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Gulfo v Ancheta: (2012)

- Edito and Emmanuela Guflo filed petition for review on certiorari under Rule 34 to assail decision of CA
reversing RTC decision, remanding the case back to RTC for trial on the merits
- Guflos = neighbors of Jose Ancheta
o Both parties live in duplex residential unit on Zodia St, Veraville Homes, Almanza Uno, Las Pinas City
(Guflos in 9-B, Ancheta in 9-A)
- 1998: Anchetas septic tank overflowed
o human waste and offensive materials spread thru property
o Ancheta and family lived in unsanitary environment, suffering fould order for several months
- 1999: early months
o Ancheta engaged services of ZE Malabanan Excavation and Plumbing Services to fix overflow
o Discovery:
Underground drainage pipe, connecting Anchetas septic tank to subdivisions drainage system,
had been closed by cement that blocked the free flow of wastes from septic tank to drainage
system
Ancheta narrated that Guflos had recently renovated their duplex + made some diggings in same
portion where drainage pipe had been cemented + closing of rdainage pipe could not have been
result of accident, but was malicious act by Guflos
o May 19, 1999: filed complaint for damages against Gulfos, alleging malicious closure of portion of
drainge pipe leading to overflow of Anchetas septic tank
- June 1999: Guflos moved to dismiss complaint on ground of lack of jurisdiction
o Since Anchest reside in same division and are members of same homeowners association (Veraville
Homeowners Association Inc), case falls within jurisdiction of Home Insurance and Guaranty Corp)
HIGC is gocc created under RA 580, vested with administrative supervision over homeowners
associations to the Securities and Exchange Commission
RA later repealed by EO 535 = transferred regulatory and djudicative functions of SEC over
homeowners ssociations to HIGC
o Gulfos based arguments on Sec 1(b) Rule II of 1994 Revised Rules of Procedure regulating Hearing of
Homeownerss Dispute:
(b) Controversies arising out of intra-corporate relations between and among members of the
association; between any or all of them and the association of which they are members; and
between such association and the state/general public or other entity in so far as it concerns its
right to exist as a corporate entity.1
- RTC: dismissed complaint for lack of jurisdiction
o Viewed case as involving intra-corporate dispute falling under jurisdiction of HIGC
o Considering parties substantiated allegations that Vervaille Homeowners Association is duly registered
with HIGC, thus Court has no jurisdiction over instant case
o Ancheta brought appeal
- CA:
o Reversed + remanded case to RTC for trial on merits, on grounds that factual allegations support claim
for damages
o Although case involves dispute between members of homeowners association, it is not an intra-corporate
matter as it does not concern the right of the corporation to exist as an entity
- ISSUE: WON the CA erred in ruling that the RTC has jurisdiction over the dispute. NO.
o Jurisdiction is determined by the allegations in the complaint.
Allegations in complaint and reliefs prayed for are determinants of nature of action and of which
court has jurisdiction.
Paragaphs 7, 8 and ( of complaint:
7 due to malicious act of cutting/closing off protion of drainage pipe, ancheta suffered
sleepless nights and claims damages
8 malicious and deliberate acts violative of others rights especially those inimical to
health or life exemplary damages
to protect and enforce rights, ancehta had to hire services of counsel, hence prays for
attorneys fes
complaint is an ordinary act for damages = purely civil rather than corporate in character;
Acnehta merely seeks indemnification for harmy suffered; no question re membership of Guflos
in association involved, nor existence of association is in any manner under question
complaint is based on either Articles 19, 20 or 21 of Civil Code on human relations; CA correctly
held that acts alleged in complaint may give rise to indemnification under ART 2176 (quasi-
delict)
since issue of damages arising from Civil Code, not intra-corporate controversy, RTC is
appropricate court to try case, and not the homeowners association
o What is an intra-corporate dispute?
Intra-corporate dispute is one that arises from intra-corporate relations; relations between or
among stockholders; or the relationships between the stockholders and the corporation. To limit
the broad definition, Court has applied the RELATIONSHIP test and the CONTROVERSY test
to determine whether the dispute is intra-corporate in nature.
RELATIONSHP TEST (Union Glass & Container Corp): whether the relationship is between:
the corporation, partnership or association and the public
the corporation, partnership or association and its stockholders, partners, members or
officers
between the corporation, partnership or association and the State insofar as its franchise,
permit or license to operate is concerned
and among the stockholders, partners or associates themselves
AS APPLIED:
o While the parties were members of the same association, this must be
supplemented by controversy test; the relationship alone does not ipso facto
make the dispute intra-corporate; the mere existence of an intra-corporate
relationship does not always give rise to an intra-corporate controversy the
incidents of the relationship must be considered to ascertain whether the
controvery itself is intracorporate.
CONTROVERSY TEST: dispute must be rooted in the xistence of an intra-corporate
relationship, and must refer to the enforcement of the parties correlative rights and obligations
under the Corporation Code, as well as the internal and intra-corporate regulatory rules of the
corporation, as determined through the allegations in the complaint.
AS APPLIED:
From the allegations in the complaint, Ancheta did not question the status of Gulfos as
members of th association
There was no allegation assailing the Gulfos rights or obligations on the basis of the
associations rules and by-laws or regarding the Gulfos relationship with the association
What was alleged were daemands for civil indemnity and damages
Thus the case involves a simple civil action, which can be determined only through a full-
blown hearing before the RTC
- HELD: Petition denied; CA decision affirmed; case remanded to RTC for trial on the merits.

