiver may have been thought of by the court below so that the dollar allocation for raw material may be revived and the textile mill placed on an operating basis.

199 | P a g e

Law 321_Corporation LAW_ Case Digest CANDIDO PASCUAL vs. EUGENIO DEL SAZ OROZCO, ET AL. G.R. No. L-5174. March 17, 1911 FACTS: This action was brought by the plaintiff Pascual, in his own right as a stockholder of the bank, for the benefit of the bank, and all the other stockholders thereof. The Banco Espaol-Filipino is a banking corporation, constituted as such by royal decree of the Crown of Spain in the year 1854, the original grant having been subsequently extended and modified by royal decree of July 14, 1897, and by Act No. 1790 of the Philippine Commission. It is alleged in the amended complaint that the only compensation contemplated or provided for the managing officers of the bank was a certain per cent of the net profits resulting from the bank's operations, as set forth in article 30 of its reformed charter or statutes. The gist of the first and second causes of action is as follows: The defendants constitute a majority of the present board of directors of the bank, who alone can authorize an action against them in the name of the corporation. It appears that during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without the knowledge, consent, or acquiescence of the stockholders, deducted their respective compensation from the gross income instead of from the net profits of the bank, thereby defrauding the bank and its stockholders of approximately P20,000 per annum. The second cause of action sets forth that defendants' and appellees' immediate predecessors in office in the bank during the years 1899, 1900, 1901, and 1902, committed the same illegality as to their compensation as is charged against the defendants themselves. In the four years immediately following the year 1902, the defendants and appellees were the only officials or representatives of the bank who could and should investigate and take action in regard to the sums of money thus fraudulently appropriated by their predecessors. They were the only persons interested in the bank who knew of the fraudulent appropriation by their predecessors. The court below sustained the demurrer as to the first and second causes of action on the ground that in actions of this character the plaintiff must aver in his complaint that he was the owner of stock in the corporation at the time of the occurrences complained of, or else that the stock has since devolved upon him by operation of law. ISSUE: Whether or not the petitioner has a cause of action to file a derivative suit. RULING: YES. As to the first cause of action: In suits of this character the corporation itself and not the plaintiff stockholder is the real party in interest. The rights of the individual stockholder are merged into that of the corporation. It is a universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of these are in the corporation itself for the benefit of all the stockholders. So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank (corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of such a right must depend upon when, how, and for what purpose he acquired the shares which he now owns. As to the Second cause of action: It affirmatively appears from the complaint that the plaintiff was not a stockholder during any of the time in question in this second cause of action. Upon the question whether or not a stockholder can maintain a suit of this character upon a cause of action pertaining to the corporation when it appears that he was not a stockholder at the time of the occurrence of the acts complained of and upon which the action is based, the authorities do not agree. 200 | P a g e

Law 321_Corporation LAW_ Case Digest

POWERS OF CORPORATION Theory of Special Capacities v. Theory of General Capacities


ACEBEDO OPTICAL COMPANY, INC. vs. THE HONORABLE COURT OF APPEALS, Hon. MAMINDIARA MANGOTARA, in his capacity as Presiding Judge of the RTC, 12th Judicial Region, Br. 1, Iligan City; SAMAHANG OPTOMETRIST Sa PILIPINAS Iligan City Chapter, LEO T. CAHANAP, City Legal Officer, and Hon. CAMILO P. CABILI, City Mayor of Iligan G.R. No. 100152. March 31, 2000 FACTS: Petitioner applied with the Office of the City Mayor of Iligan for a business permit. After consideration of petitioner's application and the opposition interposed thereto by local optometrists, respondent City Mayor issued Business Permit No. 5342 subject to the following conditions that since it is a corporation, Acebedo cannot put up an optical clinic but only a commercial store; it cannot examine and/or prescribe reading and similar optical glasses for patients, because these are functions of optical clinics; it cannot sell reading and similar eyeglasses without a prescription having first been made by an independent optometrist (not its employee) or independent optical clinic and can only sell directly to the public, without need of a prescription, Ray-Ban and similar eyeglasses; it cannot advertise optical lenses and eyeglasses, but can advertise Ray-Ban and similar glasses and frames; and is allowed to grind lenses but only upon the prescription of an independent optometrist. Private respondent Samahan ng Optometrist Sa Pilipinas (SOPI), Iligan Chapter, through its Acting President, Dr. Frances B. Apostol, lodged a complaint against the petitioner before the Office of the City Mayor, alleging that Acebedo had violated the conditions set forth in its business permit and requesting the cancellation and/or revocation of such permit. ISSUES: Whether or not the act of the Respondent Mayor was lawful. RULING: NO. The authority of city mayors to issue or grant licenses and business permits is beyond cavil. However, the power to grant or issue licenses or business permits must always be exercised in accordance with law, with utmost observance of the rights of all concerned to due process and equal protection of the law. In the case under consideration, the business permit granted by respondent City Mayor to petitioner was burdened with several conditions. Distinction must be made between the grant of a license or permit to do business and the issuance of a license to engage in the practice of a particular profession. The first is usually granted by the local authorities and the second is issued by the Board or Commission tasked to regulate the particular profession. A business permit authorizes the person, natural or otherwise, to engage in business or some form of commercial activity. A professional license, on the other hand, is the grant of authority to a natural person to engage in the practice or exercise of his or her profession. A business permit is issued primarily to regulate the conduct of business and the City Mayor cannot, through the issuance of such permit, regulate the practice of a profession, like that of optometry. Such a function is within the exclusive domain of the administrative agency specifically empowered by law to supervise the profession, in this case the Professional Regulations Commission and the Board of Examiners in Optometry.

201 | P a g e

Law 321_Corporation LAW_ Case Digest

Express, Implied and Incidental Powers, Distinguished


PILIPINAS LOAN COMPANY, INC. vs. HON. SECURITES AND EXCHANGE COMMISSION AND FILIPINAS PAWNSHOP, INC. G.R. No. 104720. April 4, 2001 FACTS: Private respondent Filipinas Pawnshop, Inc. is a duly organized corporation registered with the Securities and Exchange Commission on February 9, 1959. The articles of incorporation of private respondent states that its primary purpose is to extend loans at legal interest on the security of either personal properties or on the security of real properties, and to finance installment sales of motor vehicles, home appliances and other chattels. Petitioner is a lending corporation duly registered with the SEC on July 27, 1989. Based on its articles of incorporation, the primary purpose of petitioner is to act as a lending investor or, otherwise, to engage in the practice of lending money or extending loans on the security of real or personal, tangible or intangible properties whether as pledge, real or chattel mortgage or otherwise, xxx without however, engaging in pawnbroking as defined under PD 114." Private respondent filed a complaint with the Prosecution and Enforcement Department (PED) of the SEC and alleged that: (1) petitioner, contrary to the restriction set by the Commission, has been operating and doing business as a pawnbroker, pawnshop or "sanglaan" in the same neighborhood where private respondent has had its own pawnshop for 30 years in violation of its primary purpose and without the imprimatur of the Central Bank to engage in the pawnshop business thereby causing unjust and unfair competition with private respondent. Petitioner denied that it is engaged in the pawnshop business, alleging that it is a lending investor duly registered with the Central Bank. ISSUES: Whether or not petitioner violated its primary franchise. RULING: YES. A corporation, under the Corporation Code, has only such powers as are expressly granted to it by law and by its articles of incorporation, those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes and those which may be incident to its existence. In the case at bar, the limit of the powers of petitioner as a corporation is very clear, it is categorically prohibited from "engaging in pawnbroking as defined under PD 114". Hence, in determining what constitutes pawnbrokerage, the relevant law to consider is PD 114. Indispensable therefore to the determination of whether or not petitioner had violated its articles of incorporation, was an inquiry by the SEC if petitioner was holding out itself to the public as a pawnshop. It must be stressed that the determination of whether petitioner violated PD 114 was merely incidental to the regulatory powers of the SEC, to see to it that a corporation does not go beyond the powers granted to it by its articles of incorporation.

202 | P a g e

Law 321_Corporation LAW_ Case Digest LUNETA MOTOR COMPANY vs. A.D. SANTOS, INC., ET AL. G.R. No. L-17716. July 31, 1962 FACTS: On December 31, 1941, to secure payment of a loan evidenced by a promissory note executed by Nicolas Concepcion and guaranteed by one Placido Esteban in favor of petitioner, Concepcion executed a chattel mortgage covering the above mentioned certificate in favor of petitioner. Thereafter, he constituted a second mortgage on the same certificate to secure payment of a subsequent loan obtained by Concepcion from the Rehabilitation Finance Corporation (now Development Bank of the Philippines). This second mortgage was approved by the respondent Commission, subject to the mortgage lien in favor of petitioner. The certificate was later sold to Francisco Benitez, Jr., who resold it to Rodi Taxicab Company. Both sales were made with assumption of the mortgage in favor of the RFC, and were also approved provisionally by the Commission, subject to petitioner's lien. On October 10, 1953 petitioner filed an action to foreclose the chattel mortgage executed in its favor by Concepcion. While the above case was pending, the RFC also instituted foreclosure proceedings on its second chattel mortgage, and as a result of the decision in its favor therein rendered, the certificate of public convenience was sold at public auction in favor of Amador D. Santos for P24,010.00 on August 31, 1956. Santos immediately applied with the Commission for the approval of the sale, and the same was approved on January 26, 1957, subject to the mortgage lien in favor of petitioner. ISSUE: Whether or not the purpose for which petitioner was organized and the transaction of its lawful business reasonably and necessarily requires acquisition and holds the certificate and operates as a common carrier by land. RULING: NO. Under Section 13 (5) of the Corporation Law, a corporation created thereunder may purchase, hold, etc., and otherwise deal in such real and personal property is the purpose for which the corporation was formed may permit, and the transaction of its lawful business may reasonably and necessarily require. Petitioners corporate purposes are to carry on a general mercantile and commercial business, etc., and that it is authorized in its articles of incorporation to operate and otherwise deal in and concerning automobiles and automobile accessories' business in all its multifarious ramification and to operate, etc., and otherwise dispose of vessels and boats, etc., and to own and operate steamship and sailing ships and other floating craft and deal in the same and engage in the Philippine Islands and elsewhere in the transportation of persons, merchandise and chattels by water; all this incidental to the transportation of automobiles. The Court finds that Petitoners articles of incorporation are precisely the best evidence that it has no authority at all to engage in the business of land transportation and operate a taxicab service. That it may operate and otherwise deal in automobiles and automobile accessories; that it may engage in the transportation of persons by water does not mean that it may engage in the business of land transportation an entirely different line of business. If it could not thus engage in the line of business, it follows that it may not acquire a certificate of public convenience to operate a taxicab service, such as the one in question, because such acquisition would be without purpose and would have no necessary connection with petitioner's legitimate business. 203 | P a g e

Law 321_Corporation LAW_ Case Digest TERESA ELECTRIC AND POWER CO., INC. vs. PUBLIC SERVICE COMMISSION and FILIPINAS CEMENT CORPORATION G.R. No. L-21804. September 25, 1967 FACTS: The petitioner Teresa Electric Light and Power Co., Inc. is a domestic corporation operating an electric plant in Teresa, Rizal, under a subsisting certificate of public convenience and necessity issued on June 2, 1960, while the respondent Filipinas is likewise a domestic corporation engaged in the manufacture and sale of cement. On May 24, 1962, Filipinas filed an application with the Public Service Commission for a certificate of public convenience to install, maintain and operate an electric plant in sitio Kaysapon of barrio Pamanaan, municipality of Teresa, Rizal, for the purpose of supplying electric power and light to its cement factory and its employees living within its compound. Petitioner opposed alleging that it is the duly authorized operator of an electric light, heat and power service in Teresa, Rizal and that Filipinas is not authorized by its articles of incorporation to operate an electric plant; that the Municipal Council of Teresa had not authorized it either to operate the proposed service since Filipinas' principal business does not come within the jurisdiction of the respondent Commission. ISSUES: Whether or not under its articles of incorporation Filipinas is authorized to operate and maintain an electric plant. RULING: YES. The Articles of Incorporation of Filipinas (paragraph 7) provide for authority to secure from any governmental, state, municipality, or provincial, city or other authority, and to utilize and dispose of in any lawful manner, rights, powers, privileges, franchises and concessions obviously necessary or at least related to the operation of its cement factory. Moreover, said Articles of Incorporation also provide that the corporation may generally perform any and all acts connected with the business of manufacturing Portland cement or arising therefrom or incidental thereto. It cannot be denied that the operation of an electric light, heat and power plant is necessarily connected with the business of manufacturing cement. Moreover, it has been established in this case that petitioner was in no condition to supply the power needs of Filipinas, because its load capacity was only 200 kilowatts while Filipinas was in need of 6,000 Kilowatts power to operate its cement factory.

204 | P a g e

Law 321_Corporation LAW_ Case Digest ANTHONY POWERS, BERTEL FASSNACHT, RICHARD I GUARDIAN, JOANN KELLY, LANDLESS, AMADO MACASAET, JAVIER MACICIORATUSHI NAKAI KAY NG, JAMES ROBERSON, FREDERICK SEGGERMAN, ARTHUR YANG, EZRA TOEG, ISIDRO CO, In behalf of themselves and 316 other Associate Members all other Associate Members similarly situated, and in behalf of and for the benefit of the INTERNATIONAL SCHOOL, INC. vs. DONALD I. MARSHALL, CHARLES ANGEVINE, CARLOS D. ARGUELLES, BRYCE F. BASTIAN, GABRIEL DIMACHE, JOSE FLORENTO, JAMES T. HODGE, ROSEMARY IYAS, EUSEBIO R. LUZURIAGA, THOMAS C. NIBLOCK Board of Trustees of the International School, Inc., and MAX SNYDER Superintendent, International School, Inc. G.R. No. L-48064. May 9, 1988 FACTS: On July 16, 1975, the fourteen (14) plaintiffs, all associate members of the International School, Inc., brought an action for injunction against the ten (10) members of the Board of Trustees of the school, praying that said Trustees be enjoined from collecting a "development fee" of P2,625.00 per child-enrollee per school year for a period of twelve (12) years, beginning with the school year 1975-1976, as a prerequisite for re-enrollment in said school. The suit was precipitated by a letter addressed to the parents of the students, giving notice that the Board of Trustees had decided to embark on a program to construct new buildings and remodel existing ones. The Board intended to raise the needed funds primarily through subscriptions to capital notes and prepayment certificates, and any deficiency from these sources would be covered by collecting a socalled "development fees" of P2,625 from each enrollee starting with the school year 1975-1976 and continuing up to the school year 1986-1987. The trial court issued an order temporarily restraining the defendants or their authorized representatives and agents from executing and/or enforcing in any manner the development program and after the submission of the parties' memoranda the trial court issued an order dismissing the complaint for lack of valid cause of action ISSUE: Whether or not the Board of Trustees of the International School was authorized to adopt the development plan for which the disputed fee was being collected from the students. RULING: YES. Section 2 of Article 3 of the By-Laws of the International School, Inc. provides: The Board of Trustees, in addition to the powers conferred by these By-Laws, shall have the right to such powers and do such acts as may be lawfully exercised or performed by the corporation, subject to applicable laws and to the provisions of the articles of incorporation and the By-Laws. Section 2 (b) of P.D. No. 732 granting certain rights to the International School, Inc., expressly authorized the Board of Trustees, upon consultation with the Secretary of Education and Culture, to determine the amount of fees and assessments which may be reasonably imposed upon its students, to maintain or conform to the school standard of education." Such consultation had been made with the Secretary of Education and Culture who expressed his conformity with the reasonableness of the assessment of P2,625.00 per student for the whole school year to carry out its development program. Since the collection of the development fee had been approved by the Board of Trustees of the International School, Inc., it was a valid exercise of corporate power by the Board, and said assessment was binding upon all the members of the corporation.

205 | P a g e

Law 321_Corporation LAW_ Case Digest

Power to Have/Use Corporate Name and Seal


LAUREANO INVESTMENT & DEVELOPMENT CORPORATION vs. THE HONORABLE COURT OF APPEALS and BORMAHECO, INC. G.R. No. 100468. May 6, 1997 FACTS: The Spouses Reynaldo Laureano and Florence Laureano are majority stockholders of petitioner Corporation who entered into a series of loan and credit transactions with Philippine National Cooperative Bank. To secure payment of the loans, they executed Deeds of Real Estate Mortgage dated December 11, 1962, January 9, 1963, July 2, 1963 and September 5, 1964, for the following amounts: P100,000.00, P20,000.00, P70,000.00 and P13,424.04, respectively. Spouses Laureano failed to pay their indebtedness, thus PNCB applied for extrajudicial foreclosure of the real estate mortgages. The bank was the purchaser of the properties in question in the foreclosure sale and titles thereof were consolidated in PNCB's name on February 20, 1984. PNCB did not secure a writ of possession nor did it file ejectment proceedings against the Laureano spouses, because there were then pending cases involving the titles of ownership of subject two lots, which are situated at Bel-Air Subdivision, Makati, Metro Manila. Private respondent Bormaheco, Inc. became the successor of the obligations and liabilities of PNCB over subject lots by virtue of a Deed of Sale/Assignment. Transfer Certificate of Title Nos. 157724 and 157725 over the lots in question were issued on October 12, 1988 in the name of Bormaheco. Five (5) days after securing titles over the said properties, Petitioner Corporation filed on January 18, 1989 its Motion for Intervention and to Admit Attached Complaint in Intervention in said. Respondent Bormaheco filed its Motion to Strike out the Complaint in Intervention and all related pleadings filed by LIDECO Corporation. The motion was granted stating that Intervenor LIDECO Corporation and LAUREANO INVESTMENT AND DEVELOPMENT CORPORATION are two (2) separate and distinct entities, therefore, no way whatsoever that LIDECO Corporation's interests will be adversely affected by the outcome of the instant case. Thus, intervenor LIDECO lacks personality to intervene in the instant ISSUES: Whether or not Respondent Bormaheco, Inc. is estopped from contesting the legal personality to sue of "Lideco Corporation". RULING: NO. Bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; bad faith contemplates a state of mind affirmatively operating with furtive design or ill will. Other than its bare allegations that private respondent acted in bad faith, petitioner failed to show that the former acted consciously and deliberately to achieve a dishonest purpose or moral obliquity, or was motivated by ill will. Rather, as discussed above, no false representation was contrived nor concealment made by private respondent. Neither did it deliberately convey facts other than, or inconsistent with, what it now asserts and upon which petitioner had relied or acted upon due to the representations of private respondent.

206 | P a g e

Law 321_Corporation LAW_ Case Digest

Power to Sue and be Sued


TAM WING TAK vs. HON. RAMON P. MAKASIAR (in his Capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 35) and ZENON DE GUIA (in his capacity as Chief State Prosecutor) G.R. No. 122452. January 29, 2001 FACTS: On November 11, 1992, petitioner, in his capacity as director of Concord-World Properties, Inc., (Concord for brevity), a domestic corporation, filed an affidavitcomplaint with the Quezon City Prosecutor's Office, charging Vic Ang Siong with violation of B.P. Blg. 22 alleging that a check for the amount of P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was dishonored when presented for encashment. Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no authority to file the case on behalf of Concord, the payee of the dishonored check, since the firm's board of directors had not empowered him to act on its behalf. Second, he and Concord had already agreed to amicably settle the issue after he made a partial payment of P19,000,000.00 on the dishonored check. The City Prosecutor dismissed the case. Petitioner moved for reconsideration but the City Prosecutor denied such. On November 8, 1994, petitioner appealed the dismissal of his complaint and the Chief State Prosecutor dismissed the appeal for having been filed out of time. ISSUES: Whether or not petitioner is the proper party to institute the case. RULING: NO. In general, mandamus may be resorted to only where one's right is founded clearly in law and not when it is doubtful. The exception is to be found in criminal cases where mandamus is available to compel the performance by the public prosecutor of an ostensibly discretionary function, where by reason of grave abuse of discretion on his part, he willfully refuses to perform a duty mandated by law. Thus, mandamus may issue to compel a prosecutor to file information when he refused to do so in spite of the prima facie evidence of guilt. First, with respect to the agreement between Concord and Victor Ang Siong to amicably settle their difference, we find this resort to an alternative dispute settlement mechanism as not contrary to law, public policy, or public order. Efforts of parties to solve their disputes outside of the courts are looked on with favor, in view of the clogged dockets of the judiciary. Second, it is not disputed in the instant case that Concord, a domestic corporation, was the payee of the bum check, not petitioner. Therefore, it is Concord, as payee of the bounced check, which is the injured party. Since petitioner was neither a payee nor a holder of the bad check, he had neither the personality to sue nor a cause of action against Vic Ang Siong. Petitioner failed to show any proof that he was authorized or deputized or granted specific powers by Concord's board of director to sue Victor Ang Siong for and on behalf of the firm. Petitioner as a minority stockholder and member of the board of directors had no such power or authority to sue on Concord's behalf. Nor can we uphold his act as a derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit.

207 | P a g e

Law 321_Corporation LAW_ Case Digest NORA A. BITONG vs. COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS. PUBLISHING CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA G.R. No. 123553. July 13, 1998 NORA A. BITONG vs. COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B. ESPIRITU (CA-G.R. No. 33873) July 13, 1998 FACTS: Bitong alleged that she was the treasurer and member of the BoD of Mr. & Mrs. Corporation. She filed a complaint with the SEC to hold respondent spouses Apostol liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs of the corporation to the prejudice of the stockholders. She alleges that certain transactions entered into by the corporation were not supported by any stockholders resolution. The complaint sought to enjoin Apostol from further acting as president-director of the corporation and from disbursing any money or funds. Apostol contends that Bitong was merely a holder-in-trust of the JAKA shares of the corporation, hence, not entitled to the relief she prays for. SEC Hearing Panel issued a writ enjoining Apostol. After hearing the evidence, SEC Hearing Panel dissolved the writ and dismissed the complaint filed by Bitong. Bitong appealed to the SEC en banc which reversed SEC Hearing Panel decision. Apostol filed petition for review with the CA. CA reversed SEC en banc ruling holding that Bitong was not the owner of any share of stock in the corporation and therefore, not a real party in interest to prosecute the complaint. ISSUE: Whether or not Bitong was the real party in interest. RULING: NO. It could be gleaned that Bitong was not a bona fide stockholder of the corporation. Several corporate documents disclose that the true party in interest was JAKA. Although her buying of the shares were recorded in the Stock and Transfer Book of the corporation, and as provided by Sec. 63 of the Corp Code that no transfer shall be valid except as between the parties until the transfer is recorded in the books of the corporation, and upon its recording the corporation is bound by it and is estopped to deny the fact of transfer of said shares, this provision is not conclusive even against the corporation but are prima facie evidence only. Parol evidence may be admitted to supply the omissions in the records, explain ambiguities, or show what transpired where no records were kept, or in some cases where such records were contradicted. 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. However, the books and records of a corporation are not conclusive even against the corporation but are prima facie evidence only. The effect of entries in the books of the corporation which purport to be regular records of the proceedings of its board of directors or stockholders can be destroyed by testimony of a more conclusive character than mere suspicion that there was an irregularity in the manner in which the books were kept.

208 | P a g e

Law 321_Corporation LAW_ Case Digest SPECIAL SERVICES CORPORATION vs. CENTRO LA PAZ (SAMAHANG ESPIRITISTA SA LUNDUYANG LA PAZ), A CHAPTER OF UNION ESPIRITISTA CRISTIANA DE FILIPINAS, INC. G.R. No. L-44100. April 28, 1983 FACTS: On October 10, 1972, judgment was rendered in favor of petitioner against one Alejandro Estudillo in the amount of P94,727.52, in an action for Replevin with Sum of Money and a writ of execution was thereafter issued but which has remained unsatisfied. By virtue of an alias writ of execution issued on December 15, 1972, the Sheriff of Manila caused the annotation of a notice of levy on Transfer Certificate of Title No. 51837, in respect of the rights, interest and participation of said Alejandro Estudillo, one of the registered owners indicated in said title. On July 23, 1973, "Centro La Paz (Samahang Espiritista sa Lunduyang La Paz) a Chapter of Union Espiritista Cristiana de Filipinas, Inc.," as plaintiff, instituted for Damages and Preliminary Injunction against herein petitioner and the Sheriff of Manila with the Court of First Instance, Branch IV, Manila, the same Court which rendered judgment in the replevin case. CENTRO reiterated ownership of the properties in question and emphasized that the registered owners thereof had publicly acknowledged their possession of said properties in the concept of trustees. ISSUE: Whether or not Centro La Paz which is merely a Chapter of Union Espiritista de Filipinas, Inc. has a juridical personality of its own in accordance with the provisions of our laws. RULING: YES. Although it was CENTRO that was actively prosecuting the case, in substance, it was representing the mother organization, the Union Espiritista Cristiana de Filipinas, Inc., which is the real party in interest and is itself named in the Complaint. It is an organization that is duly registered with the Securities and Exchange Commission, and thus possessed of a juridical personality to sue and be sued. Admittedly, the trust was not registered in accordance with section 65 of Act 496 (the former Land Registration Law). The absence of said registration, however, cannot be taken against CENTRO inasmuch as, if the public auction sale had actually been held, with petitioner as the successful buyer, petitioner could not have been considered a purchaser for value and in good faith at said sale since it had knowledge of CENTRO's claim, particularly when the latter had filed a third-party-claim with the Sheriff of Manila before the scheduled auction sale, which knowledge was equivalent to registration of the several "Acknowledgments" in the Registry of Deeds. The conclusion follows that inasmuch as Estudillo has no interest in the properties in question, there is nothing that petitioner can levy upon. The power of a Court in the execution of its judgment extends only over properties unquestionably belonging to the judgment debtor.

209 | P a g e

Law 321_Corporation LAW_ Case Digest R. TRANSPORT CORPORATION vs. HON. COURT OF APPEALS, Former 15th Division, Manila, HON. SALVADOR S. ABAD SANTOS, as Presiding Judge, Regional Trial Court of, Metro Manila, Branch 65 and FLOSERIDA L. CASTAEDA G.R. No. 111187. February 1, 1995 FACTS: On November 22, 1991, private respondent filed a complaint for damages arising from breach of contract of carriage against petitioner. In an Order dated January 28, 1991, the trial court upon ex parte motion of private respondent, declared petitioner in default and appointed a commissioner to receive evidence ex parte. Petitioner filed a Motion to Dismiss and to Stop Ex Parte Reception of Evidence. It asserted that it was not properly served with summons and consequently, the trial court did not acquire jurisdiction over its person. It argued that none of the officers enumerated in Section 13, Rule 14 of the Revised Rules of Court (namely, the corporation's president, manager, secretary, cashier, agent or any of its directors) received any summons. The trial court denied petitioner's motion and allowed private respondent to adduce its evidence ex parte. The Court of Appeals dismissed the petitioners petition for certiorari ruling that the trial court did not commit any grave abuse of discretion in declaring the petitioner in default and in denying petitioner's motion for reconsideration. ISSUE: Whether or not there was valid service of summons. RULING: YES. As a general rule, service of summons must be made on the persons named in Section 13, Rule 14 of the Revised Rules of Court which provides: If the defendant is a corporation organized under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent or any of its directors. Thus service on persons other than those mentioned in said Rule has been held as improper. Through the years, the rule on service of summons has been liberalized. Such liberalization is to give life to the rationale behind Section 13 of Rule 14. Service of summons on persons other than those enumerated in Section 13 of Rule 14 have been held proper on the theory that those persons served were holding positions of responsibility and could appreciate the importance of the papers handed them, and could be expected to deliver the papers to the proper officer. These individuals were considered "agents" within the contemplation of Section 13 of Rule 14. Thus, the Court holds that service of summons on petitioner's Operations Manager was valid. He is an officer who may be relied upon to appreciate the importance of the papers served on him. The fact that service was made at petitioner's bus terminal at the address stated in the summons and not at its office in Makati does not render the service of summons invalid. Petitioner is engaged in the transportation business, operating over 100 buses. Its central bus terminal is located at Sucat, Paraaque, from where it conducts the bulk of its business. It was at that terminal where petitioner's Operations Manager was found and upon whom service was made.

210 | P a g e

Law 321_Corporation LAW_ Case Digest

Power to Acquire, Dispose, Encumber Property


THE DIRECTOR OF LANDS vs. THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO G.R. No. L-56613. March 14, 1988 FACTS: On November 28, 1973, private respondent Iglesia ni Cristo filed an application for registration in its name of a parcel of land with an area of 379 square meters located at Poblacion, Municipality of Amadeo, Cavite. In its application, private respondent alleged inter alia that it was the owner in fee simple of the land aforedescribed, having acquired title thereto by virtue of a Deed of Absolute Sale executed in 1947 by Aquelina de la Cruz in its favor and that applicant. Private respondent prayed that should the Land Registration Act not be applicable, the provisions of Chapter VIII of Commonwealth Act No. 141, as amended by Republic Act No. 6236 be applied as applicant and its predecessors-in-interest had been in possession of the land for more than thirty [30] years and had introduced improvements thereon. The Republic of the Philippines, represented by the Director of Lands, opposed the application on the following grounds: 1] the applicant and its predecessors-ininterest did not possess sufficient title to acquire ownership in fee simple of the parcel of land applied for; 2] neither the applicant nor its predecessors-in-interest have been in open, continuous, exclusive and notorious possession and occupation of the land in question; and, 3] the subject parcel of land is a portion of the public domain not subject to private appropriation. ISSUES: Whether or not the respondent is prohibited from acquiring private land as provided under the Constitution. RULING: YES. Taking the year 1936 as the reckoning point, the 30-year period of open, continuous, exclusive and notorious possession and occupation required by law was completed in 1966. The completion by private respondent of this statutory 30-year period has dual significance in the light of Section 48[b] of Commonwealth Act No. 141, as amended and prevailing jurisprudence: [1] at this point, the land in question ceased by operation of law to be part of the public domain; and [2] private respondent could have its title thereto confirmed through the appropriate proceedings as under the Constitution then in force, private corporations or associations were not prohibited from acquiring public lands, but merely prohibited from acquiring, holding or leasing such type of land in excess of 1,024 hectares. If in 1966, the land in question was converted ipso jure into private land, it remained so in 1974 when the registration proceedings were commenced. This being the case, the prohibition under the 1973 Constitution would have no application. Otherwise construed, if in 1966, private respondent could have its title to the land confirmed, then it had acquired a vested right thereto, which the 1973 Constitution can neither impair nor defeat.

