Corporation Law Chapters 6-8

[No. 6217. December 26, 1911.
]
CHARLES W. MEAD, plaintiff and appellant, vs. E. C. McCUL-LOUGH ET AL., and THE PHILIPPINE
ENGINEERING AND CONSTRUCTION COMPANY, defendants and appellants.
1.CORPORATIONS; SALARY OF GENERAL MANAGER.Held: That the verbal contract, entered into
between the board of directors and the plaintiff as general manager, as to the latter's salary, was a
contingent one, dependent upon the success of the business, and that, as the corporation was a failing
concern, the plaintiff was only entitled to his actual and necessary expenses.
2.ID.; INDUSTRIAL CIVIL PARTNERSHIP UNDER CIVIL CODE.A corporation organized for the purpose of
engaging in general engineering and construction work, the names of the organizers appearing in the
articles of agreement which were duly inscribed in the Commercial Register, is an industrial civil
partnership (corporation) in the mercantile form; an anonymous partnership, legally constituted, and
must be governed by the provisions of the Civil Code, the provisions of the Code of Commerce being
applicable subsidiarily.
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PHILIPPINE REPORTS ANNOTATED
Mead vs. McCullough.
3.ID.; POWER TO ACQUIRE, HOLD, SELL AND BUY PROPERTY.A corporation, upon the execution of the
public instrument in which its articles of agreement appear, and the contribution of funds and personal
property, becomes a juridical person, an artificial being, existing only in contemplation of the law, with
power to hold, buy, and sell property. The inscribing of its articles of incorporation in the mercantile
register is not necessary to make such a corporation a juridical person, the inscription operating only to
show that it partakes of the form of a commercial concern.
4.ID.; ARTICLES OF INCORPORATION; MEETINGS; CONDUCT OF BUSINESS BY MAJORITY VOTE.Where
the articles of incorporation prescribe that at all meetings of the stockholders a majority of votes of
those present shall be necessary to determine any question discussed, the sale or transfer to one of its
members of the corporate property is a matter which the majority of the stockholders can properly
consider, and, generally speaking, the voice of the majority of the stockholders is the law of the
corporation within the limitation which is found in the essential compacts of the articles of agreement,
which have served as a basis upon which the members united, and without which it is not probable that
they would have entered into the corporation.
5.ID.; POWERS OF DIRECTORS AND STOCKHOLDERS; SALE OF CORPORATE PROPERTY.A majority of the
stockholders or directors have the power to sell or transfer to one of its members the corporate
property, where the stockholders or directors have general ordinary powers, and where there is nothing
in the articles of incorporation which expressly prohibits such a sale.
6.ID.; ID. ; ID.A private corporation which owes no special duty to the public and which has not been
given the right of eminent domain, has the absolute -power as against the whole world, "except the
State, to sell and dispose of all its property, such power resting in the board of directors or majority of
the stockholders, without reference to the assent or authority of the minority when the corporation is in
failing circumstances or insolvent, or when it can no longer continue the business with profit and when
such action is regarded as an -imperative necessity.
7.ID.; ID.; ID.; OFFICER MAY DEAL WITH THE CONCERN. While a private corporation remains solvent,
there is no reason why a director or officer, by authority of the majority of its 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. This is likewise true of an insolvent corporation, but, in all cases, such officer or director must
act in good faith and
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pay an adequate consideration, their acts being at all times subject to the most severe scrutiny.
8.ID. ; ID.; ID.; DISSOLUTION; CIVIL CODE; CODE OF COMMERCE.There is nothing in the provisions of
the Civil Code, nor of the Code of Commerce, dealing with the manner of dissolving a corporation, which
expressly or impliedly prohibits the sale of the corporate property to one of its members, and the
dissolution of the corporation in such a manner.
9.ID. ; ID. ; PRESUMPTION OF ABANDONMENT OF OFFICE BY A DIRECTOR.Where a director in a
corporation accepts a position in which his duties are incompatible with those as such director, it is
presumed that he has abandoned his office as director of the corporation.
10.ID.; DUTY OF DIRECTORS OF INSOLVENT CORPORATION.The directors of an insolvent corporation
become trustees for all the creditors, and a director who is also a creditor will not be permitted to
secure to himself any personal advantage over other creditors.
11.PERSONAL EFFECTS OR PROPERTY.Where a person abandons his personal effects or leaves them in
possession of an irresponsible person, he can not recover the value of such effects from a party who did
not contribute in any manner to the loss of the same.
APPEAL from a judgment of the Court of First Instance of Manila. Araullo, J.
The facts are stated in the opinion of the court.
Haussermann, Cohn & Fisher and A. D. Gibbs, for plaintiff.
James J. Peterson and O'Brien & DeWitt, for defendant McCullough.
TRENT, J.:
This action was originally brought by Charles W. Mead against Edwin C. McCullough, Thomas L. Hartigan,
Frank E. Green, and Frederick H. Hilbert. Mead has died since the commencement of the action and the
case is now going forward in the name of his administrator as plaintiff.
The complaint contains three causes of action, which are substantially as follows: The first, for salary;
the second, for profits; and the third, for the value of the personal
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effects alleged to have been left by Mead and sold by the defendants.
A joint and several judgment was rendered by default against each and all of the defendants for the sum
of $3,450.61 gold. The defendant McCullough alone having made application to have this judgment set
aside, the court granted his motion, vacating the judgment as to him only, the judgment as to the other
three defendants remaining undisturbed.
At the new trial, which took place some two or three years later and after the death of Mead, judgment
was rendered upon the merits, dismissing the case as to the first and second causes of action and for the
sum of $1,200 gold in the plaintiff's favor on the third cause of action. From this judgment both parties
appealed and have presented separate bills of exceptions. No appeal was taken by the defendant
McCullough from the ruling of the court denying a recovery on his cross complaint.
On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this opinion unless it is
otherwise stated) and the defendants organized the "Philippine Engineering and Construction
Company," the incorporators being the only stockholders and also the directors of said company, with
general ordinary powers. Each of the stockholders paid into the company $2,000 Mexican currency in
cash, with the exception of Mead, who turned over to the company personal property in lieu of cash.
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. Under this organization the
company began business about April 1, 1902.
The contracts 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 quarter-
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master 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. They did on that date enter into the following
contract with the defendant McCullough, to wit:
"For value received, this contract and all the rights and interests of the Philippine Engineering and
Construction Company in the same are hereby assigned to E. C.
McCullough of Manila, P. I.
(Sgd.) "E. C. McCULLOUGH,
"President, Philippine Engineering and
Construction Company.
(Sgd.) "F. E. GREEN, Treasurer.
(Sgd.) "THOMAS L. HARTIGAN, Secretary."
The contract referred to in the foregoing document was known as the wrecking contract with the naval
authorities.
On the 28th of that same month, McCullough executed and signed the following instrument:
"For value received, and having the above assignment from my associates in the Philippine Engineering
and Construction Company, I hereby transfer my right, title, and interest in the within contract, with the
exception of onesixth, which I hereby retain, to R. W. Brown, H. D. C. Jones, John T. Macleod, and T. H.
Twentyman."
The assignees of the wrecking contract, including McCullough, formed what was 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 cash payment, McCullough retained a one-sixth interest
in the new company or association.
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The plaintiff insists that he was to receive as general manager of the first company a salary which was
not to be less than $3,500 gold (which amount he was receiving as city engineer at the time of the
incorporation of the company), plus 20 per cent of the net profits which might be derived from the
business; while McCullough contends that the plaintiff was to receive only his necessary expenses unless
the company made a profit, when he would receive $3,500 per year and 20 per cent of the profits. The
contract entered into between the board of directors and the plaintiff as to the latter's salary was a
verbal one. The plaintiff testified that this contract was unconditional and that his salary, which was
fixed at $3,500 gold, was not dependent upon the success of the company, but that his share of the
profits was to necessarily depend upon the net income. On the other hand, McCullough, Green and
Hilbert testify that the salary of the plaintiff was to be determined according to whether or not the
company was successful in its operations; that if the company made gains, he was to receive $3,500
gold, and a percentage, but that if the company did not make any profits, he was to receive only his
necessary living expenses.
It is strongly urged that the plaintiff would not have accepted the management of the company upon
such conditions, as he was receiving from the city of Manila a salary of $3,500 gold. This argument is not
only answered by the positive and direct testimony of three of the defendants, but also by the
circumstances under which this company was organized and its principal object, which was the raising of
the Spanish ships. The plaintiff put no money into the organization, the defendants put but little: just
sufficient to get the work of raising the wrecks under way. This venture was a risky one. All the members
of the company realized that they were undertaking a most difficult and expensive project. If they were
successful, handsome profits would be realized; while if they were unsuccessful, all the expenses for the
hiring of machinery, launches, and labor would be a total loss. The plaintiff
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was in complete charge and control of this work and was to receive, according to the great
preponderance of the evidence, in case the company made no profits, sufficient amount to cover his
expenses, which included his room, board, transportation, etc. The defendants were to furnish money
out of their own private funds to meet these expenses, as the original $8,000 Mexican currency was
soon exhausted in the work thus undertaken. So the contract entered into between the directors and
the plaintiff as to the latter's salary was a contingent one.
It is admitted that the plaintiff received $1,500 gold for his services, and whether he is entitled to
receive an additional amount depends upon the result of the second cause of action.
The second cause of action is more difficult to determine. On this point counsel for the plaintiff has filed
a very able and exhaustive brief, dealing principally with the facts.
It is urged that the net profits accruing to the company after the completion of all the contracts (except
the salvage contract) made before the plaintiff resigned as manager and up to the time the salvage
contract was transferred to McCullough and from him to the new company, amounted to $5,628.37
gold. This conclusion is reached, according to the memorandum of counsel for the plaintiff which
appears on pages 38 and 39 of the record, in the following manner:
Profits from the construction of warehouses for the Govern
ment ..................................................................................
$6,962.54
Profits from the construction of the wall at Fort McKinley..
500.00
Profits from the inspection of the construction of the P. O.
T. warehouse......................................... .........................................
1,000.00
Profits obtained from other projects (according to Mead's
calculations) ..................................................................................
1,000.00
Total..................................................................................
9,462.54
In this same memorandum, the expense for the operation of the company during Mead's management,
consisting of rents, the hire of one muchacho, the publication of various notices, the salary of an
engineer for four months, and
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plaintiff's salary for nine months, amounts to $3,834.17 gold. This amount, deducted from the sum total
of profits, leaves $5,628.37 gold.
Counsel for the plaintiff, in order to show conclusively as they assert that the company, after paying all
expenses and indebtedness, had a considerable balance to its credit, calls attention to Exhibit K. This
exhibit reads as follows:
"Abstract copy of ledger No. 3, folios 276-277. Philippine Engineering and Construction Company." Then
follows the debits and credits, with a balance in favor of the company of $10,728.44 Mexican currency.
This account purports to cover the period from July 1, 1902, to April 1, 1903. Ledger No. 3, above
mentioned, is that of the defendant McCullough and not one of the books of the company.
It was upon this exhibit that the lower court based its conclusion when it found that on January 25,
1903, after making the transfer of the salvage contract to McCullough, the company was in debt
$2,278.30 gold. The balance of $10,728.44 Mexican currency deducted from the $16,439.40 Mexican
currency (McCullough's losses in the Manila Salvage Association) leaves $2,278.30 United States
currency at the then existing rate of exchange. In Exhibit K, McCullough charged himself with the
$15,000 Mexican currency which he received from his associates in the new company, but did not credit
himself with the $16,439.40 Mexican currency, losses in said company, for the reason that on April 1,
1903, said losses had not occurred. It must be borne in mind that Exhibit K is an abstract from a ledger.
The defendant McCullough, in order to show in detail his transactions with the old company, presented
Exhibits 1 and 2. These accounts read as follows:
"Detailed account of the receipts and disbursements of E. C. McCullough and the Philippine Engineering
and Construction Company."
Then follow the debits and credits. These two accounts cover the period from March 5, 1902, to June 9,
1905.
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According to Exhibit No. 1, the old company was indebted to McCullough in the sum of $14,918.75
Mexican currency, and according to Exhibit No. 2 the indebtedness amounted to $6,358.15 Mexican
currency. The debits and credits in these two exhibits are exactly the same with the following
exceptions: In Exhibit No. 1, McCullough credits himself with the $10,000 Mexican currency (the amount
borrowed from the bank and deposited with the admiral as a guarantee for the faithful performance of
the salvage contract) ; while in Exhibit No. 2 he credits himself with this $10,000, and at the same time
charges himself with this amount. In the same exhibit (No. 2) he credits himself with $16,439.40
Mexican currency, his losses in the new company, and charges himself with the $15,000 Mexican
currency, received from said company. Eliminating entirely from these two exhibits the $10,000 Mexican
currency, the $15,000 Mexican currency, and the $16,439.40 Mexican currency, the balance shown in
McCulIough's favor is exactly the same in both exhibits. This balance amounts to $4,918.75 Mexican
currency.
According to McCullough's accounts in Exhibits 1 and 2, the profits derived from the construction of the
Government warehouses amounted to $4,005.02 gold, while the plaintiff contends that these profits
amounted to $6,962.54 gold. The plaintiff, during his management of the old company, made a contract
with the Government for the construction of these warehouses and commenced work. After he resigned
and left for China, McCullough took charge of and completed the said warehouses. McCullough gives a
complete, detailed statement of expenses for the completion of this work, showing the dates, to whom
paid, and for what purpose. He also gives the various amounts he received from the Government with
the dates of the receipt of the same. On the first examination, McCullough testified that the total
amount received from the Government for the construction of these warehouses was $11,128 gold. The
case was suspended for the purpose of examining the records of the Auditor and the quartermaster, to
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determine the exact amount paid for this work. As a result of this examination, the vouchers show an
additional amount of about $5,000 gold, paid in checks. These checks show that the same were
endorsed by the plaintiff and collected by him from the Hongkong and Shanghai Banking Corporation.
This money was not handled by McCullough and as it was collected by the plaintiff, it must be
presumed, in the absence of proof, that it was disbursed by him. McCullough did not charge himself
with the $2,500 gold, alleged to have been profits from the construction of the wall at Fort McKinley,
the inspection of the construction of the P. O. T. warehouse, and other projects. This work was done
under the management of the plaintiff and it is not shown that the profits from these contracts ever
reached the hands of McCullough. McCullough was not the treasurer of the company at that time. The
other items which the plaintiff insists that McCuIlough had no right to credit himself with are the
following:
Date.
To whom paid.
Amount(Mex.
currency).
Jan. 30,1903
Green ................................................................
$2,000.00
Feb. 2,1903
McCullough .......................................................
1,300.00
Feb. 2,1903
Green ................................................................
1,027.92
Feb. 19,1903
P. O. T. Co. note ...............................................
2,236. 80
May 23,1905
Hilbert ...............................................................
1,856.02
June 9,1905
Hartigan ............................................................
1,225.00
McCullough says that these amounts represent cash borrowed from the respective parties to carry on
the operations of the old company while it was trying to raise the sunken vessels. There is no proof to
the contrary, and McCullough's testimony on this point is strongly corroborated by the fact that the
work done by the company in attempting to raise these vessels was its first undertaking. The company
had made no profits while that work was going on under the management of the plaintiff, but its
expenses greatly exceeded that of the original $8,000 Mexican currency. It was necessary to borrow
money to continue that work. These amounts, having been borrowed, were
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outstanding debts when McCullough took charge for the purpose of completing the warehouses and
winding up the business of the old company. These amounts do not represent payments or refunds of
the original capital. McCullough did not credit himself with any amount for his services for supervising
the completion of the warehouses, nor for liquidating or winding up the company's affairs. We think
that the amount of $4,918.75 Mexican currency, balance in McCullough's favor up to this point,
represents a fair, equitable, and just settlement.
So far we have referred to the Philippine Engineering and Construction Company as the "company,"
without any attempt to define its legal status.
The plaintiff and defendants organized this company with a capital stock of $100,000 Mexican currency,
each paying in on the organization $2,000 Mexican currency. The remainder, $90,000, according to the
articles of agreement, were to be offered to the public in shares of $100 Mexican currency, each. The
names of all the organizers appear in the articles of agreement, which articles were duly inscribed in the
commercial register. The purposes for which this organization was effected were to engage in general
engineering and construction work, operating under the name of the "Philippine Engineering and
Construction Company." During its active existence, it engaged in the business of attempting to raise the
sunken Spanish fleet, constructing under contract warehouses and a wharf for the United States
Government, supervising the construction of a warehouse for a private firm, and some assay work. It
was, therefore, an industrial civil partnership, as distinguished from a commercial one; a civil
partnership in the mercantile form, an anonymous partnership legally constituted in the city of Manila.
The articles of agreement appeared in a public document and were duly inscribed in the commercial
register. To the extent of this inscription the corporation partook of the form of a mercantile one and as
such must be governed by articles 151 to 174 of the Code of Commerce, in so far
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as these provisions are not in conflict with the Civil Code (art. 1670, Civil Code) ; but the direct and
principal law applicable is the Civil Code. Those provisions of the Code of Commerce are applicable
subsidiarily.
This partnership or stock company (sociedad annima) upon the execution of the public instrument in
which its articles of agreement appear, and the contribution of funds and personal property, became a
juridical personan artificial being, invisible, intangible, and existing only in contemplation of lawwith
the power to hold, buy, and sell property, and to sue and be sueda corporationnot a general
copartnership nor a limited copartnership. (Arts. 37, 38, 1665, and 1666 of the Civil Code; Compaa
Agrcola de Ultramar vs. Reyes et al., 4 Phil. Rep., 2; and Chief Justice Marshall's definition of a
corporation, 17 U. S., 518.)
The inscribing of its articles of agreement in the commercial register was not necessary to make it a
juridical persona corporation. Such inscription only operated to show that it partook of the form of a
commercial corporation. (Compaa Agrcola de Ultramar vs. Reyes et al., supra.)
Did a majority of the stockholders, who were at the same time a majority of the directors of this
corporation, have the power under the law and its articles of agreement, to sell or transfer to one of its
members the assets of said corporation ?
In the first article of the statutes of incorporation it is stated that by virtue of a public document the
organizers, whose names are given in full, agreed to form a sociedad annima. Article II provides that
the organizers should be the directors and administrators until the second general meeting, and until
their successors were duly elected and installed. The third article provides that the sociedad should run
for ninety-nine years from the date of the execution of its articles of agreement. Article IV sets forth the
object or purpose of the organization. Article V makes the capital $100,000 Mexican currency, divided
into one thousand shares at $100 Mexican currency each. Article
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VI provides that each shareholder should be considered as a cowner in the assets of the company and
entitled to participate in the profits in proportion to the amount of his stock. Article VII fixed the time of
holding general meetings and the manner of calling special meetings of the stockholders. Article VIII
provides that the board of directors shall be elected annually. Article IX provides for the filling of
vacancies in the board of directors. Article X provides that "the board of directors shall elect the officers
of the sociedad and have under its charge the administration of the said sociedad." Article XI: "In all the
questions with reference to the administration of the affairs of the sociedad, it shall be necessary to
secure the unanimous vote of the board of directors, and at least three of said board must be present in
order to constitute a legal meeting." Article XII provides that all of the stock, except that which was
divided among the organizers, should remain in the treasury subject to the disposition of the board of
directors. Article XIII reads: "In all the meetings of the stockholders, a majority vote of the stockholders
present shall be necessary to determine any question discussed." The fourteenth article authorizes the
board of directors to adopt such rules and regulations for the government of the sociedad as it should
deem proper, which were not in conflict with its statutes.
When the sale or transfer heretofore mentioned took place, there were present four directors, all of
whom gave their consent to that sale or transfer. The plaintiff was then absent and his express consent
to make this transfer or sale was not obtained. He was, before leaving, one of the directors in this
corporation, and although he had resigned as manager, he had not resigned as a director. He accepted
the position of engineer of the Canton and Shanghai Railway Company, knowing that his duties as such
engineer would require his whole time and attention and prevent his returning to the Philippine Islands
for at least a year or more. The new position which he accepted in China was incompatible with his
position as director in the
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Philippine Engineering and Construction Company, a corporation whose sphere of operations was
limited to the Philippine Islands. These facts are sufficient to constitute an abandoning or vacating of his
position as director in said corporation. (10 Cyc., 741.) Consequently, the transfer or sale of the
corporation's assets to one of its members was made by the unanimous consent of all the directors in
the corporation at that time.
There were only five stockholders in this corporation at any time, four of whom were the directors who
made the sale, and the other the plaintiff, who was absent in China when the said sale took place. The
sale was, therefore, made by the unanimous consent of four-fifths of all the stockholders. Under the
articles of incorporation, the stockholders and directors had general ordinary powers. There is nothing
in said articles which expressly prohibits the sale or transfer of the corporate property to one of the
stockholders of said corporation.
Is there anything in the law which prohibits such a sale or transfer? To determine this question, it is
necessary to examine, first, the provisions of the Civil Code, and second, those provisions (arts. 151 to
174) of the Code of Commerce.
Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a corporation. There is nothing
in these articles which expressly or impliedly prohibits the sale of corporate property to one of its
members, nor a dissolution of a corporation in this manner. Neither is there anything in articles 151 to
174 of the Code of Commerce which prohibits the dissolution of a corporation by such sale or transfer.
"The articles of incorporation must include:
* * * * * * *
"The submission to the vote of the majority of the meeting of members, duly called and held, of such
matters as may properly be brought before the same." (No. 10, art. 151, Code of Commerce.)
Article XIII of the corporation's statutes expressly pro-
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vides that "in all the meetings of the stockholders, a majority vote of the stockholders present shall be
necessary to determine any question discussed."
The sale or transfer to one of its members was a matter which a majority of the stockholders could very
properly consider. But it is said that if the acts and resolutions of a majority of the stockholders in a
corporation are binding in every case upon the minority, the minority would be completely wiped out
and their rights would be wholly at the mercy of the abuses of the majority.
Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there
are exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without
such a limit the will of the majority would be absolute and irresistible and might easily degenerate into
an arbitrary tyranny. The reason for these limitations is that in every contract of partnership (and a
corporation can be considered a partnership for this purpose) there is always something fundamental
and unalterable which is beyond the power of the majority of the stockholders, and which constitutes
the rule controlling their actions. This rule which must be observed is to be found in the essential
compacts of such a partnership, which have served as a basis upon which the members have united, and
without which it is not probable that they would have entered into the corporation. Notwithstanding
these limitations upon the power of the majority of the stockholders, their (the majority's) resolutions,
when passed in good faith and for a just cause, deserve careful consideration and are generally binding
upon the minority.
Eixal, in his work entitled "Instituciones del Derecho Mercantil de Espaa," speaking of sociedades
annimas, says:
"The resolutions of the boards passed by a majority vote are valid * * * and authority for passing such
resolutions is unlimited, provided that the original contract is not broken by them, the partnership f
unds not devoted to foreign purposes, or the partnership transformed, or changes made
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which are against public policy or which infringe upon the rights of third persons."
The supreme court of Spain, in its decision dated June 30, 1888, said:
"In order to be valid and binding upon dissenting members, it is an indispensable requisite that
resolutions passed by a general meeting of stockholders conform absolutely to the compacts and
conditions of the articles of the association, which are to be strictly construed."
That resolutions passed within certain limitations by a majority of the stockholders of a corporation are
binding upon the minority, is therefore recognized by the Spanish authorities.
"Power of private corporation to alienate property.This power of absolute alienability of corporate
property applies especially to private corporations that are established solely for the purpose of trade or
manufacturing and in which the public has no direct interest. While this power is spoken of as belonging
to the corporation it must be observed that the authorities point out that the trustees or directors of a
corporation do not possess the power to dispose of the corporate property so as to virtually end the
existence of the corporation and prevent it from carrying on the business for which it was
incorporated." (Thompson on Corporations, second edition, sec. 2416, and cases cited thereunder.)
"Power to dispose of all property.Where there are no creditors, and no stockholder objects, a
corporation, as against all other persons but the state, may sell and dispose of all its property. The state
in its sovereign capacity may question the power of the corporation to do so, but with these exceptions
such a sale is valid. A rule of general application is that a corporation of a purely private business
character, one which owes no special duty to the public, and is not given the right of eminent domain,
where it is in failing circumstances or is insolvent, and when the exigencies of its business require it or
when the circumstances are such that it can no longer continue the business
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with profit, may sell and dispose of all its property, pay its debts, divide the remaining assets and wind
up the affairs of the corporation." (Id., sec. 2417.)
"When directors or officers may dispose of all the property.It is within the dominion of the managing
officers and agents of the corporation to dispose of all the corporate property under certain
circumstances; and this may be done without reference to the assent or authority of the stockholders.
This disposition of the property may be temporarily by lease, or permanently by absolute conveyance.
But it can only be done in the course of the corporate business and for the furtherance of the purposes
of the incorporation. The board of directors possess this power when the corporation becomes involved
and by reason of its embarrassed or insolvent condition is unable either to pay its debts or to secure
capital and funds for the further prosecution of its enterprise, and especially where creditors are
pressing their claims and demands and are threatening to or have instituted actions to enforce their
claims. This power of the directors to alienate the property is conceded where it is regarded as of
imperative necessity." (Id., sec. 2418, and cases cited.)
"When majority stockholders may dispose of all corporate property.Another rule that permits a
majority of the stockholders to dispose of all the corporate property and wind up the business, is where
the corporation has become insolvent, and the disposition of the property is necessary to pay the debt;
or where from any cause the business is a failure, and the best interest of the corporation and all the
stockholders require it, then the majority have clearly the power to dispose of all the property even as
against the protests of a minority. It would be a harsh rule that would permit one stockholder, or any
minority of the stockholders, to hold the majority to their investment where the continuation of the
business would be at a loss and where there was no prospect or hope that the enterprise could be made
profitable. The rule as stated by some courts is that the majority stockholders may dispose of the
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property when just cause exists; and this just cause is usually defined to be the unprofitableness of the
business and where its continuation would be ruinous to the corporation and against the interest of
stockholders." (Id., sec. 2424, and cases cited.)
"Nothing is better settled in the law of corporations than the doctrine that a corporation has the same
capacity and power as a natural person to dispose of and convey its property, real or personal, provided
it does not do so for a purpose which is foreign to the objects for which it was created, and provided,
further, it violates no charter or statutory restriction, 01 rule of law based upon public policy * * . * This
power need not be expressly conferred upon a corporation by its charter. It is implied as an incident to
its ownership of property, unless there is some clear restriction in its charter or in some statute." (Clark
and Marshall's Private Corporations, sec. 152, and cases cited.)
"A purely private business corporation, like a manufacturing or trading company, which is not given the
right of eminent domain, and which owes no special duties to the public, may certainly sell and convey
absolutely the whole of its property, when the exigencies of its business require it to do so, or when the
circumstances are such that it can no longer profitably continue its business, provided the transaction is
not in fraud of the rights of creditors, or in violation of charter or statutory restrictions. And, by the
weight of authority, this may be done by a majority of the stockholders against the dissent of the
minority." (Id., sec. 160, and cases cited.)
The above citations are taken from the works of the most eminent writers on corporation law. The
citation of cases in support of the rules herein announced are too numerous to insert.
From these authorities it appears to be well settled, first, that a private corporation, which owes no
special duty to the public and which has not been given the right of eminent domain, has the absolute
right and power as against the
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whole world except the state, to sell and dispose of all of its property; second, that the board of
directors has this power, without reference to the assent or authority of the stockholders, when the
corporation is in failing circumstances or insolvent or when it can no longer continue the business with
profit, and when it is regarded as an imperative necessity; third, that a majority of the stockholders or
directors, even against the protest of the minority, have this power where, from any cause, the business
is a failure and the best interest of the corporation and all the stockholders require it.
May officers or directors of the corporation purchase the corporate property? The authorities are not
uniform on this question, but on the general proposition whether a director or an officer may deal with
the corporation, we think the weight of authority is that he may. (Merrick vs. Peru Coal Co., 61 III, 472;
Harts et al. vs. Brown et al., 77 111., 226; Twin-Lick Oil Company vs. Marbury, 91 U. S., 587; Whitwell vs.
Warner, 20 Vt., 425; Smith vs. Lansing, 22 N. Y., 520; City of St. Louis vs. Alexander, 23 Mo., 483; Beach
et al vs. Miller, 130 111., 162.)
While a corporation remains solvent, we can see 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 pur-
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chase 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. (Beach et al. vs. Miller, supra; Twin-
Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall., 299; Curran vs. State of Arkansas, 15 How.,
304; Richards vs. New Hampshire Insurance Company, 43 N. H., 263; Morawetz on Corporations (first
edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64 Wis., 639; Port vs. Russell, 36 Ind., 60;
Lippincott vs. Shaw Carriage Company, 21 Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, supra, the complainant was a corporation
organized under the laws of West Virginia, engaged in the business of raising and selling petroleum. It
became very much embarrassed and a note was given secured by a deed of trust, conveying all the
property rights, and franchise of the corporation to William Thomas to secure the payment of said note,
with the usual power of sale in default of payment. The property was sold under the deed of trust; was
bought in by defendant's agent for his benefit, and conveyed to him the same year. The defendant was
at the time of these transactions a stockholder and director in the company. At the time the defendant's
money became due there was no apparent possibility of the corporation's paying it at any time. The
corporation was then insolvent. The property was sold by the trustee and bought in by the defendant at
a fair and open sale and at a reasonable price. The sale and purchase was the only mode left to the
defendant to make his money. The court said:
"That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings
with the subject-matter of his trust or agency, and with the beneficiary or party whose interest is
confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a
doctrine founded on the soundest morality, and which has received the clearest recognition in this court
and others. (Koehler vs. Iron Co., 2 Black,
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715; Drury vs. Cross, 7 Wall., 299; R. R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co. vs. Sherman, 30
Barb., 553; Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general doctrine, however, in
regard to contracts of this class, is, not that they are absolutely void, but that they are voidable at the
election of the party whose interest has been so represented by the party claiming under it. We say, this
is the general rule; for there may be cases where such contracts would be void ab initio; as when an
agent to sell buys of himself, and by his power of attorney conveys to himself that which he was
authorized to sell. But even here, acts which amount to a ratification by the principal may validate the
sale.
"The present case is not one of that class. While it is true that the defendant, as a director of the
corporation, was bound by all those rules of conscientious fairness which courts of equity have imposed
as the guides for dealing in such cases, it can not be maintained that any rule forbids one director
among several from loaning money to the corporation when the money is needed, and the transaction
is open, and otherwise free from blame. No adjudged case has gone so far as this. Such a doctrine, while
it would afford little protection to the corporation against actual fraud or oppression, would deprive it of
the aid of those most interested in giving aid judiciously, and best qualified to judge of the necessity of
that aid, and of the extent to which it may safely be given.
"There are in such a transaction three distinct parties whose interest is affected by it; namely, the
lender, the corporation, and the stockholders of the corporation.
"The directors are the officers or agents of the corporation, and represent the interests of that abstract
legal entity, and of those who own the shares of its stock. One of the objects of creating a corporation
by law is to enable it to make contracts; and these contracts may be made with its stockholders as well
as with others. In some classes of corporations, as in mutual insurance companies, the main object of
the act of incorporation is to enable the company to
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make contracts with its stockholders, or with persons who become stockholders by the very act of
making the contract of insurance. It is very true, that as a stockholder, in making a contract of any kind
with the corporation of which he is a member, is in some sense dealing with a creature of which he is a
part, and holds a common interest with the other stockholders, who, with him, constitute the whole of
that artificial entity, he is properly held to a larger measure of candor and good faith than if he were not
a stockholder. So, when the lender is a director, charged, with others, with the control and management
of the affairs of the corporation, representing in this regard the aggregated interest of all the
stockholders, his obligation, if he becomes a party to a contract with the company, to candor and fair
dealing, is increased in the precise degree that his representative character has given him power and
control derived from the confidence reposed in him by the stockholders who appointed him their agent.
If he should be a sole director, or one of a smaller number vested with certain powers, this obligation
would be still stronger, and his acts subject to more severe scrutiny, and their validity determined by
more rigid principles of morality, and freedom from motives of selfishness. All this falls far short,
however, of holding that no such contract can be made which will be valid; * * *."
In the case of Hancock vs. Holbrook et al. (40 La. Ann., 53), the court said:
"As a strictly legal question, the right of a board of directors of a corporation to apply its property to the
payment of its debts, and the right of a majority of stockholders present at a meeting called for the
purpose to ratify such action and to dissolve the corporation, can not be questioned.
"But where such action is taken at the instance, and through the influence of the president of the
corporation, and where the debt to which the property is applied is one for which he is himself primarily
liable, and especially where he subsequently acquires, in his personal right, the
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property thus disposed of, such circumstances undoubtedly subject his acts to severe scrutiny, and
oblige him to establish that he acted with the utmost candor and fair-dealing for the interests of the
corporation, and without taint of selfish motive."
The sale or transfer of the corporate property in the case at bar was made by three directors who were
at the same time a majority of the stockholders. If a majority of the stockholders have a clear and a
better right to sell the corporate property than a majority of the directors, then it can be said that a
majority of the stockholders made this sale or transfer to the defendant McCullough.
What were the circumstances under which said sale was made ? The corporation had been going from
bad to worse. The work of trying to raise the sunken Spanish fleet had been for several months
abandoned. The corporation under the management of the plaintiff had entirely failed in this
undertaking. It had broken its contract with the naval authorities and the $10,000 Mexican currency
deposited had been confiscated. It had no money. It was considerably in debt. It was a losing concern
and a financial failure. To continue its operation meant more losses. Success was impossible. The
corporation was civilly dead and had passed into the limbo of utter insolvency. The majority of the
stockholders or directors sold the assets of this corporation, thereby relieving themselves and the
plaintiff of all responsibility. This was the only wise and sensible thing for them to do. They acted in
perfectly good faith and for the best interests of all the stockholders. "It would be a harsh rule that
would permit one stockholder, or any minority of stockholders to hold a majority to their investment
where a continuation of the business would be at a loss and where there was no prospect or hope that
the enterprise would be profitable."
The above sets forth the condition of this insolvent corporation when the defendant McCullough
proposed to the majority of stockholders to take over the assets and assume all responsibility for the
payment of the debts and the
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completion of the warehouses which had been undertaken. The assets consisted of office furniture of a
value of less than P400, the uncompleted contract for the' construction of the Government warehouses,
and the wrecking contract. The liabilities amounted to at least $19,645.74 Mexican currency. $9,645.74
Mexican currency of this amount represented borrowed money, and $10,000 Mexican currency was the
deposit with the naval authorities which had been confiscated and which was due the bank.
McCullough's profits on the warehouse contract amounted to almost enough to pay the amounts which
the corporation had borrowed from its members. The wrecking contract which had been broken was of
no value to the corporation for the reason that the naval authorities absolutely refused to have anything
further -to do with the Philippine Engineering and Construction Company. They (the naval authorities)
had declined to consider the petition of the corporation for an extension of time in which to raise the
Spanish fleet, and had also refused to reconsider their action in confiscating the deposit. They did agree,
however, that if the defendant McCullough would organize a new association, that they would give the
new concern an extension of time and would reconsider the question of forfeiture of the amount
deposited. Under these circumstances and conditions, McCullough organized the Manila Salvage
Company, sold fivesixths of this wrecking contract to the new company for $15,000 Mexican currency
and retained one-sixth as his share of the stock in the new concern. The Manila Salvage Company paid
to the bank the $10,000 Mexican currency which had been borrowed to deposit with the naval
authorities, and began operations. All of the $10,000 Mexican currency so deposited was refunded to
the new company except P2,000. The new association failed and McCullough, by reason of this failure,
lost over $16,000 Mexican currency. These facts show that McCullough acted in good faith in purchasing
the old corporation's assets, and that he certainly paid for the same a valuable consideration.
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But counsel for the plaintiff say: "The board of directors possessed only ordinary powers of
administration (Article X of the articles of incorporation), which in no manner empowered it either to
transfer or to authorize the transfer of the assets of the company to McCullough (art. 1773, Civil Code;
decisions of the supreme court of Spain of April 2, 1862, and July 8, 1903)."
Article X of the articles of incorporation above referred to provides that the board of directors shall elect
the officers of the corporation and "have under its charge the administration of the said corporation."
Article XI reads: "In all the questions with reference to the administration of the affairs of the
corporation, it shall be necessary to secure the unanimous vote of the board of directors, and at least
three of said board must be present in order to constitute a legal meeting." It will be noted that Article X
placed the administration of the affairs of the corporation in the hands of the board of directors. If
Article XI had been omitted, it is clear that under the rules which govern business of that character, and
in view of the fact that before the plaintiff left this country and abandoned his office as director, there
were only five directors in the corporation, then three would have been sufficient to constitute a
quorum and could perform all the duties and exercise all the powers conferred upon the board under
this article. It would not have been necessary to obtain the consent of all three of such members which
constituted the quorum in order that a resolution affecting the administration of the corporation should
be binding, as two votesa majority of the quorumwould have been sufficient for this purpose. (Buell
vs. Buckingham & Co., 16 lowa, 284; 2 Kent. Com., 293; Cahill vs. Kalamazoo Mutual Insurance Company,
2 Doug. (Mich.), 124; Sargent vs. Webster, 13 Met., 497; In re Insurance Company, 22 Wend., 591; Ex
parte Wilcox, 7 Cow., 402; id., 527, note a.)
It might appear on first examination that the organizers of this corporation when they inserted the first
part of
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Article XI intended that no resolution affecting the administration of the affairs should be binding upon
the corporation unless the unanimous consent of the entire board was first obtained; but the reading of
the last part of this same article shows clearly that the said organizers had no such intention, for they
said: "At least three of said board must be present in order to constitute a legal meeting." Now, if three
constitute a legal meeting, three were sufficient to transact business, three constituted the quorum,
and, under the above-cited authorities, two of the three would be sufficient to pass binding resolutions
relating to the administration of the corporation.
If the clause "have under its charge and administer the affairs of the corporation" refers to the ordinary
business transactions of the corporation and does not include the power to sell the corporate property
and to dissolve the corporation when it becomes insolventa change we admit organic and
fundamentalthen the majority of the stockholders in whom the ultimate and controlling power lies
must surely have the power to do so.
Article 1713 of the Civil Code reads:
"An agency stated in general terms only includes acts of administration.
"In order to compromise, alienate, mortgage, or to execute any other act of strict ownership an express
commission is required."
This article appears in title 9, chapter 1 of the Civil Code, which deals with the character, form, and kinds
of agency. Now, were the positions of Hilbert, Green, Hartigan, and McCullough that of agents within
the meaning of the article above quoted when the assets of the corporation were transferred or sold to
McCullough? If so, it would appear from said article that in order to make the sale valid, an express
commission would be required. This provision of law is based upon the broad principles of sound reason
and public policy. There is a manifest impropriety in allowing the same person to act as the agent of the
seller
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and to become himself the buyer. In such cases, there arises so often a conflict between duty and
interest. "The wise policy of the law hath put the sting of a disability into the temptation, as a defensive
weapon against the strength of the danger which lies in the situation."
Hilbert, Green, and Hartigan were not only all creditors at the time the sale or transf er of the assets of
the insolvent corporation was made, but they were also directors and stockholders. In addition to being
a creditor, McCullough sustained to the corporation the double relation of a stockholder and president.
The plaintiff was only a stockholder. He would have been a creditor to the extent of his unpaid salary if
the corporation had been a profitable instead of a losing concern.
But as we have said when the sale or transfer under consideration took place, there were three
directors present, and all voted in favor of making this sale. It was not necessary for the president,
McCullough, to vote. There was a quorum without him: a quorum of the directors, and at the same time
a majority of the stockholders.
A corporation is essentially a partnership, except in form. "The directors are the trustees or managing
partners, and the stockholders are the cestui que trust and have a joint interest in all the property and
effects of the corporation." (Per Walworth, Ch., in Robinson vs. Smith, 3 Page, 222, 232; 5 idem, 607;
Slee vs. Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld., 320.)
The Philippine Engineering and Construction Company was an artificial person, owning its property and
necessarily acting by its agents; and these agents were the directors. McCullough was then an agent or a
trustee, and the stockholders the principal. Or say (as the corporation was insolvent) that he was an
agent or trustee and the creditors were the beneficiaries. This being the true relation, then the rules of
law (art. 1713 of the Civil Code) applicable to sales and purchases by agents and trustees would not
apply to the purchase in question for the reason
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that there was a quorum without McCullough, and for the further reason that an officer or director of a
corporation, being an agent of an artificial person and having a joint interest in the corporate property,
is not such an agent as that treated of in article 1713 of the Civil Code.
Again, McCullough did not represent the corporation in this transaction. It was represented by a quorum
of the board of directors, who were at the same time a majority of the stockholders. Ordinarily,
McCullough's duties as president were to preside at the meetings, rule on questions of order, vote in
case of a tie, etc. He could not have voted in this transaction because there was no tie.
The acts of Hilbert, Green, Hartigan, and McCullough in this transaction, in view of the relations which
they bore to the corporation, are subject to the most severe scrutiny. They are obliged to establish that
they acted with the utmost candor and fair dealing for the interest of the corporation, and without taint
of selfish motives.
We have subjected their conduct to this test, and, under the evidence, we believe it has safely emerged
from the ordeal.
"Transactions which only accomplish justice, which are done in good faith and operate legal injury to no
one, lack the characteristics of fraud and are not to be upset because the relations of the parties give
rise to suspicions which are fully cleared away." (Hancock vs. Holbrook, supra.)
We therefore conclude that the sale or transfer made by the quorum of the board of directorsa
majority of the stockholdersis valid and binding upon the minoritythe plaintiff. This conclusion is not
in violation of the articles of incorporation of the Philippine Engineering and Construction Company. Nor
do we here announce a doctrine contrary to that announced by the supreme court of Spain in its
decisions dated April 2, 1862, and July 8, 1903.
As to the third cause of action, it is insisted: First, that the court erred in holding the defendant
McCullough
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responsible for the personal effects of the plaintiff; and second, that the court erred in finding that the
effects left by the plaintiff were worth P2,400.
As we have said, the plaintiff was the manager of the Philippine Engineering and Construction Company
from April 1, 1902, up to January 1, 1903, Sometime during the previous month of December he
resigned to accept a position in China, but did not leave Manila until about January 20. He remained in
Manila about twenty days after he severed his connection with the company. He lived in rooms in the
same building which was rented by the company and where the company had its offices. When he
started for China he left his personal effects in those rooms, having turned the same over to one
Paulsen. Testifying on this point the plaintiff said:
"Q. To whom did you turn over these personal effects on leaving here ?A. To Mr. Paulsen.
"Q. Have you demanded payment of this sum [referring to the value of his personal effects] ?A. On
leaving for China I gave Mr. Haussermann power of attorney to represent me in this case and demand
payment.
"Q. Please state whether or not you have an inventory of these effects.A. I had an inventory which
was in my possession but it was lost when the company took all of the books and carried them away
from the office.
"Q. Can you give a list or a partial list of your effects?A. I remember some of the items. There was a
complete bedroom set, two marble tables, one glass bookcase, chairs, all of the household effects I used
when I was living in the Botanical Garden as city engineer, one theodolite, which I bought after
commencing work with the company.
"Q. How much do you estimate to be the total reasonable value of these effects?A. The total value
would not be less than $1,200 gold."
Counsel for the plaintiff, on page 56 of their brief, say:
"Mr. McCullough, in his testimony (pp. 39 and 40) admits full knowledge of and participation in the
removal
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and sale of the effects and states that he took the proceeds and considered them part of the assets of
the company. He further admits that Mr. Haussermann made a demand for the proceeds of Mr. Mead's
personal effects (p. 44)."
McGullough's testimony, referred to by counsel, is as follows:
"Q. At the time Mr. Mead left for China, in the building where the office was and in the office, there
were left some of the personal effects of Mr. Mead. What do you know about these effects, a list of
which is Exhibit B?A. Nothing appearing in this Exhibit B was ever delivered to the Philippine
Engineering and Construction Company, according to my list.
"Q. Do you know what became of these effects?A. No, sir. I have no idea. I never saw them. I never
heard these effects talked about. I only heard something said about certain effects which Mr. Mead had
in his living room.
"Q. Do you know what became of the bed of Mr. Mead?A. I know there were effects, such as a bed,
washstand, chairs, table, and other things, which are used in a living room, and that they were in Mr.
Mead's room. These effects were sent to the warehouse of the Pacific Oriental Trading Company,
together with the office furniture. We had to vacate the building where the offices were and we had to
take out everything therein. These things were deposited in the warehouse of the Pacific Oriental
Trading Company and were finally sold by that company and the money turned over to me.
"Q. How much?A. P49.97.
"Q. What did you do with this money?A. I took it and considered it part of the assets of the company.
All of the other effects of the office were sold at the same time and brought P347.16.
"Q. Did Mr. Mead leave anyone in charge of his effects when he left Manila?A. I think he left Paulsen
in charge. but Paulsen did not take these effects, so when we vacated the office we had to move them.
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"Q. Did Paulsen continue occupying the living room where these effects were and did he use these
effects?A. I do not know because I was not in the office for three months before we vacated.
"Q. Don't you know that it is a fact that Mr. Haussermann, as representative of Mr. Mead, demanded of
you and the company the payment of the salary which was due Mr. Mead and the value of his personal
effects?A. Yes, sir."
As to the value of these personal effects, Hartigan, testifying as witness for the defendant, said:
"I think the personal effects were sold for P50. His personal effects consisted of ordinary articles, such as
a person would use who had to be going from one place to another all the time, as Mr. Mead. I know
that all those effects were sold for less than P100, if I am not mistaken."
The foregoing is the material testimony with reference to the defendant McCullough's responsibility and
the value of the personal effects of the plaintiff.
McCullough was a member of the company and was responsible as such for the rents where the offices
were located. The company had no further use for the building after the plaintiff resigned. The vacating
of the building was the proper thing to do. The office furniture was removed and stored in a place where
it cost nothing for rents. When Hilbert, member of the company, went to the office to remove the
company's office furniture, he found no one in charge of "the plaintiff's personal effects. He took them
and stored them in the same place and later sold them, together with the office furniture, and turned
the entire amount over to defendant McCullough.
Paulsen, in whose charge Mead left his effects, apparently took no interest in caring for them. Was the
company to leave Mead's personal effects in that building and take the chances of having to continue to
pay rents, solely on account of the plaintiff's property remaining there? The company had reason to
believe that it would have to continue paying these rents, as they had rented the
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building and authorized the plaintiff to occupy rooms therein.
The plaintiff knew when he left for China that he would be away a long time. He had accepted a position
of importance, and which he knew would require his personal attention. He did not gather up his
personal effects, but left them in the room in charge of Paulsen. Paulsen took no interest in caring for
them, but apparently left these effects to take care of themselves. The plaintiff did not even carry with
him an inventory of these effects, but attempted on the trial to give a list of them and did give a partial
list of the things he left in his room; but it is not shown that all these things were there when Hilbert
removed the office furniture and some of the plaintiff's effects. The fact that the plaintiff remained in
Manila some twenty days after resigning and never cared for his own effects but left them in the
possession of an irresponsible person, shows extreme negligence on his part. He exhibited a reckless
indifference to the consequences of leaving his effects in the leased premises. The law imposes on every
person the duty of using ordinary care against injury or damages. What constitutes ordinary care
depends upon the circumstances of each particular case and the dangers reasonably to be
apprehended.
McCullough did not have anything personally to do with these effects at any time. He only accepted the
money which Hilbert turned over to him. He, personally, did not contribute in any way whatsoever to
the loss of the property, neither did he as a member of the corporation do so.
The plaintiff gave an estimate of the value of the effects which he left in his rooms and placed this value
at P2,400. He did not give a complete list of the effects so left, neither did he give the value of a single
item separately. The plaintiff's testimony is so indefinite and uncertain that it is impossible to determine
with any degree of certainty just what these personal effects consisted of and their values, especially
when we take into consideration the significant
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Caizares Tiana vs. Torrejon.
fact that these effects were abandoned by Paulsen. On the other hand, we have before us the positive
testimony of Hilbert as to the amount received for the plaintiff's personal effects, the testimony of
Hartigan that the same were sold for less than P100, and the testimony of McCullough as to the amount
turned over to him by Hilbert.
So we conclude that the great preponderance of evidence as to the value of these effects is in favor of
the contention of the defendant. Their value must therefore be fixed at P49.97.
For these reasons the judgment appealed from as to the first and second causes of action is hereby
affirmed. Judgment appealed from as to the third cause of action is reduced to P49.97, without costs.
Arellano, C. J., Torres, Mapa, Carson, and Moreland, JJ., concur.
[No. 5174. March 17, 1911.]
CANDIDO PASCUAL, plaintiff and appellant, vs. EUGENIO DEL SAZ OROZCO ET AL., defendants and
appellees.
1.BANKS AND BANKING; CORPORATIONS; RIGHTS OF STOCKHOLDERS.A stockholder in a banking
corporation has a right to maintain a suit for and on behalf of the corporation, but the extent of such
right depends upon when and f or what purpose he acquired the shares of stock of which he is the
owner.
2.ID.; ID.; ID.; LIMITATION UPON RIGHTS OF ACTION.A stockholder in a corporation who was not such
at the time when alleged
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83
Pascual vs. Del Saz Orozco.
objectionable transactions took place, or whose shares of stock have not since devolved upon him by
operation of law, can not maintain suits of this character, unless such transactions continue and are
injurious to such stockholder or affect him especially or specifically in some other way.
3.PLEADING AND PRACTICE; GENERAL DEMURRER.Where the matter in a single count is divisible in its
nature, the demurrer should be confined to those parts which are different, as the same general rule
which applies to different counts applies also to divisible matter in the same count constituting different
causes of action; and where one count, containing distinct averments, discloses a good cause of action
in one of such averments, as when several breaches are assigned, some well and.others ill, a general
demurrer will be overruled. (6 Ency. Pl. and Pr., 303.)
APPEAL from a judgment of the Court of First Instance of Manila. Lobingier, J.
C. W. Ney and O'Brien & De Witt, for appellant.
Ortigas & Fisher, for appellees.
TRENT, J.:
This is an appeal by the plaintiff from a judgment sustaining a demurrer to the first and second causes of
action set forth in the amended complaint. The demurrer as to both causes of action was based upon
the following grounds:
(a) Lack of legal capacity to sue on part of plaintiff;
(b) Failure to state facts constituting a cause of action;
(c) Defect of parties plaintiff; and,
(d) Uncertainty.
The lower court sustained the demurrer as to both causes of action upon the second ground above-
mentioned.
The following errors have been assigned:
The court a quo erred in sustaining the demurrer to the first cause of action and dismissing the same
because (a) the facts alleged constitute a cause of action, and (b) the remedy sought by the plaintiff is
the only one available.
The same errors are assigned as to the second cause of action.
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The gist of the first and second causes of action is as f ollows:
That during the years 1903, 1904, 1905, 1906, 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; that though due demand has been made upon them
therefor, defendants refuse to refund to the bank the sums so misappropriated, or any part thereof;
that 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, and that prior to the filing of the
present suit plaintiff exhausted every remedy in the premises within this banking corporation.
The second cause of action sets forth that defendants' and appellees' immediate predecessors In office
in this bank during the years 1899, 1900, 1901, and 1902, committed the same illegality as to their
compensation as is charged against the defendants themselves; that 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; that they were the only persons interested in the bank who knew of
the fraudulent appropriation by their predecessors; that they wholly neglected to take any action in the
premises or inform the stockholders thereof; that due demand has been made upon defendants to
reimburse the bank for this loss; that the bank itself can not bring an action in its own name against the
defendants and appellees, for the reason already stated, and that there remains no remedy within the
corporation itself.
The questions raised in the third cause of action are not before us at this time as the demurrer to that
cause of action was overruled.
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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.
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 plaintiff sues on behalf of the
corporation, which, even though nominally a defendant, is to all intents and purposes the real plaintiff in
this case. That such is the case is shown by the prayer of the complaint which is that judgment be
entered in favor of the bank,
According to the pleadings, the Banco Espaol-Filipinio 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. From the first it has been a bank of issue, and under the Spanish regime was regarded as a
quasi-public institution, its full title having been originally "Banco EspaoI-Filipino de Isabel II." The
CaptainGeneral of the Philippine Islands was its protector and supreme head. To him belonged the
power to appoint its directors and other managing officers, remove them from office for cause, fix the
rate of interest demandable by the bank, resolve all doubts and controversies relating to its
management, "and finally, exercise, as representative of Her Majesty's Government, the powers that
the laws give him respecting public establishments protected and privileged."
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 80 of its reformed charter or statutes, which article is as follows;
"Of the profits or gains which may result from the bank's
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operations, after deducting all the expenses of its administration and the part, if any, which corresponds
to the legal reserve fund, there shall be set apart ten per cent for the directors and five per cent for the
board of government, the distribution of which shall be made as provided in the regulations. The eighty-
five per cent remaining shall belong integrally to the shareholders pro rata the number of shares owned
by each."
Before proceeding to the determination of the real questions involved in this case it might be well to
note briefly the origin and history of the right of a stockholder in a corporation to maintain a suit of this
kind.
"A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law."
(Chief Justice Marshall in. Trustees of Dartmouth College vs. Woodward, 4 Wheat., 636.)
"The word 'corporation' is but a collective name for the corporators or members who compose an
incorporated association; and where it is said that a corporation is itself a person, or being, or creature,
this must be understood in a figurative sense only." (Morawetz on Private Corporations, 2d ed., sec. 1.)
"A corporation is 'an artificial person created by the sovereign from natural persons and in which
artificial person the natural persons of which it is composed become merged and nonexistent/ "
(Quoted with approval in case of The People, ex rel. Winchester, etc., respondent, vs. Coleman, et al.,
commissioners of taxes etc., appellants, 133 N. Y. Appls., 279.)
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. Text writers illustrate this rule by the familiar example of
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one person or entity owning all the stock and still having no greater or essentially different title than if
he owned but one single share. Since, therefore, the stockholder has no title, it is evident that what he
does have, with respect to the corporation and his fellow stockholders, are certain rights sui generis.
These rights are generally enumerated as being, first, to have a certificate or other evidence of his status
as stockholder issued to him; second, to vote at meetings of the corporation; third, to receive his
proportionate share of the profits of the corporation; and lastly, to participate proportionately in the
distribution of the corporate assets upon the dissolution or winding up. (Purdy's Beach on Private
Corporations, sec. 554.)
The right of individual stockholders to maintain suits for and on behalf of the corporation was denied
until within a comparatively short time, but this right is now no longer doubted. On this point Cook on
Corporations, 5th ed. (1903), secs. 644, 645, and 646, says:
"Notwithstanding this fact, however, that it was the duty and right of the corporation to bring suit to
remedy these wrongs, it gradually became apparent that frequently the corporation was helpless and
unable to institute the suit. It was found, where the guilty parties themselves controlled the directors
and also a majority of the stock, that the corporation was in their power, was unable to institute suit,
and that the minority of the stockholders were being defrauded of their rights and were without
remedy. The time came when the minority of the stockholders of the defrauded corporationthe
corporation itself being controlled by the guilty partieswere given a standing in court for the purpose
of taking up the cause of the corporation, and, in its name and stead, of bringing the guilty parties to an
account. Accordingly, in 1843, in the leading case of Foss vs. Harbottle, a stockholder brought suit in the
name of himself and other defrauded stockholders, and for the benefit of the corporation, against the
directors, for a breach of their duty to the corporation. This case was decided against the com-
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Pascual vs. Del Saz Orozco,
plaining stockholder, on the ground that the complainant had not proved that the corporation itself was
under the control of the guilty parties, and had not proved that it was unable to institute suit. The court,
however, broadly intimated that a case might arise when a suit instituted by defrauded stockholders
would be entertained by the court and redress given. Acting upon this suggestion, and impelled by the
utter Inadequacy of suits instituted by the corporation, defrauded stockholders continued to institute
these suits and to urge the courts of equity to grant relief. These efforts were unsuccessful in clearly
establishing the right of stockholders herein until the cases of Atwol against Merriwether, in England,
1867, and of Dodge vs. Woolsey, in this country, in 1855. These two great and leading cases have firmly
established the law for England and America, that 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.
"It is now no longer doubted,said Mr. Justice Wayne, in the case of Dodge vs. Woolsey, 18 How. (U.
S.), 331either in England or the United States, that courts of equity, in both, have a jurisdiction over
corporations, at the instance of one or more of their members; to apply preventive remedies by
injunction, to restrain those who administer them from doing acts which would amount to a violation of
charters, or to prevent any misapplication of their capitals or profits, which might result in lessening the
dividends of stockholders, or the value of their shares, as either may be protected by the franchises of a
corporation, if the acts intended to be done create what is in the law denominated a breach of trust.
And the jurisdiction extends to inquire into, and to enjoin, as the case may require that to be done, any
proceedings by individuals, in whatever character they
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may profess to act, if the subject of complaint is an imputed violation of a corporate franchise, or the
denial of a right growing out of it, for which there is not an adequate remedy at law."
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. In the determination of
these questions we can not see how, if it be true that the bank is a quasi-public institution, it can affect
in any way the final result,
It is alleged that the plaintiff became a stockholder on the 13th of November, 1903; that the defendants,
as members of the board of directors and board of government, respectively, during each and all the
years 1903, 1904, 1905, 1906, and 1907, did fraudulently, and to the great prejudice of the bank and Its
stockholders, appropriate to their own use from the profits of the bank sums of money amounting
approximately to P20,000 per annum.
Article 31 of the bank's charter provides that dividends shall be declared each semestre. The
stockholders meet once a year, in February, to receive and consider the report of the bank's operations
'contained in the annual balance and memorial Beyond this they have no direct voice In the affairs of
the bank, but all who are then stockholders and have a right to vote must clearly have a right to vote
upon all the business proceedings of the year, irrespective of the date upon which they may have
become stockholders. They are entitled to all the dividends that have been earned by their stock during
the year which has not been already declared and paid, regardless of the precise period of the year in
which It may have accrued. So, in the general meeting of the stockholders on February 3, 1904, the
plaintiff a right to participate,
Neither the charter, the by-laws, nor the regulations prescribe when, within the semestre, the dividends
shall be declared; but it may be presumed that such dividends
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are declared at the end of the semestre and that the first semestre begins with the first day of January
of each year. On this basis the owner of stock from whom the plaintiff purchased his ten shares might
have received the dividends corresponding to these ten shares for the first semestre (six months) of the
year 1903. The dividends were declared twice a year, every six months. The times for declaring the
dividends are specifically and distinctly pointed outone period is separated from the other. Every six
months forms a period. So if the plaintiff was not entitled to the dividends for the first period (from
January to July, 1903), he having become a stockholder in September of that year, he would have been
entitled to the dividends on his stock for the second period, or semestre. The plaintiff was, therefore, a
stockholder during all the time for which he seeks recovery in his first cause of action, except the first six
months of the year 1903. Then, again, as a matter of fact (which we do not now decide), if the
defendants had taken their salaries for the year 1903 at the close of that year or at any time after
September 13, the plaintiff would then have had an interest and, on the theory that he was a
stockholder, could have questioned the legality of the defendants' right to take such salary, inasmuch as
his dividends would be directly affected, in that, if the defendants took 10 per cent of the gross instead
of the net earnings of the bank, his dividend on his ten shares for the second period (from July to
December, 1903) would be less.
Conceding that this cause of action is demurrable on the grounds that the plaintiff was not a stockholder
during the first six months of the year 1903, should the demurrer have been sustained as to the whole
cause of action when the time for which recovery is sought is clearly divisible?
Section 90 of the Code of Civil Procedure in force in the Philippine Islands provides, in part, as follows:
"2. * * * If the complaint contains more than one cause of action, each distinct cause of action must be
set
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forth in a separate paragraph containing all the facts constituting the particular cause of action.
"Where the matter in a single count is divisible in its nature, the demurrer should be confined to those
parts which are defective, as the same general rule which applies to different counts applies also to
divisible matter in the same count constituting different causes of action; and where one count,
containing distinct averments, discloses a good cause of action in one of such averments, as when
several breaches are assigned, some well and others ill, a general demurrer will be overruled." (6 Ency.
Plead. & Prac., 303, 304.)
The complaint contains three causes of action, each set forth in a separate paragraph. The matter in the
first cause is, as we have said, divisible in its nature. The rule above quoted is, therefore, perfectly
applicable.
The most important question to be decided is, did the lower court err in sustaining the demurrer to the
second cause of action? If this question be decided in the negative, then it will not be necessary to
determine whether or not the allegations in this part of the complaint are sufficient to hold the
defendants liable for the acts of their predecessors.
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.
In the case of Hawes vs. Oakland (14 Otto [104 U. S.], 450, 456), the plaintiff, a shareholder in the Contra
Costa Waterworks Company, brought a bill in equity against the company and the city of Oakland, in the
Circuit Court of the United States for California, on the ground that he was
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a citizen of New York and the defendants citizens of California, alleging that the company was furnishing
the city of Oakland with water free of charge beyond what the law required it to do, and that, although
he had required them to desist, the directors had failed to heed his protest and that unless enjoined
they would continue to furnish water to the city in excess of their legal obligations in this particular, to
the damage of plaintiff and the shareholders.
To this complaint the city of Oakland demurred upon the ground that the appellant had shown no
capacity in himself to maintain the suit, the injury, if any, being to the corporation, and the right to sue
pertaining to it solely. The demurrer was sustained and the bill dismissed, whereupon the plaintiff
carried the case to the Supreme Court of the United States.
The decision of the court, which was written by Mr. Justice Miller and concurred in by all the other
justices, contains a review of the earlier decisions of the English and American courts with respect to the
right of stockholders of corporations to maintain suits of this character. In concluding, the court, after
enumerating a number of circumstances in which a stockholder might be permitted to sue upon a cause
of action pertaining to the corporation, said:
"But in addition to the existence of grievances which call for this kind of relief, it is equally important
that before the shareholder is permitted, in his own name to institute and conduct a litigation which
usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted
all the means within his reach to attain within the corporation itself, the redress of his grievances, or
action in conformity to his wishes. He must make an earnest, not a simulated effort, with the managing
body of the corporation, to induce remedial action on their part, and this must be made apparent to the
court. If time permits, or has permitted, he must show, if he fails with the directors, that he has made an
honest effort to obtain action by the stockholders as a body, in the matter of which he complains.
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And he must show a case, if this is not done, where it could not be done, or it was not reasonable to
require it.
"The efforts to induce such action as plaintiff desires on the part of the directors, or of the stockholders
when that is necessary, and the cause of failure in these efforts, and all allegation that plaintiff was a
shareholder at the time of the transactions of which he complains, or that the shares have devolved on
him since by operation of law and that the suit is not a collusive one to confer on a court of the United
States jurisdiction in a case in which it could otherwise have no cognizance, should be in the bill, which
should be verified by affidavit."
This case was decided January 16, 1882. More than a year afterward the Supreme Court embodied the
procedural part of this decision in the 94th Equity Rule, adopted January 23, 1883. The rule reads as
follows:
"Every bill brought by one or more stockholders in a corporation against the corporation and other
parties, founded on rights which may properly be asserted by the corporation, must be verified by oath,
and must contain an allegation that the plaintiff was a shareholder at the time of the transaction of
which he complains, or that his shares had devolved on him since by operation of law, and that the suit
is not a collusive one to confer on a court of the United States jurisdiction of a case of which it would not
otherwise have cognizance. It must also set forth with particularity the efforts of the plaintiff to secure
such action as he desires on the part of the managing directors or trustees, and, if necessary, of the
shareholders, and the causes of his failure to obtain such action."
January 21, 1884, the Supreme Court decided the case of Dimpfel vs. Ohio, etc., R. R. Co. (110 U. S., 212;
28 Law Ed., 121, 122), which was similar to the Hawes case, above cited. Mr. Justice Field, by whom the
opinion of the court was written, says (p. 122) :
"The suit was brought to set aside a contract by which the Ohio and Mississippi Railway Company
became the
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owner of a portion of its road known as the Springfield Division, and to obtain a decree from the court
declaring that the bonds, issued by the company and secured by a mortgage upon that division, are null
and void. It was commenced by Dimpfel, an individual stockholder in the company, who stated in his bill,
that it was filed on behalf of himself and such other stockholders as might join him in the suit. Callaghan,
another stockholder, is the only one who joined him. The two claim to be owners of fifteen hundred
shares of the stock of the company. The whole number of shares is 240,000. The owners of the balance
of this large number make no complaint of the transactions which the complainants seek to annul. And
it does not appear that the complainant owned their shares when these transactions took place. For
aught we can see to the contrary, they may have purchased the shares long afterwards, expressly to
annoy and vex the company, in the hope that they might thereby extort, from its fears, a larger benefit
than the other stockholders have received or may reasonably expect from the purchase, or compel the
company to buy their shares at prices above the market value. Unfortunately, litigation against large
companies is often instituted by individual stockholders from no higher motive."
The bill in this case was also open to the objection that the plaintiff had not exhausted the means of
redress available within the corporation. The court next proceeds to consider this point, but prefaces its
remarks with the following significant phrase:
"But assuming that the complainants were the owners of the shares held by them when the transactions
of which they complain took place, it does not appear that they made any attempt, etc."
Counsel for the plaintiff. in a very able and exhaustive brief sought to show that the doctrine laid down
in these two cases is not applicable to the case at bar, first, because the Supreme Court in these cases
merely established a rule of practice, designed to prevent collusive suits in the Federal courts; and,
second, that if such rule is to be regarded as a
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declaration of substantive law, it is wrong on principle and should be disregarded. Many of the
authorities cited by the plaintiff to the effect that the rule is merely one of practice, peculiar to the
Federal courts, base that conclusion upon the fact that the requirement of the inclusion of the
averments in question in the bill is to be found in the 94th Equity Rule. Some of the authorities cited,
which hold this view, are: Pomeroy, Eq. Jur., sec. 1096; Thompson, Corporations, sec. 4570; Cook,
Corporations vol. 3, secs. 736, 737; Morawetz, Corporations, sec. 209; Forrester vs. Mining Co., 55 Pac.
Rep., 229.
In the first place the doctrine was announced in Hawes vs. Oakland, supra, more than a year before the
94th Equity Rule was promulgated, so that it can admit of no dispute that in the opinion of the Supreme
Court, at least, the ownership of stock at the time of the transaction complained of was essential to the
right to maintain such an action as a matter of substantive law, prior to and independent of the Equity
Rule.
It is true that the court in writing the decision in the Hawes case, had in mind the prevalence of the
practice of bringing suits in the Federal courts, by collusion between the parties, which should properly
be tried in the State court. It is equally true that the court was desirous of preventing a continuance of
these fraudulent practices, by establishing a test which should prevent them. The basis of the right to
sue in the Federal courts being diversity of citizenship, the usual method employed to enable parties to
suits of this kind to invoke the jurisdiction of these courts was to have a few shares of stock transferred
to some person who was a citizen of a State other than that of which the proposed defendants were
citizens. In a case of this kind the transfer of the stock would be, of necessity, merely nominal, and the
plaintiff, under such circumstances, would not be a bona fide stockholder, and would not be entitled to
maintain the suit. Of necessity, in cases of this kind, of genuine collusion to create a fictitious diversity of
citizenship the nominal transfer of the stock is made at a date sub-
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sequent to that of the occurrence of the acts or omissions complained of. Although the court was
lawfully entitled to protect itself against such frauds as those of which It complains in this case, and to
refuse to take cognizance of cases in which, owing to the purely fictitious nature of the simulated
diversity of citizenship, the proper tribunals were the State courts, on the other hand, in cases of
genuine diversity of citizenship, it could not lawfully refuse to exercise the jurisdiction vested in it. " No
citation of authority is needed to support the proposition that it is the duty of courts to exercise the
jurisdiction properly conferred upon them. It is elementary that where there is a higher tribunal
authorized to issue the writ, mandamus will lie to put the judicial machinery in motion. (Spelling,
Extraordinary Relief, sec. 1394.) This being the case, the conclusion is obvious that the mere fact that in
some cases persons suing as stockholders for the redress of grievances anterior to the transfer of the
stock held by the plaintiff are not acting in good faith would not justify or authorize a refusal to take
jurisdiction in any case in which the plaintiff's stock was acquired after the occurrence of the facts
supposed to constitute the cause of action, unless the court were of the opinion, as a matter of
substantive law, that in no event would a stockholder so situated be entitled to maintain such an action.
It is only upon this assumption that the correctness of the decision in Hawes vs. Oakland and the legality
of the 94th Equity Rule can be maintained. The court had no authority to change the substantive law
either by its decision or the rule, and It is not to be presumed that it intended to do so A careful
examination of the Hawes case and of the rule will show that no such change was in fact made, The
decision is merely declaratory of the prexistlng law, as the court understood it to be, and the rule
merely provides a rule of pleading.
The decision In the Hawes case is that among other necessary averments the bill should contain "an
allegation that
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the plaintiff was a shareholder at the time of the transaction of which he complains * * * and that the
suit is not a collusive one to confer jurisdiction on a court of the United States in a case in which it would
otherwise have no cognizance * * *." The language of the 94th Equity Rule is practically identical with
this. It provides, in terms, that a stockholder's bill in cases of this character "must contain an allegation
that the plaintiff was a stockholder at the time of the transaction of which he complains * * * and that
the suit is not a collusive one to confer jurisdiction * * * "
This is, obviously, a mere rule of pleadingit requires averments of facts upon which the plaintiffs cause
of action and the jurisdiction of the court rest. It assumes, as the court had already decided, that the
ownership of the stock at the time of the transaction is a f fact essential to the maintenance of the suit
in any event. Unless that fact exists no cause of action exists, whether the suit is collusive or not. Even if
the stock was owned prior to the transaction complained of, if the suit is collusiveas it would be, for
instance, if one of the defendants had acquired a merely colorable domicile in another State to support
the allegation of diversity of citizenshipthe plaintiff has no right to maintain the action in a Federal
court. Consequently, the rule requires that these two facts be distinctly averred. The requirement that
they be pleaded is procedural. The necessity of the existence of the facts in order to give rise to the right
of action is substantive.
If the Supreme Court had been of the opinion, as are some of the State courts and text writers cited in
plaintiff's brief, that the transferee of shares of stock in a corporation acquires the right to sue upon
causes of action which accrued before he acquired such shares, it surely would not have attempted to
deprive him of the right to exercise in the Federal courts an action which, were it not for diversity of
citizenship, he might exercise in a State court. If the court had believed that the transferee of stock
could, under
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any circumstances, sue upon a cause of action accruing to the corporation prior to such transfer, the
rule instead of requiring the plaintiff to allege unconditionally that he was a stockholder at the time of
the transaction complained of and that the suit is not collusive, would have provided that the plaintiff
should be required to aver in his sworn bill the date upon which he acquired his stock, and if it appeared
that it was acquired after the occurrence of the acts complained of, then that he should also he required
to aver under oath that the suit was not collusive.
"Sound reason and good authority sustain the rule that a purchaser of stock can not complain of the
prior acts and management of the corporation." (Home Fire Ins. Co. vs. Baker, 60 L. R. A., 927, 933, citing
Hawes vs. Oakland, supra; Dimpfel vs. Ohio & M. R. Co., supra; Taylor vs. Holmes, 127 U. S., 489;
Southwest Natural Gas Co., vs. Fayette Fuel Gas Co., 146 Pa., 13; Alexander vs. Searcy, 81 Ga., 536; Clark
vs. American Coal Co., 86 lowa, 436; United Electric Securities Co., vs. Louisiana Electric Light Co., 68
Fed., 673; Venner vs. Atchison T. & S. F. R. Co., 28 Fed., 581; Heath vs. Erie R. Co., 8 Blachf., 347;
Dannmeyer vs. Coleman, 8 Sawy., 51; Works vs. Sowers, 2 Walk (Pa.), 416; 4 Thompson Corp., 4569.)
In Alexander vs. Searcy, supra, the court said (p. 550) :
"The weight of authority seems to be that a person who did not own stock at the time of the
transactions complained of can not complain or bring a suit to have them declared illegal."
In United Electric Securities Co. vs. Louisiana Electric Light Co., supra, it is said:
"As a general proposition, the purchaser of stock in a corporation is not allowed to attack the acts and
management of the company prior to the acquisition of his stock; otherwise we might have a case
where stock duly represented in a corporation consented to and participated in bad management and
waste, and after reaping the benefits from such transaction, could be easily passed into the hands of a
subsequent purchaser, who could make his harvest by appearing
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and contesting the very acts and conducts which his vendor had consented to."
Where stock is required for the purpose of bringing suit it has been held that the complainant is a mere
interloper and entitled to no consideration. And stockholder suits not brought in good faith in the
interest of the corporation have been dismissed on that ground. (Home Fire Ins. Co. vs. Baker, supra,
and cases cited therein.) Some of the State courts hold that a purchaser of shares in a corporation
acquires all the rights of the vendor. The Alabama Supreme Court has gone so far as to hold that a
purchaser in good faith is not necessarily disqualified as a suitor in all cases because the prior holder was
personally disqualified. (Parsons vs. Joseph, 92 Ala., 403.) From the pleadings in this case (it having been
decided by the Supreme Court upon a demurrer) it appears that Joseph sought to have canceled certain
certificates of stock issued by the Street Railway Company to Parsons, on the ground that said stock was
fictitious and was issued in violation of the constitution and statute law of the State. It was alleged, as a
special defense, that if the transactions, which form the basis of the issuance of the stock to Parsons,
were illegal, and fraudulent, and not done in good faith, the complainant, Joseph, was estopped from
setting up fraud in such transactions, or seeking to cancel the stock, because one E. Lesser, who was
complainant's transferrer, participated in all of said transactions. In this case the court, speaking through
Mr. Justice Coleman, said:
"If the transferee purchased the shares in good faith, and without notice of the fact that the prior holder
had precluded himself from suing, he would have as just a title to relief as if he had purchased f rom a
shareholder who was under no disability; but if the purchaser was aware that the prior holder had
barred his right to relief, neither justice nor public policy would require that the transferee, under these
circumstances, should be accorded any greater rights than his transferrer.
* * * * * * *
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"If a stockholder participates in a wrongful or fraudulent contract, or silently acquiesces until the
contract becomes executed, he can not then come into a court of equity to cancel the contract, and
more especially if the company, or himself, as a stockholder, has reaped a benefit from the contract; and
this rule holds good, although the consideration of the contract may be one expressly prohibited by
statute. The same disability would attach to the transferee of his stock who bought with notice."
This rule, in the main, is correctly stated, but we think that the latter part of the same should be
modified so as to read: "The same disability would attach to the transferee of his stock who bought with
or without notice." We base our modification of this rule upon the ground that a transferee could not
sue as being a bona fide purchaser in ignorance of the disability attaching to his vendor, because shares
of stock, strictly speaking, are not negotiable, and the sale can not pass greater rights than those
possessed by the vendor. (Clark vs. American Coal Co., 86 lowa, 436; 4 Thomp. Corp., 3410.)
It is self-evident that the plaintiff in the case at bar was not, before he acquired in September, 1903, the
shares which he now owns, injured or affected in any manner by the transactions set forth in the second
cause of action. His vendor could have complained of these transactions, but he did not choose to do so.
The discretion whether to sue to set them aside, or to acquiesce in and agree to them, is, in our opinion,
incapable of transfer. If the plaintiff himself had been injured by the acts of defendants' predecessors
that is another matter. He ought to take things as he found them when he voluntarily acquired his ten
shares. If he was defrauded in the purchase of these shares he should sue his vendor.
"If the party himself, who is the victim of fraud or usury, chooses to waive his remedy and release the
party, it does not belong to a subsequent purchaser under him to recall and assume the remedy for him.
(Quoted with ap-
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101
proval in the case of Graham vs. La Crosse and Milwaukee R. R. Co., 102 U. S., 148.)
"But it is contended that this is a case in which the debtor corporation was defrauded of its property,
and that as the company had a right of proceeding for its recovery, any of its judgment and execution
creditors have an equal right; that it is a property right, and one that inures to the benefit of creditors.
"Conceding that creditors who were such when the fraudulent procurement of the debtor's property
occurredand cases to that effect have been citedthe question still remains, whether, the debtor
being unwilling to disturb the transaction, subsequent creditors have such an interest that they can
reach the property for the satisfaction of their debts. We doubt whether any case, going as far as this,
can be found. No such case has been cited in the argument. Dicta of judges to that effect may
undoubtedly be produced, but they are not supported by the facts of the cases under consideration.
"It seems clear that subsequent creditors have no better right than subsequent purchasers, to question
a previous transaction in which the debtor's property was obtained from him by fraud, which he has
acquiesced in, and which he has manifested no desire to disturb. Yet, in such a case, subsequent
purchasers have no such right." (Id.)
So it seems to be settled by the Supreme Court of the United States, as a matter of substantive law, that
a stockholder in a corporation who was not such at the time of the transactions complained of, or
whose shares had not devolved upon him since by operation of law, can not maintain suits of this
character, unless such transactions continue and are injurious to the stockholder, or affect him
especially and specifically in some other way.
We are, therefore of the opinion, and so hold, that the judgment appealed from, sustaining the
demurrer to the first cause of action should be, and the same is hereby reversed; and the judgment
sustaining the demurrer to the
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Olsen & Co. vs. Matson, Lord & Belser Co.
second cause of action should be, and is hereby affirmed, without any special ruling as to costs. The
record will be returned to the court whence it came for f urther proceedings in accordance with this
decision. So ordered.
Arellano, C. J., Torres, Mapa, and Johnson, JJ., concur.
CARSON, J., with whom concurs MORELAND J., concurring in part:
I concur in the foregoing opinion in so far as it overrules the demurrer but dissent in so f far as it sustains
the same in part.
Judgment modified.
Pascual vs. Del Saz Orozco., 19 Phil. 82, No. 5174 March 17, 1911
[No. 25241. November 3, 1926]
HARRIE S. EVERETT, CARL G. CLIFFORD, ELLIS H. TEAL and GEORGE W. ROBINSON, plaintiffs and
appellants, vs THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED F.
KELLY, JOHN W MEARS and CHARLES D. MCINTOSH, defendants and appellees.
1.CIVIL PROCEDURE; BILLS OF DISCOVERY.Proceedings in the nature of bills of discovery are not
limited to the taking of deposi
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513
Everett vs. Asia, Banking Corporation
tions under subsection 1 of section 355 of the Code of Civil Procedure and to the compulsory attendance
of witnesses by means of subpna.
2.ID. ; ID.; PLEADING.In bills of discovery considerable latitude in the manner of stating f acts is
allowed and what might be considered bad pleading in an ordinary action at law is often allowable in a
bill of discovery.
3.ID. ; ID. ; PLEADING IN THE ALTERNATIVE.If the petitioner for discovery is unable to state with
certainty facts which are peculiarly within the knowledge of his adversary, it is proper for him to state
the facts within his knowledge with certainty, but to plead in the alternative the, to him, doubtful facts
and call upon the defendant to make a full disclosure of such facts.
4.ID. ; CORPORATIONS; HOSTILE BOARD OF DIRECTORS; ACTION BROUGHT BY STOCKHOLDERS.Where
the board of directors in a corporation is under the complete control of the principal defendants in the
case and it is obvious that a demand upon the board of directors to institute an action and prosecute
the same effectively would be useless, the action may be brought by one or more of the stockholders
without such demand.
APPEAL from a judgment of the Court of First Instance of Manila. Nepomuceno, J.
Thomas Cary Welch for appellants.
Gibbs & McDonough for appellees.
OSTRAND, J.:
This is an appeal from a decision of the Court of First Instance of Manila, sustaining a demurrer to the
complaint. The plaintiffs declined to amend and judgment was rendered dismissing the case. The
complaint in question reads as follows:
'The above named plaintiffs, by Thomas Cary Welch, their attorney, complain of the above-named
defendants and f or cause of action against them allege:
"1st That at all times in this complaint mentioned the plaintiffs Harrie S. Everett, Ellis H. Teal and George
W. Robinson were and now are residents of the City 01 Manila, Philippine Islands. That the plaintiff Carl
G. Clifford was formerly a resident of said City of Manila and
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514
now is a resident of the City of Washington, District of Columbia.
"2nd. That at all times in this complaint mentioned the defendant the Asia Banking Corporation
hereinafter called 'the Bank,' was and now is a foreign banking corporation duly licensed to transact
banking business in the Philippine Islands, having its principal office .and place of business at Manila
aforesaid and that said Asia Banking Corporation never has been empowered by law or licensed to do
any business other than commercial banking in the Philippine Islands. That the defendants Nicholas E.
Mullen, Alfred F. Kelly, John W. Mears, and Charles D. Mclntosh were residents of said City of Manila
and were officers, agents and employees of the said Asia Banking Corporation, the said Mullen being the
General Manager thereof in said City; That: the defendant Eric Barclay is now a resident of Los Angeles,
California, and the defendant Mclntosh is also residing in the United States, his exact residence being
unknown.
"3rd. That at all times in this complaint mentioned Teal & Company hereinafter called 'the Company,'
was and now is a domestic corporation duly incorporated under the laws of the Philippine Islands and
having its principal office and place of business at Manila aforesaid. That during said times the plaintiffs
Everett, Clifford, Teal and Robinson were the principal stockholders in the Company owning a total of
4,478 shares therein and that the defend.ant Barclay -was the only other stockholder, owning one share
thereof.
"4th. That in the year 1921, the said Teal & Company has become indebted to the firm of H. W. Peabody
& Company in about the sum of P300,000, being for tractors, plows and parts which had been ordered
and delivered, the Bank and other banks in Manila held drafts accepted by the Company under said H.
W. Peabody & Company's guarantee. That said tractors having become unsalable by
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515
reason of the financial and agricultural depression that had overtaken the Islands, the said tractors were
all returned to the said H. W. Peabody & Company and as these plaintiffs are informed and verily
believes were by it returned to the United States, and while the events herein set forth were taking
place the Company made payments on its indebtedness through the Bank to H. W. Peabody &
Company, amounting to the sum of at least P150,000. That at about the same time the Company had
ordered another lot of tractors, etc., from a business house in the United States, known as Smith,
Kirkpatrick & Co., under a commercial letter of credit which the Company had had from the Bank in New
York City, but that shipment of such tractors had been delayed until the credit had been rescinded by
the Bank and that upon such rescisision Smith, Kirkpatrick & Co., had been advised by telegraph that the
order was cancelled and not to ship the tractors. That nevertheless and contrary to such advice the said
Smith, Kirkpatrick & Co. did ship the tractors doing so under D/A drafts therefor and that when said
tractors arrived in Manila and in order, if possible to save Smith, Kirkpatrick & Co. from additional loss,
the Company at the request and on the advice of the said Bank accepted the drafts and stored the same
in a warehouse in Manila rented by it and gave receipts therefor.
"5th. That thereafter and on or about March, 1921, the Bank persuaded the Company and the said H. W.
Peabody & Co. and Smith, Kirkpatrick & Co. to enter into a socalled 'creditors agreement' with itself,
wherein it was mutually agreed that neither of the parties should take action to collect its debts from
the Company for the term of two years after the date thereof. That these plaintiffs have no copy of said
agreement but beg leave to refer to the original of same, in possession of the Bank, for greater
certainty.
"6th. That the business of said Company consisted mainly in the merchandising of automobiles, trucks,
tractors, spare
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Everett vs. Asia Banking Corporation
parts and accessories therefor, and the repairing thereof. That on the 29th day of December, 1922, said
company was solvent and in the enjoyment of a 'large, growing, and lucrative business and in the
possession of a valuable reputation and good-will. That since its organization in May, 1919, it had done
its banking business and financing almost exclusively thru and with the Bank and by reason of such
continued relations the officers of the Company had acquired trust and confidence in the integrity and
good intentions of the said Bank and its officers and the other defendants in their friendliness to
themselves and the Company.
"7th. That on said 29th day of December, 1922, the said Company was indebted to the Bank in about the
sum of P750,000, which said sum was secured by mortgage on its personal property and the
improvements upon the real estate occupied by it, which real estate was held under a ninety-nine years
lease upon very favorable terms and which lease was a valuable asset and constantly increasing in value,
and that the said Bank held acceptances, warehouse receipts or pledges for such other indebtedness, as
was not covered by the last mentioned mortgage, which said security was ample to cover the amount of
the indebtedness.
"8th. That toward the end of the year 1922, the Bank, through its manager the defendant Mullen
represented to the Company and its managers that f or the protection both of the Bank and the
Company it was advisable for them both that the Bank should temporarily obtain control of the
management and affairs of the Company in order that the affairs of the Company could be conducted by
the Bank without interference or hindrance from outside, and to this end that it would be necessary f or
the stockholders in the Company to place their shares therein in a Voting Trust to be held by the Bank or
one of its officers for the benefit of the Company and represented that if this were done the Bank would
then finance the Company under its own supervision and that if and when the same were successful
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517
and in position to resume independent operation the said trust would be terminated and the stock
returned to its true owners, and further represented that in case at any time the Bank decided to
discontinue operation under the said trust that then the stock also would be so returned.
"9th. That it was further represented by the Bank and the said Mullen that in order to protect the
mutual interests of the Bank and the Company it was necessary to carry into effect the said proposed
voting trust without the knowledge of the creditors above named and thereby place the Bank in an
advantageous position with regard to them. That relying upon the previous friendly relations between
the bank and the Company and between the individual defendants and these plaintiffs and relying upon
the promise and representations of the defendants, these plaintiffs were induced to sign and did sign
and deliver to the Bank simultaneously a so-called 'Voting Trust Agreement,' executed by the plaintiff
stockholders and a 'Memorandum of Agreement' executed by the Company, both dated and executed
and delivered the 29th day of December, 1922, the two forming one document, and a copy of which is
hereto attached and marked Exhibit A.
"10th. That by reason of the facts above set forth and of their reliance upon the good faith and good-will
of the defendants these plaintiffs were induced to sign the 'Memorandum of Agreement,' and 'Voting
Trust Agreement,' Exhibit A, understanding from the defendants that the same were intended for the
protection of all parties thereto from outside creditors, but that they were not intended to be enforced
according to the letter thereof, and that they did not contain the true agreement between the Bank and
the Company which was to finance the Company without interference from the above named creditors,
to hold the voting trust as a protection to the bank as against the said creditors and for its own
advances, and the further agreement that in case the Bank did not operate under the said voting trust
because of the disapproval by its New
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518
York headquarters of such action, or for any other cause, the said trust would be cancelled and the stock
in and control of the Company returned to its true owners.
"11th. That shortly subsequent to the execution and delivery of the voting trust and memorandum of
agreement. hereinabove described, in violation of the obligations and duties imposed by law upon the
trustee and in pursuance of a scheme to defraud these plaintiffs hereinbelow more fully set forth, the
said voting trustee, the defendant Mullen, caused and procured, by virtue of the powers delegated in
the said voting trust, the displacement and removal f rom the Board of Directors of the Company of
each and every person who was at the time of the execution of the said voting trust a stockholder in the
Company and the substitution in their places as such directors, of the above named persons defendant,
or of other persons at the time employees and servants of the Bank, that thereafter and at no
subsequent time did the said trustee allow or permit to act as a Director of the Company any person
who was in fact a stockholder in the Company; that no one of the so-called directors so placed in
ostensible office, at any time has ever purchased from any stockholder of the Company a single share of
the capital stock thereof, or paid to any stockholder or the Company any money or consideration
whatsoever for the stock by virtue of the assumed ownership of which he has assumed to be a director
of the Company, and that at all time since, the Company has been exclusively controlled and managed
by the said defendants none of whom had any legal or equitable right to a voice in the control or
management thereof.
"12th. That in pursuance of the above-mentioned and hereinafter described scheme to defraud these
plaintiffs, the new so-called directors proceeded to remove from office the Secretary of the Company,
and to discharge from employment all of the old responsible managers and foremen in the office and
shops who were loyal to the Company and to these plaintiffs as the stockholders thereof and to displace
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519
them substitute for them creatures of their own chosing whose interest consisted wholly in pleasing
themselves and the Bank, and who were wholly foreign to the stockholders, these plaintiffs who were
and are the real owners of the Company. That thereafter said defendants conducted the business of the
Company without consulting the stockholders thereof ,and denied to the stockholders any knowledge or
information as to their actions, or the business of the Company, and at all times thereafter carried on
the business and management in all respects as if they and the Bank were the real stockholders and
owners thereof and in utter and entire disregard of the rights and interests of these plaintiffs who were
and are the real owners. That the said individual defendants, as such pretended stockholders and
directors as aforesaid, from time to time gave new mortgages upon the properties of the Company to
the Bank as it from time to time required and without regard to the interest of the Company and looking
solely to the advantage of the Bank whose employees and henchmen all of them were and are.
"13th. That after excluding the real owners from voice in the management or knowledge of the affairs of
the Company, the said individual defendants and or the Bank by agreement among themselves or
because the individual defendants as employees were coerced by the Bank, the said defendants gave
pledges and mortgages from the Company to the Bank and entered into contracts as directed by the
Bank, and permitted the Bank to foreclose the same and to sell the property of the Company at such.
times and in such manners as to be solely to the interests of the Bank or of themselves, and wholly
without regard to the best interests of the Company itself in disregard to the duties and obligations of a
trustee, and permitted the Bank to bring suit or suits against the Company, in which the Company was
not represented by anyone having its interest at heart and in which by reason of the above set forth
relation of the Company to the Bank, the Bank in truth occupied the
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520
position of both plaintiff and defendant and tricked and deluded the courts into giving judgments in
which the rights of the real parties were concealed and unknown to the courts.
"14th. That on or about the 18th day of August, 1923, in order more effectually to plunder the Company
and to defraud these plaintiffs the said defendants, Mullen, Barclay, Mears and Mclntosh, 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 Mclntosh ?1,200, 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 no 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
for the purpose. That in case such subscriptions were of their personal 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 and because each and every one of them were
nominally and de facto directors of the Company, by reason of their appointments as such by the
defendant Mullen, the Voting Trustee, under the Voting Trust hereinabove set forth, of which facts each
and every
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one of said defendant incorporators were at the time fully informed as these plaintiffs verily believe.
"15th. That after the incorporation described in the last preceding paragraph the said Bank turned over
to the Philippine Motors Corporation all of the business and assets of the company of every name
nature and description and with the connivance and consent of the individual defendants acting in their
double capacity as directors of both corporations, permitted and assisted the said Philippine Motors
Corporation to enter and possess itself of the premises and good will of the Company and to continue
and carry on the said business for the sole benefit of the new corporation and to collect the debts owing
to the Company and convert the advantages, profits and proceeds thereof to itself. And that at all times
since the said Philippine Motors Corporation has continued to conduct and advantage itself of the
business of the Company to the disregard of and detriment to the rights of these plaintiffs and to their
damage.
"16th. That these plaintiffs, by reason of the facts hereinabove set forth were and are ignorant of the
exact relations that have existed and do exist between the Bank and the said Philippine Motors
Corporation, or between the Bank and the individual defendants as ostensible stockholders thereof and
that the Bank has prevented these plaintiffs from obtaining any such information by refusing after
demand to return to these plaintiffs their stock in the Company or to dissolve the Voting Trust or in any
wise to allow them to regain control of what is left of the Company or its records and has endeavored to
forestall and prevent any action toward regaining such control or enforcement of their rights by bringing
suit against one of the principal stockholders in the Company, the plaintiff Everett, based on an
alteration and falsification of the books of the Company and by threat of proceedings against another
principal stockholder in the Company, the plaintiff Clifford, to collect a large sum of money as and for an
alleged non-
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payment of a subscription to the stock of the Company, which the records of the Company plainly show
does not exist and has no foundation in equity or in law.
"That by reason of the ignorance, so generated and maintained, of facts wholly within the knowledge of
defendants and concealed from these plaintiffs, they are unable to allege positively and therefore must
charge as they do charge in the alternative;
" (a) That the said Philippine Motors Corporation is a fictitious entity brought into semblance of being by
the Bank through the control of its employees the above named individual defendants acting as
pretended incorporators, stockholders and directors, when in truth and in fact the said individuals had
and have no personal property interest therein, and that in case of foregoing is found to be the fact the
said Philippine Motors Corporation never obtained and has now no legal existence for the reason that it
was and is the Bank itself operating under a disguise and because said Bank, under its license to do
business in the Philippine Islands, is without power or authority to engage in the business assumed by
the Philippine Motors Corporation, and because said corporation so pretendedly created by the Bank is
in violation of its duties and obligations assumed by it as Trustee of the stockholders of the Company, Or
"(b) That in case the individual defendants as individuals created the said, the Philippine Motors
Corporation, and the same is the property of themselves as stockholders and bona fide investors of their
own money in the stock of the same, then such creation and all subsequent operations of the said
Corporation were a fraud upon these plaintiffs because such incorporation and subsequent acts of the
Corporation were caused and procured by said individual defendants, the defendant Mullen being the
voting trustee of the Company and at the same time being the Manager in the Philippine Islands of the
Bank, and by virtue of the power so focused and concentrated in himself together with
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the powers of the others individual defendants as agents and employees of the Bank, and
simultaneously as officers and directors of the Company enabled the said individual defendants to take
advantage of their position in respect to the Company and the Bank and to. sue the same to the
defraudation of these plaintiffs.
"17th. That the return to the above named individual plaintiffs by the Trustee of the stock in the
Company, transferred to it by said Voting Trust Agreement, has been demanded and refused.
"18th. That by reason of the facts above alleged these plaintiffs have been kept and are in ignorance of
accurate knowledge of the actions of the defendants and of the amount of damage thereby caused
these plaintiffs and represent to the court what accurate information can only be obtained by a
discovery by the defendants and each of them of all and every fact relevant to this cause.
"19th. That these plantiffs are credibly informed and verily believe that the defendants are now
confabulating among themselves further to conceal the facts and to damage these plaintiffs by a sale of
the Philippine Motors Corporation and all its assets tangible and intangible to a new purchaser, in which
new purchaser the said defendants will have interests, and that in case such sale should be made it will
damage these plaintiffs in a manner for which there is no adequate remedy and will cause and produce
a multiplicity of actions.
"Wherefore these plaintiffs demand the decrees and judgment of this court:
"1st. Enjoining and restraining the defendants and each of them from transferring the corporation called
Philippine Motors Corporation or any of the capital stock therein to any person or corporation during
the pendency of this action.
"2nd. Ordering the said defendants at once to cancel the said Voting trust and to return to these
plaintiffs their shares of the stock of Teal & Company, taken under said
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trust and to return to them all the books and records of every kind and nature of said Teal & Company,
and to regain to these defendants their pretended positions in and control of Teal & Company.
"3rd. Decreeing that the defendants and each of them make full and true discovery of all the facts in
relation to the formation, incorporation, and ownership of the Philippine Motors Corporation and of all
dealings and transactions between the defendant Asia Banking Corporation and said Philippine Motors
Corporation to the end that the court and these plaintiffs shall have information whether said Philippine
Motors Corporation is in fact the Asia Banking Corporation operating under a disguise or is the creation
of the individual defendants availing themselves of their connections with and positions in the said Bank
in order to take advantage of these plaintiffs and of Teal & Company.
"4th. Decreeing that the said defendants make discovery of all and every one of their acts and
transactions with respect to Teal & Company since the same was taken by them adding and including a
full and true discovery of all sales of the property of Teal & Company of every kind and nature with the
full and true consideration received in every case, the amount received from any compromise entered
into by them in the name of Teal & Company and the true consideration therefor.
"5th. In case it be found that the said Philippine Motors Corporation is in fact the Asia Banking
Corporation that a decree be entered ordering the said Bank immediately to dissolve the same and to
account to these plaintiffs for all profits made thereby, since its organization.
"6th. For judgment against said defendants jointly .and severally for the damages caused by their acts
aforesaid which the plaintiffs charged to be not less than P500,000.
"7th. For such other or further relief, or both, in the premises as to this court may seem just and
equitable."
To this complaint the defendants demurred on the grounds (1) that it is ambiguous, unintelligible and
uncertain; (2)
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that the plaintiffs have not the legal capacity to bring this action; (3) that the complaint does not state
facts sufficient to constitute a cause of action, and (4) that there is a defect or misjoinder of parties
defendant.
The court below sustained the demurrer on all four grounds and held that the complaint, especially in its
paragraphs 4 and 5, is ambiguous, confusing, unintelligible and vague; that Teal & Company should have
been joined as a party plaintiff; that, as f ar as the Philippine Motors Corporation is concerned, the
plaintiffs, not being stockholders in that corporation, had no legal right to proceed against it in this case;
and that the court could not be called upon to act as investigator of the facts referred to in paragraphs 3
and 4 of the complaint, but that such investigations fall within the duty of the interested party, the
Attorney-Gen-eral, the Insular Auditor or the Insular Treasurer.
I
If this were an ordinary action at law, the ruling of the court below would be correct in most respects; it
must be conceded that the complaint violates at least three of the four principal rules as to the manner
of stating facts in complaints in such actions. It suffers from duplicity, the facts are not stated with
certainty, and the statement is sometimes indirect and partly in the alternative.
But we are not here dealing with a complaint in an action at law; this is in effect a bill of discovery and
the proceeding is primarily one for equitable relief, though it may eventually develop into an action at
law. In such proceed-ings considerable latitude in the manner of stating facts In the pleadings is allowed.
"The minute and varied statements of the probative facts, the charges to anticipate a defense, and the
interrogatories, become necessary in the equity practice, because bills are for discovery as well as for
relief, and in order to search the conscience of the defendant, he is treated, in the pleading, somewhat
as though placed upon the stand and examined as an unwilling witness." (Bliss on Code Pleading, 3rd
edition, section 319.)
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Counsel for the defendants argue that there is no express provision in the Code of Civil Procedure for a
proceeding such as the present, and that, therefore, proceedings for discovery must be considered
limited to the taking of depositions under subsection 1 of section 355 of the Code and the compulsory
attendance of witnesses by means of subpna. But, upon a moment's reflection, it becomes evident
that' the means of discovery suggested by counsel are not always available or adequate. Before they can
be utilized there must be an action pending, or, in other words, a complaint must have been filed and
summons served upon the defendants. Now, there are cases where facts, essential to the plaintiff's
cause of action, are within the knowledge of the defendants, but of which the plaintiff is so imperfectly
informed that he cannot state them with certainty, even on information and belief. He may, however,
know that one out of two or more sets of fact is true without knowing which of them is true. In such
circumstances the plaintiff cannot, of course, state any of the facts with certainty and it stands to reason
that he cannot be required to plead with certainty facts which he does not definitely believe to be true.
But the facts being essential to this cause of action, he must state them in one form or another and
cannot very well file his complaint before so doing. And if he cannot file his complaint, he cannot, as we
have already stated, avail himself of the remedy, provided for in subsection 1 of section 355, supra. It
seems clear that, in such a case, the proper procedure is for the plaintiff to state the facts within his
knowledge with certainty, but to plead in the alternative the, to him, doubtful facts, which are wholly
within the defendant's knowledge and call upon the defendant to make a full disclosure of these facts.
That is exactly what the plaintiffs have done in the present case, and bearing in mind the purpose of the
action, their complaint seems sufficiently intelligible and free from ambiguity.
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The fact that there is no special or express provision in the Code of Civil Procedure for bills of discovery
of this character, does not necessarily signify that the remedy does not exist in this jurisdiction. The
maxim of equity that "Equity will not permit a wrong without a remedy" still holds good, and our liberal
Code of Civil Procedure is, if properly interpreted, sufficiently broad and flexible to enable the courts to
apply all necessary remedies, both legal and equitable.
II
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 heldthat the corporation Teal & 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 & 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 action and prosecute the same
effectively would have been useless, and the law does not require litigants to perform useless acts.
(Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co.,
15 Ariz., 1; Wickersham vs. Crittenden, 106 Cal., 329; Glenn vs. Kittanning Brewing Co., 259 Pa,, 510;
Hawes vs. Contra Costa Water Company, 104 U. S., 450.)
III
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
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Montinola vs. Villanueva
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.
IV
The court below also erred in holding that the investigation of the transactions referred to in the
complaint is not within the province of the courts, but should be conducted by some other agency. That
discovery, such as that demanded in the present action, is one of the functions of a court of equity is so
well established as to require no discussion.
In our opinion the plaintiffs state a good cause of action for equitable relief and their complaint is not in
any respect fatally defective, The judgment of the court below is therefore reversed, the defendants'
demurrer is overruled, and it is ordered that the defendants answer the complaint within ten days from
the return of the record to the Court of First Instance. So ordered.
Avancea, C. J., Street, Villamor, Johns, Romualdez, and Villa-Real, JJ., concur.
Judgment reversed.
Everett vs. Asia Banking Corporation, 49 Phil. 512, No. 25241 November 3, 1926
No. L-22399. March 30, 1967.
REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant, vs. MIGUEL
CUADERNO, BlENVENIDO DlZON, PABLO ROMAN, THE BOARD OF DlRECTORS OF THE REPUBLIC BANK
AND THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees.
Corporation; Banks; Derivative suit by stockholder.An individual stockholder may institute a derivative
or representative suit on behalf of the corporation, wherein he holds stock, in order to protect or
vindicate corporate rights, whenever the of f icials of the corporation refuse to sue, or are the ones to
be sued or hold 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.
Same; When authority of corporation to bring suit is not required.Such a suit need not be authorized
by the corporation where its objective is to nullify the action taken by its manager and the board of
directors, in which case any demand for intra-corporate remedy would be futile.
Same; Nonjoinder of other stockholders.The fact that no other stockholder has made common cause
with the plaintiff is irrelevant since the smallness of plaintiffs holding is no ground for denying him
relief.
Same; Joinder of corporation.Whether in a derivative suit filed by a stockholder, the corporation
should be joined as a plaintiff or a defendant is not important. What is important is that the corporation
should be made a party in order to make the courts judgment binding upon it and thus bar future
relitigations of the issues. Misjoinder of parties is not a ground for dismissing an action.
Same; Derivative suit is not a quo warranto proceeding.A derivative suit by a stockholder for the
purpose of annulling the appointment of a defendant as Chairman of the Board of Directors is not a quo
warranto proceeding. The plaintiff is not claiming title to the position of Chairman of the Board of
Directors. His action is designed to prevent diversion of the corporate funds for the payment of the
salary of said Chairman.
Same; Stockholders suit to annul actions of banks Board of Directors.A stockholder has a cause of
action to annul certain actions of the Board of Directors of a bank, which actions were considered
anomalous and a breach of trust prejudicial to the bank.
Pleadings; Motion to dismiss; Hypothetical admission of facts alleged in the complaint.The facts
pleaded in the com-
672
672
SUPREME COURT REPORTS ANNOTATED
Republic Bank vs, Cuaderno
plaint are deemed hypothetically admitted by the defendants who file a motion to dismiss the complaint
for failure to state a cause of action.
Same; Actions; Sufficiency of cause of action.The test of sufficiency of the facts alleged in the
complaint is whether or not the court could render a valid judgment as prayed for, accepting as true the
exclusive facts set forth in the complaint. If the court should doubt the truth of the facts averred, it must
not dismiss the complaint but should require an answer and proceed to trial on the merits.
Same; Pendency of other cases.A case should not be dismissed due to the pendency of other
litigations between the same parties if said ground was not invoked in the motion to dismiss, The .fact
that said case may be incorporated, by amendment, in any one of the other pending actions does not
justify its dismissal since the amendment of the complaint in the other cases rests on the discretion of
the court. It is possible that the amendment would not be allowed.
APPEAL from an order of dismissal rendered by the Court of First Instance of Manila. Lantin, 7.
The facts are stated in the opinion of the Court.

Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiff-appellant
N.M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board.
Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.
REYES, J.B.L,, J.:
Direct appeal from an order of the Court of First Instance of Manila, in its civil case No. 53936, dismissing
the petitioners complaint on the ground of failure to state cause of action.
In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine banking corporation
domiciled in Manila, instituted a derivative suit for and in behalf of said Bank, against Miguel Cuaderno,
Bienvenido Dizon, the Board of Directors of the Republic Bank, and the Monetary Board of the Central
Bank of the Philippines. Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the
following:
6. That the relator herein filed the present derivative suit without any further demand on the Board of
Directors of
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VOL. 19, MARCH 30, 1967

673
Republic Bank vs. Cuaderno
the Republic Bank for the reason that such formal demand to institute the present complaint would be a
futile formality since the members of the board are personally chosen by defendant Pablo Roman
himself.
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the Monetary
Board of the Central Bank against certain frauds allegedly committed by defendant Pablo Roman, in that
being chairman of the Board of Directors of the Republic Bank, and of its Executive Loan Committee, in
1957 to 1959, in grave abuse of his fiduciary duty and taking advantage of his said positions and in
connivance with other officials of the Republic Bank, Roman had fraudulently granted or caused to be
granted loans to fictitious and non-existing persons and to their close friends, relatives and/or
employees, who were in reality their dummies, on the basis of fictitious and inflated appraised values of
real estate properties; that said loans amounted to almost 4 million pesos; that acting upon the
complaint, Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an
investigation, which was carried out by Bank Examiners; that they and the Superintendent of Banks of
the Central Bank reported that certain mortgage loans -amounting to P2,303,400.00 were granted in
violation of sections 77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary
Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of the Republic
Bank to be elected, which was done, and subsequently approved by the Monetary Board; that on
January 5; 1960? the latter accepted the offer of Pablo Roman to put up adequate security for the
questioned loans made by the Republic Bank, and such security was made a condition for the
resumption of the Banks normal operations; that subsequently, the Central Bank through its Governor,
Miguel Cuaderno, referred to special prosecutors of the Department of Justice on July 22, 1960, the
banking frauds and violations of the Banking Act, reported by the Superintendent of Banks, for
investigation and prosecution, but no information was filed up to the time of the retirement of
Cuaderno in 1961; that other similar frauds were subsequently discovered; that to neutralize the
impending action against him, Pablo Roman
674
674
engaged Miguel Cuaderno as technical consultant at a compensation of P12,500.00 per month, and
selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank; that the Board of
Directors composed of individuals personally selected and chosen by Roman, connived and
confederated in approving the appointment and selection of Cuaderno and Dizon; that such action was
motivated by bad faith and without intention to protect the interest of the Republic Bank but were
prompted to protect Pablo Roman from criminal prosecution; that the appointment of Cuaderno and his
acceptance of the position of technical consultant are immoral, anomalous and illegal, and his
compensation highly unconscionable, because court actions involving the actuations of Cuaderno as
Governor and Member or Chairman of the Monetary Board are still pending in court; that as member of
the Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision over the Republic Bank;
that the selection of Dizon as chairman of the Board of the Republic Bank after he was forced to resign
from the presidency of the Philippine National Bank and from membership of the Monetary Board and
within one year thereafter is in violation of section 3, sub-paragraph (d) of the AntiGraft and Corrupt
Practices Act; that both Cuaderno and Dizon were alter egos of Pablo Roman; that the Monetary Board
was about to approve the appointment of Cuaderno and Dizon and would do so unless enjoined.
The complaint, therefore, prayed for a writ of preliminary Injunction against the Monetary Board to
prevent its confirmation of the appointments of Dizon and Cuaderno; against the Board of Directors of
the Republic Bank from recognizing Cuaderno as technical consultant and Dizon as Chairman of the
Board; and against Pablo Roman from appointing or selecting officers or directors of the Republic Bank,
and against the recognition of any such appointees until final determination of the action. And
concluded by praying that after due hearing, judgment be rendered,
a) making the writ of injunction permanent;
b) declaring the appointment of defendant Miguel Cuaderno as technical consultant with monthly
compensation of
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VOL. 19, MARCH 30, 1967

675
P12,500.00 unconscionable, immoral, illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman of the Board of Directors of the
Republic Bank violative of Section 3, sub-paragraph (d) of Republic Act No. 5019, otherwise known as
the Anti-Graft and Corrupt Practices Act, and therefore, illegal and null and void;
d) declaring that defendant Pablo Roman, in view of his criminal liability for the fraudulent real estate
mortgage loans in the Republic Bank amounting to P4 million, has no right to select or to be allowed to
select person or persons who are his alter egos to manage the Republic Bank, and enjoining the
defendant Board of Directors of the Republic Bank from recognizing any officers or directors appointed
or selected by defendant Pablo Roman;
e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the Republic Bank all
amounts they may have received either in the form of compensation, remuneration or emolument, with
an interest thereon at the rate of 6%; or to order defendant Pablo Roman to refund the amounts paid to
said defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay such reasonable damages
to the plaintiff Republic Bank;
f) ordering all the defendants to pay the sum of P25,000.00 as attorneys fees, including all expenses of
litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and affirmative defenses; but the other
defendants filed separate motions to dismiss on practically the same grounds: no valid cause of action
against the individual movants; lack of legal capacity of plaintiff-relator to sue; and non-exhaustion of
intra-corporate remedies. These motions were duly opposed by plaintiff Damaso Perez.
On October 24, 1963, the court, taking into consideration the grounds alleged in the motions to dismiss
and the opposition for the issuance of a writ of preliminary injunction and the affirmative defenses filed
by the defendants and the arguments in support thereof, and that there are already eight cases
pending in the different branches of this court between practically the same parties, denied the
petition for a writ of preliminary injunction and dismissed the case. The court in effect suggested
676
676
that the matter at issue in the case may be presented in any of the pending eight cases by means of
amended and supplemental pleadings.
Plaintiff Damaso Perez thereupon appealed to this Court.
The issue in this appeal, then, is whether or not the Court below erred in dismissing the complaint. In
this connection, it should be remembered that the defenses of the Monetary Board of the Central Bank,
being interposed in an answer and not in a motion to dismiss, are not here at issue. Our sole concern is
with the motions to dismiss of the other defendants, Roman, Cuaderno, Dizon, and the Board of
Directors of the Republic Bank.
They mainly controvert the right of plaintiff to question the appointment and selection of defendants
Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as
stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an
individual stockholder is permitted to institute a derivative or representative 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 (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp.,
45 Phil. 518: Angeles vs. Santos, 64 Phil 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellants
action here is precisely in conformity with these principles. He is neither alleging nor vindicating his own
individual interest or prejudice, but the interest of the Republic Bank and the damage caused to it. The
action he has brought is a derivative one, expressly manifested to be for and in behalf of the Republic
Bank, because it was futile to demand action by the corporation, since its Directors were nominees and
creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds against
the Bank that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of
Bienvenido Dizon to head the Board of Directors of the Republic Bank,
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677
were made only to shield Pablo Roman from criminal prosecution and not to further the interests of the
Bank, and avers that both men are Romans alter egos. There is no denying that the facts thus pleaded
in the complaint constitute a cause of action for the bank: if the questioned appointments were made
solely to protect Roman from criminal prosecution, by a Board composed by Romans creatures and
nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or
diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and
the directors in approving the appointments would be committing a breach of trust; the Bank, therefore,
could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those
paid out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos, supra.).
Facts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to
dismiss the complaint for failure to state a cause of action. This is the cardinal principle in the matter.
And, it has been ruled that the test of sufficiency of the facts alleged is whether or not the Court could
render a valid judgment as prayed for, accepting as true the exclusive facts set forth in the complaint.1
So rigid is the norm prescribed that if the Court should doubt the truth of the facts averred it must not
dismiss the complaint but require an answer and proceed to trial on the merits.2
Defendants urge that the action is improper because the plaintiff was not authorized by the corporation
to bring suit in its behalf. Any such authority could not be expected as the suit is aimed to nullify the
action taken by the manager and the board of directors of the Republic Bank; and any demand for intra-
corporate remedy would be futile, as expressly pleaded in the complaint. These circumstances permit a
stockholder to bring a derivative
________________
1 Paminsan vs. Costales, 28 Phil. 487; Blay vs. Batangas: Transportation Co., 80 Phil. 373; De Jesus vs.
Belarmino, 95 Phil. 366; Valencia & Co. vs. Layug, CA-G.R. No. L-11060, May 23, 1958.
2 Piero vs. Enriquez, 84 Phil. 774; Dimayuga vs. Dimayuga, 96 Phil. 366.
678
678
suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to make common cause
with plaintiff Perez is irrelevant, since the smallness of plaintiffs holdings is no ground for denying him
relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings for the
absence of other stockholders to be of any significance, no issues having even been joined.
There remains the procedural question whether the corporation itself must be made party defendant.
The English practice is to make the corporation a party plaintiff, while in the United States, the usage
leans in favor of its being joined as party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can
be raised against either method. Absence of corporate authority would seem to militate against making
the corporation a party plaintiff, while joining it as defendant places the entity in the awkward position
of resisting an action instituted for its benefit. What is important is that the corporation should be made
a party, in order to make the Courts judgment binding upon it, and thus bar future relitigation of the
issues. On what side the corporation appears loses importance when it is considered that it lay within
the power of the trial court to direct the making of such amendments of the pleadings, by adding or
dropping parties, as may be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of
parties is not a ground to dismiss an action. (Ibid.)
We see no reason to support the contention of defendant Bienvenido Dizon that the action of plaintiff
amounts to a quo warranto proceeding. Plaintiff Perez is not claiming title to Dizons position as head of
the Republic Banks board of directors. The suit is aimed at preventing the waste or diversion of
corporate funds in paying officers appointed solely to protect Pablo Roman from criminal prosecution,
and not to carry on the corporations banking business, Whether the complaints allegations to such
effect are true or not must be determined after due hearing.
Independently of the grounds advanced by the defendants in their motions to dismiss, the Court a quo
gave as a further pretext for the dismissal of the action the pen-
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VOL. 19, MARCH 30, 1967
679
Bernabe vs. Court of Appeals, et al.
dency of eight other lawsuits between practically the same parties; reasoning that the question at issue
in the present case could be incorporated in any one of the other actions by amended or supplemental
pleading. We fail to see that this justifies the dismissal of the case under appeal. In the first place, there
is no pretense that the cause of action here was already included in any of the other pending cases. As a
matter of fact, dismissal of the present action was not sought on the ground of pendency of another
action between the same parties. Secondly, the amendment of a complaint after a responsive pleading
is filed, would rest upon the discretion of the party and the Court. Hence, this case cannot be dismissed
simply because of the possibility that the cause of action here can be incorporated or introduced in any
of those of the pending cases.
In view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is
remanded to the court of origin with instructions to overrule the motions to dismiss and require the
defendants to answer the complaint, Thereafter, the case shall be tried and decided on its merits. Costs
against defendants-appellees. So ordered.
Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Makalintal, J., did not take part.
Order of dismissal set aside. Case remanded to lower court for further proceedings.
Republic Bank vs. Cuaderno, 19 SCRA 671, No. L-22399 March 30, 1967
G.R. No. 85339. August 11, 1989.*
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners, vs. ERNEST KAHN,
ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI,
JR., EDUARDO SORIANO, RALPH KARR and RAMON DEL ROSARIO, JR., respondents.
Actions; Jurisdiction; De los Angeles complaint does not involve any property illegally acquired or
misappropriated by Marcos, et al., or any incidents arising from, incidental to or related to any case
involving such property but assets indisputably belonging to San Miguel Corporation.The subject
matter of his complaint in the SEC does not therefore fall within the ambit of this Courts Resolution of
August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pea, et al, 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, their close
relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or criminal,
are lodged within the exclusive and original jurisdiction of the Sandiganbayan, and all incidents arising
from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayans
exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court. His
complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or any
incidents arising from, incidental to, or related to any case involving such property, but assets
indisputably belonging to San Miguel Corporation which were, in his (de los Angeles) view, being illicitly
committed by a majority of its board of directors to answer for loans assumed by a sister corporation,
Neptunia Co., Ltd.
Same; Same; Same; The contention therefore that in view of this Courts ruling as regards the
sequestered SMC stock, the SEC has no jurisdiction over the de los Angeles complaint cannot be
sustained and must be rejected.De los Angeles complaint, in fine, is confined to the issue of the
validity of the assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the
benefit of certain
_______________
* FIRST DIVISION.
448
448
San Miguel Corporation vs. Kahn
of its officers and stockholders, an issue evidently distinct from, and not even remotely requiring inquiry
into the matter of whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to
Marcos and his cronies or dummies (on which issue, as already pointed out, de los Angeles, in common
with the PCGG, had in fact espoused the affirmative). De los Angeles dispute, as stockholder and
director of SMC, with other SMC directors, an intra-corporate one, to be sure, is of no concern to the
Sandiganbayan, having no relevance whatever to the ownership of the sequestered stock. The
contention, therefore, that in view of this Courts ruling as regards the sequestered SMC stock above
adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be sustained and
must be rejected. The dispute concerns acts of the board of directors claimed to amount to fraud and
misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out of
intra-corporate relations between and among stockholders, or between any or all of them and the
corporation of which they are stockholders.
Corporation Law; Derivative Suit; Theory that de los Angeles has no personality to bring suit in behalf of
the corporation cannot be sustained.The theory that de los Angeles has no personality to bring suit in
behalf of the corporationbecause his stockholding is minuscule, and there is a conflict of interest
between him and the PCGGcannot be sustained, either.
Same; Same; Same; 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;
Requisites for a derivative suit.It is claimed that since de los Angeles 20 shares (owned by him since
1977) represent only .00001644% of the total number of outstanding shares (121,645,860), he cannot
be deemed to fairly and adequately represent the interests of the minority stockholders. The implicit
argumentthat a stockholder, to be considered as qualified to bring a derivative suit, must hold a
substantial or significant block of stockfinds 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
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VOL. 176, AUGUST 11, 1989

449
bringing the suit.
Same; Same; Same; Same; 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; Number of
shares is immaterial.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.
Same; Same; Same; Theory of conflict-of-interest cannot be upheld.Neither can the conflict-of-
interest theory be upheld. From the conceded premise that de los Angeles now sits in the SMC Board of
Directors by the grace of the PCGG, it does not follow that he is legally obliged to vote as the PCGG
would have him do, that he cannot legitimately take a position inconsistent with that of the PCGG, or
that, not having been elected by the minority stockholders, his vote would necessarily never consider
the latters interests. The proposition is not only logically indefensible, non sequitur, but also constitutes
an erroneous conception of a directors role and function, it being plainly a directors duty to vote
according to his own independent judgment and his own conscience as to what is in the best interests of
the company. Moreover, it is undisputed that apart from the qualifying shares given to him by the
PCGG, he owns 20 shares in his own right, as regards which he cannot from any aspect be deemed to be
beholden to the PCGG, his ownership of these shares being precisely what he invokes as the source of
his authority to bring the derivative suit.
Same; Same; Same; Argument that the PCGG has no power to vote sequestered shares of stock as an act
of dominion but only in pursuance of its power of administration is strained and of no merit.It is also
theorized, on the authority of the BASECO decision, that the PCGG has no power to vote sequestered
shares of stock as an act of dominion but only in pursuance to its power of administration. The inference
is that the PCGGs act of voting the stock to elect de los Angeles to the SMC Board of Directors was
unauthorized and void; hence, the latter could not bring suit in the corporations behalf. The argument
is strained and obviously of no merit. As already more than plainly indicated, it was not necessary for de
los Angeles to be a director in
450
450
order to bring a derivative action; all he had to be was a stockholder, and that he wasowning in his
own right 20 shares of stock, a fact not disputed by the respondents.
Same; Same; Same; Same; Nothing in the Baseco decision which can be interpreted as ruling that
sequestered stock may not under any circumstances be voted by the PCGG to elect a director in the
company in which such stock is held.Nor is there anything in the Baseco decision which can be
interpreted as ruling that sequestered stock may not under any circumstances be voted by the PCGG to
elect a director in the company in which such stock is held. On the contrary, that it held such act
permissible is evident from the context of its reference to the Presidential Memorandum of June 26,
1986 authorizing the PCGG, pending the outcome of proceedings to determine the ownership of x x
sequestered shares of stock, to vote such shares x x at all stockholders meetings called for the
election of directors x x the only caveat being that the stock is not to be voted simply because the
power to do so exists, whether it be to oust and replace directors or to effect substantial changes in
corporate policy, programs or practice, but only for demonstrably weighty and defensible grounds or
when essential to prevent disappearance or wastage of corporate property.
PETITION to review the decision of the Court of Appeals.

Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for petitioner.
Roco & Bunag Law Offices for respondent Ernest Kahn.
Siguion Reyna, Montecillo and Ongsiako for other respondents.
NARVASA, J.:
On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel
Corporation were acquired1 by fourteen (14) other corporations,2 and were placed under a
_______________
1 Rollo, p. 68.
2 (1) Soriano Shares, Inc.; (2) ASC Investors, Inc.; (3) Roxas Shares, Inc.; (4) ARC Investors, Inc.; (5)
APHOLDINGS, INC.; (6) Toda Holdings, Inc.; (7) Fernandez Holdings, Inc.; (8) San Miguel Officers Corps,
Inc.; (9) Te Deum Resources, Inc.; (10) Anglo Ventures Corporation; (11)
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451
Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the latter died, Eduardo M.
Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with power to delegate the trusteeship in
writing to Andres Soriano III.3 Shortly after the Revolution of February, 1986, Cojuangco left the country
amid persistent reports that huge and unusual cash disbursements from the funds of SMC had been
irregularly made, and the resources of the firm extensively used in support of the candidacy of
Ferdinand Marcos during the snap elections in February, 1986.4
On March 26, 1986, an Agreement was executed between Andres Soriano III, as Buyer, and the 14
corporations, as Sellers, for the purchase by Soriano, for himself and as agent of several persons, of
the 33,133,266 shares of stock at the price of P100.00 per share, or an aggregate sum of Three Billion
Three Hundred Thirteen Million Three Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00)
Pesos payable in specified installments.5 The Agreement revoked the voting trust above mentioned, and
expressed the desire of the 14 corporations to sell the shares of stock to pay certain outstanding and
unpaid debts, and Sorianos own wish to purchase the same in order to institutionalize and stabilize
the management of the COMPANY in x x (himself) and the professional officer corps mandated by the
COMPANYs By-laws, and to direct the COMPANY towards giving the highest priority to its principal
products and extensive support to agriculture programme of the Government x x.6 Actually, according
to Soriano and the other private respondents, the buyer of the shares was a foreign company, Neptunia
Corporation Limited (of Hongkong), a wholly owned subsidiary of San Miguel International which is, in
turn, First Meridian Development Inc.; (12) Rock Steel Resources, Inc.; (13) Randy Allied Ventures, Inc.;
(14) Valhalla Properties, Limited, Inc.
_______________
3 Id., p. 68.
4 Id., 31.
5 Id., pp. 66-85.
6 Id., p. 69.
452
452
a wholly owned subsidiary of San Miguel Corporation;7 and it was Neptunia which on or about April 1,
1986 had made the down payment of P500,000,000.00, from the proceeds of certain loans.8
At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good
Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close
associate and dummy of former President Marcos, and the sale thereof was in direct contravention of x
x Executive Orders Numbered 1 and 2 (x x dated February 28, 1986 and March 12, 1986, respectively)
which prohibit x x the transfer, conveyance, encumbrance, concealment or liquidation of assets and
properties acquired by former President Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates.9 The sequestration was subsequently
lifted, and the sale allowed to proceed, on representations by San Miguel Corporation x x that the
shares were owned by 1.3 million coconut farmers; the seller corporations were fully owned by said
farmers and Cojuangco owned only 2 shares in one of the companies, etc. However, the sequestration
was soon re-imposed by Order of the PCGG dated May 19, 1986 x x. The same order forbade the SMC
corporate Secretary to register any transfer or encumbrance of any of the stock without the PCGGs
prior written authority.10
San Miguel promptly suspended payment of the other installments of the price to the fourteen (14)
seller corporations. The latter as promptly sued for rescission and damages.11
On June 4, 1986, the PCGG directed San Miguel Corporation
_______________
7 Id., pp. 32, 51; p. 2 of undated Comment of respondent Kahn filed by reg. mail on January 23, 1989,
adopted as their own by the other private respondents thru a Manifestation dated Jan. 23, 1989.
8 Undated Kahn Comment, p. 4.
9 Id., pp. 3-4; SEE Resolution, G.R. Nos. 74910, 75075, 75094, 76397, 79459 and 79520, Aug. 10, 1988, at
p. 3.
10 Id., at p. 4.
11 The action was docketed as Civil Case No. 13865 of the Regional
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453
individuals, including Eduardo de los Angeles, from the sequestered shares registered as street
certificates under the control of Anscor-Hagedorn Securities, Inc., to be held in trust by x x (said seven
[7] persons) for the benefit of Anscor-Hagedorn Securities, Inc. and/or whoever shall finally be
determined to be the owner/owners of said shares.12
In December, 1986, the SMC Board, by Resolution No. 86-12-2, 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.13
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the
PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was ever
adopted, and stating that what in truth was agreed upon at the meeting of December 4, 1986 was
merely a further study by Director Ramon del Rosario of a plan presented by him for the assumption
of the loan. De los Angeles also pointed out certain deleterious effects thereof. He was however
overruled by private respondents.14 When his efforts to obtain relief within the corporation and later
the PCGG proved futile, he repaired to the Securities and Exchange Commission (SEC).
He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel
Corporation, against ten (10) of the fifteen-member Board of Directors who had either voted to
approve and/or refused to reconsider and revoke Board Resolution No. 86-12-2.15 His Amended
Petition in the SEC Trial Court at Makati (Branch 149).
______________
12 Annex 1 of Undated Kahn Comment.

13 Undated Comment, p. 4.
14 Rollo, pp. 7-8.
15 Id., pp. 48, 49. The case was docketed as SEC Case No. 3152; to issue qualifying shares in the
corporation to seven (7)
454
454
recited substantially the foregoing antecedents and the following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of Neptunia Corporation, Ltd., had met and
passed a resolution authorizing the company to borrow up to US $26,500,000.00 from the Hongkong &
Shanghai Banking Corporation, Hongkong to enable the Soriano family to initiate steps and sign an
agreement for the purchase of some 33,133,266 shares of San Miguel Corporation.16
b) The loan of $26,500,000.00 was obtained on the same day, the corresponding loan agreement having
been signed for Neptunia by Ralph Karr and Carl Ottiger. At the latters request, the proceeds of the loan
were deposited in different banks17 for the account of Eduardo J. Soriano.
c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the stockholders of San
Miguel Corporation,18 inter alia soliciting their proxies and announcing that the Soriano family, friends
and affiliates acquired a considerable block of San Miguel Corporation shares only a few days ago x x,
the transaction x x (having been) made through the facilities of the Manila Stock Exchange, and
33,133,266 shares x x (having thereby been) purchased for the aggregate price of P3,313,326,600.00.
The letters also stated that the purchase was an exercise of the Sorianos right to buy back the same
and impleaded as respondents were (1) Andres Soriano III, (2) Ernest Khan, (3) Benigno Toda, Jr., (4)
Antonio J. Roxas, (5) Antonio Prieto, (6) Francisco C. Eizmendi, Jr., (7) Eduardo Soriano, (8) Ramon
Garcia, (9) Ralph Karr, and (10) Abraham F. Sarmiento (who has since severed all relations with San
Miguel Corporation and now sits in the Supreme Court as Associate Justice thereof). Excluded were
(then Secretary, now Senator) Aquilino Pimentel, (GSIS General Manager Feliciano Belmonte, (Sec.)
Teodoro Locsin, Jr., and Sec. Lourdes R. Quisumbing who did not approve the resolution or repudiated
it.
_______________
16 Id., pp. 5-6.

17 Morgan Guaranty & Trust Co., New York; Chase Manhattan Bank, New York; Hongkong & Shanghai
Banking Corporation, Hongkong.
18 Rollo, p. 7; Annex D, Amended Petition filed in SEC Case . No.3152
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455
number of shares purchased in 1983 by the x x (14 seller corporations).
d) In implementing the assumption of the Neptunia loan and the purchase agreement for which said
loan was obtained, which assumption constituted an improper use of corporate funds to pay personal
obligations of Andres Soriano III, enabling him; to purchase stock of the corporation using funds of the
corporation itself, the respondents, through various subsequent machinations and manipulations, for
ulterior motives and in breach of fiduciary duty, compound the damages caused San Miguel Corporation
by, among other things: (1) agreeing to pay a higher price for the shares than was originally covenanted
in order to prevent a rescission of the purchase agreement by the sellers; (2) urging UCPB to accept San
Miguel Corporation and Neptunia as buyers of the shares, thereby committing the former to the
purchase of its own shares for at least 25% higher than the price at which they were fairly traded in the
stock exchanges, and shifting to said corporations the personal obligations of Soriano III under the
purchase agreement; and (3) causing to be applied to the part payment of P1,800,000.00 on said
purchase, various assets and receivables of San Miguel Corporation.
The complaint closed with a prayer for injunctions against the execution or consummation of any
agreement causing San Miguel Corporation to purchase the shares in question or entailing the use of its
corporate funds or assets for said purchase, and against Andres Soriano III from further using or
disposing of the funds or assets of the corporation for his obligations; for the nullification of the SMC
Boards resolution of April 2, 1987 making San Miguel Corporation a party to the purchase agreement;
and for damages.
Ernest Kahn moved to dismiss de los Angeles derivative suit on two grounds, to wit:
1. De los Angeles has no legal capacity to sue because
a) having been merely imposed by the PCGG as a director on San Miguel, he has no standing to bring a
minority derivative suit;
b) he personally holds only 20 shares and hence cannot
456
456
fairly and adequately represent the minority stockholders of the corporation;
c) he has not come to court with clean hands; and
2. The Securities & Exchange Commission has no jurisdiction over the controversy because the matters
involved are exclusively within the business judgment of the Board of Directors.19
Kahns motion to dismiss was subsequently adopted by his correspondents.20
The motion to dismiss was denied by SEC Hearing Officer Josefina L. Pasay Paz, by order dated
September 4, 1987.21 In her view
1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law, ownership of even
one share only, sufficed to qualify a person to bring a derivative suit;
2) it is indisputable that the action had been brought by de los Angeles for the benefit of the corporation
and all the other stockholders;
3) he was a stockholder at the time of the commission of the acts complained of, the number of shares
owned by him being to repeat, immaterial;
4) there is no merit in the assertion that he had come to Court with unclean hands, it not having been
shown that he participated in the act complained of or ratified the same; and
5) where business judgment transgresses the law, the Securities and Exchange Commission always has
competence to inquire thereinto.
Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of
this adverse resolution of the SEC Hearing Officer and her perpetual inhibition from proceeding with SEC
Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two. The majority22 ruled that de
los Angeles had no .
_______________
19 Id.
20 SEC Order dtd Sept. 4, 1987 (Rollo, p. 123)
21 Rollo, pp. 123-128; Annex I of Petition.
22 Castro Bartolome, J., ponente, Luciano, J., and Cacdac, J.
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457
legal capacity to institute the derivative suit, a conclusion founded on the following propositions:
1) a party who files a derivative suit should adequately represent the interests of the minority
stockholders; since De los Angeles holds 20 shares of stock out of 121,645,860 or 0.00001644%
(appearing to be undisputed), (he) cannot even be remotely said to adequately represent the interests
of the minority stockholders, (e)specially so when x x de los Angeles was put by the PCGG to vote the
majority stock, a situation generating a genuine conflict of interest;
2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position as PCGG-
nominated director is inconsistent with his assumed role of representative of minority stockholders; not
having been elected by the minority, his voting would expectedly consider the interest of the entity
which placed him in the board of directors;
3)Baseco v. PCGG, May 27, 1987,23 has laid down the principle that the (a) PCGG cannot exercise acts of
dominion over sequestered property, (b) it has only powers of administration, and (c) its voting of
sequestered stock must be done only pursuant to its power of administration; and
4) de los Angeles suit is not a derivative suit, a derivative suit being one brought for the benefit of the
corporation.
The dissenting Justices,24 on the other hand, were of the opinion that the suit had been properly
brought by de los
Angeles because
1) the number of shares owned by him was immaterial, he being a stockholder in his own right;
2) he had not voted in favor of the resolution authorizing the purchase of the shares; and
3) even if PCGG was not the owner of the sequestered shares, it had the right to seek the protection of
the interest of the corporation, it having been held that even an unregistered shareholder or an
equitable owner of shares and pledgees of shares may be deemed a shareholder for purposes of
instituting a derivative suit.
_______________
23 150 SCRA 181.

24 Campos, J. and Paras, J.
458
458
De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of Appeals,
imputing to the latter the following errors:
1) having granted the writ of certiorari despite the fact that Kahn had not first resorted to the plain
remedy available to him, i.e., appeal to the SEC en banc and despite the fact that no question of
jurisdiction was involved;
2) having ruled on Kahns petition on the basis merely of his factual allegations, although he (de los
Angeles) had disputed them and there had been no trial in the SEC; and
3) having held that he (de los Angeles) could not file a derivative suit as stockholder and/or director of
the San Miguel Corporation.
For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the ownership of the 33,133,266 shares
of SMC stock, in light of this Courts Resolution in G.R. Nos. 74910, 75075, 75094, 76397, 79459 and
79520, promulgated on August 10, 1988;25
2) de los Angeles was beholden to the controlling stockholder in the corporation (PCGG), which had
imposed him on the corporation; since the PCGG had a clear conflict of interest with the minority, de
los Angeles, as director of the former, had no legal capacity to sue on behalf of the latter;
3) even assuming absence of conflict of interest, de los Angeles does not fairly and adequately represent
the interest of the minority stockholders;
4) the respondents had properly applied for certiorari with the Court of Appeals because
a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies exercising quasi-
judicial functions, and hence had competence to issue the writ of certiorari;
b) the principle of exhaustion of administrative remedies does not apply since the issue involved is one
of law;
c) said respondents had no plain, speedy and adequate remedy
_______________
25 SEE footnote 9 and related text, supra.
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459
within the SEC;
d) the Order of the SEC Investigating Officerdenying the motion to dismisswas issued without or in
excess of jurisdiction, hence was correctly nullified by the Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for reconsideration by respondents in
the SEC case; in any event, such a motion was unnecessary in the premises.
De los Angeles Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a derivative suit, viz:
a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of;
b) he has exhausted 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 caused
to the corporation and not to the particular stockholder bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired
those shares as early as 1977, (2) he had sought without success to have the board of directors remedy
the wrong, and (3) that wrong was in truth a wrong against the stockholders of the corporation,
generally, and not against him individuallyand it was the corporation, and not he, particularly, that
would be entitled to the appropriate reliefthe propriety of his suit cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings in the Court of Appeals and hence
could not claim exclusion from the scope of the doctrine of exhaustion of remedies; moreover, Rule 65,
invoked by him, bars a resort to certiorari where a plain, speedy and adequate remedy was available to
him, as it had been available to him in this case, to wit: a motion for reconsideration before the SEC en
banc and, contrary to respondents claim, de los Angeles had in fact asserted these propositions before
the Appellate Tribunal; and
3) the respondents had not raised the issue of jurisdiction before the Court of Appeals; indeed, they
admit in their Com
460
460
ment that that
issue has not yet been resolved by the SEC, be this as it may, the derivative suit does not fall within
the BASECO doctrine since it does not involve any question of ownership of the 33,133,266 sequestered
SMC shares but rather, the validity of the resolution of the board of directors for the assumption by the
corporation, for the benefits of certain of its officers and stockholders, of liability for loans contracted by
another corporation, which is an intra-corporate dispute within the exclusive jurisdiction of the SEC.
1. De los Angeles is not opposed to the asserted position of the PCGG that the sequestered SMC shares
of stock belong to Ferdinand Marcos and/or his dummies and/or cronies. His consent to sit in the board
as nominee of PCGG unquestionably indicates his advocacy of the PCGG position. He does not here seek,
and his complaint in the SEC does not pray for, the annulment of the purchase by SMC of the stock in
question, or even the subsequent purchase of the same stock by others26which proposition was
challenged by (1) one Evio, in SEC Case No. 3000; (2) by the 14 corporations which sold the stock to
SMC, in Civil Case No. 13865 of the Manila RTC, said cases having later become subject of G.R. No. 74910
of this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of this Court; and (4) by Eduardo
Cojuangco and others in Civil Case No. 16371 of the RTC, Makati, [on the theory that the sequestered
stock in fact belonged to coconut planters and oil millers], said case later having become subject of G.R.
No. 79459 of this Court.27 Neither does de los Angeles impugn, obviously, the right of the PCGG to vote
the sequestered stock thru its nominee directorsas was done by United Coconut Planters Bank and
the 14 seller corporations (in SEC Case No. 3005, later consolidated with SEC Case No. 3000 above
mentioned, these two (2) cases later having become subject of G.R.
_______________
26 SEE de los Angeles Amended Petition of April 3, 1987 before the SEC (Rollo, pp. 48-65).
27 SEE Resolution in G.R. Nos. 74910, 75075, 75094,76397, 79549 and 79520, Aug. 10, 1988, supra.
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461
No. 76397) as well as by one Clifton Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court).28
The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Courts
Resolution of August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pea, et
al,29 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, their close
relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or criminal,
are lodged within the exclusive and original jurisdiction of the Sandiganbayan, and all incidents arising
from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayans
exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court. His
complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or any
incidents arising from, incidental to, or related to any case involving such property, but assets
indisputably belonging to San Miguel Corporation which were, in his (de los Angeles) view, being illicitly
committed by a majority of its board of directors to answer for loans assumed by a sister corporation,
Neptunia Co., Ltd.
De los Angeles complaint, in fine, is confined to the issue of the validity of the assumption by the
corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers
and stockholders, an issue evidently distinct from, and not even remotely requiring inquiry into the
matter of whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to Marcos and
his cronies or dummies (on which issue, as already pointed out, de los Angeles, in common with the
PCGG, had in fact espoused the affirmative). De los Angeles dispute, as stockholder and director of
SMC, with other SMC directors, an intra-corporate one, to be sure, is of no
_______________
28 Id. The right of the PCGG to sequester the UCPB stock and to vote the same was questioned in SEC
Case No. 3014, which case later became subject of G.R. No. 75075.
29 G.R. No. 77663, April 12, 1988.
462
462
concern to the Sandiganbayan, having no relevance whatever to the ownership of the sequestered
stock. The contention, therefore, that in view of this Courts ruling as regards the sequestered SMC stock
above adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be sustained
and must be rejected. The dispute concerns acts of the board of directors claimed to amount to fraud
and misrepresentation which may be detrimental to the interest of the stockholders, or is one arising
out of intra-corporate relations between and among stockholders, or between any or all of them and
the corporation of which they are stockholders.30
2. The theory that de los Angeles has no personality to bring suit in behalf of the corporationbecause
his stockholding is minuscule, and there is a conflict of interest between him and the PCGGcannot
be sustained, either.
It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only .00001644%
of the total number of outstanding shares (121,645,860), he cannot be deemed to fairly and adequately
represent the interests of the minority stockholders. The implicit argumentthat 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 suit31 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;32
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;33 and
_______________
30 Sec. 5, P.D. 902-A.

31 SEE A. Agbayani, Commercial Laws of the Philippines, 1988 ed., Vol. 3, pp. 550-552; Jose and Ma.
Clara Campos, The Corporation Code, 1981 ed., pp. 574-577; Martin, T.C., Philippine Commercial Laws,
1971 ed., p. 60.
32 Pascual v. Orozco, 19 Phil. 82; Republic Bank v. Cuaderno, 19 SCRA 671.
33 Everett v. Asia Banking Corporation, 49 Phil. 512; Angeles v. Santos, 64 Phil. 697.
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463
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.34
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.
3. Neither can the conflict-of-interest theory be upheld. From the conceded premise that de los
Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is
legally obliged to vote as the PCGG would have him do, that he cannot legitimately take a position
inconsistent with that of the PCGG, or that, not having been elected by the minority stockholders, his
vote would necessarily never consider the latters interests. The proposition is not only logically
indefensible, non sequitur, but also constitutes an erroneous conception of a directors role and
function, it being plainly a directors duty to vote according to his own independent judgment and his
own conscience as to what is in the best interests of the company. Moreover, it is undisputed that apart
from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as regards
which he cannot from any aspect be deemed to be beholden to the PCGG, his ownership of these
shares being precisely what he invokes as the source of his authority to bring the derivative suit.
4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no power to vote
sequestered shares of stock as an act of dominion but only in pursuance to its power of administration.
The inference is that the PCGGs act of voting the stock to elect de los Angeles to the SMC Board of
Directors was unauthorized and void; hence, the latter could not bring suit in the corporations behalf.
The argument is strained and obviously of no merit. As already more than
_____________
34 Evangelista v. Santos, 86 Phil. 387.

464
464
plainly indicated, it was not necessary for de los Angeles to be a director in order to bring a derivative
action; all he had to be was a stockholder, and that he wasowning in his own right 20 shares of stock,
a fact not disputed by the respondents.
Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered stock
may not under any circumstances be voted by the PCGG to elect a director in the company in which such
stock is held. On the contrary, that it held such act permissible is evident from the context of its
reference to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, pending the
outcome of proceedings to determine the ownership of x x sequestered shares of stock, to vote such
shares x x at all stockholders meetings called for the election of directors x x, the only caveat being
that the stock is not to be voted simply because the power to do so exists, whether it be to oust and
replace directors or to effect substantial changes in corporate policy, programs or practice, but only for
demonstrably weighty and defensible grounds or when essential to prevent disappearance or wastage
of corporate property.
The issues raised here do not peremptorily call for a determination of whether or not in voting
petitioner de los Angeles to the San Miguel Board, the PCGG kept within the parameters announced in
Baseco; and absent any showing to the contrary, consistently with the presumption that official duty is
regularly performed, it must be assumed to have done so.
WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA-G.R. SP No.
12857setting aside the order of September 4, 1987 issued in SEC Case No. 3153 and dismissing said
caseis REVERSED AND SET ASIDE. The further disposition in the appealed decision for the issuance of a
writ of preliminary injunction upon the filing and approval of a bond of P500,000.00 by respondent
Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and any writ of injunction issued
pursuant thereto is lifted. Costs against private respondents.
SO ORDERED.
Gancayco, Grio-Aquino and Medialdea, JJ., concur.
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465
Suzara vs. Benipayo
Cruz, J., no part. Related to one of the counsel.
Petition granted; decision reversed and set aside.
Notes.Intracorporate controversy within the jurisdiction of the Securities and Exchange Commission.
(Rivera vs. Florendo, 144 SCRA 643.)
An intracorporate controversy, has been defined as one which arises between a stockholder and the
corporation. There is no distinction, qualification, nor any exemption, whatsoever. (Rivera vs. Florendo,
144 SCRA 643.)
San Miguel Corporation vs. Kahn, 176 SCRA 447, G.R. No. 85339 August 11, 1989
No. L-20395. May 13, 1985.*
ELTON W. CHASE, as minority Stockholder and on behalf of other Stockholders similarly situated and for
the benefit of AMERICAN MACHINERY AND PARTS MANUFACTURING, INC., plaintiff-appellant, vs. DR.
VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR., JULIO B. FRANCIA and DOLORES A.
BUENCAMINO, respondents.
Evidence; Appeal; Trial court findings, are not to be disturbed absent compelling reasons.In this
jurisdiction, it is a fundamental and settled rule that conclusions and findings of fact by the trial court
are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons
because the trial court is in a better position to examine real evidence, as well as to observe the
demeanor of the witnesses while testifying in the case. We have reviewed the evidence on record
thoroughly and We are satisfied that the lover court has not overlooked factors of substance and value
which if considered, might affect the result of the case.
Same; Corporation Law; Estoppel; Fact that a corporate director filed suit in California, U.S.A. against an
officer of a local corporation in his personal capacity does not constitute an estoppel in a derivative
minority stockholders suit filed by the former against another officer of the corporation in Philippine
courts. Commission of fraud on the corporation by Dr. Buencamino is supported by evidence.The
Court having seen with its own eyes the evidence proving the fraud, can not find it easy to refuse relief
unto Chase because of the failure of his auditor to discover the anomalies; or because of the fact that he
had filed a suit against Cranker in California and failed to mention Dr. Buencamino there as a guilty
party, for this would only weaken his evidence but would not be enough to put him in estoppel for as
Chase correctly says, it did not mislead Dr. Buencamino to adopt a course of action to the latters
prejudice; and as well does the Court feel bound not to bar the case of Chase by reason of his letter Exh.
10 wherein he blamed Cranker not Dr. Buencamino tor his predicament, for the same reason; the Court
of course must grant that there was inconsistency in the position here; for there in California and in the
letter Exh. 10, he proceeded on the theory that the transaction an his plant was between him and
Cranker for
_______________
* SECOND DIVISION.
366
366
Chase vs. Buencamino, Sr.
$250,000.00 while here his theory is that it was a deal between him, Cranker and Dr. Buencamino
wherein these two would pay him $100,000.00 and they three would form Amparts with 1/3 of the
shares being given to him fully paid up as part of the purchase price; but the Court while it must admit
that this has weakened the case for Chase, must also admit that they have not altogether destroyed that
since in the first place, the inconsistency in theory adopted in the California Court from that adopted
here as an obstacle to the present action is as the Court takes it, obviated by the very evidence of Dr.
Buencamino since because the theory of California was that Chase was entitled to only $250,000.00, and
nothing more and what would if true, not grant unto Chase any personality to file this derivative suit as
an Amparts stockholder, but the evidence of defendants proves very clearly that right from the start,
Chase was by them recognized as a stockholder and initial incorporator with 600 paid up shares
representing a 1/3 interest in Amparts, and that would be enough for Chase to have the correct
personality to institute this derivative suit; the second place, it also appears apparently undenied that
Chase did not win in California so that he did not recover the $150,000.00 that he had prayed for there
against Overseas, which if he had would really in the mind of the Court have put him in estoppel to
intervene in any manner as incorporator or stockholder of Amparts; and in the third place and most
important it should not be forgotten that Chase has filed the present case not for his personal benefit,
but for the benefit of Amparts, so that to the Court the argument of estoppel as against him would
appear to be out of place; the estoppel to be valid as a defense must be an estoppel against Amparts
itself; the long and short of it is that the Court is impelled and constrained to discard all the other
defenses set up by Dr. Buencamino on the principal complaint; the result of all these would be to sustain
so far, the position of Chase that Dr. Buencamino must account for the P570,000,00 used to pay the
second series of payment on the subscription, the P330,000.00 used in paying the 1st series on the
subscription, plus another sum of P245,000.00 entered as loan on his favor and against Amparts, for the
sum of P434,000,00 earned in the blackmarketing of the excess of $140,000.00 dollars on the
forwarding costs and promotional expenses, for the sum of P391,200.00 earned in the blackmarketing of
the excess of $117,000.00 in the transaction with Bertoni and Cotti, and all these would reach a total of
P1,970,200.00; and as the appropriation of the profits for himself was a quasi-delict, the liability
therefore assuming that it had been done with the cooperation of Cranker would have to be solidary,
2194 New Civil Code, because it was a quasi-delict; but the next question is whether these findings must
justify the remedy of change of management and
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dissolution; before going to this, the Court seeing that this is a question interrelated to the
counterclaims, will proceed to examine them.
Same; Mr. Chase is guilty on two counts on the counterclaims.The result of the foregoing will be that
the Court must find it proved on the counterclaims, that Chase had helped a competitor contrary to his
position of trust as director of Amparts, and that Chase had also spread rumors against Amparts, and its
management; for these acts, the Court will impose some damages which in the absence of better proof
the Court will fix at five hundred (P500.00) pesos; We go to the most important point of debate, namely,
the final remedy that the Court must now concede. It will above be noted that while the Court found
Chase guilty on two counts, on the counterclaims the guilt referred to acts performed during the
litigation; they do not show that Chase had come to Court already guilty; as the Court has found, when
he came to Court on 20 August, 1960, he was an innocent party and Amparts was the victim of fraud.
Corporation Law; Removal of a majority stockholder from management or the dissolution of the
corporation is a drastic measure.The removal of a stockholder (in this case a majority stockholder)
from the management of the corporation and/or the dissolution of a corporation in a suit filed by a
minority stockholder is a drastic measure. It should be resorted to only when the necessity is clear which
is not the situation in the case at bar.
AQUINO, J., concurring:
Corporation Law; As found by the trial court, it would not be proper to oust a majority stockholder from
the management of the corporation.The trial court held that Amparts cannot be benefitted by its
dissolution and that as Buencamino and his group own 2/3 of Amparts, it would not be proper to oust
him as manager of Amparts. The most equitable solution would be to require him to pay his monetary
liability to Amparts.
Appeal; Both appeals should not be sustained.I concur in Justice Cuevas conclusion that Judge
Gatmaitans decision is supported by the law and the evidence. The appeals should not be sustained.
368
368
APPEAL from the decision of the Court of First Instance of Manila.

N.J. Quisumbing & Associates for plaintiff-appellant.
Belo, Gozon & Associates for private respondents.
CUEVAS, J.:
This is a joint appeal interposed by both plaintiffs and defendants from the decision of the then Court of
First Instance of Manila in its Civil Case No. 49346, the dispositive portion of which reads
IN VIEW WHEREOF, on the complaint, Dr. Buencamino is condemned to pay Amparts the sum of
P1,970,200.00 with legal interest from the date of the filing of the complaint; he is also prohibited from
collecting any interest on the sum of P300,000 paid by him on the 15th July, 1955 on the initial
subscription, and such interest as has already been paid to him is ordered refunded with legal interest
from the date of the filing of the complaint; the lease on his Apartment is declared to terminate and be
terminated after 1 year from the date this decision shall have become final; on the counterclaims, Elton
Chase is condemned to pay Amparts the sum of P500.00 with legal interest from the date of the filing of
the counterclaim; the other charges and countercharges are dismissed; no more pronouncement as to
costs. SO ORDERED.
Manila, 3 May, 1962.
On August 20, 1960, Elton Chase in his capacity as director and minority stockholder of American
Machinery and Parts Manufacturing, Inc. (AMPARTS) and in behalf of the other stockholders of said
corporation similarly situated and for the benefit of Amparts filed Civil Case No. 49346, before the then
Court of First Instance of Manila, Branch XIV against
a) Dr. Victor Buencamino, Sr. in his capacity as Director, President and General Manager of Amparts;
b) Victor Buencamino, Jr., in his capacity as Director, Treasurer and Liaison Officer;
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369
c) Julio B. Francia in his capacity as Director and Assistant General Manager;
d) Dolores A. Buencamino in her capacity as Director; and
e) Spouses William E. Cranker and Florence Cranker alias Florence Barker who together hold 1/3 of the
entire subscribed and outstanding shares of stocks of Amparts.
The complaint seeks
a) the removal of Dr. Buencamino, Sr., Victor Buencamino, Jr. and Julio B. Francia from the offices held
by them;
b) to enjoin defendants from participating in the management, operation and control of Amparts;
c) if necessary, order a dissolution and liquidation of Amparts;
d) the appointment of a receiver pendente lite in order to prevent the continuance and aggravation of
the violations of defendants and to preserve and protect the rights and interests of plaintiff-appellant
and other stockholders similarly situated; and
e) for general relief.1
Defendants William E. Cranker and Florence Cranker even at the time the complaint was filed no longer
resided in the Philippines and had no assets against which a judgment may be executed because as
alleged by the plaintiffs, the said defendants had already disposed of their interests in favor of
defendants Buencaminos. For this reason, plaintiffs motion to serve summons upon them
extraterritorially was denied by the lower court.2
The remaining defendants, Dr. Victor Buencamino, Sr., Victor Buencamino, Jr., Mrs. Dolores A.
Buencamino and Julio B. Francia filed their Opposition to Preliminary Receivership3
_______________
1 Joint Record on Appeal, Vol 1 pages 19-116.

2 Joint Record of Appeal, Vol. 1 p. 291.
3 Joint Record on Appeal, Vol. 1 p. 117.
370
370
and subsequently, on September 6, 1960, their Answer with Counterclaim.4
On June 10, 1961, the lower court issued an Order denying plaintiffs application for receivership but
ordering defendants to file a bond in the amount of P100,000.00 to answer for the damages that
plaintiffs might suffer by the non-appointment of a receiver.5
After trial on the merits, the lower court (then presided by Judge Magno Gatmaitan) rendered judgment
dated May 3, 1962, finding defendant Dr. Buencamino guilty of breach of a legal obligation.
The dispositive portion of the said decision had earlier been quoted herein.
From the aforesaid decision and from the Orders denying defendants Motion for Reconsideration, both
plaintiffs and defendants appealed to this Court, plaintiffs contending that the lower court erred
I
In not ordering the ouster of defendants from the management of Amparts notwithstanding its finding
that defendant Buencamino was guilty of breach of a legal obligation and its sentence that he pay
back his frauds;
II
In not awarding at least the dissolution of Amparts and the consequent return of the investment and
participation of plaintiff-appellant in said business notwithstanding its finding of fraud against
defendants;
III
In condemning defendants Buencamino to pay back Amparts only the proceeds he received from the
black-market sales of Amparts dollar; and in not including the amount of excess remittances of dollars
Amparts has fraudulently caused to make plus interests on
_______________
4 Joint Record on Appeal, Vol. 1, pages 139-217.

5 Joint Record on Appeal, Vol. 1, p. 274.
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371
loans and other bank charges Amparts paid to make those excess remittances and in failing to order said
defendant to render accounting of his management;
IV
In not ordering the rescission and resolution of the resale of the Pasig land by defendants to themselves;
V
In not requiring defendants to account for the illegal overprice of the Forkner Hanger parts and for the
other frauds committed by them; and
VI
In finding plaintiff-appellant Chase guilty of the two counts on the counterclaims and in condemning him
to pay P500.00 as damages.
On the other hand, defendants contend that the lower court erred
I
In not holding that plaintiff was a party to and/or consented to the alleged fraudulent acts committed by
Cranker and Buencamino;
II
In not holding that defendants and particularly defendant Dr. Buencamino were unaware of the private
arrangements between plaintiff and Cranker as to the sale of plaintiffs plant;
III
In not holding that plaintiff is in estoppel;

IV
In ruling that plaintiff had proven the alleged fraudulent acts and in requiring Dr. Buencamino to pay to
the corporation the al-
372
372
leged excess price;
V
In not holding that it was plaintiff who defrauded defendant Dr. Buencamino;
VI
In voiding the assignment of credit;

VII
In holding that Dr. Buencamino is guilty of breach of trust;

VIII
In absolving plaintiff from responsibility for alleged sale of dollars and rendering judgment against Dr.
Buencamino for the alleged proceeds of dollar sales;
IX
In holding Dr. Buencamino liable for the entire amount including the share of Cranker, assuming
arguendo, that Cranker and Dr. Buencamino profited in the alleged sale of dollars;
X
In charging Dr. Buencamino and Cranker twice for the same amounts assuming, arguendo, that they
profited in the alleged sale of dollars;
XI
In requiring Cranker and Dr. Buencamino to pay for the alleged profits on the Bertoni and Cotti deal;
XII
In holding that the term of lease of the building constructed by Dr. Buencamino to be only for a term of
seven years;
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373
XIII
In ruling that Amparts was charged with interest for payment of stock;
XIV
In not rendering judgment against plaintiff and in favor of the defendants on the first cause of action of
the counterclaim;
XV
In not rendering judgment against plaintiff in favor of Amparts on the second cause of action of the
counterclaim;
XVI
In requiring plaintiff to pay only P500.00 on the third cause of action of the counterclaim;
XVII
In not rendering judgment against plaintiff in favor of defendants on the fourth cause of action of the
counterclaim; and
XVIII
In not rendering judgment against plaintiff in favor of the defendants on the fifth cause of action of the
counterclaim.
all of which assigned errors boil down to the more important issues of
a) Were the defendants, more particularly defendant Dr. Buencamino, guilty of fraud and/or breach of
a legal obligation as would entitle plaintiff not only to a money judgment but also to the dissolution of
Amparts and/or the removal of defendants Buencaminos from the management of the said corporation;
and
b) Was plaintiff Chase himself guilty of fraud as would entitle defendants to recover on their
counterclaims.
The evidence on record discloses that defendant Dr. Buencamino, Sr., a Filipino and William Cranker, an
American,
374
374
even prior to the year 1954 were already business associates. They owned two firms namely, the
Philippine American Machinery and Equipment Corporation (PAMEC) which was organized in 1947 and
the BUCRA which means Buencamino and Cranker.6
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.7
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
Chases 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 thatElton Chase was to be paid One
Hundred Thousand Dollars ($100,000.00) and he would also be given a one-third 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 techni-
_______________
6 Pages 6-7, TSN, November 3, 1960.