Abejo v dela Cruz: (1987)

- 1982: Telectronics purchased 63k shares registered in the name of Virginia Braga (with said purchase,
Telectronics would become majority stockholder) + requested corporate secretary, Norberto Braga, to register and
transfer to its name and issue new certificates of stock
o Norbertyo refused to register transfer of shares, asserting Bagas claim preemptive rights over 133,000
Abejo shares and that Virginia Braga never transferred her 63k shares to Tleectronics but had LOST the 5
stock certificates representing those shares
o Bragas claim civil court has jurisdiction; Abejos claim SEC has jurisdiction
o Abejos:
Prayer for mandamus ordering Norberto as corporate secretary to register in their name the
transfer of Pocket Bell shares + injunction enjoining Bragas from disbursing/disposing funds and
assets of Pocket Bell
Norberto filed MTD on ground that acton is not an intracorproate controversy, Telectronics not
being a stockholder of Pocket Bell
o 1983: Sec Hearing Officer denied MTD --; but Hearing officer Garaygay granted Bragas MR, dismissing
SEC case
SEC three-man committee on injunction case reconsidered the dismissal of mandamus petition
and directed Braga to file answer
o Bragas:
Filed petition for certiorari, prohibition and mandamus with SEC en banc seeking dismissal of
SEC cases and setting aside of three-man committee
o 1984: SEC en banc issued order dismissing Bragas petition for lack of merit + ordering continuaince of
hearings of the case, ruling issue is not ownership of shares but nonperformance by Corporate Secretary
of ministerial duty to record transfers of shares fo stock
o Bragas in CFI:
Filed complaint against Abejos and Telectronics in CFI Pasig for recission and annulment of sale
of shares of stock by Aejos in favor of Telectronics on ground that it violated Bragas alleged pre-
emptive right over Abejos shareholdings + alleged perfected contract with Abejos to sell the
same shares to Bragas + damages for bad faith + declaration of nullity of transfer by Virginia
Bragas 64k shares to Telectronics for want of consideration, since said stock certificates were
intended as security for loan application (hence endorsed as blank_ and had been lost
Abejos filed MTD that SEC has original and exlusive jurisdiction as per PD 902-A; dismissal
granted
Bragas MR de la Cruz issued order rescinding order + revived TRO against Telectronics
restraining them from constituting themselves as new officers of Pocket Bell; Abejos MR denied
o Abejos filed present petition against de La Cruz alleging grave abuse of discretion + lack of jurisdicton
o Bragas alleged SEC has no jurisdiction and had acted capriciously in dismissing their petition
- ISSUE: who between the RTC and the SEC has jurisdiction over a dispute between the principal stockholders of
corporation Pocket Bell (Abejos) and purchaser Telectronic Systems Inc: SEC.
o SEC en banc resolution correct: issue is not ownership of shares but nonperformance by corporate
secretary to perform ministerial duty of recording transfers of shares of stock.
SECs primary and exclusive jurisdiction based on PD 902-A:
Sec. 3: Commission has absolute jurisdiction, supervision and control over all
corporations, partnerships or associations who are grantees of primary franchise/license
or permit by govt to operate
Sec 5: in additin to regulatory and adjudicative functions of SEC has original and
exclusive jurisdiction to hear and decide cases
Sec. 6: power to issue prelim/permanent injunctions whether prohibitory or mandatory in
nature in all cases to which it has jurisdiction
Dispute at bar is an intracorporate dispute arising because the corporate secretary backed by his
parents (erstwhile majority shareholders) failed to perform his ministerial duty to record the
transfers of corporations controlling shares in favor of Telectronics as purchase of the Abejos;
mandamus in SEC is proper
Claims of Bragas in RTC praying for resicions and annulment of sale to Telectronics on ground
of preemptive right of Bragas + lost shares of stock by Virginia may in no way deprive SEC of
primary and exclusive jurisdiction to grant or not the writ of mandamus Bragas contention that
question of ordering the recording of transfers hinges on question of ownership notwithstanding,
jurisdiction over dispute is vested with SEC
o Bragas complaint itself involves controversies between and among stockholders as to Abejos right to
sell and dispose of shares to Telectronics and the validity of the latters acquisition of those shares + who
among bragas/Abejas should be reocngized as controlling shareholders of the corporation + RTC order
restraining Telectronics from constituting themselves as new set of officers of Pcoket Bell encroached on
SECs exclusive jurisdiction
nowhere does PD 902-A empower any CFI to interfere with the orders of the Commission + any
ruling by the TC on the issue of ownership of shares of stock is not binding on the Commission
o Bragas refusal to record the transfer of shares of stock may be deemed a device/scheme amounting to
fraud/misrepresentation employed to keep the Bragas in control of the corporation ot the detriment of
Telectronics and Abejos, thus falling under par. A of PD 902-A + dispute is an intra-corporate
controversy between and among the majority and minority stockholders as to the transfer and disposition
of the controlling shares of the corporation falling under par. b + concerns issue of whether the Bragas or
Telectronics have the right to elect the corporate directors and officers and manage its business an
doperations under par. c.
o An intra-corporate controversy is one which arises between a stockholder and the corporation,
without distinction; issue of whether or not a corporation is bound to replace a stockholders lost
certificate of stock isa matter purely between a stockholder and the corporation (damages is
incidental to the main issue); general intent of law is to segregate from general jurisdiction of
regular courts controversies involving corporations and their stockholders and to bring them to the
SEC for exclusive resolution
Fact of WON to register to Telectronics shares must be resolved by SEC; Norberto blocked this
dispute resolution by refusing to register the transfer
Dispute between Abejos and bragas as to sale and transfer of As former shres to Telectronics is
an intracorporate one; SEC must resolve the Bragas caim of an alleged pre-emptive right to buy
the Abejos share by virtue of on-going negotiations _ corporation is not a close corporation,
and there is no restriction over the free transferability of the shares in the Articles of
Incorporation
Dispute between Bragas and Telectronics re Virginias 63k shares endorsed in blank in
certificates afll within SEC jurisdiction since they deal with free transferability of corporate
shares as guaranteed by the Corporation Code and its proclaimed policy of encouraging foreign
and domestic investments in Ph private corporations
There is no requirement that astockholder of a corporation must be a registered one in order that
the SEC may take cognizance of a suit seeking to enforce his rights as such stockholder (SEC has
absolute jursdiciton, superivison and control over all corporations)
o Doctrine of primary jurisdiction: the courts cannot or will n6t determine a controversy involving a
question which is within the jurisdiction of an administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the special knowledge, experience, and seruices of
the administratiue tribunal to determine technical and intricate matters of fact, and a uniformity of ruling
is essential to comply uith the purposes of the regulatory statute administere
o Corporation Code specifically vests the SEC with Rule-makign power in discharge of its task of
implemnting provisions of the Code particularly in the prevention of fraud and abuses on the part of
the controlling stockholders, members, directors, trustees or officers. SEC has primary and exclusvei
jurisdiction over this dispute.
Action fo rrecovery of glass plant in an action to annul the dacion en pago could be brought by
dissenting stockholder to regular courts only if and when the SEC rendered final judgment
annulling dacion en pago and subject to Union Glass defenses as athrid party buyer in good faith
Money claim under a slease contract, even if the collection of rentals includes shares of stock in
defendant corporation, would be beyond the competence of the SEC.
o Precinding from great concern of damage and prejudice expressed by Telctronics due to Bragas remaining
in control of corporation and allegedly committing acts of gross mismangement and misapplication of
funds, fair that SECs order creaing receivership committee be implemented (3-man committee: rep of
SEC, rep of petitioner, rep of respondent)
- HELD:
o Order of de la cruz annulled + dismissed for lack of jursidction
o TRO on Telectronics lfited
o SEC Hearing Comitte to proceed with mandamus petition re transfer of shares to Telectronics +
implementation of receivership or management comittee