211 | P a g e

Law 321_Corporation LAW_ Case Digest

Power to Make Donations


MARIA CLARA PIROVANO ET AL. vs. THE DE LA RAMA STEAMSHIP CO. G.R. No. L-5377. December 29, 1954 FACTS: Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain resolutions adopted by the Board of Directors and stockholders of the defendant company giving to said minor children of the proceeds of the insurance policies taken on the life of their deceased father Enrico Pirovano with the company as beneficiary. Defendant's main defense is: that said resolutions and the contract executed pursuant thereto are ultra vires, and, if valid, the obligation to pay the amount given is not yet due and demandable. Plaintiff-appellant Pirovano is the owner of 3424 shares of stocks in defendantappellee Corporation which declared a dividend of P100 per share. Appellant wants to recover from appellee the sum of P221, 975 after deducting the sum of P120, 424 which she had withdrawn or received from appellee for advances she received after the death of her father, the late Esteban de la Rama. Appellants theory is that the cash advances to her for her personal use and that of her children were assumed by Esteban de la Rama. She claims that the advances made to her by appellees were debited from the account of Hijos de I. de la Rama, another corporation practically owned by Esteban de la Rama. She further claims that the appellee can only deduct from the amount of dividend she is entitled to, the amount of cash advances which was not assumed by her father. The withdrawals by the appellant were made during the period 1940 to 1949 during which the appellee made a deed of trust with Hijos. The deed of trust was made to circumvent the prohibition of declaring dividends during the period. ISSUE: Whether or not the donation made by the corporation of the proceeds of the insurance is a valid act. RULING: YES. The Articles of Incorporation of Dela Rama Steamship provided that under (g) the company may invest and deal with moneys of the company not immediately required, in such a manner as from time to time may be determined, and under (i) to lend money or to aid in any other manner any person association, or corporation of which any obligation or in which any interest is held by the corporation or in the affairs of prosperity of which the corporation has a lawful interest. The corporation was thus given broad and almost unlimited powers to carry out the purposes for which it was organized. The word deal is broad enough to include any manner of disposition, and thus the donation comes within the scope of this broad power. The company was in fact very much solvent as it was able to declare and issue dividends to its stockholders, and shows that the excess funds which were not needed by the company which was donated to the children was justified under the AOI. Under the second broad power, the corporation knew well its scope such that none lifted a finger to dispute its validity. The company gave the donation not only because it was indebted to him but also because it was fit and proper to make provisions for the children and out of a sense of gratitude.

212 | P a g e

Law 321_Corporation LAW_ Case Digest

To Increase or Decrease Capital Stock


MADRIGAL & COMPANY, INC. vs. HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS, THE HON. SECRETARY OF LABOR, and MADRIGAL CENTRAL OFFICE EMPLOYEES UNION G.R. No. L-48237. June 30, 1987 MADRIGAL & COMPANY, INC. vs. HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE EMPLOYEES UNION No. L-49023. June 30, 1987 FACTS: The petitioner was engaged, among several other corporate objectives, in the management of Rizal Cement Co., Inc.Admittedly, the petitioner and Rizal Cement Co., Inc. are sister companies.Both are owned by the same or practically the same stockholders.On December 28, 1973, the respondent, the Madrigal Central Office Employees Union, sought for the renewal of its collective bargaining agreement with the petitioner, which was due to expire on February 28, 1974.Specifically, it proposed a wage increase of P200.00 a month, an allowance of P100.00 a month, and other economic benefits.The petitioner, however, requested for a deferment in the negotiations. On July 29, 1974, by an alleged resolution of its stockholders, the petitioner reduced its capital stock from 765,000 shares to 267,366 shares.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.On August 22, 1975, by yet another alleged stockholders' action, the petitioner reduced its authorized capitalization from 267,366 shares to 110,085 shares, again, through the same scheme. ISSUE: Whether or not the decrease in the ACS of petitioner is valid. RULING: NO. The Court ruled that what clearly emerges from the recorded facts is that the petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increases, decided to evade its responsibility towards the employees by a devised capital reduction. While the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. As such shareholder, the dividends paid to it were its own money, which may then be available for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the absolute property of the stockholders and hence, out of reach by creditors of the corporation. Here, the petitioner was acting as stockholder itself, and in that case, the right to a share in such dividends, by way of salary increases, may not be denied its employees. Accordingly, the Court is convinced that the petitioner's capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in its employee ranks, especially of union members.

213 | P a g e

Law 321_Corporation LAW_ Case Digest PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa Naval Filipina" vs. MARCIANO RIVERA G.R. No. L-19761. January 29, 1923 FACTS: In 1918 the Cooperativa Naval Filipina was duly incorporated under the laws of the Philippine Islands, with a capital of P100,000, divided into one thousand shares of a par value of P100 each. Among the incorporators of this company was numbered the defendant Mariano Rivera, who subscribed for 450 shares representing a value of P45,000, the remainder of the stock being taken by other persons. In the course of time the company became insolvent and went into the hands of the Philippine Trust Company, as assignee in bankruptcy; and by it this action was instituted to recover one-half of the stock subscription of the defendant, which admittedly has never been paid. The reason given for the failure of the defendant to pay the entire subscription is a meeting of its stockholders occurred, at which a resolution was adopted to the effect that the capital should be reduced by 50 per centum and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50 per centum of the same. ISSUE: Whether or not the reduction of the companys capital by 50 per centum and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50 per centum is valid. RULING: NO. The Court ruled that defendant was still liable for the unpaid balance of his subscription. It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary. In the case before us the resolution releasing the shareholders from their obligation to pay 50 per centum of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual.

214 | P a g e

Law 321_Corporation LAW_ Case Digest

To Deny Pre-Emptive Rights


DATU TAGORANAO BENITO vs. SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA, INC. G.R. No. L-56655. July 25, 1983 FACTS: On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with the Securities and Exchange Commission (SEC) and were approved on December 14, 1962. The corporation had an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of the authorized capital stock, 8,058 shares worth P80,580.00 were subscribed and fully paid for. Petitioner Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00. On October 28, 1975, the respondent corporation filed a certificate of increase of its capital stock from P200,000.00 to P1,000,000.00. Thus, P110,980.00 worth of shares were subsequently issued by the corporation from the unissued portion of the authorized capital stock of P200,000.00. Of the increased capital stock of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto. Petitioner Datu Tagoranao filed a petition alleging that the additional issue (worth P110,980.00) of previously subscribed shares of the corporation was made in violation of his pre-emptive right to said additional issue and that the increase in the authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record were not notified of the meeting wherein the proposed increase was in the agenda. Respondents denied the material allegations of the petition and claimed that petitioner has no cause of action and that the stock certificates covering the shares alleged to have been sold to petitioner were only given to him as collateral for the loan of Domocao Alonto and Moki-in Alonto. The SEC affirmed the sale. ISSUE: Whether or not the issuance of the unissued shares was subject to the preemptive right of the stockholders. RULING: NO. The Court held that the questioned issuance of the unsubscribed portion of the capital stock worth P110,980.00 is not invalid even if assuming that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders' meeting is necessary to consider it because additional issuance of shares of stocks does not need approval of the stockholders. Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he was not able to exercise his right of pre-emption over the unissued shares. However, the general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution of interest.

215 | P a g e

Law 321_Corporation LAW_ Case Digest PEDRO LOPEZ DEE vs. SECURITIES AND EXCHANGE COMMISSION, HEARING OFFICER EMMANUEL SISON, NAGA TELEPHONE CO., INC., COMMUNICATION SERVICES, INC., LUCIANO MAGGAY, AUGUSTO FEDERIS, NILDA RAMOS, FELIPA JAVALERA, DESIDERIO SAAVEDRA G.R. No. L-60502. July 16, 1991 JUSTINO DE JESUS, SR., PEDRO LOPEZ DEE, JULIO LOPEZ DEE, and VICENTE TORDILLA, JR. vs. INTERMEDIATE APPELLATE COURT, LUCIANO MAGGAY, NILDA I. RAMOS, DESIDERIO SAAVEDRA, AUGUSTO FEDERIS, ERNESTO MIGUEL, COMMUNICATION SERVICES, INC., and NAGA TELEPHONE COMPANY, INC. G.R. No. L-63922. July 16, 1991 FACTS: Naga Telephone Company, Inc. was organized in 1954, the authorized capital was P100,000.00. In 1974 Naga Telephone Co., Inc. (Natelco) decided to increase its authorized capital to P3,000,000.00. As required by the Public Service Act, Natelco filed an application for the approval of the increased authorized capital with the then Board of Communications on which a decision was rendered approving the application subject to certain conditions, among which was: That the issuance of the shares of stocks will be for a period of one year from the date hereof, "after which no further issues will be made without previous authority from this Board." Natelco filed its Amended Articles of Incorporation with the Securities and Exchange Commission. When the amended articles were filed with the SEC, the original authorized capital of P100,000.00 was already paid. Of the increased capital of P2,900,000.00 the subscribers subscribed to P580,000.00 of which P145,000 was fully paid. ISSUE: Whether or not Natelco stockholders have a right of preemption to the 113,800 shares in question. RULING: NO. The general rule is that pre-emptive right is recognized only with respect to new issues of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution of interest. Thus, the questioned issuance of the 113,800 stocks is not invalid even assuming that it was made without notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders meeting is required to consider it because additional issuance of shares of stocks does not need approval of the stockholders. Consequently, no pre-emptive right of Natelco stockholders was violated by the issuance of the 113,800 shares to CSI. Accordingly, it is clear that since the trial judge in the lower court did not have jurisdiction in issuing the questioned restraining order, disobedience thereto did not constitute contempt, as it is necessary that the order be a valid and legal one. It is an established rule that the court has no authority to punish for disobedience of an order issued without authority. 216 | P a g e

Law 321_Corporation LAW_ Case Digest PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT vs. HON. BENJAMIN M. AQUINO, JR., as Presiding Judge, Regional Trial Court, NCJR Branch LXXII Malabon, Metro Manila, and MARCELO FIBERGLASS CORPORATION G.R. No. 77816. June 30, 1988 MARCELO FIBERGLASS CORPORATION vs. PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT G.R. No. 78753. June 30, 1988 FACTS: On June 18, 1982, Edward T. Marcelo as president of private respondent Marcelo Fiberglass Corporation [hereinafter referred to as MFC] entered into a Contract to Buy and Sell with the Philippine Navy represented by Rear Admiral Simeon M. Alejandro, then Flag Officer in Command, for the construction and delivery by the former of fifty-five 551 units of fiberglass high-speed patrol boats at P7,200,000 each plus spare parts amounting to P29,700,000 for a total contract price of P425,700,000. It was stipulated in the contract that the patrol boats would be delivered within thirtysix [36] months from the date the Philippine Navy pays to private respondent the stipulated down payment of thirty per cent [30%] of the contract price. To facilitate funding of the initial down payment agreed upon under the contract, MFC through Edward Marcelo, secured presidential approval for the issuance of a guarantee 'by the national government in acquiring either a foreign currency loan in behalf of the Philippine Navy with a foreign bank or offshore banking unit, or a peso term loan to be negotiated by the Philippine National Bank, also, in behalf of the Philippine Navy. ISSUES: Whether or not the issuance and implementation of the writ of sequestration violates the constitutional rights of private respondent against impairment of obligation of contracts and deprivation of property without due process of law. RULING: NO. The Court sustains petitioner's stand and holds that regional trial courts and the Court of Appeals for that matter have no jurisdiction over the Presidential Commission on Good Government in the exercise of its powers under the applicable Executive Orders and Article XVIII, Section 26 of the Constitution and therefore may not interfere with and restrain or set aside the orders and actions of tile Commission. Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all cases of the Commission regarding "the Funds, Moneys, Assets and Properties Illegally Acquired or Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, then, Close Relatives, Subordinates, Business Associate, Dummies, Agents or Nominees' whether civil or criminal. The attempt to remove special civil actions from the Sandiganbayan's exclusive jurisdiction is of no avail if they similarly involve the powers and functions of the Presidential Commission on Good Government. The matters involved in these cases are orders of the PCGG issued in the exercise of its powers and functions for they involve the sequestration of the assets of private respondent Marcelo Fiberglass Corporation and Edward T. Marcelo, its president. The propriety of said sequestration and any incident arising from, incidental or related to such sequestration is within the exclusive jurisdiction of the Sandiganbayan.

217 | P a g e

Law 321_Corporation LAW_ Case Digest REPUBLIC OF THE PHILIPPINES vs. SANDIGANBAYAN (3RD DIVISION), JOSE L. AFRICA, UNIMOLCO, ROBERTO BENEDICTO, ANDRES AFRICA and SMART COMMUNICATIONS G.R. No. 128606. December 4, 2000 FACTS: Eastern Telecommunications Philippines, Inc. (ETPI) was one of the corporations sequestered by the Presidential Commission on Good Government (PCGG). Among its stockholders were Roberto S. Benedicto and Universal Molasses Corporation (UNIMOLCO). Sometime in 1990, PCGG and Benedicto entered into a compromise agreement whereby Benedicto ceded to the government 204,000 shares of stock in ETPI, representing his fifty-one percent (51%) equity therein. The other forty-nine percent (49%), consisting of 196,000 shares of stock, were released from sequestration and adjudicated by final judgment to Benedicto and UNIMOLCO. Furthermore, the government agreed to withdraw the cases filed against Benedicto and free him from further criminal prosecution. Meanwhile, on motion of petitioner, through the PCGG, the Sandiganbayan issued a Resolution, dated May 7, 1996, authorizing the entry in the Stock and Transfer Book of ETPI of the transfer of ownership of 204,000 shares of stock to petitioner, to be taken out of the shareholdings of UNIMOLCO. PCGG issued Resolution No. 96-142 enjoining all stockholders of ETPI from selling shares of stock therein without the written conformity of the PCGG. Subsequently, on July 24, 1996, UNIMOLCO and Smart Communications executed a Deed of Absolute Sale whereby UNIMOLCO sold its 196,000 shares of stock in ETPI to Smart. Prior to the sale, Smart was not a stockholder of ETPI. ISSUE: Whether or not petitioner was denied of his pre-emptive right because of the defective notice. RULING: NO. The records of the case clearly show that the written notice by UNIMOLCO, the Offeror, of its intention to sell its 196,000 shares of stock was duly received on April 24, 1996 by the President and Chairman of the Board of ETPI. Moreover, the purpose of the notice requirement in Article 10 of the ETPI Articles of Incorporation is to give the stockholders knowledge of the intended sale of shares of stock of the corporation, in order that they may exercise their preemptive right. Where it is shown that a stockholder had actual knowledge of the intended sale within the period prescribed to exercise the right, the notice requirement had been sufficiently met. In the case at bar, PCGG had actual knowledge of UNIMOLCOs offer to sell its shares of stock. In fact, it issued Resolution No. 96-142 enjoining the sale of the said shares of stock to Smart. Petitioner, thus, cannot feign lack of notice. PCGG had no more authority to enjoin the sale of UNIMOLCOs 196,000 shares of stock, as it endeavored to do in Resolution No. 96-142. As correctly found by the Sandiganbayan, since the 196,000 shares of stock had already been adjudicated by final judgment to Benedicto and UNIMOLCO, PCGG could no longer exercise power and authority over the same.

218 | P a g e

Law 321_Corporation LAW_ Case Digest

To Sell Or Otherwise Dispose Of All or Substantially All Of Corporate Assets


PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION vs. ANDRADA ELECTRIC & ENGINEERING COMPANY G.R. No. 142936. April 17, 2002 FACTS: The Plaintiff (herein respondent) alleged that it is a partnership duly organized, existing, and operating under the laws of the Philippines, while the herein petitioner Philippine National Bank (PNB), is a semi-government corporation duly organized, existing and operating under the laws of the Philippines; whereas, the other defendant, the National Sugar Development Corporation (NASUDECO), is also a semigovernment corporation and the sugar arm of the PNB; and the defendant Pampanga Sugar Mills (PASUMIL), is a corporation organized, existing and operating under the 1975 laws of the Philippines. The respondent is engaged in the business of general construction for the repairs and/or construction of different kinds of machineries and buildings. On August 26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311. But prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a contract. Out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P264,000.00, leaving an unpaid balance of P513,263.80. Petitioners herein failed and refused to pay the plaintiff their just, valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of the PNB, inasmuch as PNB and NASUDECO now owned and possessed the assets of the defendant PASUMIL. Accordingly, the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL, jointly and severally. ISSUE: Whether or not petitioners should be held liable for the corporate debts of PASUMIL for taking over of the latters foreclosed assets. RULING: NO. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts. Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.

219 | P a g e

Law 321_Corporation LAW_ Case Digest ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE COMMISSION vs. COURT OF APPEALS and IGLESIA NI CRISTO G.R. No. 117897. May 14, 1997 FACTS: Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic Center in Quezon City for the construction of a "Mosque (prayer place), Madrasah (Arabic School), and other religious infrastructures" so as to facilitate the effective practice of Islamic faith in the area. The Libyan government donated money to the IDP to purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with an area of 49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616) and RT-26521 (170567), both registered in the name of IDP. According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name of IDP, Martial Law was declared by the late President Ferdinand Marcos. Thereafter, two Muslim groups sprung, the Carpizo Group and the Abbas Group, both groups claimed to be the legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups, came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board members to be null and void. ISSUE: Whether or not the Deed of Sale executed by Carpizo Group is valid. RULING: NO. This is precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null and void. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of ID property. Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private respondent INC contracted is a fake Board. Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora property, allegedly in the name of the IDP. The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the corporation. The Tandang Sora property, appears from the records, 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 falling squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been obtained. These twin requirements were not met as the Carpizo Group which voted to sell the Tandang Sora property was a fake Board of Trustees, and those whose names and signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale were, from all indications, not bona fide members of the IDP as they were made to appear to be. All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent INC was intrinsically void ab initio.

220 | P a g e

Law 321_Corporation LAW_ Case Digest THE EDWARD J. NELL COMPANY vs. PACIFIC FARMS, INC. G.R. No. L-20850. November 29, 1965 FACTS: On October 9, 1958, appellant secured against Insular Farms, Inc. a judgment for the sum of P1,853.80 representing the unpaid balance of the price of a pump sold by appellant to Insular Farms with interest on said sum. A writ of execution, issued after the judgment had become final, was, on August 14, 1959, returned unsatisfied, stating that Insular Farms had no leviable property. Appellant then filed with said court the present action against Pacific Farms, Inc. for the collection of the judgment aforementioned, upon the theory that appellee is the alter ego of Insular Farms, which appellee has denied. In due course, the municipal court rendered judgment dismissing petitioners complaint. Defendant appealed, with the same result, to the court of First Instance and, subsequently, to the Court of Appeals. Hence this appeal by certiorari, upon the ground that the Court of Appeals had erred in not holding the defendant liable for said unpaid obligation of the Insular Farms. ISSUE: Whether or not the defendant is liable for the unpaid obligation of the Insular Farms. RULING: NO. Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts." In the case at bar, there is neither proof nor allegation that defendant had expressly or impliedly agreed to assume the debt of Insular Farms in favor of petitioner, or that the defendant is a continuation of Insular Farms, or that the sale of either the shares of stock or the assets of Insular Farms to the defendant had been entered into fraudulently, in order to escape liability for the debt of the Insular Farms in favor of petitioner. Moreover, defendant purchased the shares of stock of Insular Farms as the highest bidder at an auction sale held at the instance of a bank to which said shares had been pledged as security for an obligation of Insular Farms in favor of said bank. It has also been established that the defendant had paid P285,126.99 for said shares of stock, apart from the sum of P10,000.00 it, likewise, paid for other assets of Insular Farms.

221 | P a g e

Law 321_Corporation LAW_ Case Digest JULIETA V. ESGUERRA vs. COURT OF APPEALS and SURESTE PROPERTIES, INC. G.R. No. 119310. February 3, 1997 FACTS: Julieta Esguerra filed a complaint for administration of conjugal partnership or separation of property against her husband Vicente Esguerra, Jr. and V. Esguerra Construction Co., Inc. (VECCI) and other family corporations as defendants before the trial court. The parties entered into a compromise agreement. By virtue of said agreement, Esguerra Bldg. I was sold and the net proceeds distributed according to the agreement. The controversy arose with respect to Esguerra Building II. Herein petitioner started claiming one-half of the rentals of the said building which VECCI refused. Thus, petitioner filed a motion with respondent court praying that VECCI be ordered to remit one-half of the rentals to her. The trial court ruled in favor of petitioner. Meanwhile, Esguerra Bldg. II was sold to private respondent Sureste Properties. Inc. for P150,000,000.00 prompting Julieta V. Esguerra to file a motion seeking the nullification of the sale on the ground that VECCI is not the lawful and absolute owner thereof and that she has not been notified nor consulted as to the terms and conditions of the sale. The trial court ruled that the sale to Sureste was valid. ISSUES: power. Whether or not the sale of Esguerra Building II is a valid exercise of corporate

RULING: YES. VECCI's sale of all the properties mentioned in the judicially-approved compromise agreement was done on the basis of its Corporate Secretary's Certification of these two resolutions. The partial decision did not require any further board or stockholder resolutions to make VECCI's sale of these properties valid. Being regular on its face, the Secretary's Certification was sufficient for private respondent Sureste Properties, Inc. to rely on. It did not have to investigate the truth of the facts contained in such certification. Otherwise, business transactions of corporations would become tortuously slow and unnecessarily hampered. Ineluctably, VECCI's sale of Esguerra Building II to private respondent was not ultra vires but a valid execution of the trial court's partial decision. Based on the foregoing, the sale is also deemed to have satisfied the requirements of Section 40 of the Corporation Code.

222 | P a g e

Law 321_Corporation LAW_ Case Digest LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES vs. FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR RELATIONS COMMISSION G.R. No. 76801. August 11, 1995 FACTS: Lopez Realty, Inc., is a corporation engaged in real estate business, while petitioner Asuncion Lopez Gonzales is one of its majority shareholders. Sometime in 1978, Arturo Lopez submitted a proposal relative to the distribution of certain assets of Petitioner Corporation among its three (3) main shareholders. The proposal had three (3) aspects, viz: (1) the sale of assets of the company to pay for its obligations; (2) the transfer of certain assets of the company to its three (3) main shareholders, while some other assets shall remain with the company; and (3) the reduction of employees with provision for their gratuity pay. The proposal was deliberated upon and approved in a special meeting of the board of directors held on April 17, 1978. It appears that petitioner corporation approved two (2) resolutions providing for the gratuity pay of its employees, viz: (a) Resolution No. 6, Series of 1980 resolving to set aside, twice a year, a certain sum of money for the gratuity pay of its retiring employees and to create a Gratuity Fund for the said contingency; and (b) Resolution No. 10, Series of 1980, setting aside the amount of P157,750.00 as Gratuity Fund covering the period from 1950 up to 1980. On August 17, 1981, the remaining members of the Board of Directors, namely: Rosendo de Leon, Benjamin Bernardino, and Leo Rivera, convened a special meeting and passed a resolution which provides that: (a) Those who will be laid off be given the full amount of gratuity; (b) Those who will be retained will receive 25% of their gratuity (pay) due on September 1, 1981, and another 25% on January 1, 1982, and 50% to be retained by the office in the meantime. Private respondents were the retained employees of petitioner corporation. In a letter, dated August 31, 1981, private respondents requested for the full payment of their gratuity pay. Their request was granted in a special meeting held on September 1, 1981. ISSUES: Whether or not the subject resolutions requires for their validity stockholders approval. RULING: YES. The Court is not persuaded that the subject resolutions had no force and effect in view of the non-approval thereof during the Annual Stockholders' Meeting held on March 1, 1982. To strengthen their position, petitioners cite section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). The cited provision is not applicable to the case at bench as it refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets, including its goodwill. In such a case, the action taken by the board of directors requires the authorization of the stockholders on record. It will be observed that, except for Arturo Lopez, the stockholders of petitioner corporation also sit as members of the board of directors. Under the circumstances in field, it will be illogical and superfluous to require the stockholders' approval of the subject resolutions. Thus, even without the stockholders' approval of the subject resolutions, petitioners are still liable to pay private respondents' gratuity pay. Petition is dismissed.

223 | P a g e

Law 321_Corporation LAW_ Case Digest

To Invest Corporate Funds In Another Corporation or Business


JOHN GOKONGWEI, JR. vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA G.R. No. L-45911. April 11, 1979 FACTS: On October 22, 1976, petitioner, as stockholder of respondent 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. Petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent 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 30,127,047 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 by-laws 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, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. ISSUES: Whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the Corporation Law. RULING: NO. 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 Respondent 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. 224 | P a g e

Law 321_Corporation LAW_ Case Digest RAMON DE LA RAMA et.al vs. MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A. YULO G.r.No. L-17504 & l-17506; February 28, 1969 FACTS: In 1950 the MSCCI through its President, J. Amado, subscribed for P300k worth of capital stock of the Philippine Fiber Processing Co., Inc. (PFPC). Payments of the subscription were made on 3 installments, but at the time the first two payments were made there was no board resolution authorizing the investment; and that it was only on November 26, 1951, that J. Amado was so authorized by the BOD, by the way, making the third payment made in March 1952 authorized. In addition, 355k shares of PFPC, owned by Luzon Industrial Corporation (LIC) were transferred on May 31, 1952, to MSCCI. Again, the investment was made without prior board resolution, the authorizing resolution having been subsequently approved only on June 4, 1952. A derivative suit was filed by 4 minority SHs of MSCCI which stated 5 causes of action: (1) for alleged illegal and ultra-vires acts consisting of selfdealing, irregular loans, and unauthorized investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of corporate rights warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for receivership. ISSUE: Whether or not a corporation can invest in another corporation. RULING: YES. The law requiring the votes does not apply in the case because of MSCCIs contention that since said PFPC was engaged in the manufacture of sugar bags it was perfectly legitimate for MSCCI either to manufacture sugar bags or invest in another corporation engaged in said manufacture. SC also quoted the interpretation of Professor Guevara, a well-known authority in Commercial Law: A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, 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. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporation Law; namely, (a) that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation; or (b) that a non-agricultural or non-mining corporation shall be restricted to own not more than 15% of the voting stock of any agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce or combination in restraint of trade." Power to invest corporate funds - A private corporation has the power to invest its corporate 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 in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation, the approval of the stockholders is not necessary." 225 | P a g e

Law 321_Corporation LAW_ Case Digest

To Acquire Own Shares


BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION vs. HON. COURT OF APPEALS and NILCAR Y. FAJILAN G.R. No. 77860. November 22, 1988 FACTS: On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as President and Member of the Board of Directors of petitioner, Boman Environmental Development Corporation (BEDECO), and to sell to the company all his shares, rights, and interests therein for P 300,000 plus the transfer to him of the company's Isuzu pick-up truck which he had been using. At a meeting of the Board of Directors of BEDECO, Fajilan's resignation as president was accepted and new officers were elected. Fajilan's offer to sell his shares back to the corporation was approved, the Board promising to pay for them on a staggered basis from July 15, 1984 to December 15, 1984. A promissory note was signed by BEDECO'S new president, Alfredo Pangilinan, in the presence of two directors, committing BEDECO to pay him P300,000 over a sixmonth period from July 15, 1984 to December 15, 1984. However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000 on August 31, 1984 and defaulted in paying the balance of P200,000. On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of Makati for collection of that balance from BEDECO. ISSUES: Whether or not Petitioner Corporation can acquire its own shares. RULING: YES. The provisions of the Corporation Code should be deemed written into the agreement between the corporation and the stockholders even if there is no express reference to them in the promissory note. The principle is well settled that an existing law enters into and forms part of a valid contract without need for the parties' expressly making reference to it. The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void.

226 | P a g e

Law 321_Corporation LAW_ Case Digest C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated vs. GREGORIO VELASCO, ET AL. G.R. No. L-30460. March 12, 1929 FACTS: Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The defendants are residents of the Philippine Islands. It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company, at a meeting of the board of directors, approved and authorized various lawful purchases already made of a large portion of the capital stock of the company from its various stockholders with total amount of the capital stock unlawfully purchased was P3,300. At the time of such purchase, the corporation had accounts payable amounting to P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was its financial condition, in contemplation of an insolvency and dissolution. That on September 11, 1923, when the petition was filed for its dissolution upon the ground that it was insolvent, its accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over and above its liabilities. ISSUE: Whether or not the Petition Corporation can acquire its own shares. RULING: NO. It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in declaring the dividends on the stock was all done at the same meeting of the board of directors, and it appears in those minutes that the both Ganzon and Mendaros were formerly directors and resigned before the board approved the purchase and declared the dividends, and that out of the whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of the 330, which were purchased by the corporation, and for which it paid P3,300. In other words, the directors were permitted to resign so that they could sell their stock to the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their duties. Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.

227 | P a g e

Law 321_Corporation LAW_ Case Digest

Dividend: Kinds: Cash, Stock, Property, Scrip Declaration, Payment and Record Dates
IMELDA O. COJUANGCO, PRIME HOLDINGS, INC., AND THE ESTATE OF RAMON U. COJUANGCO vs. SANDIGANBAYAN, REPUBLIC OF THE PHILIPPINES, AND THE SHERIFF OF SANDIGANBAYAN G.R. No. 183278. April 24, 2009 FACTS: On July 16, 1987, respondent Republic of the Philippines filed before the Sandiganbayan a "Complaint for Reconveyance, Reversion, Accounting, Restitution and Damages," praying for the recovery of alleged ill-gotten wealth from the late President Marcos and former First Lady Imelda Marcos and their cronies, including some 2.4 million shares of stock in the Philippine Long Distance Telephone Company (PLDT) allegedly registered in the name of Prime Holdings, Inc. (Prime Holdings). The Sandiganbayan dismissed the complaint with respect to the recovery of the PLDT shares, hence, the Republic appealed to this Court, docketed as G.R. No. 153459, which appeal was later consolidated with pending cases of similar import G.R. Nos. 149802, 150320, and 150367. The Decision became final and executory on October 26, 2006, hence, the Republic filed on November 20, 2006 with the Sandiganbayan a Motion for the Issuance of a Writ of Execution, praying for the cancellation of the 111,415 shares/certificates of stock registered in the name of Prime Holdings and the annotation of the change of ownership on PTICs Stock and Transfer Book. The Republic further prayed for the issuance of an order for PTIC to account for all cash and stock dividends declared and/or issued by PLDT in favor of PTIC from 1986 up to the present including compounded interests appurtenant thereto. The Sandiganbayan granted the Motion for the Issuance of a Writ of Execution with respect to the reconveyance of the shares, but denied the prayer for accounting of dividends. On Motion for Reconsideration of the Republic, the Sandiganbayan, by the first assailed Resolution dated November 7, 2007, directed PTIC to deliver the cash and stock dividends pertaining to the 111,415 shares, including compounded interests, ratiocinating that the same were covered by this Courts Decision in G.R. No. 153459, since the Republic was therein adjudged the owner of the shares and, therefore, entitled to the fruits thereof. ISSUES: Whether or not the Sandiganbayan gravely abused its discretion in ordering the accounting, delivery, and remittance to the Republic of the stock, cash, and property dividends pertaining to the 111,415 PTIC shares of Prime Holdings. Whether or not the Republic, having transferred the shares to a third party, is entitled to the dividends, interests, and earnings thereof. RULING: NO. The term "dividend" in its technical sense and ordinary acceptation is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It is a payment to the stockholders of a corporation as a return upon their investment and the right thereto is an incident of ownership of stock. In directing the reconveyance to the Republic of the 111,415 shares of PLDT stock owned by PTIC in the name of Prime Holdings, the Court declared the Republic as the owner of said shares and, necessarily, the dividends and interests accruing thereto. 228 | P a g e

Law 321_Corporation LAW_ Case Digest Contrary to petitioners contention, while the general rule is that the portion of a decision that becomes the subject of execution is that ordained or decreed in the dispositive part thereof, there are recognized exceptions to this rule, viz: (a).where there is ambiguity or uncertainty, the body of the opinion may be referred to for purposes of construing the judgment, because the dispositive part of a decision must find support from the decisions ratio decidendi; and (b).where extensive and explicit discussion and settlement of the issue is found in the body of the decision. In G.R. No. 153459, although the inclusion of the dividends, interests, and earnings of the 111,415 PTIC shares as belonging to the Republic was not mentioned in the dispositive portion of the Courts Decision, it is clear from its body that what was being adjudicated in favor of the Republic was the whole block of shares and the fruits thereof, said shares having been found to be part of the Marcoses ill -gotten wealth, and therefore, public money. It would be absurd to award the shares to the Republic as their owner and not include the dividends and interests accruing thereto. An owner who cannot exercise the "juses" or attributes of ownership -- the right to possess, to use and enjoy, to abuse or consume, to accessories, to dispose or alienate, to recover or vindicate, and to the fruits - is a crippled owner.