7 Pages 1042, TSN, October 30, 1960.
8 Pages 13-19, TSN, Ibid.
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375
cians and finally, he has to be the production manager of Amparts.
Amparts was formally organized as a corporation on July 5, 1955 with an authorized capital stock of
P4,000,000.00 divided into 4,000 shares with a par value of P1,000.00 each. The original subscription
was P1,800,000.00. Dr. Buencamino, Cranker & Chase subscribed P600,000.00 each. But since five were
necessary to organize a corporation, Buencamino and Cranker took in their respective wives.
In the meanwhile, Chase had already 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, dated March 28, 19579 which was accepted by both Dr. Buencamino and Cranker thru a letter
dated July 8, 1957.10 On April 21, 1958, Chase thru his lawyer addressed a letter of demand to both Dr.
Buencamino and Cranker11 which reads
April 21, 1958
Dr. Victor Buencamino
Mr. William E. Cranker
American Machinery & Parts
Manufacturing Co., Inc.
1501 A. Mabini, Manila
Gentlemen:
Mr. Elton W. Chase has retained our services to enforce his claim against you for breach of contract,
unpaid salaries and expenses, and damages amounting to approximately P500,000.00 at the official rate
of exchange between pesos and U.S. dollars.
_______________
9 Exhibit 15.
10 Exhibit 16.
11 Exhibit 18.
376
376
Inasmuch as you are aware of the claims of Mr. Chase, We shall not enter into details in this letter. Our
purpose in writing to you is to inform you that unless Mr. Chases claims are satisfied within five days
from receipt of this letter, we shall have no recourse but to file suit against you.
If you would care to discuss this matter with me, I shall be free on Friday, April 25, 1958, from 3:00 P.M.
onwards, and shall be glad to meet with you at any place convenient to you.
Very truly yours,
DIOKNO & SISON
By
(Sgd) JOSE W. DIOKNO
This was answered, by Dr. Buencamino the next day in the following letter
April 22, 1958
Messrs. Diokno & Sison
Regina Bldg., Room 332-334
Escolta, Manila
Attention: Mr. Jose W. Diokno
Re: Claim of Elton W. Chase
Gentlemen:
Your letter of April 21, 1958, wherein you make reference to a claim of Mr. Chase for breach of
contract, unpaid salaries and expenses, and damages amounting to approximately P500,000.00, was,
and continues to foe a surprise to us not only because we have never heard of his claim but more so
because you go so far as to assume that we are aware of said claims. Until we receive a more definite
statement from you or from Mr. Chase himself, we cannot enter in into any discussion.
We might add that any claim that Mr. Chase may have should be directed to the American Machinery &
Parts Manufacturing, Inc. of which he himself is a one third owner. Your letter under reply, which was
addressed to Messrs. V. Buencamino, W.E. Cranker and American Machinery & Parts Manufacturing,
Inc. is obviously
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377
misdirected.
Very truly yours,
AMERICAN MACHINERY & PARTS
MANUFACTURING, INC.
By: V. BUENCAMINO
President
On May 23, 1958, Chase filed an action against Cranker with the Superior Court of Los Angeles12 seeking
to recover the sum of $150,000.00 as alleged balance of the purchase price of his plant. This case
however died a natural death because Cranker left and was never reached by process from the
California Court. Then, sometime in August 1958, Cranker sold out all his interest in Amparts to Dr.
Buencamino.13
Finally, on August 20, 1960, Chase filed this case before the Court of First Instance of Manila, alleging
various acts of fraud which he claimed had been committed by both Dr. Buencamino and Cranker,
namely,
1. Dr. Buencamino got stock in part without paying for it and in part with proceeds of the sale of
Amparts dollars in the blackmarket;
2. Dr. Buencamino purchased for Amparts certain materials from Bertoni and Cotti of Italy and inflated
the invoice price from $122,250.00 to $387,933.36, sending the excess dollars abroad and selling them
at the blackmarket for his private gain;
3. Dr. Buencamino purchased land from the province of Rizal for Amparts and then resold part of it to
himself for private gain;
4. Dr. Buencamino and Cranker in August 1955, bought a surplus building in Guam for $60,000.00 C.I.F.
and in the same year sold it to Amparts for $187,500.00 for their private gain;
_______________
12 Exhibit 11.
13 Paragraph 2, Complaint admitted in Paragraph 2. Answer.
378
378
5. Dr. Buencamino permitted the use of third parties for his private gain, of the Amparts dock at the
Pasig River;
6. Dr. Buencamino collected and collects rentals for apartments by him constructed even though no
longer used by Amparts technicians;
7. Dr. Buencamino permitted the sale abroad of Amparts manufactured tractor parts at depressed
prices;
8. Dr. Buencamino collected a mark up interest on moneys borrowed by him from the banks and by him
advanced unto Amparts;
9. The Board Resolutions of 13 May 1960 which also increased compensation of Buencaminos relatives
and gave him an increased mark up on his evidences and authorized his and his wifes trip abroad and
also authorized the conversion of his credit for unpaid interest into Amparts stocks were all void.
On the other hand, defendants in their Answer set up by way of counterclaim that
1. Chase sold machineries unto Amparts thru Overseas part of which consisting of 24 pieces worth of
P264,000.00 were junk;
2. Chase maliciously spread false rumors against Amparts and induced its employees to leave; and is
engaged in competition with Amparts;
3. Chase spread false rumors against the integrity of defendants to embarass and humiliate them and
injure their reputation;
4. Chase took into the Philippines thru the shipment of his factory, his own personal effects, machineries
and materials the freight expenses for which reach P6,676.60; and
5. Chase by the unfounded action should pay defendants their attorneys fees;
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379
for all of which counterclaims, defendants claim a monetaryjudgment against Chase.
After a careful and painstaking review of the voluminous evidences on record, We find that the lower
court correctly found that Buencamino and Cranker committed the following frauds and profited from
the same
I-A). Through overpricing, Amparts remitted to U.S. $312,500.00 for Chases factory. Only $80,000.00
was paid Chase for his machineries at this time. The excess dollars were blackmarketed and the peso
proceeds thereof went to pay the stocks subscription in Amparts of Buen camino and his wife and
Cranker and his wife. (Analysis and Synthesis of Evidence, par. 1-A, pp. 1-10) That these profits from
overpricing and remittance of dollars went to Buencamino and Cranker was testified to by no less than
Buencaminos long time accountant Maximo Peas, corroborated by the bank accounts which he kept
for Buencamino and Cranker, Exhibit UU, the duplicates of the letters of Cranker to the Bank of America
containing Buencaminos admitted initials, Exhibit L M and N, the Bank of Americas remittance
receipts and order Exhibit P, and Amparts own books, namely, journal entries Nos. 16, 21 and 26,
Exhibit FFFpp.2-3.
I-B). Through overpricing, Amparts remitted to U.S. $207,000.00 for forwarding costs, technical services
and promotional expenses. But forwarding costs were already paid from the $312,500.00 remittances
for plant purchase price and Chase was never paid his salary for one year nor his promotional expenses.
Of the $207,000.00 remittance, only $15,000.00 was expended to pay Chase the balance due in the
purchase of his factory totalling $100,000.00. The excess remittances of dollars were blackmarketed and
the peso proceeds thereof totalling P434,000.00 were deposited in Buencaminos bank account at the
Philippine Trust Company. (Analysis and Synthesis of Evidence, par. 1-B, pp. 10-12).
I-C). Through overpricing, Amparts remitted to U.S.
380
380
$387,933.66 for the tractor parts and track press imported from Bertoni and Cotti. Only $212,250.00
was paid to Bertoni and Cotti of the excess remittance, $117,000.00 were blackmarketed realizing
P391,200.00 which were deposited in the personal bank account of Buencamino at the Philippine Trust
Company and Peoples Bank. (Analysis and Synthesis of Evidence, par. 1-C, pp. 12-15).
Again, this fraud committed by Buencamino and Cranker was testified to by their own accountant
Maximo Peas and he testified from the very book of account he kept for them, Exhibit UU. They were
corroborated by Bertoni and Cottis letters Exhibit FF and HH, the debit notes of First National Bank
of Portland, Exhibits NN and NN-1 and Buencaminos initial appearing in Bertoni and Cottis letter,
Exhibit ff plus Buencaminos admission that the address to which the Bertoni and Cottis letter was
sent, i.e., P.O. Box 2493, Manila Filipinas, as the address of Overseas Ltd., was the postal box of
Amparts. (p. 72, tsn, November 18, 1960)
II. The fraudulent issue of P1,200,000.00 fully paid-up Amparts shares, without payment obviously
resulted to the profits of only Buencamino and Cranker and their families in whose favor they were
issued. (Analysis and Synthesis of Evidence, par. II, pp. 18-35)Aside from Amparts borrowing of money
for the initial payment on the subscription of Buencamino and Cranker and their wives and the
withdrawal thereof, the charging of interest thereon, the application of the proceeds of sales at
blackmarket of Amparts dollars for the payment of their subscription totalling P570,000.00 there were
the acknowledgments obtained from Amparts of an indebtedness to Overseas Investment Co., Ltd. of
$287,500.00 for the purchase price of Chases factory, Amparts acknowledgments of an assumption of
such indebtedness by Buencamino and Cranker Company to Overseas Investment Company, Ltd. and to
pay Buencamino and Cranker Company its peso equivalent or
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VOL. 136, MAY 13, 1985

381
P575,000.00 through the issue of fully paid-up P330,000.00 worth of shares to Buencamino and Cranker
and their wives and crediting Buencaminos account with P245,000.00.
In this jurisdiction, it is a fundamental and settled rule that conclusions and findings of fact by the trial
court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent
reasons because the trial court is in a better position to examine real evidence, as well as to observe the
demeanor of the witnesses while testifying in the case.14
We have reviewed the evidence on record thoroughly and We are satisfied that the lower court has not
overlooked factors of substance and value which if considered, might affect the result of the case. We
therefore uphold the following findings and conclusions of the lower court
We go first to the Bertoni and Cotti transaction; while the defense that Dr. Buencamino only saw Exh.
FF the letter of Bertoni and Cotti and did not anymore pay attention to it might be plausible, the Court
considering his long relationship with Cranker, for he and Cranker had their own BUCRA and PAMEC
and the fact that the testimony of Maximo Peas is corroborated by the padded invoice of the
transaction, is impelled to conclude that he was a party to it, probably not at first but surely afterwards,
he willingly benefited therefrom; that was a fraud upon Amparts and on the broad principle of agency
and trust, 1455, 1891, New Civil Code, he should surrender thereon, his gains of P391,200.00; and on
the same reasoning as this, the Court must also hold that with respect to the blackmarketing of the
excess dollars on the forwarding and promotion costs in the amount of $140,000.00, he once more
should be made to account for P434,000.00; unless the Court as already stated a few pages back, should
sustain his defenses as to all these charges, namely, a) That they took place when he was not yet the
manager; b) That he is estopped by reason of his letter Exh. 10, his complaint and affidavit Exhs. 11 and
12 and the actuations of his own auditor Hendershott
_______________
14 People vs. Grefiel, 125 SCRA 102; People vs. Fernandez, 124 SCRA 248; Olango vs. Court of First
Instance of Misamis Oriental, 121 SCRA 338.
382
382
as revealed in the Board Meeting of 27 November 1956 Exh. 4. Now as to these, a) That he was not the
manager but Cranker to the Court is not very important because as the Court sees it, since the inception
of the venture and even when it had become a reality, he was one of the guiding hands if not the
principal guide; he was President and Director; and he knowingly profited from the transactions which
should go to Amparts otherwise; once more the Court applying 1455 and 1891 of the New Civil Code
must hold that in these transactions where he had thus profited, he was guilty of breach of a legal
obligation; b) The Court having seen with its own eyes the evidence proving the fraud, can not find it
easy to refuse relief unto Chase because of the failure of his auditor to discover the anomalies; or
because of the fact that he bad filed a suit against Cranker in California and failed to mention Dr.
Buencamino there as a guilty party, for this would only weaken his evidence but would not be enough to
put him in estoppel for as Chase correctly says, it did not mislead Dr. Buencamino to adopt a course of
action to the latters prejudice; and as well does the Court feel bound not to bar the case of Chase by
reason of his letter Exh. 10 wherein he blamed Cranker not Dr. Buencamino for his predicament, for the
same reason; the Court of course must-grant that there was inconsistency in the position here; for there
in California and in the letter Exh, 10, he proceeded on the theory that the transaction on his plant was
between him and Cranker for $250,000.00 while here his theory is that it was a deal between him,
Cranker and Dr. Buencamino wherein these two would pay him $100,000.00 and they three would form
Amparts with 1/3 of the shares being given to him fully paid up as part of the purchase price; but the
Court while it must admit that this has weakened the case for Chase, must also admit that they have not
altogether destroyed that since in the first place, the inconsistency in theory adopted in the California
Court from that adopted here as an obstacle to the present action is as the Court takes it, obviated by
the very evidence of Dr. Buencamino since because the theory of California was that Chase was entitled
to only $250,000.00, and nothing more and what would if true, not grant unto Chase any personality to
file this derivative suit as an Amparts stockholder, but the evidence of defendants proves very clearly
that right from the start, Chase was by them recognized as a stockholder and initial incorporator with
600 paid up shares representing a 1/3 interest in Amparts, and that would be enough for Chase to have
the correct personality to institute this derivative suit; the second place, it also appears apparently
undenied that Chase did not win in California so that he did not recover the $150,000.00 that he had
prayed for there against Overseas, which if he had would really in the mind of the Court have put him in
estoppel to intervene in
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383
any manner as incorporator or stockholder of Amparts; and in the third place and most important it
should not be forgotten that Chase has filed the present case not for his personal benefit, but for the
benefit of Amparts, so that to the Court the argument of estoppel as against him would appear to be out
of place; the estoppel to be valid as a defense must be an estoppel against Amparts itself; the long and
short of it is that the Court is impelled and constrained to discard all the other defenses set up by Dr.
Buencamino on the principal complaint; the result of all these would be to sustain so far, the position of
Chase that Dr. Buencamino must account for the P570.000.00 used to pay the second series of payment
on the subscription, the P330,000.00 used in paying the 1st series on the subscription, plus another sum
of P245,000.00 entered as loan on his favor and against Amparts, for the sum of P434,000.00 earned in
the blackmarketing of the excess of $140,000.00 dollars on the forwarding costs and promotional
expenses, for the sum of P391,200.00 earned in the blackmarketing of the excess of $117,000.00 in the
transaction with Bertoni and Cotti, and all these would reach a total of P1,970,200.00; and as the
appropriation of the profits for himself was a quasi-delict, the liability therefore assuming that it had
been done with the cooperation of Cranker would have to be solidary, 2194 New Civil Code, because it
was a quasi-delict; but the next question is whether these findings must justify the remedy of change of
management and dissolution; before going to this, the Court seeing that this is a question interrelated to
the counterclaims, will proceed to examine them.
xxx xxx xxx
the result of the foregoing will be that the Court must find it proved on the counterclaims, that Chase
had helped a competitor contrary to his position of trust as director of Amparts, and that Chase had also
spread rumors against Amparts, and its management; for these acts, the Court will impose some
damages which in the absence of better proof the Court will fix at five hudnred (P500.00) pesos; we go
to the most important point of debate, namely, the final remedy that the Court must now concede.
It will above be noted that while the Court found Chase guilty on two counts, on the counterclaims the
guilt referred to acts performed during the litigation; they do not show that Chase had come to Court
already guilty; as the Court has found, when he came to Court on 20 August, 1960, he was an innocent
party, and Amparts was the victim of fraud; on the other hand, while this really is true, the Court can not
see how under the present circumstances, the correct equitable relief that the Court should grant
should be to change
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384
over the management from Buencamino unto Chase; especially considering that the Court has also seen
that Chase pendente lite had performed an act that has virtually helped an Amparts competitor; neither
can 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.
The record further shows that there were other precautionary measures adopted by lower court for the
protection of Chases rights and interest in Amparts.15 Thus, on May 12, 1962, the following Order was
issued
After hearing the parties and with a view to protect the interests of both and to prevent a possibility of
abuse, the Court resolves that until further orders, the hereinafter while the case is pending:
(1) Mr. Chase shall have free access to AMPARTS and its record personally and/or through
representative duly authorized;
(2) Decisions of Dr. Buencamino and/or management of AMPARTS shall be made known to Chase who
shall have the right to object and if so, the matter shall be notified to the Court which shall resolve the
difficulties; in the interim, pending the objection, the decision shall not be enforced or made operative;
With this resolution, the Court disposes for the present of the issue of receivership.
_______________
15 Chase vs. CFI-Manila, 18 SCRA 602.

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Supplementing the above-quoted Order, the lower court, then already presided by the Honorable Jesus
de Veyra, issued the following Order of August 27, 1962:
As for the appointment of a receiver, Judge Gatmaitan decided on the temporary measure of giving
plaintiff (petitioner herein) a veto right, appealable to this Court, on all decisions of management.
Considering that up to the present, the Buencaminos own 2/3 of the stock corporation, the solution is
equitable, and must be allowed to continue subject to the condition that once a decision of
management is made known to plaintiff, he must make known his objection thereto to the Court within
five (5) days from receipt of said decision, otherwise he shall be deemed to have waived any objection
to the decision.
The removal of a stockholder (in this case a majority stockholder) from the management of the
corporation and/or the dissolution of a corporation in a suit filed by a minority stockholder is a drastic
measure. It should be resorted to only when the necessity is clear which is not the situation in the case
at bar.
WHEREFORE, finding the appealed decision to be in accordance with the law and the evidence, the same
is hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Makasiar, Abad Santos, and Escolin, JJ., concur.
Aquino, J., see concurring opinion.
Concepcion, Jr., J., on leave.
Decision affirmed.
Chase vs. Buencamino, Sr., 136 SCRA 365, No. L-20395 May 13, 1985
No. L-16982. September 30, 1961.
CATALINA R. REYES, petitioner, vs. HON.BIENVENIDO A. TAN, as Judge of the Court of First Instance of
Manila, Branch XIII and FRANCISCA R. JUSTINIANI,respondents.
Corporations; Appointment of a receiver; When derivative suit may be brought.Where corporate
directors are guilty of a breach of trustnot of mere error of judgment or abuse of discretionand
intra-corporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and
other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted
directly upon the corporation and indirectly upon the stockholders (Angeles vs. Santos, 64 Phil. 697).
Same; Failure of stockholder to take remedial steps against the corporation within two years from
commission of fraud not fatal to suit.Although the stockholder did not take steps to remedy the illegal
importation by the corporation for a period of two years, that act does not bar him from bringing an
action for the appointment of a receiver, because during that period of time he 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 had elapsed could he conclude that the directors were
remiss in their duty to protect the corporation property and business.
Same; When expedient is necessary.Where the directors of the corporation permitted the fraudulent
transaction to go unpunished by allowing the importation of finished textile instead of raw cotton for
the textile mill, and nothing appears to have been done to remove the erring purchasing managers, the
appointment of a receiver may have been thought of by the court so that the dollar allocation for raw
material may be reviewed and the textile mill placed on an operating basis, because it is possible that if
a receiver in which the Central Bank may have confidence is appointed, the dollar allocation for raw
material may be restored.
PETITION for review by certiorari of an order of the Court of First Instance of Manila. Tan, J.
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199
Reyes vs. Tan
Jose W. Diokno for petitioner.
Norberto J. Quisumbing for respondents.
LABRADOR, J.:
This is a petition for certiorari to review and set aside an order of the Court of First Instance of Manila,
Hon. Bienvenido A. Tan, presiding, in Civil Case No. 42375, entitled Francisca R. Justiniani vs. Wadhumal
Dalamal, et al., appointing a receiver of the corporation Roxas-Kalaw Textile Mills, Inc. In said action,
plaintiff Justiniani asks the court to order the directors of the corporation, jointly and severally, to repair
the damage caused to the corporation, of which all the plaintiff and defendants are members. The
action was filed about January of 1960 and the order for the appointment of the receiver issued on
February 15, 1960, while the designation of the receiver was made in an order of the court dated April
30, 1960.
In the complaint in said Civil Case No. 42375, it is alleged that 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 plaintiff holds both Class A and
Class B shares and the number and value thereof are as follows: Class A50 shares, Class B1,250
shares; that on May 8, 1957, the Board of Directors approved a resolution designating one Dayaram as
co-manager with the specific understanding that he was to act as defendant Wadhumal Dalamals
designee, Morris Wil on was likewise designated as co-manager with responsibility for the management
of the factory only, that 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; that
several purchases aggre-
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200
Reyes vs. Tan
gating $289,678.86 were made in New York for raw materials such as greige cloth, rayon and grey goods
for the textile mill and shipped to the Philippines, which shipment were found out to consist not of raw
materials but already finished products, such as, West Point Khaki rayon suiting materials dyed in the
piece, finished rayon tafetta in cubes, cotton eyelets, etc., for which reasons the Central Bank of the
Philippines stopped all dollar allocations for raw materials for the corporation which necessarily led to
the paralization of the operation of the textile mill and its business; that the supplier of the aforesaid
finished goods was the United Commercial Company of New York in which defendant Dalamal had
interests and the letter of credit for said goods were guaranteed by the Indian Commercial Company
and the Indian Traders in which firms defendant Dalamal likewise held interests; that the resale of the
finished goods was the business of the Indian Commercial Company of Manila, which company could
not obtain dollar allocations for importations of finished goods under the Central Bank regulations; that
plaintiff and some members of the board of directors urged defendants to proceed against Dalamal,
exposing his offense to the Central Bank, and to initiate suit against Dalamal for his fraud against the
corporation; that defendants refused to proceed against Dalamal and instead continued to deal with the
Indian Commercial Company to the damage and prejudice of the corporation. The prayer asks for the
appointment of a receiver and a judgment marking defendants jointly and severally liable for the
damages.
After a denial of a motion to dismiss and the filing of an answer alleging that the complaint states no
cause of action, the motion for the appointment of a receiver was set for hearing and subsequently the
court entered the order for the appointment of a receiver. The court found and held:
The second ground of the defendants motion to dismiss and or deny the petition is the allegedly want
of a cause of action of the plaintiffs complaint. Philippine jurisprudence is complete with authorities
upholding the principle that this ground for dismissal must appear in the face of the complaint itself; and
that to determine the sufficiency of the cause of action,
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Reyes vs. Tan
only the facts alleged in the complaint and no other, should be considered; in fine, the test of sufficiency
of cause of action is whether or not, admitting the facts alleged in the complaint, the Court could render
a valid judgment upon the same in accordance with the prayer of the petition (e.g., Paminsan v.
Costales, 28 Phil. 587, 489). The complaint in the instant case abounds with arguments establishing and
supporting plaintiffs cause of action for and in behalf of the Roxas-Kalaw Textile Mills, Inc. against all
the defendants (See e.g. paragraphs 4, 5; 6 and 7 of the Complaint). Taking these paragraphs of the
complaint in context, it is clear that the plaintiff has sufficient averred facts constituting a cause or basis
for a derivative suit for injuries to the corporation, as by negligence, mismanagement or fraud of its
directors, are normally dealt with as wrong to the whole group of share holders in their corporate
capacity, to be redressed in a suit by or on behalf of the corporation.
Evident from the defendants motion to dismiss and/or to deny the petition for receivership is their
complete failure to come up with a valid and substantial defense against or denial of the complaints
allegations of mismanagement, if not the actual commission of ultra vires and illegal acts Invariably the
props of defendants motion consist of the unconvincing countercharges of the plaintiffs non-
observance of the technicalities of our procedural law and disregard of technical and evidently futile
intracorporate remedies to redress the violations charged against the defendants. It is clear that the
controlling majority did nothing for two years to protect the interests of corporation. (See pars. 5-7,
complaint.)
The defendants themselves having admitted in open court during the oral discussion of their motion to
dismiss and the plaintiffs motion for receivership that the majority stockholders will under any
condition entertain any suggestion of the minority shareholders, the appointment of an independent
third party in the management of the corporation becomes imperative for the survival of the company.
(Order dated Feb. 15, 1960).
On April 30, 1960, the court issued another order which reads as follows:
After this incident wherein it was clearly shown that the minority stockholders, represented by the
plaintiff, have no recourse whatsoever before the majority stockholders of the company, and after it has
been shown that the majority has violated the law by importing into the Philippines finished goods
instead of raw materials as stipulated in their license, and since these acts are prejudicial to the
company because it might result in the cancellation of their license, the Court is of the opinion and so
holds that the appointment of a receiver is absolutely necessary for the protection not only of the rights
of the minority but also those of the majority stockholders of the company.
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202
Reyes vs. Tan
In the first assignment of error, petitioner claims that respondent Justiniani neither alleged nor proved
the existence of an emergency requiring the immediate appointment of a receiver of the Roxas-Kalaw
Textile Mill, Inc.; that the alleged fraudulent transaction took place more than two years before the
application for receivership, and so was the refusal of the directors to sue or prosecute Dalamal. This
contention is not well founded. At the hearing of the petition for the appointment of a receiver held on
January 30, 1960, various records of shipments of finished textile goods on dollar allocations for raw
materials were exhibited. Publicity had also been given to the importations of textiles by the
corporation, in place of cotton raw materials. The record shows the list of the various documents
proving the purchase of letters of credit for textiles. These textiles were denied importation and had to
be re-exported. The fact of the importation of finished textiles on dollar allocations for raw materials in
violation of Central Bank regulations was, therefore, conclusively shown.
It is also not denied by petitioner that the allocation of dollars to the corporation for the importation of
raw materials was suspended. In the eyes of the court below, as well as in our own, the importation of
textiles instead of raw materials, as well as the failure of the Board of Directors to take action against
those directly responsible for the misuse of dollar allocations constitute fraud, or consent thereto on the
part of the directors. Therefore, a breach of trust was committed which justified the derivative suit by a
minority stockholder on behalf of the corporation.
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trustnot of
mere error of judgment or abuse of discretionand intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly
upon the stockholders. An illustration of a suit of this kind is found in the case of Pascual vs. Del Saz
Orozco (19 Phil. 82), decided by this Court as early as 1911. In that case, the Banco Espaol-Filipino
suffered heavy losses due to fraudulent connivance between a depositor
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203
Reyes vs. Tan
and an employee of the bank, which losses, it was contended, could have been avoided if the president
and directors had been more vigilant in the administration of the affairs of the bank. The stockholders
constituting the minority brought a suit in behalf of the bank against the directors to recover damages,
and this over the objection of the majority of the stockholders and the directors. This court held that the
suit could properly be maintained. (64 Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August 31,
1937] p. 697).
The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of
two years is also 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.
Counsel for petitioner claims that respondent Justiniani was treasurer of the corporation for sometime
and had control of funds and this notwithstanding, she had not taken the steps to remedy the situation.
In answer we state that 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.
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. It is possible that if a receiver in which the Central Bank may
have confidence is appointed, the dollar allocation for raw material may be restored. Claim is made that
if a receiver is appointed, the Philippine National Bank to which the corporation owes considerable sums
of money might be led to foreclose the mortgage. Precisely the appointment of a receiver in whom the
bank may have had confidence might rehabilitate the business and bring a re-
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204
Reyes vs. Tan
storation of the dollar allocation much needed for raw material and an improvement in the business and
assets of the corporation, thus insuring the collection of the banks loan.
Considering the above circumstances we are led to agree with the judge below that the appointment of
a receiver was not only expedient but also necessary to restore the faith and confidence of the Central
Bank authorities in the administration of the affairs of the corporation, thus ultimately leading to a
restoration of the dollar allocation so essential to the operation of the textile mills. The first assignment
of error is, therefore, overruled.
In the second assignment of error, petitioner claims that the management has been changed and the
new management has not been afforded a chance to show what it can do. This ground of the petition
was not mentioned or raised as a ground of defense or objection to the appointment of a receiver in the
court below. It is only raised for the first time before Us in the petition for certiorari. The principle has
long ago been enunciated by Us that an appellate court may not consider any ground of objection that
was not raised in the court below. (Tan Machan v. Trinidad, 3 Phil. 684; Ramiro v. Grao, 54 Phil. 744;
Vda. de Villaruel, et al. v. Manila Motor Co., Inc., et al., G.R. No. L-10394, Dec. 13, 1958; Collector of
Internal Revenue v. Estate of F. P. Buan, et al., G.R. Nos. L-11438-39, and L-11542-46, July 31, 1958;
S.V.S. Pictures, Inc., et al. v. The Court of Appeals, et al., G.R. No. L-7075, January 29, 1960; Elena Peralta
Vda. de Caina vs. Hon. Andres Reyes, et al., G.R. No. L-15792, May 30, 1960).
The supposed new management, alleged as a ground for the reversal of the order of the court below
appointing a receiver, is not in itself a ground of objection to the appointment of a receiver. The parties
found to be guilty of the fraud, as a cause of which receivership proceedings were instituted, were the
Board of Directors, which took no action to stop the anomalies being perpetrated by the management.
But it appears that the management must have acted directly under orders of the Board of Directors.
The appointment of a new management, there-
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205
Gordulan vs. Gordulan
fore, would not remedy the anomalous situation in which the corporation is found, because such
situation was not due to the management alone but principally because of direction of the Board of
Directors.
The second ground for the petition is, therefore, also without merit.
WHEREFORE, the court finds that the court below did not commit an abuse of discretion in appointing a
receiver for the corporation and the petition to set aside the order for the appointment of a receiver
should be, as it is hereby, dismissed. With costs against the petitioner.
Bengzon, C.J., Padilla, Reyes, J.B.L., Paredes and De Leon, JJ., concur.
Petition dismissed.
Note.As to cases which laid down the conditions precedent to the exercise of the shareholders right
to bring a derivative suit, see Everett v. Asia Banking Corp., 49 Phil. 512; Evangelista v. Santos, 86 Phil.
387; Republic v. Phil. Resources Dev. Corp., 102 Phil. 960, in rel. Pascual v. Orozco, supra.
Reyes vs. Tan, 3 SCRA 198, No. L-16982 September 30, 1961
No. L-40620. May 5, 1979.*
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE LA RAMA, EDUARDO DE LA RAMA, and the
HEIRS OF MERCEDES DE LA RAMA-BORROMEO, petitioners, 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, respondents.
Corporation Law; Remedial Law; Civil Procedure; Order denying motion to dismiss complaint is an
interlocutory order not subject of petition for certiorari.The questioned order denying the petitioners
motion to dismiss the complaint is merely interlocutory and cannot be the subject of a petition for
certiorari. The proper procedure to be followed in such a case is to continue with the trial of the case on
the merits and, if the decision is adverse, to reiterate the issue on appeal It would be a breach of orderly
procedure to allow a party to come before this Court every time an order is issued with which he does
not agree.
Compromise Agreement; No waiver of cause of action by parties by entering into compromise
agreement where there is express provi-
________________
* SECOND DIVISION.
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41
Gamboa vs. Victoriano
sion to the contrary.As found by the respondent judge, the petitioners have not waived their cause of
action against the petitioners by entering into a compromise agreement with the other defendants in
view of the express provision of the compromise agreement that the same shall not in any way
constitute or be considered a waiver or abandonment of any claim or cause of action against the other
defendants. There is also no estoppel because there is nothing in the agreement which could be
construed as an affirmative admission by the plaintiff of the validity of the resolution of the defendants
which is now sought to be judicially declared null and void. The foregoing circumstances and the fact
that no consideration was mentioned in the agreement for the transfer of rights to the said shares of
stock to the plaintiffs are sufficient to show that the agreement was merely an admission by the
defendants Ramon de la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi of the validity of the
claim of the plaintiffs.
Corporation Law; Board of Directors; Contracts; Courts cannot control discretion of board of directors
about administrative matters; Contracts intra vires entered into by board of directors binding upon the
corporation and courts will not interfere; Exception.The wellknown rule is that courts cannot
undertake to control the discretion of the board of directors about administrative matters as to which
they have legitimate power of action, and contracts intra vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such contracts are so unconscionable
and oppressive as to amount to a wanton destruction of the rights of the minority.
Same; Derivative Suit; When derivative suit should be instituted.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 case at bar, however, the
plaintiffs are alleging and vindicating their own individual interests or prejudice, and not that of the
corporation.
Same; Remedial Law; Civil Procedure; Joinder of Parties; Misjoinder of parties not a ground for dismissal
of action.At any rate,
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42
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.
PETITION for certiorari to review the order of the Court of First Instance of Negros Occidental.

Exequiel T. Alejandro for petitioners.
Acua, Lirazan & Associates for private respondents.
CONCEPCION JR., J.:
Petition for certiorari to review the order of the respondent judge, dated January 2, 1975, denying the
petitioners motion to dismiss the complaint filed in Civil Case No. 10257 of the Court of First Instance of
Negros Occidental, entitled, Benjamin Lopue, Sr., et al., plaintiffs, versus Ricardo Gamboa, et al.,
defendants, as well as the order dated April 4, 1975, denying the motion for the reconsideration of said
order.
In the aforementioned Civil Case No. 10257 of the Court of First Instance of Negros Occidental, the
herein petitioners, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Eduardo de la Rama, and
the late Mercedes de la Rama-Borromeo, now represented by her heirs, as well as Ramon de la Rama,
Paz de la Rama-Battistuzzi, and Enzo Battistuzzi, were sued by the herein private respondents, Benjamin
Lopue, Sr., Benjamin Lopue, Jr., Leonito Lopue, and Luisa U. Dacles, to nullify the issuance of 823 shares
of stock of the Inocentes de la Rama, Inc. in favor of the said defendants. The gist of the complaint, filed
on April 4, 1972, is that the plaintiffs, with the exception of Anastacio Dacles, who was joined as a formal
party, 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; that upon the plaintiffs acquisition of the
shares of stock held by Rafael Ledesma and Jose Sicangco, Jr., then President and Vice-President of the
corporation,
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43
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 thereafter
passed a resolution authorizing the sale of the 823 unissued shares of the corporation to the
defendants, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Ramon de la Rama, Paz R.
Battistuzzi, Eduardo de la Rama, and Mercedes R. Borromeo, at par value, after which the defendants
Honorio de la Rama, Lydia de la Rama-Gamboa, and Enzo Battistuzzi were elected to the board of
directors of the corporation; 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 betweem the defendants, as stockholders thereof; and that the defendants Lydia de la
Rama-Gamboa, Honorio de la Rama, and Enzo Battistuzzi were not legally elected to the board of
directors of the said corporation and has unlawfully usurped or intruded into said office to the prejudice
of the plaintiffs. Wherefore, they 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 by the defendants; that a receiver be appointed to preserve and administer the property and
funds of the corporation; that defendants Lydia de la Rama-Gamboa, Honorio de la Rama, and Enzo
Battistuzzi be declared as usurpers or intruders into the office of director in the corporation and,
consequently, ousting them therefrom and declare Luisa U. Dacles as a legally elected director of the
corporation; that the sale of 823 shares of stock of the corporation be declared null and void; and that
44
44
the defendants be ordered to pay damages and attorneys fees, as well as the costs of suit.1
Acting upon the complaint, the respondent judge, after proper hearing, directed the clerk of court to
issue the corresponding writ of preliminary injunction restraining the defendants and/or their
representatives, agents, or persons acting in their behalf from the commission or continuance of any act
tending in any way to prejudice, diminish or otherwise injure plaintiffs rights in the corporate properties
and funds of the corporation Inocentes de la Rama, Inc. and from disposing, transferring, selling or
otherwise impairing the value of the certificates of stock allegedly issued illegally in their names on
February 11, 1972, or at any date thereafter, and ordering them to deposit with the Clerk of Court the
corresponding certificates of stock for the 823 shares issued to said defendants on February 11, 1972,
upon plaintiffs posting a bond in the sum of P50,000.00, to answer for any damages and costs that may
be sustained by the defendants by reason of the issuance of the writ, copy of the bond to be furnished
to the defendants.2 Pursuant thereto, the defendants deposited with the clerk of court the
corporations certificates of stock Nos. 80 to 86, inclusive, representing the disputed 823 shares of stock
of the corporation.3
On October 31, 1972, the plaintiffs therein, now private respondents, entered into a compromise
agreement with the defendants Ramon de la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi,4
whereby the contracting parties withdrew their respective claims against each other and the
aforenamed defendants waived and transferred their rights and interests over the questioned 823
shares of stock in favor of the plaintiffs, as follows:
3. That the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi will waive,
cede, transfer or other-
________________
1 Rollo, p. 48.
2 Id., p. 10.
3 Id., p. 102.
4 Id., p. 63.
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45
wise convey, as they hereby waive, cede, transfer and convey, free from all liens and encumbrances
unto the plaintiffs, in such proportion as the plaintiffs may among themselves determine, all of the
rights, interests, participations or title that the defendants Ramon L. de la Rama, Paz de la Rama
Battistuzzi, Enzo Battistuzzi now have or may have in the eight hundred twenty-three (823) shares in the
capital stock of the corporation INOCENTES DELA RAMA, INC which were issued in the names of the
defendants in the above-entitled case on or about February 11, 1972, or at any date thereafter and
which shares are the subject-matter of the present suit.
The compromise agreement was approved by the trial court on December 4, 1972.5
As a result, the defendants filed a motion to dismiss the complaint, on November 19, 1974, upon the
grounds: (1) that the plaintiffs cause of action had been waived or abandoned; and (2) that they were
estopped from further prosecuting the case since they have, in effect, acknowledged the validity of the
issuance of the disputed 823 shares of stock. The motion was denied on January 2, 1975.6
The defendants also filed a motion to declare the defendants Ramon L. de la Rama, Paz de la Rama-
Battistuzzi, and Enzo Battistuzzi in contempt of court, for having violated the writ of preliminary
injunction when they entered into the aforesaid compromise agreement with the plaintiffs, but the
respondent judge denied the said motion for lack of merit.7
On February 10, 1975, the defendants filed a motion for the reconsideration of the order denying their
motion to dismiss the complaint,8 and subsequently, an Addendum thereto, claiming that the
respondent court has no jurisdiction to interfere with the management of the corporation by the board
of directors, and the enactment of a resolution by the defendants, as members of the board of directors
of the corporation,
_______________
5 Id., p. 12.
6 Id., p. 15.
7 Id., p. 99.
8 Id., p. 4, par. VII of the Petition.
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46
allowing the sale of the 823 shares of stock to the defendants was purely a management concern which
the courts could not interfere with.9 When the trial court denied said motion and its addendum, the
defendants filed the instant petition for certiorari for the review of said orders.
The petition is without merit. The questioned order denying the petitioners motion to dismiss the
complaint is merely interlocutory and cannot be the subject of a petition for certiorari. The proper
procedure to be followed in such a case is to continue with the trial of the case on the merits and, if the
decision is adverse, to reiterate the issue on appeal. It would be a breach of orderly procedure to allow a
party to come before this Court every time an order is issued with which he does not agree.
Besides, the order denying the petitioners motion to dismiss the complaint was not capriciously,
arbitrarily, or whimsically issued, or that the respondent court lacked jurisdiction over the cause as to
warrant the issuance of the writ prayed for. As found by the respondent judge, the petitioners have not
waived their cause of action against the petitioners by entering into a compromise agreement with the
other defendants in view of the express provision of the compromise agreement that the same shall
not in any way constitute or be considered a waiver or abandonment of any claim or cause of action
against the other defendants. There is also no estoppel because there is nothing in the agreement
which could be construed as an affirmative admission by the plaintiff of the validity of the resolution of
the defendants which is now sought to be judicially declared null and void. The foregoing circumstances
and the fact that no consideration was mentioned in the agreement for the transfer of rights to the said
shares of stock to the plaintiffs are sufficient to show that the agreement was merely an admission by
the defendants Ramon de la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi of the validity of the
claim of the plaintiffs.
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9 Id., p. 147, p. 2 of Memorandum for the Respondents.

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The claim of the petitioners, in their Addendum to the motion for reconsideration of the order denying
the motion to dismiss the complaint, questioning the trial courts jurisdiction on matters affecting the
management of the corporation, is without merit. The well-known rule is that courts cannot undertake
to control the discretion of the board of directors about administrative matters as to which they have
legitimate power of action,10 and contracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so unconscionable and
oppressive as to amount to a wanton destruction of the rights of the minority.11 In the instant case, the
plaintiffs aver that the defendants have concluded a transaction among themselves as will result to
serious injury to the interests of the plaintiffs, so that the trial court has jurisdiction over the case.
The petitioners further contend that the proper remedy of the plaintiffs would be to institute a
derivative suit against the petitioners in the name of the corporation in order to secure a binding relief
after exhausting all the possible remedies available within the corporation.
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.13
_______________
10 Govt. vs. El Hogar Filipino, 50 Phil. 399.

11 Ingersoll vs. Malabon Sugar Co., 53 Phil. 745.
12 Republic Bank vs. Cuaderno, L-22399, March 30, 1967, 19 SCRA 671 and cases cited therein.
13 Sec. 11, Rule 3, Revised Rules of Court.
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48
WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of merit. With costs against the
petitioners.
SO ORDERED.
Antonio, Aquino, Santos and Abad Santos., JJ., concur.
Petition dismissed.
Notes.A stockholder is guilty of fraud where, through false representation he succeeded in inducing
another corporation to enter into an exchange agreement with the corporation he represented and over
whose business he had absolute control and where it further appears that said stockholder had full
knowledge of the fact that his corporation was in no position to comply with the obligation which he
had caused to assume. (NAMARCO vs. Associated Finance Co., 19 SCRA 962).
A stockholder has a cause of action to annul certain actions of the Board of Directors of a bank, which
actions were considered anomalous and a breach of trust prejudicial to the bank. A stockholders
derivative suit should be commenced for such a purpose. (Republic Bank vs. Cuaderno, 19 SCRA 671).
A corporate officer, entrusted with the general management and control of its business, has implied
authority to make any contract or to do any other act which is necessary or appropriate to the conduct
of the ordinary business of the corporation. (Board of Liquidators vs. Kalaw, 20 SCRA 987).
A corporation has nopower to release an original subscriber from paying for his shares without a
valuable consideration for such release. (Philippine National Bank vs. Bitulok Sawmill, Inc., 23 SCRA
1366.)
A share of stock coming from dividends declared cannot be issued to one who is not a stockholder of a
corporation. (Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540).
________________
* Mr. Justice Antonio P. Barredo is on leave.

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A corporation is an artificial being created by operation of law; thus, it can not refuse to yield obedience
to acts of its state organs, including the judiciary, when called upon to do so. (Tayag vs. Benguet
Consolidated, Inc., 26 SCRA 242.)
When the motion of legal entity is used to defeat public convenience, justify wrong, protect fraud,
crime, the law will regard the corporation as an association of persons, or in the case of two
corporations merge them into one. (Yutivo Sons Hardware Company vs. Court of Tax Appeals, 1 SCRA
160.)
The test to be applied is whether the act of the corporation is in direct and immediate furtherance of its
business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not. (Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5
SCRA 36.)
Failure of stockholder to take remedial steps against the corporation within two years from commission
of fraud is not fatal to its suit. (Reyes vs. Tan, 3 SCRA 198.)
Where corporate directors are guilty of a breach of trust, a stockholder may institute a suit in behalf of
himself and other stockholders and for the benefit of the corporation, to bring about a redress of the
wrong inflicted directly upon the corporation and indirectly upon the stockholders. (Reyes vs. Tan, 3
SCRA 198.)
Transfer of shares to be valid must be entered and noted in the book of corporation. (Hodges vs.
Lezama, 8 SCRA 717.)
Illegal issuance of certificates of stock may result if the appropriate number of shares issued to the
original subscribers were not cancelled before the certificates in question are to be issued. (British-
American Engineering Corporation vs. Alto Surety and Insurance Company, Inc., 18 SCRA 23.)
[No. L-1721. May 19, 1950]
JUAN D. EVANGELISTA ET AL., plaintiffs and appellants, vs. RAFAEL SANTOS, defendant and appellee.
1.PLEADING AND PRACTICE; VENUE; MERE SOJOURNING IN A PLACE DOES NOT MAKE THE LATTER A
RESIDENT FOR PURPOSES OF VENUEThe facts in this case show that the objection to the venue is well-
founded. The fact that defendant was sojourning in Pasay at the time he was served with summons does
not make him a resident of that place for purposes of venue.
2.PARTIES; CORPORATION; MISMANAGEMENT BY ITS OFFICER; RIGHT OF STOCKHOLDERS TO BRING
SUIT.The plaintiff stockholders have brought the action not for the benefit of the corporation but f or
their own benefit, since they ask that the def endant make good the losses occasioned by his
mismanagement and pay to them the value of their respective participation in the corporate assets on
the basis of their respective holdings.
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388
Evangelista vs. Santos
Clearly, this cannot be, done until all corporate debts, if there be any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions
of section 16 of the Corporation Law.
APPEAL from an order of the Court of First Instance of Rizal. Tan, J.
Antonio Gonzales for appellants.
Benjamin H. Tirol for appellee.
REYES, J.:
This is an action by the minority stockholders of a corporation against its principal officer f or damages
resulting from his mismanagement of its affairs and misuse of its assets.
The complaint alleges that plaintiffs are minority stockholders of the Vitali Lumber Company, Inc., a
Philippine corporation organized for the exploitation of a lumber concession in Zamboanga, Philippines;
that defendant holds more than 50 per cent of the stocks of said corporation and also is and always has
been the president, manager, and treasurer thereof; and that defendant, in such triple capacity, through
fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets,
among them machineries, buildings, warehouses, trucks, etc., to disappear, thus causing the complete
ruin of the corporation and total depreciation of its stocks. The complaint therefore prays for judgment
requiring defendant: (1) to render an account of his administration of the corporate affairs and assets:
(2) to pay plaintiffs the value of their respective participation in said assets on the basis of the value of
the stocks held by each of them; and (3) to pay the costs of suit. Plaintiffs also ask for such other remedy
as may be just and equitable.
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The complaint does not give plaintiffs' residence, but, for purposes of venue, alleges that defendant
resides at 2112 Dewey Boulevard, corner Libertad Street, Pasay, province of Rizal. Having been served
with summons at that place, defendant filed a motion for the dismissal of the complaint on the ground
of improper venue and also on the ground that the complaint did not state a cause of action in favor of
plaintiffs.
In support of the objection to the venue, the motion, which is under oath, states that defendant is a
resident of Iloilo City and not of Pasay, and at the hearing of the motion defendant also presented
further affidavit to the effect that while he has a house in Pasay, where members of his family who are
studying in Manila live and where he himself is sojourning for the purpose of attending to his interests in
Manila, yet he has his permanent residence in the City of Iloilo where he is registered as a voter for
election purposes and has been paying his residence certificate. Plaintiffs opposed the motion for
dismissal but presented no counter proof and merely called attention to the Sheriff's return showing
service of summons on defendant personally at his alleged residence at No. 2112 Dewey Boulevard,
Pasay.
After hearing, the lower court rendered its order, granting the motion for dismissal upon the two
grounds alleged by defendant, and reconsideration of this order having been denied, plaintiffs have
appealed to this Court.
The appeal presents two questions. The first refers to venue and the second, to the right of the plaintiff
s to bring this action f or their benefit.
As to the first question, it is important to remember that the laying of the venue of an action is not left
to plaintiff's caprice. The matter is regulated by the Rules of Court.
And in actions like the present, which is one in personam, the regulation applicable is that contained in
section 1 of Rule 5, which provides:
"Civil actions in Courts of First Instance may be commenced and tried where the defendant or any of the
defendant resides or may
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390
be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff."
Objection to improper venue may be interposed at any time prior to the trial. (Moran's Comments on
the Rules of Court, Vol. I, 2nd ed., p. 108.)
Believing that def endant resided in the province of Rizal, herein plaintiffs brought their action in the
Court of First Instance of that province. But that belief proved erroneous, for the lower court found after
hearing that defendant had his residence in Iloilo. The finding is based on defendant's sworn statement
not rebutted by any proof to the contrary.
There is nothing to the contention that defendant's motion to dismiss necessarily presupposes a
hypothetical admission of the allegations of the complaint, among them the averment that defendant is
a resident of Rizal province, for the motion precisely denies that averment and alleges that his real
residence is in Iloilo City. This, defendant had the right to do in objecting to the court's jurisdiction on
the ground of improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the venue in the province where
the defendant "may be found." But this phrase has already been held to have a limited application. It is
the same phrase used in section 377 of Act 190 from which section 1 of Rule 5 was taken, and as
construed by this Court it applies only to cases where defendant has no residence in the Philippine
Islands. This was the construction adopted in the case of Cohen vs. Benguet Commercial Co., Ltd., 34
Phil. 526, which was an action brought in Manila by a nonresident against a corporation which had its
residence for legal purposes in Baguio but whose President was found in Manila and there served with
summons. This Court there said:
"Section 377 provides that actions of this character 'may be brought in any province where the
defendant or any necessary party defendant may reside or be found, or in any province where the
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VOL. 86, MAY 19, 1950
391
plaintiff or one of the plaintiffs resides, at the election of the plaintiff.' The plaintiff in this action has no
residence in the Philippine Islands. Only one of the parties to the action resides here. There can be,
therefore, no election by plaintiff as to the place of trial. It must be in the province where the defendant
resides. The defendant resides, in the eye of the law, in Baguio, Was it 'found' in the city of Manila under
section 377, its president being in that city where the service of summons was made? We think not. The
word 'found' as used in section 377 has a different meaning that belongs to it as used in section 394,
which refers exclusively to the place where the summons may be served. As we have said a summons
may be legally served on a defendant wherever he may be 'found,' i. e., wherever he may be, provided
he be in the Philippine Islands; but the venue cannot be laid wherever the defendant may be 'found.'
There is an element entering in section 377 which is not present in section 394, that is a residence.
Residence of the plaintiff or defendant does not affect the place where a summons may be served; but
residence is the vital thing when we deal with venue. The venue must be laid in the province where one
of the parties resides. If the plaintiff is a nonresident the venue must be laid in the province of the
defendant's residence. The venue can be laid in the province where defendant is 'found' only when
defendant has no residence in the Philippine Islands. A defendant can not have a residence in one
province and be 'found' in another. As long as he has a residence in the Philippine Islands he can be
'found,' for the purposes of section 377, only in the province of his residence. In such case the words
'residence' and 'found' are synonymous. If he is a nonresident then the venue may be laid in the
province where he is 'found' at the time the action is commenced or in the province of plaintiff's
residence. This applies also to a domestic corporation.
"While the service of the summons was good in either Baguio or Manila we are of the opinion that the
objection of the defendant to the place of trial was proper in both cases and that the trial court should
have held that the venue was improperly laid."
And elaborating on the point when the case came up for reconsideration, the Court further said:
"The moving party contends that the venue was properly laid under section 377 in that it was laid in the
province where the defendant was found at the time summons was served on its president, he having
been f ound and served with process in the city of Manila. For the purposes of the discussion we
assumed in the main case, as the plaintiff claimed, that the defendant was in fact and in law found in the
city of Manila; and proceeded to decide the cause upon the theory that, even if the defendant were
found in the city of Manila, that did not justify, under the facts of the case, the laying of the venue in the
city of Manila.
392
392
"We do not believe that the moving party's objection that our construction deprives the word 'found' of
all significance and results, in effect, in eliminating it from the statute, is sound. We do not deprive it of
all significance and effect and do not eliminate it from the statute. We give it the only effect which can
be given it and still accord with the other provisions of the section which give defendant the right to
have the venue laid in the province of his residence, the effect which it was intended by the legislature
they should have. We held that the word 'found' was applicable in certain cases, and in such cases gave
it full significance and effect. We declared that it was applicable and effective in cases where the
defendant is a nonresident. In such cases the venue may be laid wherever he may be found in the
Philippine Islands at the time of the service of the process, but we also held that where he is a resident
of the Philippine Islands the word 'found' has no application and the venue must be laid in the province
where he resides.
"The construction which the moving party asks us to place on that provision of section 377 above
quoted would result in the destruction of the privilege conferred by the section upon a resident
defendant which requires the venue to be laid in the province where he resides. This is clear; for, if the
venue may be laid in any province where the defendant, although a resident of some other province,
may be found at the time process is served on him, then the provision that it shall be laid in the province
where he resides is of no value to him. If ,a defendant residing in the province of Rizal is helpless when
the venue is laid in the province of Mindoro in an action in which the plaintiff is a nonresident or resides
in Manila, what is the value of a residence in Rizal? If a defendant residing in Jolo is without remedy
when a nonresident plaintiff or a plaintiff residing in Jolo lays the venue in Bontoc because the
defendant happens to be found there, of what significance is a residence in Jolo? The phrases 'where
the defendant * * * may reside' and 'or be found' must be construed together and in such manner that
both may be given effect. The construction asked for by the moving party would deprive the phrase
'where the defendant * * * may reside' of all significance, as the plaintiff could always elect to lay the
venue in the province where the defendant was 'found' and not where he resided; whereas the
construction which we place upon these phrases permits both to have effect. We declare that, when the
defendant is a resident of the Philippine Islands, the venue must be laid either in the province where the
plaintiff resides or in the province where the defendant resides, and in no other province. Where,
however, the defendant is a nonresident the venue may be laid wherever de-
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393
fendant may be found in the Philippine Islands. This construction gives both. phrases their proper and
legitimate effect without doing violence to the spirit which informs all laws relating to venue and which
insists always that the action shall be tried in the place where the greatest convenience of the parties
will be served. Ordinarily a defendant's witnesses are found where the defendant resides; and plaintiff's
witnesses are generally found where he resides or where the defendant resides. It is, therefore,
generally desirable to have the action tried where one of the parties resides. Where the plaintiff is a
nonresident and the contract upon. which suit is brought was made in the Philippine Islands it may
safely be asserted that the convenience of the defendant would be best served by a trial in the province
where he resides."
The fact that defendant was sojourning in Pasay at the time he was served with summons does not
make him a resident of that place f or purposes of venue. Residence is "the permanent home, the place
to which, whenever absent for business or pleasure, one intends to return, * * *" (67 C. J., pp. 123-124.)
A man can have but one domicile at a time (Alcantara vs. Secretary of Interior, 61 Phil., 459), and
residence is synonymous with. domicile under section 1 of Rule 5 (Moran's Comments, supra, p. 104).
In view of the foregoing, we hold that the objection to the venue was correctly sustained by the lower
court.
As to the second question, the complaint shows that the action is for damages resulting from
mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that
defendant's maladministration has brought about the ruin of the corporation and the consequent loss of
value of its stocks. The injury complained of is thus primarily to the corporation, so that the suit for the
damages claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia
of Corporation pp. 977-980). The stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the
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394
corporation and the liquidation of its debts and liabilities, something which cannot be legally done in
view of section 16 of the Corporation Law, which provides:
"No corporation shall make or declare any stock or bond dividend or any dividend whatsoever except
from the surplus profits arising from its business, or divide 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."
But while it is to the corporation that the action should pertain in cases of this nature, however, if the
officers of the corporation, who are the ones called upon to protect their rights, refuse to sue, or where
a demand upon them to file the necessary suit would be futile because they are the very ones to be
sued or because they hold the controlling interest in the corporation, then in that case any one of the
stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that
case it is the corporation itself and not the plaintiff stockholder that is the real party in interest, so that
such damages as may be recovered shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19 Phil.
82, 85). In other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for
the benefit of the corporation, which is the real party in interest (13 Fletcher, Cyclopedia of
Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the action not for the benefit of the
corporation but f or their own benefit, since they ask that the def endant make good the losses
occasioned by his mismanagement and pay to them the value of their respective participation in the
corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate
debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its
charter or by lawful dissolution in view of the provisions of section 16 of the Corporation Law.
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395
People vs. Guillermo
It results that plaintiffs' complaint shows no cause of action in their favor so that the lower court did not
err in dismissing the complaint on that ground.
While plaintiffs ask for a remedy to which they are not entitled unless the requirement of section 16 of
the Corporation Law be first complied with, we note that the action stated in their complaint is
susceptible of being converted into a derivative suit for the benefit of the corporation by a mere change
in the prayer. Such amendment, however, is not possible now, since the complaint has been filed in the
wrong court, so that the same has to be dismissed.
The order appealed from is therefore affirmed, but without prejudice to the filing of the proper action in
which the venue shall be laid in the proper province. Appellants shall pay costs. So ordered.
Moran, C. J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ., concur.
Order affirmed.
Evangelista vs. Santos, 86 Phil. 387, No. L-1721 May 19, 1950
No. L-41667. April 30, 1976.*
DELTA MOTOR SALES CORPORATION, petitioner, vs. HON JUDGE IGNACIO MANGOSING, Branch XXIV,
Court of First Instance of Manila, THE CITY SHERIFF OF MANILA and JOSE LUIS PAMINTUAN,
respondents.
Summons; Corporations law; Strict compliance with the mode of service of summons to a corporation is
necessary.A strict compliance with the mode of service is necessary to confer jurisdiction
______________
* SECOND DIVISION
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VOL. 70, APRIL 30, 1976

599
Delta Motor Sales Corporation vs. Mangosing
of the court over a corporation. The officer upon whom service is made must be one who is named in
the statute, otherwise the service is insufficient. x x x The purpose is to render it reasonably certain that
the corporation will receive prompt and proper notice in an action against it or to insure that the
summons be served on a representative so integrated with the corporation that such person will know
what to do with the legal papers served on him. In other words, to bring home to the corporation
notice of the filing of the action. In the instant case the Manila court did not acquire jurisdiction over
Delta Motor because it was not properly served with summons. The service of summons on Dionisia G.
Miranda, who is not among the persons mentioned in section 13 of Rule 14 (being a mere secretary to
the head of the personnel department who was then on sick leave) was insufficient. It did not bind Delta
Motor. x x x Consequently, the order of default, the judgment by default and the execution in Civil Case
No. 97373 are void and should be set aside.
Actions; Jurisdiction; Consolidation of two related cases filed in various courts.In the interest of justice
and to avoid conflicting decisions, the trial of the two cases should be consolidated. The Pasig case
should be transferred to Branch XXIV of CFI of Manila where Civil Case No. 97373 is assigned.
Apparently, Delta Motor filed its replevin case in Pasig because it was stipulated in the invoice receipt
covering the sale that any action thereunder may be instituted in any competent court of Rizal.
PETITION for certiorari of the orders of the Court of First Instance of Manila. Mangosing, J.

Bonoan, Santos, Lazo & Associates for petitioner.
Villareal, Matic & Associates for respondent Jose Luis Pamintuan.
AQUINO, J.:
Delta Motor Sales Corporation (Delta Motor for short) in this special civil action of certiorari seeks to
annul certain orders of the Court of First Instance of Manila denying its motion to set aside the order of
default and the judgment by default in Civil Case No. 97373 and granting the motion for execution of
Jose Luis Pamintuan. The facts are as follows:
On April 16, 1975 Pamintuan sued Delta Motor for the recovery of the sum of P58,000 as damages and
attorneys fees. The basis of the action was that Delta Motor, as the seller of an
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600
allegedly defective Toyota car to Pamintuan for the sum of P33,950, failed to fulfill its warranty
obligation by not properly repairing the car.
The summons for Delta Motor was served on April 19 on its employee, Dionisia G. Miranda, who
acknowledged its receipt by signing on the lower portion of the original summons.
Delta Motor did not answer the complaint within the reglementary period which expired on May 4. On
May 27 Pamintuan filed a motion to declare Delta Motor in default. A copy of the motion was furnished
Delta Motor. The Manila court granted the motion in its order of June 3.
In its decision dated June 16, 1975 the lower court found that Pamintuan bought from Delta Motor on
June 20, 1974 a Toyota car; that the leaks emanating from its windshield, doors and windows were not
stopped by Delta Motor, and that in consequence of its breach of warranty Delta Motor should pay
Pamintuan P45,000 as damages.
That decision was served on Delta Motor on June 27. On July 21, its lawyers filed a petition to lift the
order of default, to set aside the judgment and for new trial. Delta Motor alleged that Dionisia G.
Miranda, who accepted the service of summons, was not the corporate secretary but the secretary of
Alberto Ramos of the personnel department who was on sick leave and that service upon her was a
mistake; that Pamintuan is still indebted to Delta Motor for the unpaid balance of the price in the sum of
P25,000; that the entity liable for breach of warranty was Toyota Motor Sales Company, and that Delta
Motor has good defenses to the action.
The motion was supported by the affidavit of Dionisia G. Miranda who alleged that, as there was no
instruction from the sheriff that the summons and complaint should be delivered to the officers of Delta
Motor, she just kept the same for reference to her immediate superior, Ramos, who, however, seldom
went to office. Geldino S. Santos, the administrative officer of Delta Motor, in his affidavit, also attached
to the motion, confirmed that Dionisia G. Miranda was Ramos secretary.
The lower court denied the motion in its order of July 29 on the ground that Dionisia G. Miranda was a
person of suitable age and discretion who could receive summons for another person, as contemplated
in section 8, Rule 14 of the Revised Rules of Court, and that although Delta Motors legal
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601
department was served on May 27 with a copy of the motion to declare it in default, it did not oppose
the motion.
The order of denial was received by Delta Motors counsel on August 4. It filed a motion for
reconsideration at ten minutes before five oclock in the afternoon of the thirtieth day, August 8. The
lower court denied it in its order of August 25. That order of denial was received by Delta Motors
counsel on September 4
On the following day, September 5, Delta Motor deposited P120 as appeal bond and filed a notice of
appeal and record on appeal.
Pamintuan countered with a motion for execution. He contended that the judgment was already final
because Delta Motors motion for reconsideration was filed after four-thirty in the afternoon of the
thirtieth day or after the close of office hours.
The Manila court in its order of October 13 refused to give due course to Delta Motors appeal and
granted Pamintuans motion for execution. The instant petition was filed on October 20, 1975. The
sheriff levied upon a Toyota mini-bus and a car to satisfy the judgment for damages against Delta Motor.
Pamintuan in his comment on the petition revealed that on May 27, 1975, when Delta Motor was
furnished with a copy of the motion to declare it in default, it sued Pamintuan in the Court of First
Instance of Rizal, Pasig Branch XIII for the rescission of the sale and the recovery of the car (Civil Case
No. 21303). A writ of replevin was issued in that case. A deputy sheriff of Rizal seized from Pamintuan
the Toyota car on June 6, 1975.
Pamintuan filed a motion to dismiss Delta Motors complaint in the Pasig court on the ground of the
pendency in the Manila court of Civil Case No. 97373 involving the same Toyota car. Delta Motor
opposed it. It was denied.
Pamintuan filed in the Court of Appeals a petition for certiorari in order to set aside the Pasig courts
order denying his motion to dismiss (Pamintuan vs. Revilla, CA-G.R. No. SP-04743). The Court of Appeals
is its decision dated February 16, 1976 denied the petition. It held that the Rizal court did not commit
any grave abuse of discretion in not dismissing Delta Motors action.
The issue in this case is whether Delta Motor was properly served with summons or whether the Manila
court had jurisdiction to render the judgment by default against it and to
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602
execute that judgment. Rule 14 of the Revised Rules of Court provides:
SEC. 13. 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.
For the purpose of receiving service of summons and being bound by it, a corporation is identified with
its agent or officer who under the rule is designated to accept service of process. The corporate power
to receive and act on such service, so far as to make it known to the corporation, is thus vested in such
officer or agent. (Lafayette Insurance Co. vs. French, 15 L. Ed. 451, 453).
As noted by the Federal Supreme Court, the cases are numerous which decide that where a particular
method of serving process is pointed out by statute, that method must be followed, and the rule is
especially exacting in reference to corporations (Amy vs. City of Watertown, 32 L. Ed. 946).
The Amy case cited the ruling in Watertown vs. Robinson, 69 Wis. 230 that the particular mode of
service indicated in the statute should be followed because ita lex scripta est. There is no chance to
speculate whether some other mode will not answer as well. This has been too often held by this court
to require further citations. When the statute designates a particular officer to whom the process may
be delivered and with whom it may be left, as service upon the corporation, no other officer or person
can be substituted in his place. The designation of one particular officer upon whom service may be
made excludes all others. (Page 952).
A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a
corporation. The officer upon whom service is made must be one who is named in the statute;
otherwise the service is insufficient. So, where the statute requires that in the case of a domestic
corporation summons should be served on the president or head of the corporation, secretary,
treasurer, cashier or managing agent thereof, service of summons on the secretarys wife did not
confer jurisdiction over the corporation in the foreclosure proceeding against it. Hence, the decreee of
foreclosure and the deficiency judgment were void and should be vacated. (Reader vs. District Court, 94
Pacific 2nd 858).
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603
The purpose is to render it reasonably certain that the corporation will receive prompt and proper
notice in an action against it or to insure that the summons be served on a representative so integrated
with the corporation that such person will know what to do with the legal papers served on him. In
other words, to bring home to the corporation notice of the filing of the action. (35A C.J.S. 288 citing
Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs. Langston, D.C. Fla., 23 F.R.D. 249).
The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal
requirements as to the manner in which summons should be served on a domestic corporation (U. S. vs.
Mollenhauer Laboratories, Inc., 267 Fed. Rep. 2nd 260).
In the instant case the Manila court did not acquire jurisdiction over Delta Motor because it was not
properly served with summons. The service of summons on Dionisia G. Miranda, who is not among the
persons mentioned in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor.
Courts acquire jurisdiction over the person of a party defendant and of the subject-matter of the action
by virtue of the service of summons in the manner required by law. Where there is no service of
summons or a voluntary general appearance by the defendant, the court acquires no jurisdiction to
pronounce a judgment in the cause. (Syllabi, Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil.
556).
Consequently, the order of default, the judgment by default and the execution in Civil Case No. 97373
are void and should be set aside.
It appears that Civil Case No. 21303 filed by Delta Motor against Pamintuan in the Pasig court, which is
in effect a counter-claim to the Manila case, deals with the same sale of the Toyota car which is involved
in Civil Case No. 97373 of the Manila court.
In the interest of justice and to avoid conflicting decisions, the trial of the two cases should be
consolidated. The Pasig case should be transferred to Branch XXIV of the Court of First Instance of
Manila where Civil Case No. 97373 is assigned. Apparently, Delta Motor filed its replevin case in Pasig
because it was stipulated in the invoice covering the sale that any action thereunder may be instituted in
any competent court of Rizal.
WHEREFORE, the order of default, judgment by default and the other proceedings in Civil Case No.
97373 are set aside. The
604
604
lower court is directed to admit the answer of Delta Motor.
Respondent Pamintuan may likewise file his answer in Civil Case No. 21303. The record of that case
should be transferred to the Court of First Instance of Manila as indicated above.
If the parties do not come any amicable settlement during the pre-trial of the two cases, then further
proceedings may be had for the adjudication of the said cases. No costs.
SO ORDERED.
Concepcion Jr., J., concur.
Fernando, C.J., in the result.
Barredo, J. (Chairman), with separate opinion.
Antonio, J., concurs in the separate opinion of J. Barredo.
Delta Motor Sales Corporation vs. Mangosing, 70 SCRA 598, No. L-41667 April 30, 1976
G.R. No. 136426. August 6, 1999.*
E. B. VILLAROSA & PARTNER CO., LTD., petitioner, vs. HON. HERMINIO I. BENITO, in his capacity as
Presiding Judge, RTC, Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION,
respondents.
Remedial Law; Civil Procedure; Summons; Jurisdiction; 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 in Section 11, Rule 14 of the 1997 Rules of Civil Procedure.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 in Section 11, Rule 14 of the 1997 Rules of Civil Procedure. 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.
Same; Same; Same; Same; Strict compliance with the rules has been enjoined; The liberal construction
rule cannot be invoked and utilized as a substitute for the plain legal requirements as to the manner in
which summons should be served on a domestic corporation.It should be noted that even prior to the
effectivity of the 1997 Rules of Civil Procedure, strict compliance with the rules has been enjoined. In
the case of Delta Motor Sales Corporation vs. Mangosing, the Court held: A strict compliance with the
mode of service is necessary to confer jurisdiction of the court over a corporation. The officer upon
whom service is made must be one who is named in the statute; otherwise the service is insufficient. x x
x. The purpose is to render it reasonably certain that the corporation will receive prompt and proper
other words, to bring home to the corporation notice of the filing of the action. x x x. The liberal
construction rule cannot be invoked and utilized as a substitute for the plain legal
________________
* THIRD DIVISION.
66
66
E.B. Villarosa & Partner Co., Ltd. vs. Benito
requirements as to the manner in which summons should be served on a domestic corporation. x x x.
(italics supplied).
Same; Same; Same; Same; Service of summons upon persons other than those mentioned in Section 13
of Rule 14 (old rule) has been held as improper.Service of summons upon persons other than those
mentioned in Section 13 of Rule 14 (old rule) has been held as improper. Even under the old rule, service
upon a general manager of a firms branch office has been held as improper as summons should have
been served at the firms principal office. In First Integrated Bonding & Ins. Co., Inc. vs. Dizon, it was held
that the service of summons on the general manager of the insurance firms Cebu branch was improper;
default order could have been obviated had the summons been served at the firms principal office.
Same; Same; Same; Same; Court rules that the service of summons upon the branch manager of
petitioner at its branch office at Cagayan de Oro, instead of upon the general manager at its principal
office at Davao City is improper; Trial court did not acquire jurisdiction over the person of the
petitioner.Accordingly, we rule that the service of summons upon the branch manager of petitioner at
its branch office at Cagayan de Oro, instead of upon the general manager at its principal office at Davao
City is improper. Consequently, the trial court did not acquire jurisdiction over the person of the
petitioner.
Same; Same; Same; Same; The inclusion in a motion to dismiss of other grounds aside from lack of
jurisdiction over the person of the defendant shall not be deemed a voluntary appearance.Before, the
rule was that a party may challenge the jurisdiction of the court over his person by making a special
appearance through a motion to dismiss and if in the same motion, the movant raised other grounds or
invoked affirmative relief which necessarily involves the exercise of the jurisdiction of the court, the
party is deemed to have submitted himself to the jurisdiction of the court. This doctrine has been
abandoned in the case of La Naval Drug Corporation vs. Court of Appeals, et al., which became the basis
of the adoption of a new provision in the former Section 23, which is now Section 20 of Rule 14 of the
1997 Rules. Section 20 now provides that the inclusion in a motion to dismiss of other grounds aside
from lack of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance.
The emplacement of this rule clearly underscores the
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67
purpose to enforce strict enforcement of the rules on summons. Accordingly, the filing of a motion to
dismiss, whether or not belatedly filed by the defendant, his authorized agent or attorney, precisely
objecting to the jurisdiction of the court over the person of the defendant can by no means be deemed
a submission to the jurisdiction of the court. There being no proper service of summons, the trial court
cannot take cognizance of a case for lack of jurisdiction over the person of the defendant. Any
proceeding undertaken by the trial court will consequently be null and void.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari and Prohibition.

Capuyan, Quimpo & Salazar for petitioner.
Ermitano, Sangco, Manzano & Associates for private respondent.
GONZAGA-REYES, J.:
Before this Court is a petition for certiorari and prohibition with prayer for the issuance of a temporary
restraining order and/or writ of preliminary injunction seeking to annul and set aside the Orders dated
August 5, 1998 and November 20, 1998 of the public respondent Judge Herminio I. Benito of the
Regional Trial Court of Makati City, Branch 132 and praying that the public respondent court be ordered
to desist from further proceeding with Civil Case No. 98-824.
Petitioner E. B. Villarosa & Partner Co., Ltd. is a limited partnership with principal office address at 102
Juan Luna St., Davao City and with branch offices at 2492 Bay View Drive, Tambo, Paraaque, Metro
Manila and Kolambog, Lapasan, Cagayan de Oro City. Petitioner and private respondent executed a
Deed of Sale with Development Agreement wherein the former agreed to develop certain parcels of
land located at Barrio Carmen, Cagayan de Oro belonging to the latter into a housing subdivision for the
construction of low cost housing units. They further agreed that in case of litiga-
68
68
tion regarding any dispute arising therefrom, the venue shall be in the proper courts of Makati.
On April 3, 1998, private respondent, as plaintiff, filed a Complaint for Breach of Contract and Damages
against petitioner, as defendant, before the Regional Trial Court of Makati 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 therein.1
Summons, together with the complaint, were served upon the defendant, through its Branch Manager
Engr. Wendell Sabulbero at the stated address at Kolambog, Lapasan, Cagayan de Oro City2 but the
Sheriffs Return of Service3 stated that the summons was duly served upon defendant E. B. Villarosa &
Partner Co., Ltd. thru its Branch Manager Engr. WENDELL SALBULBERO on May 5, 1998 at their new
office Villa Gonzalo, Nazareth, Cagayan de Oro City, and evidenced by the signature on the face of the
original copy of the summons.
On June 9, 1998, defendant filed a Special Appearance with Motion to Dismiss4 alleging that on May 6,
1998, summons intended for defendant was served upon Engr. Wendell Sabulbero, an employee of
defendant at its branch office at Cagayan de Oro City. Defendant prayed for the dismissal of the
complaint on the ground of improper service of summons and for lack of jurisdiction over the person of
the defendant. Defendant contends that the trial court did not acquire jurisdiction over its person since
the summons was improperly served upon its employee in its branch office at Cagayan de Oro City who
is not one of those persons named in Section 11, Rule 14 of the 1997 Rules of Civil Procedure upon
whom service of summons may be made.
_______________
1 Annexes C to C-6 of the Petition, pp. 23-29, Rollo.

2 Annex D of the Petition, p. 41, Rollo.
3 Annex F-2 of the Petition, p. 46, Rollo.
4 Annexes E to E-1 of the Petition, pp. 42-43, Rollo.
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69
Meanwhile, on June 10, 1998, plaintiff filed a Motion to Declare Defendant in Default5 alleging that
defendant has failed to file an Answer despite its receipt allegedly on May 5, 1998 of the summons and
the complaint, as shown in the Sheriffs Return.
On June 22, 1998, plaintiff filed an Opposition to Defendants Motion to Dismiss6 alleging that the
records show that defendant, through its branch manager, Engr. Wendell Sabulbero actually received
the summons and the complaint on May 8, 1998 as evidenced by the signature appearing on the copy of
the summons and not on May 5, 1998 as stated in the Sheriffs Return nor on May 6, 1998 as stated in
the motion to dismiss; that defendant has transferred its office from Kolambog, Lapasan, Cagayan de
Oro to its new office address at Villa Gonzalo, Nazareth, Cagayan de Oro; and that the purpose of the
rule is to bring home to the corporation notice of the filing of the action.
On August 5, 1998, the trial court issued an Order7 denying defendants Motion to Dismiss as well as
plaintiffs Motion to Declare Defendant in Default. Defendant was given ten (10) days within which to
file a responsive pleading. The trial court stated that since the summons and copy of the complaint were
in fact received by the corporation through its branch manager Wendell Sabulbero, there was
substantial compliance with the rule on service of summons and consequently, it validly acquired
jurisdiction over the person of the defendant.
On August 19, 1998, defendant, by Special Appearance, filed a Motion for Reconsideration8 alleging that
Section 11, Rule 14 of the new Rules did not liberalize but, on the contrary, restricted the service of
summons on persons enumerated therein; and that the new provision is very specific and clear in that
the word manager was changed to general
_______________
5 Annexes F to F-1 of the Petition, pp. 44-45, Rollo.
6 Annexes G to G-3 of the Petition, pp. 47-50, Rollo.
7 Annexes A to A-1 of the Petition, pp. 20-21, Rollo.
8 Annexes H to H-3 of the Petition, pp. 51-54, Rollo.
70
70
manager, secretary to corporate secretary, and excluding therefrom agent and director.
On August 27, 1998, plaintiff filed an Opposition to defendants Motion for Reconsideration9 alleging
that defendants branch manager did bring home to the defendant-corporation the notice of the filing
of the action and by virtue of which a motion to dismiss was filed; and that it was one (1) month after
receipt of the summons and the complaint that defendant chose to file a motion to dismiss.
On September 4, 1998, defendant, by Special Appearance, filed a Reply10 contending that the changes
in the new rules are substantial and not just general semantics.
Defendants Motion for Reconsideration was denied in the Order dated November 20, 1998.11
Hence, the present petition alleging that respondent court gravely abused its discretion tantamount to
lack or in excess of jurisdiction in denying petitioners motions to dismiss and for reconsideration,
despite the fact that the trial court did not acquire jurisdiction over the person of petitioner because the
summons intended for it was improperly served. Petitioner invokes Section 11 of Rule 14 of the 1997
Rules of Civil Procedure.
Private respondent filed its Comment to the petition citing the cases of Kanlaon Construction
Enterprises Co., Inc. vs. NLRC 12 wherein it was held that service upon a construction project manager is
valid and in Gesulgon vs. NLRC 13which held that a corporation is bound by the service of summons
upon its assistant manager.
The only issue for resolution is whether or not the trial court acquired jurisdiction over the person of
petitioner upon service of summons on its Branch Manager.
_______________
9 Annexes I to I-4 of the Petition, pp. 55-59, Rollo.