Magalad v Premiere Financing Corporation: (1992)

- Premiere, a financing company for solicity/accepting money market placements or deposits, on Sept 1983 w/
expired permit to issue commercial papers and with intention to defraud creditors, induced Magalad into making
money market placement of P50k at 22% interest per annum + issued 2 post-dated checks in total sum of P51,079
and assigned to Magalad its receivable from a David Saman
o Drawee bank disnohonred checks for lack of sufficient funds
o Magald made demands to replace checks with cash, but Premiere failed to honor demans without just
cause
- Magalad filed complaint with RTC, QC against Premiere; Premiere failed to fie answer, so lower court declared
Premiere in default and allowed Magalad to present evidence ex-parte
- RTC:
o Magalad fuly established claim Premiere obliged to play Magalad principal obligation _ interest until
amount fully paid _ damages
- Premieres MR: SEC has exclusive and original jurisdiction over a corporation under a state of suspension of
payments
o RTC denied mR
o CA certified appeal by Premiere to SC on question of law
- ISSUE: WON lower court has jurisdiction to try the case.
o PD 902-A provides that SEC has absolute jurisdiction over all corporations + over schemes by Board of
corporations amounting to fraud or misrepresentation which may be detrimental to
public/stockholders/partners etc
o Considering that Magalads complaint sufficiently alleges acts amounting to fraud and
misrepresentation committed by Premiere, SEC has original and exclusive jurisdiction over the
case despite the suit involving collection of sums of money paid to said corporation fraud is
detrimental to interest of public
o In this case, complaint alleges that schemes amount to fraud have been resorted to by Premiere
Fact that Premieres authority to engage in financing already expired does not divest SEC of
jurisdiction; Magalads money placement were in the nature of investiments in Premiere
Magalads reliance on Union Glass and DMRC are misplaced since in those cases, nothing in the
complaint alleges fraud on the part of defendant corporatins
SEC had further already appointed a Rehabilitation Receiver for Premiere and directed that all
proceedings or claims against it be suspended (Sec. 6 of PD 902-A: upon appointment of a
rehabilitation receiver all actions for claims against corporations under receivership pending
before any court, tribunal, board or body shall be suspended accordingly.
Exercise by SEC of original and exclusive jurisdciton to hear and decide cass
involving petitions of corporations/partnerships/associations to be declared in the state
o fsuspension of paymentsin cases where the corporation etc possesses sufficient property
to cover all its debts but foresees the impossibility of meeting thme when they
respectively fall due, or in cases where corp etc has no sufficient assets to cover its
liabilities but is under the management of a Rehabilitation Receiver
- HELD: appeal granted; RTC decision reversed and set aside w/o prejudice to Magalad filing appropriate
complaint against Premiere with SEC.

Manuel Dulay v CA: (1993)