229 | P a g e

Law 321_Corporation LAW_ Case Digest

Limitation on Retention of Surplus Profits


C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated vs. GREGORIO VELASCO, ET AL. G.R. No. L-30460. March 12, 1929 FACTS: Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The defendants are residents of the Philippine Islands. It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company, at a meeting of the board of directors, approved and authorized various lawful purchases already made of a large portion of the capital stock of the company from its various stockholders with total amount of the capital stock unlawfully purchased was P3,300. At the time of such purchase, the corporation had accounts payable amounting to P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was its financial condition, in contemplation of an insolvency and dissolution. That on September 11, 1923, when the petition was filed for its dissolution upon the ground that it was insolvent, its accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over and above its liabilities. ISSUE: Whether or not the Corporation acted in bad faith in acquiring its own shares of stocks. RULING: YES. There is no stipulation or finding of facts as to what was the actual cash value of its accounts receivable. Neither is there any stipulation that those accounts or any part of them ever have been or will be collected, and it does appear that after his appointment on February 28, 1924, the receiver made a diligent effort to collect them, and that he was unable to do so, and it also appears from the minutes of the board of directors that the president and manager "recommended that P3,000 out of the surplus account to be set aside for dividends payable, and that payments be made in installments so as not to effect the financial condition of the corporation." It is very apparent that on June 24, 1922, the board of directors acted on assumption that, because it appeared from the books of the corporation that it had accounts receivable of the face value of P19,126.02, therefore it had a surplus over and above its debts and liabilities. Thus, in the purchase of its own stock to the amount of P3,300 and in declaring the dividends to the amount of P3,000, the real assets of the corporation were diminished P6,300. The corporation did not then have an actual bona fide surplus from which the dividends could be paid, and that the payment of them in full at the time would "affect the financial condition of the corporation." Creditors of a corporation have the right to assume so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.

230 | P a g e

Law 321_Corporation LAW_ Case Digest NIELSON & COMPANY, INC. vs. LEPANTO CONSOLIDATED MINING COMPANY G.R. NO. L-21601 DECEMBER 28, 1968 FACTS: Lepanto entered into a contract with Nielson wherein the latter was to manage and operate the mining properties of the former claiming to be a contract of agency. However, Nielson claims that the agreement is not one of agency.The phrase "Both parties to this agreement fully recognize that the terms of this agreement are made possible only because of the faith and confidence of the officials of each company have in the other" in paragraph XI of the management contract does not qualify the relation between Lepanto and Nielson as that of principal and agent based on trust and confidence, such that the contractual relation may be terminated by the principal at any time that the principal loses trust and confidence in the agent. Rather, that phrase simply implies the circumstance that brought about the execution of the management contract. In the annual report for 1936, submitted by Mr. C. A. Dewit, President of Lepanto, to its stockholders, under date of March 15, 1937, it states that instead of giving a monthly compensation to Nielson such was modified by giving the amount of P2,500 plus 10% of cash value of the dividends declared and paid by Lepanto. The Court ruled that from the foregoing statements in the annual report for 1936, and from the provision of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and manage its mines was principally in consideration of the know-how and technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a "detailed operating contract". ISSUE: Whether or not Nielson is entitled to receive shares of stock forming part of the stock dividend of Lepanto in lieu of the cash value of the dividends declared by Lepanto during the Japanese occupation. RULING: NO. Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or property then those shares do not fall under the category of "stock dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property, because services are equivalent to property.Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. In other words, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation. Thus, stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered. And so, in the case at bar, Nielson cannot be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract.

231 | P a g e

Law 321_Corporation LAW_ Case Digest COMMISSIONER OF INTERNAL REVENUE vs. MANNING, MCDONALD, SIMMONS AUGUST 06, 1975 FACTS: In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three respondents. In view of Reese's desire that upon his death MANTRASCO and its two subsidiaries, MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the management of the respondents, a trust agreement was executed by and among Reese, MANTRASCO ,the law firm of Ross, Selph, Carrascoso and Jand ,and the respondents . On October 19, 1954 Reese died. In 1955, after MANTRASCO made a partial payment of Reese's shares, the certificate for the 24,700 shares in Reese's name was cancelled and a new certificate was issued in the name of MANTRASCO, which was endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO. In 1963 the entire purchase price of Reese's interest in MANTRASCO was finally paid in full by the latter, In 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the shares which they were holding in trust. ISSUE: Whether or not the issuance of the notices of assessment for deficiency income taxes to the respondents for the year 1958 was proper. RULING: YES. A stock dividend always involves a transfer of surplus (or profit) to capital stock. A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend.' Congress itself has defined the term 'dividend' in No. 115(a) of the Act as meaning any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits. The declaration by the respondents and Reese's trustees of MANTRASCO's alleged treasury stock dividends in favor of the former, brings the ultimate purpose which the parties to the trust instrument aimed to realize: to make the respondents the sole owners of Reese's interest in MANTRASCO by utilizing the periodic earnings of that company and its subsidiaries to directly subsidize their purchase of the said interests, and by making it appear outwardly, through the formal declaration of nonexistent stock dividends in the treasury, that they have not received any income from those firms when, in fact, by that declaration they secured to themselves the means to turn around as full owners of Reese's shares. In other words, the respondents, using the trust instrument as a convenient technical device, bestowed unto themselves the full worth and value of Reese's corporate holdings with the use of the very earnings of the companies. Such package device, obviously not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment, e.g. the acquisition of additional facilities and other capital budget items, but exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to deflect the respondents' responsibilities toward our income tax laws. The conclusion is thus ineluctable that whenever the companies involved herein parted with a portion of their earnings "to buy" the corporate holdings of Reese, they were in ultimate effect and result making a distribution of such earnings to the respondents. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the respondents.

232 | P a g e

Law 321_Corporation LAW_ Case Digest MADRIGAL & COMPANY, INC. vs. HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS, THE HON. SECRETARY OF LABOR, and MADRIGAL CENTRAL OFFICE EMPLOYEES UNION G.R. No. L-48237. June 30, 1987 MADRIGAL & COMPANY, INC. vs. HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE EMPLOYEES UNION No. L-49023. June 30, 1987 FACTS: The petitioner was engaged, among several other corporate objectives, in the management of Rizal Cement Co., Inc.Admittedly, the petitioner and Rizal Cement Co., Inc. are sister companies.Both are owned by the same or practically the same stockholders.On December 28, 1973, the respondent, the Madrigal Central Office Employees Union, sought for the renewal of its collective bargaining agreement with the petitioner, which was due to expire on February 28, 1974.Specifically, it proposed a wage increase of P200.00 a month, an allowance of P100.00 a month, and other economic benefits.The petitioner, however, requested for a deferment in the negotiations. After the petitioner's failure to sit down with the respondent union, the latter, commenced a complaint for unfair labor practice.Pending the resolution of the case, the petitioner, in a letter informed the Secretary of Labor that Rizal Cement Co., Inc., "from which it derives income" had "ceased operating temporarily."In addition, because of the desire of the stockholders to phase out the operations of the Madrigal & Co., Inc. due to lack of business incentives and prospects, and in order to prevent further losses,it had to reduce its capital stock on two occasions, the Madrigal & Co., Inc. is without substantial income to speak of, necessitating a reorganization, by way of retrenchment, of its employees and operations. ISSUE: Whether or not the profits earned by the Corporation were in the nature of dividends declared on its shareholdings in other companies in the earning of which the employees had no participation whatsoever. RULING: NO. The Court agreed with the National Labor Relations Commission that "the dividends received by the company are corporate earnings arising from corporate investment."Indeed, as found by the Commission, the petitioner had entered such earnings in its financial statements as profits, which it would not have done if they were not in fact profits. Moreover, it is incorrect to say that such profits in the form of dividends are beyond the reach of the petitioner's creditors since the petitioner had received them as compensation for its management services in favor of the companies it managed as a shareholder thereof. As such shareholder, the dividends paid to it were its own money, which may then be available for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the absolute property of the stockholders and hence, out of reach by creditors of the corporation. Here, the petitioner was acting as stockholder itself, and in that case, the right to a share in such dividends, by way of salary increases, may not be denied its employees.

233 | P a g e

Law 321_Corporation LAW_ Case Digest REPUBLIC PLANTERS BANK vs. HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES G.R. No. 51765. March 3, 1997 FACTS: On September 18, 1961, private respondent Corporation secured a loan from petitioner in the amount of P120,000.00. Instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in the form of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the name of private respondent Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes. On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint anchored on private respondents' alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates. The trial court rendered the herein assailed decision in favor of private respondents ordering petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until full payment. ISSUES: Whether or not the corporation can declare dividends. RULING: YES. Under the old Corporation Law in force at the time the contract between the petitioner and the private respondents was entered into, it was provided that "no corporation shall make or declare any dividend except from the surplus profits arising from its business, or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution."Similarly, the present Corporation Codeprovides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price.A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation.The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.

234 | P a g e

Law 321_Corporation LAW_ Case Digest NORA A. BITONG vs. COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS. PUBLISHING CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA G.R. No. 123553. July 13, 1998 NORA A. BITONG vs. COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B. ESPIRITU (CA-G.R. No. 33873) July 13, 1998 FACTS: Bitong alleged that she was the treasurer and member of the BoD of Mr. & Mrs. Corporation. She filed a complaint with the SEC to hold respondent spouses Apostol liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs of the corporation to the prejudice of the stockholders. She alleges that certain transactions entered into by the corporation were not supported by any stockholders resolution. The complaint sought to enjoin Apostol from further acting as president-director of the corporation and from disbursing any money or funds. Apostol contends that Bitong was merely a holder-in-trust of the JAKA shares of the corporation, hence, not entitled to the relief she prays for. SEC Hearing Panel issued a writ enjoining Apostol. After hearing the evidence, SEC Hearing Panel dissolved the writ and dismissed the complaint filed by Bitong. Bitong appealed to the SEC en banc which reversed SEC Hearing Panel decision. Apostol filed petition for review with the CA. CA reversed SEC en banc ruling holding that Bitong was not the owner of any share of stock in the corporation and therefore, not a real party in interest to prosecute the complaint. ISSUE: Whether or not petitioner validly declared dividends. RULING: YES. The records show that the original stock and transfer book and the stock certificate book of Mr. & Ms. were in the possession of petitioner before their custody was transferred to the Corporate Secretary, Atty. Augusto San Pedro. On 25 May 1988, Assistant Corporate Secretary Renato Jose Unson wrote Mr.& Ms. about the lost stock and transfer book which was also noted by the corporation's external auditors, Punongbayan and Araullo, in their audit. Atty. Unson even informed respondent Eugenia D. Apostol as President of Mr. & Ms. that steps would be undertaken to prepare and register a new Stock and Transfer Book with the SEC. Incidentally, perhaps strangely, upon verification with the SEC, it was discovered that the general file of the corporation with the SEC was missing. Hence, it was even possible that the original Stock and Transfer Book might not have been registered at all. This simply shows that as of 1988 there still existed certain issues affecting the ownership of the JAKA shares, thus raising doubts whether the alleged transactions recorded in the Stock and Transfer Book were proper, regular and authorized. JAKA retained its ownership of Mr.& Ms. shares as clearly shown by its receipt of the dividends issued in December 1986. This only means, very obviously, that Mr.& Ms. shares in question still belonged to JAKA and not to petitioner. For, dividends are distributed to stockholders pursuant to their right to share in corporate profits. When a dividend is declared, it belongs to the person who is the substantial and beneficial owner of the stock at the time regardless of when the distribution profit was earned.

235 | P a g e

Law 321_Corporation LAW_ Case Digest COMMISSIONER OF INTERNAL REVENUE, vs. THE COURT OF APPEALS, COURT OF TAX APPEALS AND A. SORIANO CORPORATION G.R. NO. 108576; JANUARY 20, 1999 FACTS: Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with the same par value of the additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres. A month later, Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. Both sons are foreigners. By 1947, ANSCOR declared stock dividends. As of that date, the records revealed that he has total shareholdings of 185,154 shares, 50,495 of which are original issues and the balance of 134.659 shares as stock dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part of his estate. A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common shares each. ISSUE: Whether or not ANSCOR's redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable. RULING: YES. Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but enrichment through increase in value of capital investment." As capital, the stock dividends postpone the realization of profits because the "fund represented by the new stock has been transferred from surplus to capital and no longer available for actual distribution." In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet subject to income tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends.

236 | P a g e

Law 321_Corporation LAW_ Case Digest

To Enter into a Management Contract


WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY vs. SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ G.R. No. 75875. December 15, 1989 SANITARY WARES MANUFACTURING CORPORATION, et.al vs. THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR G.R. No. 75951 December 15, 1989 FACTS: In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners, European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on by an incorporated enterprise in the name of "Sanitary Wares Manufacturing Corporation." Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board of Investments for availment of incentives with the condition that at least 60% of the capital stock of the corporation shall be owned by Philippine nationals. ISSUES: Whether or not the ASI group may vote their additional equity during elections of Saniwares' board of directors. RULING: YES. In regard to the question as to whether or not the ASI group may vote their additional equity during elections of Saniwares' board of directors. As in other joint venture companies, the extent of ASI's participation in the management of the corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the nine directors shall be designated by ASI and the remaining six by the other stockholders, i.e., the Filipino stockholders. This allocation of board seats is obviously in consonance with the minority position of ASI. Having entered into a well-defined contractual relationship, it is imperative that the parties should honor and adhere to their respective rights and obligations thereunder. Appellants seem to contend that any allocation of board seats, even in joint venture corporations, are null and void to the extent that such may interfere with the stockholder's rights to cumulative voting as provided in Section 24 of the Corporation Code. On the one hand, the clearly established minority position of ASI and the contractual allocation of board seats cannot be disregarded. On the other hand, the rights of the stockholders to cumulative voting should also be protected.

237 | P a g e

Law 321_Corporation LAW_ Case Digest PHILIPPINE NATIONAL BANK vs. PRODUCERS' WAREHOUSE ASSOCIATION G.R. No. L-16510. January 9, 1922 FACTS: The plaintiff is a corporation organized under the banking laws of the Philippine while defendant is a domestic corporation doing a general warehouse business and the Philippine Fiber and Produce Company, to which hereafter refer as the Produce Company, is another domestic corporation. In May, 1916, the defendant, as party of the first part, entered into a written contract with the Produce Company, as party of the second part, in and by which "the above-named party of the second part is hereby named, constituted, and appointed as the general manager of the business of the party of the first part, in all of the branches thereof, with the duties, powers, authority and compensation hereinafter provided." It shall exercise a general and complete supervision over and management of the business of the party of the first part," and "shall direct, manage, promote and advance the said business, subject only to the control and instructions of the board of directors of the party of the first part." It is also alleged that in January, 1919, with the consent of the plaintiff, the Produce Company removed from the warehouse of the defendant 1,112.15 piculs of copra described in receipt No. 1255, of the declared value of P18,350. ISSUE: Whether or not the corporation has the power to enter into management contract. RULING: YES. Under the written contract between them, the Produce Company was the general manager of the defendant's warehouse business, and that it had authority to issue quedans in its name, and as its corporate act and deed. That the quedans in question are duly authenticated, and were duly issued by the defendant to, and in the name of, the Produce Company, and when issued were duly endorsed, and delivered to the plaintiff for value. For aught that appears in the record, the bank was acting in good faith, and the quedans were duly issued, endorsed and delivered to it as collateral in the ordinary course of business. Although there may have been fraud, there is no allegation or proof that the bank was a party to it, or had any knowledge of it, and this court has no right to assume that the bank was a party to a fraud. Giving to the quedans their legal force and effect, it must follow that at the time the demand was made; the bank was the owner and entitled to the possession of the copra therein described. The receipts call for 15,699.34 piculs of copra, but plaintiff admits that, with its consent, 1,112.15 piculs of copra, of the declared value of P18,350, were delivered to the Produce Company from and out of receipt No. 1255. This would leave 14,587.19 piculs of copra evidenced by the quedans.

238 | P a g e

Law 321_Corporation LAW_ Case Digest NIELSON & COMPANY, INC. vs. LEPANTO CONSOLIDATED MINING COMPANY G.R. NO. L-21601 DECEMBER 28, 1968 FACTS: Lepanto entered into a contract with Nielson wherein the latter was to manage and operate the mining properties of the former claiming to be a contract of agency. However, Nielson claims that the agreement is not one of agency.The phrase "Both parties to this agreement fully recognize that the terms of this agreement are made possible only because of the faith and confidence of the officials of each company have in the other" in paragraph XI of the management contract does not qualify the relation between Lepanto and Nielson as that of principal and agent based on trust and confidence, such that the contractual relation may be terminated by the principal at any time that the principal loses trust and confidence in the agent. Rather, that phrase simply implies the circumstance that brought about the execution of the management contract. In the annual report for 1936, submitted by Mr. C. A. Dewit, President of Lepanto, to its stockholders, under date of March 15, 1937, it states that instead of giving a monthly compensation to Nielson such was modified by giving the amount of P2,500 plus 10% of cash value of the dividends declared and paid by Lepanto. Thus, the contention of Lepanto that it had terminated the management contract in 1945, following the liberation of the mines from Japanese control, because the relation between it and Nielson was one of agency and as such it could terminate the agency at will, is, therefore, untenable. ISSUE: Whether or not the nature of the management contracta contract of agency. RULING: NO. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. Under the contract, Nielson had agreed, for a period of five years, with the right to renew for a like period, to explore, develop and operate the mining claims of Lepanto, and to mine, or mine and mill, such pay ore as may be found therein and to market the metallic products recovered therefrom which may prove to be marketable, as well as to render for Lepanto other services specified in the contract. Moreover, the contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract because it had lost its trust and confidence in Nielson. In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all, and if some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. Thus, by express stipulation of the parties, the management contract in question is not revocable at the will of Lepanto. The Court ruled that this management contract is not a contract of agency as defined in Article 1709 of the old Civil Code, but a contract of lease of services as defined in Article 1544 of the same Code.

239 | P a g e

Law 321_Corporation LAW_ Case Digest J. M. TUASON & CO., INC., represented by it Managing PARTNER, GREGORIA ARANETA, INC. vs. QUIRINO BOLAOS G.R. No. L-4935. May 28, 1954 FACTS: The complaint described the land as a portion of a lot registered in the name of the plaintiff and as containing an area of 13 hectares more or less. But the complaint was amended by reducing the area of 6 hectares after the defendant had indicated the plaintiffs surveyors the portion of the land claimed and occupied by him. The defendant set up the defense of prescription. After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right to the land in question and ordering him to restore possession thereof to plaintiff and to pay the latter a monthly rent. ISSUE: Whether or not the trial court erred in not dismissing the case on the ground that the case was not brought by the real party in interest. RULING: NO. There is nothing to the contention that the persent action is not brought by the real party in interest, that is, by J. Tuason & Co., Inc. The Rules of Court requires that action must be brought in the name of the real party in interest. The practice is for an attorney-at-law to bring the action that is to file the complaint, in the name of the plaintiff. That practice appears to have been followed in this case, since the case is signed by the law firm of Araneta and Araneta, counsel for plaintiff and commences with the statement comes plaintiff, through its undersigned counsel. It is true that the complaint also states that the plaintiff is represented herein by its Managing Partner Gregorio Araneta, Inc. another corporation, but there is nothing against one corporation being represented by another person, natural or juridical, in suit in court. The contention that Gregorio Araneta, Inc. cannot act as managing partner for plaintiff on the theory that it is illegal for two corporations to enter into partnership is without merit, for the true rule is that through a corporation has no power to enter into a partnership, it nevertheless enter into a joint venture with the another where the nature of that venture is in line with the business authorized by its charter.

240 | P a g e

Law 321_Corporation LAW_ Case Digest

Ultra Vires Acts


HEIRS OF ANTONIO PAEL and ANDREA ALCANTARA and CRISANTO PAEL vs. COURT OF APPEALS, JORGE H. CHIN and RENATO B. MALLARI G.R. No. 133547. December 7, 2001 MARIA DESTURA vs. COURT OF APPEALS, JORGE H. CHIN and RENATO B. MALLARI G.R. No. 133843. December 7, 2001 FACTS: PFINA acquired the properties from the Heirs of Pael by virtue of a deed of assignment dated January 25, 1983. It filed a motion to intervene before the Court of Appeals; however, before it filed its motion for intervention, or for a long period of fifteen (15) years, PFINA and the Heirs of Pael were totally silent about the alleged deed of assignment. No steps were taken by either of them to register the deed or secure transfer certificate of title evidencing the change of ownership during this long period of time. At the time PFINA acquired the disputed properties in 1983, its corporate name was PFINA Mining and Exploration, Inc., a mining company which had no valid grounds to engage in the highly speculative business of urban real estate development. ISSUE: Whether or not the title could produce legal effect. RULING: YES. Notwithstanding its belated filing, the motion for intervention of U.P. is granted, albeit the adjudication thereof shall be limited to a determination of the alleged overlapping or encroachment between U.P.s title, on the one hand, and respondents TCT Nos. 52928 and 52929, on the other hand. The Court highlighted the citation in the comment of Intervenor U.P., specifically citing the decision in Roberto A. Pael et al. v. Court of Appeals, et al., supra, wherein the title of the Paels was declared to be of dubious origin and a fabrication. Hence, since respondents derive their titles from a defective title, their titles should also be null and void. Considering the conflicting claims by U.P. and respondents, the ascertainment of boundaries of the lands they respectively claim becomes imperative. The instant cases have altogether taken more than eight (8) years. The boundaries of the properties covered by the disputed titles of respondents and the boundaries of the lands covered by the title of U.P. are not discussed therein. Thus, in order to avoid the institution of new cases and thus obviate further litigation, the case should be remanded to the Court of Appeals for reception of evidence relevant to determining the boundaries of the conflicting claims between U.P. and respondents Chin and Mallari over the property in dispute.

241 | P a g e

Law 321_Corporation LAW_ Case Digest PILIPINAS LOAN COMPANY, INC. vs. HON. SECURITES AND EXCHANGE COMMISSION AND FILIPINAS PAWNSHOP, INC. G.R. No. 104720. April 4, 2001 FACTS: Private respondent Filipinas Pawnshop, Inc. (private respondent) is a duly organized corporation registered with the Securities and Exchange Commission (SEC) on February 9, 1959. The articles of incorporation of private respondent states that its primary purpose is to extend loans at legal interest on the security of either personal properties or on the security of real properties, and to finance installment sales of motor vehicles, home appliances and other chattels. On September 11, 1990, private respondent filed a complaint against petitioner with the Prosecution and Enforcement Department (PED) of the SEC and alleged that petitioner, contrary to the restriction set by the Commission, has been operating and doing business as a pawnbroker, pawnshop or "sanglaan" in the same neighborhood where private respondent has had its own pawnshop for 30 years in violation of its primary purpose and without the imprimatur of the Central Bank to engage in the pawnshop business thereby causing unjust and unfair competition with private respondent. On October 18, 1990, petitioner filed its Comment/Answer questioning the power of the SEC to take cognizance of the complaint involving (1) a supposed violation of the Pawnshop Regulations Act which is more properly within the jurisdiction of the Central Bank; and (2) the determination of whether a corporate name is confusingly similar to another which is within the jurisdiction of the regular courts. Petitioner denied that it is engaged in the pawnshop business, alleging that it is a lending investor duly registered with the Central Bank. ISSUE: Whether or not Pilipinas Loan was acting beyond its authority. RULING: YES. A corporation, under the Corporation Code, has only such powers as are expressly granted to it by law and by its articles of incorporation,those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes and those which may be incident to its existence. In the case at bar, the limit of the powers of petitioner as a corporation is very clear, it is categorically prohibited from "engaging in pawnbroking as defined under PD 114". Hence, in determining what constitutes pawnbrokerage, the relevant law to consider is PD 114. This reference to PD 114 is also in line with Article 2123 of the Civil. Clearly, the recital in the complaint of Filipinas Pawnshop that Pilipinas Loan is engaged in the pawnshop business when it is not authorized to do so by its articles of incorporation amounts to fraud, detrimental not only to the corporation but also to the stockholders and the public. The billboards of Pilipinas loan uses the word SANGLAAN which cannot but give the impression to the public that its establishment is more of a pawnshop than a lending institution servicing different kinds of loans. The use of such word by petitioner was more calculated to attract customers who will acquire loans on the security of personal properties alone.

242 | P a g e

Law 321_Corporation LAW_ Case Digest ERNESTINA CRISOLOGO-JOSE vs. COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as VicePresident for Sales of Mover Enterprises, Inc G.R. No. 80599. September 15, 1989 FACTS: In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and sales; and the president of the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 payable to defendant Ernestina Crisologo-Jose. Since the check was under the account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation. However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid check as an alternate story. Plaintiff Ricardo S. Santos, Jr. did sign the check. It appears that the check was issued to defendant Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by said defendant over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong. However, since the compromise agreement was not approved within the expected period of time, the aforesaid check for P45,000.00 was replaced by Atty. Benares with another Traders Royal Bank check dated August 10, 1980, in the same amount. ISSUE: Whether or not the accommodation party is Mover Enterprises, Inc. and hence should be made liable. RULING: NO. The provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation thereon. By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so. Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith.

243 | P a g e

Law 321_Corporation LAW_ Case Digest IRINEO G. CARLOS vs. MINDORO SUGAR CO., ET AL. G.R. No. L-36207. October 26, 1932 FACTS: The Mindoro Sugar Company is a corporation constituted in accordance with the laws of the country and registered on July 30, 1917. According to its articles of incorporation, one of its principal purposes was to acquire and exercise the franchise granted by Act No. 2720 to George H. Fairchild, to substitute the organized corporation, the Mindoro Company, and to acquire all the rights and obligations of the latter and of Horace Havemeyer and Charles J. Welch in the so-called San Jose Estate in the Province of Mindoro. The Philippine Trust Company is another domestic corporation, registered on October 21, 1917. In its articles of incorporation, some of its purposes are expressed thus: "To acquire by purchase, subscription, or otherwise, and to invest in, hold, sell, or otherwise dispose of stocks, bonds, mortgages, and other securities, or any interest in either, or any obligations or evidences of indebtedness, of any other corporation or corporations, domestic or foreign. In pursuance of this resolution, the Mindoro Sugar Company executed in favor of the Philippine Trust Company the deed of trust transferring all of its property to it in consideration of the bonds it had issued to the value of P3,000,000. The Philippine Trust Company sold thirteen bonds, Nos. 1219 to 1231, to Ramon Diaz for P27,300, at a net profit of P100 per bond. The four bonds Nos. 1219, 1220, 1221, and 1222, here in litigation, are included in the thirteen sold to Diaz. The Philippine Trust Company paid the appellant, upon presentation of the coupons, the stipulated interest from the date of their maturity until the 1st of July, 1928, when it stopped payments; and thenceforth it alleged that it did not deem itself bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void. ISSUE: Whether or not Philippine Trust Company bound itself legally and acted within its corporate powers in guaranteeing the four bonds in question. RULING: YES. The Philippine Trust Company has full powers to acquire personal property such as the bonds in question. Being authorized to acquire the bonds, it was given implied power to guarantee them in order to place them upon the market under better, more advantageous conditions, and thereby secure the profit derived from their sale. It is not, however, ultra vires for a corporation to enter into contracts of guaranty or suretyship where it does so in the legitimate furtherance of its purposes and business. And it is well settled that where a corporation acquires commercial paper or bonds in the legitimate transaction of its business it may sell them, and in furtherance of such a sale it may, in order to make them the more readily marketable, indorse or guarantee their payment. Guaranties of payment of bonds taken by a loan and trust company in the ordinary course of its business, made in connection with their sale, are not ultra vires, and are binding.

244 | P a g e

Law 321_Corporation LAW_ Case Digest MARIA CLARA PIROVANO ET AL. vs. THE DE LA RAMA STEAMSHIP CO. G.R. No. L-5377. December 29, 1954 FACTS: Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain resolutions adopted by the Board of Directors and stockholders of the defendant company giving to said minor children of the proceeds of the insurance policies taken on the life of their deceased father Enrico Pirovano with the company as beneficiary. Defendant's main defense is: that said resolutions and the contract executed pursuant thereto are ultra vires, and, if valid, the obligation to pay the amount given is not yet due and demandable. Plaintiff-appellant Pirovano is the owner of 3424 shares of stocks in defendantappellee Corporation which declared a dividend of P100 per share. Appellant wants to recover from appellee the sum of P221, 975 after deducting the sum of P120, 424 which she had withdrawn or received from appellee for advances she received after the death of her father, the late Esteban de la Rama. Appellants theory is that the cash advances to her for her personal use and that of her children were assumed by Esteban de la Rama. She claims that the advances made to her by appellees were debited from the account of Hijos de I. de la Rama, another corporation practically owned by Esteban de la Rama. She further claims that the appellee can only deduct from the amount of dividend she is entitled to, the amount of cash advances which was not assumed by her father. The withdrawals by the appellant were made during the period 1940 to 1949 during which the appellee made a deed of trust with Hijos. The deed of trust was made to circumvent the prohibition of declaring dividends during the period. ISSUE: Whether or not the donation made by the corporation of the proceeds of the insurance is a valid act. RULING: YES. Even assuming that the donation was ultra vires, still it cannot be invalidated or declared legally ineffective for that reason alone, it appearing that the donation represents not only the act of the Board but also that of the stockholders themselves since they expressly ratified the resolution. By this ratification, the infirmity of the corporate act, if any, has been obliterated thereby making the act perfectly valid and enforceable, especially so if the donation is not merely executory but consummated. The defense of ultra vires cannot be set up against completed or consummated transactions. An ultra vires act may either be an act performed merely outside the scope of the powers granted to the corporation by its AOI or one which is contrary to law or violative of any principle which would void any contract. A distinction has to be made with respect to corporate acts which are illegal and those merely ultra vires. The former are contrary to law, morals, public order or policy, while the latter are not void ab initio, but merely go beyond the scope of the powers in the AOI, and which renders the act merely voidable and thus can be ratified by the stockholders. The defendant corporation, therefore, is now prevented or estopped from contesting the validity of the donation. This is especially so in this case when the very directors who conceived the idea of granting said donation are practically the stockholders themselves, with few nominal exceptions.