10 Annexes J to J-4 of the Petition, pp. 60-64, Rollo.
11 Annex B of the Petition, p. 22, Rollo.
12 279 SCRA 337.
13 219 SCRA 561.
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71
When the complaint was filed by Petitioner on April 3, 1998, the 1997 Rules of Civil Procedure was
already in force.14 Section 11, Rule 14 of the 1997 Rules of Civil Procedure provides that:
When the defendant is a corporation, partnership or association organized under the laws of the
Philippines with a juridical personality, service may be made on the president, managing partner,
general manager, corporate secretary, treasurer, or in-house counsel. (italics supplied).
This provision revised the former Section 13, Rule 14 of the Rules of Court which provided that:
SEC. 13. 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. (italics supplied).
Petitioner contends that the enumeration of persons to whom summons may be served is restricted,
limited and exclusive following the rule on statutory construction expressio unios est exclusio alterius
and argues that if the Rules of Court Revision Committee intended to liberalize the rule on service of
summons, it could have easily done so by clear and concise language.
We agree with petitioner.
Earlier cases have uphold service of summons upon a construction project manager;15 a corporations
assistant manager;16 ordinary clerk of a corporation;17 private secretary of
________________
14 It was approved by this Court in its Resolution dated April 8, 1998 in Bar Matter No. 803 to take
effect on July 1, 1997.
15 Kanlaon Construction Enterprises Co., Inc. vs. NLRC, 279 SCRA 337 [1997].
16 Gesulgon vs. NLRC, 219 SCRA 561 [1993].
17 Golden Country Farms, Inc. vs. Sanvar Development Corporation, 214 SCRA 295 [1992]; G & G
Trading Corporation vs. Court of Appeals, 158 SCRA 466 [1988].
72
72
corporate executives;18 retained counsel;19 officials who had charge or control of the operations of the
corporation, like the assistant general manager;20 or the corporations Chief Finance and Administrative
Officer.21 In these cases, these persons were considered as agent within the contemplation of the old
rule.22 Notably, under the new Rules, service of summons upon an agent of the corporation is no longer
authorized.
The cases cited by private respondent are therefore not in point.
In the Kanlaon case, this Court ruled that under the NLRC Rules of Procedure, summons on the
respondent shall be served personally or by registered mail on the party himself; if the party is
represented by counsel or any other authorized representative or agent, summons shall be served on
such person. In said case, summons was served on one Engr. Estacio who managed and supervised the
construction project in Iligan City (although the principal address of the corporation is in Quezon City)
and supervised the work of the employees. It was held that as manager, he had sufficient responsibility
and discretion to realize the importance of the legal papers served on him and to relay the same to the
president or other responsible officer of petitioner such that summons for petitioner was validly served
on him as agent and authorized representative of petitioner. Also in the Gesulgon case cited by private
respondent, the summons was received by the clerk in the office of the Assistant Manager (at principal
office address) and under Section 13 of Rule 14 (old rule),
________________
18 Summit Trading and Development Corporation vs. Avendao, 135 SCRA 397 [1985].
19 Republic vs. Ker & Co., Ltd., 18 SCRA 207 [1966].
20 Villa Rey Transit, Inc. vs. Far East Motor Corporation, 81 SCRA 298 [1978].
21 Far Corporation vs. Francisco, 146 SCRA 197 [1986].
22 See also, Filoil Marketing Corporation vs. Marine Development Corporation of the Philippines, 177
SCRA 86 [1982].
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73
summons may be made upon the clerk who is regarded as agent within the contemplation of the rule.
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 in Section 11, Rule 14 of the 1997
Rules of Civil Procedure. 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.
The particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice
Florenz Regalado, thus:23
x x x the then Sec. 13 of this Rule allowed service upon a defendant corporation to be made on the
president, manager, secretary, cashier, agent or any of its directors. The aforesaid terms were obviously
ambiguous and susceptible of broad and sometimes illogical interpretations, especially the word agent
of the corporation. The Filoil case, involving the litigation lawyer of the corporation who precisely
appeared to challenge the validity of service of summons but whose very appearance for that purpose
was seized upon to validate the defective service, is an illustration of the need for this revised section
with limited scope and specific terminology. Thus the absurd result in the Filoil case necessitated the
amendment permitting service only on the in-house counsel of the corporation who is in effect an
employee of the corporation, as distinguished from an independent practitioner. (italics supplied)
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court Revision Committee, stated
that (T)he rule must be strictly observed. Service must be made to one named in (the) statute x x x.24
It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure, strict
compliance with the rules
________________
23 p. 224, Remedial Law Compendium, Vol. 1, 1997. He is also Vice-Chairman of the Rules of Court
Revision Committee.
24 p. 147, Remedial Law, Vol. VII, 1997 Edition.
74
74
has been enjoined. In the case of Delta Motor Sales Corporation vs. Mangosing,25 the Court held:
A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a
corporation. The officer upon whom service is made must be one who is named in the statute;
otherwise the service is insufficient. x x x.
The purpose is to render it reasonably certain that the corporation will receive prompt and proper
other words, to bring home to the corporation notice of the filing of the action. x x x.
The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal
requirements as to the manner in which summons should be served on a domestic corporation. x x x.
(italics supplied).
Service of summons upon persons other than those mentioned in Section 13 of Rule 14 (old rule) has
been held as improper.26 Even under the old rule, service upon a general manager of a firms branch
office has been held as improper as summons should have been served at the firms principal office. In
First Integrated Bonding & Ins. Co., Inc. vs. Dizon,27 it was held that the service of summons on the
general manager of the insurance firms Cebu branch was improper; default order could have been
obviated had the summons been served at the firms principal office.
And in the case of Solar Team Entertainment, Inc. vs. Hon. Helen Bautista Ricafort, et al.,28 the Court
succinctly clarified
_______________
25 70 SCRA 598 (1976).

26 Talsan Enterprises, Inc., et al. vs. Baliwag Transit, Inc. and Angeles Ramos, G.R. 126258, July 8, 1999,
310 SCRA 156; R. Transport Corporation vs. Court of Appeals, 241 SCRA 77; ATM Trucking, Inc. vs.
Buencamino, 124 SCRA 434; Delta Motors Sales Corporation vs. Mangosing, supra.
27 125 SCRA 440; also cited in Regalado, Remedial Law Compendium, Vol. 1, 1997 at p. 223.
28 G.R. No. 132007, August 5, 1998, 293 SCRA 661.
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75
that, for the guidance of the Bench and Bar, strictest compliance with Section 11 of Rule 13 of the
1997 Rules of Civil Procedure (on priorities in modes of service and filing) is mandated and the Court
cannot rule otherwise, lest we allow circumvention of the innovation by the 1997 Rules in order to
obviate delay in the administration of justice.
Accordingly, we rule that the service of summons upon the branch manager of petitioner at its branch
office at Cagayan de Oro, instead of upon the general manager at its principal office at Davao City is
improper. Consequently, the trial court did not acquire jurisdiction over the person of the petitioner.
The fact that defendant filed a belated motion to dismiss did not operate to confer jurisdiction upon its
person. There is no question that the defendants voluntary appearance in the action is equivalent to
service of summons.29 Before, the rule was that a party may challenge the jurisdiction of the court over
his person by making a special appearance through a motion to dismiss and if in the same motion, the
movant raised other grounds or invoked affirmative relief which necessarily involves the exercise of the
jurisdiction of the court, the party is deemed to have submitted himself to the jurisdiction of the
court.30 This doctrine has been abandoned in the case of La Naval Drug Corporation vs. Court of
Appeals, et al.,31 which became the basis of the adoption of a new provision in the former Section 23,
which is now Section 20 of Rule 14 of the 1997 Rules. Section 20 now provides that the inclusion in a
motion to dismiss of other grounds aside from lack of jurisdiction over the person of the defendant shall
not be deemed a voluntary appearance. The emplacement of this rule clearly underscores the purpose
to enforce strict enforcement of the rules on summons. Accordingly, the filing of a
__________________
29 Section 20 (formerly Section 23), Rule 14.

30 De Midgely vs. Fernando, 64 SCRA 23 [1975]; Busuego vs. Court of Appeals, 151 SCRA 376 [1987].
31 236 SCRA 78 [1994], also cited in pp. 244-245, Regalado, Remedial Law Compendium, 1997 and p.
157, Herrera, Remedial Law; Vol. VII, 1997 Edition.
76
76
motion to dismiss, whether or not belatedly filed by the defendant, his authorized agent or attorney,
precisely objecting to the jurisdiction of the court over the person of the defendant can by no means be
deemed a submission to the jurisdiction of the court. There being no proper service of summons, the
trial court cannot take cognizance of a case for lack of jurisdiction over the person of the defendant. Any
proceeding undertaken by the trial court will consequently be null and void.32
WHEREFORE, the petition is hereby GRANTED. The assailed Orders of the public respondent trial court
are ANNULLED and SETASIDE. The public respondent Regional Trial Court of Makati, Branch 132 is
declared without jurisdiction to take cognizance of Civil Case No. 98-824, and all its orders and issuances
in connection therewith are hereby ANNULLED andSET ASIDE.
SO ORDERED.
Melo (Chairman), Vitug, Panganiban and Purisima, JJ., concur.
Petition granted; Assailed orders annulled and set aside.
Note.Voluntary appearance could cure a defect in the service of summons. (Tuason vs. Court of
Appeals, 268 SCRA 42 [1997])
E.B. Villarosa & Partner Co., Ltd. vs. Benito, 312 SCRA 65, G.R. No. 136426 August 6, 1999
No. L-17716. July 31, 1962.
LUNETA MOTOR COMPANY, petitioner, vs. A. D. SANTOS, INC., ET AL., respondents.
Corporations; Power to purchase and deal with personal or
810
810
Luneta Motor Company vs. A. D. Santos, Inc.
real property; Purpose of the corporation to be considered.Under Section 13(5) of the Corporation
Law, a corporation created thereunder may purchase, hold and otherwise deal in such real and personal
property as the purpose for which the corporation was formed may permit, and the transaction of its
lawful business may reasonably and necessarily require. A corporation authorized under its articles of
incorporation to operate and otherwise deal in automobiles and automobile accessories and to engage
in the transportation of persons by water, may not engage in the business of land transportation, which
is an entirely different line of business, and, for this reason, may not acquire any certificate of public
convenience to operate a taxicab service, because such acquisition would be without purpose and
would have no necessary connection with the corporation's legitimate business.
APPEAL from a decision of the Public Service Commission.

Jose Agbulos for petitioner.
Graciano C. Regala and Angel A. Sison for respondents.
DIZON, J.:
Appeal from the decision of the Public Service Commission in case No. 128401 dismissing petitioner's
application for the approval of the sale in its favor, made by the Sheriff of the City of Manila, of the
certificate of public convenience granted before the war to Nicolas Concepcion (Commission Cases Nos.
60604 and 60605, reconstituted after the war in Commission Case No. 1470) to operate a taxicab service
of 27 units in the City of Manila and therefrom to any point in Luzon.
It appears that 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.
To secure payment of a subsequent loan obtained by Concepcion from the Rehabilitation Finance
Corporation (now Development Bank of the Philippines) he constituted
811
VOL. 5, JULY 31, 1962

811
a second mortgage on the same certificate. 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 (Civil Case No. 20853 of the Court of First Instance of Manila) in view of the failure of the
latter and his guarantor, Placido Esteban, to pay their overdue account.
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.
On June 9, 1958 the Court of First Instance of Manila rendered judgment in Civil Case No. 20853,
amended on August 1, 1958, adjudging Concepcion indebted to petitioner in the sum of P15,197.84,
with 12% interest thereon from December 2, 1941 until full payment, plus other assessments, and
ordered that the certificate of public convenience subject matter of the chattel mortgage be sold at
public auction in accordance with law. Accordingly, on March 3, 1959 said certificate was sold at public
auction to petitioner, and six days thereafter the Sheriff of the City of Manila issued in its favor the
corresponding certificate of sale. Thereupon petitioner filed the application mentioned heretofore for
the approval of the sale. In the meantime and before his death, Amador D. Santos sold and transferred
(Commission Case No. 1272231 )all
812
812
his rights and interests in the certificate of public convenience in question in favor of the now
respondent A.D. Santos, Inc., who opposed petitioner's application.
The record discloses that in the course of the hearing on said application and after petitioner had rested
its case, the respondent A. D. Santos, Inc., with leave of court, filed a motion to dismiss based on the
following grounds:
"a) under the petitioner's Articles of Incorporation, it was not authorized to engage in the taxicab
business or operate as a common carrier;
"b) the decision in Civil Case No. 20853 of the Court of First Instance of Manila did not affect the
oppositor nor its predecessor Amador D. Santos inasmuch as neither of them had been impleaded into
the case;
"c) that what was sold to the petitioner were only the 'rights, interests and participation' of Nicolas
Concepcion in the certificate that had been granted to him which were no longer existing at the time of
the sale."
On October 18, 1960, the respondent Commission, after considering the memoranda submitted by the
parties, rendered the appealed decision sustaining the first ground relied upon in support thereof,
namely, that under petitioner's articles of incorporation it had no authority to engage in the taxicab
business or operate as a common carrier, and that, as a result, it could not acquire by purchase the
certificate of public convenience referred to above. Hence, the present appeal interposed by petitioner
who claims that, in accordance with the Corporation Law and its articles of incorporation, it can acquire
by purchase the certificate of public convenience in question, maintaining inferentially that, after
acquiring said certificate, it could make use of it by operating a taxicab business or operate as a common
carrier by land.
There is no question that a certificate of public convenience granted to a public operator is liable to
execution (Raymundo vs. Luneta Motor Co., 58 Phil. 889) and
813
VOL. 5, JULY 31, 1962

813
may be acquired by purchase. The question involved in the present appeal, however, is not only
whether, under the Corporation Law and petitioner's articles of incorporation, it may acquire by
purchase a certificate of public convenience, such as the one in question, but also whether, after its
acquisition, petitioner may hold the certificate and thereunder operate as a common carrier by land.
It is not denied that 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 as the purpose for which the
corporation was formed may permit, and the transaction of its lawful business may reasonably and
necessarily require. The issue here is precisely whether the purpose for which petitioner was organized
and the transaction of its lawful business reasonably and necessarily require the purchase and holding
by it of a certificate of public convenience like the one in question and thus giveit additional authority to
operate thereunder as a common carrier by land.
Petitioner claims in this regard that its 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 (petitioner's brief p. 7) 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 (id., pp. 7-8
and Exhibit B).
We find nothing in the legal provision and the provisions of petitioner's articles of incorporation relied
upon that could justify petitioner's contention in this case. To the contrary, they 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
814
814
Corpuz vs. Padilla
the business of land transportationan entirely different line of business. If it could not thus engage in
this line of business, it follows that it may not acquire any 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. In view of the conclusion we
have arrived at on the decisive issue involved in this appeal, we deem it unnecessary to resolve the
other incidental questions raised by petitioner.
WHEREFORE, the appealed decision is affirmed, with costs.
Bengzon, C.J., Padilla, Concepcion, Barrera, Paredes and Makalintal, JJ., concur.
Regala, J., did not take part.
Decision affirmed.
Note.In J.R.S. Business Corporation vs. Imperial Insurance, L-19891, July 31, 1964, the Court held that
the right to operate a messenger and express delivery service, by virtue of a legislative enactment, is a
secondary franchise and, as such, is subject to levy and sale on execution together with and including all
the property necessary for the enjoyment thereof.
Luneta Motor Company vs. A. D. Santos, Inc., 5 SCRA 809, No. L-17716 July 31, 1962
No. L-56613. March 14,1988.*
THE DIRECTOR OF LANDS, petitioner, vs. THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO,
respondents.
Land Registration; Evidence; Exhibit "O", the the true certified copy of the white paper plan was
sufficient for the purpose of identifying the land in question; Fact that the original survey plan was
recorded on white paper instead of a tracing cloth should not detract from the probative value
thereof.We affirm. No reversible error was committed by the appellate court in ruling that Exhibit "O",
the true certified copy of the white paper plan, was sufficient for the purpose of identifying the land in
question. Exhibit "O" was found by the appellate court to reflect the land as surveyed by a geodetic
engineer. It bore the approval of the Land Registration Commission, and was re-verified and approved
by the Bureau of Lands on April 25, 1974 pursuant to the provisions of P.D. No, 239 withdrawing from
the Land Registration Commission the authority to approve original survey plans. It contained the
following material data: the barrio [poblacion], municipality [Amadeo] and province [Cavite] where the
subject land is located, its area of 379 square meters, the land as plotted, its technical descriptions and
its natural boundaries. Exhibit "O" was further supported by the Technical Descriptions signed by a
geodetic surveyor and attested by the Land Registration Commission. In fine, Exhibit "O" contained all
the details and information necessary for a proper and definite identification of the land sought to be
registered, thereby serving the purpose for which the original tracing cloth plan is required. The fact
therefore that the original survey plan was recorded on white paper instead of a tracing cloth should not
detract from the probative value thereof.
Same; Same; Public Land Act; Majority ruling in Meralco vs. Castro-Bartolome et al., 114 SCRA 799 is no
longer deemed to be binding precedent; The correct rule x x x is that alienable public land held by a
possessor, personally or through his predecessors-in-interest, openly, continuously and exclusively for
thirty (30) years is converted to private property by mere lapse or completion of said period, ipso jure.
Since then, however, this Court had occasion to re-examine the rulings in these cases vis-a-vis the earlier
cases of Carino v. Insular Government, 41 Phil. 935; Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95
SCRA 437, among others, Thus, in the recent case of Director of Lands v, Intermediate Appellate Court,
146 SCRA 509, We categorically
_____________
* THIRD DIVISION.
569
VOL. 158, MARCH 14, 1988

569
Director of Lands vs. Court of Appeals
stated that the majority ruling in Meralco is "no longer deemed to be binding precedent", and that
"[T]he correct rule, x x x is that alienable public land held by a possessor, personally or through his
predecessorsin-interest, openly, continuously and exclusively for the prescribed statutory period [30
years under the Public Land Act, as amended] is converted to private property by mere lapse or
completion of said period, ipso jure." We further reiterated therein the time-honored principle of non-
impairment of vested rights.
PETITION for certiorari to review the decision of the Court of Appeals.
The Solicior General for petitioner.
Cruz, Esguerra, Tafalla, Peren Castillo & Associates for respondents.
FERNAN, J.:
A complaint often heard from parties-litigants is the delay in the resolution of their cases. This is one
instance where the delay will perhaps be regarded, at least by one of the parties, as a welcome
occurrence for had the case at bar been resolved earlier, the result obtained may have been
diametrically and extremely different.
This is one of the several cases** involving the qualification of private respondent Iglesia ni Cristo, a
corporation sole, to have an alleged alienable piece of public land registered in its name under the 1973
Constitution.
The antecedents are as follows:
On November 28, 1973, private respondent Iglesia ni Cristo filed an application with the then Court of
First Instance of Cavite for regi stration in its name of a parcel of land with an area of 379 square meters
located at Poblacion, Municipality of Amadeo, Cavite. In said 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
____________
** The other cases are: Director of Lands v. Villanueva, 114 SCRA 875; Director of Lands v. Gonong, 118
SCRA 729; Republic v. Cendana, 119 SCRA 449; Republic v. Iglesia ni Cristo, 127 SCRA 687; Republic v.
Iglesia ni Cristo, 128 SCRA 44 and Iglesia ni Cristo v. Court of First Instance of Nueva Ecija, 123 SCRA 516.
570
570
Absolute Sale executed in 1947 by Aquelina de la Cruz in its favor and that applicant and its
predecessors-in-interest had been in actual, continuous, public, peaceful and adverse possession and
occupation of said land in the concept of owner for more than thirty [30] years. 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-ininterest had been in possession of the land for more than thirty [30] years and had
introduced improvements thereon, including the fencing thereof on all sides,1
The Republic of the Philippines, represented by the Director of Lands, opposed the application on the
following grounds: 1] the applicant and its predecessors-in-interest 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-ininterest 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
belonging to the Republic of the Philippines not subject to private appropriation.2
After trial, the Court of First Instance of Cavite rendered judgment granting private respondent's
application for registration of title. It found that private respondent and its predecessors-in-interest had
been in continuous, open and adverse possession of the subject property in the concept of owner for
more than forty [40] years and that the land was not within any military and naval reservation, nor co
vered by any kind of public land application or patent, as it is within the proposed alienable or
disposable block of the proposed LC Project No. 5-A of Amadeo, Cavite.3
Believing that private respondent did not sufficiently identify the land in question by reason of its failure
to submit the original tracing cloth plan thereof and that private respondent was disqualified from
holding, except by lease, alienable lands of the public domain under Section 11, Article XIV of the 1973
Constitution, the Director of Lands appealed the decision of the land
____________
1 Annex "A", Petition, pp. 27-29, Rollo.
2 Annex "B", Petition, pp. 31-32, Rollo.
3 Annex "C", Petition, pp. 34-35, Rollo.
571
VOL. 158, MARCH 14, 1988

571
registration court to the Court of Appeals. The appellate court, however, affirmed in toto the assailed
decision. Hence, this petition for review on certiorari, petitioner Director of Lands reiterating as basis
therefor the two [2] issues previously raised before the appellate court
We affirm. No reversible error was committed by the appellate court in ruling that Exhibit "O", the true
certified copy of the white paper plan, was sufficient for the purpose of identifying the land in question,
Exhibit "O" was found by the appellate court to reflect the land as surveyed by a geodetic engineer. It
bore the approval of the Land Registration Commission, and was reverified and approved by the Bureau
of Lands on April 25, 1974 pursuant to the provisions of P.D. No. 239 withdrawing from the Land
Registration Commission the authority to approve original survey plans. It contained the following
material data: the barrio [poblacion], municipality [Amadeo] and province [Cavite] where the subject
land is located, its area of 379 square meters, the land as plotted, its technical descriptions and its
natural boundaries. Exhibit "O" was further supported by the Technical Descriptions4 signed by a
geodetic surveyor and attested by the Land Registration Commission. In fine, Exhibit "O" contained all
the details and information necessary for a proper and definite identification of the land sought to be
registered, thereby serving the purpose for which the original tracing cloth plan is required. The fact
therefore that the original survey plan was recorded on white paper instead of a tracing cloth should not
detract from the probative value thereof, As observed by the appellate court:
"Now, just because the law requires the filing of a tracing cloth of the plan, that We should be too
technical about it that the submission of the certified copy of the white paper plan instead of the
original of the tracing cloth of the plan would compel Us to deny the registration? The object of the law
in requiring the submission of a tracing cloth of the plan duly approved by the Bureau of Lands is to
establish the true identitythe locationof the land, in terms of degrees and minutes in order that
there is an assurance that it does not overlap a land or portion of land already covered by a previous
land registration, or that there will be no possibility that it will be overlapped by a subsequent survey of
any adjoining land.
____________
4 Exh. "O-1"
572
572
"In the case at bar, such identity can be well-established by the white paper plan, To Us, it would not
matter if the plan introduced to establish the identity of the land is made of cloth or is made of paper.
For one thing, a tracing cloth of the plan is required to be submitted to the Bureau of Lands. It must
have a file copy of the same.5
Petitioner's heavy reliance on the case of Director of Lands v. Reyes, 68 SCRA 177, is misplaced. The
original tracing cloth plan was deemed essential in that case as the lands involved were vast tracts of
uncultivated, mountainous and thickly forested lands which were necessarily difficult to identify, unlike
the land subject matter of the instant registration case which is more readily identifiable by reason of its
location, its comparatively smaller size of 379 square meters as well as the chapel constructed thereon
by private respondent in 1968. Moreover, the documentary evidence presented therein consisting in the
blueprints of two [2] survey plans were not approved by the Director of Lands unlike Exhibit "O" which
bore the approval of the Land Registration Commission at the time it was empowered by law to approve
original survey plans and which was re-verified and approved by the Bureau of Lands when the authority
to approve original survey plans was withdrawn from the Land Registration Commission by P.D. No. 239.
As observed at the outset, had this case been resolved immediately after it was submitted for decision,
the result may have been quite adverse to private respondent. For the rule then prevailing under the
case of Manila Electric Company v. CastroBartolome, et al., 114 SCRA 799, reiterated in Republic v.
Villanueva, 114 SCRA 875 as well as the other subsequent cases involving private respondent adverted
to above, is that a juridical person, private respondent in particular, is disqualified under the 1973
Constitution from applying for registration in its name alienable public land, as such land ceases to be
public land "only upon the issuance of title to any Filipino citizen claiming it under section 48[b]" of
Commonwealth Act No. 141, as amended. These are precisely the cases cited by petitioner in support of
its theory of disqualification.
Since then, however, this Court had occasion to re-examine the rulings in these cases vis-a-vis the earlier
cases of Carino v.
_____________
5 Annex "D", Petition, p. 40, Rollo.

573
VOL. 158, MARCH 14, 1988

573
Insular Government, 41 Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
others. Thus, in the recent case of Director of Lands v. Intermediate Appellate Court, 146 SCRA 509, We
categorically stated that the majority ruling in Meralco is "no longer deemed to be binding precedent",
and that "[T]he correct rule, x x x is that alienable public land held by a possessor, personally or through
his predecessors-in-interest? openly, continuously and exclusively for the prescribed statutory period
[30 years under the Public Land Act, as amended] is converted to private property by mere lapse or
completion of said period, ipso jure."6 We further reiterated therein the timehonored principle of non-
impairment of vested rights.
The crucial factor to be determined therefore is the length of time private respondent and its
predecessors-in-interest had been in possession of the land in question prior to the institution of the
instant registration proceedings. The land under consideration was acquired by private respondent from
Aquelina de la Cruz in 1947, who, in turn, acquired by same by purchase from the Ramos brothers and
sisters, namely: Eusebia, Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of
Commonwealth Act No. 141, as amended, "those who by themselves or through their predecessors-in-
interest have been in open, continuous, exclusive and notorious possession and occupation of
agricultural lands of the public domain, under a bona fide claim of acquisition or ownership, for at least
thirty years immediately preceding the filing of the application for confirmation of title except when
prevented by war or force majeure" may apply to the Court of First Instance of the province where the
land is located for confirmation of their claims, and the issuance of a certificate of title therefor, under
the Land Registration Act. Said paragraph [b] further provides that "these shall be conclusively
presumed to have performed all the conditions essential to a Government grant and shall be entitled to
a certificate of title under the provisions of this chapter." Taking the year 1936 as the reckoning point,
there being no showing as to when the Ramoses first took possession and occupation of the land in
question, the 30-year period of open, continuous, exclusive and notorious possession and occupation
required by law was completed in 1966.
____________
6 at p. 522.
574
574
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.7
WHEREFORE, the instant petition for review on certiorari is hereby DENIED. The decision of the Court of
Appeals in CA-G.R. No. 63498-R is AFFIRMED IN TOTO. This decision is immediately executory. No
pronouncement as to costs.
SO ORDERED.
Feliciano, Bidin and Corts, JJ., concur.
Gutierrez, Jr., J., following my concurrence in the Meralco case, I dissent.
Petition denied. Decision affirmed.
Note.Possession of public lands, however long never confers title upon the possessor, unless the
occupant can prove occupation of the same under claim of ownership for the required period to
constitute a grant from the State. (Republic vs. Vera, 120 SCRA 210.)
Director of Lands vs. Court of Appeals, 158 SCRA 568, No. L-56613 March 14, 1988
No. L-18062. February 28, 1963.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. ACOJE MINING COMPANY, INC., defendant-
appellant.
Corporations; Ultra vires act defined; When corporate acts may be performed outside the scope of
powers expressly con-ferred.While as a rule an ultra vires act is one committed out-side the object for
which a corporation is created as defined by the law of its organization and therefore beyond the
powers conferred upon it by law (19 C.J.S., Section 965, p. 419), there are however certain corporate
acts that may be performed out-side of the scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the corporation, such as the establishment, in the case
at bar, of a local post office in a mining camp which is far removed from the postal facilities or means of
communications accorded to- people living in a city or municipality.
Same; Same; Ultra vires act distinguished from illegal act; Enforcement of ultra vires act on the ground
of estoppel.An illegal act is void and cannot be validated, while an ultra vires act is merely voidable
and can be enforced by performance, ratifi-cation or estoppel, or on equitable grounds. In the present
case the validity of the resolution of the Board of Directors of the corporation accepting full
responsibility in connection with funds to be received by its postmaster, should be upheld on the ground
of estoppel.
Same; Assumption of responsibility; Responsibility in pres-ent case that of principal and not that of
guarantor.That the responsibility of the defendant corporation is not just that of a guarantor but of a
principal is clear from the resolution of its Board of Directors in which the corporation assumed full
responsibility for all cash received by the Postmaster.
APPEAL from a decision of the Court of First Instance of Manila. Bocar, J.
Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.
362
362
Republic vs. Acoje Mining Co., Inc.
BAUTISTA ANGELO, J.:
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 outlined in the letter of the Director of Posts requesting at the same time that it be
furnished with the necessary forms for the early establishment of a post office branch.
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 of the following tenor: That the requirement of the
Bureau of Posts that the Company should accept full responsibility for all cash received by the
Postmaster be complied with, and that a copy of this resolution be forwarded to the Bureau of Posts.
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
363
VOL. 7, FEBRUARY 28, 1963

363
inspector be sent to the camp for the purpose of acquainting the postmaster with the details of the
operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with one Hilario M. Sanchez as
postmaster. He is an employee of the company. On May 11, 1954, the postmaster went on a three-day
leave but never returned. The company immediately informed the officials of the Manila Post Office and
the provincial auditor of Zambales of Sanchez disappearance with the result that the accounts of the
postmaster were checked and a shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the shortage in line with the liability it
has assumed having failed, the government commenced the present action on September 10, 1954
before the Court of First Instance of Manila seeking to recover the amount of Pl3,867.24. The company
in its answer denied liability for said amount contending that the resolution of the board of directors
wherein it assumed responsibility for the act of the postmaster is ultra vires, and in any event its liability
under said resolution is only that of a guarantor who answers only after the exhaustion of the properties
of the principal, aside from the fact that the loss claimed by the plaintiff is not supported by the office
record.
After trial, the court a quo found that, of the amount claimed by plaintiff totalling P13,867.24, only the
sum of P9,515.25 was supported by the evidence, and so it rendered judgment for the plaintiff only for
the amount last mentioned. The court rejected the contention that the resolution adopted by the
company is ultra vires and that the obligation it has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31, 1949 is ultra vires in the
sense that it has no authority to act on a matter which may render the company liable as a guarantor
has no factual or legal basis. In the first place, it should be noted that
364
364
the opening of a post office branch at the mining camp of appellant corporation was undertaken
because of a request submitted by it to promote the convenience and benefit of its employees. The idea
did not come from the government, and the Director of Posts was prevailed upon to agree to the
request only after studying the necessity for its establishment and after imposing upon the company
certain requirements intended to safeguard and protect the interest of the government. Thus, after the
company had signified its willingness to comply with the requirement of the government that it furnish
free quarters and all the essential equipment that may be necessary for the operation of the office
including the assignment of an employee who will perform the duties of a postmaster, the Director of
Posts agreed to the opening of the post office stating 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, and accepting this condition, the company, thru its board of
directors, adopted forthwith a resolution of the following tenor: That the requirement of the Bureau of
Posts that the company should accept full responsibility for all cash received by the Postmaster, be
complied with, and that a copy of this resolution be forwarded to the Bureau of Posts. On the basis of
the foregoing facts, it is evident that the company cannot now be heard to complain that it is not liable
for the irregularity committed by its employee upon the technical plea that the resolution approved by
its board of directors is ultra vires. The least that can be said is that it cannot now go back on its plighted
word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of appellant company is an ultra vires
act cannot also be entertained it appearing that the same covers a subject which concerns the benefit,
convenience and wel-
365

365
fare of its employees and their families. While as a rule an ultra vires act is one committed outside the
object for which a corporation is created as defined by the law of its organization and therefore beyond
the powers conferred upon it by law (19 C.J.S., Section 965, p. 419), there are however certain corporate
acts that may be performed outside of the scope of the powers expressly conferred if they are necessary
to promote the interest or welfare of the corporation. Thus, it has been held that although not
expressly authorized to do so a corporation may become a surety where the particular transaction is
reasonably necessary or proper to the conduct of its business,1 and here it is undisputed that the
establishment of the local post office is a reasonable and proper adjunct to the conduct of the business
of appellant company. Indeed, such post office is a vital improvement in the living condition of its
employees and laborers who came to settle in its mining camp which is far removed from the postal
facilities or means of communication accorded to people living in a city or municipality.
Even assuming arguendo that the resolution in question constitutes an ultra vires act, the same however
is not void for it was approved not in contravention of law, customs, public order or public policy. The
term ultra vires should be distinguished from an illegal act for the former is merely voidable which may
be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.2
It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds
for taking such action. Here it is fair that the resolution be upheld at least on the ground of estoppel. On
this point, the authorities are overwhelming:
The weight of authority in the state courts is to the effect that a transaction which is merely ultra vires
and not malum
_______________
1 Thomson on Corporations, 3rd ed. Vol. 3, p. 973 citing Deming v. Maas, 18 Cal. App. 330, 123 Pac. 204;
Depot Realty Syndicate v. Enterprise Brewing Co., 87 Ore. 560, 170 Pac. 294, 171 Pac. 223, L.R.A. 1918C,
1001.
2 19 C.J.S., Section 966, p. 422, citing Smith v. Baltimore and O. R. Co., D. C. Pa., 48 F. 2d 861, 870.
366
366
in se or malum prohibitum, is, if performed by one party, not void as between the parties to all intents
and purposes, and that an action may be brought directly on the transaction and relief had according to
its terms. (19 C.J.S., Section 976, p. 432, citing Nettles v. Rhett, C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F.
Supp. 48)
This rule is based on the consideration that as between private corporations, one party cannot receive
the benefits which are embraced in total performance of a contract made with it by another party and
then set up the invalidity of the transaction as a defense. (London & Lancashire Indemnity Co. of
America v. Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty toward stockholders, and should not be
entertained where its allowance will do greater wrong to innocent parties dealing with corporation..
The acceptance of benefits arising from the performance by the other party may give rise to an
estoppel precluding repudiation of the transaction. (19 C.J.S., Section 976, p. 433.)
The current of modern authorities favors the rule that where the ultra vires transaction has been
executed by the other party and the corporation has received the benefit of it, the law interposes an
estoppel, and will not permit the validity of the transaction or contract to be questioned, and this is
especially true where there is nothing in the circumstances to put the other party to the transaction on
notice that the corporation has exceeded its powers in entering into it and has in so doing overstepped
the line of corporate privileges. (19 C.J.S., Section 977, pp. 435-437, citing Williams v. Peoples Building
& Loan Assn, 97 S.W. 2d 930, 193 Ark. 118; Hays v. Galion Gas Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is only that of a guarantor. On this point,
we agree with the following comment of the court a quo: 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. Notice that 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.
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367
WHEREFORE, the decision appealed from is affirmed. No costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Decision affirmed.
Note.Whenever the corporate entity is being used as an alter ego or business conduit for the sole
benefit of the stockholders, or to defeat public convenience, justify wrong, protect fraud, or defend
crime, the individual stock-holders may be held liable for the obligations contracted by the corporation
(McConnel, et al. v. Court of Appeals, L-10510, March 17, 1961, 1 SCRA 722).
Republic vs. Acoje Mining Co., Inc., 7 SCRA 361, No. L-18062 February 28, 1963
No. L-21804. September 25, 1967.
TERESA ELECTRIC AND POWER CO., INC., petitioner, vs. PUBLIC SERVICE COMMISSION AND FILIPINAS
CEMENT CORPORATION,respondents.
Public Service Commission; Issuance of certificates of public convenience; Municipal or legislative
franchise; When not a condition precedent; Case at bar.The requirement of a municipal franchise
under the provisions of Act No. 667 was intended to apply exclusively to any person or corporation who
desires a franchise to construct and maintain an electric line or power plant and line for business
purposes; it should not be made to apply to one who, like respondent, applied for a certificate of public
convenience and service to operate and maintain an electric plant exclusively for its own use in
connection with the operation of its cement factory and for free use of its employees living within the
compound of the factory.
Public utilities; Primordial considerations.While it is true that operators of public convenience and
service deserve protection from unlawful or unnecessary competition, yet the rule is that nobody has
any exclusive right to secure a franchise or a certificate of public convenience. Public service and interest
are the primordial considerations taken into account in the granting of franchises and certificates of
public convenience and service.
PETITION FOR REVIEW of a decision of the Public Service Commission.

Lino B. Azicate & Associates for petitioner.
G. A. Borja for respondents.
DIZON, J.:
This is a petition to review and set aside the decision of the Public Service Commission dated March 15,
1963
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199
Teresa Electric & Power Co., Inc. vs. Public Service Commission
in Case No. 62-3521 granting to the Filipinas Cement Corporationhereinafter referred to as Filipinas
a certificate of public convenience and necessity to establish, maintain and operate an electric plant in
its factory site at Teresa, Rizal, for a period of fifty years from June 26, 1958. By resolution of September
11, 1963, We denied petitioners petition for the issuance of a writ of preliminary mandatory and
prohibitory injunction restraining the Commission from enforcing its decision during the pendency of
the appeal.
The Teresa Electric Light and Power Co., Inc.,hereinafter referred to as petitioneris a domestic
corporation operating an electric plant in Teresa, Rizal, under a subsisting certificate of public
convenience and necessity issued on June 2, 1960 (PSC Case No. 129940), 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 filed its written opposition alleging: that it is the duly authorized operator of an electric light,
heat and power service in Teresa, Rizal; 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; that it is willing to supply Filipinas need for electricity; and that Filipinas principal
business does not come within the jurisdiction of the respondent Commission.
Answering the opposition, Filipinas averred that, under paragraph 7 of its articles of incorporation, it is
authorized to operate the proposed electric plant; that there is no need for securing the approval of the
Municipal Council before operating its electric plant as this is not a necessary requisite for the issuance
of a certificate of public convenience inasmuch as it already possesses the 3 basic require-
200
200
ments of law, namely: Filipino citizenship, financial capacity and the need for the service in the interest
and convenience of the consuming public.
During the hearings before the Commission Filipinas presented its evidence and petitioners counsel
cross-examined the witnesses. Upon the resumption of the hearing on December 17, 1962, petitioners
counsel filed an urgent motion for the postponement of the presentation of its evidence that day
alleging that he was to attend a preliminary hearing at Caloocan City. As the date agreed upon by the
parties was set only after the attorneys for the parties had consulted their respective calendar, the
Commission, in open court, denied said motion and considered the application as submitted for
resolution.
Upon consideration of the evidence, oral and documentary, adduced by Filipinas to the effect that the
proposed electric service will be limited to the exclusive needs of its cement factory and to give light
facilities to its employees living in the compound only, without adversely affecting the interests and
services of petitioner; that like the latter, Filipinas will not generate its own electric current but buy it
from the MERALCO; and that no municipal streets will be traversed by its electric wires and posts except
small portions of private properties, the Commission, pursuant to section 15 of Commonwealth Act 146,
as amended, issued a certificate of public convenience to it on March 15, 1963, subject to the conditions
set forth therein.
Petitioner filed a motion to set aside the above decision and re-open the case but the same was denied
en banc on August 12, 1963. Hence the instant petition for review filed on September 9 of the same
year.
Considering the assignment of errors made in petitioners brief, the following are the questions to be
resolved in this appeal: firstly, whether or not Filipinas should have secured either a municipal or
legislative franchise before it could be entitled to a certificate of public convenience and necessity to
operate and maintain an electric plant; secondly, whether under its articles of incorporation Filipinas is
authorized to operate and maintain an electric
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201
plant; and lastly, whether Filipinas could be granted a certificate of public convenience and necessity to
operate and maintain an electric plant notwithstanding the existence of an electric plant operator in the
same municipality.
In relation to the first question petitioner contends that under the provisions of Act No, 667 of the
Philippine Commission, a municipal or legislative franchise is a condition precedent to the granting to
Filipinas of a certificate of public convenience and necessity to operate and maintain an electric plant.
Section 1 of the act mentioned above requires the filing of a formal application with the Council of the
municipality in which or through which the petitioner desires to construct or maintain its line, stating,
among other things, the rate per month to be charged for electric light by lamp of specified standard
candle-power, and by amount of electricity consumed where a meter is used, and the rate per centum
of the gross receipts which petitioner is willing to pay into the provincial treasury for the franchise.
Paragraphs 2 and 3, section 2 of the same act also provide that not less than one-half of one per centum
of the gross earnings shall be paid into the provincial treasury, and that the rates to be charged shall
always be subject to regulations by act of the Philippine Commission or the legislative body of the
Islands.
The above requirements show that the act was intended to apply exclusively to any person or
corporation who desires a franchise to construct and maintain an electric line or power plant and line
for business purposes, that is, to render service to the general public at such rate of compensation as
may be approved and regulated by the government. Clearly, therefore, it should not be made to apply
to Filipinas who applied for a certificate of public convenience and service to operate and maintain an
electric plant exclusively for its own use in connection with the operation of its cement factory and for
the use of its employees living within the compound of the factorythe latter to receive service free of
charge.
It is, consequently, our view that all that Filipinas needs for the purpose above mentioned is a certificate
of
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202
public convenience and necessity such as the one granted to it by the respondent Public Service
Commission.
In relation to the second question, it appears that 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
concessionsobviously 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 can not be denied that the operation of an electric light, heat and power plant is necessarily
connected with the business of manufacturing cement. If in the modern world where we live today
electricity is virtually a necessity for our daily needs, it is more so in the case of industries like the
manufacture of cement.
Upon the last question, petitioner claims that Filipinas is not entitled to a certificate of public
convenience to maintain and operate electric service for its cement plant and its employees because
petitioner is operating an electric plant in the same municipality where Filipinas cement plant is located.
While it is true that operators of public convenience and service deserve some protection from
unnecessary or unlawful competition, yet the rule is that nobody has any exclusive right to secure a
franchise or a certificate of public convenience. Above any or all considerations, the grant of franchises
and certificates of public convenience and service should be guided by public service and interest; the
latter are the primordial considerations to be taken into account.
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.
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VOL. 21, SEPTEMBER 25 1967

203
NWSA vs. NWSA Consolidated Labor Unions
IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Scunchez, Castro, Angeles and
Fernando, JJ., concur.
Decision affirmed.
Teresa Electric & Power Co., Inc. vs. Public Service Commission, 21 SCRA 198, No. L-21804 September
25, 1967
G.R. No. 83558. February 27, 1989.*
NATIONAL POWER CORPORATION, petitioner, vs. HONORABLE ABRAHAM P. VERA, Presiding Judge,
Regional Trial Court, National Capital Judicial Region, Branch 90, Quezon City and SEA LION
INTERNATIONAL PORT TERMINAL SERVICES, INC., respondents.
Public Corporations; Public Utilities; Remedial Law; Special Civil Actions; Preliminary Injunction;
Respondent court has no jurisdiction to issue the writ of preliminary injunction against the National
Power Corporation.Firstly, respondent judge acted without jurisdiction when he issued the writ of
preliminary injunction against NPC. Presidential Decree No. 1818 explicitly provides: SECTION 1. No
court in the Philippines shall have jurisdiction to issue any restraining order, preliminary injunction, or
preliminary mandatory injunction in any case, dispute, or controversy involving an infrastructure
project, or a mining, fishery, forest or other natural resource development project of the government, or
any public utility operated by the government, including among others public utilities
_______________
* THIRD DIVISION.
722
722
National Power Corporation vs. Vera
for the transport of the goods or commodities, stevedoring and arrastre contracts, to prohibit any
person or persons, entity or government official from proceeding with, or continuing the execution or
implementation of any such project, or the operation of such public utility, or pursuing any lawful
activity necessary for such execution, implementation or operation. Undeniably, NPC is a public utility,
created under special legislation, engaged in the generation and distribution of electric power and
energy. It, therefore, enjoys the protective mantle of the above decree.
Same; Same; Powers of a Corporation; A corporation is not restricted to exercise only those powers
expressly conferred upon it by its charter, it may also exercise those powers which are reasonably
necessary or proper to promote its interests and welfare.This Court is guided by jurisprudence in the
application of the above standard. In the 1963 case of Republic of the Philippines v. Acoje Mining
Company, Inc. [G.R. No. L-18062, February 28, 1963, 7 SCRA 361] the Court affirmed the rule that a
corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has
the power to do what is reasonably necessary or proper to promote the interest or welfare of the
corporation. Thus, the Court, finding that a post office is a vital improvement in the living condition of
its employees and laborers who came to settle in its mining camp which is far removed from the postal
facilities or means of communication accorded to people living in a city or municipality [Id., at p. 365],
held that respondent mining corporation was empowered to operate and maintain postal facilities
servicing its employees and their families at its mining camp in Sta. Cruz, Zambales despite absence of a
provision in the companys charter authorizing the former to do so.
Remedial Law; Special Civil Actions; Preliminary Injunction; An application for a writ of preliminary
injunction must show that there exists a right to be protected and that the acts against which the writ is
to be directed are violative of such right.Before a writ of preliminary injunction may be issued, there
must be a clear showing by the complainant that there exists a right to be protected and that the acts
against which the writ is to be directed are violative of the said right [Araneta v. Gatmaitan, 101 Phil.
328 (1957); Buayan Cattle Co., Inc. v. Quintillan, G.R. No. L-26970, March 19, 1984, 128 SCRA 276.] In the
instant case, it is an undisputed fact that private respondents contract for stevedoring services with
NPC had already expired. Admittedly, there is no existing contractual relationship between the parties.
Moreover, private respondents PPA permit for cargo han-
723
723
dling services at the NPC Calaca pier had expired as well. On the other hand, NPC, which was under no
legal obligation to renew the contract for stevedoring services with private respondent, was granted
authority by the PPA to provide cargo handling services in its pier. Consequently, there was no right of
private respondent that needed to be protected or preserved by a writ of preliminary injunction.
Same; Same; Mandamus; Mandamus will lie only to compel the performance of a ministerial duty but
not to require anyone to fullfill a contractual obligation or compel a course of conduct, nor to control or
review the exercise of discretion.Furthermore, respondent judges directive ordering NPC to enter
into a contract for stevedoring and arrastre services or to conduct a public bidding therefor amounted to
a writ of mandamus. But it is a settled rule that mandamus will lie only to compel the performance of a
ministerial duty; it does not lie to require anyone to fulfill contractual obligations or compel a course of
conduct, nor to control or review the exercise of discretion [Sy Ha v. Galang, G.R. No. L-18513, April 27,
1963, 7 SCRA 797; Aprueba et al. v. Ganzon, G.R. No. L-20867, September 3, 1966, 18 SCRA 8; Avenue
Arrastre & Stevedoring Corporation v. Commissioner of Customs, et al., G.R. No. L-44674, February 28,
1983, 120 SCRA 878; Tangonan v. Pano, G.R. No. L-45157, June 27, 1985, 137 SCRA 245.] As far back as
1910, in the case of Tabigue v. Duvall [16 Phil. 324], the Court laid the fundamental principle governing
the issuance of a writ of mandamus that the duties to be enforced thereby must be such as are clearly
and peremptorily enjoined by law or by reason of official station.
PETITION to review the order of the Regional Trial Court of Quezon City, Br. 90. Vera, J.
The facts are stated in the resolution of the Court.
The Solicitor General for petitioner.
C.L. Cinco & Associates for private respondent.
RESOLUTION
CORTS, J.:
Petitioner, National Power Corporation (NPC), seeks to annul the order of respondent judge dated June
8, 1988 issuing a writ of preliminary injunction which enjoined NPC from further undertaking
stevedoring and arrastre services in its pier lo-
724
724
cated at the Batangas Coal-Fired Thermal Power Plant at Calaca, Batangas and directing it either to enter
into a contract for stevedoring and arrastre services or to conduct a public bidding therefor. Private
respondent was also allowed to continue stevedoring and arrastre services at the pier.
The instant petition arose from a complaint for prohibition and mandamus with damages filed by private
respondent against NPC and Philippine Ports Authority (PPA), wherein private respondent alleged that
NPC had acted in bad faith and with grave abuse of discretion in not renewing its Contract for
Stevedoring Services for Coal-Handling Operations at NPCs plant, and in taking over its stevedoring
services.
Soon after the filing of private respondents complaint, respondent judge issued a restraining order
against NPC enjoining the latter from undertaking stevedoring services at its pier. Consequently, NPC
filed an Urgent Motion to dissolve the restraining order, asserting, inter alia: (1) that by virtue of
Presidential Decree No. 1818, respondent judge had no jurisdiction to issue the order; and (2) that
private respondent, whose contract with NPC had expired prior to the commencement of the suit, failed
to establish a cause of action for a writ of preliminary injunction.
Respondent judge issued the assailed Order denying NPCs motion and issuing a writ of preliminary
injunction, after finding that NPC was not empowered by its Charter, Republic Act No. 6395, as
amended, to engage in stevedoring and arrastre services. Hence, the instant petition.
On June 15, 1988, the Court issued a temporary restraining order. After private respondent filed its
comment to the petition, and petitioner filed its reply, the Court considered the issues joined and the
case submitted for decision.
After a careful study of the various allegations and issues raised in the pleadings, the Court finds merit in
the petition. Indeed, the assailed Order suffers from infirmities which must be rectified by the grant of a
writ of certiorari in favor of the petitioner.
A. Firstly, respondent judge acted without jurisdiction when he issued the writ of preliminary injunction
against NPC.
Presidential Decree No. 1818 explicitly provides:
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725
SECTION 1. No court in the Philippines shall have jurisdiction to issue any restraining order, preliminary
injunction, or preliminary mandatory injunction in any case, dispute, or controversy involving an
infrastructure project, or a mining, fishery, forest or other natural resource development project of the
government, or any public utility operated by the government, including among others public utilities
for the transport of the goods or commodities, stevedoring and arrastre contracts, to prohibit any
person or persons, entity or government official from proceeding with, or continuing the execution or
implementation of any such project, or the operation of such public utility, or pursuing any lawful
activity necessary for such execution, implementation or operation.
Undeniably, NPC is a public utility, created under special legislation engaged in the generation and
distribution of electric power and energy. It, therefore, enjoys the protective mantle of the above
decree.
Moreover, respondent judges finding that NPC is not empowered by its Charter to undertake
stevedoring services in its pier is erroneous.
To carry out the national policy of total electrification of the country, specifically the development of
hydroelectric generation of power and the production of electricity from nuclear, geothermal and other
sources to meet the needs of industrial development and dispersal and the needs of rural electrification
[Secs. 1 and 2, Rep. Act No. 6395, as amended], the NPC was created and empowered not only to
construct, operate and maintain power plants, reservoirs, transmission lines, and other works, but also:
xxx
. . . To exercise such powers and do such things as may be reasonably necessary to carry out the
business and purposes for which it was organized, or which, from time to time, may be declared by the
Board to be necessary, useful, incidental or auxiliary to accomplish said purpose, . . . [Sec. 3 (1) of Rep.
Act No. 6395, as amended.]
In determining whether or not an NPC act falls within the purview of the above provision, the Court
must decide whether or not a logical and necessary relation exists between the act questioned and the
corporate purpose expressed in the NPC
726
726
charter. For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the
purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense, it may be fairly considered within the corporations
charter powers [Montelibano v. Bacolod-Murcia Milling Co., Inc., G.R. No. L-15092, May 18, 1962, 5
SCRA 36.]
This Court is guided by jurisprudence in the application of the above standard. In the 1963 case of
Republic of the Philippines v. Acoje Mining Company, Inc. [G.R. No. L-18062, February 28, 1963, 7 SCRA
361] the Court affirmed the rule that a corporation is not restricted to the exercise of powers expressly
conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to
promote the interest or welfare of the corporation. Thus, the Court, finding that a post office is a vital
improvement in the living condition of its employees and laborers who came to settle in its mining camp
which is far removed from the postal facilities or means of communication accorded to people living in a
city or municipality [Id., at p. 365], held that respondent mining corporation was empowered to
operate and maintain postal facilities servicing its employees and their families at its mining camp in Sta.
Cruz, Zambales despite absence of a provision in the companys charter authorizing the former to do so.
The Court in the case of Teresa Electric & Power Co., Inc. v. Public Service Commission and Filipinas
Cement Corporation [G.R. No. L-21804, September 25, 1967, 21 SCRA 198] in interpreting a provision
found in respondent corporations articles of incorporation authorizing the corporation to perform any
and all acts connected with the business of manufacturing portland cement or arising therefrom or
incidental thereto, concluded that the corporation must be deemed authorized to operate and maintain
an electric power plant exclusively for its own use in connection with the operation of its cement factory
in a remote barrio. The Court found that the operation of such plant was necessarily connected with the
business of manufacturing cement.
In the instant case, it is an undisputed fact that the pier located at Calaca, Batangas, which is owned by
NPC, receives
727
727
the various shipments of coal which is used exclusively to fuel the Batangas Coal-Fired Thermal Power
Plant of the NPC for the generation of electric power. The stevedoring services which involve the
unloading of the coal shipments into the NPC pier for its eventual conveyance to the power plant are
incidental and indispensable to the operation of the plant. The Court holds that NPC is empowered
under its Charter to undertake such services, it being reasonably necessary to the operation and
maintenance of the power plant.
B. Secondly, the assailed Order was issued in grave abuse of discretion, considering: (1) that private
respondent had failed to establish a right to the issuance of a writ of preliminary injunction; and (2) that
the court cannot direct the exercise of a corporate prerogative.
Before a writ of preliminary injunction may be issued, there must be a clear showing by the complainant
that there exists a right to be protected and that the acts against which the writ is to be directed are
violative of the said right [Araneta v. Gatmaitan, 101 Phil. 328 (1957); Buayan Cattle Co., Inc. v.
Quintillan, G.R. No. L-26970, March 19, 1984, 128 SCRA 276.]
In the instant case, it is an undisputed fact that private respondents contract for stevedoring services
with NPC had already expired. Admittedly, there is no existing contractual relationship between the
parties. Moreover, private respondents PPA permit for cargo handling services at the NPC Calaca pier
had expired as well. On the other hand, NPC, which was under no legal obligation to renew the contract
for steve-doring services with private respondent, was granted authority by the PPA to provide cargo
handling services in its pier. Consequently, there was no right of private respondent that needed to be
protected or preserved by a writ of preliminary injunction.
Furthermore, respondent judges directive ordering NPC to enter into a contract for stevedoring and
arrastre services or to conduct a public bidding therefor amounted to a writ of mandamus. But it is a
settled rule that mandamus will lie only to compel the performance of a ministerial duty; it does not lie
to require anyone to fulfill contractual obligations or compel a course of conduct, nor to control or
review the exercise of
728
728
discretion [Sy Ha v. Galang, G.R. No. L-18513, April 27, 1963, 7 SCRA 797; Aprueba, et al. v. Ganzon, G.R.
No. L-20867, September 3, 1966, 18 SCRA 8; Avenue Arrastre & Stevedoring Corporation v.
Commissioner of Customs, et al., G.R. No. L-44674, February 28, 1983, 120 SCRA 878; Tangonan v. Pano,
G.R. No. L-45157, June 27, 1985, 137 SCRA 245.] As far back as 1910, in the case of Tabigue v. Duvall [16
Phil. 324], the Court laid the fundamental principle governing the issuance of a writ of mandamus that
the duties to be enforced thereby must be such as are clearly and peremptorily enjoined by law or by
reason of official station.
Whether NPC will enter into a contract for stevedoring and arrastre services to handle its coal shipments
to its pier, or undertake the services itself, is entirely and exclusively within its corporate discretion. It
does not involve a duty the performance of which is enjoined by law. Thus, the courts cannot direct the
NPC in the exercise of this prerogative.
WHEREFORE, in view of the foregoing, the Court having considered the Petition, private respondents
Comment, and the Reply thereto, Resolved to GRANT the petition. The respondent Judges Order dated
June 8, 1988 is SET ASIDE and the temporary restraining order issued by the Court on June 15, 1988 is
made PERMANENT.
SO ORDERED.
Fernan, (C.J.), Gutierrez Jr., Feliciano and Bidin, JJ., concur.
Petition granted and order set aside.
Note.Two requisites are necessary if a preliminary injunction is to issue, namely, the existence of the
right to be protected, and the facts against which the injunction is to be directed are violative of said
right. (Ortigas & Company, Limited Partnership vs. Ruiz, 148 SCRA 326).
National Power Corporation vs. Vera, 170 SCRA 721, G.R. No. 83558 February 27, 1989
No. L-48064. May 9, 1988.*
ANTHONY POWERS, BERTEL FASSNACHT, RICHARD I. GUARDIAN, JOANN KELLY, IAN LANDLESS, AMADO
MACASAET, JAVIER MACICIOR, ATUSHI 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., plaintiffs-appellants, vs. DONALD I. MARSHALL, CHARLES ANGEVINE, CARLOS D.
ARGUELLES, BRYCE F. BASTIAN, GABRIEL DIMANCHE, JOSE FLORENTO, JAMES T. HODGE, ROSEMARY
ILYAS, EUSEBIO R. LUZURIAGA, THOMAS C. NIBLOCK Board of Trustees of the International School, Inc.,
and MAX SNYDER Superintendent, International School, Inc., defendants-appellees.
Corporation; 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, xxx to determine
the amount of fees and assessments imposed upon its students.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, x x x 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. The lower court observed that: x x x the
expansion of the school facilities, which is to be done by improving old buildings and/or constructing
new ones, is an ordinary business transaction well within competence of the Board of Trustees to act
upon. x x x Being directly related to the purpose of elevating and maintaining the schools standard of
instruction, which is ordained in fact by Presidential Decree No. 732, the expansion cannot result in any
radical or fundamental change in the kind of activity being conducted by the school that might require
the consent of the members composing it.
_______________
* FIRST DIVISION.
177
VOL. 161, MAY 9, 1988

177
Powers vs. Marshall
Same; Same; A valid exercise of corporate power by the Board, binding upon all members of the
corporation.Since the collection of the development fee had been approved by the Board of Trustees
of the lnternational 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. Their action to stop the collection of
said fee was correctly dismissed by the trial court for lack of a valid cause of action against the school.
APPEAL from the order of the Court of First Instance of Rizal, Br. XI.
Manuel and Abdona de Castro for plaintiffs-appellants.
Siguion Reyna, Montecillo and Ongsiako Law Office for defendants-appellees.
GRIO-AQUINO, J.:
On July 16, 1975, the fourteen (14) plaintiffs, all associate members of the International School, Inc.,
brought an action for injunction in the Court of First Instance of Rizal, 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 19751976, as a pre-requisite for re-enrollment in said school.
The suit was precipitated by a letter dated May 19, 1975 which Donald I. Marshall, president of the
Board of Trustees of the International School in Makati, Metro-Manila, 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 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 fee of P2,625
from each enrollee starting with the school year 18751976 and continuing up to the school year 1986
1987.
Under date of June 11, 1975, the school superintendent, Dr.
178
178
Powers vs. Marshall
Max Snyder, acting under instructions from the Board of Trustees, wrote a letter to the parents of
returning students, enclosing an Application for Admission which specifically advised that the payment
of the development fee was a pre-requisite for re-enrollment.
The plaintiffs, who are associate members of the International School, Inc., protested against the
imposition of the development fee of P2,625.00 per student per year for twelve (12) years. In a petition
dated June 18, 1975 they requested the Board of Trustees to suspend the implementation of the
requirement of payment of the development fee as a pre-requisite to final enrollment or re-enrollment
for the school year 19751976."
Under date of July 7, 1975, Donald Marshall, signing for the Board of Trustees and as President of the
School:
1. extended the deadline for the selection of the option by which the Development Fee is to be paid
from July 15 to July 22, 1975;
2. allowed deferred payment thereof from August 1, 1975 to October 13, 1975 (beginning of the second
quarter) and allowing quarterly payment thereof;
3. granted assistance on a case to case basis.
On July 16, 1975 the plaintiffs filed a complaint for injunction against the school. It was docketed as Civil
Case No. 21612 in the Court of First Instance of Rizal.
On July 17, 1975, the trial court issued an order temporarily restraining the defendants or their
authorized representatives and agents:
x x x from executing and/or enforcing in any manner the development program that they had adopted
for the raising of funds to put up new building and provide for the remodelling of existing ones
belonging to the International School, Inc., or from otherwise requiring as a pre-requisite to the re-
enrollment for the school year 19751976 of the children of the plaintiffs and other similarly situated
the payment of the development fee or charge imposed under the said development plan; and from
requiring the payment of the matriculation fee likewise imposed pursuant to said development as a pre-
requisite for the enrollment for the first time of the children of the associate members of the
International School, Inc.
179
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179
Powers vs. Marshall
During the hearing on July 24, 1975, the trial court heard not only the plaintiffs application for a
preliminary writ of injunction but also the defendants motion to dismiss the complaint.
After the submission of the parties memoranda the trial court issued an order on November 18, 1975,
dismissing the complaint for lack of valid cause of action, and dissolved the restraining order of July 17,
1975.
Their motion for reconsideration having been denied, the plaintiffs appealed to the Court of Appeals
alleging four (4) assignments of error which may be reduced to the lone legal question of whether 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.
Section 2 of Article 3 of the By-Laws of the International School, Inc. provides:
Section 2. Powers and Duties.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 x x x (Article III, 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, x x x 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.
The lower court observed that:
x x x the expansion of the school facilities, which is to be done by improving old buildings and/or
constructing new ones, is an ordinary business transaction well within competence of the Board of
Trustees to act upon. xxx Being directly related to the purpose of elevating and maintaining the schools
standard of instrtuction, which is ordained in fact by Presidential Decree No. 732, the expansion cannot
result in any radical or fundamental change in the kind of activity being conducted by the school that
might require the consent of the members composing it.
180
180
Aspacio vs. Inciong
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. Their action to stop the collection of said fee was
correctly dismissed by the trial court for lack of a valid cause of action against the school.
WHEREFORE, finding no error in the appealed order of the trial court, We affirm it in toto, with costs
against the appellants.
SO ORDERED.
Narvasa, Cruz and Gancayco, JJ., concur.
Order affirmed.
Notes.Generally, a corporation is invested by law with a personality separate and distinct from that of
the persons composing it as well as from that of any legal entity to which it may be related. By virtue of
this attribute, a corporation may not, generally, be made for acts or liabilities of its stockholders or those
of the legal entities to which it may be connected, and vice-versa. This separate and distinct personality
is, however, merely a fiction created by law for convenience and to promote the end of Justice. (Cease
vs. Court of Appeals, 93 SCRA 483.)
[No. 19761. January 29, 1923]
PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa Naval Filipina," plaintiff and
appellee, vs. MARCIANO RIVERA, defendant and appellant.
CORPORATIONS; DIMINUTION OF CAPITAL.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 and under the conditions prescribed by law.
APPEAL from a judgment of the Court of First Instance of Manila. Concepcion, J.
Araneta & Zaragoza for appellant.
Ross & Lawrence for appellee.
STREET, J.;
This action was instituted on November 21, 1921, in the Court of First Instance of Manila, by the
Philippine Trust Company, as assignee in insolvency of La Cooperativa Naval Filipina, against Marciano
Rivera, for the purpose of recovering a balance of P22,500, alleged to be due upon defendant's
subscription to the capital stock of said insolvent corporation. The trial judge having given judgment in
favor of the plaintiff for the amount sued for, the defendant appealed.
It appears in evidence that 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 Marciano Rivera,
who subscribed for 450 shares representing a value of P45,000, the remainder of the stock being taken
by other persons. The articles of incorpora-
470
470
Philippine Trust Co. vs. Rivera,
tion were duly registered in the Bureau of Commerce and Industry on October 30 of the same year.
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, that not long after the
Cooperativa Naval Filipina had been incorporated, 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. As a result of this resolution it seems to have been supposed that the
subscriptions of the various shareholders had been cancelled to the extent stated; and fully paid
certificates were issued to each shareholder for one-half of his subscription. It does not appear that the
formalities prescribed in section 17 of the Corporation Law (Act No. 1459) , as amended, relative to the
reduction of capital stock in corporations were observed, and in particular it does not appear that any
certificate was at any time filed in the Bureau of Commerce and Industry, showing such reduction.
His Honor, the trial judge, therefore held that the resolution relied upon by the defendant was without
effect and that the defendant was still liable for the unpaid balance of his subscription. In this we think
his Honor was clearly right.
It is established doctrine that subscriptions to the capital of a corporation constitute a fund 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. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original
471
VOL. 44, JANUARY 30, 1923

471
People vs. Lerma
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 and under the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is necessary (14 C. J., 498,
620).
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.
The judgment will be affirmed with costs, and it is so ordered.
Araullo, C. J., Malcolm, Avancea, Villamor, Ostrand, Johns, and Romualdez,, JJ., concur.
Judgment affirmed.
Philippine Trust Co. vs. Rivera, 44 Phil. 469, No. 19761 January 29, 1923
No. L-48237. June 30, 1987.*
MADRIGAL & COMPANY, INC., petitioner, vs. HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT
FOR LEGAL AFFAIRS, THE HON. SECRETARY OF LABOR, and MADRIGAL CENTRAL OFFICE EMPLOYEES
UNION, respondents.
No. L-49023. June 30, 1987.*
MADRIGAL & COMPANY, INC., petitioner, vs. HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE
EMPLOYEES UNION, respondents.
Evidence; Findings of administrative agencies are accorded not only respect but even finality.As a
general rule, the findings of administrative agencies are accorded not only respect but even finality. This
is especially true with respect to the Department of Labor, which performs not only a statutory function
but carries out a Constitutional mandate as well. Our jurisdiction, as a rule, is confined to cases of grave
abuse of discretion. But for certiorari to lie, there must be such arbitrary and whimsical exercise of
power, or that discretion was exercised despotically.
Labor Law; Dividends received by the company are corporate earnings arising from corporate
investment.The petitioner would, however, have us believe that it in fact sustained losses. Whatever
profits it earned, so it claims were in the nature of dividends declared on its shareholdings in other
companies in the earning of which the employees had no participation whatsoever. Cash dividends,
according to it, are the absolute property of the stockholders and cannot be made available for
disposition if only to meet the employees economic demands. There is no merit in this contention. We
agree with the National Labor Relations Commission that [t]he 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 profitsin the form of
dividendsare beyond the reach of the petitioners
_______________
* FIRST DIVISION.
356
356
Madrigal & Company, Inc. vs. Zamora
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.
Same; Unfair Labor Practice; Reduction of capital to evade employees demand for salary adjustments,
mass lay-off of employees under the guise of retrenchment policy constitute unfair labor practice.
Accordingly, this court is convinced that the petitioners 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 lay off in its employee ranks, especially of union members. They were
nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of
the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither
countenance nor condone this. It is an unfair labor practice. As we observed in Peoples Bank and Trust
Company v. Peoples Bank and Trust Co. Employees Union: xxx xxx xxx As has been held by this Court in
Insular Lumber Company vs. CA, et al., L-23875, August 29, 1969, 29 SCRA 371, retrenchment can only
be availed of if the company is losing or meeting financial reverses in its operation, which certainly is not
the case at bar. Undisputed is the fact, that the Bank at no time incurred losses. As a matter of fact.
the net earnings of the Bank would be in the average of P2,000,000.00 a year from 1960 to 1969 and,
during this period of nine (9) years, the Bank continuously declared dividends to its stockholders. Thus
the mass layoff or dismissal of the 65 employees under the guise of retrenchment policy of the Bank is a
lame excuse and a veritable smoke-screen of its scheme to bust the Union and thus unduly disturb the
employment tenure of the employees concerned, which act is certainly an unfair labor practice.
PETITIONS for certiorari and prohibition to review the decision of the Secretary of Labor.

357
VOL. 151, JUNE 30, 1987

357
Madrigal & Company, Inc, vs. Zamora
SARMIENTO, J.:
These are two petitions for certiorari and prohibition filed by the petitioner, the Madrigal & Co., Inc, The
facts are undisputed.
The petitioner was engaged, among several other corporate objectives, in the management of Rizal
Cement Co., Inc.1 Admittedly, the petitioner and Rizal Cement Co., Inc. are sister companies.2 Both are
owned by the same or practically the same stockholders.3
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, 1974.4 Specifically, it proposed a wage increase of P200.00 a month, an allowance of P1 00,00 a
month, and other economic benefits.5 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.6 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.7
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.8
After the petitioners failure to sit down with the respondent union, the latter, on August 28, 1974,
commenced Case No. LR-5415 with the National Labor Relations Commission
_______________
1 Rollo, G.R. No. 48237, 10, 18, 2021.

2 Id., 10.
3 Id., 20.
4 Id., 21.
5 Id., 29,
6 Id., 18, 30.
7 Id.
8 Id.
358
358
on a complaint for unfair labor practice.9 In due time, the petitioner filed its position paper,10 alleging
operational losses. Pending the resolution of Case No. LR-5415, the petitioner, in a letter dated
November 17, 1975,11 informed the Secretary of Labor that Rizal Cement Co., Inc., from which it
derives income12 as the General Manager or Agent13 had ceased operating temporarily.14 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,15 it had to
reduce its capital stock on two occasions As the situation, therefore, now stands, the Madrigal & Co.,
Inc. is without substantial income to speak of, necessitating a reorganization, by way of retrenchment,
of its employees and operations.16 The petitioner then requested that it be allowed to effect said
reorganization gradually considering all the circumstances, by phasing out in at least three (3) stages, or
in a manner the Company deems just, equitable and convenient to all concerned, about which your
good office will be apprised accordingly.17 The letter, however, was not verified and neither was it
accompanied by the proper supporting papers. For this reason, the Department of Labor took no action
on the petitioners request.
On January 19, 1976, the labor arbiter rendered a decision18 granting, among other things, a general
wage increase of P200.00 a month beginning March 1, 1974 plus a monthly living allowance of P100.00
monthly in favor of the petitioners employees. The arbiter specifically found that the petitioner had
been making substantial profits in its operation19 since 1972 through 1975. The petitioner appealed.
_______________
9 Rollo, G.R. No. 49023, 4.

10 Id., 2529.
11 Id., G.R. No. 48237, 1820.
12 Id., 18.
13 Id.
14 Id.
15 Id.
16 Id.
17 Id.
18 Id., G.R. No. 49023, 3237.
19 Id., 34.
359
VOL. 151, JUNE 30, 1987

359
On January 29, 1976, the petitioner applied for clearance to terminate the services of a number of
employees pursuant supposedly to its retrenchment program. On February 3, 1976, the petitioner
applied for clearance to terminate 18 employees more.20 On the same date, the respondent union went
to the Regional Office (No. IV) of the Department of Labor (NLRC Case No. R042143276) to complain
of illegal lockout against the petitioner.21 Acting on this complaint, the Secretary of Labor, in a decision
dated December 14, 1976,22 found the dismissals to be contrary to law23 and ordered the petitioner
to reinstate some 40 employees, 37 of them with backwages.24 The petitioner then moved for
reconsideration, which the Acting Labor Secretary, Amado Inciong, denied.25
Thereafter, the petitioner filed an appeal to the Office of the President. The respondent, the Presidential
Assistant on Legal Affairs, affirmed with modification the Labor Departments decision, thus:
xxx xxx xxx
1. Eliseo Dizon, Eugenio Evangelista and Benjamin Victorio are excluded from the order of
reinstatement.
2. Rogelio Meneses and Roberto Taladro who appear to have voluntarily retired and paid their
retirement pay, their cases are left to the judgment of the Secretary of Labor who is in a better position
to assess appellants allegation as to their retirement.
3. The rest are hereby reinstated with six (6) months backwages, except Aleli Contreras, Teresita Eusebio
and Norma Parlade who are to be reinstated without backwages.
SO ORDERED.26
xxx xxx xxx
On May 15, 1978, the petitioner came to this court. (G.R.
_______________
20 Id., G.R. No. 48237, 3, 84.

21 Id.
22 Id., 2028.
23 Id., 27.
24 Id., 28.
25 Id., 2936.
26 Id., 6061.
360
360
No. 48237.)
Meanwhile, on May 25, 1977, the National Labor Relations Commission rendered a decision affirming
the labor arbiter s judgment in Case No. LR-5415.27 The petitioner appealed to the Secretary of Labor.
On June 9, 1978, the Secretary of Labor dismissed the appeal.28 Following these successive reversals,
the petitioner came anew to this court. (G.R. No. 49023.)
By our resolution dated October 9, 1978, we consolidated G.R. No. 48237 with G.R. No. 49023.29 We
likewise issued temporary restraining orders.30
In G.R. No. 48237, the petitioner argues, that.
xxx xxx xxx
I. SAID RESPONDENTS ERRED IN HOLDING THAT THERE WAS NO VALID COMPLIANCE WITH THE
CLEARANCE REQUIREMENT.
II. SAID RESPONDENTS ERRED IN NOT HOLDING THAT THERE IS NO LOCKOUT HERE IN LEGAL
CONTEMPLATION, MUCH LESS FOR UNION-BUSTING PURPOSES.
III. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN ORDERING THE REINSTATEMENT OF THE REST OF
AFFECTED MEMBERS OF RESPONDENT UNION WITH SIX (6) MONTHS BACKWAGES, EXCEPT ALELI
CONTRERAS, TERESITA EUSEBIO AND NORMA PARLADE WHO ARE TO BE REINSTATED WITHOUT
BACKWAGES.
IV. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN LEAVING TO THE JUDGMENT OF RESPONDENT
SECRETARY THE CASES OF ROGELIO MENESES AND ROBERTO TALADRO WHO HAD VOLUNTARILY
RETIRED AND PAID THEIR RETIREMENT PAY.31
xxx xxx xxx
_______________
27 Id., G.R. No. 49023, 6476.

28 Id., 7880.
29 Id., 86-A1.
30 Id., 8586; id., G.R. No. 48237, 7778.
31 Id., G.R. No. 48237, 6.
361
VOL. 151, JUNE 30, 1987

361
Madrigal & Company, Inc. us. Zamora
while in G.R. No. 49023, it submits that.
xxx xxx xxx
1. RESPONDENT MINISTER ERRED IN AFFIRMING THE DECISION EN BANC OF THE NATIONAL LABOR
RELATIONS COMMISSION DESPITE CLEAR INDICATIONS IN THE RECORD THAT THE AWARD WAS
PREMATURE IN THE ABSENCE OF A DEADLOCK IN NEGOTIATION AND THE FAILURE ON THE PART OF THE
LABOR ARBITER TO RESOLVE THE MAIN IF NOT ONLY ISSUE OF REFUSAL TO BARGAIN, THEREBY
DEPRIVING PETITIONER OF ITS RIGHT TO DUE PROCESS.
2. ASSUMING ARGUENDO THAT THERE WAS A DEADLOCK IN NEGOTIATION, RESPONDENT MINISTER
ERRED NEVERTHELESS IN NOT FINDING THAT THE ECONOMIC BENEFITS GRANTED IN THE FORM OF
SALARY INCREASES ARE UNFAIR AND VIOLATIVE OF THE MANDATORY GUIDELINES PRESCRIBED UNDER
PRESIDENTIAL DECREE NO. 525 AND IGNORING THE UNDISPUTED FACT THAT PETITIONER HAD
VIRTUALLY CEASED OPERATIONS AFTER HAVING TWICE DECREASED ITS CAPITAL STOCKS AND,
THEREFORE, NOT FINANCIALLY CAPABLE TO ABSORB SUCH AWARD OF BENEFITS.32
xxx xxx xxx
There is no merit in these two (2) petitions,
As a general rule, the findings of administrative agencies are accorded not only respect but even
finality.33 This is especially true with respect to the Department of Labor, which performs not only a
statutory function but carries out a Constitutional mandate as well.34 Our jurisdiction, as a rule, is
confined to
_______________
32 Id., G.R. No. 49023, 8.

33 Special Events & Central Shipping Office Workers Union San Miguel Corp., Nos. L-5100206, May 30,
1983, 122 SCRA 557 (1983), citing International Hardwood and Veneer Co. of the Phil. v. Leogardo, No.
L-57429, October 28, 1982, 117 SCRA 967 (1982), Genconsu Free Workers Union v. Inciong, No. L-48687,
July 2, 1979, 91 SCRA 311 (1979), and Dy Keh Beng v. International Labor, No. L-32245, May 25, 1979, 90
SCRA 161 (1979).
34 Intl. Hardwood and Veneer Co. of the Phil. v. Leogardo, supra.
362
362
Madrigal & Company, Inc. us, Zamora
cases of grave abuse of discretion.35 But for certiorari to lie, there must be such arbitrary and whimsical
exercise of power, or that discretion was exercised despotically.36
In no way can the questioned decisions be seen as arbitrary. The decisions themselves show why.
Anent Case No. R042143276 (G.R. No. 48237), we are satisfied with the correctness of the
respondent Presidential Assistant for Legal Affairs findings. We quote:
xxx xxx xxx
In urging reversal of the appealed decision, appellant contends that (1) its letter dated November 17,
1975, constitute substantial compliance with the clearance requirement to terminate; and (2)
individual appellees dismissal had no relation to any union activities, but was the result of an honest-to-
goodness retrenchment policy occasioned by loss of income due to cessation of operation.
We find the first contention to be without merit. Aside from the fact that the controversial letter was
unverified, with not even a single document submitted in support thereof, the same failed to specify the
individual employees to be affected by the intended retrenchment. Not only this, but the letter is so
vague and indefinite regarding the manner of effecting appellants retrenchment plan as to provide the
Secretary of (sic) a reasonable basis on which to determine whether the request for retrenchment was
valid or otherwise, and whether the mechanics in giving effect thereto was just or unjust to the
employees concerned. In fact. to be cleary implied from the letter is that the implementary measures
needed to give effect to the intended retrenchment are yet to be thought of or concretized in the
indefinite future, measures about which the office of the Secretary will be apprised accordingly. All
these, and more, as correctly
_______________
35 Special Events & Central Shipping Office Workers Union v. San Miguel Corp., supra, citing
Consolidated Farms, Inc. v. Noriel, No. L-47752, July 31, 1978, 84 SCRA 469 (1970), Scott v. Inciong, No.
L-38868, December 29, 1975, 68 SCRA 473 (1975), and San Miguel Corp. v. Secretary of Labor, No. L-
39195, May 26, 1975, 64 SCRA 56 (1975).
36 Busier v. Leogardo, Jr., No. L-63316, July 31, 1984, 131 SCRA 151 (1984), citing Palma and Ignacio v. Q
& S, Inc., No. L20366, May 19, 1966, 17 SCRA 97 (1966) and Philippine Virginia Tobacco Administration v.
Lucero, No. L-32550, October 27, 1983, 125 SCRA 337 (1983).
363
VOL. 151, JUNE 30, 1987

363
found by the Acting Secretary, cannot but show that the letter is insufficient in form and substance to
constitute a valid compliance with the clearance requirement. That being so, it matters little whether or
not complainant union or any of its members failed to interpose any opposition thereto.
It cannot be over-emphasized that the purpose in requiring a prior clearance by the Secretary of Labor,
in cases of shutdown or dismissal of employees, is to afford said official ample opportunity to examine
and determine the reasonableness of the request. This is made imperative in order to give meaning and
substance to the constitutional mandate that the State must afford protection to labor, and guarantee
their security of tenure. Indeed, the rules require that the application for clearance be filed ten (10)
days before the intended shutdown or dismissal, serving a copy thereof to the employees affected in
order that the latter may register their own individual objections against the grant of the clearance. But
how could this requirement of notice to the employees have been complied with, when, as observed by
the Acting Secretary in his modificatory decision dated June 30, 1977 the latter of November 17, 1975
does not even state definitely the employees involved upon whom service could be made.
With respect to appellants second contention, we agree with the Acting Secretarys findings that
individual appellees dismissal was an offshoot of the unions demand for a renegotiation of the then
validly existing collective bargaining Agreement.
xxx xxx xxx
The pattern of appellants acts after the decision of the Labor Arbiter in Case No. LR-5415 has convinced
us that its sole objective was to render moot and academic the desire of the union to exercise its right to
bargain collectively with management, especially so when it is considered in the light of the fact that
under the said decision the demand by the union for wage increase and allowances was granted. What
renders appellants motive suspect was its haste in terminating the services of individual appellees,
without waiting the outcome of its appeal in Case No. LR-5415. The amount involved by its offer to pay
double separation could very well have been used to pay the salaries of those employees whose services
were sought to be terminated, until the resolution of its appeal with the NLRC, since anyway, if its
planned retrenchment is found to be justifiable and done in good faith, its only liability is to answer for
the separation pay provided by law. By and large, therefore, we agree with the Acting Secretary that,
under the circumstances obtaining in this case,
364
364
respondents action [was] a systematic and deliberate attempt to get rid of complainants because of
their union activities.
We now come to the individual cases of Aleli Contreras, Teresita Eusebio and Norma Parlade. It is
appellants claim that these three (3) should not be reinstated inasmuch as they have abandoned their
work by their continued absences, and moreover in the case of Contreras, she failed to oppose the
application for clearance filed against her on October 24, 1975. However, appellants payrolls for
December 1631, 1975, January 115, 1976 and January 1631, 1976, show that the three (3) were on
leave without pay. As correctly appreciated by the Acting Secretary, these payrolls prove, first, that
leave has been granted to these employees, and, second, that it is a practice in the company to grant
leaves without pay without loss of employment status, to those who have exhausted their authorized
leaves. As regards, Norma Parlade, the records show that she truly incurred illness and actually
underwent surgery in Oct., 1975. As to Aleli Contreras, there is no showing that the Secretary of Labor
or appellant ever acted on the clearance. If we were to follow the logic of appellant, Contreras should
not have been included in the application for clearance filed on Feb. 3, 1976. The fact that she was
included shows that up to that time, she was still considered as a regular employee. It was for these
reasons, coupled with the length of service that these employees have rendered appellant, that the
Acting Secretary ordered their reinstatement but without backwages.37
xxx xxx xxx
With respect to Case No. LR-5415 (G.R. No. 49023), we are likewise content with the findings of the
National Labor Relations Commission. Thus:
xxx xxx xxx
Appellant now points that the only issue certified to compulsory arbitration is refusal to bargain and it
is, therefore, premature to dictate the terms of the CBA on the assumption that there was already a
deadlock in negotiation. Appellant further contends that, assuming there was deadlock in negotiation,
the economic benefits granted are unreasonable and violative of the guideline prescribed by P.D. 525.
On the other hand, it is the unions stance that its economic demands are justified by the persistent
increase in the cost of living
_______________
37 Id., G.R. No. 48237, 5557, 5859.