- Manuel Dulay Enterprises owned Dulay Apartment (16 apartment units) in Pasay City; thru president Manuel
Dulay, DE obtained loans for construction of its hotel project (Frederick Hotel) and borrowed from Virgilio
Dulay, who occupied one of the unit apartments since 1973 while managing the Dulay Apartment as his
shareholdings in the corp was increased by his father
- Dec 1976: Manuel via Board Resolution sold the property to Maria Theresa and Castrense Veloso for P300k;
TCTs were issued to them, with right to repurchase within 2 years (but was not annotated on TCT)
o w/o Manuels knowledge, TVeloso mortgaged the property to Manuel Torres for a P250k loan, annotated
in TCT
o when Veloso efaulted, subject property was sold to Torres as highest bidder in extrajudicial foreclosure
- July 1978: Veloso executed deed of absolute assignment of right to redeem in favor of Manuel Dulay assigning
her right to repurchase subject property from Torres
o Neither Veloso nor Dulay redeemed w/in 1 year statutory period
o Torres filed affidavit for consolidation of ownership, and TCT was issued to him
- Oct 1979: Torres filed petition for issuance of writ of possession against Veloso and Dulay; but Dulay was never
authorized by corporation to sell the subject property, hence trial court ordered Torres to implead corporation as
indispensible party, but Torres later moved for dismissal of petition which was granted
- June 1980: Torres and Pabalan (real estate administrator) filed action against corporation and Nepomuceno, tenant
of Dulay Aprtment, for recovryo fpossession + sum of money and damages in CFI Rizal
o Dulay Corp filed action against Velosos and Torres for cancellation of certificate of Sheriffs sale
o Jan 1981: Pabalan and Tores filed action against Manalastasas, tenants of Dulay Aparmtment, for
ejectment with MTC Pasay City, which ruled in favor of Torres ordering tennats to vacate
- May 1985: Corporation and DUlay fild action against MTC Pasay City, Pabal and Torres, for annulment of RTC
decision
- Cases were jointly tried; ruled in favor of Torres; CA affirmed, hence this petition
- ISSUE: WON respondent court acted with grave abuse of discretion when it applied the doctrine of piercing the
veil of corporate entity considering the sale of subject property between Veloso and Dualy was pursuant to a
resolution that was not approved by all members of the board and was prepared by a person not designated by
corp to be its secretary. NO GAD.
o Sec 101 of Corporation Code: When board meeting is unnecessary or improperly held. Unless the by-
laws provide otherwise, any action by the directors of a close corporation without a meeting shall
nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the directors, or
2. All the stockholders have actual or implied knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiese of all
the stockholders, or
4. All the directors have express or implied knowledge of the action in question and none of them
makes prompt objection thereto in writing.
If a directors' meeting is held without call or notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having knowledge thereof.
o As applied: Dulay Corp is a close corporation; a board resolution authorizing the sale/mortgage of subject
property is not necessary to bind the corporation for the action of its president + corporate action taken at
a board meeting without proper call or notice ina close corporation is deemed ratified by the absent
director unless the latter promptly files his written objection with the secretary of the corporation after
knowledge of the meeting which Virgilio Dulay failed to do
o A corporation may have a personality distinct from its members, but the veil of corporate fiction may be
pierced when it is used to defeat public convenience, justif wrong, protect fraud, or defend crime; when
the corporation is used as a mere alter ego of a person, the law will regard the corporation as the act of
that person
o CA was correct in ruling that Virgiio Dulay was privy to transactions as incorporator and one of the
board, and as a family corporation + 4/5 of its incorporators are close relatives (3 children and their
father) + Virgilio executed an affidavit as signatory witness to the execution of the Deed of Absolute Slae
in favor of Torres = awareness of transaction by his father
o Corporation is liable for Manuel Dulays act and the sale is vali and binding
Sale was a corporate act and not a personal transaction of Manuel, because Manuel was not just
president and treasurer but also general manager of the corporation; the only non-relative on the
board was Atty Jose who appeared on paper as secretary; as a closed family ocrporation, it cannot
be concealed that Manuel as president had absolute control over the business and affairs of the
corporation
o Furthermore, prior physical delivery or possession is not legally required for Torres to acquire ownership,
since texecution of deed of sale in public instrument is deemed eqivalent to delivery.
- HELD: Decision appealed from affirmed.

NDC v Philippine Veterans Bank: (1990)

- PD 1717 ordered rehabilitation of the Agrix Group of Companies to be administered by the National Devt
Company outlined procedure for filing claims against the Agrix companies + created Claims Committee to
process these claims + Sec 4(1): all mortgages and other liens presently attaching to any of the assets of the
dissolved corporations are hereby extinguished.
- Agrix Marketing had executed in favor of Ph veterans Bank a rel estate mortgage (July 1978) over 3 parcels of
land in Los Banos, Laguna; during existence of mortgage, AGRIX went bankrupt to salvage this and other
Agrix companies, PD was issued by Pres Marcos
- PVB filed claim against Agrix Claims Committee for payment of its loan credit, while Agrix and Natl Devt
Company invoked Sec. 4, filed a peititon with RTC Calamba, Laguna for cancellation fo the mortgage lien; PVB
took steps to extrajudicially forelcose mortgage, prompting Agrix and NDC to file second case to stop foreclosure
- RTC:
o Annulled Sec. 4 but also the entire PD 1717 on grounds that presidential exercise of legislative power
violates principle of separation of powers + law impaired obligation of contracts + decree violated the
equal protection clause
- Issue: WON PVB is estopped from contesting the validity of the decree, considering they had filed claims with
the Claims Committee. No.
o While PVB did file a claim with the claims committee, this was done in 1980 when Pres Marcos was
absolute ruler and his decrees were absolute law; msut be distinguished from Mendoza where petitioners
after filing claims, received in settlement shares fo stock without protest or reservation in thi cs,PVas
not been paid its claim + validity of the claim was not questioned by Agrix when it soguht to restrain the
extrajudicial foreclosure, simply limiting its argument to questioning the decree because of prior
compliance
o Sec 4 _ Subsection ii (all unsecured obligations shall not bear interest) + subsetion III (all accrued
interests, penalties or charges as of date hereof pertaining to the obligations, whether secured or
unsecured, shall not be recognized) must be read with Bill of Rights, where Sec 1 provides that no
person shall be deprived of life, liberty or property w/o due course of law nor shall any person be denied
the equal protection of the law, and Sec 10 that no law impairing the obligation of contracts shall be
passed
Legislative act based on police power requires concurrence of lawful subject + lawful method --?
Interests of public generally, as distinguished from those of particular class, should justify
interference of the state; and menas employed are reasonably necessary for the accomplishment
of the purpose and not unduly oppressive upon individuals
Interests of public are not sufficiently involved to warrant interference of govt w/ private
contracts of AGRIX decree speaks vaguely of public and small investorys who would
be prejudiced if the corporation were not to be assisted, but does not state how many
there are of such investors, who they are, etc
Indispensible link to welfare of greater number has not been established + means
employed to rehabilitate AGRIX all short of requirement that they not be unduly
oppressive (ie right to propery in all mortgages, liens, interests, penalties and charges
owing to creditors of AGRIC is arbitrarily destroyed = private propery cannot simply be
taken by law from one person and given to another w/o comepsnation and any known
public purpose) _ discrimination (decree lumps secured creditors with unsecured
creditors and places them on same level in prosecution of respective claims, ie treat them
all as unsecured creditors, only concession given to secured creditors is that their loans
are allowd to earn interest from date of the decree but that does not justify cancellation
of the interests earned before the date; under equal protection clause, all persons
differently situated should be treated differently)
Why was AGRIX singled out for govt help? AGRIX was also created by special decree
despite Art XIV Sec 4 of 1973 Constitution: that batasang Pambansa shall not, except by
general law, provide for the formation, organization, or regulation of private
corporations, unless such corporations are owned or controlled b the Govt or any
subdivision or instrumentality thereof AGRIX is neither owned nor controlled by the
Govt; NDC merely extened loan to Agrix + manages corporation but with obligation of
making period reports to board of directors and after payment of loan, board can appoint
its own management + stocks of new corp to be issued to old investors of Agrix upon
proof of claims against abolished corporation = Agrix Inc is entirely private and should
have been organized under Corporation Law
Decree also impairs obligation of contract between AGRIX and PVB w/o justification;
contracts of loan and mortgage by AGRIX are purely private transactions and have not
been shown to be affected with public interest
Mortgage lien is a property right protected by due process and contract clauses
- HELD: PD 1717 = invalid exercise of police power; extinction of mortgage and other liens constitutes taking
without due process of law, compounded by reduction of secured creditors to category of unsecured creditors in
violation of equal protection clause + new corporation being neither owned nor controlled by the Govt, should
have been created only by general and not special law _ decree interferes with purely private agreements
petition dismissed; PD 1717 declared unconstitutional; TRO lifted.