245 | P a g e

Law 321_Corporation LAW_ Case Digest REPUBLIC OF THE PHILIPPINES vs. ACOJE MINING COMPANY, INC. G.R. No. L-18062. February 28, 1963 FACTS: On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts requesting the opening of a post, telegraph and money order offices at its mining camp at Sta. Cruz, Zambales, to service its employees and their families that were living in said camp. Acting on the request, the Director of Posts wrote in reply stating that if aside from free quarters the company would provide for all essential equipment and assign a responsible employee to perform the duties of a postmaster without compensation from his office until such time as funds therefor may be available he would agree to put up the offices requested. The company in turn replied signifying its willingness to comply with all the requirements. On April 11, 1949, the Director of Posts again wrote a letter to the company stating among other things that "In cases where a post office will be opened under circumstances similar to the present, it is the policy of this office to have the company assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by reason of any act of dishonesty, carelessness or negligence on the part of the employee of the company who is assigned to take charge of the post office," thereby suggesting that a resolution be adopted by the board of directors of the company expressing conformity to the above condition relative to the responsibility to be assumed buy it in the event a post office branch is opened as requested. On September 2, 1949, the company informed the Director of Posts of the passage by its board of directors of a resolution The letter further states that the company feels that that resolution fulfills the last condition imposed by the Director of Posts and that, therefore, it would request that an inspector be sent to the camp for the purpose of acquainting the postmaster with the details of the operation of the branch office. ISSUE: Whether or not the act of the Board in issuing the said resolution of conformity was ultra vires. RULING: NO. The corporate act was a necessary corollary to promote the interest and welfare of the corporation. This is further bolstered by the fact that the opening of the post was upon the request of the company for the convenience and benefit of its employees, and not an idea of the Director of Posts. Thus, having benefited from the agreement, the corporation is estopped from raising the defense that the said corporate act by its board in conforming to the condition imposed by the Director of Posts is ultra vires. Neither can the corporation interpose the defense that its liability is only that of a guarantor. A mere reading of the resolution of the Board of Directors dated August 31, 1949, upon which the plaintiff based its claim, would show that the responsibility of the defendant company is not just that of a guarantor. The phraseology and the terms employed are so clear and sweeping and that the defendant assumed 'full responsibility for all cash received by the Postmaster.' Here the responsibility of the defendant is not just that of a guarantor. It is clearly that of a principal."

246 | P a g e

Law 321_Corporation LAW_ Case Digest REPUBLIC OF THE PHILIPPINES vs. SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D. BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR. G.R. No. L-20583. January 23, 1967 FACTS: The Articles of Incorporation of defendant corporation were registered with the Securities and Exchange Commission on March 27, 1961. Thereafter, the Board of Directors of the corporation adopted a set of by-laws which were filed with said Commission on April 5, 1961 On September 19, 1961, the Superintendent of Banks of the Central Bank of the Philippines asked its legal counsel an opinion on whether or not said corporation is a banking institution, within the purview of Republic Act No. 337; that, acting upon this request, on October 11, 1961, said legal counsel rendered an opinion resolving the query in the affirmative On March 9, 1961, the corporation had applied with the Securities and Exchange Commission for the registration and licensing of its securities under the Securities Act. However, SCACs registration of its Articles of Incorporation was denied on the ground that it has not complied with the requirements under the General Banking Act (RA No. 337). Later, a Search Warrant was issued against SCAC where documents and records relative to its business operation were seized. Even when SCAC was duly advised of the findings, SCAC and its BOD and Officers still continued operations prompting the Solicitor General to file a quo warranto proceedings for the dissolution of SCAC. ISSUE: Whether or not SCAC was illegally engaged in the business of banking. RULING: YES. In dissolving SCAC, the Court held that the corporation was indeed engaged in the business of banking without first securing the administrative authority required by RA No. 337. Although, admittedly, SCAC has not secured the requisite authority to engage in banking, defendants deny that its transactions partake of the nature of banking operations. Note however that, in consequence of their propaganda campaign, a total of 59,463 savings account deposits have been made by the public with SCAC and its 74 branches, with an aggregate deposit of P1,689,136.74, which has been lent out to such persons as SCAC deemed suitable. It is clear that these transactions partake of the nature of banking, as the term is used in Section 2 of RA No. 337. Indeed, a bank has been defined as: A moneyed institute founded to facilitate the borrowing, lending, and safe-keeping of money and to deal in notes, bills of exchange, and credits; an investment company which loans out the money of its customers, collects the interests, and charges a commission to both lender and borrower is a bank; any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised. The illegal transactions thus undertaken by SCAC to warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,643 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby.

247 | P a g e

Law 321_Corporation LAW_ Case Digest

BY-LAWS Function
DILY DANY NACPIL vs. INTERNATIONAL BROADCASTING CORPORATION G.R. No. 144767. March 21, 2002 FACTS: Petitioner was Assistant General Manager for Finance/Administration and Comptroller of private respondent Intercontinental Broadcasting Corporation (IBC) from 1996 until April 1997. According to petitioner, when Emiliano Templo was appointed to replace IBC President Tomas Gomez III sometime in March 1997, the former told the Board of Directors that as soon as he assumes the IBC presidency, he would terminate the services of petitioner. Apparently, Templo blamed petitioner, along with a certain Mr. Basilio and Mr. Gomez, for the prior mismanagement of IBC. Upon his assumption of the IBC presidency, Templo allegedly harassed, insulted, humiliated and pressured petitioner into resigning until the latter was forced to retire. However, Templo refused to pay him his retirement benefits, allegedly because he had not yet secured the clearances from the Presidential Commission on Good Government and the Commission on Audit. IBC filed a motion to dismiss contending that petitioner was a corporate officer who was duly elected by the Board of Directors of IBC; hence, the case qualifies as an intra-corporate dispute falling within the jurisdiction of the SEC. On the other hand, petitioner argues that he is not a corporate officer of IBC but an employee thereof since he had not been elected nor appointed as Comptroller and Assistant Manager by the IBC's Board of Directors but by an IBC General Manager. This is also because the IBC's By-Laws do not even include the position of comptroller in its roster of corporate officers.He therefore contends that his dismissal is a controversy falling within the jurisdiction of the labor courts. ISSUE: Whether or not petitioner is a corporate officer although the position of comptroller is not expressly mentioned in the by-laws. RULING: NO. The fact that the position of Comptroller is not expressly mentioned among the officers of the IBC in the By-Laws is of no moment, because the IBC's Board of Directors is empowered under Section 25 of the Corporation Code and under the corporation's By-Laws to appoint such other officers as it may deem necessary. The by-laws may and usually do provide for such other officers," and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the board of directors may also be empowered under the bylawsto create additional officers as may be necessary. Furthermore, as petitioner's appointment as comptroller required the approval and formal action of the IBC's Board of Directors to become valid, it is clear therefore holds that petitioner is a corporate officer whose dismissal may be the subject of a controversy cognizable by the SEC under Section 5(c) of P.D. 902-A which includes controversies involving both election and appointmentof corporate directors, trustees, officers, and managers. Had petitioner been an ordinary employee, such board action would not have been required.

248 | P a g e

Law 321_Corporation LAW_ Case Digest PMI COLLEGES vs. THE NATIONAL LABOR RELATIONS COMMISSION and ALEJANDRO GA LVA N G.R. No. 121466. August 15, 1997 FACTS: On July 7, 1991, petitioner, an educational institution offering courses on basic seaman's training and other marine-related courses, hired private respondent as contractual instructor with an agreement that the latter shall be paid at an hourly rate of P30.00 to P50.00, depending on the description of load subjects and on the schedule for teaching the same. Pursuant to this engagement, private respondent then organized classes in marine engineering. Initially, private respondent and other instructors were compensated for services rendered during the first three periods of the abovementioned contract. However, for reasons unknown to private respondent, he stopped receiving payment for the succeeding rendition of services. This claim of non-payment was embodied in a letter dated March 3, 1992, written by petitioner's Acting Director, Casimiro A. Aguinaldo, addressed to its President, Atty. Santiago Pastor, calling attention to and appealing for the early approval and release of the salaries of its instructors including that of private respondent. Private respondent's claims, were resisted by petitioner. Later in the proceedings, PMI Colleges manifested that Mr. Tomas Cloma Jr., a member of the board of trustees write a letter to the Chairman of the Board, clarifying the case of Galvan and stating therein, inter alia, that under PMIs by -laws only the Chairman is authorized to sign any contract and that Galvan, in any event, failed to submit documents on the alleged shipyard and plant visits in Cavite Naval Base. ISSUE: Whether or not the contract of employment of Galvan valid even if the signatory therein was not the Chairman of the Board. RULING: YES. The contract of employment is valid. The contract remained valid even if the signatory thereon was not the chairman of the board which allegedly violated petitioners by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same. No proof appears on record that private respondent ever knew anything about the provisions of the said by-laws. In fact, petitioner itself merely asserts the same without even bothering to attach a copy or excerpt thereof to show that there is such provision. That this allegation has never been denied to private respondent nor necessarily signify admission of its existence because technicalities of law and procedure and the rules obtaining in the courts of law do not strictly apply to proceeding of this nature.

249 | P a g e

Law 321_Corporation LAW_ Case Digest LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC. vs. CA, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO G.R. No. 117188 August 7, 1997 FACTS: Loyola Grand Villas Homeowners Association (LGVHA) was organized on February 8, 1983 as the association of homeowners and residents of the Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor of herein respondent Home Insurance and Guaranty Corporation (HIGC), as the sole homeowners' organization in the said subdivision. It was organized by the developer of the subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For unknown reasons, however, LGVHAI did not file its corporate by-laws. Sometime in 1988, the officers of the LGVHAI tried to register its by-laws but failed to do so. Then the officers that there were two other organizations within the subdivision the Loyola Grand Villas homeowners North Association Incorporated (North Association) and the Loyola Grand Villas homeowners South Association Incorporated (South Association). According to private respondents, a non-resident and Soliven himself, respectively headed these associations. They also discovered that these associations had five (5) registered homeowners each who were also the incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as member of the North Association while three (3) members of LGVHAI were listed as members of the South Association. When Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved because it did not submit its by-laws within the period required by the Corporation Code and there was nonuser of corporate charter because HIGC had not received any report on the association's activities. Apparently, this information resulted in the registration of the North and South Association. ISSUE: Whether or not failure of LGVHAI to file its by-laws within one month from the date of its incorporation result in its automatic dissolution. RULING: NO. The Supreme Court ruled that the non-filing of the by-laws within the period of 1 month from the issuance by SEC of the Certificate of Incorporation will not result to the automatic dissolution of the corporation because the word MUST in Sec 46 of the Corporation Code is merely directory not mandatory in meaning. In fact the second paragraph allows the filing of by-laws even prior to incorporation. This provision of the Code rules out mandatory compliance with the requirement of filing the by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes.

250 | P a g e

Law 321_Corporation LAW_ Case Digest CITIBANK, N.A. vs. HON. SEGUNDINO G. CHUA, SANTIAGO M. KAPUNAN and LUIS L. VICTOR, ASSOCIATE JUSTICES OF THE HON. COURT OF APPEALS, THIRD DIVISION, MANILA, HON. LEONARDO B. CANARES, Judge of Regional, Trial Court of Cebu, Branch 10, and SPOUSES CRESENCIO AND ZENAIDA VELEZ G.R. No. 102300. March 17, 1993 FACTS: Citibank is a foreign commercial banking corporation duly licensed to do business in the Philippines. Private respondents, spouses Cresencio and Zenaida Velez, who were good clients alleged that the petitioner bank extended to them credit lines sufficiently secured with real estate and chattel mortgages on equipment. They claim that a restructuring agreement has been entered into between them and the bank. However, the bank failed to comply thereto thus spouses Velez sued for specific performance and damages. On March 30, 1990, the date of the pre-trial conference, counsel for petitioner bank appeared, presenting a special power of attorney executed by Citibank officer Florencia Tarriela in favor of petitioner bank's counsel, the J.P. Garcia & Associates, to represent and bind petitioner bank at the pre-trial conference of the case at bar. Inspite of this special power of attorney, counsel for spouses Velez orally moved to declare petitioner bank as in default on the ground that the special power of attorney was not executed by the Board of Directors of Citibank. Thus petitioner bank executed another special power of attorney made by William W. Ferguson, Vice President and highest ranking officer of Citibank, Philippines, constituting and appointing the J.P. Garcia & Associates to represent and bind the BANK. Unsatisfied, private respondents moved again for declaration of default. Though the bank again executed anotherspecial power of attorney through William W. Ferguson in favor of Citibank employees, the court issued an order declaring petitioner bank as in default. The CA dismissed the petition filed by the bank. The CA relied on Section 46 of the Corporation Code to support its conclusion that the by-laws in question are without effect because they were not approved by the SEC. ISSUE: Whether or not petitioner bank's by-laws, which constitute the basis for Ferguson's special power of attorney in favor of petitioner bank's legal counsel are effective, considering that petitioner bank has been previously granted a license to do business in the Philippines. RULING: YES. Section 46 (which was relied upon by the CA) starts with the phrase "Every corporation formed under this Code", which can only refer to corporations incorporated in the Philippines. Hence, Section 46, in so far as it refers to the effectivity of corporate by-laws, applies only to domestic corporations and not to foreign corporations. On the other hand, Section 125 of the same Code requires that a foreign corporation applying for a license to transact business in the Philippines must submit, among other documents, to the SEC, a copy of its articles of incorporation and by-laws, certified in accordance with law. Unless these documents are submitted, the application cannot be acted upon by the SEC. Since the SEC will grant a license only when the foreign corporation has complied with all the requirements of law, it follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is an approval of the foreign corporations by laws. It may not have been made in express terms; still it is clearly an approval. Therefore, petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and effective in the Philippines. 251 | P a g e

Law 321_Corporation LAW_ Case Digest

When to Adopt and File


LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC. vs. CA, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO G.R. No. 117188 August 7, 1997 FACTS: Loyola Grand Villas Homeowners Association (LGVHA) was organized on February 8, 1983 as the association of homeowners and residents of the Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor of herein respondent Home Insurance and Guaranty Corporation (HIGC), as the sole homeowners' organization in the said subdivision. It was organized by the developer of the subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For unknown reasons, however, LGVHAI did not file its corporate by-laws. Sometime in 1988, the officers of the LGVHAI tried to register its by-laws but failed to do so. Then the officers that there were two other organizations within the subdivision the Loyola Grand Villas homeowners North Association Incorporated (North Association) and the Loyola Grand Villas homeowners South Association Incorporated (South Association). According to private respondents, a non-resident and Soliven himself, respectively headed these associations. They also discovered that these associations had five (5) registered homeowners each who were also the incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as member of the North Association while three (3) members of LGVHAI were listed as members of the South Association. When Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved because it did not submit its by-laws within the period required by the Corporation Code and there was nonuser of corporate charter because HIGC had not received any report on the association's activities. Apparently, this information resulted in the registration of the North and South Association. ISSUE: Whether or not failure of LGVHAI to file its by-laws within one month from the date of its incorporation result in its automatic dissolution. RULING: NO. The Supreme Court ruled that the non-filing of the by-laws within the period of 1 month from the issuance by SEC of the Certificate of Incorporation will not result to the automatic dissolution of the corporation because the word MUST in Sec 46 of the Corporation Code is merely directory not mandatory in meaning. In fact the second paragraph allows the filing of by-laws even prior to incorporation. This provision of the Code rules out mandatory compliance with the requirement of filing the by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes.

252 | P a g e

Law 321_Corporation LAW_ Case Digest

Authority to Elect Additional By-Laws Officers


HENRY FLEISCHER vs. BOTICA NOLASCO CO., INC. G.R. No. L-23241. March 14, 1925 FACTS: On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of five shares of stock of said corporation, by purchase from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the defendant refused to register said shares in his name in the books of the corporation in spite of repeated demands to that effect made by him upon said corporation, which refusal caused him damages amounting to P500. The defendant filed a demurrer on the ground that the amended complaint did not state facts sufficient to constitute a cause of action, and that said amended complaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the court. The defendant answered the amended complaint denying generally and specifically each and every one of the material allegations thereof, and, as a special defense, alleged that the defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said shares at the par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that said offer was refused by the plaintiff. The defendant prayed for a judgment absolving it from all liability under the complaint and directing the plaintiff to deliver to the defendant the five shares of stock in question, and to pay damages. ISSUE: Whether or not article 12 of the by-laws of the corporation is in conflict with the provisions of the Corporation Law (Act No. 1459). RULING: YES. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith. The by-law now in question was adopted under the power conferred upon the corporation by section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has transcended the limits fixed by law in the same section, and has not taken into consideration the provisions of section 35 of Act No. 1459. As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade. 253 | P a g e

Law 321_Corporation LAW_ Case Digest JOHN GOKONGWEI, JR., petitioner vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO et.al. respondents. G.R. No. L-45911 April 11, 1979. FACTS: Petitioner alleged that on September 18, 1976, individual respondents amended the by-laws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws 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, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. Petitioner averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being six (6) new directors. It was claimed that prior to the questioned March 13, 1961 amendment, petitioner had all the qualifications to be a director of respondent corporation, being a substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely provided for petitioner's disqualification and deprived him of his vested right as aforementioned, hence the amended by-laws are null and void. ISSUE: Whether or not the disqualification of Gokongwei Jr. to run for directorship of the corporation valid, as such was only provided in the amended by-laws of the corporation. RULING: YES. It is recognized by all authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.'" At common law, the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. 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." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. It is a settled that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ".An amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid."

254 | P a g e

Law 321_Corporation LAW_ Case Digest THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the AttorneyGeneral) vs. EL HOGAR FILIPINO G.R. No. L-26649 July 13, 1927 FACTS: This case has 17 causes of action proceeded by the Government of the Philippines through Quo Warranto alleging that El Hogar Filipino, a corporation organized as a mutual building and loan association under the provisions of the Corporation Law, has violated or went beyond its stated primary purposes for mutual building and loan associations. Under Corporation Law Section 171 to 190, inclusive, of this Act are devoted to the subject of building and loan associations, defining their objects making various provisions governing their organization and administration, and providing for the supervision to be exercised over them.. The respondent, El Hogar Filipino, was apparently the first corporation organized in the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success. The articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had been subscribed to the amount of P150,000 of which the sum of P10,620 had been paid in. Under the law as it then stood, the capital of the Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten millions. Soon thereafter the association took advantage of this enactment by amending its articles so as to provide that the capital should be in an amount not exceeding the then lawful limit. From the time of its first organization the number of shareholders has constantly increased, with the result that on December 31, 1925, the association had 5,826 shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its existence prior to the date last above-mentioned the association paid to withdrawing stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form of dividends among its stockholders the sum of P7,621,565.81. As one of the causes of action, the respondent is charged with having a provision in its by-laws stating that The board of directors of the association, by the vote of an absolute majority of its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is not desirable. ISSUE: Whether or not the provision of the by-laws valid. RULING: YES. The by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the by-laws has never been enforced, and in fact no attempt has ever been made by the board of directors to make use of the power therein conferred. It appears, however, that no annual meeting of the shareholders called since that date has been attended by a sufficient number of shareholders to constitute a quorum, with the result that the provision referred to has no been eliminated from the by-laws, and it still stands among the by-laws of the association, notwithstanding its patent conflict with the law.

255 | P a g e

Law 321_Corporation LAW_ Case Digest

Amendment and/or Rejection of By Laws


ENRIQUE SALAFRANCA vs. PHILAMLIFE (PVHA VILLAGE, HOMEOWNERS ASSOCIATION, INC.,et al., respondents. G.R. No. 121791 December 23, 1998 FACTS: Salafranca was hired as Administrative Officer by PVHA on May 1, 1981 and was extended successive appointments. Sometime in 1987, PVHA decided to amend its by-laws. Included therein was a provision regarding officers, specifically, the position of administrative officer under which said officer shall hold office at the pleasure of the Board of Directors. In a letter dated December 7, 1992, PVHA and Dazo informed Salafranca that they had decided to discontinue his services. Claiming that his services had been unlawfully and unceremoniously dispensed with, Salafranca filed a complaint for illegal dismissal with money claims and for damages. The LA held that respondents contention that complainants term of employment was co-terminous with the term of Office of the Board of Directors, is wanting in merit. The 1987 Amendment would not be applicable to the case of complainant who had become a regular employee long time before the Amendment took place. Moreover, the Amendment should be applied prospectively and not retroactively. On appeal, the NLRC reversed the decision of the LA. ISSUE: Whether or not Salafranca was legally dismissed by private respondents pursuant to the 1987 amendment in the By-laws. RULING: NO. Salafranca had already attained the status of a regular employee, as evidenced by his eleven years of service with PVHA. Accordingly, petitioner enjoys the right to security of tenure and his services may be terminated only for causes provided by law. While PVHA has the right to terminate the services of Salafranca, this is subject to both substantive and procedural grounds. PVHA failed to substantiate petitioners dismissal, rendering the latters termination illegal. In an effort to validate the dismissal of Salafranca, respondents posit the theory that the latters position is co-terminous with that of the Board of Directors, as provided for in its amended by-laws. Admittedly, 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. PVHAs insistence that it can legally dismiss Salafranca on the gro und that his tenure has expired is untenable. Salaranca, being 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 not find justification in the laws or the Constitution. If the Court was to rule otherwise, it 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. If PVHA wanted to make the Salafrancas position co-terminous with that of the Board of Directors, then the amendment must be effective after Salafrancas stay with PVHA, not during his term. Obviously, the measure taken by the private respondent in amending its by-laws is nothing but a devious, but crude, attempt to circumvent Salafrancas right to security of tenure as a regular employee guaranteed under the Labor Code.

256 | P a g e

Law 321_Corporation LAW_ Case Digest

MEETINGS OF STOCKHOLDERS AND THE BOARD OF DIRECTORS Notice Required


ROSITA PEA vs. COURT OF APPEALS G.R. No. 91478 February 7, 1991 FACTS: Pampanga Bus Co. (PAMBUSCO), original owners of the lots in question, mortgaged the same to the Development Bank of the Philippines (DBP) in consideration of P935,000.00. This mortgage was foreclosed. In the foreclosure, the said properties were awarded to Pea as highest bidder. Thereafter, the board of directors of PAMBUSCO, through (3) out of its (5) directors, resolved to assign its right of redemption over the aforesaid lots and authorized one of its members, Atty. Joaquin Briones "to execute and sign a Deed of Assignment for and in behalf of PAMBUSCO in favor of any interested party. Consequently, Briones executed a Deed of Assignment of PAMBUSCO's redemption right over the subject lots in favor of Enriquez. Thereafter, Enriquez executed a deed of absolute sale of the subject properties in favor of plaintiffs-appellants, the spouses Rising T. Yap and Catalina Lugue, for the sum of P140,000.00. Plaintiffs-appellants, the spouses Rising T. Yap and Catalina Lugue, are the registered owners of the lots in question. In the complaint filed, appellants sought to recover possession over the subject lands from defendants Rosita Pea and Washington Distillery on the ground that being registered owners, they have to enforce their right to possession against defendants who have been allegedly in unlawful possession thereof since October 1974 "when the previous owners assigned (their) right to collect rentals in favor of plaintiffs. After trial, a decision was rendered by the court in favor of the defendants. ISSUE: Whether or not the board resolution of PAMBUSCO is valid. RULING: NO. 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 cannot constitute a quorum and any act therein would not bind the corporation; all that the attending directors could do is to adjourn. Records show that PAMBUSCO ceased to operate as of November 15, 1949. Being a dormant corporation for several years, it was highly irregular, if not anomalous, for a group of three (3) individuals representing themselves to be the directors of PAMBUSCO to pass a resolution disposing of the only remaining asset of the corporation in favor of a former corporate officer. As a matter of fact, the three (3) alleged directors who attended the said meeting were not listed as directors of respondent PAMBUSCO. Furthermore, PAMBUSCO was insolvent and its only remaining asset was its right of redemption over the subject properties. Since the disposition of said redemption right of respondent PAMBUSCO by virtue of the questioned resolution was not approved by the required number of stockholders under the law, the said resolution, as well as the subsequent assignment to respondent Enriquez should be struck down as null and void.

257 | P a g e

Law 321_Corporation LAW_ Case Digest

Quorum Required
THE BOARD OF DIRECTORS And ELECTION COMMITTEE OF THE SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL. vs. HON BIENVENIDO A. TAN, ETC., ET AL. G.R. No. L-12282 1959 March 31 FACTS: On January 17, 1957 John de Castillo et al., commenced a suit in the Court of First Instance of Manila to declare null and void the election of the members of the board of directors of the SMB Workers Savings and Loan Association, Inc. and of the members of the Election Committee for the year 1957 held on January 11 and 12 and to compel the board of directors of the association to call for and hold another election in accordance with its constitution and by-laws and the Corporation Law. Such was granted by the court, however, another suit was filed alleging that the subsequent meeting for the elections would not be in accordance with the constitution and by-laws regarding notice to the stockholders. ISSUE: Whether or not proper notice was given as regards the new meeting for the elections of the board of directors. RULING: NO. There was no proper notice. Notice of a special meeting of members should be given at least five days before the date of the meeting. It appears that the notice was posted on 26 March and the election was set for 28 March. Therefore, the five days previous notice required would not be complied with.

258 | P a g e

Law 321_Corporation LAW_ Case Digest

Who Presides
ABELARDO JAVELLANA, TOMAS JONCO, et al., in their capacities as Councilors of the Municipal Municipality of Buenavista, Province of Iloilo vs. SUSANO TAYO, as Mayor of the Municipal Municipality of Buenavista, Iloilo G.R. No. L-18919 December 29, 1962 FACTS: Petitioners were members of the municipal council. On several sessions, the mayor, herein defendant, was absent prompting the council to decide emong themselves as to who to appoint as presiding officers. The mayor refused to act on the resulting minutes also refused to sign the payrolls of the council covering the per diems of the petitioners, alleging that the proceedings were illegal due to his absence. Despite the Provincial Fiscal and the Provincial Board upholding the controverted sessions of the Municipal Council, the Mayor refused and still refuses to recognize the validity of the acts of the Municipal Council and the legality of its regular session held in his absence. The trial court ruled that attendance of the Mayor is not essential to the validity of the session as long as there is quorum constituted in accordance with law. To declare that the proceedings of the petitioners were null and void, is to encourage recalcitrant public officials who would frustrate valid sessions for political end or consideration. ISSUE: Whether or not the sessions held by petitioners were valid and legal, having constituted a quorum, and despite the absence of the defendant. RULING: YES. The term "quorum" has been defined as "that number of members of the body which, when legally assembled in their proper places, will enable the body to transact its proper business, or, in other words, that number that makes a lawful body and gives it power to pass a law or ordinance or do any other valid corporate act. The Revised Administrative Code states that for the majority of the members of the council to constitute a quorum to do business, the council "shall be presided by the Mayor and no one else. The procedure, as provided in the Administrative Code, provides that in case of temporary incapacity of the mayor, the council member having the highest number of votes can sit as presiding officer. This rule on incapacity was declared as valid by the court in the case. Thus, the quorum requirement was satisfied despite the continuous absence of the mayor on those scheduled sessions. Thus, the questioned sessions and the resulting resolutions were declared valid.

259 | P a g e

Law 321_Corporation LAW_ Case Digest

Who Could Attend and Vote


JULIO E. T. SALES and GEORGE V. AGONIAS and SMEC vs. SEC, SIHI and ATCO, represented by its President, ANSELMO TRINIDAD; VIMC, represented by its President, et al. G.R. No. 54330 January 13, 1989 FACTS: SMEC sold 200M common shares of its capital stock in the amount of P2.6M to SIHI under a Sales Agreement providing that the sale shall be only up to 5m shares per buyer. SIHI requested for the transfer of the 200M shares to ATCO to which SMEC complied. During the time that ATCO held the shares, it voted them in the SHs' meetings of SMEC. ATCO in turn sold 198,500,000 of the shares to respondent VIMC. Upon request, SMEC BOD issued a resolution directing its President to sign the certificate of stock that would effect the transfer. Before the 1979 annual SH meeting of SMEC, petitioners sought to nullify the sales of the shares to VIMC with the SEC and to enjoin VIMC from voting the said shares. VIMC was temporarily restrained and the meeting was held without the participation of VIMCs shares and BODs were elected only from the group of petitioners. In VIMCs answer, it questioned the said election. SEC denied the petition as well as motion to dismiss and lifted the Restraining it issued earlier and allowed the shares of VIMC to be counted in determining the quorum of the 1980 annual SHs meeting, which was already near, and the same shares were allowed to vote and be voted for. Before the SC, petitioners contended that the SEC gravely abused its discretion in not enjoining the participation of VIMC in the 1980 election considering that the sale of the shares to VIMC was null and void as it was done in violation of the Sales Agreement on the limit of shares to be sold to each buyer and that VIMCs ownership of the shares is contrary to Sec. 13 (5A) of the old corporation law. ISSUE: Whether or not SEC acted with grave abuse of discretion in not permanently enjoining VIMC in voting. RULING: NO. SC found no grave abuse of discretion on the part of the SEC in not restraining VIMC. It adopted the SEC resolution stating that the sale of the shares of stock had long been perfected and is presumed valid until declared otherwise. As against this presumption, petitioners' prayer for injunction cannot prevail as the issue of the validity of the sale is still to be resolved by the SEC. Considering that the shares constitute the majority, it is more equitable that the same be allowed to vote rather than be enjoined. As it has been ruled the removal of a majority SH from the management of the corporation and/or the dissolution of a corporation in a suit filed by a minority SH is a drastic measure. It should be resorted to only when the necessity is clear. With more reason, the Court will not deprive a SH of his right to vote his shares in the annual SHs' meeting, except upon a clear showing of its lawful denial under the articles of incorporation or by-laws of the corporation, as it is a right inherent in stock ownership.

260 | P a g e

Law 321_Corporation LAW_ Case Digest DOMINGO PONCE AND BUHAY PONCE vs. DEMETRIO B. ENCARNACION AND POTENCIANO GAPOL G.R. NO. L-5883 NOVEMBER 28, 1953 FACTS: Daguhoy Enterprises, Inc., was duly registered as such on 24 June 1948. On 16 April 1951 at a meeting duly called, the voluntary dissolution of the corporation and the appointment of Gapol as receiver were agreed upon and to that end a petition for voluntary dissolution was drafted which was sent to, and signed by, the petitioner Domingo Ponce. Instead of filing the petition for voluntary dissolution of the corporation as agreed upon, Gapol, who is the largest stockholder, changed his mind and filed a complaint in the CFI of Manila to compel the petitioners to render an accounting of the funds and assets of the corporation, to reimburse it, jointly and severally, a total sum of P18,690, plus interest, which have been converted by the petitioner Domingo Ponce to his own use and benefit. On 18 May 1951 Gapol filed a motion praying that the petitioners be removed as members of the board of directors which was denied by the court. On 3 January 1952 Gapol filed a petition praying for an order directing him to call a meeting of the stockholders of the corporation and to preside at such meeting in accordance with section 26 of the Corporation Law. Two-days later, without notice to the petitioners and to the other members of the board of directors and in violation of the Rules of Court which require that the adverse parties be notified of the hearing of the motion three days in advance, the respondent court issued the order as prayed for. ISSUE: Whether or not under and pursuant to section 26 of the Corporation Law, the respondent court may issue the order complained of. RULING: NO. Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides: The Board of Directors shall compose of five (5) members who shall be elected by the stockholders in a general meeting called for that purpose which shall be held every even year during the month of January. Article 22 of the by-laws provides: The Chairman shall have the right to fix the date, the time and the place where the general meeting shall be held, either special or general. Section 26 of the Corporation Code provides: - Whenever, from any cause, there is no person authorized to call a meeting, or when the officer authorized to do so refuses, fails, or neglects to call a meeting, any judge of a Court of First Instance, on the showing of good cause therefor, may issue an order to any stockholder or member of a corporation, directing him to call a meeting of the corporation by giving the proper notice required by this Act or the by-laws; and if there be no person legally authorized to preside at such meeting, the judge of the Court of First Instance may direct the person calling the meeting to preside at the same until a majority of the members or stockholders representing a majority of the stock present and permitted by law to be voted have chosen one of their number to act as presiding officer for the purposes of the meeting. Petitioners were not deprived of their right without due process of law. They had no right to continue as directors of the corporation unless reelected by the stockholders in a meeting called for that purpose every even year.