365
VOL. 151, JUNE 30, 1987
365
and the substantial earnings of the company from 1971 to 1975.
It bears to stress that although the unions petition was precipitated by the companys refusal to
bargain, there are glaring circumstances pointing out that the parties also submitted deadlock to
arbitration. The petition itself is couched in general terms, praying for arbitration of the unions
dispute with the respondent concerning proposed changes in the collective bargaining agreement. It
is supported with a copy of the proposed changes which just goes to show that the union, aside from
the issue concerning respondents refusal to bargain, sought determination of the merit of its proposals.
On the part of the appellant company, it pleaded financial incapacity to absorb the proposed economic
benefits during the initial stage of the proceedings below. Even the evidence and arguments proferred
below by both parties are relevant to deadlock issue. In the f ace of these factual environment, it is our
view that the Labor Arbiter below did not commit a reversible error in rendering judgment on the
proposed CBA changes. At any rate, the minimum requirements of due process was satisfied because as
heretofore stated, the appellant was given opportunity, and had in fact, presented evidence and
argument in avoidance of the proposed CBA changes.
We do not also subscribe to appellants argument that by reducing its capital, it is made evident that it is
phasing out its operations. On the contrary, whatever may be the reason behind such reductions, it is
indicative of an intention to keep the company a going concern, 80 much so that until now almost four
(4) years later, it is still very much in existence and operational as before.
We now come to the question concerning the equitableness of the economic benefits granted below. It
requires no evidence to show that the employees concerned deserve some degree of upliftment due to
the unabated increase in the cost of living especially in Metro Manila. Of course the company would like
us to believe that it is losing and is therefore not financially capable of improving the present CBA to
favor its employees. In support of such assertion, the company points that the profits reflected in its
yearly Statement of Income and Expenses are dividends from security holdings. We, however, reject as
puerile its suggestion to dissociate the dividends it received from security holdings on the pretext that
they belong exclusively to its stockholders. The dividends received by the company are corporate
earnings arising from corporate investment which no doubt are attended to by the employees involved
in this proceedings, Otherwise, it would not have been reflected as part of profits in the companys
yearly financial statements. In determining the reason
366
366
ableness of the economic grants below, we have, therefore, scrutinized the companys Statement of
Income and Expenses from 1972 to 1975 and after equating the welfare of the employees with the
substantial earnings of the company, we find the award to be predicated on valid justifications.
The salary increase we herein sanction is also in keeping with the rational that made imperative the
enactment of the Termination Pay Law since in case the respondent company really closes down, the
employees will receive higher separation pay or retirement benefits to tide them over while seeking
another employment.38
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. In the face of the petitioner companys piling
profits, the unionists had the right to demand for such salary adjustments.
That the petitioner made quite handsome profits is clear from the records. The labor arbiter stated in his
decision in the collective agreement case (Case No. LR-5415):
xxx xxx xxx
A clear scrutiny of the financial reports of the respondent [herein petitioner] reveals that it had been
making substantial profits in the operation.
In 1972, when it still had 765,000 common shares, of which 305,000 were unissued and 459,000
outstanding capitalized at P16,830,000.00, the respondent made a net profit of P2,403,211.58. Its total
assets were P70,821,317.81.
In 1973, based on the same capitalization, its profit increased to P2,724,465.33. Its total assets increased
to P83,240,473.73.
In 1974, although its capitalization was reduced from P16,830,000.00 to P1 1,230,459.36, its profits
were further increased to P2,922,349.70. Its assets were P78,842,175.75.
_______________
38 Id., G.R. No 49023, 6567.

367
VOL. 151, JUNE 30, 1987

367
The reduction in its assets by P4,398,297.98 was due to the fact that its capital stock was reduced by the
amount of P5,599,540.54.
In 1975, for the period of only six months, the respondent reported a net profit of P547,414.72, which
when added to the surplus of P5,591.214.19, makes a total surplus of P6,138,628.91 as of June 30,
1975.39
xxx xxx xxx
The petitioner would, however, have us believe that it in fact sustained losses Whatever profits it
earned, so it claims were in the nature of dividends declared on its shareholdings in other companies in
the earning of which the employees had no participation whatsoever.40 Cash dividends, according to
it, are the absolute property of the stockholders and cannot be made available for disposition if only to
meet the employees economic demands.41
There is no merit in this contention. We agree with the National Labor Relations Commission that [t]he
dividends received by the company are corporate earnings arising from corporate investment.42
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 prof fits.43
Moreover, it is incorrect to say that such profitsin the form of dividendsare beyond the reach of the
petitioners 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,
_______________
39 Id., 3435.
40 Id., 53.
41 Id.
42 Id., 67.
43 Id.
368
368
and in that case, the right to a share in such dividends, by way of salary increases, may not be denied its
employees.
Accordingly, this court is convinced that the petitioners 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 lay off in its employee ranks, especially of union members, They were
nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of
the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither
countenance nor condone this. It is an unfair labor practice.
As we observed in Peoples Bank and Trust Company v. Peoples Bank and Trust Co. Employees Union:44
xxx xxx xxx
As has been held by this Court in Insular Lumber Company vs. CA, et al., L-23875, August 29, 1969, 29
SCRA 371, retrenchment can only be availed of if the company is losing or meeting financial reverses in
its operation, which certainly is not the case at bar. Undisputed is the fact, that the Bank at no time
incurred losses. As a matter of fact, the net earnings of the Bank would be in the average of
P2,000,000.00 a year from 1960 to 1969 and, during this period of nine (9) years, the Bank continuously
declared dividends to its stockholders. Thus the mass lay-off or dismissal of the 65 employees under
the guise of retrenchment policy of the Bank is a lame excuse and a veritable smoke-screen of its
scheme to bust the Union and thus unduly disturb the employment tenure of the employees concerned,
which act is certainly an unfair labor practice,45
Yet, at the same time, the petitioner would claim that the phasing out of its operations which brought
about the retrenchment of the affected employees was mainly dictated be the necessity of its
stockholders in their capacity as heirs of the late Don Vicente Madrigal to partition the estate left by
_______________
44 Nos. L-39598 and 39603, January 13, 1976, 69 SCRA 10 (1976).

45 Supra, 2526.
369
VOL. 151, JUNE 30, 1987

369
him.46 It must be noted, however, that the labor cases were tried on the theory of losses the petitioner
was supposed to have incurred to justify retrenchment. The petitioner cannot change its theory in the
Supreme Court. Moreover, there is nothing in the records that will substantiate this claim. But what is
more important is the fact that it is not impossible to partition the Madrigal estateassuming that the
estate is up for partitionwithout the petitioners business closing shop and inevitably, without the
petitioner laying off its employees.
As regards the question whether or not the petitioners letter dated November 17, 197547 was in
substantial compliance with legal clearance requirements, suffice it to state that apart from the
Secretary of Labors valid observation that the same did not constitute a sufficient clearance as
contemplated by law,48 the factual circumstances show that the letter in question was itself a part of
the systematic and deliberate attempt to get rid of [the union members] because of their union
activities.49 Hence, whether or not the said letter complied with the legal formalities is beside the
point since under the circumstances, retrenchment was, in all events, unjustified. Parenthetically, the
clearance required under Presidential Decree No. 850 has been done away with by Batas Blg. 130,
approved on August 21,1981.
During the pendency of these petitions, the petitioner submitted manifestations to the effect that
certain employees have accepted retirement benefits pursuant to its retrenchment scheme.50 This is a
matter of defense that should be raised before the National Labor Relations Commission.
To do away with the protracted process of determining the earnings acquired by the employees as a
result of ad interim employment, and to erase any doubt as to the amount of backwages due them, this
court, in line with the precedent set in Mercury Drug Co., Inc. v. Court of Industrial Relations,51 af-
_______________
46 Id., G.R. No. 48237, 144.

47 Id., 1819.
48 Id., 25.
49 Id., 26.
50 Id., 118122, 141145.
51 No. L-23557, April 30, 1974, 56 SCRA 694 (1974).
370
370
firmed in a long line of decisions that came later,52 hereby fixes the amount of backwages at three (3)
years pay reckoned at the increased rates decreed by the labor arbiter in Case No. LR5415 without
deduction or qualification.
_______________
52 Manila Hotel Corporation v. NLRC, No. L-53453, January 22, 1986, 141 SCRA 169 (1986); Akay Printing
Press v. Minister of Labor and Employment, No. L-59651, December 6, 1985, 140 SCRA 381 (1985);
Magtoto v. National Labor Relations Commission, No. L63370, November 18, 1985, 140 SCRA 58 (1985);
Panay Railways, Inc. v. National Labor Relations Commission, No. L-69416, July 11, 1985, 137 SCRA 480
(1985); Lepanto Consolidated Mining Company v. Encarnacion, Nos. L-6700203, April 30, 1985, 136
SCRA 256 (1985); Medical Doctors, Inc. (Makati Medical Center) v. NLRC, No. L-56633, April 24, 1985,
136 SCRA 1 (1985); Insular Life Assurance Co., Ltd. v. NLRC, No. L-49071, April 17, 1985, 135 SCRA 697
(1985); Flexo Manufacturing Corp. v. NLRC, No. L-55971, February 28, 1985, 135 SCRA 145 (1985);
Philippine Airlines, Inc. v. NLRC, No. L-64809, November 29, 1983, 126 SCRA 223 (1983); Associated
Anglo American Tobacco Corporation v. Lazaro, No. L-63779, October 27, 1983, 125 SCRA 463 (1983);
Capital Garment Corporation v. Ople, No. L-53627, September 10, 1982, 117 SCRA 473 (1982); Litex
Employees Association v. CIR, No. L-39154, September 9, 1982, 116 SCRA 459 (1982); Yucoco v. Inciong,
No. L-49061, March 29, 1982, 113 SCRA 245 (1982); Peoples Industrial and Commercial Employees and
Workers Org. (FFLU) v. Peoples Industrial and Commercial Corp., No. L-37687, March 15, 1982, 112
SCRA 440 (1982); Kapisanan ng Manggagawa sa Camara Shoes v. Camara Shoes, No. L-50985, January
30, 1982, 111 SCRA 477 (1982); Pepito v. Secretary of Labor, No, L-49418, February 29,1980, 96 SCRA
454 (1980); Citizens League of Free-Workers v. CIR, No. L-38293, February 21, 1980, 96 SCRA 225
(1980); Liberty Cotton Mills Workers Union v. Liberty Cotton Mills, Inc., No. L-33987, May 31, 1979, 90
SCRA 391 (1979); Dy Keh Beng v. International Labor, supra; Bachrach Motor Co., Inc. v. Court of
Industrial Relations, No. L-26136, October 30, 1978, 86 SCRA 27 (1978); L.R. Aguinaldo & Co., Inc. v.
Court of Industrial Relations, No. L-31909, April 3, 1978, 82 SCRA 309 (1978); Danao Development
Corporation v. NLRC, Nos. L40706 & 40700, February 16, 1978, 81 SCRA 487 (1978); Monteverde v.
Court of Industrial Relations, No. L-32975, September 30, 1977, 79 SCRA 259 (1977); Insular Life
Assurance Co., Ltd. Employees Association-Natu v. Insular Life Assurance Co., Ltd., No. L-25291, March
10, 1977, 76 SCRA 50 (1977); Peoples Bank and Trust Com
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VOL. 161, JUNE 30, 1987

371
WHEREFORE, the petitions are hereby DISMISSED. Subject to the modification as to the amount of
backwages hereby awarded, the challenged decisions are AFFIRMED. The temporary restraining orders
are LIFTED. With costs against the petitioner.
This decision is IMMEDIATELY EXECUTORY.
SO ORDERED.
Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Feliciano and Gancayco, JJ., concur.
Petitions dismissed Decisions affirmed with modification. Orders lifted.
Notes.Labor must be represented by a union that can express its collective will. (Federacion Obrera de
la Industria Tabaquera y Otros Trabajadores de Filipinas vs. Noriel, 72 SCRA 24.)
Terms and conditions of collective bargaining contract constitute the law between the parties.
(Batangas-LagunaTayabas Bus Company vs. Court of Appeals, 71 SCRA 470.)
Refusal by employer to comply with provisions of collective bargaining agreement is an unfair labor
practice. (MRR Yard Crew Union vs. Philippine National Railways, 72 SCRA 88.)
Madrigal & Company, Inc. vs. Zamora, 151 SCRA 355, No. L-48237, No. L-49023 June 30, 1987
No. L-56655. July 25, 1983.*
DATU TAGORANAO BENITO, petitioner, vs. SECURITIES AND EXCHANGE COMMISSION and JAMIATUL
PHILIPPINE-AL ISLAMIA, INC., respondents.
Corporation Law; No stockholders meeting or approval is necessary for issuance of unsubscribed
portion of capital stock.As aptly stated by the Securities and Exchange Commission in its decision: x x x
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. The by-laws of the corporation itself states that the Board of
Trustees shall, in accordance with law, provide for the issue and transfer of shares of stock of the
Institute and shall prescribe the form of the certificate of stock of the Institute (Art. V, Sec. 1).
Same; A stockholder enjoys no pre-emptive right to buy unissued shares of originally authorized capital
stock.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 reoffered, he cannot therefore claim a dilution of interest. (Campos and Lopez-
Campos Selected Notes and Cases on Corporation Law, p. 855, citing Yasik V. Wachtel, 25 Del. Ch. 247,
17A. 2d 308 (1941). (pp. 33-34, Rollo)
Same; Administrative Law; Findings of fact of an administrative tribunal, i.e., stockholders were notified
of the
_______________
* FIRST DIVISION.
723
VOL. 123, JULY 25, 1983

723
Datu Tagoranao Benito vs. Securities & Exchange Commission
cannot be deemed to have waived his pre-emptive right to buy additional shares of stock, are binding on
courts.Well-settled is the rule that the findings of facts of administrative bodies will not be interfered
with by the courts in the absence of grave abuse of discretion on the part of said agencies, or unless the
aforementioned findings are not supported by substantial evidence. (Gokongwei, Jr. vs. SEC, 97 SCRA
78). In a long string of cases, the Supreme Court has consistently adhered to the rule that decisions of
administrative officers are not to be disturbed by the courts except when the former have acted without
or in excess of their jurisdiction or with grave abuse of discretion (Sichangco vs. Board of Commissioners
of Immigration, 94 SCRA 61).
PETITION to review the decision of the Securities and Exchange Commission.

The Solicitor General for respondent.
Tacod D. Macaraya for private respondent.
RELOVA, J.:
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. Herein 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. It was shown in said certificate that P191,560.00 worth of shares were
represented in the stockholders meeting held on November 25, 1975 at which time the increase was
approved. Thus, P110,980.00 worth of shares were subsequently issued by the corporation from the
unissued portion of the authorized capital stock of 723
724
724
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.
On November 18, 1976, petitioner Datu Tagoranao filed with respondent Securities and Exchange
Commission 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. Petitioner prayed that the additional issue of shares of previously
authorized capital stock as well as the shares issued from the increase in capital stock of respondent
corporation be cancelled; that the secretary of respondent corporation be ordered to register the 2,540
shares acquired by him (petitioner) from Domocao Alonto and Moki-in Alonto; and that the corporation
be ordered to render an accounting of funds to the stockholders.
In their answer, respondents denied the material allegations of the petition and, by way of special
defense, 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.
On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities and Exchange Commission, after
due proceedings, rendered a decision which was affirmed by the Commission En Banc during its
executive session held on March 9, 1981, as follows:
RESOLVED, That the decision of the Hearing Officer in SEC Case No. 1392, dated July 11, 1980, the
dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing considerations, this Commission hereby rules: (a) That the
issuance by the corporation of its unissued shares was validly made and was not subject to the pre-
emptive rights of stockholders, including
725
VOL. 123, JULY 25, 1983

725
the petitioner, herein: (b) That there is no sufficient legal basis to set aside the certificate issued by this
Commission authorizing the increase in capital stock of respondent corporation from P200,000.00 to
P1,000,000.00 Considering, however, that petitioner has not waived his pre-emptive right to subscribe
to the increased capitalization, respondent corporation is hereby directed to allow petitioner to
subscribe thereto, at par value, proportionate to his present shareholdings, adding thereto the 2,540
shares transferred to him by Mr. Domocao Alonto and Mrs. Moki-in Alonto; (c) To direct as it hereby
directs, the respondent corporation to immediately cancel Certificates of Stock Nos. 216, 223, 302, all in
the name of Domocao Alonto, and Certificate of Stock No. 217, in the name of Moki-in Alonto, upon
their presentation by the petitioner and to issue new certificates corresponding thereto in the name of
petitioner herein; (d) To direct, as it hereby directs, respondent corporation to religiously comply with
the requirement of filing annual financial statements under pain of a more drastic action; (e) To declare,
as it hereby declares, as irregular, the election of the nine (9) members of the Board of Trustees of
respondent corporation on October 30, 1976, for which reason, respondent corporation is hereby
ordered to call a stockholders meeting to elect a new set of five (5) members of the Board of Trustees,
unless in the meantime the said number is accordingly increased and the requirement of law to make
such increase effective have been complied with. It is understood that the said stockholders meeting be
called within thirty (30) days from the time petitioner shall have subscribed to the increased
capitalization.
be, as the same is hereby AFFIRMED, the same being in accordance with law and the facts of the case.
(pp. 28-29, Rollo)
Hence, this petition for review by way of appeal from the aforementioned decision of the Securities and
Exchange Commission, petitioner contending that (1) the issuance of the 11,098 shares without the
consent of the stockholders or of the Board of Directors, and in the absence of consideration, is null and
void; (2) the increase in the authorized capital stock from P200,000.00 to P1,000,000.00 without the
consent or express waiver of the stockholders, is null and void; (3) he is entitled to attorneys fees,
damages and expenses of litigation in filing this suit against the directors of respondent corporation.
726
726
We are not persuaded. As aptly stated by the Securities and Exchange Commission in its decision:
x x x x x x x x x
x x x 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. The by-laws of the corporation itself states that the Board of
Trustees shall, in accordance with law, provide for the issue and transfer of shares of stock of the
Institute and shall prescribe the form of the certificate of stock of the Institute (Art. V, Sec. 1).
Petitioner bewails the fact that in view of the lack of notice to Mm 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 reoffered, he cannot therefore claim a dilution of interest. (Campos and Lopez-Campos Selected
Notes and Cases on Corporation Law, p. 855, citing Yasik V. Wachtel, 25 Del. Ch. 247, 17A. 2d 308
(1941). (pp. 33-34, Rollo)
With respect to the claim that the increase in the authorized capital stock was without the consent,
expressed or implied, of the stockholders, it was the finding of the Securities and Exchange Commission
that a stockholders meeting was held on November 25, 1975, presided over by Mr. Ahmad Domocao
Alonto, Chairman of the Board of Trustees and, among the many items taken up then were the change
of name of the corporation from Kamilol Islam Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the
increase of its capital stock from P200,000.00 to P1,000,000.00, and the increase of the number of its
Board of Trustees from five to nine. Despite the
727
VOL. 123, JULY 25, 1983

727
insistence of petitioner, this Commission is inclined to believe that there was a stockholders meeting on
November 25, 1975 which approved the increase. The petitioner had not sufficiently overcome the
evidence of respondents that such meeting was in fact held. What petitioner successfully proved,
however, was the fact that he was not notified of said meeting and that he never attended the same as
he was out of the country at the time. The documentary evidence of petitioner conclusively proved that
he was attending the Mecca pilgrimage when the meeting was held on November 25, 1975. (Exhs. Q
Q-14 R, S and S-1). While petitioner doubts the authenticity of the alleged minutes of the
proceedings (Exh. 4), the Commission notes with significance that said minutes contain numerous
details of various items taken up therein that would negate any claim that it was not authentic. Another
thing that petitioner was able to disprove was the allegation in the certificate of increase (Exh. E-1) that
all stockholders who did not subscribe to the increase of capital stock have waived their pre-emptive
right to do so. As far as the petitioner is concerned, he had not waived his pre-emptive right to subscribe
as he could not have done so for the reason that he was not present at the meeting and had not
executed a waiver, thereof. Not having waived such right and for reasons of equity, he may still be
allowed to subscribe to the increased capital stock proportionate to his present shareholdings. (pp. 36-
37, Rollo)
Well-settled is the role that the findings of facts of administrative bodies will not be interfered with by
the courts in the absence of grave abuse of discretion on the part of said agencies, or unless the
aforementioned findings are not supported by substantial evidence. (Gokongwei, Jr. vs. SEC, 97 SCRA
78). In a long string of cases, the Supreme Court has consistently adhered to the rule that decisions of
administrative officers are not to be disturbed by the courts except when the former have acted without
or in excess of their jurisdiction or with grave abuse of discretion (Sichangco vs. Board of Commissioners
of Immigration, 94 SCRA 61). Thus, in the case of Deluao vs. Casteel (L-21906, Dec. 24, 1968, 26 SCRA
475, 496, citing Pajo vs. Ago, et al., L-15414, June 30,
728
728
1960) and Genitano vs. Secretary of Agriculture and Natural Resources, et al. (L-21167, March 31, 1966),
the Supreme Court held that:
x x x Findings of fact by an administrative board or official, following a hearing, are binding upon the
courts and will not be disturbed except where the board or official has gone beyond his statutory
authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to his duty
or with grave abuse of discretion. x x x
ACCORDINGLY, this petition is hereby dismissed for lack of merit.
SO ORDERED.
Plana, Escolin and Gutierrez, Jr., JJ., concur.
Teehankee, J., in the result.
Melencio-Herrera and Vasquez, JJ., are on leave.
Petition dismissed
Notes.A corporation with a pending court action may still continue prosecuting or defending the same
for three years after its dissolution. Its legal counsel may be considered its trustee for that case only.
(Gelano vs. Court of Appeals, 103 SCRA 90.)
Just as foreign corporations not doing business in the Philippines may sue in Philippine courts so also are
they subject to be sued here. Service of summons extraterritorially under Rule 14 may be effected. (FBA
Aircraft vs. Zosa, 110 SCRA 1).
A plea to disqualify other members of the Board of Directors from being members thereof should be
specifically raised in issue before the Securities and Exchange Commission and buttressed by evidence.
(Gokongwei, Jr. vs. Securities & Exchange Commission, 97 SCRA 78.)
The Rice and Corn Administration is a government agency without a distinct and separate legal
personality from that of
729
VOL. 123, JULY 25, 1983

729
People vs. Casas
the Republic of the Philippines. (Republic vs. CFI of Rizal, 99 SCRA 660.)
Two corporations cannot be trepted as a single bargaining unit even if their businesses are related.
(Diatagon Labor Federation Local 110 of ULGWP vs. Ople, 101 SCRA 534.)
Datu Tagoranao Benito vs. Securities & Exchange Commission, 123 SCRA 722, No. L-56655 July 25, 1983
G.R. No. 117897. May 14, 1997.*
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE
COMMISSION, petitioners, vs. COURT OF APPEALS and IGLESIA NI CRISTO, respondents.
Actions; Judgments; Res Judicata; Bar by Prior Judgment; Conclusiveness of Judgment; Words and
Phrases; Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in
actions in personam.Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of
res judicata in actions in personam, to wit: Effect of judgment.The effect of a judgment or final order
rendered by a court or judge of the Philippines, having jurisdiction to pronounce the judgment or order,
may be as follows: xxx xxx xxx (b) In other cases the judgment or order is, with respect to the matter
directly adjudged or as to any other matter that could have been raised in relation thereto, conclusive
between the parties and their successors in interest by title subsequent to the commencement of the
action or special proceeding, litigating for the same thing and under the same title and in the same
capacity; (c) In any other litigation between the same parties or their succes sors in interest, that only is
deemed to have been adjudged in a former judgment which appears upon its face to have been so
adjudged, or which was actually and necessarily included therein or necessary thereto. Section 49(b)
enunciates the first concept of res judicata known as bar by prior judgment, whereas , Section 49(c) is
referred to as conclusiveness of judgment.
Same; Same; Same; Same; Same; Same; There is bar by former judgment when, between the first case
where the judgment was rendered, and the second case where the judgment is invoked, there is identity
of parties, subject matter and cause of action while there is conclusiveness of judgment where there is
only identity of parties but there is no identity of cause of action, the judgment being conclusive in the
second case only as to those matters actually and directly controverted and determined, and not as to
matters merely involved therein.There is bar by former judgment when, between the first case
where the judgment was rendered, and the s econd case where such judgment is invoked, there is
identity of parties, subject matter
_______________
* FIRST DIVISION.
455
VOL. 272, MAY 14, 1997

455
Islamic Directorate of the Phils. vs. Court of Appeals
and cause of action. When the three identities are present, the judgment on the merits rendered in the
first constitutes an absolute bar to the subsequent action. But where between the first case wherein
judgment is rendered and the second case wherein such judgment is invoked, there is only identity of
parties but there is no identity of cause of action, the judgment is conclusive in the s econd case, only as
to those matters actually and directly controverted and determined, and not as to matters merely
involved therein. This is what is termed conclusiveness of judgment.
Same; Same; Same; Same; Same; Intervention; A party-in-intervention cannot be considered a principal
in a prior case for purposes of applying the principle of res judicata since the contrary goes against the
true import of the action of intervention as a m ere subsidiary proceeding without an independent life
apart from the principal action as well as the intrinsic character of the intervenor as a mere subordinate
party in the main case whose right may be said to be only in aid of the right of the original party.
Neither of these concepts of res judicata find relevant application in the case at bench. While there may
be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal
parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as
private respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was
only made an ancillary party in G.R. No. 107751 as intervenor. It was never originally a principal party
thereto. it must be noted that intervention is not an independent action, but is merely collateral,
accessory, or ancillary to the principal action. It is just an interlocutory proceeding dependent on or
subsidiary to the case between the original parties. Indeed, The IDP-Tamano Group cannot be
considered a principal party in G.R. No. 107751 for purposes of applying the principle of res judicata
since the contrary goes against the true import of the action of intervention as a mere subsidiary
proceeding without an independent life apart from the principal action as well as the intrinsic character
of the intervenor as a mere subordinate party in the main case whose right may be said to be only in aid
of the right of the original party. It is only in the present case, actually, where the IDP-Tamano Group
became a principal party, as petitioner, with the Iglesia Ni Cristo, as private res pondent. Clearly, there is
no identity of parties in both cases.
Same; Same; Same; Same; Same; Corporation Law; A juridical person can not be considered essentially a
formal party to a case
456
456
where it was not duly represented by its legitimate governing board.In this connection, although it is
true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751, was entitled, Iglesia Ni Kristo,
Plaintiff v. Islamic Directorate of the Philippines, Defendant, the IDP can not be considered essentially a
formal party thereto for the simple reason that it was not duly represented by a legitimate Board of
Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for Specific
Performance with Damages, a mere action in personam , did not become final and executory insofar as
the true IDP is concerned since petitioner corporation, for want of legitimate representation, was
effectively deprived of its day in court in said case. Res inter alios judicatae nullum aliis praejudicium
faciunt. Matters adjudged in a cause do not prejudice those who were not parties to it. Elsewise put, no
person (natural or juridical) shall be affected by a proceeding to which he is a stranger.
Same; Same; Same; Same; Same; While it is true that the principle of res judicata is a fundamental
component of our judicial system, it should be disregarded if its rigid application would involve the
sacrifice of justice to technicality.In any case, while it is true that the principle of res judicata is a
fundamental component of our judicial system, it should be disregarded if its rigid application would
involve the sacrifice of justice to technicality.
Corporation Law; Jurisdiction; Securities and Exchange Commission; The SEC has the unquestionable
authority to pass upon the issue as to who among the different contending groups is the legitimate
governing board of a corporate body.There can be no question as to the authority of the SEC to pass
upon the issue as to who among the different contending groups is the legitimate Board of Trustees of
the IDP since this is a matter properly falling within the original and exclusive jurisdiction of the SEC by
virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A: Section 3. The Commission shall have
absolute jurisdiction, supervision and control over all corporations, partnerships or associations , who
are the grantees of primary franchises and/or a license or permit issued by the government to operate
in the Philippines x x x x x x. x x x x x x x x x Section 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over corpora ti ons , partnerships and other forms
of associations registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving: x x x x x x x x x c) Controversies in
the selection or appointment of
457
VOL. 272, MAY 14, 1997
457
directors, trustees, officers, or managers of such corporations, partnerships or associations. x x x.
Same; Contracts; Sales; Where a corporate body never gave its consent, thru a legitimate governing
board, to a deed of absolute sale, the subject sale is void and produces no effect whatsoever.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, have to be struck down for having been done without the consent of
the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the essential
requisites of contracts: There is no contract unless the following requisites concur: (1) Consent of the
contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the
obligation which is established. All these elements must be present to constitute a valid contract. For,
where even one is absent, the contract is void. As succinctly put by Tolentino, consent is essential for the
existence of a contract, and where it is wanting, the contract is non-existent. In this case, the IDP, owner
of the subject parcels of land, never gave its consent, thru a legitimate Board of Trustees, to the
disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case not only of vitiated
consent, but one where consent on the part of one of the supposed contracting parties is totally
wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.
Same; Same; Same; For the sale of the only property of a corporation to be valid, the majority vote of
the legitimate board, concurred in by the vote of at least 2/3 of the bona fide m embers of the
corporation, should be obtained.The Tandang Sora property, it 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 I DP falling squarely within the contemplation of the foregoing section. For the
sale to be valid, the m a jorit y vot e 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 s ignatures 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 ma de to appear to be. Apparently, there
are only fifteen (15) official members of
458
458
the petitioner corporation including the eight (8) members of the Board of Trustees.
Same; Same; Same; Securities and Exchange Commission; Remand of Cases; No end of substantial
justice will be served if the Supreme Court reverses the SECs conclusion and remand the case to the
regular courts for further litigation over an issue which is already determinable based on what is in the
records.The resolution of the question as to whether or not the SEC had jurisdiction to declare the
subject sale null and void is rendered moot and academic by the inherent nullity of the highly dubious
sale due to lack of consent of the I DP, owner of the subject property. No end of substantial justice will
be served if we revers e the SECs conclusion on the matter, and remand the case to the regular courts
for further litigation over an issue which is already determinable based on what we have in the records.
Land Titles; Under the Torrens System of Registration, the minimum requirement for one to be a good
faith buyer for value is that the vendee at least sees the owners duplicate copy of the title and relies
upon the same.Furthermore, the Court observes that the INC bought the questioned property from
the Carpizo Group without even seeing the owners duplicate copy of the titles covering the property.
This is very strange considering that the subject lot is a large piece of real property in Quezon City worth
millions , and that under the Torrens System of Registration, the minimum requirement for one to be a
good faith buyer for value is that the vendee at least sees the owners duplicate copy of the title and
relies upon the same. The private respondent, presumably knowledgeable on the aforesaid workings of
the Torrens System, did not take heed of this and nevertheless went through with the sale with undue
haste. The unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even
being presented with the owners copy of the titles casts very serious doubt on the rightfulness of its
position as vendee in the transaction.
PETITION for review of a decision of the Court of Appeals.

Blo Umpar Adiong for petitioner.
Cuevas, De la Cuesta & De La Cuesta for private respondent.
459
VOL. 272, MAY 14, 1997

459
HERMOSISIMA, JR., J.:
The subject of this petition for review is the Decision of the public respondent Court of Appeals,1 dated
October 28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission
(SEC, for short) in SEC Case No. 4012 which declared null and void the sale of two (2) parcels of land in
Quezon City covered by the Deed of Absolute Sale entered into by and between private respondent
Iglesia Ni Cristo (INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP,
for short).
The following facts appear of record.
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.2
Towards this end, that is, in the same year, 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)3 and RT-26521 (170567),4 both registered in the name of IDP.
It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of
its Articles of Incorporation:
______________
1 Docketed as CA G.R. SP No. 33295.

2 Rollo, p. 197.
3 Annex C; Rollo, p. 40.
4 Annex B; Rollo, p. 39.
460
460
Senator Mamintal Tamano5
Congressm an Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Del egate Ahmad Al onto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar6
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. Most of the members of
the 1971 Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and
Congressman Al-Rashid Lucman flew to the Middle East to escape political persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the
Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. 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. The dispositive portion of the SEC
Decision reads:
WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners7 and
respondents8 as null and void for being violative of the Articles of Incorporation of petitioner
corporation. With the nullification of the election of the respondents, the approved by-laws which they
certified to th is Commi ssion as members of the Board of Trustees must necessarily be likewise declared
null and void. However, before any election of the members of the Board of Trustees could be
conducted, there must be an approved bylaws to govern the internal government of the association
including
______________
5 Now deceased.
6 Rollo, p. 99.
7 IDP-Carpizo Group.
8 Hadja Potri Zorayda Tamano, et al.
461
VOL. 272, MAY 14, 1997

461
the conduct of election. And since the election of both petitioners and respondents have been declared
null and void, a vacuum is created as to who should adopt the by-laws and certify its adoption. To
remedy this unfortunate situation that the association has found itself in, the members of the
petitioning corporation are hereby authorized to prepare and adopt their by-laws for submission to the
Commission. Once approved, an election of the members of the Board of Trustees shall immediately be
called pursuant to the approved bylaws.
SO ORDERED.9
Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision,
and, thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although
the Carpizo Group10 attempted to submit a set of by-laws, the SEC found that, aside from Engineer
Farouk Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona fide
members of the IDP, thus rendering the adoption of the by-laws likew ise null and void.
On April 20, 1989, without having been properly elected as new members of the Board of Trustees of
IDP, the Carpizo Group caused to be signed an alleged Board Resolution11 of the ID P, authorizing the
sale of the subject two parcels of land to the private respondent INC for a consideration of
P22,343,400.00, which sale was evidenced by a Deed of Absolute Sale12 dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mami nt al
Taman o, or the Tamano Group, filed a petition before the SEC, docketed as SEC Case No. 4012, seeking
to declare null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC
______________
9 Rollo, p. 45.
10 Composed of Farouk Carpizo, Musib M. Buat, Abdulla U. Camlian, Suleiman Clem Antonio Al-Haj,
Ustadz Iljas Ismael, Abdurafih Sayedy, and Abdurahman Linzag.
11 Rollo, pp. 135-145.
12 Annex E; Rollo, pp. 46-48.
462
462
since the group of Engineer Carpizo was not the legitimate Board of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor filed an
action for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of
the Regional Trial Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to
clear the property of squatters and deliver complete and full physical possession thereof to INC.
Likewise, INC filed a motion in the same case to compel one Mrs. Leticia P. Ligon to produce and
surrender to the Register of Deeds of Quezon City the owners duplicate copy of TCT Nos. RT-26521 and
RT-26520 covering the aforementioned two parcels of land, so that the sale in INCs favor may be
registered and new titles issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the
two parcels of land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-
Sampaco claimed to be in behalf of the Carpizo G roup.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring, inter
alia:
x x x x x x x x x
2. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against Mr.
Farouk Carpizo, et al., who, through false schemes and machinations, succeeded in executing the Deed
of Sale between the I DP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of Sale is
the subject of the case at bar;
3. That the said case before the SEC is docketed as Case No. 04012, the main issue of which is whether
or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void, hence,
Intervenors legal interest in the instant case. A copy of the said case is hereto attached as Annex A;
4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully and legally
represent the Islamic Directorate of the Philippines;
x x x x x x x x x.13
_______________
13 Rollo, pp. 51-52.

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VOL. 272, MAY 14, 1997

463
Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by
way of intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC.14
Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioners motion
to intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues
being raised by way of intervention are intra-corporate in nature, jurisdiction thereto properly
pertaining to the SEC.15
Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo
Group but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered
Partial Judgment in Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its
obligation under the Deed of Sale of clearing the subject lots of squatters and of delivering the actual
possession thereof to INC.16
Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-
6937, treated INC as the rightful owner of the real properties and disposed as follows:
WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff17 the owners
copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of
Absolute Sale in the latters name and the annotation of the mortgage executed in her favor by herein
defendant Islamic Directorate of the Philippines on the new transfer certificate of title to be issued to
plaintiff.
SO ORDERED.18
_______________
14 Rollo, pp. 67-72.

15 Order, pp. 1-2; Rollo, pp. 75-76.
16 Rollo, p. 79.
17 Iglesia Ni Cristo.
18 Rollo, p. 82.
464
464
On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon to deliver the owners
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of
Quezon City for the purposes stated in the Order of March 2, 1992.19
Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R. No. SP-
27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on
October 28, 1992.20
Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No.
107751.
In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this
wise:
1. Declaring the by-laws submitted by the respondents21 as unauthorized, and hence, null and void.
2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale
entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc.22 null and void.
3. Declaring the election of the Board of Directors23 of the corporation from 1986 to 1991 as null and
void.
4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musib Buat, as members of
the IDP null and void.
No pronouncement as to cost.
SO ORDERED.24
Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012,
but the same was denied on account of the fact that the decision of the case
_______________
19 Rollo, p. 158.
20 Rollo, p. 164.
21 Engr. Farouk Carpizo, et al.
22 Carpizo Group.
23 Ibid.
24 Decision, p. 19; Rollo, p. 104.
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VOL. 272, MAY 14, 1997

465
had become final and executory, no appeal having been taken therefrom.25
INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil
action for certiorari, docketed as CA-G.R. SP No. 33295. On October 28, 1994, the court a quo
promulgated a Decision in CA-G.R. SP No. 33295 granting INCs petition. The portion of the SEC Decision
in SEC Case No. 4012 which declared the sale of the two (2) lots in question to INC as void was ordered
set aside by the Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994,
submitting that the Court of Appeals gravely erred in:
1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel and laches.26
While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No.
107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon
petition and affirmed the Oc-tober 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973
which sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owners
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of
Quezon City so that the Deed of Absolute Sale in INCs favor may be properly registered. Before we rule
upon the main issues posited in this petition, we would like to point out that our disposition in G.R. No.
107751 entitled, Ligon v. Court of Appeals, promulgated on June 1, 1995, in no wise constitutes res
judicata such that the petition under consideration would be barred if it were the case. Q uite the
contrary, the requisites of res judicata do not obtain in the case at bench.
_______________
25 Annex P; Rollo, p. 109.

26 Petition, p. 14; Rollo, p. 22.
466
466
Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in
personam, to wit:
Effect of judgment.The effect of a judgment or final order rendered by a court or judge of the
Philippines, having jurisdiction to pronounce the judgment or order, may be as follows :
xxx xxx xxx
(b) I n other cases the judgment or order is, with respect to the matter directly adjudged or as to any
other matter that could have been raised in relation thereto, conclusive between the parties and their
successors in interest by title subsequent to the commencement of the action or special proceeding,
litigating for the same thing and under the same title and in the same capacity;
(c) In any other litigation between the same parties or their successors in interest, that only is deemed
to have been adjudged in a former judgment which appears upon its face to have been so adjudged, or
which was actually and necessarily included therein or necessary thereto.
Section 49(b) enunciates the first concept of res judicata known as bar by prior judgment, whereas,
Section 49(c) is referred to as conclusiveness of judgm ent.
There is bar by former judgment when, between the first case where the judgment was rendered, and
the second case where such judgment is invoked, there is identity of parties, subject matter and cause
of action. When the tree identities are present, the judgment on the merits rendered in the first
constitutes an absolute bar to the subsequent action. But where between the first case wherein
judgment is rendered and the second case wherein such judgment is invoked, there is only identity of
parties but there is no identity of cause of action, the judgment is conclusive in the second case, only as
to those matters actually and directly controverted and determined, and not as to matters merely
involved therein. This is what is termed conclusiveness of judgment.27
_____________
27 Nabus v. Court of Appeals, 193 SCRA 732, 739-740 [1991].

467
VOL. 272, MAY 14, 1997

467
Neither of these concepts of res judicata find relevant application in the case at bench. While there may
be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal
parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia ni Cristo, as
private respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was
only made an ancillary party in G.R. No. 107751 as intervenor.28 It was never originally a principal party
thereto. It must be noted that intervention is not an independent action, but is merely collateral,
accessory, or ancillary to the principal action. It is just an interlocutory proceeding dependent on or
subsidiary to the case between the original parties.29 Indeed, the IDP-Tamano Group cannot be
considered a principal party in G.R. No. 107751 for purposes of applying the principles of res judi-cata
since the contrary goes against the true import of the action of intervention as a mere subsidiary
proceeding without an independent life apart from the principal action as well as the intrinsic character
of the intervenor as a mere subordinate party in the main case whose right may be said to be only in aid
of the right of the original party.30 It is only in the present case, actually, where the ID P-Tamano Group
became a principal party, as petitioner, with the Iglesia ni Cristo, as private respondent. Clearly, there is
no identity of parties in both cases.
In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751,
was entitled, Iglesia ni Kristo, Plaintiff v. Islamic Directorate of the Phil-ippines, defendant,31 the IDP
can not be considered essentially a formal party thereto for the simple reason that it was
______________
28 Rollo of G.R. No. 107751, p. 561.

29 Big Country Ranch Corp. v. Court of Appeals, 227 SCRA 161, 167 [1993]; Cario v. Ofilada, 217 SCRA
206, 215 [1993]; Ordoez v. Gustilo, 192 SCRA 469 [1990]; Chavez v. Ongpin, 186 SCRA 331, 338 [1990];
Republic v. Sandiganbayan, 182 SCRA 9111, 918 [1990].
30 Cario, supra., citing Clareza v. Rosales, 2 SCRA 455, 457 [1961].
31 Rollo, p. 80.
468
468
not duly represented by a legitimate Board of Trustees in that case. As a necessary consequence, Civil
Case No. Q-90-6937, a case for Specific Performance with Damages, a mere action in personam, did not
become final and executory insofar as the true IDP is concerned since petitioner corporation, for want of
legitimate representation, was effectively deprived of its day in court in said case. Res inter alios
judicatae nullum aliis praejudicium faciunt. Matters adjudged in a cause do not prejudice those who
were not parties to it.32 Elsewise put, no person (natural or juridical) shall be affected by a proceeding
to which he is a stranger.33
Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a bar by
former j udgment will still not set in on the ground that the case of action in the two cases are
different. The cause of action in G.R. No. 107751 is the surrender of the owners duplicate copy of the
transfer certificates of title to the rightful possessor thereof, whereas the cause of action in the present
case is the validity of the Carpizo Group-INC Deed of Absolute Sale.
Res Judicata in the form of conclusiveness of judgment cannot likewise apply for the reason that any
mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed
incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC
has the better right of possession over the owners duplicate copy of the TCTs covering the IDP
property? G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the
validity of the sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would
be to cause grave and irreparable injustice to IDP which never gave its consent to the sale, thru a
legitimate Board of Trustees.
______________
32 Tan v. Barrios, 190 SCRA 686, 698 [1990], citing 54, C.J. 719.
33 Filamer Christian Institute v. Court of Appeals, 190 SCRA 485, 492 [1990], citing Church Assistance
Program v. Sibulo, G.R. No. 76552, March 21, 1989.
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VOL. 272, MAY 14, 1997

469
In any case, while it is true that the principle of res judicata is a fundam ental component of our judicial
system, it should be disregarded if its rigid application would involve the sacrifice of justice to
technicality.34
The main question though in this petition is: Did the Court of Appeals commit reversible error in setting
aside that portion of the SECs Decision in SEC Case No. 4012 which declared the sale of two (2) parcels
of land in Quezon City between the IDP-Carpizo Group and private respondent INC null and void?
We rule in the affirmative.
There can be no question as to the authority of the SEC to pass upon the issue as to who among the
different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly
falling within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of
Presidential Decree No. 902-A:
Section 3. The Commission shall have absolute jurisdiction, supervision and control over all
corporations, partnerships or associations, who are the grantees of primary franchises and/or a license
or permit issued by the government to operate in the Philippines
x x x x x x.
xxx xxx xxx
Section 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving:
xxx xxx xxx
______________
34 Zaldarriaga v. Court of Appeals, 255 SCRA 254, 268 [1996], citing Ronquillo v. Marasigan, L-11621,
May 31, 1962, 5 SCRA 304, 312, cited in Republic v. De los Santos, L-30240, March 25, 1988, 159 SCRA
264, 285 and in the concurring opinion of Justice Florenz D. Regalado in Sumaoang v. Judge, RTC, Br.
XXXI, Guimba, Nueva Ecija, G.R. No. 78173, October 26, 1992, 215 SCRA 136, 150-151; Suarez v. Court of
Appeals, 193 SCRA 183, 189 [1991].
470
470
c) Controversies in the selection or appointment of directors, trustees, officers, or managers of such
corporations, partnerships or associations. x x x.
If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare
who is not the legitimate IDP Board. 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.35 By this
ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a bogus Board of
Trustees. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind
of transaction including the sale or disposition of IDP property.
It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to
pass upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687,36
in a suit between the Carpizo Group and the Abbas Group, already declared the election of the Carpizo
Group (as well as the Abbas Group) to the IDP Board as null and void for being violative of the Articles of
Incorporation.37 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 nam e of the IDP, have to be struck down for having been done without the
consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the
essential requisites of contracts:
There is no contract unless the following requisites concur:
(1)Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
_______________
35 Supra, note 24.

36 Annex D; Rollo, p. 41.
37 Id., p. 45.
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471
(3) Cause of the obligation which is established.
All these elements must be present to constitute a valid contract. For, where even one is absent, the
contract is void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and
where it is wanting, the contract is non-existent.38 In this case, the IDP, owner of the subject parcels of
land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale
executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent
on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is
void and produces no effect whatsoever.
The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Groups
failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or
substantially all assets of the corporation:
Sec. 40. Sale or other disposition of assets.Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon terms and conditions and for s uch cons ideration,
which may be money, stocks, bonds or other instruments for the payment of money or other property
or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote
of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of
non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders or
members meeting duly called for the purpose. Written notice of the propos ed action and of the time
and place of the meeting shall be addressed to each stockholder or member of his place of residence as
shown on the books of the corporation and deposited to the addressee in the post office with postage
prepaid, or s erved personally: Provided, That any diss enting stockholder may exercise his appraisal
right under the conditions provided in this Code.
_______________
38 Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV,
1991 ed., p. 445.
472
472
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
x x x x x x x x x.
The Tandang Sora property, it 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 ID P 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 w ith the sham Board Resolution
authorizing the negotiation for the sale w ere, from all indications, not bona fide members of the ID P as
they were made to appear to be. Apparently, there are only fifteen (15) official members of the
petitioner corporation including the eight (8) members of the Board of Trustees.39
All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent
INC was intrinsically void ab initio.
Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being
made outside of its jurisdiction, the same not being an intra-corporate dispute.
The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale
null and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to
lack of consent of the IDP, owner of the subject property. No end of substantial justice will be served if
we reverse the SECs conclusion on the matter, and
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39 Rollo, p. 200.
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473
over an issue which is already determinable based on what we have in the records.
It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971
Board of Trustees in Civil Case No. Q-90-6937, a case for Specific Performance with Damages between
INC and the Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have
been granted ample opportunity before the regional trial court to shed light on the true status of the
Carpizo Board and settled the matter as to the validity of the sale then and there. But INC, wanting to
acquire the property at all costs and threatened by the participation of the legitimate IDP Board in the
civil suit, argued for the denial of the motion averring, inter alia, that the issue sought to be litigated by
the movant is intra-corporate in nature and outside the jurisdiction of the regional trial court.40 As a
result, the motion for intervention was denied. When the Decision in SEC Case No. 4012 came out
nullifying the sale, INC came forward, this time, quibbling over the issue that it is the regional trial court,
and not the SEC, w hich has jurisdiction to rule on the validity of the sale. INC is here trifling with the
courts. We cannot put a premium on this clever legal maneuverings of private respondent which, if
countenanced, w ould result in a failure of justice.
Furthermore, the Court observes that the INC bought the questioned property from the Carpizo Group
without even seeing the owners duplicate copy of the titles covering the property. This is very strange
considering that the subject lot is a large piece of real property in Quezon City worth millions, and that
under the Torrens System of Registration, the minimum requirement for one to be a good faith buyer
for value is that the vendee at least sees the owners duplicate copy of the title and relies upon the
same.41 The private respondent, pre-
______________
40 Supra, note 14.

41 See Realty Sales Enterprises, Inc. v. IAC, 154 SCRA 328 [1987].
474
474
sumably knowledgeable on the aforesaid workings of the Torrens System, did not take heed of this and
nevertheless went through with the sale with undue haste. The unexplained eagerness of INC to buy this
valuable piece of land in Quezon City without even being presented with the owners copy of the titles
casts very serious doubt on the rightfulness of its position as vendee in the transaction.
WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated
October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange
Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of Quezon
City is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of respondent
Iglesia Ni Cristo, if one has already been made. If new titles have been issued in the name of Iglesia Ni
Cristo, the Register of Deeds is hereby ordered to cancel the same, and issue new ones in the name of
petitioner Islamic Directorate of the Philippines. Petitioner corporation is ordered to return to private
respondent whatever amount has been initially paid by INC as consideration for the property with legal
interest, if the same was actually received by IDP. Otherwise, INC may run after Engineer Farouk Carpizo
and his group for the amount of money paid.
SO ORDERED.
Kapunan, J., concur.
Padilla (J., Chairman), On leave.
Bellosillo, J., No part. To dispel any doubt on my judicial objectivity.
Vitug, J., In the result.
Petition granted. Judgment of Court of Appeals set aside, while that of the SEC reinstated.
Notes.A party cannot evade the application of the rule of res judicata by adopting a different method
of presenting his
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475
Abaca Corporation of the Philippines vs. Garcia
case. (Allied Banking Corporation vs. Court of Appeals, 229 SCRA 252 [1994])
In order for res judicata to apply, absolute identity of parties is not required because substantial identity
is sufficient. (Mendiola vs. Court of Appeals, 258 SCRA 492 [1996])
Islamic Directorate of the Phils. vs. Court of Appeals, 272 SCRA 454, G.R. No. 117897 May 14, 1997
No. L-20850. November 29, 1965.
THE EDWARD J. NELL COMPANY, petitioner, vs. PACIFIC FARMS, INC., respondent.
Corporations; Sale of assets by one corporation to another; Liability for debts of the transferor.
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 f or such debts.
Same; Same; Merger of two corporations; Case at bar.Appellant's claim that the transactions betwe
the two corporations have resulted in their consilidation or merger is negated by its theory to the effect
that one of the said corporations is an alter ego of the other. For, a corporation cannot be its own alter
ago.
APPEAL by certiorari from a decision of the Court of Appeals.
Agrava & Agrava for petitioner.
Araneta, Mendoza & Papa for respondent
CONCEPCION, J.:
Appeal by certiorari, taken by Edward J. Nell Co.hereinafter referred to as appellantfrom a

decision of the Court of Appeals.
On October 9, 1958, appellant secured in Civil Case No. 58579 of the Municipal Court of Manila against
Insular
416
416
Edward J. Nell Company vs. Pacific Farms,
Farms, Inc,hereinafter referred to as Insular Farmsa judgment for the sum of P1,853.80
representing the unpaid balance of the price of a pump sold by appellant to Insular Farmswith interest
on said sum, plus P125.00 as attorney's fees and P84.00 as costs. A writ of execu-tion, issued after the
judgment had become final, was, on August 14, 1959, returned unsatisfied, stating that Insular Farms
had no leviable property. Soon thereafter, or on November 13, 1959, appellant filed with said court the
present action against Pacific Farms, Inc.hereinafter referred to as appelleefor the collection of the
judg-ment 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: appellant's
complaint. Appellant appealed, with the same result, to the court of first instance and, subsequently, to
the Court 01 Appeals, Hence this appeal by certiorari, upon the ground that the Court of Appeals had
erred: (1) in not holding: the appellee liable for said unpaid obligation of the Insular Farms; and (2) in not
granting attorney's fees to appellant.
With respect to the first ground, it should be noted that appellant's complaint in the municipal court
was anchored upon the theory that appellee is an alter ego of Insular Farms, because the former had
purchased all or substantially all of the shares of stock, as well as the real and personal properties of the
latter, including the pumping equipment sold by appellant to Insular Farms. The record shows that, on
March 21, 1958, appellee purchased 1,000 shares of stock of Insular Farms for P285, 126.99; that,
thereupon, appellee sold said shares of stock to certain individuals, who forthwith reorganized said
corporation; and that the board of directors thereof, as reorganized, then caused its assets, including its
leasehold rights over a public land in Bolinao, Pangasinan, to be sold to herein appellee for P10,000.00.
We agree with the Court of Appeals that these facts do not prove that the appellee is an alter ego of
Insular Farms, or is liable for its debts, The rule is set forth in Fletcher Cyclopedia Corporations, Vol. 15,
Sec. 7122, pp. 160-161, as follows:
417

417
Edward J. Nell Company vs. Pacific Farms, Inc.
"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 appellee had expressly or impliedly agreed
to assume the debt of Insular Farms in favor of appellant herein, or that the appellee is a continuation of
lnsular Farms, or that the sale of either the shares of stock or the assets of Insular Farms to the appellee
has been entered into fraudulently, in order to escape liability for the debt of the InsuIar Farms in favor
of appellant herein. In fact, the sales took place (March, 1958) not only over six (6) months before the
rendition of the judgment (October 9, 1958) sought to be collected in the present action, but, also, over
a month before the filing of the case (May 29, 1958) in which said judgment was rendered, Moreover,
appellee 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 as security for an obligation of Insular Farms in
favor of said bank. It has, also, been established that the appellee had paid P285,126.99 for said shares
of stock, apart from the sum of P10,000.00 it, likewise, paid for the other assets of Insular Farms.
Neither is it claimed that these transactions have resulted in the consolidation or merger of the Insular
Farms and appellee herein. On the contrary, appellant's theory to the effect that appellee is an alter ego
of the Insular Farms negates such consolidation or merger, for a corporation cannot be its own alter ego.
It is urged, however, that said P10,000.00 paid by appellee for other assets of Insular Farms is a grossly
inadequate price, because, appellant now claims, said assets were worth around P285,126.99, and that,
consequently, the
418
418
Li Tong Pek vs. Republic
sale must be considered fraudulent. However, the sale was submitted to and approved by the Securities
and Exchange Commission. It must be presumed, therefore, that the price paid was fair and reasonable.
Moreover, the only issue raised in the court of origin was whether or not appellee is an alter ego of
Insular Farms. The question of whether the aforementioned sale of assets for P10,000.00 was fraudulent
or not, had not been put in "issue in said court. Hence. it may not be raised on appeal.
Being a mere consequence of the first assignment of error, which is thus clearly untenable, appellant's
second assignment of error needs no discussion.
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the appellant. It is so
ordered.
Bengzon, C.J., Baustista Angelo, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar,
JJ., concur.
Barrera, J., is on leave.
Decision affirmed.
Edward J. Nell Company vs. Pacific Farms, Inc., 15 SCRA 415, No. L-20850 November 29, 1965
[No. 30460. March 12, 1929]
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated, plaintiff and appellant, vs.
GRE-GORIO VELASCO ET AL., defendants and appellees.
1.WHAT CREDITORS MAY ASSUME.The creditors of a corporation have the right to assume that so
long as there are debts and liabilities, the board of directors of the corporation will not use its assets to
purchase its own stock or to declare dividends to its stockholders when the corporation is insolvent.
2.DUTIES OF DIRECTORS.The directors of a corporation are bound to care for its property and manage
its affairs in good faith, and for a violation of their duties resulting in waste of its assets or injury to its
property, they are liable to account the same as any other trustee.
3.LIABILITY OF DIRECTORS.If the directors of a corporation do acts clearly beyond their power, by
reason of which a loss ensued, or dispose of its property without authority, they will be required to
make good the loss out of their private estate.
4.IGNORANCE IS NO DEFENSE.A director of a corporation is bound to exercise ordinary skill and
judgment and cannot excuse his negligence or unlawf ul acts on the ground of ignorance or
inexperience.
APPEAL from a judgment of the Court of First Instance of Zamboanga. Summers, J.
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
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
954
954
Steinberg vs. Velasco
director of the Trading Company, at a meeting of the board of directors held on July 24, 1922, approved
and authorized various unlawful purchases already made of a large portion of the capital stock of the
company from its various stockholders, thereby diverting its funds to the injury, damage and in fraud of
the creditors of the corporation. That pursuant to such resolution and on March 31, 1922, the
corporation purchased from the defendant S. R. Ganzon 100 shares of its capital stock of the par value
of P10, and on June 29,1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, and on July 16, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the
par value of P10, each, and on April 5, 1922, it purchased from the defendant Dionisio Saavedra 10
shares of the same par value, and on June 29, 1922, it purchased from the defendant Valentin Matias 20
shares of like value. That the total amount of the capital stock unlawfully purchased was P3,300. That at
the time of such purchase, the corporation had accounts payable amounting to P13,807.50, most of
which were unpaid at the time the petition for the dissolution of the corporation was presented, and
that the corporation was then in a bad financial condition, in contemplation of an insolvency and
dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and directors of the
corporation approved a resolution for the payment of P3,000 as dividends to its stockholders, which was
wrongfully done and in bad faith, and. to the injury and fraud of its creditors. That at the time the
petition for the dissolution of the corporation was presented it had accounts payable in the sum of
P9,241.19, "and practically worthless accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco, Felix del Castillo,
Andres L. Navallo and Rufino Manuel, personally as members of the Board of Directors, or for the
recovery from the de-
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955
fendant S. R. Ganzon, of the sum of P1,000, from the defendant Felix D. Mendaros, P2,000, and from the
defendant Dionisio Saavedra, P100, and under his second cause of action, he prays judgment for the
sum of P3,000, with legal interest against the board of directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio Saavedra and
Valentin Matias made a general and specific denial.
In his amended answer, the defendant Gregorio Velasco admits paragraphs 1, 2. and 3. of each cause of
action of the complaint, and that the shares mentioned in paragraph 4. of the first cause of action were
purchased, but alleges that they were purchased by virtue of a resolution of the board of directors of
the corporation "when the business of the company was going on very well." That the defendant is one
of the principal shareholders, and that about the same time, he purchased other shares for his own
account, because he thought they would bring profits. As to the second cause of action, he admits that
the dividends described in paragraph 4. of the complaint were distributed, but alleges that such
distribution was authorized by the board of directors, "and that the amount represented by said
dividends really constitutes a surplus profit of the corporation," and as a counterclaim, he asks for
judgment against the receiver for P12,512.47 for and on account of his negligence in failing to collect the
accounts.
Although duly served, the defendant Mendaros did not appear or answer. The defendant Navallo was
not served, and the case against him was dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon which the lower
court dismissed plaintiff's complaint, and rendered judgment for the defendants, with costs against the
plaintiff, and absolved him from the cross-complaint of the defendant Velasco, and on appeal, the
plaintiff assigns the following errors:
"1. In holding that the Sibuguey Trading Company, Incorporated, could legally purchase its own stock.
956
956
"2. In holding that the Board of Directors of the said Corporation could legally declare a dividend of
P3,000, July 24, 1922."
JOHNS, J.;
It is stipulated that on July 24, 1922, the directors of the corporation approved the purchase of stock as
follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price; which purchase was made on June 29,
1922; another
One hundred shares from Felix; D. Mendaros at the same price on July 16, 1922;
Ten shares from Dionisio Saavedra at the same price on June 29,1922.
That during such times, the defendant Gregorio Velasco purchased 13 shares from the corporation for
P130; Felix del Castillo42 shares for P420; Andres Navallo15 shares for P150; and the defendant
Mendaros10 shares for P100. That during the time these various purchases were made, the total
amount of subscribed and paid up capital stock of the corporation was P10,030, out of the authorized
capital stock 2,000 shares of the par value of P10 each.
Paragraph 4. of the stipulation also recites:
"Be it also admitted as a fact that at the time of the said purchases there was a surplus profit of the
corporation above-named of P3,314.72."
Paragraph 5, is as follows:
"That at the time of the repeatedly mentioned various purchases of the said capital stock were made,
the said corporation had Accounts Payable in the total amount of P13,807.50 as shown by the statement
of the corporation, dated June 30, 1922, and Accounts Receivable in the sum of P19,126.02 according to
the books, and that the intention of the Board of Directors was to resell the stocks purchased by the
corporations at a sum above par for each stock, this expectation being justified by the then satisfactory
and
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VOL. 52, MARCH 12, 1929

957
sound financial condition of the business of the corporation."
It is also stipulated that on September 11, 1923, when the petition for the dissolution of the corporation
was presented to the court, according to a statement made June 30, 1923, it has accounts payable
aggregating P9,241.19, and accounts receivable for P12,512.47.
Paragraph 7, of the stipulation recites:
"That the same defendants, mentioned in paragraph 2. of this stipulation of facts and in the same
capacity, on the same date of July 24, 1922, and at the said meeting of the said Board of Directors,
approved and authorized by resolution the payments of dividends to its stockholders, in the sum of
three thousand pesos (P3,000), Philippine currency, which payments were made at different dates,
between September 30, 1922, and May 12, 1923, both dates inclusive, at a time when the corporation
had accounts less in amount than the accounts receivable, which resolution was based upon the balance
sheet made as June 30, 1922, said balance sheet showing that the corporation had a surplus of
P1,069.41, and a profit on the same date of P2,656.08, or a total surplus amount of P3,725.49, and a
reserve fund of P2,889.23 for bad and doubtful accounts and depreciation of equipment, thereby
leaving a balance of P3,314.72 of net surplus profit after paying this dividend."
It is also stipulated at a meeting of the board of directors held on July 24, 1922, as follows:
"6. The president and manager submitted to the Board of Directors his statement and balance sheet for
the first semester ending June 30, 1922 and recommended that P3,000out of the surplus account be
set aside for dividends payable, and that payments be made in installments so as not to affect the
financial condition of the corporation. That stockholders having outstanding account with the
corporation should settle first their accounts before payments of their dividends could be made. Mr.
Castillo moved that
958
958
the statement and balance sheet be approved as submitted, and also the recommendations of the
president. Seconded by Mr. Manuel. Approved."
Paragraph 8, of the stipulation is as follows:
"That according to the balance sheet of the corporation, dated June 30, 1923, it had accounts receivable
in the sum of P12,512.47, due from various contractor and laborers of the National Coal Company, and
also employees of the herein corporation, which the herein receiver, after his appointment on February
28, 1924, although he made due efforts by personally visiting the location of the corporation, and of
National Coal Company, at its offices, at Malangas, Mindanao, and by writing numerous letters of
demand to the debtors of the corporation, in order to collect these accounts receivable, he was unable
to do so as most of them Were without goods or property, and he could not file any suit against them
that might have any property, for the reason that he had no funds on hand with which to pay the filing
and sheriff fees to Malangas, and other places of their residences."
From all of which, it appears that on June 30, 1922, the board of directors of the corporation authorized
the purchase of, purchased and paid for, 330 shares of the capital stock of the corporation at the agreed
price of P3,300, and that at the time the purchase was made, the corporation was indebted in the sum
of P13,807.50, and that according to its books, it had accounts receivable in the sum of P19,126.02. 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. But it will be noted that there is no stipulation
or finding of fact 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
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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 P3,000out of the
surplus account to be set aside for dividends payable, and that payments be made in installments so as
not to affect the financial condition of the corporation."
If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over and above all of its
debts and liabilities, the payment of the P3,000 in dividends would not in the least impair the financial
condition of the corporation or prejudice the interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on the 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. But as stated, there is no
stipulation as to the actual cash value of those accounts, and it does appear from the stipulation that on
February 28,1924, P12,512.47 of those accounts had but little, if any, value, and it must be conceded
that, 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. It also appears from
paragraph 4. of the stipulation that the corporation had a "surplus profit" of P3,314.72 only. It is further
stipulated that the dividends should "be made in installments so as not to affect the financial condition
of the corporation." In other words, that 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 that time would "affect
the financial condition of the corporation."
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
960
960
that 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, that 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, of 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.
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, section 454, where it
is said:
"General Duty to Exercise Reasonable Care.The directors of a corporation are bound to care for its
property and manage its affairs in good faith, and for a violation of these duties resulting in waste of its
assets or injury to the property they are liable to account the same as other trustees. And there can be
no doubt that if they do acts clearly beyond their power, whereby loss ensues to the corporation, or
dispose of its property or pay away its money without authority, they will be required to make good the
loss out of their private estates. This is the rule where the disposition made of money or property of the
corporation is one either not within the lawful power of the corporation, or, if within the power of the
corporation, is not within the power or authority of the particular officer or officers."
And section 468 which says:
"Want of Knowledge, Skill, or Competency.lt has been said that directors are not liable for losses
resulting to the
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VOL. 52, MARCH 12, 1929