Pioneer Insurance v CA: (1989)

- 1965: Jaclob Lim owned and operated Southern Air Lines, a single proprietorship
o May 1965: at Tokyo, Japan, Japan Domestic Airlines and Lim entered into an executed sales contract for
2 planes and 1 set of spare parts for USD 109k to be paid in installments one plane arrived in June
1965, the other on July 1965
o Border Machinery and Heavy Equipment Company (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and Constancio Maglana had contributed some funds for the purchase as their contributions
to a new corporation by Lim to expand his airline business
o Two indemnity agreements were executed to bind them solidarily to save Pioneer from damages in
consequence of having become surety upon the bond
- June 1965: Lim under SAL executed in favor of Pioneer a deed of chattel mortgage as security for the latters
suretyship = reistered with Office of the Register of Deeds of the City o Manila and the Civil Aeronautics
Administration
o Lim defaulted; JDA requested pyments from surety, which Pioneer paid
o Pioneer filed petition for extrajudicial foreclosure before Sheriff of Davao City w/ application for writ of
preliminary attachment against Lim and respondents, who filed cross-craim against Lim alleging they
were not privies to the contracts
- Trial court: Lim liable to Pioneer, but dismissed Pioneers complaint against other defendants; CA affirmed,
hence this petition.
- Issue: Has Pioneer a cause of action against defendants with respect to its obligations to JDA as has been paid
with reinsurance money?
o Total amount paid by Pioneer to JDA is P299; Pioneer colleceed from reinsurers P295k, with uninsured
portion having difference of P3,666 but was covered by the proceeds of the chattel mortgage sale, totaling
P37k, thus Pioneer was overpaid by P33k Pioneer has no claim against defendants
o Art 2207 applies insofar as the reinsurer acquires the same rights by subrogation as are acquired in similar
cases where the orignal insurer pays a loss, whereby the insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the person who has violated the contract (ie insurer is
deemed subogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency real
party in interest is thus the insurer and ot the insured
o When Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer, it erred because
Pioneer is not the real party in interest (should be reinsurer) and thus has no cause of action against
respondents)
o The indemnity agreement ceased to be valid and effective after the execution of the chattel mortgage the
planes could not be mortgaged at first being in Japan, but as soon as they were brought to the Philippines,
they wuld be mortgaged to Pioneer Insurane to cover the bond and the indemnity agreement would be
cancelled; Pioneer, having foreclosed on the chattel mortgage, have no further action against the
indemnitors since the indemnity agreement was extinguished upon the foreclosure of the chattel mortgage
(Recto Law)
o Original memorandum was novated by a subsequent agreement that altered the maturity dates of the
obligation twice having been done without the knowledge or consent of defendants, their obligation
under the inemnity agreement was extinguished (NCC 2079: an extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty)
o JDA had not presented claim to Pioneer within 10 days from default of Lim or SAL; thus Pioneer not
entitled to exact reimbursement even though he paid the surety to JDA because payment by a solidary
debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or become illegal
- Issue: WON as a result of respondents failure to incorporate, a de facto partnership among them was created, and
as a consequence of such relationship, all must share in the losses and/or gains of the venture in proportion to their
contribution? Ie WON respondents should reimburse amounts given by them to Pioneer as their contributions to
the intended corporation?
o As between themselves, rights of stockholders in a defectively incorporate association should be governed
by the supposed charter and laws of the state relating thereto and not by the rules governing partners,
BUT persons who attempt but fail to form a corporation and who carry on business under the corporate
name occupy the position of prtners inter se
Legal effects = partners inter se
However, such a relation does not necessarily exist, for ordinarily persons cannot be made to
assume the relation of partners, as between themselves, when their purpose is that no partnership
shall exist, and it should be implied only when necessary to do justice between the parties + thus
one who takes no part except to subscribe for stock in a proposed corporation which is never
legally formed does not become a partner with other subscribers who engage in business under
the name of the pretended corporation, so as to be liable as such in an action for settlement of the
alleged partnership and contribution
AS APPLIED: although Lim received money from respondents as to planes and spare parts, Lim
denied having received any amount never had intention to form a corporation with respondents
despite his representations, hence respondents cross-claims that they were induced and lured by
Lim to make contributons to a proposed corporation which was never formed because Lim
reneged on their agreement
Thus no de facto partnership was created among the parties which would entitle Lim to a
reimbumrsenent of the supposed losses of the proposed corporation; record shows Lim
was acting on his own and not in behalf of other would-be incorporators in transaction
the sale of planes and spare parts.
- HELD: petitions dismissed.