261 | P a g e

Law 321_Corporation LAW_ Case Digest SALVADOR P. LOPEZ vs. ERICTA G.R. No. L-32991 June 29, 1972 FACTS: The first such appointment was extended on April 27, 1970, "effective May 1, 1970 until April 30, 1971, unless sooner terminated and subject to the appproval of the Board of Regents and to pertinent University regulations." Pursuant thereto Dr. Blanco assumed office as ad interim Dean on May 1, 1970. The Board of Regents met on May 26, 1970, and President Lopez submitted to it the ad interim appointment of Dr. Blanco for reconsideration. The minutes of that meeting disclose that "the Board voted to defer action on the matter in view of the objections cited by Regent Kalaw based on the petition against the appointment, addressed to the Board, from a majority of the faculty and from a number of alumni Dr. Blanco's appointment had lapsed. On May 26, 1970, President Lopez extended another ad interim appointment to her, effective from May 26, 1970 to April 30, 1971, with the same conditions as the first.However, such ad interim appointment had not been confirmed by the Board of Regents. Due to the following votes: 5-yes, 3-no and 4-abstain. On August 18, 1970 Dr. Blanco wrote the President of the University, protesting the appointment of Oseas A. del Rosario as Officer-in-Charge of the College of Education. Neither communication having elicited any official reply, Dr. Blanco went to the Court of First Instance of Quezon City on a petition for certiorari and prohibition with preliminary injunction. ISSUE: Whether or not respondent Dr. Consuelo S. Blanco was duly elected Dean of the College of Education, University of the Philippines, in the meeting of the Board of Regents on July 9, 1970. RULING: NO. The votes of abstention, viewed in their setting, can in no way be construed as votes for confirmation of the appointment. There can be no doubt whatsoever as to the decision and recommendation of the three members of the Personnel Committee: it was for rejection of the appointment. No inference can be drawn from this that the members of the Personnel Committee, by their abstention, intended to acquiesce in the action taken by those who voted affirmatively. Neither, for that matter, can such inference be drawn from the abstention that he was abstaining because he was not then ready to make a decision. Dr. Blanco was clearly not the choice of a majority of the members of the Board of Regents, as unequivocally demonstrated by the transcript of the proceedings. This fact cannot be ignored simply because the Chairman, in submitting the question to the actual vote, did not frame it as accurately as the preceding discussion called for, such that two of the Regents present (Silva and Kalaw) had to make some kind of clarification.

262 | P a g e

Law 321_Corporation LAW_ Case Digest

VOTING Who May Exercise


Wilson P. Gamboa vs. Finance Secretary Margarito Teves, et al., G.R. No. 176579, June 28, 2011 FACTS: This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT). The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%, thus: Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. (Emphasis supplied) ISSUE: Whether or not the term capital in Section 11, Article XII of the Constitution refer to the total common shares only, or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility. HELD: YES. Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have the right to vote in the election of directors, then the term capital shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term capital in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors. To construe broadly the term capital as the total outstanding capital stock, including both common and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the State shall develop a self -reliant and independent national economy effectively controlled by Filipinos. A broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public utility.

263 | P a g e

Law 321_Corporation LAW_ Case Digest Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors. PLDTs Articles of Incorporation expressly state that the holders of Serial Preferred Stock shall not be entitled to vote at any meeting of the stockholders for the election of directors or for any other purpose or otherwise participate in any action taken by the corporation or its stockholders, or to receive notice of any meeting of stockholders. On the other hand, holders of common shares are granted the exclusive right to vote in the election of directors. PLDTs Articles of Incorporation state that each holder of Common Capital Stock shall have one vote in respect of each share of such stock held by him on all matters voted upon by the stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for the election of directors and for all other purposes. It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS), which is a document required to be submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of PLDTs common shares, while Fi lipinos hold only 35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution. As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility.

264 | P a g e

Law 321_Corporation LAW_ Case Digest PHILIPPINE COCONUT PRODUCERS FEDERATION, INC. (COCOFED), et al. vs. REPUBLIC OF THE PHILIPPINES G.R. Nos. 177857-58 February 11, 2010 FACTS: The Court, in its earlier resolution adverted to, approved, upon motion of petitioner Philippine Coconut Producers Federation, Inc. (COCOFED), the conversion of the sequestered 753,848,312 Class "A" and "B" common shares of San Miguel Corporation (SMC), registered in the name of Coconut Industry Investment Fund (CIIF) Holding Companies (hereunder referred to as SMC Common Shares), into 753,848,312 SMC Series 1 Preferred Shares. The oppositors herein made the following arguments: (1) economic disadvantage and harm that government might suffer by such proposed conversion; (2) they question the wisdom of PCGG in converting those sequestered shares; (3) that the conversion is invalid in view of the Commission on Audit Circular No. 89- 296 which provides that disposal of government property must be undertaken via public Auction; (4) that the conversion thereof needs the acquiescence of the 14 CIIF companies; (5) As to the Motion to Intervene by UCPB, that it should be the sole depositary of the proceeds of the dividends. ISSUE: Whether or not the arguments of the Oppositors herein have merits. RULING: NO. Anent the 1st contention, it is not tenable because in fact this conversion is a business strategy to preserve and conserve the value of the Governments interest in the CIIF SMC shares. As to the 2nd argument, it is also untenable because it is not within the Courts to determine wisdom of other agencies of the government. As to the 3rd argument, likewise untenable because FIRST, there is really no disposal of SMC shares and SECOND, there is no yet government assets to talk about because the ownership thereto is still to be determined, hence, those shares are akin to properties subject of attachment. As to the 4th contention, PCGG need not obtain the acquiescence of the owners of those sequestered shares with respect to any of its acts intended to preserve such assets. Otherwise, it would be impossible for it to perform its function as provided by law. And as to the 5th argument, it is also of no merit because the Court has the discretion where to deposit those net dividends, whether it be on Development Bank of the Philippines/ Land Bank of the Philippines or the UCPB.

265 | P a g e

Law 321_Corporation LAW_ Case Digest REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) vs. COCOFED, ET AL. and BALLARES, ET AL., EDUARDO M. COJUANGCO JR. and the SANDIGANBAYAN (First Division) G.R. No. 147062-64 December 14, 2001 FACTS: On the explicit premise that 'vast resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad,' the Presidential Commission on Good Government (PCGG) was created by Executive Order No. 1 to assist the President in the recovery of the ill-gotten wealth thus accumulated whether located in the Philippines or abroad. Several executive orders were then issued describing the properties to be recovered.Among the properties sequestered by the Commission were shares of stock in the United Coconut Planters Bank (UCPB) registered in the names of the alleged "one million coconut farmers," the so-called Coconut Industry Investment Fund companies (CIIF companies) and Private Respondent Eduardo Cojuangco Jr. Six years later, on February 13, 2001, the Board of Directors of UCPB received from the ACCRA Law Office a letter written on behalf of the COCOFED and the alleged nameless one million coconut farmers, demanding the holding of a stockholders' meeting for the purpose of, among others, electing the board of directors. In response, the board approved a Resolution calling for a stockholders' meeting on March 6, 2001 at three o'clock in the afternoon. However, the same was meted by a Class Action Omnibus Motion seeking to enjoin PCGG from voting the UCPB shares of stock registered in the respective names of the more than one million coconut farmers; and to enjoin the PCGG from voting the SMC shares registered in the names of the 14 CIF holding companies including those registered in the name of the PCGG. ISSUE: Whether or not PCGG may vote the sequestered UCPB shares while the main case for their reversion to the State is pending in the Sandiganbayan. RULING: YES. The SC holds that the government should be allowed to continue voting those shares inasmuch as they were purchased with coconut levy funds since those are prima facie public in character or, at the very least, are "clearly affected with public interest." The general rule is that the registered owner of the shares of a corporation exercises the right and the privilege of voting. This principle applies even to shares that are sequestered by the government, over which the PCGG as a mere conservator cannot, as a general rule, exercise acts of dominion. On the other hand, it is authorized to vote these sequestered shares registered in the names of private persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered test. Unfortunately, this test is not applicable under the circumstances of this case. Hence, the Court granted PCGG the right to vote the sequestered shares because they appeared to be assets belonging to the government itself.

266 | P a g e

Law 321_Corporation LAW_ Case Digest RAMON C. LEE and ANTONIO DM. LACDAO vs. THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS GONZALES G.R. No. 93695 February 4, 1992 FACTS: In 1985, a complaint for sum of money was filed by the International Corporate Bank, Inc. against the private respondents who, in turn, filed a third party complaint against Alfa Integrated Textile Mills (ALFA) and the petitionersRamon C. Lee and Antonio Dm. Lacdao who were officers of ALFA. Meanwhile, in 1988, the trial court issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of the petitioners' letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the Development Bank of the Philippines (DBP). In a manifestation, the DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence. ISSUE: Whether or not despite the execution of the Voting Trust Agreement, the summons be served upon the petitioners who were officers and directors of ALFA (the trustor). RULING: NO. There is no dispute as to the most immediate effect of a voting trust agreement on the status of a stockholder who is a party to its execution from legal titleholder or owner of the shares subject of the voting trust agreement, he becomes the equitable or beneficial owner. Note that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stocks covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case before the execution of the subject voting trust agreement. There appears to be no dispute from the records that DBP has taken over full control and management of the firm.

267 | P a g e

Law 321_Corporation LAW_ Case Digest Republic of the Philippines (Presidential Commission on Good Government), vs. Sandiganbayan GR 107789 30 April 2003 FACTS: On 7 August 1991, the PCGG conducted an Eastern Telecommunications, Philippines, Inc. (ETPI) stockholders meeting during which a PCGG controlled board of directors was elected. A special stockholders meeting was later convened by the registered ETPI stockholders wherein another set of board of directors was elected, as a result of which two sets of such board and officers were elected. Victor Africa, a stockholder of ETPI, alleging that the PCGG had since been "illegally 'exercising' the rights of stockholders of ETPI," especially in the election of the members of the board of directors, filed a motion before the Sandiganbayan, prayed that said court order the "calling and holding of the ETPI annual stockholders meeting for 1992 under the court's control and supervision and prescribed guidelines." The PCGG did not object to Africa's motion provided that "(1) An Order be issued upholding the right of PCGG to vote all the Class "A" shares of ETPI; (2) In the alternative, in the remote event that PCGG's right to vote the sequestered shares be not upheld, an Order be issued (a) disregarding the Stock and Transfer Book and Booklet of Stock Certificates of ETPI in determining who can vote the shares in an Annual Stockholders Meeting of ETPI, (b) allowing PCGG to vote 23.9% of the total subscription in ETPI, and (c) directing the amendment of the Articles of Incorporation and By-laws of ETPI providing for the minimum safeguards for the conservation of assets prior to the calling of a stockholders meeting. The Sandiganbayan resolved Africa's motion, ordering the conduct of an annual stockholders meeting of ETPI, for 1992. Assailing the foregoing resolution, the PCGG filed before the Supreme Court a petition for Certiorari, Mandamus and Prohibition. ISSUE: Whether or notthe PCGG can vote the sequestered ETPI Class "A" shares in the stockholders meeting for the election of the board of directors. RULING: YES. The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or to amend the Articles of Incorporation for the purpose of increasing the authorized capital stock unless there is a prima facie evidence showing that said shares are illgotten and there is an imminent danger of dissipation. (2)The ETPI Stock and Transfer Book should be the basis for determining which persons have the right to vote in the stockholders meeting for the election of the ETPI Board of Directors. (3) The PCGG is entitled to vote the shares ceded to it by Roberto S. Benedicto and his controlled corporations under the Compromise Agreement, provided that the shares are first registered in the name of the PCGG. The PCGG may not register the transfer of the Malacaang and the Nieto shares in the ETPI Stock and Transfer Book; however, it may vote the same as conservator provided that the PCGG satisfies the two-tiered test devised by the Court in Cojuangco v. Calpo. (4) The safeguards laid down in the case of Cojuangco v. Roxas shall be incorporated in the ETPI Articles of Incorporation substantially contemporaneous to, but not before, the election of the ETPI Board of Directors. (5) Members of the Sandiganbayan shall not participate in the stockholders meeting for the election of the ETPI Board of Directors.

268 | P a g e

Law 321_Corporation LAW_ Case Digest

Voting Trust Agreement


ROSAURA P. CORDON vs. JESUS BALICANTA A.C. No. 2797 October 4, 2002 FACTS: Sometime in the early part of 1981, respondent enticed complainant and her daughter to organize a corporation that would develop the said real properties into a high-scale commercial complex with a beautiful penthouse for complainant. Relying on these apparently sincere proposals, complainant and her daughter assigned 19 parcels of land to Rosaura Enterprises, Incorporated, and a newly-formed and duly registered corporation in which they assumed majority ownership. The subject parcels of land were then registered in the name of the corporation. Thereafter, respondent single-handedly ran the affairs of the corporation in his capacity as Chairman of the Board, President, General Manager and Treasurer. The respondent also made complainant sign a document which turned out to be a voting trust agreement. Respondent likewise succeeded in making complainant sign a special power of attorney to sell and mortgage some of the parcels of land she inherited from her deceased husband. She later discovered that respondent transferred the titles of the properties to a certain Tion Suy Ong who became the new registered owner thereof. Respondent never accounted for the proceeds of said transfers. Other spurious transactions not approved by the Board were entered into by the defendant through spurious board resolutions. ISSUE: Whether or not there was really a voting trust agreement made by the complainant in favor of the defendant. RULING: NO. The claim is baseless. The voting trust referred to by respondent, even if it were assumed to be valid, covered only 266 shares of complainants yet she owned a total of 1,039 shares after she and her daughter ceded in favor of the corporation 19 parcels of land. Being a former lawyer to complainant, respondent should have ensured that her interest was safeguarded. Yet, complainant was apparently and deliberately left it on the pretext that, she had executed a voting trust agreement in favor of respondent. It is suspicious that complainant was made to sign a voting trust agreement on 21 August 1981 and immediately thereafter, the resolutions authorizing respondent to obtain a loan and to mortgage the 9 parcels of land were passed and approved. It is further worth noting that complainants voting trust where she allegedly entrusted 266 shares to respondent on August 21, 1981 had only a validity of 5 years. Thus, she should have had her entire holdings of 1,283 shares back in her name in August 1986.Respondents purported minutes of stockholders meeting do not reflect this. There was no explanation whatsoever from respondent on how complainant and her daughter lost their 97% control holding in the corporation. Respondent cannot take refuge in the contested voting trust agreement supposedly executed by complainant and her daughter for the reason that it authorized respondent to represent complainant for such matters. Moreover the factual findings of the investigating commission, affirmed by the IBP Board, disclosed that complainant and her daughter own 1,711 out of 1,750 shares of the outstanding capital stock of the corporation, based on the Articles of Incorporation and deeds of transfer of the properties. But respondents evidence showed that complainant had only 266 shares of stock in the corporation while her daughter had none, notwithstanding the fact that there was nothing to indicate that complainant and her daughter ever conveyed their shares to others. 269 | P a g e

Law 321_Corporation LAW_ Case Digest NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO vs. HON. BENJAMIN AQUINO, et al. G.R. No. L-34192 June 30, 1988 FACTS: Batjak, is a Filipino-American corporation which has indebtedness to Philippine National Bank (PNB) amounted to P11,915,000.00, As security for the payment of its obligations and advances against shipments, Batjak mortgaged its three (3) cocoprocessing oil mills to Manila Bank, Republic Bank , and PCIB, respectively. In need for additional operating capital to place the three (3) coco-processing mills at their optimum capacity and maximum efficiency and to settle, pay or otherwise liquidate pending financial obligations with the different private banks, Batjak applied to PNB for additional financial assistance. A Financial Agreement was submitted by PNB to Batjak for acceptance which was duly accepted by Batjak. Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any mortgages they held on the properties of Batjak. Batjak executed a first mortgage in favor of PNB on all its properties A Voting Trust Agreement was executed in favor of NIDC by the stockholders representing 60% of the outstanding paid-up and subscribed shares of Batjak. This agreement was for a period of five (5) years and, upon its expiration, was to be subject to negotiation between the parties. Forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings against the oil mills of Batjak. The properties were sold to PNB as the highest bidder. Three years thereafter, Batjak wrote a letter to NIDC inquiring if the latter was still interested in negotiating the renewal of the Voting Trust Agreement. Batjak wrote another letter to NIDC informing the latter that Batjak would now safely assume that NIDC was no longer interested in the renewal of said Voting Trust Agreement. ISSUE: Whether or not the NIDC and PNB acquired ownership over the assets of Batjak despite a voting trust agreement between Batjaks stockholders and NIDC. RULING: YES. What was assigned to NIDC was the power to vote the shares of stock of the stockholders of Batjak, representing 60% of Batjak's outstanding shares, and who are the signatories to the agreement. The power entrusted to NIDC also included the authority to execute any agreement or document that may be necessary to express the consent or assent to any matter, by the stockholders. Nowhere in the said provisions or in any other part of the Voting Trust Agreement is mention made of any transfer or assignment to NIDC of Batjak's assets, operations, and management. NIDC was constituted as trustee only of the voting rights of 60% of the paid-up and outstanding shares of stock in Batjak. Under the provision on termination what was to be returned by NIDC as trustee to Batjak's stockholders, upon the termination of the agreement, are the certificates of shares of stock belonging to Batjak's stockholders, not the properties or assets of Batjak itself which were never delivered, in the first place to NIDC, under the terms of said Voting Trust Agreement. A voting trust transfers only voting or other rights pertaining to the shares subject of the agreement or control over the stock hence the acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak.

270 | P a g e

Law 321_Corporation LAW_ Case Digest LEON J. LAMBERT vs. T. J. FOX G.R. No. L-7991 January 29, 1914 FACTS: Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery business, found itself in such condition financially that its creditors, including the plaintiff and the defendant, together with many others, agreed to take over the business, incorporate it and accept stock therein in payment of their respective credits. This was done, the plaintiff and the defendant becoming the two largest stockholders in the new corporation called John R. Edgar & Co., Incorporated. A few days after the incorporation was completed plaintiff and defendant entered into an agreement whereby the shockholders mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one year from the date hereof and that Either party violating this agreement shall pay to the other the sum of one thousand (P1,000) pesos as liquidated damages, unless previous consent in writing to such sale, transfer, or other disposition be obtained. Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc. This sale was made by the defendant against the protest of the plaintiff and with the warning that he would be held liable under the contract hereinabove set forth and in accordance with its terms. In fact, the defendant Foz offered to sell his shares of stock to the plaintiff for the same sum that McCullough was paying them less P1,000, the penalty specified in the contract. ISSUE: Whether or not the suspension of the power to sell the stock is valid and legal. RULING: YES. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. We do not here undertake to discuss the limitations to the power to suspend the right of alienation of stock, limiting ourselves to the statement that the suspension in this particular case is legal and valid.

271 | P a g e

Law 321_Corporation LAW_ Case Digest

CAPITAL STRUCTURE STOCKS AND STOCKHOLDERS As Legal/Stated Capital: Trust Fund Doctrine
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY vs. NATIONAL TELECOMMUNICATIONS COMMISSION, JOSEPH A.SANTIAGO, in his capacity as NTC Commissioner, and EDGARDO CABARRIOS G.R. No. 152685 4 December 2007 FACTS: Case pertains to Section 40 (e) the Public Service Act (PSA), as amended on March 15, 1984, pursuant to Batas Pambansa Blg This. 325, which authorized the NTC to collect from public telecommunications companies Supervision and Regulation Fees (SRF) of PhP 0.50 for every PhP 100 or a fraction of the capital and stock subscribed or paid for of a stock corporation, partnership or single proprietorship of the capital invested, or of the property and equipment, whichever is higher. Under Section 40 (e) of the PSA, the NTC sent SRF assessments to petitioner Philippine Long Distance Telephone Company (PLDT) starting sometime in 1988. The SRF assessments were based on the market value of the outstanding capital stock, including stock dividends, of PLDT. PLDT protested the assessments contending that the SRF ought to be based on the par value of its outstanding capital stock. Its protest was denied by the NTC and likewise, its motion for reconsideration. PLDT appealed before the CA. The CA modified the disposition of the NTC by holding that the SRF should be assessed at par value of the outstanding capital stock of PLDT, excluding stock dividends. ISSUE: Whether or not the value transferred from the unrestricted retained earnings of PLDT to the capital stock account pursuant to the issuance of stock dividends is the proper basis for the assessment of the SRF. RULING: NO. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can be loosely termed as the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the considerations therefore. When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the amount of the declared dividend while the stockholders equity is increased. Furthermore, the actual payment is the cash value from the unrestricted retained earnings that each shareholder foregoes for additional stocks/shares which he would otherwise receive as required by the Corporation Code to be given to the stockholders subject to the availability and conditioned on a certain level of retained earnings. In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary value of their dividend for capital stock, and the monetary value they forego is considered the actual payment for the original issuance of the stocks given as dividends. Therefore, stock dividends acquired by shareholders for the monetary value they forego are under the coverage of the SRF and the basis for the latter is such monetary value as declared by the board of directors. 272 | P a g e

Law 321_Corporation LAW_ Case Digest NATIONAL TELECOMMUNICATIONS COMMISSION vs. HONORABLE COURT OF APPEALS and PHILIPPINE LONG DISTANCE TELEPHONE COMPANY G.R. No. 127937 July 28, 1999 FACTS: Sometime in 1988, the NTC served on the PLDT the following assessment notices and demands for payment: 1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40 (e) of the PSA for the said year, 1988, computed at P0.50 per P100.00 of the Protestant's (PLDT) outstanding capital stock as at December 31, 1987 which then consisted of Serial Preferred Stock amounting to P1,277,934,390.00 and Common Stock of P221,097,785 (Million) or a total of P1,499,032,175.00; 2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the approval of the protestant's increase of its authorized capital stock from P2.7 Billion to P4.5 Billion; and the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section 40(g) of the PSA in connection with the Commission's decisions in NTC Cases Nos. 86-13 and 87-008 respectively, approving the Protestant's equity participation in the Fiber Optic Interpacific Cable systems and X-5 Service Improvement and Expansion Program. ISSUE: Whether or not the Court of Appeals erred in holding that the computation of supervision and regulation fees under section 40 (f) of the public service act should be based on the par value of the subscribed capital stock. RULING: NO. The basis for computation of the fee to be charged by NTC on PLDT, is the capital stock subscribed or paid and not, alternatively, the property and equipment. The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefor.

273 | P a g e

Law 321_Corporation LAW_ Case Digest

Voting Control Test v. Beneficial Control Test


Wilson P. Gamboa vs. Finance Secretary Margarito Teves, et al., G.R. No. 176579, June 28, 2011 FACTS: This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT). The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%. ISSUE: Whether or not the term capital in Section 11, Article XII of the Constitution refer to the total common shares only, or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility. RULING: NO. The Court partly granted the petition and held that the term capital in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, i.e., to the total common shares in PLDT. It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS), which is a document required to be submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of PLDTs common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution. As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility.

274 | P a g e

Law 321_Corporation LAW_ Case Digest HEIRS OF WILSON P. GAMBOA vs. FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT(PCGG), et.al. G.R. No. 176579 October 9, 2012 FACTS: The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe SEC, assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated Comment on behalf of the State, declaring expressly that it agrees with the Court's definition of the term "capital" in Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the Court's 28 June 2011 Decision. ISSUE: Whether or not the term "capital" in Section 11, Article XII of the Constitution has long been settled and defined to refer to the total outstanding shares of stock, whether voting or non-voting. RULING: NO. Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.

275 | P a g e

Law 321_Corporation LAW_ Case Digest G.R. NOS. 174457-59 EXPRESS INVESTMENTS III PRIVATE LTD. AND EXPORT DEVELOPMENT CANADA vs. DAYAN TELECOMMUNICATIONS, INC., THE BANK OF NEW YORK (AS TRUSTEE FOR THE HOLDERS OF THE US$200,000,000 13.5% SENIOR NOTES OF DAYAN TELECOMMUNICATIONS, INC.) AND ATTY. REMIGIO A. NOVAL (AS THE COURTAPPOINTED REHABILITATION RECEIVER OF BAYANTEL) x---------------x G.R. Nos. 175418-20 IN THE MATTER OF: THE CORPORATE REHABILITATION OF DAYAN TELECOMMUNICATIONS, INC. PURSUANT TO THE INTERIM RULES OF PROCEDURE ON CORPORATE REHABILITATION (A.M. NO. 00-8-10-SC) THE BANK OF NEW YORK AS TRUSTEE FOR THE HOLDERS OF THE US$200,000,000 13.5% SENIOR NOTES OF DAYAN TELECOMMUNICATIONS, INC. DUE 2006 ACTING ON THE INSTRUCTIONS OF THE INFORMAL STEERING COMMITTEE: AVENUE ASIA INVESTMENTS, L.P., AVENUE ASIA INTERNATIONAL, LTD., AVENUE ASIA SPECIAL SITUATIONS FUND II, L.P. AND AVENUE ASIA CAPITAL PARTNERS, L.P. vs. DAYAN TELECOMMUNICATIONS, INC. x---------------x IN THE MATTER OF: THE CORPORATE REHABILITATION OF BAY AN TELECOMMUNICATIONS, INC. PURSUANT TO THE INTERIM RULES OF PROCEDURE ON CORPORATE REHABILITATION (A.M. NO. 00-8-10-SC) AVENUE ASIA INVESTMENTS, L.P., AVENUE ASIA INTERNATIONAL, LTD., AVENUE ASIA SPECIAL SITUATIONS FUND II, L.P., AVENUE ASIA CAPITAL PARTNERS, L.P. AND AVENUE ASIA SPECIAL SITUATIONS FUND III, L.P. vs. DAYAN TELECOMMUNICATIONS, INC. x---------------x G.R. No. 177270 December 5, 2012 THE BANK OF NEW YORK AS TRUSTEE FOR THE HOLDERS OF THE US$200,000,000 13.5% SENIOR NOTES OF BAY AN TELECOMMUNICATIONS, INC. vs. BAY AN TELECOMMUNICATIONS, INC. FACTS: Respondent Bayantel is a duly organized domestic corporation engaged in the business of providing telecommunication services. It is 98.6% owned by Bayan Telecommunications Holdings Corporation (BTHC), which in turn is 85.4% owned by the Lopez Group of Companies and Benpres Holdings Corporation. On various dates between the years 1995 and 2001, Bayantel entered into several credit agreements. In July 1999, Bayantel issued US$200 million worth of 13.5% Senior Notes pursuant to an Indenture dated July 22, 1999 that it entered into with The Bank of New York as trustee for the holders of said notes. ISSUES: Whether or not the claims of secured and unsecured creditors should be treated pari passu during rehabilitation. Whether or not the debt-equity complies with the citizenship requirement under the Constitution. 276 | P a g e

Law 321_Corporation LAW_ Case Digest RULING: YES. As between the creditors, the key phrase is "equality is equity." When a corporation threatened by bankruptcy is taken over by a receiver, all the creditors should stand on equal footing. Not anyone of them should be given any preference by paying one or some of them ahead of the others. This is precisely the reason for the suspension of all pending claims against the corporation under receivership. Instead of creditors vexing the courts with suits against the distressed firm, they are directed to file their claims with the receiver who is a duly appointed officer of the SEC. Since then, the principle of equality in equity has been cited as the basis for placing secured and unsecured creditors in equal footing or in pari passu with each other during rehabilitation. In legal parlance, pari passu is used especially of creditors who, in marshaling assets, are entitled to receive out of the same fund without any precedence over each other. YES. Applying this, two steps must be followed in order to determine whether the conversion of debt to equity in excess of 40% of the outstanding capital stock violates the constitutional limit on foreign ownership of a public utility: First, identify into which class of shares the debt shall be converted, whether common shares, preferred shares that have the right to vote in the election of directors or non-voting preferred shares; Second, determine the number of shares with voting right held by foreign entities prior to conversion. If upon conversion, the total number of shares held by foreign entities exceeds 40% of the capital stock with voting rights, the constitutional limit on foreign ownership is violated. Otherwise, the conversion shall be respected. In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantel is that its shareholders shall "relinquish the agreed-upon amount of common stock[s] as payment to Unsecured Creditors as per the Term Sheet." Evidently, the parties intend to convert the unsustainable portion of respondent's debt into common stocks, which have voting rights. If we indulge petitioners on their proposal, the Omnibus Creditors which are foreign corporations, shall have control over 77.7% of Bayantel, a public utility company. This is precisely the scenario proscribed by the Filipinization provision of the Constitution. Therefore, the Court of Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion.

277 | P a g e

Law 321_Corporation LAW_ Case Digest REDMONT CONSOLIDATED MINING CORPORATION vs. MCARTHUR MINING, INC. ET.AL. SEC En Banc Case No. 09-09-177, March 25. 2010 Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has adopted the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership and control. But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.

278 | P a g e

Law 321_Corporation LAW_ Case Digest DEMOSTHENES P. AGAN, et al., petitioners,, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, et al., Respondents. G.R. No. 155001 January 21, 2004 FACTS: Sometime in 1993, six business leaders, explored the possibility of investing in the new NAIA airport terminal, so they formed Asians Emerging Dragon Corp. They submitted proposals to the government for the development of NAIA Intl. Passenger Terminal III (NAIA IPT III). The NEDA approved the NAIA IPT III project. Bidders were invited, and among the proposal Peoples Air Cargo (Paircargo) was chosen. AEDC protested alleging that preference was given to Paircargo, but still the project was awarded to Paircargo. Because of that, it incorporated into, Phil. Intl. Airport Terminals Co. (PIATCO). The DOTC and PIATCO entered into a concession agreement in 1997 to franchise and operate the said terminal for 21years. In Nov. 1998 it was amended in the matters of pertaining to the definition of the obligations given to the concessionaire, development of facilities and proceeds, fees and charges, and the termination of contract. Since MIAA is charged with the maintenance and operations of NAIA terminals I and II, it has a contract with several service providers. The workers filed the petition for prohibition claiming that they would lose their job, and the service providers joined them, filed a motion for intervention. Likewise several employees of the MIAA filed a petition assailing the legality of arrangements. A group of congressmen filed similar petitions. Pres. Arroyo declared in her speech that she will not honor PIATCO contracts which the Exec. Branch's legal office concluded null and void. ISSUE: Whether or Not the 1997 concession agreement is void, together with its amendments for being contrary to the constitution. RULING: YES. The 1997 concession agreement is void for being contrary to public policy. The amendments have the effect of changing it into and entirely different agreement from the contract bidded upon. The amendments present new terms and conditions which provide financial benefit to PIATCO which may have the altered the technical and financial parameters of other bidders had they know that such terms were available. The 1997 concession agreement, the amendments and supplements thereto are set aside for being null and void. The petitioners have local standi. They are prejudiced by the concession agreement as their livelihood is to be taken away from them.