961
corporation from want of knowledge on their part; or for mistakes of judgment, provided they were
honest, and provided they are fairly within the scope of the powers and .discretion confided to the
managing body. But the acceptance of the office of a director of a corporation implies a competent
knowledge of the duties assumed, and directors cannot excuse imprudence on the ground of their
ignorance or inexperience; and if they commit an error of judgment through mere recklessness or want
of ordinary prudence or skill, they may be held liable for the consequences. Like a mandatory, to whom
he has been likened, a director is bound not only to exercise proper care and diligence, but ordinary skill
and judgment. As he is bound to exercise ordinary skill and judgment, he cannot set up that he did not
possess them."
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.
The amount involved in this case is not large, but the legal principles are important, and we have given
them the consideration which they deserve.
The judgment of the lower court is reversed, and (a), as to the first cause of action, one will be entered
for the plaintiff and against the defendant S. R. Ganzon for the sum of P1,000, with legal interest from
the 10th of February, 1926, and against the defendant Felix D. Mendaros for P2,000, with like interest,
and against the defendant Dionisio Saavedra for P100, with like interest, and against each of them for
costs, each on their primary liability as purchasers of stock, and (b) against the defendants Gregorio
Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the board of directors of the
Sibuguey Trading Company, Incorporated, as secondarily liable for the whole amount of such stock sold
and pur-
962
962
Nacionalista Party vs. Municipal Board of Manila
chased as above stated, and on the second cause of action, judgment will be entered (c) for the plaintiff
and jointly and severally against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel,
personally, as members of the board of directors of the Sibuguey Trading Company, Incorporated, for
P3,000, with interest thereon from February 10,1926, at the rate of b, per cent per annum, and costs. So
ordered.
Johnson, Street, Malcolm, Ostrand, Romualdez, and Villa-Real, JJ., concur.
Judgment reversed. Steinberg vs. Velasco, 52 Phil. 953, No. 30460 March 12, 1929
Nos. L-17504 & L-17506. February 28, 1969.
RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and PATRIA SALAS, heirs
of Magdalena Salas, as stockholders on their own behalf and on the benefit of the Ma-ao Sugar Central
Co., Inc., and other stockholders thereof who may wish to join in this action, plaintiffs-appellants, vs.
MA-AO SUGAR CENTRAL Co., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M.
ARANETA, and RAMON A. YULO, defendants-appellants.
Corporation Law; Investment of corporate funds in another corporation; When not violative of Section
of the Corporation Law.Plaintiffs-appellants contend that the investment of corporate funds by
defendants-appellants in another corporation constitutes a violation of section of the Corporation
Law. The Supreme Court held that such an act, if done pursuance of the corporate purpose, does not
need the approval of the stock-
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248
De la Rama vs. Ma-ao Sugar Central Co., Inc.
holders; 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,
and further states that when purpose or purposes as stated in its articles of incorporation, the approval
of the stockholders is not necessary. (Guevara, Philippine Corp. Law, 1967 ed., p. 89).
Counterclaims; Dismissal; When justified.The defendants counterclaim on the allegation that the
complaint of plaintiff was premature, improper, malicious and that the language is unnecessarily
vituperative, abusive and insulting cannot be sustained in the case at bar. On the contrary, the lower
court found otherwise, as could be gleaned from the decision. With respect to the allegation that the
complaint was abusive and insulting, there is no finding that plaintiff had been actuated by bad faith,
nor is there anything in the complaint essentially libelous especially as the rule is that allegations in
pleadings where relevant, are privileged even though they may not be clearly proved afterwards.
Corporation Law; Investment of corporation for other corporations not similar with its business;
Deemed proper by Section 17 of the Corporation Law.The lower courts order refraining the
appellant corporation from making investment in other companies whose purpose is not connected
with the sugar central business should be reversed. This is because section 17 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.
APPEAL from a judgment of the Court of First Instance of Manila. Gatmaitan, J.
San Juan, Africa & Benedicto for plaintiffs-appellants.
Vicente Hilado and Gianzon, Sison, Yulo & Associates for defendants-appellants.
CAPISTRANO, J.:
This was a representative or derivative suit commenced on October 20, 1953, in the Court of First
Instance of Manila by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado
Araneta and three other directors of the corporation.
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249
The complaint comprising the period November, 1946 to October, 1952, stated five causes of action, to
wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing, irregular loans, and unauthorized
investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of corporate rights
warranting dissolution; (4) for alleged damages and attorneys fees; and (5) for receivership.
Plaintiffs prayed, in substance, as follows:
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his individual co-
defendants be ordered to render an accounting of all transactions made and carried out by them for
defendant corporation, and to collect, produce and/or pay to the defendant corporation the
outstanding balance of the amounts so diverted and still unpaid to defendant corporation;
Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and be ordered to
pay to the defendant corporation whatever amounts may be recovered by the plaintiffs in Civil Case
No. 20122, entitled Francisco Rodriguez vs. Ma-ao Sugar Central Co. "; to return to the defendant
corporation all amounts withdrawn by way of discretionary funds or backpay, and to account for the
difference between the corporations crop loan accounts payable and its crop loan accounts receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net assets be distributed
to the stockholders; and
Under the FOURTH CAUSE OF ACTION, that the defendants be ordered to pay the sum of P300,000.00
by way of compensatory, moral and exemplary damages and for expenses of litigation, including
attorneys fees and costs of the suit.
THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of receivership.
In their answer originally filed on December 1, 1953, and amended on February 1, 1955, defendants
denied the allegations regarding the supposed gross mismanagement, fraudulent use and diversion of
corporate funds, disregard of corporate requirements, abuse of trust and violation of
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250
fiduciary relationship, etc., supposed to have been discovered by plaintiffs, all of which are nothing but
gratuitous, unwarranted, exaggerated and distorted conclusions not supported by plain and specific
facts and transactions alleged in the complaint.
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the complaint is
premature, improper and unjustified; (2) that plaintiffs did not make an earnest, not simulated effort
to exhaust first their remedies within the corporation before filing their complaint; (3) that no actual loss
had been suffered by the def endant corporation on account of the transactions questioned by
plaintiffs; (4) that the payments by the debtors of all amounts due to the defendant corporation
constituted a full, sufficient and adequate remedy for the grievances alleged in the complaint; and (5)
that the dissolution and/or receivership of the defendant corporation would violate and impair the
obligation of existing contracts of said corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among others, that the
complaint was premature, improper and malicious, and that the language used was unnecessarily
vituperative, abusive and insulting, particularly against defendant J. Amado Araneta who appears to be
the main target of their hatred. Wherefore, the defendant sought to recover compensation for
damages, actual, moral , exemplary and corrective, including reasonable attorneys fees.
After trial, the Lower Court rendered its Decision (later supplemented by an Order resolving defendants
Motion for Reconsideration), the dispositive portion of which reads:
IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns J. Amado Araneta to
pay unto Ma-ao Sugar Central Co., Inc. the amount of P46,270.00 with 8% interest from the date of the
filing of this complaint, plus the costs; the Court reiterates the preliminary injunction restraining the Ma-
ao Sugar Central Co., Inc. management .to give any loans or advances to its officers and orders that this
injunction be as it is hereby made, permanent; and orders it to refrain from making investments in Acoje
Mining, Mabuhay Printing, and any other company whose purpose is not connected with the
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Sugar Central business; costs of plaintiffs to be borne by the Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme Court.
Before taking up the errors respectively assigned by the parties, we should state that the following
findings of the Lower Court on the commission of corporate irregularities by the defendants have not
been questioned by the defendants:
1. Failure to hold stockholders meetings regularly. No stockholders meetings were held in 1947, 1950
and 1951;
2. Irregularities in the keeping of the books. Untrue entries were made in the books which could not
simply be considered as innocent errors;
3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000,00. The
investments were made not in pursuance of the corporate purpose and without the requisite authority
of two-thirds of the stockholders;
4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to the defendants,
had been fully paid), in violation of the by-laws of the corporation which prohibits any director from
borrowing money from the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:
J. Amado Araneta & Co .................................................................................
P243,415.62
Luzon Industrial Corp. ...................................................................................
585,918.17
Associated Sugar ...........................................................................................
463,860.36
General Securities ...........................................................................................
86,743.65
Bacolod Murcia ..............................................................................................
501,030.61
Central Azucarera del Danao .........................................................................
97,884.42
Talisay-Silay .................................................................................................
4,365.90
The Court found that sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc. and
delivered to these affiliated companies, and vice versa, without the approval of the Ma-ao Board of
Directors, in violation of Sec. III, Art. 6-A of the by-laws.
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252
The errors assigned in the appeal of the plaintiffs, as appellants, are as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE FUNDS OF THE MA-AO
SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER PROCESSING CO., INC. WAS NOT A VIOLATION OF
SEC. 171/2 OF THE CORPORATION LAW.
II.
THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL CO., INC. WAS
INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS COMMITTED AGAINST
PLANTERS DID NOT CONSTITUTE MISMANAGEMENT.
IV.
THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE ACTS WERE INSUFFICIENT FOR THE
DISSOLUTION OF THE CORPORATION.
The portions of the Decision of the Lower Court assailed by the plaintiffs as appellants are as follows:
(1) x x x. Finally, as to the Philippine Fiber, the Court takes it that defendants admit having invested
P655,000.00 in shares of stock of this company but that this was ratified by the Board of Directors in
Resolutions 60 and 80, Exhibits R' and R-2' ; more than that, defendants contend that since said
company was engaged in the manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar
either to manufacture sugar bags or invest in another corporation engaged in said manufacture, and
they quote authorities for the purpose, pp. 2831, memorandum; the Court is persuaded to believe that
the defendants on this point are correct, because while Sec. 171/2 of the Corporation Law provides
that:
No corporation organized under this act shall invest its funds in any other corporation or business or
for any purpose other than the main purpose for which it was organized unless 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
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least two-thirds of the voting power on such proposal at the stockholders meeting called for the
purpose.
the Court is convinced that that law should be understood ,to mean as the authorities state, that it is
prohibited to the Corporation to invest in shares of another corporation unless such an investment is
authorized by two-thirds of the voting power of the stockholders, if the purpose of the corporation in
which investment is made is f oreign to the purpose of the investing corporation because surely there is
more logic in the stand that if the investment is made in a corporation whose business is important to
the investing corporation and would aid it in its purpose, to require authority of the stockholders would
be to unduly curtail the power of the Board of Directors; the only trouble here is that the investment
was made without any previous authority of the Board of Directors but was only ratified afterwards; this
of course would have the effect of legalizing the unauthorized act but it is an indication of the manner in
which corporate business is transacted by the Ma-ao Sugar administration, the fact that off and on,
there would be passed by the Board of Directors, resolutions ratifying all acts previously done by the
management, e.g. resolutions passed on February 25, 1947, and February 25, 1952, by the Board of
Directors as set forth in the affidavit of Isidro T. Dunca, p. 127, etc. Vol. 1." (Decision, pp. 239241 of
Record on Appeal.)
x x x x x x x x x
(2) On the other hand, the Court has noted against plaintiffs that their contention that Ma-ao Sugar is
on the verge of bankruptcy has not been clearly shown; against this are Exh. C to Exh. C-3; perhaps the
best proof that insolvency is still far is that this action was filed in 1953 and almost seven years have
passed since then without the company apparently getting worse than it was before; x x x (Decision,
pp. 243244, supra.)
x x x x x x x x x
(3) As to the crop loan anomalies in that instead of giving unto the planters the entire amount alloted
for that, the Central withheld a certain portion for their own use, as can be seen in Appendix A of Exh. C-
1, while the theory of plaintiffs is that since between the amount of P3,791,551.78 ,the crop loan
account -payable, and the amount of P1,708,488.22, .the crop loan receivable, there is a difference of
P2,083,063.56, this would indicate that this latter sum had been used by the Central itself for its own
purposes; on the other hand, defendants contend that the first amount did not represent the totality of
the crop loans obtained from the Bank for the purpose of relending to the planters, but that it included
the Centrals own credit line on its 40% share in the standing crop; and that this irregularity
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254
amounts to a grievance by plaintiffs as planters and not as stockholders, the Court must f ind that as to
this count, there is really reason to find that said anomaly is not a clear basis for the derivative suit, first,
because plaintiffs evidence is not very sufficient to prove clearly the alleged diversion in the face of
defendants defense; there should have been a showing that the Central had no authority to make the
diversion; and secondly, if the anomaly existed, there is ground to hold with defendants that it was an
anomaly pernicious not to the Central but to the planters; it was not even pernicious to the
stockholders.
Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of cane allotments,
withholding of molasses and alcohol shares, withholding of trucking allowance, formation of rival
planters associations, refusal to deal with legitimate planters group, Exh. S; the Court notices that as to
the failure to provide hauling transportation, this in a way is corroborated by Exh. 7, that part containing
the decision of the Court of First Instance of Manila, civil 20122, Francisco Rodriguez v. Ma-ao Sugar; for
the reason, however, that even if these were true, those grievances were grievances of plaintiffs as
planters and not as stockholdersjust as the grievance as to the crop loans already adverted to,this
Court will find insufficient merit on this count. (Decision, pp. 230231, supra.)
x x x x x x x x x
(4) x x x; for the Court must admit its limitations and confess ,that it cannot pretend to know better
than the Board in matters where the Board has not transgressed any positive statute or by-law
especially where as here, there is the circumstance that presumably, an impartial representative in the
Board of Directors,the one f rom the Philippine National Bank,against whom apparently plantiffs
have no quarrel, does not appear to have made any protest against the same; the net result will be to
hold that the culpable acts proved are not enough to secure a dissolution; the Court will only order the
correction of abuses, proved as already mentioned; nor will the Court grant any more damages one way
or the other. (Decision, p. 244, supra.)
On the other hand, the errors assigned in the appeal of the defendants as appellants are as follows:
I.
THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO SUGAR CENTRAL CO.,
INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST FROM THE DATE OF FILING OF THE COMPLAINT.
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255
II.
THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE DEFENDANTS, PARTICULARLY
J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN THE COUNTERCLAIM OF SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the defendants as appellants are as follows:
(1) As to the alleged juggling of books in that the personal account of J. Amado Araneta of P46,270.00
was closed on October 31, 1947 by charges transferred to loans receivable nor was interest paid on ,this
amount, the Court finds that this is related to charge No. 1, namely, the granting of personal loans to J.
Amado Araneta; it is really true that according to the books, and as admitted by defendants, J. Amado
Araneta secured personal loans; in 1947, the cash advance to him was P132,082.00 (Exh. A); the Court
has no doubt that this was against the By-Laws which provided that:
The Directors shall not in any case borrow money from the Company. (Sec. III, Art. 7);
the Court therefore f inds this count to be duly proved; worse, the Court also finds that as plaintiffs
contend, while the books of the Corporation would show that the last balance of P46,270.00 was
written off as paid, as testified to by Auditor Mr. Sanchez, the payment appeared to be nothing more
than a transfer of his loan receivable account, stated otherwise, the item was only transferred from the
personal account to the loan receivable account, so that again the Court considers established the
juggling of the books; and then again, it is also true that the loans were secured without any interest and
while it is true that in the Directors meeting of 21 October, 1953, it was resolved to collect 8%, the
Court does not see how such a unilateral action of the Board could bind the borrowers. Be it stated that
defendants have presented in evidence Exh. 5 photostatic copy of the page in loan receivable and it is
sought to be proved that J. Amado Aranetas debt was totally paid on 31 October, 1953; to the Court, in
the absence of definite primary proof of actual payment having found out that there had already been a
juggling of books, it cannot just believe that the amount had been paid as noted in the books.
(Decision, pp. 233235 of Record on Appeal.)
(2) With respect to the second point in the motion for reconsideration to the effect that the Court did
not make any findings of fact on the counterclaim of defendants, although the Court did not say that in
so many words, the Court takes it that its f indings of f act on pages 17 to 21 of its decision were enough
to justify a dismissal of the counterclaim, because the
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256
counterclaims were based on the fact that the complaint was premature, improper, malicious and that
the language is unnecessarily vituperative, abusive and insulting; but the Court has not found that the
complaint is premature; nor has the Court found that the complaint was malicious; these findings can be
gleaned from the decision with respect to the allegation that the complaint was abusive and insulting,
the Court does not concur; for it has not seen anything in the evidence that would justify a finding that
plaintiffs and been actuated by bad faith, nor is there anything in the complaint essentially libelous;
especially as the rule is that allegations in pleading where relevant, are privileged even though they may
not be clearly proved afterwards; so that the Court has not seen any merit in the counterclaims; and the
Court had believed that the decision already carried with it the implication of the dismissal of the
counterclaims, but if that is not enough, the Court makes its position clear on this matter in this order,
and clarifies that it has dismissed the counterclaims of defendants; x x x (Order of September 3, 1960,
pp. 248249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as appellants, it
appears to us that the Lower Court was correct in its appreciation (1) that the evidence presented did
not show that the defendant Ma-ao Sugar Company was insolvent; (2) that the alleged discriminatory
acts committed by; the defendant Central against the planters were not a proper subject of derivative
suit, but, at most, constituted a cause of action of the individual planters; and (3) that the acts of
mismanagement complained of and proved do not justify a dissolution of the corporation.
Whether insolvency exists is usually a question of fact, to be determined f rom an inventory of the
assets and their value, as well as a consideration of the liabilities. x x x. But the mere impairment of
capital stock alone does not establish insolvency, there being other evidence as to the corporation being
a going concern with sufficient assets. Also, the excess of liabilities over assets does not establish
insolvency, when other assets are available (Fletcher Cyc. of the Law of Private Corporations, Vol. 15A,
1938 Ed., pp. 3437; italics supplied).
But relief by dissolution will be awarded in such cases only where no other adequate remedy is
available, and is not available where the rights of the stockholders can be, or are, protected in some
other way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812813, citing Thwing v. McDonald, 134
Minn. 148, 156 N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell v. Bank of St.
Paul, 7 Minn. 252).
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257
The First Assignment of Error in the brief of the plaintiffs as appellants, contending that the investment
of corporate funds by the Ma-ao Sugar Co., Inc, in another corporation (the Philippine Fiber Processing
Co., Inc.) constitutes a violation of Sec. 171/2 of the Corporation Law, deserves consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through its President, J.
Amado Araneta, subscribed for P300,000.00 worth of capital stock of the Philippine Fiber Processing Co.,
Inc., that payments on the subscription were made on September 20, 1950, for P150,000.00, on April
30, 1951, for P50,000.00, and on March 6, 1952, for P100,000.00; that 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 the President of Ma-ao Sugar Central Co., Inc., was so authorized by the Board
of Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by Luzon
Industrial Corporation were transferred on May 31, 1952, to the defendant Ma-ao Sugar Central Co.,
Inc., with a valuation of P355,000.00 on the basis of P1.00 par value per share. Again, the investment
was made without prior board resolution, the authorizing resolution having been subsequently
approved only on June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board Resolutions are
valid, the transaction is still wanting in legality, no resolution having been approved by the affirmative
vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of
the voting power, as required in Sec. 171/2 of the Corporation Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 171/2 of the Corporation Law, provides:
No corporation organized under this act shall invest its funds in any other corporation or business, or
for any purpose other than the main purpose f or which it was organized, unless its board of directors
has been so authorized in a resolution by
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258
the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such proposal at a stockholders meeting called for the purpose x x x.
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law, which
provides:
SEC. 13.Every corporation has the power:
x x x x x x x x x
(9) To enter into any obligation or contract essential to the proper administration of its corporate affairs
or necessary for the proper transaction of the business or accomplishment of the purpose for which the
corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in the
articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities and
other evidences of indebtedness of any domestic or foreign corporation.
A reading- of the two afore-quoted provisions shows that there is need for interpretation of the
apparent conflict.
In his work entitled The Philippine Corporation Law, now in its 5th edition, Professor Sulpicio S.
Guevara of the University of the Philippines, College of Law, a wellknown authority in commercial law,
reconciled these two apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities.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
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259
of bringing about a monopoly in any line of commerce or combination in restraint of trade. (The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89.) (Italics ours.)
40. 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 (Id.,
p. 108.) (Italics ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the investment in question does not fall
under the purview of Sec. 171/2 of the Corporation Law.
With respect to the defendants assignment of errors, the second (referring to the counterclaim) is
clearly without merit. As the Lower Court aptly ruled in its Order of September 3, 1960 (resolving the
defendants Motion for Reconsideration) the findings of fact were enough to justify a dismissal of the
counterclaim, because the counterclaims were based on the fact that the complaint was premature,
improper, malicious and that the language is unnecessarily vituperative, abusive and insulting; but the
Court has not found that the complaint is premature; nor as the Court found that the complaint was
malicious; these findings can be gleaned from the decision; with respect to the allegation that the
complaint was abusive and insulting, the Court does not concur; for it has not seen anything in the
evidence that would justify a finding that plaintiffs had been actuated by bad faith, nor is there anything
in the complaint essentially libelous especially as the rule is that allegations in pleadings where relevant,
are privileged even though they may not be clearly proved afterwards; x x x
260
260
Hong Chiong Yu vs. Republic
As regards defendants first assignment of error, referring to the status of the account of J. Amado
Araneta in the amount of P46,270.00, this Court likewise agrees with the finding of the Lower Court that
Exhibit 5, photostatic copy of the page on loans receivable, does not constitute definite primary proof of
actual payment, particularly in this case where there is evidence that the account in question was
transferred from one account to another. There is no better substitute for an official receipt and a
cancelled check as evidence of payment.
In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. to
refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company whose
purpose is not connected with the sugar central business. This portion of the decision should be
reversed because Sec. 171/2 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.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao Sugar Central Co.,
Inc. to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company
whose purpose is not connected with the sugar central business, is reversed. The other parts of the
judgment are affirmed. No special pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando and Barredo, JJ., concur.
Makalintal and Sanchez, JJ., did not take part.
Teehankee, J., took no part.
Judgment partly reversed and partly affirmed.
De la Rama vs. Ma-ao Sugar Central Co., Inc., 27 SCRA 247, Nos. L-17504 February 28, 1969
Nos. L-17504 & L-17506. February 28, 1969.
RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and PATRIA SALAS, heirs
of Magdalena Salas, as stockholders on their own behalf and on the benefit of the Ma-ao Sugar Central
Co., Inc., and other stockholders thereof who may wish to join in this action, plaintiffs-appellants, vs.
MA-AO SUGAR CENTRAL Co., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M.
ARANETA, and RAMON A. YULO, defendants-appellants.
Corporation Law; Investment of corporate funds in another corporation; When not violative of Section
of the Corporation Law.Plaintiffs-appellants contend that the investment of corporate funds by
defendants-appellants in another corporation constitutes a violation of section of the Corporation
Law. The Supreme Court held that such an act, if done pursuance of the corporate purpose, does not
need the approval of the stock-
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holders; 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,
and further states that when purpose or purposes as stated in its articles of incorporation, the approval
of the stockholders is not necessary. (Guevara, Philippine Corp. Law, 1967 ed., p. 89).
Counterclaims; Dismissal; When justified.The defendants counterclaim on the allegation that the
complaint of plaintiff was premature, improper, malicious and that the language is unnecessarily
vituperative, abusive and insulting cannot be sustained in the case at bar. On the contrary, the lower
court found otherwise, as could be gleaned from the decision. With respect to the allegation that the
complaint was abusive and insulting, there is no finding that plaintiff had been actuated by bad faith,
nor is there anything in the complaint essentially libelous especially as the rule is that allegations in
pleadings where relevant, are privileged even though they may not be clearly proved afterwards.
Corporation Law; Investment of corporation for other corporations not similar with its business;
Deemed proper by Section 17 of the Corporation Law.The lower courts order refraining the
appellant corporation from making investment in other companies whose purpose is not connected
with the sugar central business should be reversed. This is because section 17 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.
APPEAL from a judgment of the Court of First Instance of Manila. Gatmaitan, J.
San Juan, Africa & Benedicto for plaintiffs-appellants.
Vicente Hilado and Gianzon, Sison, Yulo & Associates for defendants-appellants.
CAPISTRANO, J.:
This was a representative or derivative suit commenced on October 20, 1953, in the Court of First
Instance of Manila by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado
Araneta and three other directors of the corporation.
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The complaint comprising the period November, 1946 to October, 1952, stated five causes of action, to
wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing, irregular loans, and unauthorized
investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of corporate rights
warranting dissolution; (4) for alleged damages and attorneys fees; and (5) for receivership.
Plaintiffs prayed, in substance, as follows:
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his individual co-
defendants be ordered to render an accounting of all transactions made and carried out by them for
defendant corporation, and to collect, produce and/or pay to the defendant corporation the
outstanding balance of the amounts so diverted and still unpaid to defendant corporation;
Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and be ordered to
pay to the defendant corporation whatever amounts may be recovered by the plaintiffs in Civil Case
No. 20122, entitled Francisco Rodriguez vs. Ma-ao Sugar Central Co. "; to return to the defendant
corporation all amounts withdrawn by way of discretionary funds or backpay, and to account for the
difference between the corporations crop loan accounts payable and its crop loan accounts receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net assets be distributed
to the stockholders; and
Under the FOURTH CAUSE OF ACTION, that the defendants be ordered to pay the sum of P300,000.00
by way of compensatory, moral and exemplary damages and for expenses of litigation, including
attorneys fees and costs of the suit.
THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of receivership.
In their answer originally filed on December 1, 1953, and amended on February 1, 1955, defendants
denied the allegations regarding the supposed gross mismanagement, fraudulent use and diversion of
corporate funds, disregard of corporate requirements, abuse of trust and violation of
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fiduciary relationship, etc., supposed to have been discovered by plaintiffs, all of which are nothing but
gratuitous, unwarranted, exaggerated and distorted conclusions not supported by plain and specific
facts and transactions alleged in the complaint.
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the complaint is
premature, improper and unjustified; (2) that plaintiffs did not make an earnest, not simulated effort
to exhaust first their remedies within the corporation before filing their complaint; (3) that no actual loss
had been suffered by the def endant corporation on account of the transactions questioned by
plaintiffs; (4) that the payments by the debtors of all amounts due to the defendant corporation
constituted a full, sufficient and adequate remedy for the grievances alleged in the complaint; and (5)
that the dissolution and/or receivership of the defendant corporation would violate and impair the
obligation of existing contracts of said corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among others, that the
complaint was premature, improper and malicious, and that the language used was unnecessarily
vituperative, abusive and insulting, particularly against defendant J. Amado Araneta who appears to be
the main target of their hatred. Wherefore, the defendant sought to recover compensation for
damages, actual, moral , exemplary and corrective, including reasonable attorneys fees.
After trial, the Lower Court rendered its Decision (later supplemented by an Order resolving defendants
Motion for Reconsideration), the dispositive portion of which reads:
IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns J. Amado Araneta to
pay unto Ma-ao Sugar Central Co., Inc. the amount of P46,270.00 with 8% interest from the date of the
filing of this complaint, plus the costs; the Court reiterates the preliminary injunction restraining the Ma-
ao Sugar Central Co., Inc. management .to give any loans or advances to its officers and orders that this
injunction be as it is hereby made, permanent; and orders it to refrain from making investments in Acoje
Mining, Mabuhay Printing, and any other company whose purpose is not connected with the
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Sugar Central business; costs of plaintiffs to be borne by the Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme Court.
Before taking up the errors respectively assigned by the parties, we should state that the following
findings of the Lower Court on the commission of corporate irregularities by the defendants have not
been questioned by the defendants:
1. Failure to hold stockholders meetings regularly. No stockholders meetings were held in 1947, 1950
and 1951;
2. Irregularities in the keeping of the books. Untrue entries were made in the books which could not
simply be considered as innocent errors;
3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000,00. The
investments were made not in pursuance of the corporate purpose and without the requisite authority
of two-thirds of the stockholders;
4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to the defendants,
had been fully paid), in violation of the by-laws of the corporation which prohibits any director from
borrowing money from the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:
J. Amado Araneta & Co .................................................................................
P243,415.62
Luzon Industrial Corp. ...................................................................................
585,918.17
Associated Sugar ...........................................................................................
463,860.36
General Securities ...........................................................................................
86,743.65
Bacolod Murcia ..............................................................................................
501,030.61
Central Azucarera del Danao .........................................................................
97,884.42
Talisay-Silay .................................................................................................
4,365.90
The Court found that sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc. and
delivered to these affiliated companies, and vice versa, without the approval of the Ma-ao Board of
Directors, in violation of Sec. III, Art. 6-A of the by-laws.
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The errors assigned in the appeal of the plaintiffs, as appellants, are as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE FUNDS OF THE MA-AO
SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER PROCESSING CO., INC. WAS NOT A VIOLATION OF
SEC. 171/2 OF THE CORPORATION LAW.
II.
THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL CO., INC. WAS
INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS COMMITTED AGAINST
PLANTERS DID NOT CONSTITUTE MISMANAGEMENT.
IV.
THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE ACTS WERE INSUFFICIENT FOR THE
DISSOLUTION OF THE CORPORATION.
The portions of the Decision of the Lower Court assailed by the plaintiffs as appellants are as follows:
(1) x x x. Finally, as to the Philippine Fiber, the Court takes it that defendants admit having invested
P655,000.00 in shares of stock of this company but that this was ratified by the Board of Directors in
Resolutions 60 and 80, Exhibits R' and R-2' ; more than that, defendants contend that since said
company was engaged in the manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar
either to manufacture sugar bags or invest in another corporation engaged in said manufacture, and
they quote authorities for the purpose, pp. 2831, memorandum; the Court is persuaded to believe that
the defendants on this point are correct, because while Sec. 171/2 of the Corporation Law provides
that:
No corporation organized under this act shall invest its funds in any other corporation or business or
for any purpose other than the main purpose for which it was organized unless 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
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least two-thirds of the voting power on such proposal at the stockholders meeting called for the
purpose.
the Court is convinced that that law should be understood ,to mean as the authorities state, that it is
prohibited to the Corporation to invest in shares of another corporation unless such an investment is
authorized by two-thirds of the voting power of the stockholders, if the purpose of the corporation in
which investment is made is f oreign to the purpose of the investing corporation because surely there is
more logic in the stand that if the investment is made in a corporation whose business is important to
the investing corporation and would aid it in its purpose, to require authority of the stockholders would
be to unduly curtail the power of the Board of Directors; the only trouble here is that the investment
was made without any previous authority of the Board of Directors but was only ratified afterwards; this
of course would have the effect of legalizing the unauthorized act but it is an indication of the manner in
which corporate business is transacted by the Ma-ao Sugar administration, the fact that off and on,
there would be passed by the Board of Directors, resolutions ratifying all acts previously done by the
management, e.g. resolutions passed on February 25, 1947, and February 25, 1952, by the Board of
Directors as set forth in the affidavit of Isidro T. Dunca, p. 127, etc. Vol. 1." (Decision, pp. 239241 of
Record on Appeal.)
x x x x x x x x x
(2) On the other hand, the Court has noted against plaintiffs that their contention that Ma-ao Sugar is
on the verge of bankruptcy has not been clearly shown; against this are Exh. C to Exh. C-3; perhaps the
best proof that insolvency is still far is that this action was filed in 1953 and almost seven years have
passed since then without the company apparently getting worse than it was before; x x x (Decision,
pp. 243244, supra.)
x x x x x x x x x
(3) As to the crop loan anomalies in that instead of giving unto the planters the entire amount alloted
for that, the Central withheld a certain portion for their own use, as can be seen in Appendix A of Exh. C-
1, while the theory of plaintiffs is that since between the amount of P3,791,551.78 ,the crop loan
account -payable, and the amount of P1,708,488.22, .the crop loan receivable, there is a difference of
P2,083,063.56, this would indicate that this latter sum had been used by the Central itself for its own
purposes; on the other hand, defendants contend that the first amount did not represent the totality of
the crop loans obtained from the Bank for the purpose of relending to the planters, but that it included
the Centrals own credit line on its 40% share in the standing crop; and that this irregularity
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amounts to a grievance by plaintiffs as planters and not as stockholders, the Court must f ind that as to
this count, there is really reason to find that said anomaly is not a clear basis for the derivative suit, first,
because plaintiffs evidence is not very sufficient to prove clearly the alleged diversion in the face of
defendants defense; there should have been a showing that the Central had no authority to make the
diversion; and secondly, if the anomaly existed, there is ground to hold with defendants that it was an
anomaly pernicious not to the Central but to the planters; it was not even pernicious to the
stockholders.
Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of cane allotments,
withholding of molasses and alcohol shares, withholding of trucking allowance, formation of rival
planters associations, refusal to deal with legitimate planters group, Exh. S; the Court notices that as to
the failure to provide hauling transportation, this in a way is corroborated by Exh. 7, that part containing
the decision of the Court of First Instance of Manila, civil 20122, Francisco Rodriguez v. Ma-ao Sugar; for
the reason, however, that even if these were true, those grievances were grievances of plaintiffs as
planters and not as stockholdersjust as the grievance as to the crop loans already adverted to,this
Court will find insufficient merit on this count. (Decision, pp. 230231, supra.)
x x x x x x x x x
(4) x x x; for the Court must admit its limitations and confess ,that it cannot pretend to know better
than the Board in matters where the Board has not transgressed any positive statute or by-law
especially where as here, there is the circumstance that presumably, an impartial representative in the
Board of Directors,the one f rom the Philippine National Bank,against whom apparently plantiffs
have no quarrel, does not appear to have made any protest against the same; the net result will be to
hold that the culpable acts proved are not enough to secure a dissolution; the Court will only order the
correction of abuses, proved as already mentioned; nor will the Court grant any more damages one way
or the other. (Decision, p. 244, supra.)
On the other hand, the errors assigned in the appeal of the defendants as appellants are as follows:
I.
THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO SUGAR CENTRAL CO.,
INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST FROM THE DATE OF FILING OF THE COMPLAINT.
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II.
THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE DEFENDANTS, PARTICULARLY
J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN THE COUNTERCLAIM OF SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the defendants as appellants are as follows:
(1) As to the alleged juggling of books in that the personal account of J. Amado Araneta of P46,270.00
was closed on October 31, 1947 by charges transferred to loans receivable nor was interest paid on ,this
amount, the Court finds that this is related to charge No. 1, namely, the granting of personal loans to J.
Amado Araneta; it is really true that according to the books, and as admitted by defendants, J. Amado
Araneta secured personal loans; in 1947, the cash advance to him was P132,082.00 (Exh. A); the Court
has no doubt that this was against the By-Laws which provided that:
The Directors shall not in any case borrow money from the Company. (Sec. III, Art. 7);
the Court therefore f inds this count to be duly proved; worse, the Court also finds that as plaintiffs
contend, while the books of the Corporation would show that the last balance of P46,270.00 was
written off as paid, as testified to by Auditor Mr. Sanchez, the payment appeared to be nothing more
than a transfer of his loan receivable account, stated otherwise, the item was only transferred from the
personal account to the loan receivable account, so that again the Court considers established the
juggling of the books; and then again, it is also true that the loans were secured without any interest and
while it is true that in the Directors meeting of 21 October, 1953, it was resolved to collect 8%, the
Court does not see how such a unilateral action of the Board could bind the borrowers. Be it stated that
defendants have presented in evidence Exh. 5 photostatic copy of the page in loan receivable and it is
sought to be proved that J. Amado Aranetas debt was totally paid on 31 October, 1953; to the Court, in
the absence of definite primary proof of actual payment having found out that there had already been a
juggling of books, it cannot just believe that the amount had been paid as noted in the books.
(Decision, pp. 233235 of Record on Appeal.)
(2) With respect to the second point in the motion for reconsideration to the effect that the Court did
not make any findings of fact on the counterclaim of defendants, although the Court did not say that in
so many words, the Court takes it that its f indings of f act on pages 17 to 21 of its decision were enough
to justify a dismissal of the counterclaim, because the
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counterclaims were based on the fact that the complaint was premature, improper, malicious and that
the language is unnecessarily vituperative, abusive and insulting; but the Court has not found that the
complaint is premature; nor has the Court found that the complaint was malicious; these findings can be
gleaned from the decision with respect to the allegation that the complaint was abusive and insulting,
the Court does not concur; for it has not seen anything in the evidence that would justify a finding that
plaintiffs and been actuated by bad faith, nor is there anything in the complaint essentially libelous;
especially as the rule is that allegations in pleading where relevant, are privileged even though they may
not be clearly proved afterwards; so that the Court has not seen any merit in the counterclaims; and the
Court had believed that the decision already carried with it the implication of the dismissal of the
counterclaims, but if that is not enough, the Court makes its position clear on this matter in this order,
and clarifies that it has dismissed the counterclaims of defendants; x x x (Order of September 3, 1960,
pp. 248249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as appellants, it
appears to us that the Lower Court was correct in its appreciation (1) that the evidence presented did
not show that the defendant Ma-ao Sugar Company was insolvent; (2) that the alleged discriminatory
acts committed by; the defendant Central against the planters were not a proper subject of derivative
suit, but, at most, constituted a cause of action of the individual planters; and (3) that the acts of
mismanagement complained of and proved do not justify a dissolution of the corporation.
Whether insolvency exists is usually a question of fact, to be determined f rom an inventory of the
assets and their value, as well as a consideration of the liabilities. x x x. But the mere impairment of
capital stock alone does not establish insolvency, there being other evidence as to the corporation being
a going concern with sufficient assets. Also, the excess of liabilities over assets does not establish
insolvency, when other assets are available (Fletcher Cyc. of the Law of Private Corporations, Vol. 15A,
1938 Ed., pp. 3437; italics supplied).
But relief by dissolution will be awarded in such cases only where no other adequate remedy is
available, and is not available where the rights of the stockholders can be, or are, protected in some
other way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812813, citing Thwing v. McDonald, 134
Minn. 148, 156 N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell v. Bank of St.
Paul, 7 Minn. 252).
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257
The First Assignment of Error in the brief of the plaintiffs as appellants, contending that the investment
of corporate funds by the Ma-ao Sugar Co., Inc, in another corporation (the Philippine Fiber Processing
Co., Inc.) constitutes a violation of Sec. 171/2 of the Corporation Law, deserves consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through its President, J.
Amado Araneta, subscribed for P300,000.00 worth of capital stock of the Philippine Fiber Processing Co.,
Inc., that payments on the subscription were made on September 20, 1950, for P150,000.00, on April
30, 1951, for P50,000.00, and on March 6, 1952, for P100,000.00; that 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 the President of Ma-ao Sugar Central Co., Inc., was so authorized by the Board
of Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by Luzon
Industrial Corporation were transferred on May 31, 1952, to the defendant Ma-ao Sugar Central Co.,
Inc., with a valuation of P355,000.00 on the basis of P1.00 par value per share. Again, the investment
was made without prior board resolution, the authorizing resolution having been subsequently
approved only on June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board Resolutions are
valid, the transaction is still wanting in legality, no resolution having been approved by the affirmative
vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of
the voting power, as required in Sec. 171/2 of the Corporation Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 171/2 of the Corporation Law, provides:
No corporation organized under this act shall invest its funds in any other corporation or business, or
for any purpose other than the main purpose f or which it was organized, unless its board of directors
has been so authorized in a resolution by
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258
the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such proposal at a stockholders meeting called for the purpose x x x.
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law, which
provides:
SEC. 13.Every corporation has the power:
x x x x x x x x x
(9) To enter into any obligation or contract essential to the proper administration of its corporate affairs
or necessary for the proper transaction of the business or accomplishment of the purpose for which the
corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in the
articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities and
other evidences of indebtedness of any domestic or foreign corporation.
A reading- of the two afore-quoted provisions shows that there is need for interpretation of the
apparent conflict.
In his work entitled The Philippine Corporation Law, now in its 5th edition, Professor Sulpicio S.
Guevara of the University of the Philippines, College of Law, a wellknown authority in commercial law,
reconciled these two apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities.A private corporation, in order to accomplish its
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
Law; namely, (a) that no agricultural or mining corporation shall in anywise be interested in any other
(c) .that such holdings shall be solely for investment and not for the purpose
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259
of bringing about a monopoly in any line of commerce or combination in restraint of trade. (The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89.) (Italics ours.)
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 (Id.,
p. 108.) (Italics ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the investment in question does not fall
under the purview of Sec. 171/2 of the Corporation Law.
With respect to the defendants assignment of errors, the second (referring to the counterclaim) is
clearly without merit. As the Lower Court aptly ruled in its Order of September 3, 1960 (resolving the
defendants Motion for Reconsideration) the findings of fact were enough to justify a dismissal of the
counterclaim, because the counterclaims were based on the fact that the complaint was premature,
improper, malicious and that the language is unnecessarily vituperative, abusive and insulting; but the
Court has not found that the complaint is premature; nor as the Court found that the complaint was
malicious; these findings can be gleaned from the decision; with respect to the allegation that the
complaint was abusive and insulting, the Court does not concur; for it has not seen anything in the
evidence that would justify a finding that plaintiffs had been actuated by bad faith, nor is there anything
in the complaint essentially libelous especially as the rule is that allegations in pleadings where relevant,
are privileged even though they may not be clearly proved afterwards; x x x
260
260
Hong Chiong Yu vs. Republic
As regards defendants first assignment of error, referring to the status of the account of J. Amado
Araneta in the amount of P46,270.00, this Court likewise agrees with the finding of the Lower Court that
Exhibit 5, photostatic copy of the page on loans receivable, does not constitute definite primary proof of
actual payment, particularly in this case where there is evidence that the account in question was
transferred from one account to another. There is no better substitute for an official receipt and a
cancelled check as evidence of payment.
In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. to
refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company whose
purpose is not connected with the sugar central business. This portion of the decision should be
reversed because Sec. 171/2 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.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao Sugar Central Co.,
Inc. to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company
whose purpose is not connected with the sugar central business, is reversed. The other parts of the
judgment are affirmed. No special pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando and Barredo, JJ., concur.
Makalintal and Sanchez, JJ., did not take part.
Teehankee, J., took no part.
Judgment partly reversed and partly affirmed.
De la Rama vs. Ma-ao Sugar Central Co., Inc., 27 SCRA 247, Nos. L-17504 February 28, 1969
No. L-45911. April 11, 1979.*
JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO,
JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUAO, WALTHRODE B. CONDE,
MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
Supreme Court; Judgments; Securities and Exchange Commission; Corporation Law; Supreme Court
always strives to settle a legal controversy in a single proceeding.xxx In the case at bar, there are facts
which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the
San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant
to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for
that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record; that
the foreign investment in the Hongkong Brewery and Distillery, a beer manufacturing company in
Hongkong, was made
________________
* EN BANC.
337
VOL. 89, APRIL 11, 1979

337
Gokongwei, Jr. vs. Securities and Exchange Commission
by the San Miguel Corporation in 1948; and that in the stockholders annual meeting held in 1972 and
1977, all foreign investments and operations of San Miguel Corporation were ratified by the
stockholders.
Corporation Law; While reasonableness of a by-law is a legal question, where reasonableness of a by-
law provision is one in which reasonable minds may differ a court will not be justified in subsisting its
judgment for those authorized to make the by-laws.The validity or reasonableness of a by-law of a
corporation is purely a question of law. Whether the by-law is in conflict with the law of the land, or
with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a
question of law. This rule is subject, however, to the limitation that where the reasonableness of a by-
law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court
would not be warranted in substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have exercised their authority.
Same; Under the Corporation Law a corporation is authorized to prescribe the qualification of its
directors.In this jurisdiction, under Section 21 of the Corporation Law, a corporation may prescribed 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 * * *.
Same; Stockholder has no vested right to be elected as stockholder.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 implied 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 or 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, ***.
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Same; A director stands in a fiduciary relation to the competition and its stockholders. The
disqualification of a competition from being elected to the board of directors is a reasonable exercise of
corporate authority. 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 for the collective benefit of the stockholders, they occupy a fiduciary relation, and in these
sense the relation is one of trust.
Same; Same.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 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 corporate duties above his personal
concerns.
Same; Same.Sound principles of corporate management counsel against sharing sensitive information
with a director whose fiduciary duty to loyalty may well require that he disclose this information to a
competitive rival. These dangers are enhanced considerably where the common director such as the
petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest
that in such situations, the director has an economic incentive to appropriate for the benefit of his own
corporation the corporate plans and policies of the corporation where he sits as director.
Same; Another reason for upholding a by-law provision that forbids a competitor to be elected as
corporate director are the laws prohibiting cartels.There is another important consideration in
determining whether or not the amended by-laws are reasonable. The Constitution and the law prohibit
combinations in restraint of trade or unfair competition. Thus, Section 2 of Article XIV of the
Constitution provides: That State shall regulate or prohibit private monopolies when the public interest
so requires. No combinations in restraint of trade or unfair competition shall be allowed.
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Same; Same.Basically, these anti-trust laws or laws against monopolies or combinations in restraint of
trade are aimed at raising levels of competition by improving the consumers effectiveness as the final
arbiter in free markets. These laws are designed to preserve free and unfettered competition as the rule
of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices and the highest quality ***. They operate
to forestall concentration of economic power. The law against monopolies and combinations in restraint
of trade is aimed at contracts and combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing
the course of trade.
Same; Election of petitioner as San Miguel Corporation Director may run counter to the prohibition
contained in Section 13(5) of Corporation Law on investments in corporations engaged in agriculture.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the
election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in
Section 13(5) of the Corporation Law. Said section provides in part that any stockholder of more than
one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of such corporations. ***.
Same; The by-law amendment of SMC applies equally to all and does not discriminate against petitioner
only.However, the by-law, by its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-laws operate equally upon all persons of a class. Besides, before
petitioner can be declared ineligible to run for director, there must be hearing and evidence must be
submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which disqualifies a competitor from election to
the Board of Directors of another corporation is valid and reasonable.
Same; Petitioner is not ipso facto disqualified to run on SMC director. He must be given full opportunity
by the SEC to show that he is not covered by the disqualification.While We here sustain the
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validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due process, there must be due hearing at which
the petitioner must be given the fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of
directors to act with fairness to the stockholders. Pursuant to this obligation and to remove any
suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities and Exchange Commission en banc and its decision shall be final
unless reversed by this Court on certiorari.
Same; Every stockholder has the right to inspect corporate books and records.The stockholders right
of inspection of the corporations books and records is based upon their ownership of the assets and
property of the corporation. It is, therefore, an incident of ownership of the corporate property,
whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a
quasi-ownership. This right is predicated upon the necessity of selfprotection. It is generally held by
majority of the courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. In other words, the inspection has to germane to
the petitioners interest as a stockholder, and has to be proper and lawful in character and not inimical
to the interest of the corporation.
Same; The right of stockholder to inspect corporate books extends to a wholly-owned subsidiary.In
the case at bar, considering that the foreign subsidiary is wholly owned by respondent 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
respondent corporations possession and control.
Same; Purely ultra vires corporate acts of corporate officers to invest corporate funds in another
business or corporation, i.e., acts not contrary to law, morals, public order as public policy, may be
ratified
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341
by the stockholders holding 2/3 of the voting power.Assuming arguendo that the Board of Directors of
San Miguel Corporation 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 twothirds 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. Mere ultra vires acts, said this Court in Pirovano, or those which are not illegal and void
ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by the stockholders.
Corporation Law; Judgment; The doctrine of the law of the case.We hold on our part that the doctrine
of the law of the case invoked by Mr. Justice Barredo has no applicability for the following reasons: a)
Our jurisprudence is quite clear that this doctrine may be invoked only where there has been a final and
conclusive determination of an issue in the first case later invoked as the law of the case.
Same; Same; When doctrine of the law of the case not applicable.The doctrine of the law of the case,
therefore, has no applicability whatsoever herein insofar as the question of the validity or invalidity of
the amended by-laws is concerned. The Courts judgment of April 11, 1979 clearly shows that the voting
on this question inconclusive with six against four Justices and two other Justices (the Chief Justice and
Mr. Justice Fernando) expressly reserving their votes thereon, and Mr. Justice Aquino while taking no
part in effect likewise expressly reserved his vote thereon. No final aad conclusive determination could
be reached on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil
action originally commenced in this Court, the action was simply dismissed with the result that no law of
the case was laid down insofar as the issue of the validity or invalidity of the questioned by-laws is con-
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cerned, and the relief sought herein by petitioner that this Court bypass the SEC which has yet to hear
and determine the same issue pending before it below and that this Court itself directly resolve the said
issue stands denied.
Same; Same; Constitutional Law; Due Process; When procedural due process was not observed.The
entire Court, therefore, recognized that petitioner had not been given procedural due process by the
SMC board on the matter of his disqualification and that he was entitled to a new and proper hearing.
It stands to reason that in such hearing, petitioner could raise not only questions of fact but questions of
law, particularly questions of law affecting the investing public and their right to representation on the
board as provided by lawnot to mention that as borne out by the fact that no restriction whatsoever
appears in the Courts decision, it was never contemplated that petitioner was to be limited questions of
fact and could not raise the fundamental question of law bearing on the invalidity of the questioned
amended by-laws at such hearing before the SMC board. Furthermore, it was expressly provided
unanimously in the Courts decision that the SMC boards decision on the disqualification of petitioner
(assuming the board of directors of San Miguel Corporation should, after the proper hearing, disqualify
him as qualified in Mr. Justice Barredos own separate opinion, at page 2) shall be appealable to
respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to
this Court.
Same; Same; Reservation of the vote of the Chief Justice.As expressly stated in the Chief Justices
reservation of his vote, the matter of the question of the applicability of the said section 13(5) to
petitioner would be heard by this Court at the appropriate time after the proceedings below (and
necessarily the question of the validity of the amended by-laws would be taken up anew and the Court
would at that time be able to reach a final and conclusive vote).
Same; Same; Validity of the amended by-laws.The six votes cast by Justices Makasiar, Antonio, Santos,
Abad Santos, De Castro and this writer in favor of validity of the amended by-laws in question, with only
four members of this Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero
opining otherwise, and with Chief Justice Castro and Justice Fernando reserving their votes thereon and
Justice Aquino and Melencio Herrera not
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voting, thereby resulting in the dismissal of the petition insofar as it assails the validity of the amended
by-laws . . . . for lack of necessary votes, has no other legal consequence than that it is the law of the
case far as the parties herein are concerned, albeit the majority opinion of six against four Justices is not
doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases. This
means that petitioner Gokongwei and the respondents, including the Securities and Exchange
Commission, are bound by the foregoing result, namely, that the Court en banc has not found merit in
the claim that the amended by-laws in question are invalid. Indeed, it is one thing to say that dismissal
of the case is not doctrinal and entirely another thing to maintain that such dismissal leaves the issue
unsettled.
Same; Same; Where petitioner can no longer revive the issue validity of the amended by-laws.I
reiterate, therefore, that as between the parties herein, the issue of validity of the challenged bylaws is
already settled. From which it follows that the same are already enforceable insofar as they are
concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue
of validity whether in the Securities Exchange Commission, in this Court or in any other forum, unless he
proceeds on the basis of a factual milieu different from the setting of this case. Not even the Securities
and Exchange Commission may pass on such question anymore at the instance of herein petitioner or
anyone acting in his stead or on his behalf. The vote of four justices to remand the case thereto cannot
alter the situation.
Same; Same; Where Court has not found merit in the claim that the amended by-laws in question are
valid.I concur in Justice Barredos statement that the dismissal (for lack of necessary votes) of the
petition to the extent that it assails the validity of the amended by-laws, is the law of the case at bar,
which means in effect that as far and only in so far as the parties and the Securities and Exchange
Commission are concerned, the Court has not found merit in the claim that the amended by-laws in
question are valid.
Same; Same; Term and meaning of farming.This is my view, even as I am for a restrictive
interpretation of Section 13(5) of the Philippine Corporation Law, under which I would limit the scope of
the provision to corporations engaged in agriculture, but only as the word agriculture refers to its
more limited meaning as distinguish-
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ed from its general and broad connotation. The term would then mean farming or raising the natural
products of the soil, such as by cultivation, in the acquisition of agricultural land such as by homestead,
before the patent may be issued.
Same; Same; Poultry raising or piggery is included in the term agriculture.It is my opinion that under
the public land statute, the development of a certain portion of the land applied for a specified in the
law as a condition precedent before the applicant may obtain a patent, is cultivation, not let us say,
poultry raising or piggery, which may be included in the term Agriculture in its broad sense. For under
Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it should
because the provision is in derogation of property rights, the petitioner in this case would be disqualified
from becoming an officer of either the San Miguel Corporation or his own supposedly agricultural
corporations.
ORIGINAL ACTION in the Supreme Court. Certiorari, mandamus and injunction.

De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos.
Sequion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T. Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:
SEC CASE NO. 1375
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
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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. The petition, entitled John Gokongwie, Jr. vs.
Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buao, Walthrode B.
Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation, was docketed as SEC Case No.
1375.
As a first cause of action, 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 30,127,043 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.
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, 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.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all
the qualifications to
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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
petitioners disqualification and deprived him of his vested right as afore-mentioned, hence the
amended by-laws are null and void.1
________________
1 The pertinent amendment reads as follows: RESOLVED, That Section 2, Article III of the By-laws of San
Miguel Corporation, which reads as follows:
SECTION 2. Any stockholder having at least five thousand shares registered in his name may be elected
director, but he shall not be qualified to hold office unless he pledges said five thousand shares to the
Corporation to answer for his conduct. be, and the same hereby is, amended, to read as follows;
SECTION 2. Any stockholder having at least five thousand shares registered in his name may be elected
Director, provided, however, that no person shall qualify or be eligible for nomination or election to the
Board of Directors if he is engaged in any business which competes with or is antagonistic to that of the
Corporation. Without limiting the generality of the foregoing, a person shall be deemed to be so
engaged:
(a) if he is an officer, manager or controlling person of, or the owner (either of record or beneficially) of
10% or more of any outstanding class of shares of, any corporation (other than one in which the
corporation owns at least 30% of the capital stock) engaged in a business which the Board, by at least
three-fourths vote, determines to be competitive or antagonistic to that of the Corporation; or
(b) If he is an officer, manager or controlling person of, or the owner (either of record or beneficially) of
10% or more of any outstanding class of shares of, any other corporation or entity engaged in any line of
business of the Corporation, when in the judgment of the Board, by at least three-fourths vote, the laws
against combinations in restraint of trade shall be violated by such persons membership in the Board of
Directors.
(c) If the Board, in the exercise of its judgment in good faith, determines by at least three-fourths vote
that he is the nominee of any person set forth in (a) or (b).
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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 respondent corporation, which was allowed
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
bylaws 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 individual respondents be made to pay damages, in specified amounts, to
petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
Exchange Commission an Urgent Motion for Production and Inspection of Documents, alleging that
the Secretary of respondent corportion refused to allow him to inspect its records despite request made
by petitioner for production of certain documents enumerated in the request, and that respondent
corporation
________________
In determining whether or not a person is a controlling person, beneficial owner, or the nominee of
another, the Board may take into account such factors as business and family relationship. For the
proper implementation of this provision, all nominations for election of Directors by the stockholders
shall be submitted in writing to the Board of Directors at least five working days before the date of the
Annual Meeting. (Rollo, pp. 402-463.)
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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. Among the documents requested to be copied were (a)
minutes of che stockholders meeting held on March 13, 1961; (b) copy of the management contract
between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San
Miguel International, Inc.; (d) authority of the stockholders to invest the funds of respondent
corporation in San Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other
compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-in-interest.
The Urgent Motion for Production and Inspection of Documents was opposed by respondents,
alleging, among others, that the motion has no legal basis; that the demand is not based on good faith;
that the motion is premature since the materiality or relevance of the evidence sought cannot be
determined until the issues are joined; that it fails to show good cause and constitutes continued
harrasment; and that some of the information sought are not part of the records of the corporation and,
therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation, Enrique
Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition denying the substantial
allegations therein and stating, by way of affirmative defenses that the action taken by the Board of
Directors on September 18, 1976 resulting in the * * * amendments is valid and legal because the power
to amend, modify, repeal or adopt new By-laws delegated to said Board on March 13, 1961 and long
prior thereto has never been revoked, withdrawn or otherwise nullified by the stockholders of SMC;
that contrary to petitioners claim, the vote requirement for a valid delegation of the power to amend,
repeal or adopt new by-laws is determined in relation to the total subscribed capital stock at the time
the delegtion of said power is made, not when the Board opts to exercise said delegated power; that
petitioner has not availed of his intracorporate remedy for the nullification of the amendment,
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which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital
stock at any regular or special meeting, as provided in Article VIII, section 1 of the by-laws and section 22
of the Corporation Law, hence the petition is premature; that petitioner is estopped from questioning
the amendments on the ground of lack of authority of the Board, since he failed to object to other
amendments made on the bais of the same 1961 authorization; that the power of the corporation to
amend its by-laws is broad, subject only to the condition that the by-laws adopted should not be
inconsistent with any existing law; that respondent corporation should not be precluded from adopting
protective measures to minimize or eliminate situations where its directors might be tempted to put
their personal interests over that of the corporation; that the questioned amended by-laws is a matter
of internal policy and the judgment of the board should not be interfered with; that the by-laws, as
amended, are valid and binding and are intended to prevent the possibility of violation of criminal and
civil laws prohibiting combinations in restraint of trade; and that the petition states no cause of action. It
was, therefore, prayed that the petition be dismissed and that petitioner be ordered to pay damages
and attorneys fees to respondents. The application for writ of preliminary injunction was likewise on
various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying
the material averments thereof and stating, as part of their affirmative defenses, that in August 1972,
the Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein, until September 1976 when its total holding
amounted to 622,987 shares; that in October 1972, the Consolidated Foods Corporation (CFC) likewise
began acquiring shares in respondent corporation, until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of
Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in
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behalf of himself, CFC and Robina, conducted malevolent and malicious publicity campaign against
SMC to generate support from the stockholder in his effort to secure for himself and in representation
of Robina and CFC interests, a seat in the Board of Directors of SMC, that in the stockholders meeting
of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of
Directors on the basic issue that petitioner was engaged in a competitive business and his securing a
seat would have subjected respondent corporation to grave disadvantages; that petitioner
nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that
thereafter the Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorneys fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection
of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and
they accordingly filed their oppositions-inintervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for production
and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the petitioner and respondents in the
above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing, by or on behalf of
the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders meeting of the
respondent San Miguel Corporation held on March 13, 1961, which are in the possession, custody and
control of the said corporation, it appearing that the same is material and relevant to the issues involved
in the main case. Accordingly, the respondents should allow petitionr-movant entry in the principal
office of the respondent Cor
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poration, San Miguel Corporation on January 14, 1977, at 9:30 oclock in the morning for purposes of
enforcing the rights herein granted; it being understood that the inspection, copying and photographing
of the said documents shall be undertaken under the direct and strict supervision of this Commission.
Provided, however, that other documents and/or papers not heretofore included are not covered by
this Order and any inspection thereof shall require the prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries, allowances,
bonuses, compensation and/or remuneration received by respondent Jose M. Soriano, Jr. and Andres
Soriano from San Miguel International, Inc. and/or its successors-in-interest, the Petition to produce and
inspect the same is hereby DENIED, as petitioner-movant is not a stockholder of San Miguel
International, Inc. and has, therefore, no inherent, right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing his request
to copy and inspect the management contract between San Miguel Corporation and A. Soriano
Corporation and the renewal and amendments thereof for the reason that he had already obtained the
same, the Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of production and inspection
of the authority of the stockholders of San Miguel Corporation to invest the funds of respondent
corporation in San Miguel International, Inc., until after the hearing on the merits of the principal issues
in the above-entitled case.
This Order is immediately executory upon its approval.2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent 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 February 10, 1977. This prompted petitioner to
ask respondent Commission for a summary judgment in-
________________
2 Annex H, Petition, pp. 168-169, Rollo.
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sofar as the first cause of action is concerned, for the alleged reason that by calling a special
stockholders meeting for the aforesaid purpose, private respondents admitted the invalidity of the
amendments of September 18, 1976. The motion for summary judgment was opposed by private
respondents. Pending action on the motion, petitioner filed an Urgent Motion for the Issuance of a
Temporary Restraining Order, praying that pending the determination of petitioners application for
the issuance of a preliminary injunction and/or petitioners motion for summary judgment, a temporary
restraining order be issued, restraining respondents from holding the special stockholders meeting as
scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification the special stockholders
meeting.
A motion for reconsideration of the order denying petitioners man for summary judgment was filed by
petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of
the filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the
motion for reconsideration of the order granting in part and denying in part petitioners motion for
production of records had not yet been resolved.
In view of the die fact that the annual stockholders meeting of respondent corporation had been
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that
he intended to run for the position of director of respondent corporation. Thereafter, respondents filed
a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of
respondent corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications
specified in
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the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed
a manifestation and motion to resolve pending incidents in the case and to issue a writ of injunction,
alleging that private respondents were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioners irreparable damage and prejudice. Allegedly
despite a subsequent Manifestation to prod respondent Commission to act, petitioner was not heard
prior to the date of the stockholders meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act,
hence petitioner came to this Court.
SEC CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent 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 respondent Commission,
on January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account
for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4,
1977, the Commission acted thereon only on April 25, 1977, when it denied respondents 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.
Respondents issued notices of the annual stockholders meeting, including in the Agenda thereof, the
following:
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354
6. Reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting on
March 20, 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 April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the
Agenda at the annual stockholders meeting, requesting that the same be set for hearing on May 3,
1977, the date set for the second hearing of the case on the merits. Respondent Commission, 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,
petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been
taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioners contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on
the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his
rights as stockholder of respondent corporation, and that respondent are acting oppressively against
petitioner, in gross derogation of petitioners rights to property and due process. He prayed that this
Court direct respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from
disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders meeting on May 10, 1977, or from
making effective the amended by-laws of respondent corporation, until further orders from this Court or
until the Securities and Ex-
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change Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had
been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies
of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioners motion for reconsideration,
with its supplement, of the order of the Commission denying in part petitioners motion for production
of documents, petitioners motion for reconsideration of the order denying the issuance of a temporary
restraining order denying the issuance of a temporary restraining order, and petitioners consolidated
motion to declare respondents in contempt and to nullify the stockholders meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the by-laws in dispute, and denying deferment of Item 6 of the
Agenda for the annual stockholders meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioners motion for reconsideration
of the order of respondent Commission denying petitioners motion for summary judgment;
It is petitioners assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioners irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioners right to due
process when it decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioners request to have the same
calendared for hearing; and (3) that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial intervention.
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356
It is prayed in the supplemental petition that the SEC orders complained of be declared null and void
and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings
relative to San Miguel International, Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the
merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:
(1) that the petitioner and the interests he represents are engaged in businesses competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that he owns and controls a
greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in businesses directly and substantially competing with
the allied businesses of respondent SMC and of corporations in which SMC has substantial investments.
Further, when CFC and Robina had accumulated shares in SMC, the Board of Directors of SMC realized
the clear and present danger that competitors or antagonistic parties may be elected directors and
thereby have easy and direct access to SMCs business and trade secrets and plans;
(2) that the amended by-laws were adopted to preserve and protect respondent SMC from the clear and
present danger that business competitors, if allowed to become directors, will illegally and unfairly
utilize their direct access to its business secrets and plans for their own private gain to the irreparable
prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership
of a competitor in the Board of Directors is a blatant disregard of no less than the Constitution and
pertinent laws against combinations in restraint of trade;
(3) that by-laws are valid and binding since a corporation has the inherent right and duty to preserve
and protect itself by excluding competitors and antagonistic parties, under the law of self-preservation,
and it should be allowed a wide latitude in the selection of means to preserve itself;
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(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioners own acts or omissions, since he failed to have the petition to suspend, pendente lite, the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May
3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was
not given a chance to act with deliberate dispatch, and
(5) that even assuming that the petition was meritorious, it has become moot and academic because
respondent Commission has acted on the pending incidents complained of. It was, therefore, prayed
that the petition be dismissed.
On May 21, 1977, respondent Emigdio G. Tanjuatco, Sr. filed his comment, alleging that the petition has
become moot and academic for the reason, among others, that the acts of private respondents sought
to be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel
Corporation, which was held on May 10, 1977; that in said meeting, in compliance with the order of
respondent Commission, petitioner was allowed to run and be voted for as director; and that in the
same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further, it was
averred that the questions and issues raised by petitioner are pending in the Securities and Exchange
Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had;
hence the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
questions for the determination of this Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court; (2)
a derivative suit, such as the instant case, is not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders meeting of May 10, 1977
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358
did not render the case moot; that the amendment to the bylaws which specifically bars petitioner from
being a director is void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did
not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No.
1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders meeting of respondent corporation, took
into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977
which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given
for denial of deferment was that such action is within the authority of the corporation as well as falling
within the sphere of stockholders right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their investments are the ones directly
affected. It was alleged that the main petition has, therefore, become moot and academic.
On September 29, 1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and that all possible questions on the facts now pending before the respondent Commission
are now before this Honorable Court which has the authority and the competence to act on them as it
may see fit. (Rollo, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioners request for an
examination
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of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation; and
(3) 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.
I
Whether or not amended by-laws are valid is purely a legal question, which public interest requires to
be resolved
It is the position of the petitioner that it is not necessary to remand the case to respondent SEC for an
appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of
exhaustion of administrative remedies, considering that: first: whether or not the provisions of the
amended by-laws are intrinsically valid * * * is purely a legal question. There is no factual dispute as to
what the provisions are and evidence is not necessary to determine whether such amended by-laws are
valid as framed and approved * * *; second: it is for the interest and guidance of the public that an
immediate and final ruling on the question be made * * *; third: petitioner was denied due process by
SEC when Commissioner de Guzman had openly shown prejudice against petitioner * * *, and
Commissioner Sulit * * * approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: to remand the case to SEC would only entail delay rather than serve the
ends of justice.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal
issues raised by the parties in keeping with the cherished rules of procedure that a court should
always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the
seeds of future ligiation, citing Gayos v. Gayos.3 To
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3 L-27812, September 26, 1975, 67 SCRA 146.

360
360
the same effect is the prayer of San Miguel Corporation that this Court resolve on the merits the validity
of its amended bylaws and the rights and obligations of the parties thereunder, otherwise the time
spent and effort exerted by the parties concerned and, more importantly, by this Honorable Court,
would have been for naught because the main question will come back to this Honorable Court for final
resolution. Respondent Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing
and decision of the issues involved, invoking the latters primary jurisdiction to hear and decide cases
involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving no root or branch to bear the seeds of future litigation.4
Thus, in Francisco v. City of Davao,5 this Court resolved to decide the case on the merits instead of
remanding it to the trial court for further proceedings since the ends of justice would not be subserved
by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et al.,6 this Court,
finding that the main issue is one of law, resolved to decide the case on the merits because public
interest demands an early disposition of the case, and in Republic v. Central Surety and Insurance
Company,7 this Court denied remand of the third-party complaint to the trial court for further
proceedings, citing precedents where this Court, in similar situations, resolved to decide the cases on
the merits, instead of remanding them to the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public interest demands an early disposition of the
case; or (c) where the trial court had already received
________________
4 Gayos v. Gayos, ibid., citing Marquez v. Marquez, No. 47792, July 24, 1941, 73 Phil. 74, 78; Keramik
Industries, Inc. v. Guerrero, L-38866, November 29, 1974, 61 SCRA 265.
5 L-20654, December 24, 1964, 12 SCRA 628.
6 L-20583, January 23, 1967, 19 SCRA 58.
7 L-27802, October 26, 1968, 25 SCRA 641.
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all the evidence presented by both parties and the Supreme Court is now in a position, based upon said
evidence, to decide the case on its merits.8 It is settled that the doctrine of primary jurisdiction has no
application where only a question of law is involved.8a Because uniformity may be secured through
review by a single Supreme Court, questions of law may appropriately be determined in the first
instance by courts.8b In the case at bar, there are facts which cannot be denied, viz.: that the amended
by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the
power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a
special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified
by more tna 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery
and Distillery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in
1948; and that in the stockholders annual meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or election to
the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation is purely a question of law.9 Whether the by-
law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law.10 This rule is subject, however, to the limita-
________________
8 Samal v. Court of Appeals, L-8579, May 25, 1956, 99 Phil. 230.

8a 2 Am. Jur. 2d 696, 697.
8b Pan American P. Corp. v. Supreme Court of Delaware, 330 US 656, 6 L. ed. 2d 584.
9 Fleischer v. Botica Nolasco Co., Inc., No. 23241, March 14, 1925, 47 Phil. 583, 590.
10 18 C.J.S. Corporations, Sec. 189, p. 603.
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tion that where the reasonableness of a by-law is a mere matter of judgment, and one upon which
reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment
instead of the judgment of those who are authorized to make by-laws and who have exercised their
authority.11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to
suppress the minority and prevent them from having representation in the Board, at the same time
depriving petitioner of his vested right to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation
content that exclusion of a competitor from the Board is legitimate corporate purpose, considering that
being a competitor, petitioner cannot devote an unselfish and undivided loyalty to the corporation; that
it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable
protection from the unrestrained self-interest of those charged with the promotion of the corporate
enterprise; that access to confidential information by a competitor may result either in the promotion of
the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both
the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a
combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further argued that there is not vested right
of any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that
petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by
him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr.
6,325 shares; (b) Universal Robina Corporation788,647 shares; (c) CFC Corporation658,313 shares,
or a total of 1,403,285
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11 People ex rel. Wildi v. Ittner, 165 Ill. App. 360, 367 (1911), cited in Fletcher, Cyclopedia Corporations,
Sec. 4191.
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shares. Since the outstanding capital stock of San Miguel Corporation, as of the present date, is
represented by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by
petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also
contended that petitioner is the president and substantial stockholder of Universal Robina Corporation
and CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It
is also claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in
businesses directly and substantially competing with the allied businesses of San Miguel Corporation,
and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONERS CORPORATIONS AND SAN MIGUEL COR
PORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board
the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line
Estimated
1977 SMC
Market Share
Robina-CFC
Total
Table Eggs
0.6%
10.0%
10.6%
Layer Pullets
33.0%
24.0%
57.0%
Dressed Chicken
35.0%
14.0%
49.0%
Poultry & Hog Feeds
40.0%
12.0%
52.0%
Ice Cream
70.0%
13.0%
83.0%
Instant Coffee
45.0%
40.0%
85.0%
Woven Fabrics
17.5%
9.1%
26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product
sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly,
the combined market shares of SMC and CFC-Robina in layer pullets, dressed chicken, poultry and hog
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364
feeds, ice cream, instant coffee and woven fabrics would result in a position of such dominance as to
affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines
which, for SMC, represented sales amounting to more than P478 million. In addition, CFC-Robina was
directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented
sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton
Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc.,
subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition
between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than
P849 million.
According to private respondents, at the Annual Stockholders Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total
outstanding shares of SMC, rejected petitioners candidacy for the Board of Directors because they
realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC. On
September 18, 1978, the Board of Directors of SMC, by virtue of powers delegated to it by the
stockholders, approved the amendment to the by-laws in question. At the meeting of February 10,
1977, these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares,
or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares,
opposed the confirmation and ratification. At the Annual Stockholders Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected
petitioners candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the
May 9, 1978 Annual Stockholders Meeting, 12,480 shareholders, owning more than 30 million shares,
or more than 90% of the total outstanding shares, voted against petitioner.
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AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CON FERRED
BY LAW
Private respondents contend that the disputed amended bylaws were adopted by the Board of Directors
of San Miguel Corporation as a measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board may cause upon the corporation
and the other stockholders irreparable prejudice. Submitted for resolution, therefore, is the issue
whether or not respondent San Miguel Corporation could, as a measure of self-protection, disqualify a
competitor from nomination and election to its Board of Directors.
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. 12 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. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this inherent power as
one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation.13
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
________________
12 McKee & Company v. First National Bank of San Diego, 265 F. Supp. 1 (1967), citing Olincy v. Merle
Norman Cosmetics, Inc., 200 Cal. App. 20, 260, 19 Cal. Reptr. 387 (1962).
13 Fletcher, Cyclopedia Corporations, Sec. 4171, cited in McKee & Company, supra.
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366
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 * * *. In Government v. El Hogar,14
the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to
the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held
as security for their action, on the ground that section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for the qualifications of directors and is highly
prudent and in conformity with good practice.
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED 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.15 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 * *
*.16
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 amend-
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14 No. 26649, July 13, 1927, 50 Phil. 399, 441.

15 6 Thompson 369, Sec. 4490.
16 Ibid.
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ment 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 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.17
It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is whether the disqualification of a competitor from being
elected to the Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS
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.18 The ordinary trust relationship of directors of a corporation and
stockholders, according to Ashaman v. Miller,19 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 in-
_________________
17 Mobile Press Register, Inc. v. McGowin, 277 Ala. 414, 124 So. 2d 812; Brundage v. The New Jersey
Zinc Co., 226 A 2d 585.
18 Fletcher, Cyclopedia Corporations, 1975 Ed., Vol. 3, p. 144, Sec. 838.
19 101 Fed. 2d 85, cited in Aleck, Modern Corporation Law, Vol. 2, Sec. 959.
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368
terests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton,20 emphatically restated the standard of fiduciary obligation of the
directors of corporations, thus:
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.
And in Cross v. West Virginia Cent, & P. R. R. Co.,21 it was said:
* * * A person cannot serve two hostile and adverse masters without detriment to one of them. A
judge cannot be impartial if personally interested in the cause. No more can a director. Human nature is
too weak for this. Take whatever statute provision you please giving power to stockholders to choose
directors, and in none will you find any express prohibition against a discretion to select directors having
the companys interest at heart, and it would simply be going far to deny by mere implication the
existence of such a salutary power.
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20 308 U.S. 309; 84 L. ed. 281, 289-291.

21 16 S.E. 587, 18 L.R.A. 582.
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* * * If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from
being a director, the same reasoning would apply to disqualify the wife and immediate member of the
family of such stockholder, on account of the supposed interest of the wife in her husbands affairs, and
his supposed influence over her. It is perhaps true that such stockholders ought not to be condemned as
selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that
we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the
by-law. The strife over the matter of control in this corporation as in many others is perhaps carried on
not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to
whether or not the action of the Board is authorized and sanctioned by law. * * *.22
These principles have been applied by this Court in previous cases.23
AN AMENDMENT TO THE CORPORATE BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE
DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH
THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, 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
corporations Board of Directors. * * * (A)n 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.24 This is based
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22 265 F. Supp., pp. 8-9.

23 Barreto v. Tuason, No. 23923, Mar. 23, 1926, 50 Phil. 888; Severino v. Severino, No. 18058, Jan. 16,
1923, 44 Phil. 343; Thomas v. Pineda, L-2411, June 28, 1951, 89 Phil. 312, 326.
24 2 Fletcher Cyclopedia Corporations, Sec. 297 (1969), p. 87.
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upon the principle that where the director is so employed in the service of a rival company, he cannot
serve both, but must betray one or the other. Such an amendment advances the benefit of the
corporation and is good. An exception exists in New Jersey, where the Supreme Court held that the
Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not
empowered to add additional qualifications.25 This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation Law expressly provides that a
corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of
a corporation cannot engage in a business in direct competition with that of the corporation where he is
a director by utilizing information he has received as such officer, under the established law that a
director or officer of a corporation may not enter into a competing enterprise which cripples or injures
the business of the corporation of which he is an officer or director.26
It is also well established that corporate officers are not permitted to use their position of trust and
confidence to further their private interests.27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firms products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal.28
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25 Costello v. Thomas Cusack Co., 125 A. 15, 94 N.J. Eq. 923, (1923).
26 Hall v. Dekker, 115 P. 2d 15, July 9, 1941.
27 Thaver v. Gaebler, 232 NW 563.
28 Sialkot Importing Corporation v. Berlin, 68 NE 2d 501, 503.
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The doctrine of corporate opportunity29 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.30
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,
________________
29 Schildberg Rock Products Co. v. Brooks, 140 NW 2d 132, 137. Chief Justice Garfield quotes the
doctrine as follows:
(5) The doctrine corporate opportunity is not new to the law and is but one phase of the cardinal rule
of undivided loyalty on the part of the fiduciaries. 3 Fletcher Cyc. Corporations, Perm. Ed., 1965 Revised
Volume, section 861.1, page 227; 19 Am. Jur. 2d, Corporations, section 1311, page 717. Our own
consideration of the quoted terms as such is mainly in Ontjes v. MacNider, supra, 232 Iowa 562, 579, 5
N.W., 2d 860, 869, which quotes at length with approval from Guth v. Loft, Inc., 23 Del. Ch. 255, 270, 5 A
2d 503, 511, a leading case in this area of the law. The quotation cites several precedents for this: * * *
if there is presented to a corporate officer or director a business opportunity which the corporation is
financially able to undertake, is from its nature, in the line of the corporations business and is of
practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and
by embracing the opportunity, the self-interest of the officer or director will be brought into conflict
with that of his corporation, the law will not permit him to seize the opportunity for himself. And, if, in
such circumstances, the interests of the corporation are betrayed, the corporation may elect to claim all
of the benefits of the transaction for itself, and the law will impress a trust in favor of the corporation
upon the property, interests and profits so acquired.
30 Paulman v. Kritzer, 74 III. App. 2d 284, 291 NE 2d 541; Tower Recreation, Inc. v. Beard, 141 Ind. App.
649, 231 NE 2d 154.
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372
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.
Thus, in McKee & Co. v. First National Bank of San Diego, supra, the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors,
officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or
subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:
* * * A bank director has access to a great deal of information concerning the business and plans of a
bank which would likely be injurious to the bank if known to another bank, and it was reasonable and
prudent to enlarge this minimum disqualification to include any director, officer, employee, agent,
nominee, or attorney of any other bank in California. The Ashkins case, supra, specifically recognizes
protection against rivals and others who might acquire information which might be used against the
interests of the corporation as a legitimate object of by-law protection. With respect to attorneys or
persons associated with a firm which is attorney for another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger of inadvertent leakage of confidential information
through casual office discussions or accessibility of files. Defendants directors determined that its
welfare was best protected if this opportunity for conflicting loyalties and potential misuse and leakage
of confidential information was foreclosed.
In McKee, the Court further listed qualificational by-laws upheld by the courts, as follows:
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(1) A director shall not be directly or indirectly interested as a stockholder in any other firm, company,
or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in any other firm,
company, or association which competes with the subject corporation.
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company,
or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding office.
(5) No person who is an attorney against the corporation in a law suit is eligible for service on the
board. (At p. 7.)
These are not based on theorical abstractions but on human experiencethat a person cannot serve
two hostile masters without detriment to one of them.
The offer and assurance of petitioner 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 here involved. Apart from the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioners primary motive in running for board memberhsipwhich 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 directors duty of fidelity to the corporation, for
the policy of the law is to encourage and enforce responsible corporate management. As explained by
Oleck:31 The law will not tolerate the passive attitude of directors * * * without active and
conscientious participation in the managerial functions of the company. As directors, it is their duty to
control and supervise the day to day business activities of the company or to promulgate definite
policies and rules of guidance with a
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31 Oleck, Modern Corporation Law, Vol. 2, Section 960.

374
374
vigilant eye toward seeing to it that these policies are carried out. It is only then that directors may be
said to have fulfilled their duty of fealty to the corporation.
Sound principles of corporate management counsel against sharing sensitive information with a director
whose fiduciary duty of loyalty may well require that he disclose this information to a competitive rival.
These dangers are enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his own corporation
the corporate plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the strategies for the development
of existing or new markets of existing or new products could enable said competitor to utilize such
knowledge to his advantage.32
There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Con-
________________
32 The CFC and Robina companies, which are reportedly worth more than P500 Million, are principally
owned and controlled by Mr. Gokongwei and are in substantial competition to San Miguel. As against his
almost 100% ownership in these basically family companies, Mr. Gokongweis holding in San Miguel are
approximately 4% of the total shareholdings of your Company. As a consequence, One Peso (P1.00) of
profit resulting from a sale by CFC and Robina in the lines competing with San Miguel, is earned almost
completely by Mr. Gokongwei, his immediate family and close associates. On the other hand, the loss of
that sale to San Miguel, resulting in a One Peso (P1.00) loss of profit to San Miguel, in the limes
competing with CFC and Robina, would result in a loss in profit of only Four Centavos (P0.04) to Mr.
Gokongwei. (Letter to stockholders of SMC, dated April 3, 1978, Annex R, Memo for respondent San
Miguel Corporation, rollo, p. 1867).
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stitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of
Article XIV of the Constitution provides: The State shall regulate or prohibit private monopolies when
the public interest so requires. No combinations in restraint of trade or unfair competition shall be
allowed.
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade.The penalty of prision correccional in its
minimum period or a fine ranging from two hundred to six thousand pesos, or both, shall be imposed
upon:
1. Any person who shall enter into any contract or agreement or shall take part in any conspiracy or
combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by
artificial means free competition in the market.
2. Any person who shall monopolize any merchandise or object of trade or commerce, or shall combine
with any other person or persons to monopolize said merchandise or object in order to alter the price
thereof by spreading false rumors or making use of any other artifice to restrain free competition in the
market.
3. Any person who, being a manufacturer, producer, or processor of any merchandise or object of
commerce or an importer of any merchandise or object of commerce from any foreign country, either
as principal or agent, wholesale or retailer, shall combine, conspire or agree in any manner with any
person likewise engaged in the manufacture, production, processing, assembling or importation of such
merchandise or object of commerce or with any other persons not so similarly engaged for the purpose
of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of
the Philippines, or any such merchandise or object of commerce manufactured, produced, processed,
assembled in or imported into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint
of trade.33
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33 Article 28, Civil Code; Section 4, par. 5, of Rep. Act No. 5455; and Section 7 (g) of Rep. Act No. 6173.
Cf. Section 17, paragraph 2. of the Judiciary Act.
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376
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers effectiveness as the final arbiter in
free markets. These laws are designed to preserve free and unfettered competition as the rule of trade.
It rests on the premise that the unrestrained interaction of competitive forces will yield the best
allocation of our economic resources, the lowest prices and the highest quality * * *.34 they operate to
forestall concentration of economic power.35 The law against monopolies and combinations in restraint
of trade is aimed at contracts and combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing
the course of trade.36
The terms monopoly, combination in restraint of trade and unfair competition appear to have a
well defined meaning in other jurisdictions. A monopoly embraces any combination the tendency of
which is to prevent competition in the broad and general sense, or to control prices to the detriment of
the public.37 In short, it is the concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when desired.38 Further, it must
be considered that the idea of monopoly is now understood to include a condition produced by the
mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression
of competition by the unification of interest or
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34 Standard Oil Co. v. United States, 55 L. Ed. 619.

35 Blake & Jones, Contracts in Antitrust Theory, 65 Columbia L. Rev. 377, 383 (1965).
36 Filipinas Compania de Seguros v. Mandanas, L-19638, June 20, 1966, 17 SCRA 391.
37 Love v. Kozy Theater Co., 236 SW 243, 245, 26 ALR 364.
38 Aldea-Rochelle, Inc. v. American Society of Composers, Authors and Publishers, D.D.N.Y., 80 F. Suppl.
888, 893:
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management, or it may be thru agreement and concert of action. It is, in brief, unified tactics with
regard to prices.39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination or
conspiracy in restraint of trade.40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements,41 and what is to be considered is what the parties actually
did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition between them
would constitute violation of any provision of the anti-trust laws.42 There is here a statutory recognition
of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of
two or more competing corporations. A common director of two or more competing corporations would
have access to confidential sales, pricing and marketing information and would be in a position to
coordinate policies or to aid one corporation at the expense of another, thereby stifling competition.
This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one director is that the
interlock permits the coordination of policies between nominally independent firms to an extent that
competition between them may be completely eliminated. Indeed, if a director, for example, is to be
faithful to both corporations, some accommodation must result. Suppose X is a director of both
_________________
39 National Cotton Oil Co. v. State of Texas, 25 S.T. 379, 383, 49 L. Ed. 689.
40 Norfolk Monument Co. v. Woodlawn Memorial Gardens, Inc., 394 U.S. 700; U.S. v. General Motors
Corp., 384 U.S. 127.
41 U.S. v. Paramount Pictures, 334 U.S. 131.
42 Section 8, 15 U.S.C.A. 19.
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378
Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without
violating his duty of loyalty to B; at the same time he could hardly abstain from voting without depriving
A of his best judgment. If the firms really do competein the sense of vying for economic advantage at
the expense of the otherthere can hardly be any reason for an interlock between competitors other
than the suppression of competition.43 (Italics supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: By means of the interlocking directorates one man or group of men
have been able to dominate and control a great number of corporations * * * to the detriment of the
small ones dependent upon them and to the injury of the public.44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated. The competitor could so manipulate the
prices of his products or vary its marketing strategies by region or by brand in order to get the most out
of the consumers. Where the two competing firms control a substantial segment of the market this
could lead to collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry between the corporations, to
seek out ways of compromising opposing interests, and thus eliminate competition. As respondent SMC
aptly observes, knowledge by CFC-Robina of SMCs costs in
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43 Travers, Interlocks in Corporate Management and the Anti Trust Laws, 46 Texas L. Rev. 819, 840
(1968).
44 51 Cong. Rec. 9091.
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various industries and regions in the country will enable the former to practice price discrimination. CF-
Robina can segment the entire consuming population by geographical areas or income groups and
change varying prices in order to maximize profits from every market segment. CFC-Robina could
determine the most profitable volume at which it could produce for every product line in which it
competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free
competition and deprive the consuming public of opportunity to buy goods of the highest possible
quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the
election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in
section 13(5) of the Corporation Law. Said section provides in part that any stockholder of more than
one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of such corporations * *).
Neither are We persuaded by the claim that the by-law was intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but
waived in the case of another, then it could be reasonably claimed that the by-law was being applied in
a discriminatory manner. However, the by-law, by its terms, applies to all stockholders. The equal
protection clause of the Constitution requires only that the by-law operate equally upon all persons of a
class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles
of public policy and management, therefore, support the view that a by-law which disqualifies a
competition from election to the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the
corporation in
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380
adopting measures to protect legitimate corporate interests. Thus, where the reasonableness of a by-
law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court
would not be warranted in substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have expressed their authority.45
Although it is asserted that the amended by-laws confer on the present Board powers to perpetuate
themselves in power, such fears appear to be misplaced. This power, by its very nature, is subject to
certain well established limitations. One of these is inherent in the very concept and definition of the
terms competition and competitor. Competition implies a struggle for advantage between two or
more forces, each possessing, in substantially similar if not identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more persons to obtain
the business patronage of a third by offering more advantageous terms as an inducement to secure
trade.46 The test must be whether the business does in fact compete, not whether it is capable of an
indirect and highly unsubstantial duplication of an isolated or non-characteristic activity.47 It is,
therefore, obvious that not every person or entity engaged in business of the same kind is a competitor.
Such factors as quantum and place of business, identity of products and area of competition should be
taken into consideration. It is, therefore, necessary to show that petitioners business covers a
substantial portion of the same markets for similar products to the extent of not less than 10% of
respondent corporations market for competing products. While We here sustain the validity of the
amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto dis-
_________________
45 People ex rel. Wildi v. Ittner, supra, citing Thompson on Corporation, Section 1002 (2nd Ed.).
46 Schill v. Remington Putnam Book Co., 17 A 2d 175, 180, 179 Md. 83.
47 People ex rel. Broderick v. Goldfogle, 205 NYS 870, 877, 123 Misc. 399.
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qualified. Consonant with the requirement of due process, there must be due hearing at which the
petitioner must be given the fullest opportunity to show that he is not covered by the disqualification.
As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with
fairness to the stockholders.48 Pursuant to this obligation and to remove any suspicion that this power
may be utilized by the incumbent members of the Board to perpetuate themselves in power, any
decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the
Securities and Exchange Commission en banc and its decision shall be final unless reversed by this Court
on certiorari.49 Indeed, it is a settled principle that where the action of a Board of Directors
_________________
48 Swanson v. American Consumer Industries, Inc., 288 F. Supp. 60.

49 Sections 3 and 5 of Presidential Decree No. 902-A provides:
SEC. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations *
* * who are grantees of * * * license or permit issued by the government * * *.
SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with its as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving:
a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers
or partners amounting to fraud and misrepresentation which may be detrimental to the interest of the
public and/or of the stockholders, partners, members of associations or organizations registered with
the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnership or associations.
382
382
is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud
upon minority stockholders or creditors, or will result in waste, dissipation or misapplication of the
corporation assets, a court of equity has the power to grant appropriate relief.50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioners request for an
examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioners claim that he was
denied inspection rights as stockholder of SMC was made in the teeth of undisputed facts that, over a
specific period, petitioner had been furnished numerous documents and information, to wit: (1) a
complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders meeting of May 18, 1975; (3) a copy of the minutes of
the stockholders meeting of March 18, 1976; (4) a breakdown of SMCs P186.6 million investment in
associated companies and other companies as of December 31, 1975; (5) a listing of the salaries,
allowances, bonuses and other compensation or remunerations received by the directors and corporate
officers of SMC; (6) a copy of the US$100 million EuroDollar Loan Agreement of SMC; and (7) copies of
the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of
sensitive data, which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976;
(1) that SMCs foreign investments are handled by San Miguel International, Inc., incorporated in
Bermuda and wholly owned by SMC; this was SMCs first venture abroad, having started in 1948 with
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50 Moore v. Keystone Macaroni Mfg. Co., 29 ALR 2d 1256.

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an initial outlay of P500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under
the personal guaranty of SMCs former President, the late Col. Andres Soriano; (2) that as of December
31, 1975, the estimated value of SMI would amount to almost P400 million; (3) that the total cash
dividends received by SMC from SMI since 1953 has amount to US$9.4 million; and (4) that from 1972-
1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a program
for the setting up of breweries by SMI.
These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the
afore-mentioned documents.51
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 stockholders right of inspection of the corporations 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.52 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.53 In other words, the inspection
has to be germane to the petitioners interest as a stockholder, and
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51 Annex A of SMCs Comment on Supplemental Petition pp. 680-688, Rollo.

52 Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. Ed. Section 2213, p. 693.
53 Fletcher, Ibid., Section 2218, p. 709.
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384
has to be proper and lawful in character and not inimical to the interest of the corporation.54 In Grey v.
Insular Lumber,55 this Court held that the right to examine the books of the corporation must be
exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on application for mandamus to
enforce the right, it is proper for the court to inquire into and consider the stockholders good faith and
his purpose and motives in seeking inspection.56 Thus, it was held that the right given by statute is not
absolute and may be refused when the information is not sought in good faith or is used to the
detriment of the corporation.57 But the impropriety of purpose such as will defeat enforcement must
be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other
words, the specific provisions take from the stockholder the burden of showing propriety of purpose
and place upon the corporation the burden of showing impropriety of purpose or motive.58 It appears
to be 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.59
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.
________________
54 Fletcher, Ibid., Section 2222, p. 725.