ALPS Transporation v Rodriguez: (2013)

- Elpidio Rodriguez, bus conductor, entered into an employment contract with Contact Tours Manpower and was
assigned to work with bus company ALPS Transportation
o He committed irregularities (e.g. collecting bus fares w/o issuing corresponding tickets to passengers)
irregularity report was annotated with the word Terminate
o Rodriguez alleged he was terminated the day after the issuance of the last irregularity report, but did not
receive any written notice of termination bus company refused to readmit him
o Filed with labor arbiter a complaint for illegal dismissal
o ALPS response: they had no prerogative to dismiss Rodriguez, since Contact Tours was his employer;
CT had obligation to inform Rodriguez of the contents of the reports and the appropriate sanctions
o Pending illegal dismissal case, ALPS charged Rodriguez with theft before Office of Provincial Prosecutor
of Tanauan, Batangas, but eventually filed affidavit of desistance
o LA dismissed illegal dismissal case for lack of merit no evidence to support contention that R had been
terminated + representative of Contact Tours manifestated a willingness to reinstate him
o Rodriguez appealed with NLRC, who set aside LA decision and ordered ALPS to reinstate Rodriguez,
ruling that CT was a labor-only contractor an Rodriguez was considered a regular EE of ALPS given
that ALPS had failed to prove R had abandoned his work, and R had failed prove termination, ER should
order EE to report back to work
o CA NLRC acted with GAD; in termination cases, ER bears burden of proving EE was not illegally
dismissed, and ALPS had failed to present convincing evidence that R had collected bus fares without
issuing corresponding tickets to passengers + more than 6 months had lapsed prior to filing complaint that
R had not been given an assignment ordered ALPS to reinstate Rodriguez and pay him full backwages
- Issue: was Rodriguez validly dismissed. No. Illegal dismissal.
o For dismissal to be valid, must be pursuant to a just/authorized cause and comply with procedural due
process (notice and hearing)
ALPS failed to prove just cause burden of proving that termination of EE was for just acuse lies
with ER; the irregularity report which served as basis for his dismissal may only be considered as
an uncorroborated allegation if unspported by substantial evidence failure to remit to company
must be substantial and not based on mere conjectures + R was not given written notice
specifying grounds for termination nor reasonable opportunity to explain his side
R entitled to twin remedies of reinstatmenet and payment of full backwages
- Issue: if illegally dismissed, was ALPS and/or Alfredo Perez liable for dismissal.
o Presumption is that a contractor is a labor-only contractor unless he overcomes the burden of proving that
it has substantial capital, investment, tools, and the like; ALPS has burden of proving that CT is an
independent contractor, and not labor-only
o Incumbent on ALPS to present sufficient proof that CT has substantial capital, investment and tools to
successfully impute liability, which ALPS failed to substantiate
o As labor-only contractor, CT is deemed agent of ALPS, thus ALPS is liable as ER
o Since ALPS is a sole proprietoryship owned by Alfredo Perez, it is he who must be held liable for
the payment of backwages to Rodriguez. A sole proprietoryship does not possess a juridical
personality separate and distinct from that of the owner of the enterpsie. Thus the owner has
unlimiated personal liability for all the debts and obligations of the business, and it is agains him
that a decision for illegaldismissal is to be enforced.
- Held: petition denied; CA decision affirmed.
281 SCRA 133 Business Organization Corporation Law Members of the Corporate Board
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 effect
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 effect because it is void and contrary to the law.
GCHS seat in the corporate board is at best merely tolerated by GVAI.
Gokongwei vs. SEC Case Digest
Gokongwei vs. Securities and Exchange Commission
[GR L-45911, 11 April 1979]

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

It was contended that according to section 22 of the Corporation Law and Article VIII of the 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, Gokongwei contended that the Board acted without authority and in
usurpation of the power of the stockholders. As a second cause of action, it was alleged that the authority granted in 1961
had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist. As a third cause of
action, Gokongwei averred that the membership of the Board of Directors had changed since the authority was given in
1961, there being 6 new directors. As a fourth cause of action, it was claimed that prior to the questioned amendment,
Gokogwei had all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that as a
stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon
in the election of directors; and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's
disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void. As
additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being
elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into contracts (specifically a management contract) with the
corporation, which was avowed because the questioned amendment gave the Board itself the prerogative of determining
whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended by-
laws which states that in determining whether or not a person is engaged in competitive business, the Board may consider
such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion
of the amended by-laws which requires that "all nominations for election of directors shall be submitted in writing to the
Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and
oppressive. It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing
thereof be cancelled, and that Soriano, et. al. be made to pay damages, in specified amounts, to Gokongwei. On 28
October 1976, in connection with the same case, Gokongwei filed with the Securities and Exchange Commission an
"Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of the corporation refused to
allow him to inspect its records despite request made by Gokongwei for production of certain documents enumerated in
the request, and that the corporation had been attempting to suppress information from its stockholders despite a negative
reply by the SEC to its query regarding their authority to do so.