279 | P a g e

Law 321_Corporation LAW_ Case Digest

Voting v. Non-Voting
CECILIA CASTILLO, et al., and MEDICAL CENTER PARAAQUE, INC. vs. ANGELES BALINGHASAY, et al. G.R. No. 150976 October 18, 2004 FACTS: Petitioners are stockholders of MCPI holding Class B shares while the respondents are also stockholders owning Class A shares. In a 1992 amendment of the Articles of Incorporation of MCPI, the Articles of incorporation of the MCPI provides that, except when otherwise provided by law, only holders of Class A shares are entitled to vote and to have the right to be elected as directors and corporate officers. During the 2001meeting, petitioners raise d an objection to the fact that only Class A shares are allowed to vote and to be elected. They contended that the Class B share holders right to vote is violated in violation of law. ISSUE: Whether or not holders of Class B shares of MCPI may be deprives of the right to vote and be voted for as directors. RULING: NO. The 1992 amendment contains a proviso except as otherwise provided for by law the law being referred to by the proviso is that which is in force at the time of the amendment, in this case, was the Corporation Code. Under Sec. 6 of the Corporation Code, it provides that no share may be deprived of voting rights except those classified and issued as preffered or redeemable shares unless otherwise provided in this code.there is nothing in the articles of incorporation or an iota of evidence on record that shows that Class B shares were categorized as either preffered or redeemable shares.

280 | P a g e

Law 321_Corporation LAW_ Case Digest JULIO E. T. SALES and GEORGE V. AGONIAS and SMEC, petitioners, vs. SEC, SIHI and ATCO, represented by its President, ANSELMO TRINIDAD; VIMC, represented by its President, et al., respondents; G.R. No. 54330 January 13, 1989 FACTS: SMEC sold 200M common shares of its capital stock in the amount of P2.6M to SIHI under a Sales Agreement providing that the sale shall be only up to 5m shares per buyer. SIHI requested for the transfer of the 200M shares to ATCO to which SMEC complied. During the time that ATCO held the shares, it voted them in the SHs' meetings of SMEC. ATCO in turn sold 198,500,000 of the shares to respondent VIMC. Upon request, SMEC BOD issued a resolution directing its President to sign the certificate of stock that would effect the transfer. Before the 1979 annual SH meeting of SMEC, petitioners sought to nullify the sales of the shares to VIMC with the SEC and to enjoin VIMC from voting the said shares. VIMC was temporarily restrained and the meeting was held without the participation of VIMCs shares and BODs were elected only from the group of petitioners. In VIMCs answer, it questioned the said election. SEC denied the petition as well as motion to dismiss and lifted the Restraining it issued earlier and allowed the shares of VIMC to be counted in determining the quorum of the 1980 annual SHs meeting, which was already near, and the same shares were allowed to vote and be voted for. Before the SC, petitioners contended that the SEC gravely abused its discretion in not enjoining the participation of VIMC in the 1980 election considering that the sale of the shares to VIMC was null and void as it was done in violation of the Sales Agreement on the limit of shares to be sold to each buyer and that VIMCs ownership of the shares is contrary to Sec. 13 (5A) of the old corporation law. ISSUE: Whether or not SEC acted with grave abuse of discretion in not permanently enjoining VIMC in voting. RULING: YES. SC found no grave abuse of discretion on the part of the SEC in not restraining VIMC. It adopted the SEC resolution stating that the sale of the shares of stock had long been perfected and is presumed valid until declared otherwise. As against this presumption, petitioners' prayer for injunction cannot prevail as the issue of the validity of the sale is still to be resolved by the SEC. Considering that the shares constitute the majority, it is more equitable that the same be allowed to vote rather than be enjoined. As it has been ruled the removal of a majority SH from the management of the corporation and/or the dissolution of a corporation in a suit filed by a minority SH is a drastic measure. It should be resorted to only when the necessity is clear. With more reason, the Court will not deprive a SH of his right to vote his shares in the annual SHs' meeting, except upon a clear showing of its lawful denial under the articles of incorporation or by-laws of the corporation, as it is a right inherent in stock ownership.

281 | P a g e

Law 321_Corporation LAW_ Case Digest

Redeemable Preferred
REPUBLIC PLANTERS BANK vs. HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES G.R. No. 51765. March 3, 1997 FACTS: On September 18, 1961, private respondent Corporation secured a loan from petitioner in the amount of P120,000.00. Instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in the form of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the name of private respondent Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes. On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint anchored on private respondents' alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates. The trial court rendered the herein assailed decision in favor of private respondents ordering petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until full payment. ISSUES: Whether or not the respondent court was correct in ordering petitioner to pay private respondents the face value of the stock certificates as redemption price. RULING: NO. A preferred share of stock is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation;the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock.There is no guaranty, however, that the share will receive any dividends. The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central Bank made a finding that said petitioner has been suffering from chronic reserve deficiency, and that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G.S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors.Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole.

282 | P a g e

Law 321_Corporation LAW_ Case Digest

Treasury
COMMISSIONER OF INTERNAL REVENUE vs. MANNING, MCDONALD, SIMMONS No. L-28398 6 August 1975 FACTS: In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three respondents. On October 19, 1954 Reese died. In 1955, after MANTRASCO made a partial payment of Reese's shares, the certificate for the 24,700 shares in Reese's name was cancelled and a new certificate was issued in the name of MANTRASCO, which was endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO. In 1958, at a special meeting of MANTRASCO stockholders, the following resolution was passed:"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the company as a stock dividend to be distributed to shareholders of record." In 1963 the entire purchase price of Reese's interest in MANTRASCO was finally paid in full by the latter, In 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the shares which they were holding in trust. On the basis of their examination, the BIR examiners concluded that the distribution of Reese's shares as stock dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned from the payment of cash for the redemption of said stock and distributing the same as stock dividend." On April 14, 1965 the CIR issued notices of assessment for deficiency income taxes to the respondents for the year 1958. ISSUE: Whether or not the issuance of the notices of assessment for deficiency income taxes to the respondents for the year 1958 was proper. RULING: YES. The declaration by the respondents and Reese's trustees of MANTRASCO's alleged treasury stock dividends in favor of the former, brings, however, into clear focus the ultimate purpose which the parties to the trust instrument aimed to realize: to make the respondents the sole owners of Reese's interest in MANTRASCO by utilizing the periodic earnings of that company and its subsidiaries to directly subsidize their purchase of the said interests, and by making it appear outwardly, through the formal declaration of non-existent stock dividends in the treasury, that they have not received any income from those firms when, in fact, by that declaration they secured to themselves the means to turn around as full owners of Reese's shares. In other words, the respondents, using the trust instrument as a convenient technical device, bestowed unto themselves the full worth and value of Reese's corporate holdings with the use of the very earnings of the companies. Such package device, obviously not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment, e.g. the acquisition of additional facilities and other capital budget items, but exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to deflect the respondents' responsibilities toward our income tax laws. The conclusion is thus ineluctable that whenever the companies involved herein parted with a portion of their earnings "to buy" the corporate holdings of Reese, they were in ultimate effect and result making a distribution of such earnings to the respondents. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the respondents.

283 | P a g e

Law 321_Corporation LAW_ Case Digest SAN MIGUEL CORPORATION vs. SANDIGANBAYAN (First Division), EDUARDO M. COJUANGCO, JR., et al., G.R. No. 118661 SEPTEMBER 14, 2000 FACTS: CIIF sold 33,133,266 shares of the outstanding capital stock of SMC to Andres Soriano III of the SMC Group payable in 4 installments. April 1, 1986, Soriano paid the initial 500M to the UCPB as administrator of CIIF. The sale was transacted through the stock exchange and the shares were registered in the name of AHSI. On April 7, 1986, PCGG sequestered the shares subject of the sale, thus SMC suspended payment of the balance. UCPB, filed a complaint for rescission and damages with the RTC Makati. SMC assailed the RTC jurisdiction on the ground that primary jurisdiction was vested with the PCGG since the SMC shares were sequestered shares. SC dismissed the complaint for rescission without prejudice to the ventilation of the parties claims before the Sandiganbayan (SBN). The Republic, thru the OSG opposed the Agreement contending that the involved coco-levy funds, whether in the form of earnings or dividends therefrom, or in the form of the value of liquidated corporate assets represented by all sequestered share (like the value of assets sold/mortgaged to finance the 500M 1st installment), or in the form of cash, or, as in the case of subject Settlement, in the form of proceeds of sale or of payments of certain alleged obligations are public funds and are beyond or outside the commerce and not within the private disposition of private individuals. ISSUE: Whether or not there is a valid delivery of certificates of stock of smc shares and the dividends thereon to the PCGG. RULING: YES. No grave abuse of discretion on the part of SBN when it ordered petitioners to deliver the treasury shares to the PCGG and pay their corresponding dividends for the following reasons: Under the Corporation Code, Treasury shares are shares of stocks which have been issued and fully paid for, but subsequently reacquired by, the issuing corporation by purchase, redemption, donation or through some lawful means. These 26.45M shares or any portion thereof can, therefore, become treasury shares, i.e., property of SMC, only if the sale between the UCPB Group and the SMC Group is allowed; otherwise these shares cannot even begin to be deemed to have been reacquired by the issuing corporation, the SMC.

284 | P a g e

Law 321_Corporation LAW_ Case Digest

Trust Fund Doctrine


NATIONAL TELECOMMUNICATIONS COMMISSION vs. COURT OF APPEALS AND PHILIPPINE LONG DISTANCE TELEPHONE COMPANY G.R. NO. 127937 1999 JULY 28 FACTS: Sometime in 1988, the National Telecommunications Commission (NTC) served on the Philippine Long Distance Telephone Company (PLDT) assessment notices and demands for payment. PLDT challenged the aforesaid assessments. On September 29, 1993, the NTC rendered a Decision, denying the protest of PLDT. On October 22, 1993, PLDT interposed a Motion for Reconsideration, which was denied by NTC in an Order issued on May 3, 1994. On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals, which came out with its questioned Decision of October 30, 1996, modifying the disposition of NTC. On November 20, 1996, NTC moved for partial reconsideration of the Decision, with respect to the basis of the assessment under Section 40(e), i.e., par value of the subscribed capital stock. It also sought a partial reconsideration of the fee of fifty (P0.50) centavos for the issuance or increasing of the capital stock under Section 40 (f). With the denial of its motions for reconsideration by the Resolution of the Court of Appeals dated January 27, 1997, petitioner found its way to the Court via the Petition for Certiorari. ISSUE: Whether or not the Court of Appeals erred in holding that the computation of Supervision and regulation Fees under Section 40(f) of the Public Service Act should be based on the par value of the subscribed capital stock. RULING: NO. Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Telephone Company vs. Public Service Commission, 66 SCRA 341, that the basis for computation of the fee to be charged by NTC on PLDT, is the capital stock subscribed or paid and not, alternatively, the property and equipment. The fee in question is based on the capital stock subscribed or paid, nothing less nothing more. The Trust Fund doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. In the same way that the Court in PLDT vs. PSC has rejected the value of the property and equipment as being the proper basis for the fee imposed by Section 40(e) of the Public Service Act, as amended by Republic Act No. 3792, so also must the Court disallow the idea of computing the fee on the par value of [PLDTs] capital stock subscribed or paid excluding stock dividends, premiums, or capital in excess of par. Neither is the assessment made by the National Telecommunications Commission on the basis of the market value of the subscribed or paid-in capital stock acceptable since it is itself a deviation from the explicit language of the law.

285 | P a g e

Law 321_Corporation LAW_ Case Digest ONG YONG, et al., petitioner vs. TIU, et al., respondent G.R. No. 144476 8 April 2003 FACTS: In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius), encountered dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value of P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the Treasurer plus 5 directors while the Ongs were entitled to nominate the President, the Secretary and 6 directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall. Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in another P70 million 3 to FLADC and P20 million to the Tius over and above their P100 million investment, the total sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of FLADC to PNB. The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the Tius, on 23 February 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares covering their real property contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon. The controversy finally came to a head when the case was commenced by the Tius on 27 February 1996 at the Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the Pre-Subscription Agreement. ISSUE: Whether or not the rescission of Pre-Subscription Agreement would result in unauthorized liquidation. RULING: YES. The rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. Rescission will, in the final analysis, result in the premature liquidation of the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120 of the Corporation Code.

286 | P a g e

Law 321_Corporation LAW_ Case Digest

What is a Subscription
ONG YONG, et al., petitioner vs. TIU, et al., respondent G.R. No. 144476 8 April 2003 FACTS: In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius), encountered dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value of P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the Treasurer plus 5 directors while the Ongs were entitled to nominate the President, the Secretary and 6 directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall. Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in another P70 million 3 to FLADC and P20 million to the Tius over and above their P100 million investment, the total sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of FLADC to PNB. ISSUE: Whether or not the pre-Subscription Agreement executed by the Ongs is actually a subscription contract. RULING: YES. FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital stock became necessary to give each group equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized capital stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the parties' Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title VII of the Corporation Code. A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between the Ongs and the Tius. 287 | P a g e

Law 321_Corporation LAW_ Case Digest BAYLA, et al., petitioner vs. SILANG TRAFFIC CO., INC., respondent G.R. Nos. L-48195 and 48196 May 1, 1942 FACTS: Petitioners in G.R. No. 48195 instituted this action in the Court of First Instance of Cavite against the respondent Silang Traffic Co., Inc. (cross-petitioner in G.R. No. 48196), to recover certain sums of money which they had paid severally to the corporation on account of shares of stock they individually agreed to take and pay for under certain specified terms and conditions. The agreements signed by the other petitioners were of the same date (March 30, 1935) and in identical terms as the foregoing except as to the number of shares and the corresponding purchase price. The petitioners agreed to purchase a total of 46 shares and, up to April 30, 1937, had paid the corresponding amount on account thereof.Petitioners' action for the recovery of the sums above mentioned is based on a resolution by the board of directors of the respondent corporation on August 1, 1937. The respondent corporation set up the following defenses: (1) That the abovequoted resolution is not applicable to the petitioners Sofronio T. Bayla, Josefa Naval, and Paz Toledo because on the date thereof "their subscribed shares of stock had already automatically reverted to the defendant, and the installments paid by them had already been forfeited"; and (2) that said resolution of August 1, 1937, was revoked and cancelled by a subsequent resolution of the board of directors of the defendant corporation dated August 22, 1937. ISSUE: Whether or not the agreement was a contract of subscription to the capital stock of the respondent corporation. RULING: NO. Whether a particular contract is a subscription or a sale of stock is a matter of construction and depends upon its terms and the intention of the parties. In the Unson case just cited, this Court held that a subscription to stock in an existing corporation is, as between the subscriber and the corporation, simply a contract of purchase and sale. It seems clear from the terms of the contracts in question that they are contracts of sale and not of subscription. The lower courts erred in overlooking the distinction between subscription and purchase "A subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual and the corporation to buy shares of stock from it at stipulated price." In some particulars the rules governing subscriptions and sales of shares are different. For instance, the provisions of our Corporation Law regarding calls for unpaid subscription and assessment of stock do not apply to a purchase of stock. Likewise the rule that corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for his shares, is inapplicable to a contract of purchase of shares.

288 | P a g e

Law 321_Corporation LAW_ Case Digest SALMON, DEXTER & Co., plaintiff vs. TIMOTEO UNSON, defendant G.R. No. L-23608 March 17, 1925 FACTS: The plaintiff seeks to recover of the defendant the sum of P1,000 with legal interest on a subscription for capital stock contract. The defense is that the defendant is released from his obligation on the subscription agreement by virtue of the increase of the capital stock of the plaintiff from P250,000, the amount mentioned in the agreement, to P500,000, the amount agreed upon the stockholders prior to the defendant's signing the agreement. On this issue, judgment in the lower court was with the plaintiff. The plaintiff is Salmon, Dexter and Company, a domestic corporation. It was organized under the name of C.S. Salmon and Company on May 28, 1918, with a capital stock of P250,000. Thereafter, pursuant to a resolution of the board of directors of the corporation of June 24, 1920, a meeting of the stockholders was had on July 14, 1920, at which the capital stock of C.S. Salmon and Company was increased to P500,000. The certificate of increase of capital stock from P250,000 to P500,000, and articles of incorporation, as amended, of Salmon, Dexter and Company were filed with the Mercantile Registry of the Bureau of Commerce and Industry on September 16, 1920. On July 28, 1920, Timoteo Unson, the defendant, to follow the allegation in the third paragraph of the complaint, "became a subscriber of C.S. Salmon and Company, by signing an agreement in writing and delivering the same to C.S. Salmon and Company, the name of which company was later changed to Salmon, Dexter and Company." ISSUE: Whether or not the contract entered into by the parties is a Subscription contract. RULING: YES. After incorporation, one may become a shareholder by subscription, or by purchasing stock directly from the corporation, or from individual owners thereof. A distinction is drawn by the authorities between a subscription to the capital stock of the corporation after its organization and a sale of shares by it. Whether a particular contract is a subscription or a sale of stock is a matter of construction, and depends upon its terms and the intention of the parties. It has been held that a subscription to stock in an existing corporation is, as between the subscriber and the corporation, simply a contract of purchase and sale. Admitting that the terminology of the agreement is not conclusive, and admitting that it is a contract between a subscriber and the corporation, and thus simply a contract of purchase and sale, then under the last hypothesis we have to determine if the contract is avoided by misrepresentation. In our opinion, a contract different from that which was entered into cannot be made for the parties and imposed upon Unson. Unson has the right to stand upon the contract he has made. In our opinion also, there was such a non-disclosure of a material fact as was equivalent to false representation. This representation was of a character that the party to whom it was made had a right to rely upon it.

289 | P a g e

Law 321_Corporation LAW_ Case Digest SUNSET VIEW CONDOMINIUM CORPORATION, petitioner vs. CAMPOS, respondent G.R. No. L-52361 April 27, 1981 FACTS: The private respondent, Aguilar-Bernares Realty, a sole proprietorship with business name registered with the Bureau of Commerce, owned and operated by the spouses Emmanuel G. Aguilar and Zenaida B. Aguilar, is the assignee of a unit, "Solana", in the Sunset View Condominium Project with La Perla Commercial, Incorporated, as assignor. 3 The La Perla Commercial, Incorporated bought the "Solana" unit on installment from the Tower Builders, Inc. 4 The petitioner, Sunset View Condominium Corporation, filed for the collection of assessments levied on the unit against Aguilar-Bernares Realty, private respondent herein, a complaint dated June 22, 1979 docketed as Civil Case No. 7303-P of the Court of First Instance of Pasay City, Branch XXX. The private respondent filed a Motion to Dismiss the complaint on the grounds (1) that the complaint does not state a cause of action: (2) that the court has no jurisdiction over the subject or nature other action; and (3) that there is another action pending between the same parties for the same cause. The petitioner filed its opposition thereto. The motion to dismiss was granted on December 11, 1979 by the respondent Judge who opined that the private respondent is, pursuant to Section 2 of Republic Act No. 4726, a "holder of a separate interest" and consequently, a shareholder of the plaintiff condominium corporation; and that "the case should be properly filed with the Securities & Exchange Commission which has exclusive original jurisdiction on controversies arising between shareholders of the corporation." the motion for reconsideration thereof having been denied, the petitioner, alleging grave abuse of discretion on the part of respondent Judge, filed the instant petition for certiorari praying that the said orders be set aside. ISSUE: Whether or not a purchaser of a condominium unit in the condominium project managed by the petitioner, who has not yet fully paid the purchase price thereof, automatically a stockholder of the petitioner Condominium Corporation. RULING: NO. The share of stock appurtenant to the unit win be transferred accordingly to the purchaser of the unit only upon full payment of the purchase price at which time he will also become the owner of the unit. Consequently, even under the contract, it is only the owner of a unit who is a shareholder of the Condominium Corporation. Inasmuch as owners is conveyed only upon full payment of the purchase price, it necessarily follows that a purchaser of a unit who has not paid the full purchase price thereof is not The owner of the unit and consequently is not a shareholder of the Condominium Corporation. That only the owner of a unit is a stockholder of the Condominium Corporation is inferred from Section 10 of the Condominium Act. Pursuant to such statutory provision, ownership of a unit is a condition sine qua non to being a shareholder in the condominium corporation. It follows that a purchaser of a unit who is not yet the owner thereof for not having fully paid the full purchase price, is not a shareholder By necessary implication, the "separate interest" in a condominium, which entitles the holder to become automatically a share holder in the condominium corporation, as provided in Section 2 of the Condominium Act, can be no other than ownership of a unit. This is so because nobody can be a shareholder unless he is the owner of a unit and when he ceases to be the owner, he also ceases automatically to be a shareholder. The private respondents, therefore, who have not fully paid the purchase price of their units and are consequently not owners of their units are not members or shareholders of the petitioner condominium corporation. 290 | P a g e

Law 321_Corporation LAW_ Case Digest VELASCO, petitioner vs. POIZAT, respondent G.R. No. L-11528 March 15, 1918 FACTS: From the amended complaint filed in this cause upon February 5, 1915, it appears that the plaintiff, as assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the corporate stock of said company. It appears that the corporation in question was originally organized by several residents of the city of Manila, where the company had its principal place of business, with a capital of P50,000, divided into 500 shares. The defendant subscribed for 20 shares of the stock of the company, an paid in upon his subscription the sum of P500, the par value of 5 shares . The action was brought to recover the amount subscribed upon the remaining shares. It appears that the defendant was a stock holder in the company from the inception of the enterprise, and for sometime acted as its treasurer and manager. While serving in this capacity he called in and collected all subscriptions to the capital stock of the company, except the aforesaid 15 shares subscribed by himself and another 15 shares owned by Jose R. Infante. Upon July 13, 1914, a meeting of the board of directors of the company was held at which a majority of the stock was presented. Upon this occasion two resolutions, important to be here noted, were adopted. The first was a proposal that the directors, or shareholders, of the company should make good by new subscriptions, in proportion to their respective holdings, 15 shares which had been surrendered by Infante. ISSUE: Whether or not Poizat is liable for his unpaid subscription. RULING: YES. A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It is a rule, accepted by the Supreme Court of the United States that a subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. The provisions of the Corporation Law (Act No. 1459) give recognition of two remedies for the enforcement of stock subscriptions. The first and most special remedy given by the statute consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the provisions of section 38 to 48, inclusive, of the Corporation Law are applicable and must be followed. It is generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a remedy in addition to that which proceeds by action in court; and it has been held that the ordinary legal remedy by action exists even though no express mention thereof is made in the statute.

291 | P a g e

Law 321_Corporation LAW_ Case Digest

Acquisition and Ownership of Shares in a Corporation; Extent of Proprietary Right/Doctrine of Limited Liability
Conjuangco vs Republic 12 April 2011 GR NO. 166859 FACTS: Last April 12, 2011, the Supreme Court en banc rendered its ruling on one of the most crucial case against the ill-gotten wealth of the Marcoses and their associates dating back from the Martial Law era involving the shares in San Miguel Corporation (SMC) allegedly bought with coconut levy funds exacted from the poor marginal coconut farmers all over the country. This block of shares was purportedly owned by businessman Eduardo Danding Cojuangco and is one of many cases filed way back in 1987 by the Presidential Commission on Good Government, as part of its mandate to recover illgotten wealth. In a nutshell, four justices of the Supreme Court ruled that the Government of the Philippines (dubbed as the Republic of the Philippines or Republic, for short, in this case) failed to submit further evidence to prove that the loans from United Coconut Planters Bank (UCPB) and the Coconut Industry Investment Fund (CIIF) secured by Eduardo Danding Cojuangco to purchase the shares of SMC, were public in character. A dissenting opinion by Justice Conchita CarpioMorales held the view that it was Dganding who has failed in his burden of showing that such funds were not taken from public funds, while another dissenting opinion, by Justice Brion, takes the view of the majority handing a loss to the Government but urging instead a prosecution of the government lawyers handling the case of Danding, for their mishandling of the case, citing several instances when they could have presented stronger evidence and have taken other steps to bolster their case, but didn't. ISSUE : Whether or not Cojuangco breach his fiduciary duties as an officer and member of the Board of Directors of the UCPB? Did his acquisition and holding of the contested SMC shares come under a constructive trust in favor of the Republic. RULING: NO. The thrust of the Republic that the funds were borrowed or lent might even preclude any consequent trust implication. In a contract of loan, one of the parties (creditor) delivers money or other consumable thing to another ( debtor) on the condition that the same amount of the same kind and quality shall be paid. To say that a relationship is fiduciary when existing laws do not provide for such requires evidence that confidence is reposed by one party in another who exercises dominion and influence. Absent any special facts and circumstances proving a higher degree of responsibility, any dealings between a lender and borrower are not fiduciary in nature. This explains why, for example, a trust receipt transaction is not classified as a simple loan and is characterized as fiduciary, because the Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Based on the foregoing, a debtor can appropriate the thing loaned without any responsibility or duty to his creditor to return the very thing that was loaned or to report how the proceeds were used. Nor can he be compelled to return the proceeds and fruits of the loan, for there is nothing under our laws that compel a debtor in a contract of loan to do so. As owner, the debtor can dispose of the thing borrowed and his act will not be considered misappropriation of the thing.

292 | P a g e

Law 321_Corporation LAW_ Case Digest MANUEL C. ESPIRITU, JR., AUDIE LLONA, FREIDA F. ESPIRITU, CARLO F. ESPIRITU, RAFAEL F. ESPIRITU, ROLANDO M. MIRABUNA, HERMILYN A. MIRABUNA, KIM ROLAND A. MIRABUNA, KAYE ANN A. MIRABUNA, KEN RYAN A. MIRABUNA, JUANITO P. DE CASTRO, GERONIMA A. ALMONITE and MANUEL C. DEE, who are the officers and directors of BICOL GAS REFILLING PLANT CORPORATION vs. PETRON CORPORATION and CARMEN J. DOLOIRAS, doing business under the name "KRISTINA PATRICIA ENTERPRISES, G.R. No. 170891 November 24, 2009 FACTS: Petron sold and distributed LPG in cylinder tanks that carried its trademark "Gasul."1 Respondent Carmen J. Doloiras owned and operated Kristina Patricia Enterprises, the exclusive distributor of Gasul LPGs in the whole of Sorsogon. Jose Nelson Doloiras served as KPEs manager. Bicol Gas Refilling Plant Corporation was also in the business of selling and distributing LPGs in Sorsogon but theirs carried the trademark "Bicol Savers Gas." Petitioner Audie Llona managed Bicol Gas. On August 4, 2001 KPEs Jose saw a particular Bicol Gas truck on the Maharlika Highway. While the truck carried mostly Bicol Savers LPG tanks, it had on it one unsealed 50-kg Gasul tank and one 50-kg Shellane tank. He offered to make a swap for these but Llona declined, saying the Bicol Gas owners wanted to send those tanks to Batangas. Later Bicol Gas told Jose that it had no more Gasul tanks left in its possession. ISSUE: Whether or not all the Petitioners are liable. RULING: NO. The "owners" of a corporate organization are its stockholders and they are to be distinguished from its directors and officers. The petitioners here, with the exception of Audie Llona, are being charged in their capacities as stockholders of Bicol Gas. But the Court of Appeals forgets that in a corporation, the management of its business is generally vested in its board of directors, not its stockholders. Stockholders are basically investors in a corporation. They do not have a hand in running the day-today business operations of the corporation unless they are at the same time directors or officers of the corporation. Before a stockholder may be held criminally liable for acts committed by the corporation, therefore, it must be shown that he had knowledge of the criminal act committed in the name of the corporation and that he took part in the same or gave his consent to its commission, whether by action or inaction. The finding of the Court of Appeals that the employees "could not have committed the crimes without the consent, [abetment], permission, or participation of the owners of Bicol Gas" is a sweeping speculation especially since, as demonstrated above, what was involved was just one Petron Gasul tank found in a truck filled with Bicol Gas tanks. Although the KPE manager heard petitioner Llona say that he was going to consult the owners of Bicol Gas regarding the offer to swap additional captured cylinders, no indication was given as to which Bicol Gas stockholders Llona consulted. It would be unfair to charge all the stockholders involved, some of whom were proved to be minors. No evidence was presented establishing the names of the stockholders who were charged with running the operations of Bicol Gas. The complaint even failed to allege who among the stockholders sat in the board of directors of the company or served as its officers.

293 | P a g e

Law 321_Corporation LAW_ Case Digest CRISOSTOMO, petitioner vs. S.E.C, respondent G.R. Nos. 89095 & 89555 November 6, 1989 FACTS: Sixto Crisostomo, Felipe Crisostomo (deceased), Veronica Palanca, Juanito Crisostomo, Carlos Crisostomo, Ricardo Alfonso, Regino Crisostomo and Ernesto Crisostomo (known as the Crisostomo group) were the original stockholders of the United Doctors Medical Center (UDMC) which was organized in 1968 with an authorized capital stock of P1,000,000 (later increased to P15,000,000 in 1972). They owned approximately 40% of UDMC's outstanding capital stock, while the 60% majority belonged to the members of the United Medical Staff Association (UMSA), numbering approximately 150 doctors and medical personnel of UDMC. In 1988, UDMC defaulted in paying its loan obligation of approximately P55 million to the DBP. In the last quarter of 1987, UDMC's assets (principally its hospital) and those of the Crisostomos which had been given as collateral to the DBP, faced foreclosure by the Asset Privatization' rust (APT), which had taken over UDMC's loan obligation to the DBP. To stave off the threatened foreclosure, UDMC, through its principal officers, Ricardo Alfonso and Juanito Crisostomo, persuaded the Yamadas and Enatsu (Shoji Yamada and Tomotada Enatsu are Japanese doctors) to invest fresh capital in UDMC. The wife of Tomotada Enatsu, Edita Enatsu, is a Filipina. They invested approximately P57 million in UDMC. The investment was effected by means of: (1) a Stock Purchase Agreement; and (2) an Amended Memorandum of Agreement whereby the group subscribed to 82.09% of the outstanding shares of UDMC. Upon the completion of the governmental approval process, shares of stock, duly signed by UDMC's authorized officers, were issued to the Yamadas and Enatsus. As it had been agreed in the Amended Memorandum of Agreement between UDMC and the Japanese group that upon the latter's acquisition of the controlling interest in UDMC, the corporation would be reorganized, a special stockholders' meeting and board of directors' meeting were scheduled to be held on August 20, 1988. ISSUE: Whether or not the investment of the Japanese group in UDMC is unconstitutional. RULING: NO. While 82% of UDMC's capital stock is indeed subscribed by the Japanese group, only 30% (equivalent to 171,721 shares or P17,172.00) is owned by the Japanese citizens, namely, the Yamada spouses and Tomotada Enatsu. 52% is owned by Edita Enatsu, who is a Filipino. Accordingly, in its application for approval/registration of the foreign equity investments of these investors, UDMC declared that 70% of its capital stock is owned by Filipino citizens , including Edita Enatsu. That application was approved by the Central Bank on August 3, 1988. The investments in UDMC of Doctors Yamada and Enatsu do not violate the Constitutional prohibition against foreigners practising a profession in the Philippines (Section 14, Article XII, 1987 Constitution) for they do not practice their profession (medicine) in the Philippines, neither have they applied for a license to do so. They only own shares of stock in a corporation that operates a hospital. No law limits the sale of hospital shares of stock to doctors only. The ownership of such shares does not amount to engaging (illegally,) in the practice of medicine, or, nursing. If it were otherwise, the petitioner's stockholding in UDMC would also be illegal.