55 40 O.G., 1st Suppl. 1. April 3, 1939, citing 14 C.J.S. 854, 855.
56 Fletcher, supra, p. 716.
57 State v. Monida & Yellowstone Stage Co., 110 Minn. 193, 124 NW 791, 125 NW 676; State v. Cities
Service Co., 114 A 463.
58 Fletcher, supra, Section 2220, p. 717.
59 Fletcher, supra, Section 2223, p. 728.
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385
Some state courts recognize the right under certain conditions, while others do not. Thus, it has been
held that, where a corporation owns approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination,60 and that a writ of mandamus may be
granted, as the records of the subsidiary were, to all intents and parposes, the records of the parent
even though the subsidiary was not named as a party.61 Mandamus was likewise held proper to inspect
both the subsidiarys and the parent corporations books upon proof of sufficient control or dominion by
the parent showing the relation of principal or agent or something similar thereto.62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation
is a separate and distinct corporation domiciled and with its books and records in another jurisdiction,
and is not legally subject to the control of the parent company, although it owned a vast majority of the
stock of the subsidiary.63 Likewise, inspection of the books of an allied corporation by a stockholder of
the parent company which owns all the stock of the subsidiary has been refused on the ground that the
stockholder was not within the class of persons having an interest.64
In the Nash case,65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to in-
_________________
60 Martin v. D. B. Martin Co., 10 Del. Ch. 211, 88 A. 612, 102 A. 373.

61 Woodward v. Old Second National Bank, 154 Mich. 459, 117 NW 893, 118 NW 581.
62 Martin v. D. B. Martin Co., supra.
63 State v. Sherman Oil Co., 1 W.W. Harr. (31 Del) 570, 117 A. 122.
64 Lisle v. Shipp, 96 Cal. App. 264, 273 P. 1103.
65 Nash v. Gay Apparel Corp., 193 NYS 2d 246.
386
386
spect corporations subsidiaries books and records which were in corporations possession and control
in its office in New York.
In the Bailey case,66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had identical officers and directors.
In his Urgent Motion for Production and Inspection of Documents before respondent SEC, petitioner
contended that respondent corporation had been attempting to suppress information from the
stockholders and that petitioner, as stockholder of respondent corporation, is entitled to copies of
some documents which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation.67 There is no question that 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.68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent 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
respondent corporations possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent
corporation to
________________
66 Bailey v. Boxboard Products Co., 314 Pa. 45, 170 A. 127.

67 Rollo, pp. 50-51.
68 18 Am. Jur. 2d 718.
387
VOL. 89, APRIL 11, 1979

387
ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the investment by the stockholders.
Respondent SECs position is that submission of the investment to the stockholders for ratification is a
sound corporate practice and should not be thwarted but encouraged.
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.69
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
________________
69 De la Rama v. Ma-ao Sugar Central Co., Inc., L-17504 and L17506, February 28, 1969, 27 SCRA 247,
260.
388
388
the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Maao Sugar Central Co., Inc., supra, appears
relevant. In said case, one of the issues was the legality of an investment made by Ma-ao Sugar Central
Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders voting
power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags.
The lower court said that there is more logic in the stand that if the investment is made in a
corporation whose business is important to the investing corporation and would aid it in its purpose, to
require authority of the stockholders would be to unduly curtail the power of the Board of Directors.
This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara,
said:
j. Power to acquire or dispose of shares or securities.A private corporation, in order to accomplish is
done in pursuance of the corporate purpose, does not need the approval of stockholders; but when the
purchase of shares of another corporation is done solely for investment and not to accomplish the
law; namely, (a) that no agricultural or raining corporation shall in anywise be interested in any other
(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. (The Philippine Corporation Law
by Sulpicio S. Guevara, 1967 Ed., p. 89) (Italics ours.)
funds in any other corporation
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389
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. (Id., p. 108.) (Italics ours.)
(pp. 258-259.)
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.70 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. Mere ultra vires acts, said this Court in Pirovano,71 or those which are
not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently
_________________
70 Boyce v. Chemical Plastics, 175 F 2d 839, citing 13 Am. Jur., Section 972.
71 Pirovano v. De la Rama Steamship Co., L-53-7, 96 Phil. 335, December 29, 1954.
390
390
relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed
investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent 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.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc, and ultimately to this
Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned
amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the
validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing
by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise
concurs in the result.
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391
Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero filed a separate
opinion, wherein they voted against the validity of the questioned amended bylaws and that this
question should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur
in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the
scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by the
respondents Board of Directors and petitioners disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
In resum, subject to the qualifications afore-stated, judgment is hereby rendered GRANTING the
petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as
specified in the petition. The petition,* insofar as it assails the validity of the amended by-laws and the
ratification of the foreign investment of respondent corporation, for lack of necessary votes, is hereby
DISMISSED. No costs.
Makasiar, Santos, Abad Santos and De Castro, JJ., concur.
Castro, C.J., reserves his right to file a separate opinion.
Fernando, J., concurs in the result and reserves his right to file a separate opinion.
Teehankee, Concepcion Jr., Fernandez, and Guerrero, JJ., file a joint separate opinion.
Barredo, J., concurs and reserves the filing of a separate opinion.
Aquino, and Melencio Herrera, JJ., did not take part.
Fernandez, J., concurs in the opinion of Justice Teehankee.
Guerrero, J., concurs and dissents in a separate opinion.
Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336, No. L-45911 April 11, 1979
No. L-21601. December 28, 1968.
NIELSON & COMPANY, INC., plaintiff-appellant, vs. LEPANTO CONSOLIDATED MINING COMPANY,
defendant-appellee.
Pleading and practice; Appeal; Change of theory on appeal not allowable.It is the rule, and the settled
doctrine, that a party cannot change his theory on appealthat is, that a party cannot raise in the
appellate court any question of law or of fact that was not raised in the court below or which was not
541
VOL. 26, DECEMBER 28, 1968

541
Nielson & Company, Inc. vs. Lepanto Consolidated Mining Company
within the issue made by the parties in their pleadings (Sec. 19, Rule 49, old Rules of Court; Sec. 18 of
Revised Rules of Court; Hautea v. Magallon, L-20345, Nov. 28, 1964; Northern Motors, Inc. v. Prince
Line, L-13884, Feb. 29, 1960; American Express Co. v. Natividad, 46 Phil. 207; Agoncillo v. Javier, 38 Phil.
424; Molina v. Somes, 24 Phil. 49).
Civil Law; Contracts; "Agency" and "lease of service" compared and distinguished.In both agency and
lease of services one of the parties binds himself to render some service to the other party. Agency,
however, is distinguished from lease of work or services in that the basis of agency is representation,
while in the lease of work or services the basis is employment. The lessor of services does not represent
his employer, while the agent represents his principal. Agency is a preparatory contract, as agency "does
not stop with the agency because the purpose is to enter into other contracts." The most characteristic
feature of an agency relationship is the agent's power to bring about business relations between his
principal and third persons. "The agent is destined to execute juridical acts (creation, modification or
extinction of relations with .third parties). Lease of services contemplate only material (non-juridical)
acts." (Reyes & Puno, An Outline of Philippine Civil Law, Vol. V, p. 277).
Same; Obligations and contracts; Moratorium law; Republic Act No. 342 not applicable to debts
contracted during the war.Republic Act No. 342 does not apply to debts contracted during the war
and did not lift the moratorium in relation thereto (Uy v. Kalaw Katigbak, L-1830, Dec. 31, 1949; Sison v.
Mirasol, L-4711, Oct. 3, 1952; Compaia Maritima v. Court of Appeals, L-14949, May 30, 1960). Said Rep.
Act No. 342, however, modified Executive Order No. 32 as to pre-war debts, making the protection
available only to debtors who had war damage claims (Sison v. Mirasol, L-4711, Oct. 3, 1952, cited in
Abraham, et al. v. Intestate Estate of Ysmael, et al., L-16741, Jan. 31, 1962).
Corporation law; Shares of stock; Consideration for which shares of stock may be issued; A share of
stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a
corporation.From the provision of Section 16 of the Corporation Law, the consideration for which
shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. 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. It is the shares
542
542
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 f rom 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.
Under Section 16 of the Corporation Law stock dividends can not be issued to a person who is not a
stockholder in payment of services rendered.
Same; "Stock dividend"; "Dividend"; Concept and nature.A "stock dividend" is any dividend payable in
shares of stock of the corporation declaring or authorizing such dividend. It is, as what the term itself
implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A
stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly
payable only out of surplus profits (Sec. 16, Corporation Law). So, a stock dividend is actually two things:
(1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at
par. (Words and Phrases, p. 270). When a corporation issues stock dividends, it shows that the
corporation's accumulated profits have been capitalized instead of distributed to the stockholders or
retained as surplus available f or distribution, in money or kind, should opportunity offer. Far from being
a realization of profits for the stockholder, it tends rather ,to postpone said realization, in ,that the fund
represented by the new stock has been transferred from surplus to assets and no longer available for
actual distribution (Fisher v. Trinidad, 43 Phil. 973). Thus, it is apparent that stock dividends are issued
only to stockholders. This is so because only stockholders are entitled to dividends. They are the only
ones who have a right to a proportional share in that part of the surplus which is declared as dividends.
A stock dividend really adds nothing to the interest of the stockholder; the proportional interest of each
stockholder remains the same (Towne v. Eisner, 62 L. Ed. 372). If a stockholder is deprived of his stock
dividendsand this happens if the shares of stock f orming part of the stock dividends are issued to a
nonstockholderthen the proportion of the stockholder's interest changes radically. Stock dividends
are civil fruits of the original investment, and to the owners of the shares belong the civil fruits (Art. 441,
Civil Code). The term "dividend" both in the technical sense and its ordinary acceptation, is that part or
portion of the profits of the enterprise which the corporation, by its governing agents,
543

543
sets apart for ratable division among the holders of the capital stock. It means the fund actually set
aside, and declared by the directors of the corporation as a dividend, and duly ordered by the directory,
or by the stockholders, at a corporate meeting, to be divided or distributed among the stockholders
according to their respective interests (7 Thompson on Corporations 134135).
MOTION FOR RECONSIDERATION of a Supreme Court decision.
The facts are stated in the resolution of the Court.

RESOLUTION*
ZALDIVAR, J.:
Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The motion for
reconsideration is based on two sets of groundsthe first set consisting of four principal grounds, and
the second set consisting of five alternative grounds, as follows:
Principal Grounds:
1. The court erred in overlooking and failing to apply the proper law applicable to the agency or
management contract in question, namely, Article 1733 of the Old Civil Code (Article 1920 of the new),
by virtue of which said agency was effectively revoked and terminated in 1945 when, as stated in
paragraph 20 of the complaint, "defendant voluntarily x x x prevented plaintiff from resuming
management and operation of said mining properties."
2. The court erred in holding that paragraph II of the management contract (Exhibit C) suspended the
period of said contract.
3. The court erred in reversing the ruling of the trial judge, based on well-settled jurisprudence of this
Supreme Court, that the management agreement was only suspended but not extended on account of
the war.
4. The court erred in reversing the finding of the trial judge that Nielson's action had prescribed, but
considering only the first claim and ignoring the prescriptibility of the other claims.
_______________
* Editor's Note: See decision in 18 SCRA 1040.

544
544
Alternative Grounds:
5. The court erred in holding that the period of suspension of the contract on account of the war lasted
from February 1942 to June 26, 1948.
6. Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as damages (a)
10% of the cash dividends declared and paid in December, 1941; (b) .the management fee of P2,500.00
for the month of January, 1942; and (c) the full contract price for the extended period of sixty months,
since these damages were neither demanded nor proved and, in any case, not allowable under the
general law of damages.
7. Assuming arguendo that appellant is entitled to any relief, the court erred in ordering appellee to
issue and deliver to appellant shares of stock together with fruits thereof.
8. The court erred in awarding to appellant an undetermined amount of shares of stock and/or cash,
which award cannot be ascertained and executed without further litigation.
9. The court erred in rendering judgment for attorney's fees.
We are going to dwell on these grounds in the order they are presented.
1. In its first principal ground Lepanto claims that its own counsel and this Court had overlooked the real
nature of the management contract entered into by and between Lepanto and Nielson, and the law that
is applicable on said contract. Lepanto now asserts for the first timeand this is done in a motion for
reconsiderationthat the management contract in question is a contract of agency such that it has the
right to revoke and terminate the said contract, as it did terminate the same, under the law of agency,
and particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the New Civil Code).
We have taken note that Lepanto is advancing a new theory. We have carefully examined the pleadings
filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never did it assert the
theory that it has the right to terminate the management contract because that contract is one of
agency which it could terminate at will. While it is true that in its ninth and tenth special affirmative
defenses, in its answer in the court below, Lepanto pleaded that it had the right to terminate the
545
545
management contract in question, that plea of its right to terminate was not based upon the ground
that the relation between Lepanto and Nielson was that of principal and agent but upon the ground that
Nielson had allegedly not complied with certain terms of the management contract. If Lepanto had
thought of considering the management contract as one of agency it could have amended its answer by
stating exactly its position. It could have asserted its theory of agency in its memorandum for the lower
court and in its brief on appeal. This, Lepanto did not do. It is the rule, and the settled doctrine of this
Court, that a party cannot change his theory on appealthat is, that a party cannot raise in the
appellate court any question of law or of fact that was not raised in the court below or which was not
within the issue made by the parties in their pleadings (Section 19, Rule 49 of the old Rules of Court, and
also Section 18 of the new Rules of Court; Hautea vs. Magallon, L-20345, November 28, 1964; Northern
Motors, Inc. vs. Prince Line, L-13884, February 29, 1960; American Express Co. vs. Natividad, 46 Phil.
207; Agoncillo vs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil 49).
At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the proceedings,
this Court cannot sustain the same.
Lepanto contends that the management contract in question (Exhibit C) is one of agency because: (1)
Nielson was to manage and operate the mining properties and mill on behalf, and for the account, of
Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on Lepanto's behalf, into
contracts for the hiring of laborers, purchase of supplies, and the sale and marketing of the ores mined.
All these, Lepanto claims, show that Nielson was, by the terms of the contract, destined to execute
juridical acts not on its own behalf but on behalf of Lepanto under the control of the Board of Directors
of Lepanto "at all times". Hence Lepanto claims that the contract is one of agency. Lepanto then
maintains that an agency is revocable at the will of the principal (Article
546
546
1733 of the Old Civil Code), regardless of any term or period stipulated in the contract, and it was in
pursuance of that right that Lepanto terminated the contract in 1945 when it took over and assumed
exclusive management of the work previously entrusted to Nielson under the contract. Lepanto finally
maintains that Nielson as an agent is not entitled to damages since the law gives to the principal the
right to terminate the agency at will.
Because of Lepanto's new theory We consider it necessary to determine the nature of the management
contractwhether it is a contract of agency or a contract of lease of services. Incidentally, we have
noted that the lower court, in the decision appealed from, considered the management contract as a
contract of Iease of services.
Article 1709 of the Old Civil Code, defining contract of agency, provides:
"By the contract of agency, one person binds himself to render some service or do something for the
account or at the request of another."
Article 1544, defining contract of lease of service, provides:
"In a lease of work or services, one of the parties binds himself to make or construct something or to
render a service to the other for a price certain."
In both agency and lease of services one of the parties binds himself to render some service to the other
party. Agency, however, is distinguished from lease of work or services in that the basis of agency is
representation, while in the lease of work or services the basis is employment. The lessor of services
does not represent his employer, while the agent represents his principal. Manresa, in his
"Commentarios al Codigo Civil Espaol" (1931, Tomo IX, pp. 372-373), points out that the element of
representation distinguishes agency from lease of services, as follows:
" "Nuestro art. 1.709 como el art. 1.984 del Cdigo de Napolen y cuantos textos legales citamos en las
concordancias, expresan claramente esta idea de la representacin, 'hacer alguna cosa por cuenta o
encargo de otra' dice nuestro Cdigo; 'poder de hacer alguna cosa para el mandante o en su nombre'
dice el C-
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547
digo de Napolen, y en tales palabras aparece vivo y luminoso el concepto y la teoria de la
representacin, tan fecunda en enseanzas, que a su sola luz es como se explican las diferencias que
separan el mandato del arrendamiento de servicios, de los contratos inominados, del consejo y de !a
gestin de negocios.
"En efecto, en el arrendamiento de servicios al obligarse para su ejecucin, se trabaja, en verdad, para el
dueo que remunera la labor, pero ni se le representa ni se obra en su nombre x x x."
On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the new Civil Code
has defined the contract of agency in more explicit terms, as follows:
"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."
There is another obvious distinction between agency and lease of services. Agency is a preparatory
contract, as agency "does not stop with the agency because the purpose is to enter into other
contracts." The most characteristic feature of an agency relationship is the agent's power to bring about
business relations between his principal and third persons. "The agent is destined to execute juridical
acts (creation, modification or extinction of relations with third parties). Lease of services contemplate
only material (non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277).
In the light of the interpretations we have mentioned in the foregoing paragraphs, let us now determine
the nature of the management contract in question. 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. We gather from the contract that the work undertaken
by Nielson was to take complete charge, subject at all times to the general control of the Board of
Directors
548
548
of Lepanto, of the exploration and development of the mining claims, of the hiring of a sufficient and
competent staff and of sufficient and capable laborers, of the prospecting and development of the mine,
of the erection and operation of the mill, and of the beneficiation and marketing of the minerals found
on the mining properties; and in carrying out said obligation Nielson should proceed diligently and in
accordance with the best mining practice. In connection with its work Nielson was to submit reports,
maps, plans and recommendations with respect to the operation and development of the mining
properties, make recommendations and plans on the erection or enlargement of any existing mill,
dispatch mining engineers and technicians to the mining properties as from time to time may
reasonably be required to investigate and make recommendations without cost or expense to Lepanto.
Nielson was also to "act as purchasing agent of supplies. equipment and other necessary purchases by
Lepanto, provided, however, that no purchase shall be made without the prior approval of Lepanto; and
provided further, that no commission shall be claimed or retained by Nielson on such purchase"; and "to
submit all requisition for supplies, all contracts and arrangement with engineers, and staff and all
matters requiring the expenditures of money, present or future, for prior approval by Lepanto; and also
to make contracts subject to the prior approval of Lepanto for the sale and marketing of the minerals
mined from said properties, when said products are in a suitable condition for marketing."1
It thus appears that the principal and paramount undertaking of Nielson under the management
contract was the operation and development of the mine and the operation of the mill. All the other
undertakings mentioned in the contract are necessary or incidental to the principal under-takingthese
other undertakings being dependent upon the work on the development of the mine and the operation
of the mill. In the performance of this principal undertaking Nielson was not in any way executing
juridical acts
_______________
1 Annex A to complaint, pp. 48-46, R.A., Also Exhibit ('.

549

549
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.
Lepanto contends that the management contract in question being one of agency it had the right to
terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We find,
however, a proviso in the management contract which militates against this stand of Lepanto. Paragraph
XI of the contract provides:
"Both parties to this agreement fully recognize that the terms of this Agreement are made possible only
because of the faith or confidence that the Officials of each company have in the other; therefore, in
order to assure that such confidence and faith shall abide and continue, NIELSON agrees that LEPANTO
may cancel this Agreement at any time upon ninety (90) days written notice, in the event that NIELSON
for any reason whatsoever, except acts of God, strike and other causes beyond its control, shall cease to
prosecute the operation and development of the properties herein described in good faith and in
accordance with approved mining practice."
It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that
Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the agreement by
giving notice of termination ninety days in advance only in the event that Nielson should prosecute in
bad faith and not in accordance with approved mining practice the operation and develop-
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550
Nielson & Company, Inc. vs; Lepanto Consolidated Mining Company
ment of the mining properties of Lepanto. Lepanto could not terminate the agreement if Nielson should
cease to prosecute the operation and development of the mining properties by reason of acts of God,
strike and other causes beyond the control of Nielson.
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. Thus, in the annual report for 19362, submitted by Mr. C. A. Dewit, President of
Lepanto, to its stockholders, under date of March 15, 1937, we read the following: "To the Stockholders:
xxx xxx xxx
"The incorporation of our Company was effected as a result of negotiations with Messrs. Nielson & Co.,
Inc., and an offer by these gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated August 11, 1936,
reading as follows:
'Messrs. Cookes and Lednicky,
'Present
'Re: Mankayan Copper Mines.
'GENTLEMEN:
'After an examination of your property by our engineers, we have decided to offer. as we hereby offer to
underwrite the entire issue of stock of a corporation to be formed for the purpose of taking over said
properties, said corporation to have an authorized capital of P1,750,-000.00, of which P700,000.00 will
be issued in escrow to the claimowners in exchange for their claims, and the balance of P1,050,000.00
we will sell to the public at par or take ourselves.
_______________
2 Exhibit A.
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551
'The arrangement will be under the following conditions:
'1. The subscriptions for cash shall be payable 50% at time of subscription and the balance subject to the
call of the Board of Directors of the proposed corporation.
'2. We shall have an underwriting and brokerage commission of 10% of the P1,050,000.00 to be sold for
cash to the public, said commission to be payable from the first payment of 50% on each subscription.
'3. We will bear the cost of preparing and mailing any prospectus that may be required, but no such
prospectus will be sent out until the text thereof has been first approved by the Board of Directors of
the proposed corporation.
'4. That after the organization of the corporation, all operating contract be entered into between
ourselves and said corporation, under the terms which the property will be developed and mined and a
mill erected, under our supervision, our compensation to be P2,000.00 per month until the property is
put on a profitable basis and P2,500.00 per month plus 10% of the net profits for a period of five years
thereafter.
'5. That we shall have the option to renew said operat-ing contract for an additional period of five years,
on the same basis as the original contract, upon the expiration thereof.
'lt is understood that the development and mining operations on said property, and the erection of the
mill thereon, and the expenditures therefor shall be subject to the general control of the Board of
Directors of the proposed corporation, and, in case you accept this proposition, that a detailed
operating contract will be entered into, covering the relationships between the parties.
Yours very truly,
(Sgd.) L. R. Nielson'"
"Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson & Co., took subscriptions for
One Million Fifty Thousand Pesos (P1,050,000.00) in shares of our Company and their underwriting and
brokerage commission has been paid. More than fifty per cent of these subscriptions have been paid to
the Company in cash. The claimowners have transferred their claims to the Corporation, but the
P700,000.00 in stock which they are to receive therefor, is as yet held in escrow.
"Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the Management
of the property under the control of the Board of Directors. A modification in the
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552
Management Contract was made with the consent of all the then stockholders, in virtue of which the
compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month when mill construction
began. The formal Management Contract was not entered into until January 30, 1937."
X X X X
"Manila, March 15, 1937
(Sgd.) "C. A. DeWitt
"President"
We can gather 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". 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.
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. On the other hand, it
can be said that, in asserting that it had terminated or cancelled the management contract in 1945,
Lepanto had thereby violated the express terms of the management contract. The management
contract was renewed to last until January 31, 1947, so that the contract had yet almost two years to
goupon the liberation of the mines in 1945. There is no showing that Nielson had ceased to prosecute
the operation and development of the mines in good faith and in accordance with approved mining
practice which would warrant the termination of the contract upon ninety days written notice. In fact
there was no such written notice of termination. It is an admitted fact that Nielson ceased to operate
and develop the mines because of the wara cause beyond
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553
the control of Nielson.
Indeed, if the management contract in question was intended to create a relationship of principal and
agent between Lepanto and Nielson, paragraph XI of the contract should not have been inserted
because, as provided in Article 1733 of the old Civil Code, agency is essentially revocable at the will of
the principalthat means, with or without cause. But precisely said paragraph XI was inserted in the
management contract to provide for the cause for its revocation. The provision of paragraph XI must be
given effect.
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,3 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.4
It is Our considered view that by express stipulation of the parties, the management contract in question
is not revocable at the will of Lepanto. We rule 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. This contract can not be unilaterally revoked by Lepanto.
The first ground of the motion for reconsideration should, therefore, be brushed aside.
2. In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that this
Court erred, in holding that paragraph II of the management contract suspended the period of said
contract, in holding that the agreement was not only suspended but was extended on account of the
war, and in holding that the period of suspension on account of the war lasted from February, 1942 to
June 26, 1948. We are going to discuss these three grounds together because they are inter-related.
In our decision we have dwelt lengthily on the points
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3 Sec. 9, Rule 130 of the Rules of Court.

4 Article 1373 of the (new) Civil Code,
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554
that the management contract was suspended because of the war, and that the period of the contract
was extended for a period -equivalent to the time when Nielson was unable to perf orm the work of
mining and milling because of the adverse effects of the war on the work of mining and milling.
It is the contention of Lepanto that the happening of those events, and the effects of those events,
simply suspended the perf ormance of the obligations by either party in the contract, but did not
suspend the period of the contract, much less extended the period of the contract.
We have conscientiously considered the arguments of Lepanto in support of these three grounds, but
We are not persuaded to reconsider the rulings that We made in Our decision.
We want to say a little more on these points, however. Paragraph II of the management contract
provides as follows:
"In the event of inundation, flooding of the mine, typhoon, earthquake or any other force majeure, war,
insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or other event or cause
reasonably beyond the control of NIELSON and which adversely affects the work of mining and milling;
NIELSON shall report such fact to LEPANTO and without liability or breach of ,the terms of this
Agreement, the same shall remain in suspense, wholly or partially during the terms of such inability."
(Italics supplied)
A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of any
of the events enumerated therein, which adversely affects the work of mining and milling, the
agreement is deemed suspended for as long as Nielson is unable to perform its work of mining and
milling because of the adverse effects of the happening of the event on the work of mining and milling.
During the period when the adverse effects on the work of mining and milling exist, neither party in the
contract would be held liable f or non-compliance of its obligation under the contract. In other words,
the operation of the contract is suspended for as long as the adverse effects of the happening of any of
those events had im-
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555
peded or obstructed the work of mining and milling. An analysis of the phraseology of the above-quoted
paragraph II of the management contract readily supports the conclusion that it is the agreement, or the
contract, that is suspended. The phrase "the same" can refer to no other than the term "Agreement"
which immediately precedes it. The "Agreement" may be wholly or partially suspended, and this
situation will depend on whether the event wholly or partially affected adversely the work of mining and
milling. In the instant case, the war had adversely affectedand wholly at thatthe work of mining and
milling. We have clearly stated in Our decision the circumstances brought about by the war which
caused the whole or total suspension of the agreement or of the management contract.
LEPANTO itself admits that the management contract was suspended. We quote from the brief of
LEPANTO:
"Probably, what Nielson meant was, it was prevented by Lepanto to assume again the management of
the mine in 1945, at the precise time when defendant was at the feverish phase of rehabilitation and
although the contract had already been suspended." (Lepanto's Brief, p. 9).
"x x x it was impossible, as a result of the destruction of the mine, for the plaintiff to manage and
operate the same and because, as provided in the agreement, the contract was suspended by reason of
the war." (Lepanto's Brief, pp. 9-10).
"Clause II, by its terms, is clear that the contract is suspended in case fortuitous event or force majeure,
such as war, adversely affects the work of mining and milling." (Lepanto's Brief, p. 49).
Lepanto is correct when it said that the obligations under the contract were suspended upon the
happening of any of the events enumerated in paragraph II of the management contract. Indeed, those
obligations were suspended because the contract itself was suspended. When we talk of a contract that
has been suspended we certainly mean that the contract temporarily ceased to be operative, and the
contract becomes operative again upon the happening of a conditionor when a situation obtains
which warrants the termination of the suspension of the contract.
556
556
In Our decision We pointed out that the agreement in the management contract would be suspended
when two conditions concur, namely: (1) the happening of the event constituting a force majeure that
was reasonably beyond the control of Nielson, and (2) that the event constituting the force majeure
adversely affected the work of mining and milling. The suspension, therefore, would last not only while
the event constituting the force majeure continued to occur but also for as long as the adverse effects of
the force majeure on the work of mining and milling had not been eliminated. Under the management
contract the happening alone of the event constituting the force majeure which did not affect adversely
the work of mining and milling would not suspend the period of the contract. It is only when the two
conditions concur that the period of the agreement is suspended.
It is not denied that because of the war, in February 1942, the mine, the original mill, the original power
plant, the supplies and equipment, and all installations at the Mankayan mines of Lepanto, were
destroyed upon order of the United States Army, to prevent their utilization by the enemy. It is not
denied that for the duration of the war Nielson could not undertake the work of mining and milling.
When the mines were liberated from the enemy in August, 1945, the condition of the mines, the mill,
the power plant and other installations, was not the same as in February 1942 when they were ordered
destroyed by the US army. Certainly, upon the liberation of the mines from the enemy, the work of
mining and milling could not be undertaken by Nielson under the same favorable circumstances that
obtained before February 1942. The work of mining and milling, as undertaken by Nielson in January,
1942, could not be resumed by Nielson soon after liberation because of the adverse effects of the war,
and this situation continued until June of 1948. Hence, the suspension of the management contract did
not end upon the liberation of the mines in August, 1945. The mines and the mill and the installations,
laid waste by the ravages of war, had to be reconstructed and rehabilitated, and it can be said that it
was only on June 26, 1948 that the
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557
adverse effects of the war on the work of mining and milling had ended, because it was on that date
that the operation of the mines and the mill was resumed. The period of suspension should, therefore,
be reckoned from February 1942 until June 26, 1948, because it was during this period that the war and
the adverse effects of the war on the work of mining and milling had lasted. The mines and the
installations had to be rehabilitated because of the adverse effects of the war. The work of rehabilitation
started soon after the liberation of the mines in August, 1945 and lasted until June 26, 1948 when, as
stated in Lepanto's annual report to its stockholders for the year 1948, "June 28, 1948 marked the
official return to operation of this company at its properties at Mankayan, Mountain province,
Philippines" (Exh. F-1).
Lepanto would argue that if the management contract was suspended at all the suspension should
cease in August of 1945, contending that the effects of the war should cease upon the liberation of the
mines from the enemy. This contention cannot be sustained, because the period of rehabilitation was
still a period when the physical effects of the warthe destruction of the mines and of all the mining
installationsadversely affected, and made impossible, the work of mining and milling. Hence, the
period of the reconstruction and rehabilitation of the mines and the installations must be counted as
part of the period of suspension of the contract.
Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the
mines because soon after the liberation of the mines Nielson insisted to resume the management work,
and that Nielson was under obligation to reconstruct the mill in the same way that it was under
obligation to construct the mill in 1937. This contention is untenable. It is true that Nielson insisted to
resume its management work after liberation, but this was only for the purpose of restoring the mines,
the mill, and other installations to their operating and producing condition as of February 1942 when
they were ordered destroyed. It is not shown by any evidence in the record, that Nielson had agreed, or
would
558
558
have agreed, that the period of suspension of the contract would end upon the liberation of the mines.
This is so because, as found by this Court, the intention of the parties in the management contract, and
as understood by them, the management contract was suspended for as long as the adverse effects of
the force majeure on the work of mining and milling had not been removed, and the contract would be
extended for as long as it was suspended. Under the management contract Nielson had the obligation to
erect and operate the mill, but not to re-erect or reconstruct the mill in case of its destruction by force
majeure.
It is the considered view of this court that it would not be fair to Nielson to consider the suspension of
the contract as terminated upon the liberation of the mines because then Nielson would be placed in a
situation whereby it would have to suffer the adverse effects of the war on the work of mining and
milling. The evidence shows that as of January 1942 the operation of the mines under the management
of Nielson was already under beneficial conditions, so much so that dividends were already declared by
Lepanto for the years 1939, 1940 and 1941. To make the management contract immediately operative
after the liberation of the mines from the Japanese, at the time when the mines and all its installations
were laid waste as a result of the war, would be to place Nielson in a situation whereby it would lose all
the benefits of what it had accomplished in placing the Lepanto mines in profitable operation before the
outbreak of the war in December, 1941. The record shows that Nielson started its management
operation way back in 1936, even before the management contract was entered into. As early as August
1936 Nielson negotiated with Messrs. C. I. Cookes and V. L. Lednicky for the operation of the Mankayan
mines and it was the result of those negotiations that Lepanto was incorporated; that it was Nielson that
helped to capitalize Lepanto, and that after the formation of the corporation (Lepanto) Nielson
immediately assumed the management of the mining properties of Lepanto. It was not until January 30,
1937 when the management contract in question was entered into between Lepanto and
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559
Nielson (Exhibit A ).
A contract for the management and operation of mines calls for a speculative and risky venture on the
part of the manager-operator. The manager-operator invests its technical know-how, undertakes back-
breaking efforts and tremendous spade-work, so to say, in the first years of its management and
operation of the mines, in the expectation that the investment and the efforts employed might be
rewarded later with success. This expected success may never come. This had happened in the very case
of the Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various persons and entities of
different nationalities, including Lednicky himself, invested all their money and failed. The manager-
operator may not strike sufficient ore in the first, second, third, or fourth year of the management
contract, or he may not strike ore even until the end of the fifth year. Unless the manager-operator
strikes sufficient quantity of ore he cannot expect profits or reward for his investment and efforts. In the
case of Nielson, its corps of competent engineers, geologists, and technicians begun working on the
Mankayan mines of Lepanto since the latter part of 1936, and continued their work without success and
profit through 1937, 1938, and the earlier part of 1939. It was only in December of 1939 when the
efforts of Nielson started to be rewarded when Lepanto realized profits and the first dividends were
declared. From that time on Nielson could expect profit to come to itas in fact Lepanto declared
dividends for 1940 and 1941if the development and operation of the mines and the mill would
continue unhampered. The operation, and the expected profits, however, would still be subject to
hazards due to the occurrence of fortuitous events, fires, earthquakes, strikes, war, etc., constituting
force majeure, which would result in the destruction of the mines and the mill. One of these diverse
causes, or one after the other, may consume the whole period of the contract, and if it should happen
that way the manager-operator would reap no profit to compensate for the first years of spade-work
and investment of efforts
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560
and know-how. Hence, in fairness to the manager-operator, so that he may not be deprived of the
benefits of the work he had accomplished, the force majeure clause is incorporated as a standard clause
in contracts for the management and operation of mines.
The nature of the contract for the management and operation of mines justifies the interpretation of
the force majeure clause, that a period equal to the period of suspension due to force majeure should
be added to the original term of the contract by way of an extension. We, therefore, reiterate the ruling
in Our decision that the management contract in the instant case was suspended from February, 1942
to June 26, 1948, and that from the latter date the contract had yet five years to go.
3. In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in
reversing the finding of the trial court that Nielson's action has prescribed, by considering only the first
claim and ignoring the prescriptibility of the other claims.
This ground of the motion for reconsideration has no merit.
In Our decision We stated that the claims of Nielson are based on a written document, and, as such, the
cause of action prescribes in ten years.5 Inasmuch as there are different claims which accrued on
different dates the prescriptive periods for all the claims are not the same. The claims of Nielson that
have been awarded by this Court are itemized in the dispositive part of the decision.
The first item of the awards in Our decision refers to Nielson's compensation in the sum of P17,500.00,
which is equivalent to 10 % of the cash dividends declared by Lepanto in December, 1941. As We have
stated in Our decision, this claim accrued on December 31, 1941, and the right to commence an action
thereon started on January 1, 1942. We declared that the action on this claim did not prescribe although
the complaint was filed on February 6, 1958or after a lapse of 16 years, 1 month and
_______________
5 daysbecause of the operation of the moratorium law. Section 43, par. 1, Act 190.
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561
We declared that under the applicable decisions of this Court6 the moratorium period of 8 years, 2
months and 8 days should be deducted from the period that had elapsed since the accrual of the cause
of action to the date of the filing of the complaint, so that there is a period of less than 8 years to be
reckoned for the purpose of prescription.
This claim of Nielson is covered by Executive Order No. 32, issued on March 10, 1945, which provides as
follows:
''Enforcement of payments of all debts and other monetary obligations payable in the Philippines,
except debts and other monetary obligations entered into in any area after declaration by Presidential
Proclamation that such area has been freed from enemy occupation and control, is temporarily
suspended pending action by the Commonwealth Government." (41 O.G. 56-57; Italics supplied)
Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or before
December 8, 1941) and those contracted subsequent to December 8, 1941 and during the Japanese
occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium provided for in
Executive Order No. 32 on pre-war (or preDecember 8, 1941) debts of debtors who had not filed war
damage claims with the United States War Damage Commission. In other words, after the effectivity of
Republic Act No. 342, the debt moratorium was limited: (1) to debts and other monetary obligations
which were contracted after December 8, 1941 and during the Japanese occupation, and (2) to those
pre-war (or pre-December 8, 1941) debts and other monetary obligations where the debtors filed war
damage claims. That was the situation up to May 18, 1953 when this Court declared Republic Act No.
342 unconstitutional.7 It has been held by this Court, however, that from March 10, 1945 when
Executive Order No. 32 was issued, to May 18, 1953 when Republic Act No. 342 was declared
unconstitutionalor a period of 8 years, 2 months and 8 daysthe debt moratorium was in
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6 Tiosejo vs. Day, et al., L-9944. April 30, 1937: Levi Hermanos, Inc. vs. Perez, L-14487 April 29 1960.
7 Rutter vs. Esteban. 93 Phil. 68.
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562
force, and had the effect of suspending the period of prescription.8
Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for in
Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of pre-war
obligations or those incurred prior to December 8, 1941," and that "the moratorium was lifted and
terminated with respect to obligations incurred after December 8, 1941,"9
This Court has held that Republic Act No. 342 does not apply to debts contracted during the war and did
not lift the moratorium in relations thereto.10 In the case of Abraham, et al. vs. Intestate Estate of Juan
C. Ysmael, el al., L-16741, Jan. 31, 1962, this Court said:
"Respondents, however, contend that Republic Act No. 342, which took 'effect on July 26, 1948, lifted
the moratorium on debts contracted during the Japanese occupation. The court has already held that
Republic Act No. 342 did not lift the moratorium on debts contracted during the war (Uy vs. Kalaw
Katigbak, G.R. No. L-1830, Dec. 31, 1949) but modified Executive Order No. 32 as to pre-war debts,
making the protection available only to debtors who had war damage claims (Sison v. Mirasol, G.R. No.
L-4711, Oct. 3, 1952)."
We therefore reiterate the ruling in Our decision that the claim involved in the first item awarded to
Nielson had not prescribed.
What we have stated herein regarding the non-prescription of the cause of action of the claim involved
in the first item in the award also holds true with respect to the second item in the award, which refers
to Nielson's claim for management fee of P2,500.00 for January, 1942. Lepanto admits that this second
item, like the first, is a monetary obligation. The right of action of Nielson regarding this claim accrued
on January 31, 1942.
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8 Tiosejo vs. Day, supra; Levi Hermanos Inc. vs. Perez supra.
9 Motion for reconsideration, p. 60.
10 Uy v. Kalaw Katigbak, G.R. No,' L-1830, Dec. 31, 1949 ; Sison v. Mirasol, L-4711, Oct. 31, 1962;
Compaia Maritima v. ( Court of Appeals, L-14949, May 30 1960
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563
As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not applicable. That
is the reason why in Our decision We did not discuss the question of prescription regarding these items.
The claims of Nielson involved in these items are based on the management contract, and Nielson's
cause of action regarding these claims prescribes in ten years. Corollary to Our ruling that the
management contract was suspended from February, 1942 until June 26, 1948, and that the contract
was extended for five years from June 26, 1948, the right of action of Nielson to claim for what is due to
it during that period of extension accrued during the period from June 26,1948 till the end of the five-
year extension periodor until June 26, 1953. And so, even if We reckon June 26, 1948 as the starting
date of the ten-year period in connection with the prescriptibility of the claims involved in items 3, 4, 5,
6 and 7 of the awards in the decision, it is obvious that when the complaint was filed on February 6,
1958 the ten-year prescriptive period had not yet lapsed.
In Our decision We have also ruled that the right of action of Nielson against Lepanto had not prescribed
because of the arbitration clause in the Management contract. We are satisf ied that there is evidence
that Nielson had asked for arbitration, and an arbitration committee had been constituted. The
arbitration committee, however, failed to bring about any settlement of the differences between
Nielson and Lepanto. On June 25, 1957 counsel for Lepanto definitely advised Nielson that they were
not entertaining any claim of Nielson. The complaint in this case was filed on February 6, 1958.
4. In the sixth ground of its motion for reconsideration, Lepanto maintains that this Court "erred in
awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the
management fee of P2,500.00 for the month of January 1942; and (c) the full contract price for the
extended period of 60 months, since the damages were never demanded nor proved and, in any case,
not allowable under the general law on damages."
We have stated in Our decision that the original agree-
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564
ment in the management contract regarding the compensation of Nielson was modif ied, such that
instead of receiving a monthly" compensation of P2,500.00 plus 10% of the net profits from the
operation of the properties for the preceding month,11 Nielson would receive a compensation of
P2,500.00 a month, plus (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.
It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by
Lepanto.12 Niel-son, therefore, should receive the equivalent of 10% of this amount, or the sum of
P17,500.00. We have found that this amount was not paid to Nielson.
In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash
disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had been
paid to Nielson. It appears, however, in this photographic copy of page 127 of the cash disbursement
book that the sum of P17,500.00 was entered on October 29 as "surplus a/c Nielson & Co. Inc." The
entry does not make any reference to dividends or participation of Nielson in the profits. On the other
hand, in the photographic copy of page 89 of the 1941 cash disbursement book, also attached to the
motion for reconsideration, there is an entry for P17,500.00 on April 23, 1941 which states "Accts. Pay.
Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really be the participation of Nielson in the
profits based on dividends declared in April 1941 as shown in Exhibit L. But in the same Exhibit L it is not
stated that any dividend was declared in October 1941. On the contrary it is stated in Exhibit L that
dividends were declared in December 1941. We cannot entertain this piece of evidence for several
reasons: (1) because this evidence was not pre-
_______________
11 Par. V of Management Contract, Exhibit C.

12 Page ?,. Exhibit L, Report for 1954.
565

565
sented during the trial in the court below; (2) there is no showing that this piece of evidence is newly
discovered and that Lepanto was not in possession of said evidence when this case was being tried in
the court below; and (a) according to Exhibit L cash dividends of P175,000.00 were declared in
December, 1941, and so the sum of P17,500.00 which appears to have been paid to Nielson in October
1941 could not be payment of the equivalent of 10% of the cash dividends that were later declared in
December, 1941.
As regards the management fee of Nielson corresponding to January, 1942, in the sum of P2,500.00, We
have also found that Nielson is entitled to be paid this amount, and that this amount was not paid by
Lepanto to Nielson. Whereas, Lepanto was able to prove that it had paid the management fees of
Nielson for November and December, 1941,13 it was not able to present any evidence to show that the
management fee of P2,500.00 for January, 1942 bad been paid.
It having been declared in Our decision, as well as in this resolution, that the management contract had
been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the cause of
action of Nielson to claim for its compensation during that period of extension had not prescribed, it
follows that Nielson should be awarded the management fees during the whole period of extension,
plus the 10% of the value of the dividends declared during the said period of extension, the 10% of the
depletion reserve that was set up, and the 10% of any amount expended out of surplus earnings for
capital account.
5. In the seventh ground of its motion for reconsideration, Lepanto maintains that this Court erred in
ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof.
In Our decision, We declared that pursuant to the modified agreement regarding the compensation of
Nielson which provides, among others, that Nielson would receive
_______________
13 Exhibit 1.
566
566
10% of any dividends declared and paid, when and as paid, Nielson should be paid 10% of the stock
dividends declared by Lepanto during the period of extension of the contract.
It is not denied that on November 28, 1949, Lepanto declared stock dividends worth P1,000,000.00; and
on August 22, 1950, it declared stock dividends worth P2,-000,000.00. In other words, during the period
of extension Lepanto had declared stock dividends worth P3,000,-000.00. We held in Our decision that
Nielson is entitled to receive 10% of the stock dividends declared, or shares of stock worth P300,000.00
at the par value of P0.10 per share. We ordered Lepanto to issue and deliver to Nielson those shares of
stocks as well as all the fruits or dividends that accrued to said shares.
In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as
compensation for its services under the management contract is a violation of the Corporation Law, and
that it was not, and it could not be, the intention of Lepanto and Nielsonas contracting partiesthat
the services of Nielson should be paid in shares of stock taken out of stock dividends declared by
Lepanto. We have assiduously considered the arguments adduced by Lepanto in support of its
contention, as well as the answer of Nielson in this connection, and We have arrived at the conclusion
that there is merit in the contention of Lepanto.
Section 16 of the Corporation Law, in part, provides as follows:
"No corporation organized under this Act shall create or issue bills, notes or other evidence of debt, for
circulation as money, and no corporation shall issue stock or bonds except in exchange for actual cash
paid to the corporation or for: (1) property actually received by it at a fair valuation equal to the par or
issued value of the stock or bonds so issued; and in case of disagreement as to their value, the same
shall be presumed to be the assessed value or the value appearing in invoices or other commercial
documents, as the case may be; and the burden or proof that the real present value of the property is
greater than the assessed value or value appearing in invoices or other commercial documents, as the
case may be,
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567
shall be upon the corporation, or for (2) profits earned by it but not distributed among its stockholders
or members; Provided, however, That no stock or bond dividend shall be issued without the approval of
stockholders representing not less than two-thirds of all stock then outstanding and entitled to vote at a
general meeting of the corporation or at a special meeting duly called for the purpose.
x x x x
"No corporation shall make or declare any dividend except from the surplus profits arising from its
business, or divide 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: Provided, That banking, savings and loan, and trust corporations may
receive deposits and issue certificates of deposit, checks, drafts, and bills of exchange, and the like in the
transaction of the ordinary business of banking, savings and loan, and trust corporations." (As amended
by Act No. 2792, and Act No. 3518; Italics supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the consideration for which
shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock
are given the special name "stock dividends" only if they are issued in lieu of undistributed prof its. 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 is equivalent to property.14 Likewise a share of stock issued in payment of indebtedness is
equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the
original capital stock of the corporation upon its organization, or part of the stocks issued when the
increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of
stock that are originally issued by the corporation and forming part
_______________
14 Sec. 5187, 11 Fletcher, Cyclopedia of the Law on Private Corporations, p. 422.

568
568
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.
A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing
such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation
among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of
stock instead of cash, and is properly payable only out of surplus profits.15 So, a stock dividend is
actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase
additional shares of stock at par.16 When a corporation issues stock dividends, it shows that the
corporation's accumulated profits have been capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or kind, should opportunity offer. Far from being
a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from surplus to assets and no longer available for
actual distribution.17 Thus, it is apparent that stock dividends are issued only to stockholders. This is so
because only stockholders are entitled to dividends. They are the only ones who have a right to a
proportional share in that part of the surplus which is declared as dividends. A stock dividend really adds
nothing to the interest of the stockholder; the proportional interest of each stockholder re-
________________
15 Sec. 16, Corporation Law.

16 Words and Phrases, p. 270.
17 Fisher vs. Trinidad, 43 Phil. 973,
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569
mains the same.18 If a stockholder is deprived of his stock dividendsand this happens if the shares of
stock f orming part of the stock dividends are issued to a non-stockholderthen the proportion of the
stockholder's interest changes radically. Stock dividends are civil fruits of the original investment, and to
the owners of the shares belong the civil fruits.19
The term "dividend" both in the technical sense and its 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 means the f und actually set aside, and declared by the
directors of the corporation as a dividends, and duly ordered by the director, or by the stockholders at a
corporate meeting, to be divided or distributed among the stockholders according to their respective
interests.20
It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends can
not be issued to a person who is not a stockholder in payment of services rendered. And so, in the case
at bar Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for
services it rendered under the management contract. We sustain the contention of Lepanto that the
understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends
declared as the basis for determining the amount of compensation that should be paid to Nielson, in the
proportion of 10% of the cash value of the stock dividends declared. And this conclusion of Ours finds
support in the-record.
We had adverted to in Our decision that in 1940 there was some dispute between Lepanto and Nielson
regarding the application and interpretation of certain provisions of the original contract particularly
with regard to the 10% participation of Nielson in the net profits, so that some
_______________
18 Towne vs. Eisner, 02 L. Ed. 372.

19 Art. 441. Civil Code of the Philippines.
20 7 Thompson on Corporations 134-135.
570
570
adjustments had to be made. In the minutes of the meeting of the Board of Directors of Lepanto on
August 21. 1940, We read the following:
"The Chairman stated that he believed that it would be better to tie the computation of the 10%
participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to definitely
compute its net participation by the amount of the dividends declared. In addition to the dividend, we
have been setting up a depletion reserve and it does not seem fair to burden the 10% participation of
Nielson with the depletion reserve, as the depletion reserve should not be considered as an operating
expense. After a prolonged discussion, upon motion duly made and seconded, it was
"RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement with
Nielson & Company, Inc., modifying Paragraph V of management contract of January 30, 1937, effective
January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any dividends declared
and paid, when and as paid during the period of the contract and at the end of each year, 10% of any
depletion reserve that may be set up and 10% of any amount expended during the year out of surplus
earnings for capital account." (Italics supplied.)
From the sentence, "The Chairman stated that he believed that it would be better to tie the
computation of the 10% participation of Nielson & Company, Inc. to the dividend, because Nielson will
then be able to definitely compute its net participation by the amount of the dividends declared" the
idea is conveyed that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to make
the value of the dividends declaredwhether the dividends were in cash or in stockas the basis for
determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of
the cash value of the dividends so declared. It does not mean, however, that the compensation of
Nielson would be taken from the amount actually declared as cash dividend to be distributed to the
stockholder, nor f rom the shares of stocks to be issued to the stockholders as stock dividends, but from
the other assets or funds of the corporation which are not burdened by the dividends thus declared. In
other words, if, for example, cash dividends of P300,000.00 are
571

571
declared. Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00 should not be
taken from the P300,000.00 to be distributed as cash dividends to the stockholders but from some other
funds or assets of the corporation which are not included in the amount to answer for the cash
dividends thus declared. This is so because if the P30,000.00 would be taken out f rom the P300,-000.00
declared as cash dividends, then the stockholders would not be getting P300,000.00 as dividends but
only P270,000.00. There would be a dilution of the dividend that corresponds to each share of stock
held by the stockholders. Similarly, if there were stock dividends worth one million pesos that were
declared, which means an issuance of ten million shares at the par value of ten centavos per share, it
does not mean that Nielson would be given 100,000 shares. It only means that Nielson should be given
the equivalent of 10% of the aggregate cash value of those shares issued as stock dividends. That this
was the understanding of Nielson itself is borne out by the fact that in its appeal brief Nielson urged that
it should be paid "P300,000.00 being 10% of the P3,000,000.00 stock dividends declared on November
28, 1949 and August 20, 1950 x x x,"21
We, therefore, reconsider that part of Our decision which declares that Nielson is entitled to shares of
stock worth P300,000.00 based on the stock dividends declared on November 28, 1949 and on August
20, 1950, together with all the fruits accruing thereto. Instead, We declare that Nielson is entitled to
payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money value of the stock
dividends worth P3,000,000.00 which were declared on November 28, 1949 and on August 20, 1950,
with interest thereon at the rate of 6% from February 6, 1958.
6. In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in
awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not be
ascertained and
_______________
21 p. 115, Nielson's Appeal Brief.

572
572
executed without further litigation.
In view of Our ruling in this resolution that Nielson is not entitled to receive shares of stock as stock
dividends in payment of its compensation under the management contract, We do not consider it
necessary to discuss this ground of the motion for reconsideration. The awards in the present case are
all reduced to specific sums of money.
7. In the ninth ground of its motion for reconsideration Lepanto maintains that this Court erred in
rendering judgment or attorney's fees.
The matter of the award of attorney's fees is within the sound discretion of this Court. In Our decision
We have stated the reason why the award of P50,000.00 for attorney's fees is considered by this Court
as reasonable.
Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the sense
that instead of awarding Nielson shares of stock worth P300,000.00 at the par value of ten centavos
(P0.10) per share based on the stock dividends declared by Lepanto on November 28, 1949 and August
20, 1950, together with their fruits, Nielson should be awarded the sum of P300,000.00 which is an
amount equivalent to 10% of the cash value of the stock dividends thus declared, as part of the
compensation due Nielson under the management contract. The dispositive portion of the decision
should, therefore, be amended, to read as follows:
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo and
enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson the different
amounts as specified hereinbelow:
(1) Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% of the cash dividends of
December, 1941, with legal interest thereon f rom the date of the f iling of the complaint;
(2) Two thousand five hundred pesos (P2,500.00), as management fee for January, 1942, with legal
interest thereon from the date of the filing of the complaint;
(3) One hundred fifty thousand pesos (P150.000.00),
573

573
Infantado vs. Liwanag
representing management fees for the sixty-month period of extension of the management contract,
with legal interest thereon from the date of the f iling of the complaint;
(4) One million four hundred thousand pesos (?1,400,000.00), equivalent to 10% of the cash dividends
declared during the period of extension of the management contract, with legal interest thereon from
the date of the filing of the complaint;
(5) Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash value of the stock
dividends declared on November 28, 1949 and August 20, 1950, with legal interest thereon from the
date of the filing of the complaint;
(6) Fifty three thousand nine hundred twenty eight pesos and eighty eight centavos (P53,928.88),
equivalent to 10% of the depletion reserve set up during the period of extension, with legal interest
thereon from the date of the filing of the complaint;
(7) Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos
(P694,364.76), equivalent to 10% of the expenses for capital account during the period of extension,
with legal interest thereon from the date of the filing of the complaint;
(8) Fifty thousand pesos (P50,000.00) as attorney's fees; and
(9) The costs.
It is so ordered.
Concepcion, CJ., Reyes, J.B.L., Dizon, Makalintal, Sanchez and Castro, JJ., concur.
Fernando, Capistrano, Teehankee and Barredo. JJ., did not take part.
Decision reversed.
Nielson & Company, Inc. vs. Lepanto Consolidated Mining Company, 26 SCRA 540, No. L-21601
December 28, 1968
[No. L-5377. December 29, 1954]
MARIA CARLA PIROVANO ET AL., plaintiffs and appellees, vs. THE DE LA RAMA STEAMSHIP Co.,
defendant and appelant.
1.CORPORATIONS; DONATIONS; DONATION GlVEN "OUT OF GRATITUDE FOR SERVICES RENDERED" Is
REMUNERATIVE.A donation given by the corporation to the minor children of its late president
because he "was to a large extent responsible for the rapid and very successful development and
expansion of the activities of this company" is remunerative in nature in contemplation of law.
2.ID.; ID.; PERFECTED DONATION CAN ONLY BE RESCINDED ON LEGAL GROUNDS.Where the donation
made by the corporation has not only been granted in several resolutions duly adopted by its board of
directors but also it has been formally ratified by its stockholders, with the concurrence of its only
creditor, and accepted by the donee, the donation -has reached the stage of perfection which is valid
and binding upon the corporation and as such cannot be rescinded unless there exist legal grounds for
doing so.
3.ID.; ID.; DONATION DISTINGUISHED FROM GRATUITY.While a donation may technically be different
from a gratuity, in substance they are the same. They are even similar to a pension. Thus, it was said
that "A pension is a gratuity only when it is granted for services previously rendered, and which at the
time they were rendered gave rise to no legal obligation." (Words and Phrases, Permanent Edition, p.
675; O'Dea vs. Ck, 169 Pac., 306, 176 Cal., 659.)
336
336
Pirovano, et al. vs. De la Rama Steamship Co.
4.ID.; POWERS OF A CORPORATION; ACTS PERFORMED WITHIN THE POWERS GRANTED ARE NOT
"ULTRA VIRES".Where the corporation was given broad and almost unlimited powers to carry out the
purposes for which it was organized among them, to aid in any other manner any person in the affairs
and prosperity of whom it has a lawful interest, a donation made to the heirs of its late president in
recognition of the valuable services rendered by the latter which had immensely contributed to its
growth, comes within this broad grant of power and can not be considered an ultra vires act.
5.ID.; ID.; "ULTRA VIRES" ILLEGAL ACTS DISTINGUISHED; EFFECT OF RATIFICATION BY STOCKHOLDERS.
Illegal acts of a corporation contemplate the doing of an act which is contrary to law, morals, or public
order, or contravene some rules of public policy or public duty, and are, like similar transactions
between individuals, void. They can not serve as basis of a court action, nor acquire validity by
performance, ratification, or estoppel. On the other hand, ultra vires acts or those which are not illegal
and void ab initio but are merely within the scope of the article of incorporation, are merely voidable
and may become binding and enforceable when ratified by the stockholders.
6.ID.; ID.; "ULTRA VIRES" ACTS; RATIFICATION BY STOCKHOLDERS OF "ULTRA VIRES" ACTS CURES
INFIRMITY.The ratification by the stockholders of an ultra vires act which is not illegal cures the
infirmity of the corporate act and makes it perfectly valid and enforceable, specially so if it is not merely
executory but executed and consummated and no creditors are prejudiced thereby.
7.ATTORNEY'S FEES, WHEN MAY BE AWARDED AS DAMAGES.When the defendant's act or omission
has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest,
attorney's fees may be awarded as damages (Article 2208, paragraph 2, of the new Civil Code).
APPEAL from a judgment of the Court of First Instance of Rizal. Tan, J.