The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and their opposition to the
petition, respectively. Meanwhile, on 10 December 1976, while the petition was yet to be heard, the corporation issued a
notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-
laws", setting such meeting for 10 February 1977. This prompted Gokongwei to ask the SEC for a summary judgment
insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders' meeting for
the aforesaid purpose, Soriano, et. al. admitted the invalidity of the amendments of 18 September 1976. The motion for
summary judgment was opposed by Soriano, et. al. Pending action on the motion, Gokongwei filed an "Urgent Motion for
the Issuance of a Temporary Restraining Order", praying that pending the determination of Gokongwei's application for
the issuance of a preliminary injunction and or Gokongwei's motion for summary judgment, a temporary restraining order
be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as scheduled. This motion was duly
opposed by Soriano, et. al. On 10 February 1977, Cremation issued an order denying the motion for issuance of temporary
restraining order. After receipt of the order of denial, Soriano, et. al. conducted the special stockholders' meeting wherein
the amendments to the by-laws were ratified. On 14 February 1977, Gokongwei filed a consolidated motion for contempt
and for nullification of the special stockholders' meeting. A motion for reconsideration of the order denying Gokongwei's
motion for summary judgment was filed by Gokongwei before the SEC on 10 March 1977.
[SEC Case 1423] Gokongwei alleged that, having discovered that the corporation has been investing corporate funds in
other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17-1/2
of the Corporation Law, he filed with SEC, on 20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and
Jose M. Soriano, as well as the corporation declared guilty of such violation, and ordered to account for such investments
and to answer for damages. On 4 February 1977, motions to dismiss were filed by Soriano, et. al., to which a consolidated
motion to strike and to declare Soriano, et. al. in default and an opposition ad abundantiorem cautelam were filed by
Gokongwei. Despite the fact that said motions were filed as early as 4 February 1977, the Commission acted thereon only
on 25 April 1977, when it denied Soriano, et. al.'s motions to dismiss and gave them two (2) days within which to file
their answer, and set the case for hearing on April 29 and May 3, 1977. Soriano, et. al. issued notices of the annual
stockholders' meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the Board of Directors
by the stockholders at the meeting on 20 March 1972 to invest corporate funds in other companies or businesses or for
purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments
thereafter made pursuant thereto." By reason of the foregoing, on 28 April 1977, Gokongwei filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain Soriano, et. al. from taking up Item 6 of the Agenda
at the annual stockholders' meeting, requesting that the same be set for hearing on 3 May 1977, the date set for the second
hearing of the case on the merits. The SEC, however, cancelled the dates of hearing originally scheduled and reset the
same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the
Commission to act, Gokongwei filed an urgent manifestation on 3 May 1977, but this notwithstanding, no action has been
taken up to the date of the filing of the instant petition.

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

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

1. It is recognized by all authorities that "every corporation has the inherent power to adopt 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.'" In this jurisdiction under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and
employees." This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation
Law, which provides that "every director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director." Any person "who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall
govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law."
To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate
the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will
of the majority of his fellow incorporators. It can not therefore be justly said that the contract, express or implied, between
the corporation and the stockholders is infringed by any act of the former which is authorized by a majority." Pursuant to
section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of
the stockholders representing at least two-thirds of the subscribed capital stock of the corporation. If the amendment
changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right,
viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the
majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that Gokongwei has a vested right to be elected director, in the face of the fact that the law at the time such right
as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification.

2. Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be
any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned.
As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust." "The ordinary trust relationship of directors of a
corporation and stockholders is not a matter of statutory or technical law. It springs from the fact that directors have the
control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries
thereof." A director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot serve
himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard
of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept
against serving two masters. He cannot utilize his inside information and strategic position for his own preferment. He
cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot
violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his
power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms
that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times
subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the
fiduciary to the exclusion or detriment of the cestuis. The doctrine of "corporate opportunity" is precisely a recognition by
the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking
advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. It is
not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly
confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and
diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers
or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which
he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive
in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his
duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal
concerns. The offer and assurance of Gokongwei that to avoid any possibility of his taking unfair advantage of his
position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters
would be discussed, would not detract from the validity and reasonableness of the by-laws involved. Apart from the
impractical results that would ensue from such arrangement, it would be inconsistent with Gokongwei's primary motive in
running for board membership which is to protect his investments in San Miguel Corporation. More important, such a
proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and enforce responsible corporate management.

3. Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the
corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the
corporation at reasonable hours." The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the
corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a
quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him
with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In
other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful
in character and not inimical to the interest of the corporation. The "general rule that stockholders are entitled to full
information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to
obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for
the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." While the right of a
stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such
stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a
stockholder is a different thing. Stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the corporation, and generally take an
account of the stewardship of the officers and directors. herein, considering that the foreign subsidiary is wholly owned by
San Miguel Corporation and, therefore, under Its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as
extending to books and records of such wholly owned subsidiary which are in the corporation's possession and control.

4. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or
for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of
the voting power is necessary. As stated by the corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and
market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc.,
purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San
Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as
a tax free reorganization. Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents. This is true because the questioned investment is neither
contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate
powers, but which is defective from a purported failure to observe in its execution the requirement of the law that the
investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the
outset. Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently
relevant to the corporate purpose. The mere fact that the corporation submitted the assailed investment to the stockholders
for ratification at the annual meeting of 10 May 1977 cannot be construed as an admission that the corporation had
committed an ultra vires act, considering the common practice of corporations of periodically submitting for the
ratification of their stockholders the acts of their directors, officers and managers.

China Banking Corporation vs CA Case Digest


China Banking Corporation vs. Court of Appeals
[GR 117604, 26 March 1997]

Facts: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc. (VGCCI), pledged
his Stock Certificate 1219 to China Banking Corporation (CBC). On 16 September 1974, CBC wrote VGCCI requesting
that the pledge agreement be recorded in its books. In a letter dated 27 September 1974, VGCCI replied that the deed of
pledge executed by Calapatia in CBC's favor was duly noted in its corporate books. On 3 August 1983, Calapatia obtained
a loan of P20,000.00 from CBC, payment of which was secured by the pledge agreement still existing between Calapatia
and CBC. Due to Calapatia's failure to pay his obligation, CBC, on 12 April 1985, filed a petition for extrajudicial
foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of
the pledged stock. On 14 May 1985, CBC informed VGCCI of the foreclosure proceedings and requested that the pledged
stock be transferred to its name and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI
wrote CBC expressing its inability to accede to CBC's request in view of Calapatia's unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and CBC emerged as the
highest bidder at P20,000.00 for the pledged stock. Consequently, CBC was issued the corresponding certificate of sale.