294 | P a g e

Law 321_Corporation LAW_ Case Digest GARCIA, petitioner vs. LIM CHU SING, respondent G.R. No. L-39427 February 24, 1934 FACTS: On June 20, 1930, the defendant-appellant Lim Chu Sing executed and delivered to the Mercantile Bank of China promissory note for the sum of P19,605.17 with interest thereon at 6 per cent per annum, payable monthly as follows: P1,000 on July 1, 1930; P500 on August 1, 1930; and P500 on the first of every month thereafter until the amount of the promissory note together with the interest thereon is fully paid (Exhibit A). One of the conditions stipulated in said promissory note is that in case of defendant's default in the payment of any of the monthly installments, as they become due, the entire amount or the unpaid balance thereof together with interest thereon at 6 per cent per annum, shall become due and payable on demand. The defendant had been, making several partial payments thereon, leaving an unpaid balance of P9,105.17. However, he defaulted in the payment of several installments by reason of which the unpaid balance of P9,105.17 on the promissory note has ipso facto become due and demandable. ISSUE: Whether or not it is proper to compensate the defendant-appellant's indebtedness of P9,105.17, which is claimed in the complaint, with the sum of P10,000 representing the value of his shares of stock with the plaintiff entity, the Mercantile Bank of China. RULING: NO. According to the weight of authority, a share of stock or the certificate thereof is not indebtedness to the owner or evidence of indebtedness and, therefore, it is not a credit. Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of the American courts, repeatedly asserted in the broadest terms, that the capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. Therefore, the defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the latter is a creditor of the former, there is no sufficient ground to justify compensation.

295 | P a g e

Law 321_Corporation LAW_ Case Digest MAGSAYSAY-LABRADOR, petitioner vs. COURT OF APPEALS, respondent G.R. No. 58168 December 19, 1989 FACTS: On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of the late Senator Genaro Magsaysay, brought before the then Court of First Instance of Olongapo an action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. In her complaint, she alleged that in 1958, she and her husband acquired, thru conjugal funds, a parcel of land with improvements, known as "Pequena Island", covered by TCT No. 3258; that after the death of her husband, she discovered [a] an annotation at the back of TCT No. 3258 that "the land was acquired by her husband from his separate capital;" [b] the registration of a Deed of Assignment dated June 25, 1976 purportedly executed by the late Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC; and [c] the registration of Deed of Mortgage dated April 28, 1977 in the amount of P 2,700,000.00 executed by SUBIC in favor of FILMANBANK; that the foregoing acts were void and done in an attempt to defraud the conjugal partnership considering that the land is conjugal, her marital consent to the annotation on TCT No. 3258 was not obtained, the change made by the Register of Deeds of the titleholders was effected without the approval of the Commissioner of Land Registration and that the late Senator did not execute the purported Deed of Assignment or his consent thereto, if obtained, was secured by mistake, violence and intimidation. She further alleged that the assignment in favor of SUBIC was without consideration and consequently null and void. She prayed that the Deed of Assignment and the Deed of Mortgage be annulled and that the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title in her favor. ISSUE: Whether or not petitioners ownership in the outstanding capital stock of SUBIC entitles them to a significant vote in the corporate affairs. RULING: NO. The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person.

296 | P a g e

Law 321_Corporation LAW_ Case Digest NICOLAS, petitioner vs. COURT OF APPEALS, respondent G.R. No. 122857 March 27, 1998 FACTS: On February 19, 1987, petitioner Roy Nicolas and private respondent Blesito Buan entered into a Portfolio Management Agreement, wherein the former was to manage the stock transactions of the latter for a period of three months with an automatic renewal clause. However, upon the initiative of the private respondent the agreement was terminated on August 19, 1987, and thereafter he requested for an accounting of all transactions made by the petitioner. Three weeks after the termination of the agreement, petitioner demanded from the private respondent the amount of P68,263.67 representing his alleged management fees covering the periods of June 30, July 31 and August 19, 1987 as provided for in the Portfolio Management Agreement. But the demands went unheeded, much to the chagrin of the petitioner. Rebuffed, petitioner filed a complaint for collection of sum of money against the private respondent before the trial court. In his answer, private respondent contended that petitioner mismanaged his transactions resulting in losses, thus, he was not entitled to any management fees. ISSUE: Whether or not petitioner is entitled to management fees. RULING: NO. To begin with, petitioner has the burden to prove that the transaction realized gains or profits to entitle him to said management fees, as provided in the Agreement. Accordingly, petitioner submitted the profit and loss statements for the period of June 30, July 31 and August 19, 1987, showing a total profit of P341,318.34, of which 20% would represent his management fees amounting to P68,263.70. Unfortunately, the profit and loss statements presented by the petitioner are nothing but bare assertions, devoid of any concrete basis or specifics as to the method of arriving at the amounts indicated in the documents. In fact, it did not even state when the stocks were purchased, the type of stocks (whether Class A or B or common or preferred) bought, when the stocks were sold, the acquisition and selling price of each stock, when the profits, if any, were delivered to the private respondent, the cost of safekeeping or custody of the stocks, as well as the taxes paid for each transaction. With respect to the alleged losses, it has been held that where a profit or loss statement shows a loss, the statement must show income and items of expense to explain the method of determining such loss. However, in the instant petition, petitioner hardly elucidated the reasons and the factors behind the losses incurred in the course of the transactions. In short, no evidentiary value can be attributed to the profit and loss statements submitted by the petitioner. These documents can hardly be considered a credible or true reflection of the transactions. It is an incomplete record yielding easily to the inclusion or deletion of certain matters. The contents are subject to suspicion since they are not reflective of all pertinent and relevant data. Thus, even assuming the admissibility of these alleged profit and loss statements, they are devoid of any evidentiary weight, for the amounts are conclusions without premises, its bases left to speculation, conjectures, assertions and guesswork.

297 | P a g e

Law 321_Corporation LAW_ Case Digest RAMOS, petitioner vs. COURT OF APPEALS, respondent G.R. No. L-41295 December 4, 1989 FACTS: On August 14 and 26, 1969, CMS Stock Brokerage, Inc. (or CMS) sold to Lopez, Locsin, Ledesma & Co., Inc. (or LLL) on the floor of the Makati Stock Exchange (or MSE) 2,650 shares of Benguet Consolidated Corporation for P297,650 on a delayed delivery basis of 10 to 20 days, evidenced by Exchange Contracts Nos. B-11807 and B11814 both dated August 14, 1969 and B-13084 dated August 26, 1969. LLL bought the shares for the account of its clients, the third-party defendants, Rene Ledesma, Jose Maria Lopez, Cesar A. Lopez, Jr. and Alfredo Ramos. CMS failed to deliver the shares of stocks within the agreed period, but LLL did not demand delivery. On January 6, 1970, CMS informed LLL that it would deliver the shares the next day. LLL wrote CMS that it would not accept the shares because its principals had cancelled their orders. In its reply, CMS insisted that LLL take delivery of the Benguet shares. In CMS's Clearing House Report of January 9, 1970, the disposition of the shares in favor of LLL appeared, but the latter refused to acknowledge receipt of the covering disposal letter. CMS then deposited the letter in the Office of the Exchange Executive, Secretary with the notation "Refused acceptance pending decision of the Exchange". When the controversy was submitted to the Board of Governors of the Exchange for determination, the Board issued Resolution No. 523 on August 10, 1970 advising the parties to litigate the matter in court. Accordingly, CMS filed in the Court of First Instance of Rizal a complaint to compel LLL to accept the Benguet shares, to pay the price of P297,650, as well as P25,000 as attorney's fees and costs. LLL's motion to dismiss the complaint was denied. ISSUE: Whether or not appellate court erred in rendering a summary judgment, in failing to find that CMS has no right to damages against the petitioner there being no privity of contract between them, and in refusing to exonerate the petitioner from personal liability for the orders he placed with LLL for the account of the Alakor Corporation. RULING: NO. In the case at bar, the stock purchases of LLL were on a 10-20 day delayed delivery basis. Accordingly, after that period lapsed, the Buying Member (LLL) should have advised the Selling Member CMS in writing. As observed by the trial court, Section 1, Article V of the Exchange Rules does not vest on the buyer, respondent LLL, a right to rescind its contract with CMS upon the latter's default. The Exchange Rules obligate the buyer to make a demand, and if the selling member fails to deliver the ordered shares despite the demand, the buyer is further obligated to deliver a copy of his demand letter to the Chairman of the Floor Trading and Arbitration Committee so that the latter may purchase the shares for the selling member's account. Said rules were held binding on members of the Exchange. Inasmuch as petitioner placed his order for Benguet shares through a member of the Exchange (LLL), he is indirectly bound by the rules of the Exchange. The defendants' lack of knowledge regarding the truth of the allegation in the complaint, that the failure of CMS to deliver the Benguet shares on time was due to oversight, did not constitute an obstacle to the rendition of a summary judgment by the trial court, for although an averment of lack of knowledge has the effect of a denial, it does not raise a genuine issue. 298 | P a g e

Law 321_Corporation LAW_ Case Digest SAW, petitioner vs. COURT OF APPEALS, respondent G.R. No. 90580 April 8, 1991 FACTS: A collection suit with preliminary attachment was filed by Equitable Banking Corporation against Freeman, Inc. and Saw Chiao Lian, its President and General Manager. The petitioners moved to intervene, alleging that (1) the loan transactions between Saw Chiao Lian and Equitable Banking Corp. were not approved by the stockholders representing at least 2/3 of corporate capital; (2) Saw Chiao Lian had no authority to contract such loans; and (3) there was collusion between the officials of Freeman, Inc. and Equitable Banking Corp. in securing the loans. The motion to intervene was denied, and the petitioners appealed to the Court of Appeals. Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they submitted to and was approved by the lower court. But because it was not complied with, Equitable secured a writ of execution, and two lots owned by Freeman, Inc. were levied upon and sold at public auction to Freeman Management and Development Corp. The Court of Appeals sustained the denial of the petitioners' motion for intervention, holding that "the compromise agreement between Freeman, Inc., through its President, and Equitable Banking Corp. will not necessarily prejudice petitioners whose rights to corporate assets are at most inchoate, prior to the dissolution of Freeman, Inc. And intervention under Sec. 2, Rule 12 of the Revised Rules of Court is proper only when one's right is actual, material, direct and immediate and not simply contingent or expectant." It also ruled against the petitioners' argument that because they had already filed a notice of appeal, the trial judge had lost jurisdiction over the case and could no longer issue the writ of execution. ISSUE: Whether or not the Honorable Court of Appeals erred in holding that the petitioners cannot intervene in Civil Case No. 88-44404 because their rights as stockholders of Freeman are merely inchoate and not actual, material, direct and immediate prior to the dissolution of the corporation. RULING: NO. The petitioners base their right to intervene for the protection of their interests as stockholders on Everett v. Asia Banking Corp. where it was held: The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the action must be brought by the Board of Directors, has its exceptions. Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian is essentially in personam and, as an action against defendants in their personal capacities, will not prejudice the petitioners as stockholders of the corporation. The Everett case is not applicable because it involved an action filed by the minority stockholders where the board of directors refused to bring an action in behalf of the corporation. In the case at bar, it was Freeman, Inc. that was being sued by the creditor bank. On the second assignment of error, Equitable maintains that the petitioners' appeal could only apply to the denial of their motion for intervention and not to the main case because their personality as party litigants had not been recognized by the trial court. After examining the issues and arguments of the parties, the Court finds that the respondent court committed no reversible error in sustaining the denial by the trial court of the petitioners' motion for intervention. 299 | P a g e

Law 321_Corporation LAW_ Case Digest

Consideration for Stocks


APODACA, petitioner vs. NATIONAL LABOR RELATIONS COMMISSION, respondent G.R. No. 80039 April 18, 1989 FACTS: Petitioner was employed in respondent corporation. On August 28, 1985, respondent Jose M. Mirasol persuaded petitioner to subscribe to 1,500 shares of respondent corporation at P100.00 per share or a total of P150,000.00. He made an initial payment of P37,500.00. On September 1, 1975, petitioner was appointed President and General Manager of the respondent corporation. However, on January 2, 1986, he resigned. On December 19, 1986, petitioner instituted with the NLRC a complaint against private respondents for the payment of his unpaid wages, his cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation for 1986. Petitioner and private respondents submitted their position papers to the labor arbiter. Private respondents admitted that there is due to petitioner the amount of P17,060.07 but this was applied to the unpaid balance of his subscription in the amount of P95,439.93. Petitioner questioned the set-off alleging that there was no call or notice for the payment of the unpaid subscription and that, accordingly, the alleged obligation is not enforceable. In a decision dated April 28, 1987, the labor arbiter sustained the claim of petitioner for P17,060.07 on the ground that the employer has no right to withhold payment of wages already earned under Article 103 of the Labor Code. Upon the appeal of the private respondents to public respondent NLRC, the decision of the labor arbiter was reversed in a decision dated September 18, 1987. The NLRC held that a stockholder who fails to pay his unpaid subscription on call becomes a debtor of the corporation and that the set-off of said obligation against the wages and others due to petitioner is not contrary to law, morals and public policy. ISSUE: Whether or not an obligation arising from non-payment of stock subscriptions to a corporation can be offset against a money claim of an employee against the employer. RULING: NO. The unpaid subscriptions are not due and payable until a call is made by the corporation for payment. Private respondents have not presented a resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the respondent corporation. What the records show is that the respondent corporation deducted the amount due to petitioner from the amount receivable from him for the unpaid subscriptions. No doubt such set-off was without lawful basis, if not premature. As there was no notice or call for the payment of unpaid subscriptions, the same is not yet due and payable. Lastly, assuming further that there was a call for payment of the unpaid subscription, the NLRC cannot validly set it off against the wages and other benefits due petitioner. Article 113 of the Labor Code allows such a deduction from the wages of the employees by the employer, only in three instances, to wit: No employer, in his own behalf or in behalf of any person, shall make any deduction from the wages of his employees, except in certain cases.

300 | P a g e

Law 321_Corporation LAW_ Case Digest FUA CUN, petitioner vs. SUMMERS, respondent G.R. No. L-19441 March 27, 1923 FACTS: It appears from the evidence that on August 26, 1920, one Chua Soco subscribed for five hundred shares of stock of the defendant Banking Corporation at a par value of P100 per share, paying the sum of P25,000, one-half of the subscription price, in cash, for which a receipt was issued. On May 18, 1921, Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the sum of P25,000 payable in ninety days and drawing interest at the rate of 1 per cent per month, securing the note with a chattel mortgage on the shares of stock subscribed for by Chua Soco, who also endorsed the receipt above mentioned and delivered it to the mortgagee. The plaintiff thereupon took the receipt to the manager of the defendant Bank and informed him of the transaction with Chua Soco, but was told to await action upon the matter by the Board of Directors. In the meantime Chua Soco appears to have become indebted to the China Banking Corporation in the sum of P37,731.68 for dishonored acceptances of commercial paper and in an action brought against him to recover this amount, Chua Soco's interest in the five hundred shares subscribed for was attached and the receipt seized by the sheriff. The attachment was levied after the defendant bank had received notice of the facts that the receipt had been endorsed over to the plaintiff. Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-half of the subscription price of five hundred shares Chua Soco in effect became the owner of two hundred and fifty shares and praying that his, the plaintiff's, lien on said shares, by virtue of the chattel mortgage, be declared to hold priority over the claim of the defendant Banking Corporation; that the defendants be ordered to deliver the receipt in question to him; and that he be awarded the sum of P5,000 in damages for wrongful attachment. ISSUE: Whether or not the trial court erred in declaring that Chua Soco, through the payment of the P25,000, acquired the right to two hundred and fifty shares fully paid up, upon which shares the plaintiff holds a lien superior to that of the defendant Banking Corporation and ordering that the receipt be returned to said plaintiff. RULING: YES. The claim of the defendant Banking Corporation upon which it brought the action in which the writ of attachment was issued, was for the non-payment of drafts accepted by Chua Soco and had no direct connection with the shares of stock in question. At common law a corporation has no lien upon the shares of stockholders for any indebtedness to the corporation and our attention has not been called to any statute creating such lien here. On the contrary, section 120 of the Corporation Act provides that "no bank organized under this Act shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith, and stock so purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at public or private sale, or, in default thereof, a receiver may be appointed to close up the business of the bank in accordance with law." The reasons for this doctrine are obvious; if banking corporations were given a lien on their own stock for the indebtedness of the stockholders, the prohibition against granting loans or discounts upon the security of the stock would become largely ineffective.

301 | P a g e

Law 321_Corporation LAW_ Case Digest NATIONAL EXCHANGE CO., INC., petitioner vs. I.B. DEXTER, respondent G.R. No. L-27872 February 25, 1928 FACTS: This action was instituted in the Court of First Instance of Manila by the National Exchange Co., Inc., as assignee (through the Philippine National Bank) of C. S. Salmon & Co., for the purpose of recovering from I. B. Dexter a balance of P15,000, the par value of one hundred fifty shares of the capital stock of C. S. Salmon & co., with interest and costs. Upon hearing the cause the trial judge gave judgment for the plaintiff to recover the amount claimed, with lawful interest from January 1, 1920, and with costs. From this judgment the defendant appealed. It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a written subscription to the corporate stock of C. S. Salmon & Co. in the following form: I hereby subscribe for three hundred (300) shares of the capital stock of C. S. Salmon and Company, payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until the full amount of this subscription has been paid. Upon this subscription the sum of P15,000 was paid in January, 1920, from a dividend declared at about that time by the company, supplemented by money supplied personally by the subscriber. Beyond this nothing has been paid on the shares and no further dividend has been declared by the corporation. There is therefore a balance of P15,000 still paid upon the subscription. ISSUE: Whether or not the stipulation contained in the subscription to the effect that the subscription is payable from the first dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover the value of the shares. RULING: NO. In discussing this problem we accept as sound law the proposition propounded by the appellant's attorneys and taken from Fletcher's Cyclopedia as follows: In the absence of restrictions in its character, a corporation, under its general power to contract, has the power to accept subscriptions upon any special terms not prohibited by positive law or contrary to public policy, provided they are not such as to require the performance of acts which are beyond the powers conferred upon the corporation by its character, and provided they do not constitute a fraud upon other subscribers or stockholders, or upon persons who are or may become creditors of the corporation. Pursuant to such, we find that the Philippine Commission inserted in the Corporation Law, enacted March 1, 1906, the following provision: "no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of the stock or bonds so issued." The prohibition against the issuance of shares by corporations except for actual cash to the par value of the stock to its full equivalent in property is thus enshrined in both the organic and statutory law of the Philippine; Islands; and it would seem that our lawmakers could scarely have chosen language more directly suited to secure absolute equality stockholders with respect to their liability upon stock subscriptions. Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation such as that now under consideration, in a stock subcription, is illegal, for this stipulation obligates the subcriber to pay nothing for the shares except as dividends may accrue upon the stock. In the contingency that dividends are not paid, there is no liability at all. This is discrimination in favor of the particular subcriber, and hence the stipulation is unlawful. 302 | P a g e

Law 321_Corporation LAW_ Case Digest NIELSON & CO., INC., plaintiff vs. LEPANTO CONSOLIDATED MINING CO., defendant G.R. No. L-21601 December 17, 1966 FACTS: An operating agreement was executed before World War II (on 30 January 1937) between Nielson & Co. Inc. and the Lepanto Consolidated Mining Co. whereby the former operated and managed the mining properties owned by the latter for a management fee of P2,500.00 a month and a 10% participation in the net profits resulting from the operation of the mining properties, for a period of 5 years. In 1940, a dispute arose regarding the computation of the 10% share of Nielson in the profits. The Board of Directors of Lepanto, realizing that the mechanics of the contract was unfair to Nielson, authorized its President to enter into an agreement with Nielson modifying the pertinent provision of the contract effective 1 January 1940 in such a way that Nielson shall receive (1) 10% of the dividends declared and paid, when and as paid, during the period of the contract and at the end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the year out of surplus earnings for capital account. In the latter part of 1941, the parties agreed to renew the contract for another period of 5 years, but in the meantime, the Pacific War broke out in December 1941. In January 1942 operation of the mining properties was disrupted on account of the war. In February 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and mines, were destroyed upon orders of the United States Army, to prevent their utilization by the invading Japanese Army. The Japanese forces thereafter occupied the mining properties, operated the mines during the continuance of the war, and who were ousted from the mining properties only in August 1945. Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose between NIELSON and LEPANTO over the status of the operating contract which as renewed expired in 1947. ISSUE: Whether or not the management contract is a contract of agency. RULING: NO. In the performance of this principal undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation. It is true that the management contract provides that Nielson would also act as purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an agent. Further, from the statements in the annual report for 1936, and from the provision of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and manage its mines was principally in consideration of the know-how and technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract because it had lost its trust and confidence in Nielson.

303 | P a g e

Law 321_Corporation LAW_ Case Digest TRILLANA, petitioner vs. QUEZON COLLEGE, INC., respondent G.R. No. L-5003 June 27, 1953 FACTS: Damasa Crisostomo sent a letter to the Board of Trustees of the Quezon College subscribing to 200 shares of its capital stock at par value of Php100 each. Damasa Crisostomo died on October 26, 1948. As no payment appears to have been made on the subscription mentioned in her letter, the Quezon College, Inc. presented a claim before the Court of First Instance of Bulacan in her testate proceeding, for the collection of the sum of P20,000, representing the value of the subscription to the capital stock of the Quezon College, Inc. This claim was opposed by the administrator of the estate, and the Court of First Instance of Bulacan, after hearing issued an order dismissing the claim of the Quezon College, Inc. on the ground that the subscription in question was neither registered in nor authorized by the Securities and Exchange Commission. From this order the Quezon College, Inc. has appealed. ISSUE: Whether or not the subscription applied for by Damasa Crisostomo is an enforceable contract. RULING: NO. It appears that the application sent by Damasa Crisostomo to the Quezon College, Inc. was written on a general form indicating that an applicant will enclose an amount as initial payment and will pay the balance in accordance with law and the regulations of the College. On the other hand, in the letter actually sent by Damasa Crisostomo, the latter (who requested that her subscription for 200 shares be entered) not only did not enclose any initial payment but stated that "babayaran kong lahat pagkatapos na ako ay makapagpahuli ng isda." There is nothing in the record to show that the Quezon College, Inc. accepted the term of payment suggested by Damasa Crisostomo, or that if there was any acceptance the same came to her knowledge during her lifetime. As the application of Damasa Crisostomo is obviously at variance with the terms evidenced in the form letter issued by the Quezon College, Inc., there was absolute necessity on the part of the College to express its agreement to Damasa's offer in order to bind the latter. Conversely, said acceptance was essential, because it would be unfair to immediately obligate the Quezon College, Inc. under Damasa's promise to pay the price of the subscription after she had caused fish to be caught. In other words, the relation between Damasa Crisostomo and the Quezon College, Inc. had only thus reached the preliminary stage whereby the latter offered its stock for subscription on the terms stated in the form letter, and Damasa applied for subscription fixing her own plan of payment, a relation, in the absence as in the present case of acceptance by the Quezon College, Inc. of the counter offer of Damasa Crisostomo, that had not ripened into an enforceable contract. Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the more imperative, in view of the proposal of Damasa Crisostomo to pay the value of the subscription after she has harvested fish, a condition obviously dependent upon her sole will and, therefore, facultative in nature, rendering the obligation void, under article 1115 of the old Civil Code which provides as follows: "If the fulfillment of the condition should depend upon the exclusive will of the debtor, the conditional obligation shall be void. If it should depend upon chance, or upon the will of a third person, the obligation shall produce all its effects in accordance with the provisions of this code." It cannot be argued that the condition solely is void, because it would have served to create the obligation to pay, wherein only the potestative condition was held void because it referred merely to the fulfillment of an already existing indebtedness.

304 | P a g e

Law 321_Corporation LAW_ Case Digest

Unpaid Subscriptions: Call: When necessary


GARCIA, plaintiff vs. SUAREZ, defendant G.R. No. L-45493 April 21, 1939 FACTS: On October 4, 1924, the appellant subscribed to sixteen shares of the capital stock of the Compaia Hispano-Filipina, Inc., a corporation which is duly formed and organized. Of the sixteen subscribed shares, at the par value of P100 each, the appellant only paid P400, the value of four shares. On June 5, 1931, the plaintiffappellee was appointed by the court receiver of the Compaia Hispano-Filipina, Inc., to collect all the credits of said corporation, pay its debts and dispose of the remainder of its assets and of its properties. On June 18, 1931, the plaintiff-appellee in vain made demand upon the defendant-appellant to pay the balance of his subscription. On July 10, 1933, the plaintiff, as receiver, brought an action in the Court of First Instance of Manila to recover from the defendant-appellant and other shareholders the balance of their subscriptions, but the complaint was dismissed for lack of prosecution. On October 10, 1935, a similar complaint was filed against the appellant, and after trial, judgment was rendered therein ordering the said defendant to pay to the plaintiff, as receiver of Compaia Hispano-Filipina, Inc., the sum of P1,200, with legal interest thereon from October 4, 1924, and the costs. The defendant appealed and in this instance contends that the trial court erred in holding that the action of the plaintiff-appellee has not prescribed, and that the appellant has not been released from his obligation to pay the balance of his subscription. ISSUE: Whether or not the obligation contracted by the appellant to pay the value of his subscription was demandable from the date of subscription in the absence of any stipulation to the contrary. RULING: NO. Section 37 of the Corporation Law provides when the obligation to pay interest arises and when payment should be made, but it is absolutely silent as to when the subscription to a stock should be paid. Of course, the obligation to pay arises from the date of the subscription, but the coming into being of an obligation should not be confused with the time when it becomes demandable. In a loan for example, the obligation to pay arises from the time the loan is taken; but the maturity of that obligation, the date when the debtor can be compelled to pay, is not the date itself of the loan, because this would be absurd. The date when payment can be demanded is necessarily distinct from and subsequent to that the obligation is contracted. By the same token, the subscription to the capital stock of the corporation, unless otherwise stipulation, is not payable at the moment of the subscription but on a subsequent date which may be fixed by the corporation. Hence, section 38 of the Corporation Law, amended by Act No. 3518, provides that: The board of directors or trustees of any stock corporation formed, organized, or existing under this Act may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock. The board of directors of the Compaia Hispano-Filipino, Inc., not having declared due and payable the stock subscribed by the appellant, the prescriptive period of the action for the collection thereof only commenced to run from June 18, 1931 when the plaintiff, in his capacity as receiver and in the exercise of the power conferred upon him by the said section 38 of the Corporation Law, demanded of the appellant to pay the balance of his subscription. The present action having been filed on October 10, 1935, the defense of prescription is entirely without basis. 305 | P a g e

Law 321_Corporation LAW_ Case Digest PHILIPPINE NATIONAL BANK, plaintiff vs. BITULOK SAWMILL INC., defendant G.R. Nos. L-24177-85 June 29, 1968 FACTS: The Philippine Lumber Distributing Agency, Inc., according to the lower court, "was organized sometime in the early part of 1947 upon the initiative and insistence of the late President Manuel Roxas of the Republic of the Philippines who for the purpose, had called several conferences between him and the subscribers and organizers of the Philippine Lumber Distributing Agency, Inc." The purpose was praiseworthy, to insure a steady supply of lumber, which could be sold at reasonable prices to enable the war sufferers to rehabilitate their devastated homes. At the beginning, the lumber producers were reluctant to organize the cooperative agency as they believed that it would not be easy to eliminate from the retail trade the alien middlemen who had been in this business from time immemorial, but because the late President Roxas made it clear that such a cooperative agency would not be successful without a substantial working capital which the lumber producers could not entirely shoulder, and as an inducement he promised and agreed to finance the agency by making the Government invest P9.00 by way of counterpart for every peso that the members would invest therein." Accordingly, "the late President Roxas instructed the Hon. Emilio Abello, then Executive Secretary and Chairman of the Board of Directors of the Philippine National Bank, for the latter to grant said agency an overdraft in the original sum of P250,000.00 which was later increased to P350,000.00, which was approved by said Board of Directors of the Philippine National Bank on July 28, 1947, payable on or before April 30, 1958, with interest at the rate of 6% per annum, and secured by the chattel mortgages on the stock of lumber of said agency." The Philippine Government did not invest the P9.00 for every peso coming from defendant lumber producers. The loan extended to the Philippine Lumber Distributing Agency by the Philippine National Bank was not paid. ISSUE: Whether or not the non-compliance with a plain statutory command, considering the persuasiveness of the plea that defendants-appellees would "not have subscribed to the capital stock" of the Philippine Lumber Distributing Agency "were it not for the assurance of the then President of the Republic that the Government would back it up by investing P9.00 for every peso" subscribed, a condition which was not fulfilled, such commitment not having been complied with, be justified. RULING: NO. It would be unwarranted to ascribe to the late President Roxas the view that the payment of the stock subscriptions, as thus required by law, could be condoned in the event that the counterpart fund to be invested by the Government would not be available. Even if such were the case, however, and such a promise were in fact made, to further the laudable purpose to which the proposed corporation would be devoted and the possibility that the lumber producers would lose money in the process, still the plain and specific wording of the applicable legal provision as interpreted by this Court must be controlling. It is a well-settled principle that with all the vast powers lodged in the Executive, he is still devoid of the prerogative of suspending the operation of any statute or any of its terms.

