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Grace Christian High School vs Court of Appeals

281 SCRA 133 Business Organisation Corporation Law Members of the Corporate
Board

FACTS: Grace Christian High School (GCHS) is an educational institution in Grace Village
(QC?). Grace Village Association, Inc. (GVAI)is the homeowners association in Grace
Village. GVAI has an existing by-laws which was already in eect since 1968. But in 1975,
the board of directors made a draft amending the by-laws whereby the representative of
GCHS shall have a permanent seat in the 15-seat board. The draft however was never
presented to the general membership for approval. But nevertheless, the representative of
GCHS held a seat in the board for 15 years until in 1990 when a proposal was made to
the board to reconsider the practice of allowing the GCHS representative in taking a
permanent seat. Thereafter, an election was scheduled for the 15 seat in the board. GCHS
opposed the election as it insists that the election should only be for 14 directors because
it has a permanent seat. GVAI argued that GCHS claim has no basis because the 1975
proposed amendment was never ratified. GCHS averred that it was ratified when it was
allowed to take the seat for 15 years and as such its right has already vested.

ISSUE: Whether or not the representative from Grace Christian High School should be
allowed to have a permanent seat in the board of directors.

HELD: No. The Corporation Code is clear when it provides that members of the board of
a corporation must be elected by the stockholders (stock corporation) or the members
(non-stock corporation). Admittedly, there are corporations who allow some of their
directors to sit in the board without being elected but such practice cannot prevail over
provisions of law. Practice, no matter how long continued, cannot give rise to any vested
right if it is contrary to law. Further, there is no reason as to why a representative from
GCHS should be given an automatic seat. It should therefore go through the process of
election. It cannot also be argued that the draft of the by-laws in 1975 was ratified when
GCHS was allowed to take its seat for 15 years without an election. In the first place, the
proposal was merely a draft and even if passed and approved by the general
membership, it cannot be given eect because it is void and contrary to the law. GCHS
seat in the corporate board is at best merely tolerated by GVAI.

Commissioner of Internal Revenue vs Court of Appeals and A. Soriano Corp.


301 SCRA 152 Business Organisation Corporation Law Trust Fund Doctrine

FACTS: Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total
shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares
which were of original issue when the corporation was founded and 134,659 shares as
stock dividend declarations. So in 1964 when Soriano died, half of the shares he held
went to his wife as her conjugal share (wifes legitime) and the other half (92,577 shares,
which is further broken down to 25,247.5 original issue shares and 82,752.5 stock
dividend shares) went to the estate. For sometime after his death, his estate still
continued to receive stock dividends from ASC until it grew to at least 108,000 shares.

In 1968, ASC through its Board issued a resolution for the redemption of shares from
Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000
shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against
ASC for deficiency withholding tax-at-source. The CIR explained that when the
redemption was made, the estate profited (because ASC would have to pay the estate to
redeem), and so ASC would have withheld tax payments from the Soriano Estate yet it
remitted no such withheld tax to the government.

ASC averred that it is not duty bound to withhold tax from the estate because it
redeemed the said shares for purposes of Filipinization of ASC and also to reduce its
remittance abroad.

ISSUE: Whether or not ASCs arguments are tenable.

HELD: No. The reason behind the redemption is not material. The proceeds from a
redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano
Estate definitely profited from the redemption and such profit is taxable, and again, ASC
had the duty to withhold the tax. There was a total of 108,000 shares redeemed from the
estate. 25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of
the shares are deemed to have been from stock dividend shares. Sale of stock dividends
is taxable. It is also to be noted that in the absence of evidence to the contrary, the Tax
Code presumes that every distribution of corporate property, in whole or in part, is made
out of corporate profits such as stock dividends.

It cannot be argued that all the 108,000 shares were distributed from the capital of ASC
and that the latter is merely redeeming them as such. The capital cannot be distributed in
the form of redemption of stock dividends without violating the trust fund doctrine
wherein the capital stock, property and other assets of the corporation are regarded as
equity in trust for the payment of the corporate creditors. Once capital, it is always
capital. That doctrine was intended for the protection of corporate creditors.

Alhambra Cigar & Cigarette Manufacturing Company, Inc. vs Securities and


Exchange Commission
24 SCRA 269 Business Organisation Corporation Law Corporate Lifespan

FACTS: On January 15, 1912, Alhambra Cigar & Cigarette Manufacturing Company, Inc.
was incorporated. Its lifespan was for 50 years so on January 15, 1962, it expired.
Thereafter, its Board authorised its liquidation. Under the prevailing law, Alhambra has 3
years to liquidate.

In 1963, while Alhambra was liquidating, Republic Act 3531 was enacted. It amended
Section 18 of the Corporation Law; it empowered 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. Previous to Republic Act 3531, the
maximum non-extendible term of such corporations was fifty years.
Alhambra now amended its articles of incorporation to extend its lifespan for another 50
years. The Securities and Exchange Commission (SEC) denied the amended articles of
incorporation.

ISSUE: Whether or not a corporation under liquidation may still amend its articles of
incorporation to extend its lifespan.
HELD: No. Alhambra cannot avail of the new law because it has already expired at the
time of its passage. When a corporation is liquidating pursuant to the statutory period of
three years to liquidate, it is only allowed to continue for the purpose of final closure of its
business and no other purposes. In fact, within that period, the corporation is enjoined
from continuing the business for which it was established. Hence, Alhambras board
cannot validly amend its articles of incorporation to extend its lifespan.