On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of
P18,783.24. Said notice was followed by a demand letter dated 12 December 1985 for the same amount and another
notice dated 22 November 1986 for P23,483.24. On 4 December 1986, VGCCI caused to be published in the newspaper
Daily Express a notice of auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m.
Included therein was Calapatia's own share of stock (Stock Certificate 1219). Through a letter dated 15 December 1986,
VGCCI informed Calapatia of the termination of his membership due to the sale of his share of stock in the 10 December
1986 auction. On 5 May 1989, CBC advised VGCCI that it is the new owner of Calapatia's Stock Certificate 1219 by
virtue of being the highest bidder in the 17 September 1985 auction and requested that a new certificate of stock be issued
in its name. On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public
auction held on 10 December 1986 for P25,000.00. On 9 March 1990, CBC protested the sale by VGCCI of the subject
share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December
1986 auction and for the issuance of a new stock certificate in its name. On 18 June 1990, the Regional Trial Court of
Makati dismissed the complaint for lack of jurisdiction over the subject matter on the theory that it involves an intra-
corporate dispute and on 27 August 1990 denied CBC's motion for reconsideration. On 20 September 1990, CBC filed a
complaint with the Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by
VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new certificate in
petitioner's name; and for damages, attorney's fees and costs of litigation.

On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that
considering that the said share is delinquent, VGCCI had valid reason not to transfer the share in the name of CBC in the
books of VGCCI until liquidation of delinquency. Consequently, the case was dismissed. On 14 April 1992, Hearing
Officer Perea denied CBC's motion for reconsideration. CBC appealed to the SEC en banc and on 4 June 1993, the
Commission issued an order reversing the decision of its hearing officer; holding that CBC has a prior right over the
pledged share and because of pledgor's failure to pay the principal debt upon maturity, CBC can proceed with the
foreclosure of the pledged share; declaring that the auction sale conducted by VGCCI on 10 December 1986 is declared
NULL and VOID; and ordering VGCCI to issue another membership certificate in the name of CBC. VGCCI sought
reconsideration of the order. However, the SEC denied the same in its resolution dated 7 December 1993. The sudden turn
of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of Appeals rendered its
decision nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the
subject matter and, consequently, dismissed CBC's original complaint. The Court of Appeals declared that the controversy
between CBC and VGCCI is not intra-corporate; nullifying the SEC orders and dismissing CBCs complaint. CBC moved
for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October 1994. CBC filed the
petition for review on certiorari.

Issue: Whether CBC is bound by VGCCI's by-laws.

Held: In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the
transaction or agreement between said third party and the shareholder was entered into. Herein, at the time the pledge
agreement was executed. VGCCI could have easily informed CBC of its by-laws when it sent notice formally recognizing
CBC as pledgee of one of its shares registered in Calapatia's name. CBC's belated notice of said by-laws at the time of
foreclosure will not suffice. By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and
officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively
permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals
composing it and having the direction, management and control of its affairs, in whole or in part, in the management and
control of its affairs and activities. The purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory
authority, have no status as public law. Therefore, it is the generally accepted rule that third persons are not bound by by-
laws, except when they have knowledge of the provisions either actually or constructively. For the exception to the
general accepted rule that third persons are not bound by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted.
Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect pledgee's right over
the pledged share. Article 2087 of the Civil Code provides that it is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or mortgage consists maybe alienated for the payment to
the creditor. Further, VGCCI's contention that CBC is duty-bound to know its by-laws because of Article 2099 of the
Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a
family, fails to convince. CBC was never informed of Calapatia's unpaid accounts and the restrictive provisions in
VGCCI's by-laws. Furthermore, Section 63 of the Corporation Code which provides that "no shares of stock against
which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by
VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction." Herein, the
subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate 1219.
What Calapatia owed the corporation were merely the monthly dues. Hence, Section 63 does not apply.

Tan V. Sycip (2006)

G.R. No. 153468 August 17, 2006

Lessons Applicable: Release from Subscription Obligation (Corporate Law)

FACTS:

Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation w/ 15 regular members, who
also constitute the board of trustees.
April 6, 1998: During the annual members meeting only 11 living member-trustees, as 4 had already died.
7 attended the meeting through their respective proxies.
The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who
argued that there was no quorum.
In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the 4
deceased member-trustees.
SEC: meeting void due to lack of quorum (NOT living but based on AIC)
Sec 24 read together with Sec 89
CA: Dismissed due to technicalities
ISSUE: W/N dead members should still be counted in the quorum - NO based on by-laws

HELD: NO. remaining members of the board of trustees of GCHS may convene and fill up the vacancies in the board

Except as provided, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
quorum in a members meeting is to be reckoned as the actual number of members of the corporation
stock corporations - shareholders may generally transfer their shares
on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to
the stock and entitled to vote it
Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or
executor
nonstock corporation - personal and non-transferable unless the articles of incorporation or the bylaws of the
corporation provide otherwise
Section 91 of the Corporation Code: termination extinguishes all the rights of a member of the corporation, unless
otherwise provided in the articles of incorporation or the bylaws.
whether or not "dead members" are entitled to exercise their voting rights (through their executor or administrator),
depends on those articles of incorporation or bylaws
By-Laws of GCHS: membership in the corporation shall be terminated by the death of the member
With 11 remaining members, the quorum = 6.
SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the board of directors or
trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of
at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must
be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to
fill a vacancy shall be elected only for the unexpired term of his predecessor in office.
the filling of vacancies in the board by the remaining directors or trustees constituting a quorum is merely permissive,
not mandatory
either by the remaining directors constituting a quorum, or by the stockholders or members in a regular or special
meeting called for the purpose
By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a
majority vote of the remaining members of the board
remaining member-trustees must sit as a board (as a body in a lawful meeting)
in order to validly elect the new ones