306 | P a g e

Law 321_Corporation LAW_ Case Digest VELASCO, plaintiff vs. POIZAT, defendant G.R. No. L-11528 March 15, 1918 FACTS: From the amended complaint filed in this cause upon February 5, 1915, it appears that the plaintiff, as assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the corporate stock of said company. It appears that the corporation in question was originally organized by several residents of the city of Manila, where the company had its principal place of business, with a capital of P50,000, divided into 500 shares. The defendant subscribed for 20 shares of the stock of the company, an paid in upon his subscription the sum of P500, the par value of 5 shares . The action was brought to recover the amount subscribed upon the remaining shares. It appears that the defendant was a stock holder in the company from the inception of the enterprise, and for sometime acted as its treasurer and manager. While serving in this capacity he called in and collected all subscriptions to the capital stock of the company, except the aforesaid 15 shares subscribed by himself and another 15 shares owned by Jose R. Infante. Upon July 13, 1914, a meeting of the board of directors of the company was held at which a majority of the stock was presented. Upon this occasion two resolutions, important to be here noted, were adopted. The first was a proposal that the directors, or shareholders, of the company should make good by new subscriptions, in proportion to their respective holdings, 15 shares which had been surrendered by Infante. ISSUE: Whether or not Poizat is liable for his unpaid subscription. RULING: YES. A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It is a rule, accepted by the Supreme Court of the United States that a subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. The provisions of the Corporation Law (Act No. 1459) given recognition of two remedies for the enforcement of stock subscriptions. The first and most special remedy given by the statute consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the provisions of section 38 to 48, inclusive, of the Corporation Law are applicable and must be followed. The other remedy is by action in court. It is generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a remedy in addition to that which proceeds by action in court; and it has been held that the ordinary legal remedy by action exists even though no express mention thereof is made in the statute.

307 | P a g e

Law 321_Corporation LAW_ Case Digest

Court Action
LUMANLAN, plaintiff vs. CURA, et al., defendants G.R. No. L-39861 March 21, 1934 FACTS: The appellant is a corporation duly organized under the laws of the Philippine Islands with its central office in the City of Manila. The plaintiff-appellee Bonifacio Lumanlan, on July 31, 1922, subscribed for 300 shares of stock of said corporation at a par value of P50 or a total of P15,000. Julio Valenzuela, Pedro Santos and Francisco Escoto, creditors of this corporation, filed suit against it in the Court of First Instance of Manila, case No. 37007, praying that a receiver be appointed, as it appeared that the corporation at that time had no assets except credits against those who had subscribed for shares of stock. The court named Tayag as receiver for the purpose of collecting, said subscriptions. As Bonifacio Lumanlan had only paid P1,500 of the P15,000, par value of the stock for which he subscribed, the receiver on August 30, 1930, filed a suit against him in the Court of First Instance of Manila, civil case No. 37492, for the collection of P15,109, P13,500 of which was the amount he owed for unpaid stock and P1,609 for loans and advances by the corporation to Lumanlan. In that case Lumanlan was sentenced to pay the corporation the above-mentioned sum of P15,109 with legal interest thereon from August 30, 1930, and costs. Lumanlan appealed from this decision. ISSUE: Whether or not Bonifacio Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25 per cent on the principal debt, as he had to file this suit to collect, or receive credit for the sum which he had paid Valenzuela for and in place of the corporation, or a total of P13,840. RULING: YES. It appears from the record that during the trial of the case now under consideration, the Bank of the Philippine Islands appeared in this case as assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was appointed assignee in case No. 43065 of the Court of First Instance of the City of Manila on November 28, 1932. It is therefore evident that there are still other creditors of Dizon & Co., Inc. This being the case that corporation has a right to collect all unpaid stock subscriptions and any other amounts which may be due it. It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. The Corporation Law clearly recognizes that a stock subscription is a subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable.

308 | P a g e

Law 321_Corporation LAW_ Case Digest EDWARD KELLER & Co., Ltd., petitioner vs. COB GROUP MARKETING, respondent G.R. No. L-68097 January 16, 1986 FACTS: Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive distributor of its household products, Brite and Nuvan in Panay and Negros, as shown in the sales agreement dated March 14, 1970 . Under that agreement Keller sold on credit its products to COB Group Marketing. As security for COB Group Marketing's credit purchases up to the amount of P35,000, one Asuncion Manahan mortgaged her land to Keller. Manahan assumed solidarily with COB Group Marketing the faithful performance of all the terms and conditions of the sales agreement. In July, 1970 the parties executed a second sales agreement whereby COB Group Marketing's territory was extended to Northern and Southern Luzon. As security for the credit purchases up to P25,000 of COB Group Marketing for that area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased) executed a mortgage on their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily liable with COB Group Marketing for its obligations under the sales agreement. The credit purchases of COB Group Marketing, which started on October 15, 1969, limited up to January 22, 1971. On May 8, the board of directors of COB Group Marketing were apprised by Jose E. Bax the firm's president and general manager, that the firm owed Keller about P179,000. Bax was authorized to negotiate with Keller for the settlement of his firm's liability. On the same day, May 8, Bax and R. Oefeli of Keller signed the conditions for the settlement of COB Group Marketing's liability. Twelve days later, or on May 20, COB Group Marketing, through Bax executed two second chattel mortgages over its 12 trucks (already mortgaged to Northern Motors, Inc.) as security for its obligation to Keller amounting to P179,185.16 as of April 30, 1971. ISSUE: Whether or not the lower courts erred in nullifying the admissions of liability made in 1971 by Bax as president and general manager of COB Group Marketing and in giving credence to the alleged overpayment computed by Bax. RULING: YES. The lower courts not only allowed Bax to nullify his admissions as to the liability of COB Group Marketing but they also erroneously rendered judgment in its favor in the amount of its supposed overpayment in the sum of P100,596.72, in spite of the fact that COB Group Marketing was declared in default and did not file any counterclaim for the supposed overpayment. The lower courts harped on Keller's alleged failure to thresh out with representatives of COB Group Marketing their "diverse statements of credits and payments". This contention has no factual basis. That means that there was a conference on the COB Group Marketing's liability. Bax in that discussion did not present his reconciliation statements to show overpayment. Bax admitted that Keller sent his company monthly statements of accounts but he could not produce any formal protest against the supposed inaccuracy of the said statements. He lamely explained that he would have to dig up his company's records for the formal protest. He did not make any written demand for reconciliation of accounts. As to the liability of the stockholders, it is settled that a stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription.

309 | P a g e

Law 321_Corporation LAW_ Case Digest

Effect of Delinquency
VALLEY GOLF & COUNTRY CLUB, Inc., petitioner vs. VDA. DE CARAM, respondent G.R. No. 158805 April 16, 2009 FACTS: Valley Golf & Country Club (Valley Golf) is a duly constituted non-stock, nonprofit corporation which operates a golf course. The members and their guests are entitled to play golf on the said course and otherwise avail of the facilities and privileges provided by Valley Golf. The shareholders are likewise assessed monthly membership dues. In 1961, the late Congressman Fermin Z. Caram, Jr. (Caram), the husband of the present respondent, subscribed to purchased and paid for in full one share (Golf Share) in the capital stock of Valley Golf. He was issued Stock Certificate No. 389 dated 26 January 1961 for the Golf Share. The Stock Certificate likewise indicates a par value of P9,000.00. Valley Golf would subsequently allege that beginning 25 January 1980, Caram stopped paying his monthly dues, which were continually assessed until 31 June 1987. Valley Golf claims to have sent five (5) letters to Caram concerning his delinquent account within the period from 27 January 1986 until 3 May 1987, all forwarded to P.O. Box No. 1566, Makati Commercial Center Post Office, the mailing address which Caram allegedly furnished Valley Golf. The Golf Share was sold at public auction on 11 June 1987 for P25,000.00 after the Board of Directors had authorized the sale in a meeting on 11 April 1987, and the Notice of Auction Sale was published in the 6 June 1987 edition of the Philippine Daily Inquirer. ISSUE: Whether or not a non-stock corporation seize and dispose of the membership share of a fully-paid member on account of its unpaid debts to the corporation when it is authorized to do so under the corporate by-laws but not by the Articles of Incorporation. RULING: NO. It may be conceded that the actions of Valley Golf were, technically speaking, in accord with the provisions of its by-laws on termination of membership, vaguely defined as these are. Yet especially since the termination of membership in Valley Golf is inextricably linked to the deprivation of property rights over the Golf Share, the emergence of such adverse consequences make legal and equitable standards come to fore. The commentaries of Lopez advert to an SEC Opinion dated 29 September 1987 which we can cite with approval. Lopez cites: In order that the action of a corporation in expelling a member for cause may be valid, it is essential, in the absence of a waiver, that there shall be a hearing or trial of the charge against him, with reasonable notice to him and a fair opportunity to be heard in his defense. If the method of trial is not regulated by the by-laws of the association, it should at least permit substantial justice. The hearing must be conducted fairly and openly and the body of persons before whom it is heard or who are to decide the case must be unprejudiced. It is unmistakably wise public policy to require that the termination of membership in a non-stock corporation be done in accordance with substantial justice. No matter how one may precisely define such term, it is evident in this case that the termination of Carams membership betrayed the dictates of substantial justice.

310 | P a g e

Law 321_Corporation LAW_ Case Digest CALATAGAN GOLF CLUB, INC., petitioner vs. CLEMENTE Jr., respondent G.R. No. 165443 April 16, 2009 FACTS: Clemente applied to purchase one share of stock of Calatagan, indicating in his application for membership his mailing address at "Phimco Industries, Inc. P.O. Box 240, MCC," complete residential address, office and residence telephone numbers, as well as the company (Phimco) with which he was connected, Calatagan issued to him Certificate of Stock No. A-01295 on 2 May 1990 after paying P120,000.00 for the share. Calatagan charges monthly dues on its members to meet expenses for general operations, as well as costs for upkeep and improvement of the grounds and facilities. The provision on monthly dues is incorporated in Calatagans Articles of Incorporation and By-Laws. It is also reproduced at the back of each certificate of stock. Calatagan declared Clemente delinquent for having failed to pay his monthly dues for more than sixty (60) days, specifically P5,600.00 as of 31 October 1992. Calatagan also included Clementes name in the list of delinquent members posted on the clubs bulletin board. On 1 December 1992, Calatagans board of directors adopted a resolution authorizing the foreclosure of shares of delinquent members, including Clementes; and the public auction of these shares. ISSUE: Whether or not the action of Clemente had prescribed pursuant to Section 69 of the Corporation Code, and that the requisite notices under both the law and the bylaws had been rendered to Clemente. RULING: YES. There are fundamental differences that defy equivalence or even analogy between the sale of delinquent stock under Section 68 and the sale that occurred in this case. At the root of the sale of delinquent stock is the non-payment of the subscription price for the share of stock itself. The stockholder or subscriber has yet to fully pay for the value of the share or shares subscribed. In this case, Clemente had already fully paid for the share in Calatagan and no longer had any outstanding obligation to deprive him of full title to his share. Perhaps the analogy could have been made if Clemente had not yet fully paid for his share and the non-stock corporation, pursuant to an article or by-law provision designed to address that situation, decided to sell such share as a consequence. But that is not the case here, and there is no purpose for us to apply Section 69 to the case at bar. It is plain that Calatagan had endeavored to install a clear and comprehensive procedure to govern the payment of monthly dues, the declaration of a member as delinquent, and the constitution of a lien on the shares and its eventual public sale to answer for the members debts. Under Section 91 of the Corporation Code, membership in a non-stock corporation "shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws." The By-law provisions are elaborate in explaining the manner and the causes for the termination of membership in Calatagan, through the execution on the lien of the share. The Court is satisfied that the By-Laws, as written, affords due protection to the member by assuring that the member should be notified by the Secretary of the looming execution sale that would terminate membership in the club. In addition, the By-Laws guarantees that after the execution sale, the proceeds of the sale would be returned to the former member after deducting the outstanding obligations. If followed to the letter, the termination of membership under this procedure outlined in the By-Laws would accord with substantial justice.

311 | P a g e

Law 321_Corporation LAW_ Case Digest

Issuance of Certificates of Stock


FUA CUN, petitioner vs. SUMMERS, respondent G.R. No. L-19441 March 27, 1923 FACTS: It appears from the evidence that on August 26, 1920, one Chua Soco subscribed for five hundred shares of stock of the defendant Banking Corporation. On May 18, 1921, Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the sum of P25,000 payable in ninety days and drawing interest at the rate of 1 per cent per month, securing the note with a chattel mortgage on the shares of stock subscribed for by Chua Soco, who also endorsed the receipt above mentioned and delivered it to the mortgagee. The plaintiff thereupon took the receipt to the manager of the defendant Bank and informed him of the transaction with Chua Soco, but was told to await action upon the matter by the Board of Directors. In the meantime Chua Soco appears to have become indebted to the China Banking Corporation in the sum of P37,731.68 for dishonored acceptances of commercial paper and in an action brought against him to recover this amount, Chua Soco's interest in the five hundred shares subscribed for was attached and the receipt seized by the sheriff. The attachment was levied after the defendant bank had received notice of the facts that the receipt had been endorsed over to the plaintiff. Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-half of the subscription price of five hundred shares Chua Soco in effect became the owner of two hundred and fifty shares and praying that his, the plaintiff's, lien on said shares, by virtue of the chattel mortgage, be declared to hold priority over the claim of the defendant Banking Corporation; that the defendants be ordered to deliver the receipt in question to him; and that he be awarded the sum of P5,000 in damages for wrongful attachment. ISSUE: Whether or not the interest held by Chua Soco was merely an equity which could not be made the subject of a chattel mortgage. RULING: NO. Though the courts have uniformly held that chattel mortgages on shares of stock and other choses in action are valid as between the parties, there is still much to be said in favor of the defendants' contention that the chattel mortgage here in question would not prevail over liens of third parties without notice; an equity in shares of stock is of such an intangible character that it is somewhat difficult to see how it can be treated as a chattel and mortgaged in such a manner that the recording of the mortgage will furnish constructive notice to third parties. In regard to a chattel mortgage of shares of stock: These certificates of stock are in the pockets of the owner, and go with him where he may happen to locate, as choses in action, or evidence of his right, without any means on the part of those with whom he proposes to deal on the faith of such a security of ascertaining whether or not this stock is in pledge or mortgaged to others. The chief office of the company may be at one place to-day and at another tomorrow. The owner may have no fixed or permanent abode, and with his notes in one pocket and his certificates of stock in the other. But a determination of this question is not essential in the present case. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt.

312 | P a g e

Law 321_Corporation LAW_ Case Digest BALTAZAR, plaintiff vs. LINGAYEN GULF ELECTRIC POWER CO., INC., respondent G.R. No. L-16236 June 30, 1965 FACTS: The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to as Corporation, was doing business in the Philippines, with principal offices at Lingayen, Pangasinan, and with an authorized capital stock of P300.000.00 divided into 3,000 shares of voting stock at P100.00 par value, per share. Plaintiffs Baltazar and Rose were among the incorporators, having subscribed to 600 and 400 shares of the capital stock, or a total par value of P60,000.00 and P40.000.00, respectively. It is alleged that it has always been the practice and procedure of the Corporation to issue certificates of stock to its individual subscribers for unpaid shares of stock. Of the 600 shares of capital stock subscribed by Baltazar, he had fully paid 535 shares of stock, and the Corporation issued to him several fully paid up and non-assessable certificates of stock, corresponding to the 535 shares. After having made transfers to third persons and acquired new ones, Baltazar had to his credit, on the filing of the complaint 341 shares fully paid and non-assessable. The respondents Ungson, Estrada, Fernandez and Yuson were small stockholders of the Corporation, all holding a total number of fully paid-up shares of stock, of not more than 100 shares, with a par value of P10,000.00 and the defendant Acena, was likewise an incorporator and stockholder, holding 600 shares of stock, for which certificate of stock were issued to him and as such, was the largest individual stockholder thereof. Defendants Ungson, Estrada, Fernandez and Yuzon, constituted the majority of the holdover seven-member Board of Directors of the Corporation, in 1955, two (2) of said defendants having been elected as members of the Board in the annual stockholders' meeting held in May 1954, largely on the vote of their codefendant Acena, while the other two (2) were elected mainly on the vote of the plaintiffs and their group of stockholders. Let the first group be called the Ungson group and the second, the Baltazar group. ISSUE: Whether or not a stockholder, in a stock corporation, subscribes to a certain number of shares of stock, and he pays only partially, for which he is issued certificates of stock, is he entitled to vote the latter, notwithstanding the fact that he has not paid the balance of his subscription, which has been called for payment or declared delinquent. RULING: YES. The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun v. Summers case, because it was the practice and procedure, since the inception of the corporation, to issue certificates of stock to its individual subscribers for unpaid shares of stock and gave voting power to shares of stock fully paid. And even though no agreement existed, the ruling in said case does not now reflect the correct view on the matter, for better than an agreement or practice, there is the law, which renders the said case of Fua Cun-Summers, obsolescent. In the cases at bar, the defendant-corporation had chosen to apply payments by its stockholders to definite shares of the capital stock of the corporation and had fully paid capital stock shares certificates for said payments; its call for payment of unpaid subscription and its declaration of delinquency for non-payment of said call affecting only the remaining number of shares of its capital stock for which no fully paid capital stock shares certificates have been issued, "and only these have been legally shorn of their voting rights by said declaration of delinquency" (amended decision).

313 | P a g e

Law 321_Corporation LAW_ Case Digest TAN, petitioner vs. SECURITIES AND EXCHANGE COMMISSION, respondent G.R. No. 95696 March 3, 1992 FACTS: Respondent corporation was registered on October 1, 1979. As incorporator, petitioner had four hundred (400) shares of the capital stock standing in his name at the par value of P100.00 per share, evidenced by Certificate of Stock No. 2. He was elected as President and subsequently reelected, holding the position as such until 1982 but remained in the Board of Directors until April 19, 1983 as director. On January 31, 1981, while petitioner was still the president of the respondent corporation, two other incorporators, namely, Antonia Y. Young and Teresita Y. Ong, assigned to the corporation their shares, represented by certificate of stock No. 4 and 5 after which, they were paid the corresponding 40% corporate stock-in-trade. Petitioner's certificate of stock No. 2 was cancelled by the corporate secretary and respondent Patricia Aguilar by virtue of Resolution No. 1981 (b), which was passed and approved while petitioner was still a member of the Board of Directors of the respondent corporation. Due to the withdrawal of the aforesaid incorporators and in order to complete the membership of the five (5) directors of the board, petitioner sold fifty (50) shares out of his 400 shares of capital stock to his brother Angel S. Tan. Another incorporator, Alfredo B. Uy, also sold fifty (50) of his 400 shares of capital stock to Teodora S. Tan and both new stockholders attended the special meeting, Angel Tan was elected director and on March 27, 1981, the minutes of said meeting was filed with the SEC. These facts stand unchallenged. ISSUE: Whether or not the cancellation and transfer of petitioner's shares and Certificate of Stock No. 2 as well as the issuance and cancellation of Certificate of Stock No. 8 was patently and palpably unlawful, null and void, invalid and fraudulent. RULING: YES. Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already exercised his rights and prerogatives as stockholder and was even elected as member of the board of directors in the respondent corporation with the full knowledge and acquiescence of petitioner. Due to the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and responsibilities in the board of the respondent corporation when he was elected as officer thereof. Besides, in Philippine jurisprudence, a certificate of stock is not a negotiable instrument. "Although it is sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner/s or transferor's creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel." To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the corporation law itself as the only law governing transfer of stocks. While Section 47(s) grants stock corporations the authority to determine in the by-laws "the manner of issuing certificates" of shares of stock, however, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of stockholders to transfer their shares. 314 | P a g e

Law 321_Corporation LAW_ Case Digest EMBASSY FARMS, INC., petitioner vs. COURT OF APPEALS, respondent G.R. No. 80682 August 13, 1990 FACTS: It appears on record that sometime on August 2, 1984, Alexander G. Asuncion (AGA for short) and Eduardo B. Evangelists (EBE for short) entered into a Memorandum of Agreement (Annex "A" of the petition). Under said agreement EBE obligated himself to transfer to AGA 19 parcels of agricultural land registered in his name with an aggregate area of 104,447 square meters located in Loma de Gato, Marilao, Bulacan, together with the stocks, equipment and facilities of a piggery farm owned by Embassy Farms, Inc., a registered corporation wherein ninety (90) per cent of its shares of stock is owned by EBE. EBE also obligated himself to cede, transfer and convey "in a manner absolute and irrevocable any and all of his shares of stocks" in Embassy Farins Inc. to AGA or his nominees "until the total of said shares of stock so transferred shall constitute 90% of the paid-in-equity of said corporation" within a reasonable time from signing of the document. Likewise, EBE obligated to turnover to AGA the effective control and management of the piggery upon the signing of the agreement. On the other hand, AGA obligated himself, upon signing of the agreement to pay to EBE the total sum of close to P8,630,000.00. Within reasonable time from signing of the agreement AGA obligated himself to organize and register a new corporation with an authorized capital stock of P10,000,000.00 which upon registration will take over all the rights and liabilities of AGA. ISSUE: Whether or not there has been an effective transfer of shares of stock from AGA to other persons. RULING: NO. There being no delivery of the indorsed shares of stock AGA cannot therefore effectively transfer to other person or his nominees the undelivered shares of stock. For an effective transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred by delivery to the transferree of the certificate properly indorsed. Title may be vested in the transferree by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation. In the case at bar the indorsed certificate of stock was not actually delivered to AGA so that EBE is still the controlling stockholder of Embassy Farms despite the execution of the memorandum of agreement and the turn over of control and management of the Embassy Farms to AGA on August 2, 1984. When AGA filed on April 10, 1986 an action for the rescission of contracts with damages the Pasig Court merely restored and established the status quo prior to the execution of the memorandum of agreement by the issuance of a restraining order on July 10, 1987 and the writ of preliminary injunction on July 30, 1987. It would be unjust and unfair to allow AGA and his nominees to control and manage the Embassy Farms despite the fact that AGA who is the source of their supposed shares of stock in the corporation is not asking for the delivery of the indorsed certificate of stock but for the rescission of the memorandum of agreement. Rescission would result in mutual restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow EBE to manage the farm. 315 | P a g e

Law 321_Corporation LAW_ Case Digest

Right to Transfer of Shares/Validity of Restrictions on Right


Makati Sports Club Inc vs. Cecile Cheng G.R. No. 178523 June 16, 2010 FACTS: October 20, 1994: Makati Sports Club Inc (MSCI) BOD adopted a resolution authorizing the sale of 19 unissued shares at a floor price of P400,000 and P450,000 per share for Class A and B, respectively. Cheng was a Treasurer and Director of Makati Sports Club in 1995 On July 7, 1995, Hodreal expressed his interest to buy a share, for this purpose he sent the letter requesting to be wait listed. On November 1995, McFoods acquiried shares of Makati Sports Club at P1,800,000 through Urban Bank. Thereafter, Cheng advised sale by McFoods to Hodreal of the share evidenced by a certificate new certificate was issued. Investigation showed that Cheng profited from the transaction because of her knowledge MSCI sought judgment that would order respondents to pay the sum of P1,000,000.00, representing the amount allegedly defrauded, together with interest and damages. ISSUE: Whether or not MSCI was defrauded by Cheng's collaboration with Mc Foods. RULING: NO. No evidence on record that the Membership Committee acted on Hodreal's letter. SEC. 29. (a) The Membership Committee shall process applications for membership; ascertain that the requirements for stock ownership, including citizenship, are complied with; submit to the Board its recommended on applicants for inclusion in the Waiting List; take charge of auction sales of shares of stock; and exercise such other powers and perform such other functions as may be authorized by the Board. Membership Committee failed to question the alleged irregularities attending Mc Foods purchase price of P1,800,000.00 is P1,400,000.00 more than the floor price it is not detrimental. Upon payment and the execution of the Deed of Absolute Sale, it had the right to demand the delivery of the stock certificate in its name. The right of a transferee to have stocks transferred to its name is an inherent right flowing from its ownership of the stocks certificate of stock paper representative or tangible evidence of the stock itself and of the various interests therein not a stock in the corporation but is merely evidence of the holders interest and status in the corporation, his ownership of the share represented thereby MSCI failed to repurchase Mc Foods Class "A" share within the 30 day pre-emptive period and no proof that Cheng personally profited.

316 | P a g e

Law 321_Corporation LAW_ Case Digest FLEISCHER, plaintiff vs. BOTICA NOLASCO CO., INC., defendant G.R. No. L-23241 March 14, 1925 FACTS: Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided on the back thereof, together with other credits, in consideration of a large sum of money owed by Gonzalez to Fleischer; that on March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from Manuel Gonzalez said shares; that the plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano to register said shares in his name; that Doctor Miciano refused to do so, saying that it would be in contravention of the by-laws of the corporation. It also appears from the record that on the 13th day of March, 1923, two days after the assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to the Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer be noted transferred to Fleischer's name. He also acknowledged in said written statement the preferential right of the corporation to buy said five shares. ISSUE: Whether or not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act No. 1459). RULING: NO. It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith. The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade. And moreover, the by-laws now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.

317 | P a g e

Law 321_Corporation LAW_ Case Digest CYRUS PADGETT vs. BABCOCK & TEMPLETON, INC., and W. R. BABCOCK G.R. No. L-38684, December 21, 1933 FACTS: The appellee was an employee of the Appellant Corporation and rendered services as such from January 1, 1923, to April 15, 1929. During that period he bought 35 shares thereof at P100 a share at the suggestion of the president of said corporation. He was also the recipient of 9 shares by way of bonus during Christmas seasons. In this way the said appellee became the owner of 44 shares for which the 12 certificates, Exhibits F to F-11, were issued in his favor. The word "nontransferable" appears on each and every one of these certificates. Before severing his connections with the said corporation, the appellee proposed to the president that the said corporation buy his 44 shares at par value plus the interest thereon, or that he be authorized to sell them to other persons. The corporation bought similar shares belonging to other employees, at par value. Sometime later, the said president offered to buy the appellee's shares first at P85 each and then at P80. The appellee did not agree thereto. ISSUE: Whether or not the defendant obliged to buy his shares of stock at par value. RULING: NO. A restriction imposed upon a certificate of shares, similar to the ones under consideration, is null and void on the ground that it constitutes and unreasonable limitation of the right of ownership and is in restraint of trade. Shares of corporate stock being regarded as property, the owner of such shares may, as a general rule, dispose of them as he sees fit, unless the corporation has been dissolved, or unless the right to do so is properly restricted, or the owner's privilege of disposing of his shares has been hampered by his own action. Any restriction on a stockholder's right to dispose of his shares must be construed strictly; and any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to such restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the corporation or its officers or by other stockholders, even though the sale is to a competitor of the company, or to an insolvent person, or even though a controlling interest is sold to one purchaser.

318 | P a g e

Law 321_Corporation LAW_ Case Digest RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO TRIAS vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR. G.R. No. 96674, June 26, 1992 FACTS: Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his name (represented by the Bank's stock certificates nos. 26, 49 and 65), to execute the proper documents therefor, and to receive and sign receipts for the dispositions. On February 27, 1980, and pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of private respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco Guerrero, Jr. (5 shares).Almost four months later, or two (2) days before the death of Clemente Guerrero on June 24, 1980, private respondent Melania Guerrero, pursuant to the same Special Power of Attorney, executed a Deed of Assignmentfor the remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr. Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the two (2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of Clemente G. Guerrero, and the issuance of new stock certificates covering the transferred shares of stocks in the name of the new owners thereof. However, petitioner Bank denied the request of respondent Melania Guerrero. ISSUE: Whether or not a Mandamus lie against the Rural Bank of Salinas to register in its stock and transfer book the transfer of 473 shares of stock to private respondents. RULING: YES. Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases involving intracorporate controversies. An intracorporate controversy has been defined as one which arises between a stockholder and the corporation. There is neither distinction, qualification, nor any exception whatsoever. The case at bar involves shares of stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to adjudicate. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because: Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock in the books of the corporation.

319 | P a g e

Law 321_Corporation LAW_ Case Digest MARSH THOMSON vs. COURT OF APPEALS and THE AMERICAN CHAMPER OF COMMERCE OF THE PHILIPPINES, INC. G.R. No. 116631, October 28, 1998 FACTS: A. Lewis Burridge, retired as AmCham's President while petitioner was still working with private respondent, his superior,. Before Burridge decided to return to his home country, he wanted to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However, through the intercession of Burridge, private respondent paid for the share but had it listed in petitioner's name. This was made clear in an employment advice dated January 13, 1986, wherein petitioner was informed by private respondent. Burridge transferred said proprietary share to petitioner, as confirmed in a letter of notification to the Manila Polo Club. Upon his admission as a new member of the MPC, petitioner paid the transfer fee of P40,000.00 from his own funds; but private respondent subsequently reimbursed this amount. MPC issued Proprietary Membership Certificate Number 3398 in favor of petitioner. But petitioner, however, failed to execute a document recognizing private respondent's beneficial ownership over said share. When petitioner's contract of employment was up for renewal in 1989, he notified private respondent that he would no longer be available as Executive Vice President after September 30, 1989. Still, the private respondent asked the petitioner to stay on for another six (6) months. ISSUE: Whether or not private respondent the beneficial owner of the disputed share. RULING: YES. In the present case, as the Executive Vice-President of AMCHAM, petitioner occupied a fiduciary position in the business of AMCHAM. It released the funds to acquire a share in the Club for the use of petitioner but obliged him to "execute such document as necessary to acknowledge beneficial ownership thereof by the Chamber". A trust relationship is, therefore, manifestly indicated. The beneficiary of a trust has beneficial interest in the trust property, while a creditor has merely a personal claim against the debtor. In trust, there is a fiduciary relation between a trustee and a beneficiary, but there is no such relation between a debtor and creditor. While a debt implies merely an obligation to pay a certain sum of money, a trust refers to a duty to deal with a specific property for the benefit of another. If a creditor-debtor relationship exists, but not a fiduciary relationship between the parties, there is no express trust. However, it is understood that when the purported trustee of funds is entitled to use them as his or her own (and commingle them with his or her own money), a debtor-creditor relationship exists, not a trust. Moreover, petitioner failed to present evidence to support his allegation of being merely a debtor when the private respondent paid the purchase price of the MPC share. Applicable here is the rule that a trust arises in favor of one who pays the purchase money of property in the name of another, because of the presumption that he who pays for a thing intends a beneficial interest therein for himself.

320 | P a g e

Law 321_Corporation LAW_ Case Digest ENRIQUE T. YUCHENGCO, INC., A. T. YUCHENGCO, INC., ANNABELLE Y. PUEY and MONA LISA Y. ABAYA vs. CONRADO M. VELAYO G.R. No. L-50439, July 20, 1982 FACTS: Conrado M. Velayo offered to sell to the plaintiffs-appellees 2,265 shares of common stock of the RIC Tours Philippines, Inc. ("Ric Tours Phil., for short) a Philippine Corporation then duly licensed as a tourist operator, constituting 70% of the subscribed and outstanding capital stock of the said corporation. Appellees paid the entire purchase price of P367,500.00 to appellant Velayo, and the latter, on his part, delivered to the former all the 2,265 shares of stock of Ric Tours Phil. Appellant claims that the shares of stock of Ric Tours Phil. were sold to another group without previous clearance from the Department of Tourism because he really was not aware of the rule requiring prior approval by the Department of Tourism for the validity of transfers of shares of local tour operators. On September 3, 1974, appellees wrote a letter to appellant demanding rescission of the contract, the restitution of a sum of money. ISSUE: Whether or not the "Stock Purchase Agreement" entered into by the appellees and appellant Velayo annulled, or in the alternative, declared void ab initio. RULING: NO. The provision governing the Agreement sought to be annuled is Sec 4, Part IV of the Rules and Regulations Governing the Business of Tour Operators and Tour Guides, which recites as follows: Sec. 4. No transfer of rights to a license of a tour operator or own