Del Rosario & Garcia for appellant
Vicente J. Francisco for appellees.
337

337
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Rizal declaring the donation made by
the defendant in favor of the minor children of the late Enrico Pirovano of the proceeds of the insurance
policies taken on his life valid and binding, and ordering said defendant to pay to said minor children the
sum of P583,813.59, with interest thereon at the rate of 5 per cent from the date of filing of the
complaint, plus an additional amount equivalent to 20 per cent of said sum of P583,813.59 as damages
by way of attorney's fees, and the costs of action.
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 the proceeds of the
insurance policies taken 011 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.
The trial court resolved all the issues raised by the parties in favor of the plaintiffs and, after considering
the evidence, both oral and documentary, arrived at the following conclusions:
"First.That the contract executed between the plaintiffs and the defendant is a renumerative
donation.
"Second.That said contract or donation is not ultra vires, but an act executed within the powers of the
defendant corporation in accordance with its articles of incorporation and by-laws, sanctioned and
approved by its Board of Directors and stockholders; and subsequently ratified by other subsequent acts
of the defendant company.
"Third.That the said donation is in accordance with the trend of modern and more enlightened
legislation in its treatment of questions between labor and capital.
338
338
"Fourth.That the condition mentioned in the donation is null and void because it depends on the
provisions of Article 1115 of the old Civil Code.
"Fifth.That if the condition is valid, its non-fulfillment is due to the desistance of the defendant
company from obeying and doing the wishes and mandates of the majority of the stockholders.
"Sixth.That the non-payment of the debt in favor of the National Development Company is not due to
the lack of funds, nor to lack of authority, but the desire of the President of the corporation to preserve
and continue the Government participation in the company.
"Seventh.That due demands were made by the plaintiffs and their attorneys and these demands were
rejected for no justifiable or legal grounds."
The important facts which need to be considered for purposes of this appeal may be briefly stated as
follows: Defendant is a corporation duly organized in accordance with law with an authorized capital of
P500,000, divided into 5,000 shares, with a par value of P100 each share. The stockholders were:
Esteban de la Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania de la Rama, 100 shares, and
Eliseo Hervas, Tomas Concepcion, Antonio G. Juanco, and Gaudencio Volasote with 5 shares each.
Leonor and Estefania are daughters of Don Esteban, while the rest his employees. Estefania de la Rama
was married to the late Enrico Pirovano and to them four children were born who are the plaintiffs in
this case.
Enrico Pirovano became the president of the defendant company and under his management the
company grew and progressed until it became a multi-million corporation by the time Pirovano was
executed by the Japanese during the occupation. On May 13, 1941, the capital stock of the corporation
was increased to P2,000,000, after which a 100 per cent stock dividend was declared. Subsequently, or
before the outbreak of the war, new stock dividends of 200 per cent and 331/3 per cent were again
declared. On December 4, 1941, the capital stock was once more increased to P5,000,000. Under
Pirovano's management,
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339
the assets of the company grew and increased f rom an original paid up capital of around P240,000 to
P15,538,024.37 by September 30, 1941 (Exhibit HH).
In the meantime, Don Esteban de la Rama, who practically owned and controlled the stock of the
defendant corporation, distributed his shareholding among his five daughters, namely, Leonor,
Estefania, Lourdes, Lolita and Conchita and his wife Natividad Aguilar so that, at that time, or on July 19,
1946, the stockholding of the corporation stood as follows: Esteban de la Rama, 869 shares, Leonor de la
Rama, 3,376 shares, Estefania de la Rama, 3,368 shares, Lourdes de la Rama, 3,368 shares, Lolita de la
Rama, 3,368 shares, Conchita de la Rama, 3,376 shares, and Natividad Aguilar, 2,136 shares. The other
stockholders, namely, Eliseo Hervas, Tomas Concepcion, Antonio Juanco, and Jose Aguilar, who were
merely employees of Don Esteban, were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco
and Rafael Roces, one share each, because they merely represented the National Development
Company. This company was given representation in the Board of Directors of the corporation because
at that time the latter had an outstanding bonded indebtedness to the National Development Company.
This bonded indebtedness was incurred on February 26, 1940 and was in the amount of P7,500,00. The
bond held by the National Development Company was redeemable within a period of 20 years from
March 1, 1940, bearing interest at the rate of 5 per cent per annum. To secure said bonded
indebtedness, all the assets of the De la Rama Steamship Co., Inc. and properties of Don Esteban de la
Rama, as well as those of the Hijos de I. de la Rama & Co., Inc., a sister corporation owned by Don
Esteban and his family, were mortgaged to the National Development Company (Annexes A, B, C, D of
Exhibit 3, Deed of Trust). Payments made by the corporation under the management of Pirovano
reduced this bonded indebtedness to P3,260,855.77.
340
340
Upon arrangement made with the National Development Company, the outstanding bonded
indebtedness was converted into non-voting preferred shares of stock of the De la Rama company
under the express condition that they would bear a fixed cumulative dividend of 6 per cent per annum
and would be redeemable within 15 years (Exhibits 5 and 7). This conversion was carried out on
September 23, 1949, when the National Development Company executed a "Deed of Termination of
Trust and Release of Mortgage" in favor of the De la Rama company (Exhibit 6). The immediate effect of
this conversion was the released from incumbrance of all the properties of Don Esteban and of the Hijos
de I. de la Rama & Co., Inc., which was apparently f avorable to the interests of the De la Rama
company, but, on the other hand, it resulted in the inconvenience that, as holder of the preferred stock,
the National Development Company, was given the right to 40 percent of the membership of the Board
of Directors of the De la Rama company, which meant an increase in the representation of the National
Development Company from 2 to 4 of the 9 members of- said Board of Directors.
The first resolution granting to the Pirovano children the proceeds of the insurance policies taken on his
life by the defendant company was adopted by the Board of Directors at a meeting held on July 10,
1946, (Exhibit B). This grant was called in the resolution as "Special Payment to Minor Heirs of the late
Enrico Pirovano". Because of its direct bearing on the issues involved in this case, said resolution is
hereunder reproduced in toto:
"SPECIAL PAYMENT TO MINOR HEIRS OF THE LATE ENRICO PIROVANO
"The President stated that the principal purpose for which the meeting had been called was to discuss
the advisability of making some form of compensation to the minor heirs of the late Enrico Pirovano,
former President and General Manager of the Company. As every member of the Board knows, said the
President, the late Enrico Pirovano who was largely responsible for the very success-
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341
ful development of the activities of the Company prior to the war, was killed by the Japanese in Manila
sometime in 1944 leaving as his only heirs four minor children, Maria Carla, Esteban, Enrico and John
Albert. Early in 1941, explained the President, the Company had insured the life of. Mr. Pirovano for a
million pesos. Following the occupation of the Philippines by Japanese forces the Company was, unable
to pay the premiums on those policies issued by Filipino companies and these policies had lapsed. But
with regards to the York Office of the De la Rama Steamship Co., Inc. had kept up payment of the
premiums from year to year. The payments made on account of these premiums, however, are very
small compared to the amount which the Company will now receive as a result of Mr. Pirovano's death.
The President proposed therefore that out of the proceeds of these policies the sum of P400,000 be set
aside for the minor children of the deceased, said sum of money to be convertible into 4,000 shares of
stock of the Company, at par, or 1,000 shares for each child. ' This proposal, explained the President as
being made by him upon suggestion of President Roxas, but, he added, that he himself was very much in
favor of it also. On motion of Miss Leonor de la Rama duly seconded by Mrs. Lourdes de la Rama de
Osmea, the following resolution was, thereupon, unanimously approved:
'Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship
Company, died In Manila sometime in November, 1944:
'Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of this company;
'Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various Philippine and
American Life Insurance companies for the total sum of P1,000,000;
'Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano . and four minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano;
'Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and proper that
this company which owes so much to the deceased should make some provision for his children;
'Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for a period of only 4
years so that it will receive from the insurance companies sums of money greatly in excess of the
premiums paid by this company.
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'Be it resolved, That out of the proceeds to be collected from the life insurance policies on the life of the
late Enrico Pirovano, the sum of P400,000 be set aside for equal division among the 4 minor children of
the deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano, which sum of
money shall be convertible into shares of stock of the De la Rama Steamship Company, at par and, for
that purpose, that the present registered stockholders of the corporation be requested to waive their
preemptive right to 4,000 shares of the unissued stock of the company in order to enable each of the 4
minor heirs of the deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano,
to obtain 1,000 shares at par;
'Resolved, further, that in view of the fact that under the provisions of the indenture with the National
Development Company, it is necessary that action herein proposed be confirmed by the Board of
Directors of that company, the Secretary is hereby instructed to send a copy of this resolution to the
proper officers of the National Development Company for appropriate action.' (Exhibit B)
The above resolution, which was adopted on July 10, 1946, was submitted to the stockholders of the De
la Rama company at a meeting properly convened, and on that same date, July 10, 1946, the same was
duly approved.
It appears that, although Don Esteban and the Members of his family were agreeable to giving to the
Pirovano children the amount of P400,000 out of the proceeds of the insurance policies taken on the life
of Enrico Pirovano, they did not realize that when they provided in the above referred two resolutions
that said amount should be paid in the form of shares of stock, they would be actually giving to the
Pirovano children more than what they intended to give. This came about when Lourdes de la Rama,
wife of Sergio Osmea, Jr., showed to the latter copies of said resolutions and asked him to explain their
import and meaning, and it was then that Osmea explained that because the value then of the shares
of stock was actually 3.6 times their par value, the donation, although purporting to be only P400,000,
would actually amount to a total of P1,440,000. He further explained that if the Pirovano children would
be given shares of stock in lieu of the amount
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to be donated, the voting strength of the five daughters of Don Esteban in the company would be
adversely affected in the sense that Mrs. Pirovano would have a voting power twice as much as that of
her sisters. This caused Lourdes de la Rama to write to the secretary of the corporation, Atty. Marcial
Lichauco, asking him to cancel the waiver she supposedly gave of her pre-emptive rights. Osmea
elaborated on this matter at the annual meeting of the stockholders held on December 12,1946, but at
said meeting it was decided to leave the matter in abeyance pending further action on the part of the
members of the De la Rama family.
Osmea, in the meantime, took up the matter with Don Esteban and, as a consequence, the latter, on
December 30, 1946, addressed to Marcial Lichauco a letter stating, among other things, that "in view of
the total lack of understanding by me and my daughters of the two Resolutions abovementioned,
namely, Directors' and Stockholders' dated July 10, 1946, as finally resolved by the majority of the
Stockholders and Directors present yesterday, that you consider the abovementioned resolutions
nullified." (Exhibit CC)
On January 6, 1947, the Board of Directors of the De la Rama company, as a consequence of the change
of attitude of Don Esteban, adopted a resolution changing the form of the donation to the Pirovano
children from a donation of 4,000 shares of stock as originally planned into a renunciation in favor of the
children of all the company's "right, title, and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies", subject to the express condition that said proceeds should be
retained by the company as a loan drawing interest at the rate of 5 per cent per annum and payable to
the Pirovano children after the company "shall have first settled in full the balance of its present
remaining bonded indebtedness in the sum of approximately P5,000,000" (Exhibit C). This resolution
was concurred in by the repre-
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Pirovano, et al. vs. De la, Rama Steamship Co.
sentatives of the National Development Company. The pertinent portion of the resolution reads as
follows:
'Be it resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it hereby
renounces, all of its right, title and interest as beneficiary in and to the proceeds of the abovementioned
life insurance policies in favor of Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano,
subject to the terms and conditions hereinafter provided;
'That the proceeds of said insurance policies shall be retained by the Company in the nature of a loan
drawing interest at the rate of 5 per cent per annum from the date of receipt of payment by the
Company from the various insurance companies above-mentioned until the time the same amounts are
paid to the minor heirs of Enrico Pirovano previously mentioned;
'That all amounts received from the above-mentioned policies shall be divided equally among the minor
heirs of said Enrico Pirovano;
'That the company shall proceed to pay the proceeds of said insurance policies plus interests that may
have accrued to each of the heirs of the said Enrico Pirovano or their duly appointed representatives
after the Company shall have first settled in full the balance of its present remaining bonded
indebtedness in the sum of approximately P5,000,000.'
The above resolution was carried out by the company and Mrs. Estefania R. Pirovano, the latter acting as
guardian of her children, by executing a Memorandum Agreement on January 10, 1947 and June 17,
1947, respectively, stating therein that the De la Rama Steamship Co., Inc. shall enter in its books as a
loan the proceeds of the life insurance policies taken on the life of Pirovano totalling $321,500, which
loan would earn interest at the rate of 5 per cen per annum. Mrs. Pirovano, in executing the agreement,
acted with the express authority granted to her by the court in an order dated March 26, 1947.
On June 24, 1947, the Board of Directors approved a resolution providing therein that instead of the
interest on the loan being payable, together with the principal, only after the company shall have first
settled in full its bonded indebtedness, said interest may be paid to
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the Pirovano children "whenever the company is in a position to meet said obligation" (Exhibit D), and
on February 26, 1948, Mrs. Pirovano executed a public document in which she formally accepted the
donation (Exhibit H). The De la Rama company took "official notice" of this formal acceptance at a
meeting held by its Board of Directors on February 26, 1948.
In connection with the above negotiations, the Board of Directors took up at its meeting on July 25,
1949, the proposition of Mrs. Pirovano to buy the house at New Rochelle, New York, owned by the
Demwood Realty, a subsidiary of the De la Rama company at its original cost of $75,000, which would be
paid from the funds held in trust belonging to her minor children. After a brief discussion relative to the
matter, the proposition was approved in a resolution adopted on the same date.
The formal transfer was made in an agreement signed on September 5, 1949 by Mrs. Pirovano, as
guardian of her children, and by the De la Rama company, represented by its new General Manager,
Sergio Osmea, Jr. The transfer of this property was approved by the court in its order of September 20,
1949.
On September 13, 1949, or two years and 3 months after the donation had been approved in the
various resolutions herein above mentioned, the stockholders of the De la Rama company formally
ratified the donation (Exhibit E), with certain clarifying modifications, including the resolution approving
the transfer of the Demwood property to the Pirovano children. The clarifying modifications are quoted
hereunder:
"I. That the payment of the above-mentioned donation shall not be effected until such time as the
Company shall have first duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 with the National Development Company, or fully redeemed the preferred shares of
stock in the amount which shall be issued to the National Development Company in lieu thereof;
"2. That any and all taxes, legal fees, and expenses in any way connected with the above transaction
shall be chargeable and
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Pirovano, et al vs. De la, Rama Steamship Co.
deducted from the proceeds of the life insurance policies mentioned in the resolutions of the Board of
Directors," (Exhibit E).
Sometime in March, 1950, the President of the corporation, Sergio Osmea, Jr., addressed an inquiry to
the Securities and Exchange Commission asking for opinion regarding the validity of the donation of the
proceeds of the insurance policies to the Pirovano children. On June 20, 1950 that office rendered its
opinion holding that the donation was void because the corporation could not dispose of its assets by
gift and therefore the corporation acted beyond the scope of its corporate powers. This opinion was
submitted to the Board of Directors at its meeting on July 12, 1950, on which occasion the president
recommended that other legal ways be studied whereby the donation could be carried out. On
September 14, 1950, another meeting was held to discuss the propriety of the donation. At this meeting
the president expressed the view that, since the corporation was not authorized by its charter to make
the donation to the Pirovano children and the majority of the stockholders was in favor of making
provision for said children, the manner he believed this could be done would be to declare a cash
dividend in favor of the stockholders in the exact amount of the insurance proceeds and thereafter have
the stockholders make the donation to the children in their individual capacity. Notwithstanding this
proposal of the president, the board took no action on the matter, and on March 8, 1951, at a
stockholders' meeting convened on that date, the majority of the stockholders voted to revoke the
resolution approving the donation to the Pirovano children. The pertinent portion of the resolution
reads as follows:
"Be it resolved, as it is hereby resolved, that in view of the failure of compliance with the above
conditions to which the above donation was made subject, and in view of the opinion of the Securities &
Exchange Commissioner, the stockholders revoke, rescind and annul, as they do hereby revoke, rescind
and annul, its ratification and approval on September 13, 1949 of the
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aforementioned resolution of the Board of Directors of January 6, 1947, as amended on June 24, 1947."
(Exhibit T)
In view of the resolution declaring that the corporation failed to comply with the condition set for the
effectivity of the donation and revoking at the same time the approval given to it by the corporation,
and considering that the corporation can no longer set aside said donation because it had long been
perfected and consummated, the minor children of the late Enrico Pirovano, represented by their
mother and guardian, Estefania R. de Pirovano, demanded the payment of the credit due them as of
December 31, 1951, amounting to P564,980.89, and this payment having been refused, they instituted
the present action 111 the Court of First Instance of Rizal wherein they prayed that they be granted an
alternative relief of the following tenor: (1) sentencing defendant to pay to the plaintiff the sum of
P564,980.89 as of December 31, 1951, with the corresponding interest thereon; (2) as an alternative
relief, sentencing defendant to pay to the plaintiffs the interests on said sum of P564,980.89 at the rate
of 5 per cent per annum, and the sum of P564,980.89 after the redemption of the preferred shares of
the corporation held by the National Development Company; and (3) in any event, sentencing defendant
to pay the plaintiffs damages in the amount of not less than 20 per cent of the sum that may be
adjudged to the plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be determined in order to reach a decision in
this appeal are: (1) Is the grant of the proceeds of the insurance policies taken on the life of the late
Enrico Pirovano as embodied in the resolution of the Board of Directors of defendant corporation
adopted on January 6, 1947 and June 24, 1947 a remunerative donation as found by the lower court?;
(2) In the affirmative case, has that donation been perfected before its rescission or
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nullification by the stockholders of the corporation on March 8, 1951?; (3) Can defendant corporation
give by way of donation the proceeds of said insurance policies to the minor children of the late Enrico
Pirovano under the law or its articles of incorporation, or is that donation an ultra vires act?; and (4) has
the defendant corporation, by the acts it performed subsequent to the granting of the donation,
deliberately prevented the fulfillment of the condition precedent to the payment of said donation such
that it can be said it has forfeited its right to demand its fulfillment and has made the donation entirely
due and demandable?
We will discuss these issues separately.
1. To determine the nature of the grant made by the defendant corporation to the minor children of the
late Enrico Pirovano, we do not need to go far nor dig into the voluminous record that lies at the bottom
of this case. We do not even need to inquire into the interest which has allegedly been shown by
President Roxas in the welfare of the children of his good friend Enrico Pirovano. Whether President
Roxas has taken the initiative in the move to give something to said children which later culminated in
the donation now in dispute, is of no moment for the fact is that, from the mass of evidence on hand,
such a donation has been given the full indorsement and encouraging support by Don Esteban de la
Rama who was practically the owner of the corporation. We only need to fall back to accomplish this
purpose on the several resolutions of the Board of Directors of the corporation containing said grant for
they clearly state the reasons and purposes why the donation has been given.
Before we proceed further, it is convenient to state here in passing that, before the Board of Directors
had approved its resolution of January 6, 1947, as later amended by another resolution adopted on June
24, 1947, the corporation had already decided to give to the minor
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children of the late Enrico Pirovano the sum of P400,000 out of the proceeds of the insurance policies
taken on his life in the form of shares, and that when this form was considered objectionable because its
result and effect would be to give to said children a much greater amount considering the value then of
the stock of the corporation, the Board of Directors decided to amend the donation in the form and
under the terms stated in the aforesaid resolutions. Thus, in the original resolution approved by the
Board of Directors on July 10, 1946, wherein the reasons for granting the donation to the minor children
of the late Enrico Pirovano were clearly expressed, we find out the following revealing statements:
'Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship
Company, died in Manila sometime in November, 1944;
'Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of this company;
'Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various Philippine and
American Life Insurance companies for the total sum of P1,000,000;
'Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and 4 minor children, to
wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano;
this company which owes so much to the deceased should make some provision for his children;
'Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for a period of only 4
years so that it will receive from the insurance companies sums of money greatly in excess of the
premiums paid by the company,'
Again, in the resolution approved by the Board of Directors on January 6, 1947, we also find the
following expressive statements which are but a reiteration of those already expressed in the original
resolution:
'Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship Co.,
Inc., died in Manila sometime during the latter part of the year 1944;
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'Whereas, the said Enrico Pirovano was to a large extent responsible for the rapid and very successful
development and expansion of the activities of this company;
'Whereas, early in 1941, the life of the said Enrico Pirovano was insured in various life insurance
companies, to wit: * * *
'Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit: Esteban, Maria Carla, Enrico
and John Albert, all surnamed Pirovano; and
this Company which owes so much to the deceased should make some provision for his children;
'Be it resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it hereby
renounces, * * *.'
From the above it clearly appears that the corporation thought of giving the donation to the children of
the late Enrico Pirovano because he "was to a large extent responsible for the rapid and very successful
development and expansion of the activities of this company"; and also because he "left practically
nothing to his heirs and it is but fit and proper that this company which owes so much to the deceased
should make some provision to his children", and so the donation was given "out of gratitude to the late
Enrico Pirovano." We do not need to stretch our imagination to see that a grant or donation given under
these circumstances is remunerative in nature in contemplation of law.
"That which is made to a person in consideration of his merits or for services rendered to the donor,
provided they do not constitute recoverable debts, or that in which a burden less than the value of the
thing given is imposed upon the donee, is also a donation." (Art. 619, old Civil Code.)
"In donations made to a person for services rendered to the donor, the donor's will is moved by acts
which directly benefit him. The motivating cause is gratitude, acknowledgement of a favor, a desire to
compensate. A donation made to one who saved the donor's life, or a lawyer who renounced his fees
for services rendered to the donor, would fall under this class of donations. These donations are called
remunerative donations." (Sinco & Capistrano, The Civil Code, Vol. 1, p. 676; Manresa, 5th ed., pp. 72-
73.)
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Pirovano, et al. vs. De to Rama Steamship Co.
2. The next question to be determined is whether the donation has been perfected such that the
corporation can no longer rescind it even if it wanted to. The answer to this question cannot but be in
the affirmative considering that the same has not only been granted in several resolutions duly adopted
by the Board of Directors but it has been formally ratified by the stockholders of the defendant
corporation, and in all these corporate acts the concurrence of the representatives of the National
Development Company, the only creditor whose interest may be affected by the donation, has been
expressly given. The corporation has even gone further. It actually transferred the ownership of the
credit subject of donation to the Pirovano children with the express understanding that the money
would be retained by the corporation subject to the condition that the latter would pay interest thereon
at the rate of 5 per cent per annum payable whenever said corporation may be in a financial position to
do so. Thus, the following acts of the corporation as reflected from the evidence bear this out:
(a) The donation was embodied in a resolution duly approved by the Board of Directors on January 6,
1947. In this resolution, the representatives of the National Development Company, have given their
concurrence. This is the only creditor which can be considered as being adversely affected by the
donation. The resolution of June 24, 1947 did not modify the substance of the former resolution for it
merely provided that, instead of the interest on the loan being payable, together with the principal, only
after the corporation had first settled in full its bonded indebtedness, said interest would be paid
"whenever the company is in a position to meet said obligation."
(b) The resolution of January 6, 1947 was actually carried out when the company and Mrs. Estefania R.
Pirovano executed a memorandum agreement stating therein that the proceeds of the insurance
policies would be entered in the books of the corporation as a loan which would
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bear an interest at the rate of 5 per cent per annum, and said agreement was signed by Mrs. Pirovano as
judicial guardian of her children after she had been expressly authorized by the court to accept the
donation in behalf of her children.
(c) While the donation can be considered as duly executed by the execution of the document stated in
the preceding paragraph, and by the entry in the books of the corporation of the donation as a loan, a
further record of said execution was made when Mrs. Pirovano executed a public document on February
26, 1948 making a similar acceptance of the donation. And this acceptance was officially recorded by the
corporation when on the same date its Board of Directors approved a resolution taking "official notice"
of said acceptance.
(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano to buy the house at
New Rochelle, New York, owned by a subsidiary of the corporation at the cost of $75,000 which would
be paid from the sum held in trust belonging to her minor children. And this agreement was actually
carried out in a document signed by the general manager of the corporation and by Mrs. Pirovano, who
acted on the matter with the express authority of the court.
(e) And on September 30, 1949, or two years and 3 months after the donation had been executed, the
stockholders of the defendant corporation formally ratified and gave approval to the donation as
embodied in the resolutions above referred to, subject to certain modifications which did not materially
affect the nature of the donation.
There can therefore be no doubt from the foregoing relation of facts that the donation was a corporate
act carried out by the corporation not only with the sanction of its Board of Directors but also of its
stockholders. It is evident that the donation has reached the stage of perfection which is valid and
binding upon the corporation and as such cannot be rescinded unless there exist legal
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grounds for doing so. In this case, we see none. The two reasons given for the rescission of said donation
in the resolution of the corporation adopted on March 8, 1951, to wit: that the corporation failed to
comply with the conditions to which the above donation was made subject, and that in the opinion of
the Securities and Exchange Commission said donation is ultra vires, are not, in our opinion, valid and
legal as to justify the rescission of a perfected donation. These reasons, as we will discuss in the latter
part of this decision, cannot be invoked by the corporation to rescind or set at naught the donation, and
the only way by which this can be done is to show that the donee has been in default, or that the
donation has not been validly executed, or is illegal or ultra vires, and such is not the case as we will see
hereafter. We therefore declare that the resolution approved by the stockholders of the defendant
corporation on March 8, 1951 did not and cannot have the effect of nullifying the donation in question.
3. The third question to be determined is: Can defendant corporation give by way of donation the
proceeds of said insurance policies to the minor children of the late Enrico Pirovano under the law or its
articles of incorporation, or is that donation an ultra vires act? To answer this question it is important for
us to examine the articles of incorporation of the De la Rama company to see if the act or donation is
outside of their scope. Paragraph second of said articles provides:
"Second.The purposes for which said corporation is formed are:
(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or vessels, together with
equipments and furniture therefor, and to employ the same in conveyance and carriage of goods, wares
and merchandise of every description, and of passengers upon the high seas.
(b) To sell, let, charter, or otherwise dispose of the said vessels or other property of the company.
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(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its branches.
(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and other things which the
company may deem necessary or advisable to be purchased or leased for the necessary and proper
purposes of the business of the company, and from time to time to sell and dispose of the same.
(f) To promote any company or companies for the purposes of acquiring all or any of the property or
liabilities of this company, or both, or for any other purpose which may seem directly or indirectly
calculated to benefit the company.
(g) To invest and deal with the moneys of the company not immediately required, in such manner as
from time to time may be determined.
(h) To borrow, or raise, or secure the payment of money in such manner as the company shall think fit.
(i) Generally, to do all such other things and to transact all business as may be directly or indirectly
incidental or conducive to the attainment of the above object, or any of them respectively.
(j) Without in any particular limiting or restricting any of the objects and powers of the corporation, it is
hereby expressly declared and provided that the corporation shall have power to issue bonds and other
obligations, to mortgage or pledge any stocks, bonds or other obligations or any property which may be
acquired by said corporation; to secure any bonds, guarantees or other obligations by it issued or
incurred; to lend money or credit to and to aid in any other manner any person, association, or
corporation of which any obligation or in which any interest is held by this corporation or in the affairs
or prosperity of which this corporation has a lawful interest, and to do such acts and things as may be
necessary to protect, preserve, improve, or enhance the value of any such obligation or interest; and, in
general, to do such other acts in connection with the purposes for which this corporation has been
formed which is calculated to promote the interest of the corporation or to enhance the value of its
property and to exercise all the rights, powers and privileges which are now or may hereafter be
conferred by the laws of the Philippines upon corporations formed under the Philippine Corporation
Act; to execute from time to time general or special powers of attorney to persons, firms, associations
or corporations either in the Philippines, in
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the United States, or in any other country and to revoke the same as and when the Directors may
determine and to do any and or all of the things hereinafter set forth and to the same extent as natural
persons might or could do."
After a careful perusal of the provisions above quoted we find that the corporation was given broad and
almost unlimited powers to carry out the purposes for which it was organized among them, (1) "To
invest and deal with the moneys of the company not immediately required, in such manner as from time
to time may be determined" and, (2) "to aid in any other manner any person, association, or corporation
of which any obligation or in which any interest is held by this corporation or in the affairs or prosperity
of which this corporation has a lawful interest." The world deal is broad enough to include any manner
of disposition, and ref ers to moneys not immediately required by the corporation, and such disposition
may be made in such manner as from time to time may be deter-mined by the corporations. The
donation in question undoubtedly comes within the scope of this broad power f or it is a fact appearing
in the evidence that the insurance proceeds were not immediately required when they were given
away. In fact, the evidence shows that the corpora-tion declared a 100 per cent cash dividend, or
P2,000,000, and later on another 30 per cent cash dividend. This is clear proof of the solvency of the
corporation. It may be that, as insinuated, Don Esteban wanted to make use of the insurance money to
rehabilitate the central owned by a sister corporation, known as Hijos de I. de la Rama & Co., Inc.,
situated in Bago, Negros Occidental, but this, far from reflecting against the solvency of the De la Rama
company, only shows that the funds were not needed by the corporation.
Under the second broad power we have above stated, that is, to aid in any other manner any person in
the affairs and prosperity of whom the corporation has a lawful interest, the record of this case is
replete with instances which clearly show that the corporation knew well its
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scope and meaning so much so that, with the exception of the instant case, no one has lifted a finger to
dispute their validity. Thus, under this broad grant of power, this corporation paid to the heirs of one
Florentino Nonato, an engineer of one of the ships of the company who died in Japan, a gratuity of
P7,000, equivalent to one month salary for each year of service. It also gave to Ramon Pons, a captain of
one of its ships, a retirement gratuity equivalent to one month salary for every year of service, the same
to be based upon his highest salary. And it contributed P2,000 to the fund raised by the Associated
Steamship Lines for the widow of the late Francis Gispert, secretary of said Association, of which the De
la Rama Steamship Co., Inc., was a member along with about 30 other steamship companies. In this
instance, Gispert was not even an employee of the corporation. And invoking this vast power, the
corporation even went to the extent of contributing P100,000 to the Liberal Party campaign funds,
apparently in the hope that by conserving its cordial relations with that party it might continue to retain
the patronage of the administration. All these acts executed before and after the donation in question
have never been questioned and were willingly and actually carried out.
We don't see much distinction between these acts of generosity or of benevolence extended to some
employees -of the corporation, and even to some in whom the corporation was merely interested
because of certain moral or political considerations, and the donation which the corporation has seen fit
to give to the children of the late Enrico Pirovano from the point of view of the power of the corporation
as expressed in its articles of incorporation. And if the former had been sanctioned and had been
considered valid and intra vires, we see no plausible reason why the latter should now be deemed ultra
vires. It may perhaps be argued that the donation given to the children of the late Enrico Pirovano is so
large and dis-
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proportionate that it can hardly be considered a pension or gratuity that can be placed on a par with the
instances above mentioned, but this argument overlooks one consideration: the gratuity here given was
not merely motivated by pure liberality or act of generosity, but by a deep sense of recognition of the
valuable services rendered by the late Enrico Pirovano which had immensely contributed to the growth
of the corporation to the extent that from its humble capitalization it blossomed into a multi-million
corporation that it is today. In the words of the very resolutions granting the donation or gratuity, said
donation was given not only because the company was so indebted to him that it saw fit and proper to
make provisions for his children, but it did so out of a sense of gratitude. Another factor that we should
bear in mind is that Enrico Pirovano was not only a high official of the company but was at the same
time a member of the De la Rama family, and the recipient of the donation are the grandchildren of Don
Esteban de la Rama. This, we may say, is the motivating root cause behind the grant of this bounty.
It may be contended that a donation is different from a gratuity. While technically this may be so in
substance they are the same. They are even similar to a pension. Thus, it was-said that "A pension is a
gratuity only when it is granted for services previously rendered, and which at the time they were
rendered gave rise to no legal obligation." (Words & Phrases, Permanent Edition, p. 675; O'Dea vs. Cook,
169 Pac., 306, 176 Cal., 659.) Or stated in another way, a "Gratuity is a mere bounty given by the
Government in consideration or recognition of meritorious services and springs from the appreciation
and graciousness of the Government", (Ilagan vs. Ilaya, G. R. No. 33507, Dec. 20, 1930) or "A gratuity is
something given freely, or without recompense, a gift, something voluntarily given in return for a favor
or services; a bounty; a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77
Phil., 533, 43 Off. Gaz. p. 4633. We do not
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see much difference between this definition of gratuity and a remunerative donation contemplated in
the Civil Code. In essence they are the same. Such being the case, it may be said that this donation is
gratuity in a large sense for it was given for valuable services rendered, and in this sense the same
cannot be considered an ultra vires act in the light of the following authorities:
"Indeed, some American cases seem to hold that the giving of a pure gratuity to directors is ultra vires of
the corporation, so that it could not be legalized even by the approval of the shareholders; but this
position has no sound reason to support it, and is opposed to the weight of authority (Suffaker vs.
Krieger's Assignee, 53 S. W. Rep, 288; 107 Ky. 200; 46 L. R. A. 384)."
"But although business corporations cannot contribute to charity or benevolence, yet they are not
required always to insist on the full extent of their legal rights. They are not forbidden from recognizing
moral obligations of which strict law takes no cognizance. They are not prohibited from establishing a
reputation for broad, liberal, equitable dealing which may stand them in good stead in competition with
less fair rivals. Thus, an incorporated fire insurance company whose policies except losses from
explosions may nevertheless pay a loss from that cause when other companies are accustomed to do so,
such liberal dealing being deemed conducive to the prosperity of the corporation." (Modern Law of
Corporations, Machen, Vol. 1, p. 81)
"So, a bank may grant a five years' pension to the family of one of its officers. In all cases of these sorts,
the amount of the gratuity rests entirely within the discretion of the company, unless indeed it be
altogether out of reason and fitness. But where the company has ceased to be a going concern, this
power to make gifts or presents is at an end." (Modern Law 01 Corporations, Machen, Vol. 1, p. 82.)
"Payment of Gratuities out of Capital.There seems on principle no reason to doubt that gifts or
gratuities wherever they are lawful may be paid out of capital as well as out of profits." (Modern Law of
Corporations, Machen, Vol. 1, p. 83.)
"Whether desirable to supplement implied powers of this kind by express provisions.Enough has been
said to show that the implied powers of a corporation to give gratuities to its servants and officers, as
well as to strangers, are ample, so that there is
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Pirovano, et al. vs, De la Rama Steamship Co.
therefore no need to supplement them by express provisions." (Modern Law of Corporations, Machen,
Vol. 1, p. 83.) 1
Granting arguendo that the donation given to the Pirovano children is outside the scope of the powers
of the defendant corporation, or the scope of the powers that it may exercise under the law, or it is an
ultra vires act, still it may be said that the same cannot be invalidated, or declared legally ineffective for
that reason alone, it appearing that the donation represents not only the act of the Board of Directors
but of the stockholders themselves as shown by the fact that the same has been expressly ratified in a
resolution duly approved by the latter. By this ratification, the infirmity of the corporate act, if any has
been obliterated thereby making the act perfectly valid and enforceable. This is specially so if the
donation is not merely executory but executed and consummated and no creditors are prejudiced, or if
there are creditors affected, the later have expressly given their conformity.
In making this pronouncement, advertence should be made of the nature of the ultra vires act that is in
question. A little digression needs be made on this matter to show the different legal effects that may
result consequent upon the performance of a particular ultra vires act on the part of the corporation.
Many authorities may be cited interpreting or defining the meaning, extent, and scope of an ultra vires
act, but all of them are uniform and unanimous that the same may be either an act performed merely
outside the scope of the powers granted to it by its articles of incorporation, or one which is contrary to
law or violative of any principle which would void any contract whether done individually or collectively.
In
_______________
1 Specific cases holding the same view may be cited, such as Gray & Farr vs. Carlile, 2 West Week Rep.
526; Wiseman vs. Musgrane, 309 Mich. 523; Anglo-American Equities Co vs. E. H. Rollins & Sons, 258
App. Div. 878, 282 NY 782; Koplar vs. Warnes Bros. Pictures, 9 F Supp. 173; Heinz vs. National Bank, 237
Fed. 942; Henderson vs. Bank of Australasia, L. R. 40 Ch. Div. (Eng.) 170.
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360
other words, a distinction should be made between corporate acts or contracts which are illegal and
those which are merely ultra vires. The former contemplates the doing of an act which is contrary to
law, morals, or public order, or contravene some rules of public policy or public duty, and are, like
similar transactions between individuals, void. They cannot serve as basis of a court action, nor acquire
validity by performance, ratification, or estoppel. Mere ultra vires acts, on the other hand, or those
which are not illegal and void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when ratified by the
stockholders.
"Strictly speaking, an ultra vires act is one outside the scope of the powers conferred by the legislature,
and although the term has been used indiscriminately, it is properly distinguishable from acts which are
illegal, in excess or abuse of power, or executed in an unauthorized manner, or acts within corporate
powers but outside the authority of particular officers or agents" (19 C. J. S. 419).
"Corporate transactions which are illegal because prohibited by statute or against public policy are
ordinarily void and unenforceable regardless of part performance, ratification, or estoppel; but general
prohibitions against exceeding corporate powers and prohibitions intended to protect a particular class
or specifying the consequences of violation may not preclude enforcement of the transaction and an
action may be had for the part unaffected by the illegality or for equitable restitution." (19 C. J. S. 421.)
"Generally, a transaction within corporate powers but executed in an irregular or unauthorized manner
is voidable only, and may become enforceable by reason of ratification or express or implied assent by
the stockholders or by reason of estoppel of the corporation or the other party to the transaction to
raise the objection, particularly where the benefits are retained.
"As appears in paragraphs 960-964 supra, the general rule is that a corporation must act in the manner
and with the formalities, if any, prescribed by its charter or by the general law. However, a corporation
transaction or contract which is within the corporation powers, which is neither wrong in itself nor
against public policy, but which is defective from a failure to observe in its execution a requirement of
law enacted for the benefit or protection of a certain class, is voidable only and is valid until avoided,
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not void until validated; the parties for whose benefit the requirement was enacted may ratify it or be
estopped to assert its invalidity, and third persons acting in good faith are not usually affected by an
irregularity on the part of the corporation in the exercise of its granted powers." (19 C. J. S., 423-24.)
It is true that there are authorities which hold that ultra vires acts, or those performed beyond the
powers conferred upon the corporation either by law or by its articles of incorporation, are not only
voidable, but wholly void and of no legal effect, and that such acts cannot be validated by ratification or
be the basis of any action in court; but such ruling does not constitute the weight of authority, the
reason being that they fail to make the important distinction we have above adverted to. Because of the
failure to consider such important distinction, such rule has been rejected by most of the state courts
and even by the modern treatises on corporations (7 Fletcher, Cyc. Corps., 563-564). And now it can be
said that the majority of the cases hold that acts which are merely ultra vires, or acts which are not
illegal, may be ratified by the stockholders of a corporation (Brooklyn Heights R. Co. vs. Brooklyn City R.
Co., 135 N. Y. Supp. 1001).
"Strictly speaking, an act of a corporation outside of its charter powers is just as such ultra vires where
all the stockholders consent thereto as in a case where none of the stockholders expressly or impliedly
consent, and it is generally held that an ultra vires act cannot be ratified so as to make it valid, even
though all the stockholders consent thereto; but inasmuch as the stockholders in reality constitute the
corporation, it should, it would seem, be estopped to allege ultra vires, and it is generally so held where
there are no creditors, or the creditors are not injured thereby, and where the rights of the state or the
public are 'not involved, unless the act is not only ultra vires but in addition illegal and void. Of course,
such consent of all the stockholders cannot adversely affect creditors of the corporation nor preclude a
proper attack by the state because of such ultra vires act." (7 Fletcher Corp., Sec. 3432, p. 585).
Since it is not contended that the donation under consideration is illegal, or contrary to any of the
express
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362
provisions of the articles of incorporation, nor prejudicial to the creditors of the defendant corporation,
we cannot but logically conclude, on the strength of the authorities we have quoted above, that said
donation, even if ultra vires in the supposition we have adverted to, is not void, and if voidable its
infirmity has been cured by ratification and subsequent acts of the defendant corporation. The
defendant corporation, therefore, is now prevented or estopped from contesting the validity of the
donation. This is specially so in this case when the very directors who conceived the idea of granting said
donation are practically the stockholders themselves, with few nominal exception. This applies to the
new stockholder Jose Cojuangco who acquired his interest after the donation has been made because of
the rule that a "purchaser of shares of stock cannot avoid ultra vires acts of the corporation authorized
by its vendor, except those done after the purchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603;
Pascual vs. Del Saz Orozco, 19 Phil., 82.) Indeed, how can the stockholders now pretend to revoke the
donation which has been partly consummated? How can the corporation now set at naught the transfer
made to Mrs. Pirovano of the property in New York, U. S. A., the price of which was paid by her but of
the proceeds of the insurance policies given as a donation. To allow the corporation to undo what it has
done would not only be most unfair but would contravene the well-settled doctrine that the defense of
ultra vires cannot be set up or availed of in completed transactions (7 Fletcher, Cyc. Corps. Section 3497,
p. 652; 19 C. J. S., 431).
4. We now come to the fourth and last question that the defendant corporation, by the acts it has
performed subsequent to the granting of the donation, deliberately prevented the fulfillment of the
condition precedent to the payment of said donation such that it can be said it has forfeited its right to
demand its fulfillment and has made the donation entirely due and demandable.
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363
It should be recalled that the original resolution of the Board of Directors adopted on July 10, 1946
which provided for the donation of P400,000 out of the proceeds which the De la Rama company would
collect on the insurance policies taken on the life of the late Enrico Pirovano was, as already stated
above, amended on January 6, 1947 to include, among the conditions therein provided, that the
corporation shall proceed to pay said amount, as well as the interest due thereon, after it shall have
settled in full the balance of its bonded indebtedness in the sum of P5,000,000. It should also be recalled
that on September 13, 1949, or more than 2 years after the last amendment referred to above, the
stockholders adopted another resolution whereby they formally ratified said donation but subject to the
following clarifications: (1) that the amount of the donation shall not be effected until such time as the
company shall have first duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 to the National Development Company, or shall have first fully redeemed the preferred
shares of stock in the amount to be issued to said company in lieu thereof, and (2) that any and all taxes,
legal fees, and expenses connected with the transaction shall be chargeable from the proceeds of said
insurance policies.
The trial court, in considering these conditions in the light of the acts subsequently performed by the
corporation in connection with the proceeds of the insurance policies, considered said conditions null
and void, or at most not written because in its opinion their non-fulfillment was due to a deliberate
desistance of the corporation and not to lack of funds to redeem the preferred shares of the National
Development Company. The conclusions arrived at by the trial court on this point are as follows:
"Fourth.That the condition mentioned in the donation is null and void because it depends on the
exclusive will of the donor, in accordance with the provisions of Article 1115 of the Old Civil Code.
"Fifth.That if the condition is valid, its nonfulfillment is due
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364
to the desistance of the defendant company from obeying and doing the wishes and mandate of the
majority of the stockholders.
"Sixth.That the non-payment of the debt in favor of the National Development Company is not due to
the lack of funds, nor to lack of authority, but to the desire of the President of the corporation to
preserve and continue the Government participation in the company."
To this views of the trial court, we fail to agree. There are many factors we can consider why the failure
to immediately redeem the preferred shares issued to the National Development Company as desired
by the minor children of the late Enrico Pirovano cannot or should not be attributed to a mere desire on
the part of the corporation to delay the redemption, or to prejudice the interest of the minors, but
rather to protect the interest of the corporation itself. One of them is the text of the very resolution
approved by the National Development Company on February 18, 1949 which prescribed the terms and
conditions under which it expressed its conformity to the conversion of the bonded indebtedness into
preferred shares of stock. The text of the resolution above mentioned reads:
"Resolved: That the outstanding bonded indebtedness of the De la Rama Steamship Co., Inc., in the
approximate amount of P3,260,855.77 be converted into non-voting preferred shares of stock of said
company, said shares to bear a fixed dividend of 6 percent per annum which shall be cumulative and
redeemable within 15 years. Said shares shall be preferred as to assets in the event of liquidation or
dissolution of said Company but shall be nonparticipating."
It is plain from the text of the above resolution that the defendant corporation had 15 years from
February 18, 1949, or until 1964, within which to effect the redemption of the preferred erred shares
issued to the National Development Company. This condition cannot but be binding and obligatory upon
the donees, if they desire to maintain the validity of the donation, for it is not only the basis upon which
the stockholders of the defendant corporation expressed their willingness to ratify the donation, but it is
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also the way by which its creditor, the National Development Company, would want it to be. If the
defendant corporation is given 15 years within which to redeem the preferred shares, and that period
would expire in 1964, one cannot blame the corporation for availing itself of this period if.in its opinion
it would redound to its best interest. It cannot therefore be said that the fulfillment of the condition for
the payment of the donation is one that wholly depends on the exclusive will of the donor, as the lower
court has concluded, simply because it failed to meet the redemption of said shares in the manner
desired by the donees. While it may be admitted that because of the disposition of the assets of the
corporation upon the suggestion of its general manager more than enough funds had been raised to
effect.the immediate redemption of the above shares, it is not correct to say that the management has
completely failed in its duty to pay its obligations for, according to the evidence, a substantial portion of
the indebtedness has been paid and only a balance of about P1,805,169.98 was outstanding when the
stockholders of the corporation decided to revoke or cancel the donation. (Exhibit P).
But there are other good reasons why all the available funds have not been actually applied to the
redemption of the preferred shares, one of them being the "desire of the president of the corporation
to preserve and continue the government participation in the company" which even the lower court
found it to be meritorious, which is one way by which it could continue receiving the patronage and
protection of the government. Another reason is that the redemption of the shares does not depend on
the will of the corporation alone but to a great extent on the will of a third party, the National
Development Company. In fact, as the evidence shows, this Company had pledged these shares to the
Philippine National Bank and the Rehabilitation Finance Corporation as a security to obtain certain loans
to finance the purchase of certain ships to
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366
Pirovano, et al. vs. De to, Rama Steamship Co.
contract entered into between the corporation and the National Development Company, and this was
what prevented the corporation from carrying out its offer to pay the sum of P1,956,513.07 on April 5,
1951. Had this offer been accepted, or favorably acted upon by the National Development Company, the
indebtedness would have been practically liquidated, leaving outstanding only one certificate worth
P217,390.45. Of course, the corporation could have insisted in redeeming the shares if it wanted to even
to the extent of taking .a court action if necessary to force its creditor to relinguish the shares that may
be necessary to accomplish the redemption, but such would be a drastic step which would have not
been advisable considering the policy right along maintained by the corporation to preserve its cordial
and smooth relation with the government. At any rate, whether such attitude be considered as a mere
excuse to justify the delay in effecting the redemption of the shares, or a mere desire on the part of the
corporation to retain in its possession more funds available to attend to other pressing need as
demanded by the interest of the corporation, we fail to see in such an attitude an improper motive to
circumvent the early realization of the desire of the minors to obtain the immediate payment of the
donation which was made dependent upon the redemption of said shares there being no clear evidence
that may justify such design. Anyway, a great portion of the f unds went to the stockholders themselves
by way of dividends to offset, so it appears, the huge advances that the corporation had made to them
which were entered in the books of the corporation as loans and, therefore, they were invested for their
own benefit. As General Manager Osmea said, "we were first confronted with the problem of the
withdrawals of the family which had to be repaid back to the National Development Company and one
of the most practical solutions to that was to declare dividends and reduce the amounts of their
withdrawals", which then totalled about P3,000,000. PHILIPPINE REPORTS ANNOTATED
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All things considered, we are of the opinion that the finding of the lower court that the failure of the
defendant corporation to comply with the condition of the donation is merely due to its desistance from
obeying the mandate of the majority of the stockholders and not to lack of f unds, or to lack of
authority, has no foundation in law or in fact, and, therefore, its conclusion that because of such
desistance that condition should be deemed as f ulfilled and the payment of the donation due and
demandable, is not justified. In this respect, the decision of the lower court should be reversed.
Having reached the foregoing conclusion, we deem it unncessary to discuss the other issues raised by
the parties in their briefs.
The lower court adjudicated to plaintiffs an additional amount equivalent to 20 per cent of the amount
claimed as damages by way of attorney's fees, and in our opinion, this award can be justified under
Article 2208, paragraph 2, of the new Civil Code, which provides: "When the defendant's act or omission
has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest",
attorney's fees may be awarded as damages. However, the majority believes that this award should be
reduced to 10 per cent.
Wherefore, the decision appealed f rom should be modified as follows: (a) that the donation made in
favor of the children of the late Enrico Pirovano of the proceeds of the insurance policies taken on his
life is valid and binding on the defendant corporation, (b) that said donation, which amounts to a total of
P583,813.59, including interest, as it appears in the books of the corporation as of August 31, 1951, plus
interest thereon at the rate of 5 per cent per annum from the filing of the complaint, should be paid to
the plaintiffs after the defendant corporation shall have fully redeemed the preferred shares issued to
the National Development Company under the terms and conditions stated in the resolutions of the
Board of Directors
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368
Caltex (Phil.), Inc., et al vs. Delgado Bros., Inc., et al
of January 6, 1947 and June 24, 1947, as amended by the resolution of the stockholders adopted on
September 13, 1949; and (c) defendant shall pay to plaintiffs an additional amount equivalent to 10 per
cent of said amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs of action.
Pars, C. J., Pablo, Bengzon, Padilla, Montemayor, Jugo, Concepcin, and Reyes, J. B. L., JJ., concur.
Reyes, A., concurs in the result.
Judgment modified.
Pirovano, et al. vs. De la Rama Steamship Co., 96 Phil. 335, No. L-5377 December 29, 1954
[No. 36207. October 26, 1932]
Irineo G. Carlos, plaintiff and appellant, vs. Mindoro Su-gar Co., et al., defendants and appellees.
1.Contracts; Deed of Trust.The Mindoro Sugar Company issued certain bonds and assigned them to
the Philippine Trust Com-pany, which guaranteed them. Held: That in the interpre-tation of the
instrument the acts of the parties performed at the same time and subsequently thereto must be taken
into account, and accordingly the document held to be a deed of transfer.
2.Corporations; Power to Guarantee Bonds Issued by Another Corporation.In view of the facts proved
in this case, it is held: That the Philippine Trust Company was empowered to guarantee the bonds of the
Mindoro S'ugar Company which
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344 PHILIPPINE REPORTS ANNOTATED
Carlos vs. Mindoro Sugar Co.
it acquired, and is therefore obliged to redeem the four bonds held by the appellant, and which have
become due by reason of a violation of the conditions.
APPEAL from a judgment of the Court of First Instance of Manila. Vickers, J.
Jose Ayala for appellant.
Ross, Lawrence & Selph for appellees.
Imperial, J.:
The plaintiff brought this action to recover from the defendants the value of four bonds, Nos. 1219,
1220, 1221, and 1222, with due and unpaid interest thereon, issued by the Mindoro Sugar Company and
placed in trust with the Philippine Trust Company which, in turn, guaranteed them for value received.
Said plaintiff appealed from the judg-ment rendered by the Court of First Instance of Manila absolving
the defendants from the complaint, excepting the Mindoro Sugar Company, which was sentenced to pay
the value of the four bonds with interest at S per cent per annum, plus costs.
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, Exhibit 5, 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 Have-meyer 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, Exhibit A, some of its purposes are expressed thus: "To acquire by purchase,
subscription, or otherwise, and to invest in, hold, sell, or otherwise
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VOL. 57, OCTOBER 26, 1932 345
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. * * *
Without in any particu-lar limiting any of the powers of the corporation, it is hereby expressly declared
that the corporation shall have power to make any guaranty respecting the dividends, in-terest, stock,
bonds, mortgages, notes, contracts or other obligations of any corporation, so far as the same may be
permitted by the laws of the Philippine Islands now or here-after in force." Its principal purpose, then, as
its name indicates, is to engage in the trust business.
On November 17, 1917, the board of directors of the Philippine Trust Company, composed of Phil. C.
Whitaker, chairman, and James Ross, Otto Vorster, Charles' D. Ayton, and William J. O'Donovan,
members, adopted a resolution authorizing its president, among other things, to purchase at par and in
the name and for the use of the trust cor-poration all or such part as he may deem expedient, of the
bonds in the value of P3,000,000 that the Mindoro Sugar Company was about to issue, and to resell
them, with or without the guarantee of said trust corporation, at a price not less than par, and to
guarantee to the Philippine Na-tional Bank the payment of the indebtedness to said bank by the
Mindoro Sugar Company or Charles J. Welch and Horace Havemeyer, up to P2,000,000. The relevant
part of the resolution, Exhibit 3, reads as follows:
"Resolved that Mr. Phil. C. Whitaker, president of this company, be and he hereby is authorized to
purchase at par in the name and for the use of this company all, or such part as he may deem expedient,
of the said P3,000,000 of 20-year 8 per cent coupon bonds of the said Mindoro Sugar Company, and to
resell or otherwise dispose of the said bonds, with or withQut this company's guaranty, at a price not
less than par; and it was further
"Resolved that Mr. Phil. C. Whitaker, president of the company be and he hereby is authorized in the
name of
346
this company alone or in connection with others, by joint and several obligations, to guarantee to the
Philippine National Bank the due and punctual payment of any and all indebtedness owing to the said
Bank by either the Mindoro Sugar Company, the Mindoro Company, or Charles J. Welch and Horace
Havemeyer, up to P2,000,000; and it was further
"Resolved that the said president, Mr. Phil. C. Whitaker, be and he hereby is authorized to execute in the
name of this company any and all notes, mortgages, bonds, guaranties, or instruments in writing
whatever necessary for the carrying into effect of the authority hereby granted."
In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar Company executed in favor
of the Philippine Trust Company the deed of trust, Exhibit 6, transferring all of its property to it in
consideration of the bonds it had issued to the value of P3,000,000, the value of each bond being
$1,000, which par value, with interest at 8 per cent per annum, the Philippine Trust Company had
guaranteed to the holders, and in consideration, fur-thermore, of said trust corporation having
guaranteed to the Philippine National Bank all the obligations contracted by the Mindoro Sugar
Company, Charles J. Welch and Horace Havemeyer up to the aforesaid amount of P2,000,000. The
aforementioned deed was approved by His Excel-lency, the Governor-General, upon recommendation
of the Secretary of Agriculture and Natural Resources, and in accordance with the provisions of Act No.
2720 of the Philippine Legislature. Following are the clauses of said Exhibit 6 material to this decision:
"Whereas, for the purposes aforesaid, and in further pursuance of said resolutions of its board of
directors and of its stockholders, the company, in order to secure the payment of said First Mortgage,
Twenty Year, Eight Per Cent, Gold Bonds, has determined to execute and deliver to said Philippine Trust
Company, as trustee, a deed of trust of its properties hereinafter described, and the board
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VOL. 57, OCTOBER 26, 1932 347
of directors of the Company has approved the form of this indenture and directed that the same be
executed and delivered to said trustee; and
"Whereas, all things necessary to make said bonds, when certified by said trustee as in this indenture
provided, valid, binding, legal and negotiable obligations of the company and this indenture a valid deed
of trust to secure the pay-ment of said bonds, have been done and performed, and the creation and
issue of said bonds, and the execution, acknowledgment and delivery of this deed of trust have been
duly authorized;
"Now, therefore, in order to secure the payment of the principal and interest of all such bonds at any
time issued and outstanding under this indenture, according to their tenor, purport and effect, and to
secure the performance and observance of all the covenants and conditions herein contained and to
declare the terms and conditions upon which said bonds are issued, received and held, and for and in
consideration of the premises, and of the purchase or acceptance of such bonds by the holders thereof,
and of the sum of one dollar, United States currency, to it duly paid at or before the ensealing and
delivery of these pres-ents, the receipt whereof is hereby acknowledged, the Min-doro Sugar Company,
party of the first part, has sold and conveyed, and by these presents does sell and convey to the
Philippine Trust Company, party of the second part, its successors and assigns forever:"
(Description of the property.)

In consequence of this transaction, the bonds, with their coupons were placed on the market and sold
by the Philippine Trust Company, all endorsed as follows:
"This is to certify that the within bond is one of the series described in the trust deed therein
mentioned.
"Philippine Trust Company
"by: (Sgd.) Phil. C. Whitaker
"President
348
"For value received, the Philippine Trust Company here-by guarantees the payment of principal and
interest of the within bond.
"Manila, Jan.-2, 1918
"Philippine Trust Company
"by: (Sgd.) Phil. C. Whitaker
"President"
The Philippine Trust Company sold thirteen bonds, Nos. 1219 to 1231, to Ramon Diaz for ?27,300, at a
net profit of 100 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.
The appellant now contends that the judgment appealed from is untenable, assigning the following
errors:
"FIRST ERROR
"The lower court erred in sustaining the demurrer against the amended complaint, filed by defendant J.
S. Reis (Reese) and consequently in dismissing the same with regard to this defendant.
"SECOND ERROR
"The lower court, without a proof to support it or an averment in defense by the defendant Philippine
Trust Company, erred in finding hypothetically that if the guar-antee made by this company be held
valid, the trust funds and deposits in its hands would probably be endangered.
"THIRD ERROR
"The lower court erred in holding that the Philippine Trust Company has no power to guarantee the
obligation of another juridical personality, for value received.
349
VOL. 57, OCTOBER 26, 1932 349
"FOURTH ERROR
"The lower court erred in not recognizing the validity and effect of the guarantee subscribed by the
Philippine Trust Company for the payment of the four bonds claimed in the complaint, endorsed upon
them, and in absolving said institution from the complaint.
"FIFTH ERROR
"The lower court erred in absolving the ex-directors of the Philippine Trust Company, Phil. C. Whitaker,
0. Vorster, and Charles D. Ayton, from the complaint."
We shall not follow the order of the appellant's argument, deeming it unnecessary, but shall decide only
the third and fourth assignments of error upon which the merits of the case depend. For the clear
understanding of this decision and to avoid erroneous interpretations, however, we wish to state that in
this decision we shall decide only the rights of the parties with regard to the four bonds in question and
whatever we say in no wise affects or applies to the rest of the bonds.
We shall begin by saying that the majority of the justices of this court who took part in the case are of
opinion that the only point of law to be decided is whether the Philippine Trust Company acquired the
four bonds in ques-tion, and whether as such it bound itself legally and acted within its' corporate
powers in guaranteeing them. This question was answered in the affirmative.
In adopting this conclusion we have relied principally upon the following facts and circumstances: Firstly,
that the Philippine Trust Company, although secondarily en-gaged in banking, was primarily organized as
a trust cor-poration with full power to acquire personal property such as the bonds in question,
according to both section 13 (par. 5) of the Corporation Law and its duly registered by-laws and articles
of incorporation; secondly, that being thus authorized to acquire the bonds, it was given implied power
to guarantee them in order to place them upon the
350
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." (7 R. C. L., p. 604 and cases cited.)
"Whenever a corporation has the power to take and dis-pose of the securities of another corporation, of
whatsoever kind, it may, for the purpose of giving them a marketable quality, guarantee their payment,
even though the amount involved in the guaranty may subject the corporation to liabilities in excess of
the limit of indebtedness which it is authorized to incur. A corporation which has power by its charter to
issue its own bonds has power to guar-antee the bonds of another corporation, which has been taken in
payment of a debt due to it, and which'it sells or transfers in payment of its own debt, the guaranty
being given to enable it to dispose of the bond to better advantage. And so 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." (14-A C. J., pp. 742-743 and cases cited) ; thirdly, that
although it does not clearly appear in the deed of trust (Exhibit 6) that the Mindoro Sugar Company
transferred the bonds therein referred to, to the Philippine Trust Company, nevertheless, in the
resolution of the board of directors (Exhibit 3), the president of the Philippine Trust Company was
expressly authorized to purchase all or some of the bonds and to guarantee them; whence it may be
inferred that subsequent purchasers of the bonds in the market relied upon the belief that they were
351
VOL. 57, OCTOBER 26, 1932 351
acquiring securities of the Philippine Trust Company, guar-anteed by this corporation; fourthly, that as
soon as P3,000,000 worth of bonds was issued, and by the deed of trust the Mindoro Sugar Company
transferred all its real property to the Philippine Trust Company, the cause or consideration of the
transfer being, (1) the guarantee given by the purchaser to the bonds, and (2) its' having likewise
guaranteed its obligations and those of Welch and Havemeyer in favor of the Philippine National Bank
up to the amount of P2,000,000; fifthly, that in transferring its real property as aforesaid the Mindoro
Sugar Com-pany was reduced to a real state of bankruptcy, as the parties specifically agreed during the
hearing of the case, to the point of having become a nominal corporation without any assets
whatsoever; sixthly, that such operation or trans-action cannot mean anything other than that the real
intention of the parties was that the Philippine Trust Company acquired the bonds issued and at the
same time guaranteed the payment of their par value with interest, because otherwise the transaction
would be fraudulent, in-asmuch as nobody would be answerable to the bond-holders for their value and
interest; seventhly, that the Philippine Trust Company had been paying the appellant the interest
accrued upon the four bonds from the date of their is-suance until July 1, 1928, such payment of interest
being another proof that said corporation had really become the owner of the aforesaid bonds; and,
eighthly, that the Philip-pine Trust Company has not adduced any evidence to show any other
conclusions.
There are other considerations leading to the same result even in the supposition that the Philippine
Trust Company did not acquire the bonds in question, but only guaranteed them. In such a case the
guarantee of these bonds would, at any rate, be valid and the said corporation would be bound to pay
the appellant their value with the accrued interest in view of the fact that they become due on account
352
of the lapse of sixty (60) days, without the accrued in-terest due having been, paid; and the reason is
that it is estopped from denying the validity of its guarantee.
"* * * On the other hand, according to the view taken by other courts, which it must be
acknowledged are in the majority, a recovery directly upon the contract is permitted, on the ground that
the corporation, having re-ceived money or property by virtue of a contract not im-moral or illegal of
itself, is estopped to deny liability; and that the only remedy is one on behalf of the state to punish the
corporation for violating the law." (7 R. C. L., pp. 680-681 and cases cited.)
"* * * The doctrine of ultra vires has been declared to be entirely the creation of the courts and is
of compa-ratively modern origin. The defense is by some courts regarded as an ungracious and odious
one, to be sustained only where the most persuasive considerations of public policy are involved, and
there are numerous decisions and dicta to the effect that the plea should not as a general rule prevail
whether interposed for or against the corpo-ration, where it will not advance justice but on the
con-trary will accomplish a legal wrong." (14-A C. J., pp. 314-315.)
"The doctrine of the Supreme Court of the United States together with the English courts and some of
the state courts is that no performance upon either side can validate an ultra vires transaction or
authorize an action to be maintained directly upon it. However, the great weight of authority in the
state courts is to the effect that a transaction which is merely ultra vires and not malum in se or malum
prohibitum although it may be made by the state a basis for the forfeiture of the corporate charter or
the dissolution of the corporation, is, if performed by one party, not void as between the parties to all
intents and purposes, and that an action may be brought directly upon the transaction and relief had
according to its terms." (14-A C. J., pp. 319-320.)
353
VOL. 57, OCTOBER 26, 1932 353
"When a contract is not on its face necessarily beyond the scope of the power of the corporation by
which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations
are presumed to con-tract within their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal
wrong." (Coleman vs. Hotel de France Co., 29 Phil., 323.)
"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." (Broadway Nat. Bank
vs. Baker, 57 N. E., p. 603.)
It has been intimated that according to section 121 of the Corporation Law, the Philippine Trust
Company, as a banking institution, could not guarantee the bonds to the value of P3,000,000 because
this amount far exceeds its capital of P1,000,000 of which only one-half has been subscribed and paid.
Section 121 reads as follows:
"Sec. 121. No such bank shall at any time be indebted or in any way liable to an amount exceeding the
amount of its capital stock at such time actually paid in and remaining undiminished by losses or
otherwise, except on account of demands of the following nature:
"(1) Moneys deposited with or collected by the bank;
"(2) Bills of exchange or drafts drawn against money actually on deposit to the credit of the bank or
due thereto;
" (3) Liabilities to the stockholders of the bank for dividends and reserve profits."
This difficulty is easily obviated by bearing in mind that, as we stated above, the banking operations are
not the primary aim of said corporation, which is engaged essen-tially in the trust business, and that the
prohibition of the law is not applicable to the Philippine Trust Company, for the evidence shows that
Mindoro Sugar Company trans-ferred all its real property, with the improvements, to it, and the value of
both, which surely could not be less than the value of the obligation guaranteed, became a part of its
capital and assets; in other words, with the value of the real property transferred to it, the Philippine
Trust Company had enough capital and assets to meet the amount of the bonds guaranteed with
interest thereon.
Wherefore, the decision appealed from is reversed and the Philippine Trust Company is sentenced to
pay to the ap-pellant the sum of four thousand dollars ($4,000) with interest at eight per cent (8%) per
annum from July 1, 1928 until fully paid, and the costs of both instances. So ordered.
Avancena, C. J., Ostrand, Villa-Real, Abad Santos, and Butte, J J., concur.
Malcolm and Hull, J J., concur in the result.
Judgment reversed.
Carlos vs. Mindoro Sugar Co., 57 Phil., 343, No. 36207 October 26, 1932
[No. L-8987. May 23, 1957]
JAPANESE WAR NOTES CLAIMANTS ASSOCIATION OF THE PHILIPPINES, INC., petitioner, vs. SECURITIES
AND EX-CHANGE COMMISSION, respondent.
PRIVATE CORPORATIONS ; JAPANESE WAR NOTES CLAIMANTS ASSOCIATION; EXERCISE OF POWERS NOT
GRANTED IN THE ARTICLES OF
541
VOL. 101, MAY 23, 1957

541
Japanese War Notes Claimants Asso. Inc. vs. Securities and Exchange Com.
INCORPORATION, EFFECT OF.Although the articles of incorporation give petitioner the privilege to
work for the redemption of the Japanese war notes of its members alone, it can not offer its services to
the public for a valuable consideration, because there is nothing definite and tangible about the
redemption of the war notes and its success is speculative. Thus, when petitioner engaged in the
business of registering war notes for deposit upon payment of fees, and of accepting and collecting fees
for reparation claims for civilian casualties and other injuries, it acted beyond the powers embodied in
its articles of incorporation.
PETITION to review an order of the Securities and Exchange Commission with Preliminary Injunction.
Felix B. Mintu for petitioner.
Solicitor General Ambrosio Padilla and Solicitor Jorge R. Coquia or respondent.
LABRADOR, J.:
On August 25, 1954 the Securities and Exchange Commissioner issued an order requiring petitioner
herein and its President, Mr. Alfredo Abcede, to show cause why it should not be proceeded against for
making misrepresentations to the public about the need of registering and depositing Japanese war
notes, with a view to their probable redemption as contemplated in Senate Bill No. 163 and in Senate
Concurrent Resolution No. 14, for otherwise they would be valueless, At the investigation that was
conducted in connection with the above order, the petitioner tried to show that there were no
misrepresentations made by them in their publications and that the mistake made by them (that
President Magsaysay would soon make representations to the United States Government to have the
war notes redeemed) was made in good faith as it was later retracted and rectified. They also stated
that they longed and hoped that the war notes would be redeemed; that they are sincere and honest in
their activities; and that they are entitled to their
542
542
beliefs. After the investigation, in which it was disclosed that the petitioner claimed the right to continue
in the above-mentioned activities, the Commissioner found that according to its articles the petitioner
has the privilege to work for the redemption of the war notes of its members alone, but that it can not
offer its services to the public for a valuable consideration, because there is nothing definite and
tangible about the redemption of the war notes and its success is speculative; that any authority given
to offer services can easily degenerate into a racket; that under its articles of incorporation the
petitioner is a civic and non-stock corporation and should not engage in business for profit; that it has
received war notes for deposit, upon payment of fees, without authority in its articles to do so; that it
had previously been ordered to desist from collecting fees for those registering the war notes, but
notwithstanding this prohibition it has done so in the guise of service fees. Hence the Commissioner
ordered:
"(1) That the Association, and all/any of its officers, directors, employees, representatives, or agents
stop immediately the registration of Japanese War Notes, receiving the same for deposit, and charging
fees therefor. It is not, however, prohibited from admitting members, with the corresponding rights and
obligations as such.
"(2) That the Association and all/any of its officers, directors, employees, representatives, or agents,
desist forthwith from accepting and collecting fees for reparation claims for civilian casualties and other
injuries, as it is not authorized so to do under its articles of incorporation." (Order of the Securities and
Exchange Commission dated February 28, 1955.)
The case at bar is for a review of the above order. It is contended that the Commissioner erred (1) in
finding that petitioner made misrepresentations to the public so as to induce holders of war notes to
register them with petitioner, (2) in ordering the petitioner to stop the registration of Japanese war
notes, receiving same for deposit and charging fees therefore, and (3) in ordering petitioner to desist
from accepting and collecting fees for reparation claims for civilian casualties and injuries.
543
VOL. 101, MAY 23, 1957

543
We are not permitted to examine the correctness of the first contention as above set forth as the same
involves questions of fact; only questions of law may be raised in this case for review (section 2, Rule 43
of the Rules of Court).
In support of the second contention it is claimed that the order was beside the issue investigated. While
it may be true that the issue which started the investigation has been the misrepresentations made to
the public by the petitioner herein, the order is based on the findings of fact made in the course of the
investigation and the prohibition stated in the order aims at the eradication of the source of the evil of
misrepresentation that was the subject of the investigation. It can not be said, therefore, that the
resultant order is not germane or related to the subject-matter of the investigation.
It is also argued that the registration of war notes and the collection of fees therefor is not prohibited by
the corporation law and the authority of the petitioner to engage therein is implied from its articles of
incorporation, the purposes of which are:
"(1) To consecrate and sanctify in a strong and militant organization in the furtherance of the financial
conditions of its members toward the attainment of their claims;
"(2) To take a position which is only secondary and complimentary to that of our constituted
government in campaigning for the welfare of our people, especially when it is to demand redemption
of currency from foreign country;
"(3) To work for, and to make due representations with the United States and Japanese Governments,
for the redemption and, or, for the future payments of the Japanese War Notes (mickey mouse money);
"(4) To instill the ties of comradeship through this and noble gesture of goodwill between our people
and country.with the people and countries of the United States and Japan;
"(5) To do any and all acts and things which are naturally incidental on arising out of the purpose or any
others." (Petitioner's brief, pp. 57-58.)
We do not find any merit in the contention. The articles authorize collection of fees from members; but
they do
544
544
Marcelo, et al. vs. Phil. Nat. Red Cross, et al.
not authorize the corporation to engage in the business of registering and accepting war notes for
deposit and collecting fees from such services. This was the ruling of the Commissioner and this we find
to be correct.
Neither do we find any merit in the third contention that the association has authority to accept and
collect fees for reparation claims for civilian casualties and other injuries. This is beyond any of the
powers of the association as embodied in its articles and have absolutely no relation to the avowed
purpose of the association to work for the redemption of war notes.
The order of the Securities and Exchange Commissioner was evidently promulgated under the authority
of section 1 (b) of Republic Act No. 1143 which reads:
"(b) To penalize any violation of or non-compliance with any terms of conditions of any certificate,
license, or permit issued by the Commission or of any order, decision, ruling or regulation thereof, by a
fine of not exceeding two hundred pesos per day for every day during which such violation or default
continues: and the Commission is hereby authorized and empowered to impose and collect such fine
after due notice and hearing."
The order sought to be reviewed is hereby affirmed, with costs against the petitioner. So ordered.
Bengzon, Padilla, Montemayor, Bautista Angelo, Concepcin, Reyes, J. B. L., Endencia, and Felix, JJ.,
concur.
Reyes, A., J., concurs in the result.
Order affirmed.
Japanese War Notes Claimants Asso Inc. vs. Securities and Exchange Com., 101 Phil. 540, No. L-8987
May 23, 1957
G.R. No. 117188. August 7, 1997.*
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner, vs. HON. COURT OF
APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO
AYCARDO, respondents.
Corporation Law; Statutory Construction; Words and Phrases; Ordinarily, the word must connotes an
imperative act or operates to impose a duty which may be enforcedit is synonymous with ought
which connotes compulsion or mandatoriness though the word must in a statute, like shall, is not
always imperative and may be consistent with an exercise of discretion.As correctly postulated by the
petitioner, interpretation of this provision of law begins with the determination of the meaning and
import of the word must in this section. Ordinarily, the word must connotes an imperative act or
operates to impose a duty which may be enforced. It is synonymous with ought which connotes
compulsion or mandatoriness. However, the word must in a statute, like shall, is not always
imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency has
been to interpret shall as the context or a reasonable construction of the statute in which it is used
demands or requires. This is equally true as regards the word must. Thus, if the language of a statute
considered as a whole and with due regard to its nature and object reveals that the legislature intended
to use the words shall and must to be directory, they should be given that meaning.
Same; Same; By-Laws; The legislative deliberations demonstrate that automatic corporate dissolution
for failure to file the bylaws on time was never the intention of the legislature.This exchange of views
demonstrates clearly that automatic corporate dissolution for failure to file the by-laws on time was
never the intention of the legislature. Moreover, even without resorting to the records of deliberations
of the Batasang Pambansa, the law itself provides the answer to the issue propounded by petitioner.
______________
* SECOND DIVISION.
682
682
Loyola Grand Villas Homeowners (South) Association, Inc. vs. Court of Appeals
Same; Same; Same; Taken as a whole and under the principle that the best interpreter of a statute is the
statute itself (optima statuli interpretatix est ipsum statutum), Section 46 of the Corporation Code
reveals the legislative intent to attach a directory, and not mandatory, meaning for the word must in
the first sentence thereof.Taken as a whole and under the principle that the best interpreter of a
statute is the statute itself (optima statuti interpretatix est ipsum statutum), Section 46 aforequoted
reveals the legislative intent to attach a directory, and not mandatory, meaning for the word must in
the first sentence thereof. Note should be taken of the second paragraph of the law which allows the
filing of the by-laws even prior to incorporation. This provision in the same section 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.
Same; Same; Same; 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.
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. There are in fact cases
where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers,
thus: In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either
to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all
cases where the charter sufficiently provides for the government of the body; and even where the
governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure
to exercise the power will be ascribed to mere nonaction which will not render void any acts of the
corporation which would otherwise be valid. (Italics supplied.)
Same; Same; Same; Due Process; There can be no automatic corporate dissolution simply because the
incorporators failed to abide by the required filing of by-lawsthe incorporators must be given the
chance to explain their neglect or omission and to remedy the same.Even under the foregoing express
grant of power and authority, there can be no automatic corporate dissolution simply because the
683
VOL. 276, AUGUST 7, 1997

683
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.
Same; Same; Same; Presidential Decree 902-A; Statutes in Materia; Securities and Exchange
Commission; The failure of the Corporation Code to provide for the consequences of the non-filing of
by-laws on time has been rectified by P.D. No. 902-A; Every statute must be so construed and
harmonized with other statutes as to form a uniform system of jurisprudence.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. However, such omission has
been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the
Securities and Exchange Commission of which state: * * * That the failure to file by-laws is not provided
for by the Corporation Code but in another law is of no moment. P.D. No. 902-A, which took effect
immediately after its promulgation on March 11, 1976, is very much apposite to the Code. Accordingly,
the provisions abovequoted supply the law governing the situation in the case at bar, inasmuch as the
Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare legibus est
optimus interpretandi. Every statute must be so construed and harmonized with other statutes as to
form a uniform system of jurisprudence.
Same; By-Laws; Failure to file the by-laws within the period required by law by no means tolls the
automatic dissolution of a corporation.As 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,
by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate
birth but certainly, these are required by law for an orderly governance and management of
corporations. Nonetheless, failure to file them within the period required by law by no means tolls the
automatic dissolution of a corporation.
684
684
Same; Administrative Law; Subdivisions; Home Insurance and Guaranty Corporation; Jurisdiction; With
respect to homeowners associations, the HIGC shall exercise all the powers, authorities and
responsibilities that are vested on the Securities and Exchange Commission.That the corporation
involved herein is under the supervision of the HIGC does not alter the result of this case. The HIGC has
taken over the specialized functions of the former Home Financing Corporation by virtue of Executive
Order No. 90 dated December 17, 1986. With respect to homeowners associations, the HIGC shall
exercise all the powers, authorities and responsibilities that are vested on the Securities and Exchange
Commission x x x, the provision of Act 1459, as amended by P.D. 902-A, to the contrary
notwithstanding.
PETITION for review on certiorari of a decision of the Court of Appeals.

Rene A. Diokno for petitioner.
Reyno, De Vera, Tiu, Domingo & Santos for private respondents.
ROMERO, J.:
May 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?
This is the issue raised in this petition for review on certiorari of the Decision1 of the Court of Appeals
affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body
recognized Loyola Grand Villas Homeowners Association (LGVHA) as the sole homeowners association
in Loyola Grand Villas, a duly registered subdivision in Quezon City and Marikina City that was owned
_______________
1 Penned by Associate Justice Antonio M. Martinez and concurred in by Associate Justices Quirino D.
Abad Santos, Jr. and
Godardo A. Jacinto.
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VOL. 276, AUGUST 7, 1997

685
and developed by Solid Homes, Inc. It revoked the certificates of registration issued to Loyola Grand
Villas Homeowners (North) Association Incorporated (the North Association for brevity) and Loyola
Grand Villas Homeowners (South) Association Incorporated (the South Association).
LGVHAI 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 HIGC, as the sole homeowners organization in the said subdivision under Certificate of
Registration No. 04-197. 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. They failed to do so.2 To the
officers consternation, they discovered that there were two other organizations within the
subdivisionthe North Association and the 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.3 The North
Association was registered with the HIGC on February 13, 1989 under Certificate of Registration No. 04-
1160 covering Phases West II, East III, West III and East. IV. It submitted its by-laws on December 20,
1988.
In July, 1989, 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
______________
2 On March 4, 1993, LGVHAI filed its by-laws with the HIGC. Its filing fee was duly receipted for under
O.R. No. 6393291 (Private Respondents Comment, p. 5; Rollo, p. 72).
3 Private Respondents Comment, pp. 3-4.
686
686
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. Apparently, this information resulted in the
registration of the South Association with the HIGC on July 27, 1989 covering Phases West I, East I and
East II. It filed its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They
questioned the revocation of LGVHAIs 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.
On January 26, 1993, after due notice and hearing, private respondents obtained a favorable ruling from
HIGC Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas Homeowners
Association, Inc., under Certificate of Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of
Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola Grand
Villas Homeowners Association, Inc., all assets and records of the Association now under his custody and
possession.
The South Association appealed to the Appeals Board of the HIGC. In its Resolution of September 8,
1993, the Board4 dismissed the appeal for lack of merit.
______________
4 Fernando M. Miranda, Jr., Chairman, and Wilfredo F. Hernandez, Arthur G. Tan and Aida A. Mendoza,
Members.
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687
Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two issues. First,
whether or not LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the
Corporation Code resulted in the automatic dissolution of LGVHAI. Second, whether or not two
homeowners associations may be authorized by the HIGC in one sprawling subdivision. However, in
the Decision of August 23, 1994 being assailed here, the Court of Appeals affirmed the Resolution of the
HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that under the Corporation Code, a private
corporation commences to have corporate existence and juridical personality from the date the
Securities and Exchange Commission (SEC) issues a certificate of incorporation under its official seal. The
requirement for the filing of by-laws under Section 46 of the Corporation Code within one month from
official notice of the issuance of the certificate of incorporation presupposes that it is already
incorporated, although it may file its by-laws with its articles of incorporation. Elucidating on the effect
of a delayed filing of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the petitioner, i.e., Sections 46 and 22, Corporation
Code, or in any other provision of the Code and other laws which provide or at least imply that failure to
file the by-laws results in an automatic dissolution of the corporation. While Section 46, in prescribing
that by-laws must be adopted within the period prescribed therein, may be interpreted as a mandatory
provision, particularly because of the use of the word must, its meaning cannot be stretched to support
the argument that automatic dissolution results from non-compliance.
We realize that Section 46 or other provisions of the Corporation Code are silent on the result of the
failure to adopt and file the by-laws within the required period. Thus, Section 46 and other related
provisions of the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A. This section
empowers the SEC to suspend or revoke certificates of registration on the grounds listed therein. Among
the grounds stated is the failure to file by-laws (see also II Campos: The Corporation Code, 1990 ed., pp.
124-125). Such suspension or revocation, the same section provides, should be made
688
688
upon proper notice and hearing. Although P.D. 902-A refers to the SEC, the same principles and
procedures apply to the public respondent HIGC as it exercises its power to revoke or suspend the
certificates of registration or homeowners associations. (Section 2[a], E.O. 535, series 1979, transferred
the powers and authorities of the SEC over homeowners associations to the HIGC.)
We also do not agree with the petitioners interpretation that Section 46, Corporation Code prevails
over Section 6, P.D. 902-A and that the latter is invalid because it contravenes the former. There is no
basis for such interpretation considering that these two provisions are not inconsistent with each other.
They are, in fact, complementary to each other so that one cannot be considered as invalidating the
other.
The Court of Appeals added that, as there was no showing that the registration of LGVHAI had been
validly revoked, it continued to be the duly registered homeowners association in the Loyola Grand
Villas. More importantly, the South Association did not dispute the fact that LGVHAI had been organized
and that, thereafter, it transacted business within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous ruling5 that the HIGC has the authority
to order the holding of a referendum to determine which of two contending associations should
represent the entire community, village or subdivision.
Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as sole
issue for resolution the first issue it had raised before the Court of Appeals, i.e., whether or not the
LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code
had the effect of automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word must with respect to the filing of by-laws,
noncompliance
______________
5 This was in Bagong Lipunan Community Association v. HIGC, CA-G.R. SP No. 12592, November 16,
1987.
689
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689
therewith would result in self-extinction either due to non-occurrence of a suspensive condition or the
occurrence of a resolutory condition under the hypothesis that (by) the issuance of the certificate of
registration alone the corporate personality is deemed already formed. It asserts that the Corporation
Code provides for a gradation of violations of requirements. Hence, Section 22 mandates that the
corporation must be formally organized and should commence transactions within two years from date
of incorporation. Otherwise, the corporation would be deemed dissolved. On the other hand, if the
corporation commences operations but becomes continuously inoperative for five years, then it may be
suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not provide for
sanctions for non-filing of the by-laws. However, it insists that no sanction need be provided because
the mandatory nature of the provision is so clear that there can be no doubt about its being an essential
attribute of corporate birth. To petitioner, its submission is buttressed by the facts that the period for
compliance is spelled out distinctly; that the certification of the SEC/HIGC must show that the by-laws
are not inconsistent with the Code, and that a copy of the by-laws has to be attached to the articles of
incorporation. Moreover, no sanction is provided for because in the first place, no corporate identity
has been completed. Petitioner asserts that non-provision for remedy or sanction is itself the tacit
proclamation that non-compliance is fatal and no corporate existence had yet evolved, and therefore,
there was no need to proclaim its demise.6 In a bid to convince the Court of its arguments, petitioner
stresses that:
x x x the word MUST is used in Sec. 46 in its universal literal meaning and corollary human implication
its compulsion is integrated in its very essenceMUST is always enforceable by the inevitable
consequencethat is, OR ELSE. The use of the word
______________
6 Petition, pp. 7-10.

690
690
MUST in Sec. 46 is no exceptionit means file the by-laws within one month after notice of issuance of
certificate of registration OR ELSE. The OR ELSE, though not specified, is inextricably a part of MUST. Do
this or if you do not you are Kaput. The importance of the by-laws to corporate existence compels such
meaning for as decreed the by-laws is the government of the corporation. Indeed, how can the
corporation do any lawful act as such without by-laws. Surely, no law is intended to create chaos.7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation Code
which itself does not provide sanctions for non-filing of by-laws. For the petitioner, it is not proper to
assess the true meaning of Sec. 46 x x x on an unauthorized provision on such matter contained in the
said decree.
In their comment on the petition, private respondents counter that the requirement of adoption of by-
laws is not mandatory. They point to P.D. No. 902-A as having resolved the issue of whether said
requirement is mandatory or merely directory. Citing Chung Ka Bio v. Intermediate Appellate Court,8
private respondents contend that Section 6(1) of that decree provides that non-filing of by-laws is only a
ground for suspension or revocation of the certificate of registration of corporations and, therefore, it
may not result in automatic dissolution of the corporation. Moreover, the adoption and filing of by-laws
is a condition subsequent which does not affect the corporate personality of a corporation like the
LGVHAI. This is so because Section 9 of the Corporation Code provides that the corporate existence and
juridical personality of a corporation begins from the date the SEC issues a certificate of incorporation
under its official seal. Consequently, even if the by-laws have not yet been filed, a corporation may be
considered a de facto corporation. To emphasize the fact the LGVHAI was registered as the sole
homeowners association in the Loyola Grand Villas, private respondents
______________
7 Ibid., pp. 10-11.

8 G.R. No. 71837, July 26, 1988, 163 SCRA 534.
691
VOL. 276, AUGUST 7, 1997

691
point out that membership in the LGVHAI was an unconditional restriction in the deeds of sale signed
by lot buyers.
In its reply to private respondents comment on the petition, petitioner reiterates its argument that the
word must in Section 46 of the Corporation Code is mandatory. It adds that, before the ruling in Chung
Ka Bio v. Intermediate Appellate Court could be applied to this case, this Court must first resolve the
issue of whether or not the provisions of P.D. No. 902-A prescribing the rules and regulations to
implement the Corporation Code can rise above and change the substantive provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of controversy in this case states:
Sec. 46. Adoption of by-laws.Every corporation formed under this Code, must within one (1) month
after receipt of official notice of the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For
the adoption of bylaws by the corporation, the affirmative vote of the stockholders representing at least
a majority of the outstanding capital stock, or of at least a majority of the members, in the case of non-
stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the corporation, subject to the stockholders or
members voting for them and shall be kept in the principal office of the corporation, subject to
inspection of the stockholders or members during office hours; and a copy thereof, shall be filed with
the Securities and Exchange Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission
of a certification that the by-laws are not inconsistent with this Code.
692
692
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special corporations governed by special laws,
unless accompanied by a certificate of the appropriate government agency to the effect that such by-
laws or amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of this provision of law begins with the
determination of the meaning and import of the word must in this section. Ordinarily, the word
must connotes an imperative act or operates to impose a duty which may be enforced.9 It is
synonymous with ought which connotes compulsion or mandatoriness.10 However, the word must
in a statute, like shall, is not always imperative. It may be consistent with an exercise of discretion. In
this jurisdiction, the tendency has been to interpret shall as the context or a reasonable construction
of the statute in which it is used demands or requires.11 This is equally true as regards the word must.
Thus, if the language of a statute considered as a whole and with due regard to its nature and object
reveals that the legislature intended to use the words shall and must to be directory, they should be
given that meaning.12
In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are
illuminating:
______________
9 Soco v. Hon. Militante, et al., 208 Phil. 151, 154 (1983); Caltex Filipino Managers & Supervisors Assn v.
CIR, 131 Phil. 1022, 1029 (1968).
10 People v. Tamani, L-22160 & 22161, January 21, 1974, 55 SCRA 153, 157.
11 Diokno v. Rehabilitation Finance Corporation, 91 Phil. 608, 611 (1952).
12 27A WORDS AND PHRASES 650 citing Arkansas State Highway Commission v. Mabry, 315 S.W. 2d
900, 905, 229 Ark. 261.
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693
MR. FUENTEBELLA. Thank you, Mr. Speaker. On page 34, referring to the adoption of by-laws, are we
made to understand here, Mr. Speaker, that by-laws must immediately be filed within one month after
the issuance? In other words, would this be mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the effect of the failure of the
corporation to file these by-laws within one month?
MR. MENDOZA. There is a provision in the latter part of the Code which identifies and describes the
consequences of violations of any provision of this Code. One such consequence is the dissolution of the
corporation for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by merely
failing to file the bylaws within one month. Supposing the corporation was late, say, five days, what
would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution of the
corporation. Perhaps, as in the case, as you suggested, in the case of El Hogar Filipino where a quo
warranto action is brought, one takes into account the gravity of the violation committed. If the by-laws
were latethe filing of the by-laws were late by, perhaps, a day or two, I would suppose that might be a
tolerable delay, but if they are delayed over a period of monthsas is happening nowbecause of the
absence of a clear requirement that by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences.13
This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the
by-laws on time was never the intention of the legislature. Moreover, even without resorting to the
records of deliberations of the Batasang Pambansa, the law itself provides the answer to the issue
propounded by petitioner.
______________
13 Record of the Batasang Pambansa, Vol. III, November 12, 1979, p. 1303.
694

694
Taken as a whole and under the principle that the best interpreter of a statute is the statute itself
(optima statuti interpretatix est ipsum statutum),14 Section 46 aforequoted reveals the legislative intent
to attach a directory, and not mandatory, meaning for the word must in the first sentence thereof.
Note should be taken of the second paragraph of the law which allows the filing of the by-laws even
prior to incorporation. This provision in the same section 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.15 There are in fact
cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate
powers, thus:
In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to
the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all
cases where the charter sufficiently provides for the government of the body; and even where the
governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure
to exercise the power will be ascribed to mere nonaction which will not render void any acts of the
corporation which would otherwise be valid.16 (Italics supplied.)
As Fletcher aptly puts it:
______________
14 Lopez and Javelona v. El Hogar Filipino, 47 Phil. 249, 277 (1925) cited in AGPALO, STATUTORY
CONSTRUCTION, 3rd ed., p. 197.
15 CAMPOS, THE CORPORATION CODE, Vol. I, 1990 ed., p. 123.
16 18 C.J.S. 595-596.
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695
It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have
been adopted the corporation may not be able to act for the purposes of its creation, and that the first
and most important duty of the members is to adopt them. This would seem to follow as a matter of
principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a
matter of practical, if not one of legal, necessity. Moreover, the peculiar circumstances attending the
formation of a corporation may impose the obligation to adopt certain by-laws, as in the case of a close
corporation organized for specific purposes. And the statute or general laws from which the corporation
derives its corporate existence may expressly require it to make and adopt by-laws and specify to some
extent what they shall contain and the manner of their adoption. The mere fact, however, of the
existence of power in the corporation to adopt by-laws does not ordinarily and of necessity make the
exercise of such power essential to its corporate life, or to the validity of any of its acts.17
Although the Corporation Code requires the filing of bylaws, it does not expressly provide for the
consequences of the non-filing of the same within the period provided for in Section 46. However, such
omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the
jurisdiction of the SEC of which state:
SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:
x x x x x x x x x x x x;
(1) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the
following:
xxx xxx xxx xxx
5. Failure to file by-laws within the required period;
x x x x x x x x x x x x.
_______________
17 8 FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 640.

696
696
In the exercise of the foregoing authority and jurisdiction of the Commissions or by a Commissioner or
by such other bodies, boards, committees and/or any officer as may be created or designated by the
Commission for the purpose. The decision, ruling or order of any such Commissioner, bodies, boards,
committees and/or officer may be appealed to the Commission sitting en banc within thirty (30) days
after receipt by the appellant of notice of such decision, ruling or order. The Commission shall
promulgate rules of procedures to govern the proceedings, hearings and appeals of cases falling within
its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the
Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of Court.
Even under the foregoing express grant of power and authority, 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.
That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no
moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is
very much apposite to the Code. Accordingly, the provisions abovequoted supply the law governing the
situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari
materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so
construed and harmonized with other statutes as to form a uniform system of jurisprudence.18
______________
18 Corona v. Court of Appeals, G.R. No. 97356, September 30, 1992, 214 SCRA 378, 392.
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697
As 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,19 by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are
required by law for an orderly governance and management of corporations. Nonetheless, failure to file
them within the period required by law by no means tolls the automatic dissolution of a corporation. In
this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka
Bio v. Intermediate Appellate Court,20 as follows:
x x x. Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation but
is now considered only a ground for such dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code, provided
that the powers of the corporation would cease if it did not formally organize and commence the
transaction of its business or the continuation of its works within two years from date of its
incorporation. Section 20, which has been reproduced with some modifications in Section 46 of the
Corporation Code, expressly declared that every corporation formed under this Act, must within one
month after the filing of the articles of incorporation with the Securities and Exchange Commission,
adopt a code of by-laws. Whether this provision should be given mandatory or only directory effect
remained a controversial question until it became academic with the adoption of PD 902-A. Under this
decree, it is now clear that the failure to file by-laws within the required period is only a ground for
suspension or revocation of the certificate of registration of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(I) of
PD 902-A, the SEC is empowered to suspend or revoke, after proper notice and hearing,
______________
19 8 FLETCHER, supra, at p. 633.

20 Supra.
698
698
the franchise or certificate of registration of a corporation on the ground inter alia of failure to file by-
laws within the required period. It is clear from this provision that there must first of all be a hearing to
determine the existence of the ground, and secondly, assuming such finding, the penalty is not
necessarily revocation but may be only suspension of the charter. In fact, under the rules and
regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of
an administrative fine without affecting the corporate existence of the erring firm.
It should be stressed in this connection that substantial compliance with conditions subsequent will
suffice to perfect corporate personality. Organization and commencement of transaction of corporate
business are but conditions subsequent and not prerequisites for acquisition of corporate personality.
The adoption and filing of by-laws is also a condition subsequent. Under Section 19 of the Corporation
Code, a corporation commences its corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues certificate of incorporation
under its official seal. This may be done even before the filing of the by-laws, which under Section 46 of
the Corporation Code, must be adopted within one month after receipt of official notice of the issuance
of its certificate of incorporation. 21
That the corporation involved herein is under the supervision of the HIGC does not alter the result of
this case. The HIGC has taken over the specialized functions of the former Home Financing Corporation
by virtue of Executive Order No. 90 dated December 17, 1986.22 With respect to homeowners
associations, the HIGC shall exercise all the powers, authorities and responsibilities that are vested on
the Securities and Exchange Commission x x x, the provision of Act 1459, as amended by P.D. 902-A, to
the contrary notwithstanding.23
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned Decision
of the Court
______________
21 Ibid., at pp. 543-544.

22 The capitalization of HIGC was increased to P2,500,000,000 by Rep. Act No. 7835.
23 No. 2 (a), Executive Order No. 535 dated May 3, 1979 (78 O.G. 6805).
699
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699
Centro Escolar University vs. NLRC (First Division)
of Appeals AFFIRMED. This Decision is immediately executory. Costs against petitioner.
SO ORDERED.
Regalado (Chairman), Puno and Mendoza, JJ., concur.
Torres, Jr., J., On leave.
Petition denied, judgment affirmed.
Note.Being the sole regulatory body for housing and land development, Housing and Land Use
Regulatory Board would have been reduced to a functionally sterile entity if it lacked the powers
exercised by its predecessor which included the power to settle disputes concerning land use and
housing development and acquisition. (Realty Exchange Venture Corporation vs. Sendino, 233 SCRA 665
[1994])
Loyola Grand Villas Homeowners (South) Association, Inc. vs. Court of Appeals, 276 SCRA 681, G.R. No.
117188 August 7, 1997
[No. L-12282. 31 March 1959]
THE BOARD OF DIRECTORS and ELECTION COMMITTEE OF THE SMB WORKERS SAVINGS AND LOAN
ASSOCIATION, INC., ET AL., petitioners, vs. HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.
1.CORPORATION LAW; LABOR ASSOCIATIONS; PROVISIONS OF CONSTITUTION AND BY-LAWS SHOULD
BE COMPLIED WITH.The constitution and by-laws of the petitioner association provide that 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.
2.ID.; ID.; AUTHORITY OF COURTS TO APPOINT COMMITTEE TO SUPERVISE ELECTION OF OFFICIALS.
When it appears that a fair election cannot be had, the court in the exercise of its equity jurisdiction may
appoint a committee with the authority to call, conduct and supervise the election of the directors of
the association.
ORIGINAL ACTION in the Supreme Court. Certiorari with Preliminary Injunction.
Pnfilo M. Manguera and Restituto L. Opiz for petitioners.
Cipriano Cid & Associates for respondents.
PADILLA, J.:
Petitioners pray for a writ of certiorari with preliminary injunction.

427
VOL. 105, MARCH 81, 1959

427
Board of Directors and Election Committee of SMB Workers Savings and Loan Asso., Inc. vs. Tan, etc., et
al.
On 17 January 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 11
and 12 January; 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; to restrain the defendants who
had been illegally elected as members of the board of directors from exercising the functions of their
office; to order the defendants to pay the plaintiffs attorney's fees and costs of the suit; and to grant
them other just and equitable relief (civil No. 31584, Annex A). The defendants filed an answer (Annex
B), and after joinder of issues the Court set the case for trial. On the day set for trial of the case, neither
the defendants nor their attorney appeared. The Court proceeded to receive the plaintiffs' evidence. On
11 February, the Court rendered judgment declaring the election held on 11 and 12 January null and
void, ordering the defendants to call for and hold another election in accordance with the constitution
and by-laws of the association and the Corporation Law, and sentencing the defendants to pay the
plaintiffs the sum of P1,500 as attorney's fees, and to pay the costs of the suit (Annex C).1 On 15
February, before the expiration of the time to appeal, the plaintiffs moved for immediate execution of
the judgment (Annex F). On 4 March the Court granted the plaintiffs motion and issued the writ of
execution prayed for (Annex G). On 9 March the defendants
_______________
1 On 19 February 1957 the defendants filed a petition for relief from judgment on the ground of
excusable neglect (Annex D). On 23 February the Court denied their petition. The defendants appealed
to the Supreme Court but their appeal was dismissed on 21 June 1957 for failure to pay the docket fee
and to deposit the estimated cost of printing the record on appeal (Annex 2).
428
428
al.
moved for stay of execution of the judgment, for which they offered to file a supersedeas bond in the
amount to be fixed by the Court (Annex H). On 23 March the Court denied the defendants' motion. In
compliance with the judgment rendered by the Court, on 26 March the election committee composed
of Quintin Tesalona, Manuel Dumaup and Jos Capinio Santos set the meeting of the members of the
association for 28 March at 5:30 o'clock in the afternoon to elect the new members of the board of
directors (Annexes J & 4). On 27 March the plaintiffs filed an ex-parte motion alleging that the election
committee that had called the meeting of members of the association is composed of the same
members that had conducted and supervised the election of the members of the board of directors that
was declared null and void by the Court; that in view thereof it would be inequitable to allow them to
conduct and supervise again the forthcoming election; that the election to be conducted and supervised
by the said committee would not be held in accordance with the constitution and by-laws of the
association providing for five days notice to the members before the election, since the notice was
posted and sent out only on 26 March, and the election would be held on 28 March, or two days after
notice; that the notice that beginning 26 March any member could secure his ballot and proxy from the
office of the association is in violation of section 5, article III of the constitution and by-laws, which
prohibits voting by proxy in the election of members of the board of directors,2 and that the defendants
did not show that arrangement is being made "to guarantee that the election will be held in accordance
with the constitution and by-laws and by the law." They prayed
_______________
2 This statement by the plaintiffs, respondents herein, is not correct because voting by proxy is allowed
by section 5, Article III, of the by-laws of the association.
429
VOL. 105, MARCH 31, 1959

429
al.
that the Court appoint its representative or representatives, whose compensation shall be paid out of
the funds of the association, to supervise and conduct the election ordered by it (Annex 4). On the same
day, 27 March, the Court entered an order providing as follows:
* * * the Court hereby orders that the election scheduled for March 28, 1957 be, as it hereby is,
cancelled, and a committee of three is hereby constituted and appointed to call, conduct and supervise
the election of the members of the board of directors of the association for 1957, said committee to be
composed of: Mr. Candido C. Viernes as representative of the Court and to act as Chairman; and one
representative each from the plaintiffs and defendants, as members. The committee is vested with the
sole and exclusive power and authority to call conduct and supervise the election of the members of the
board of directors of the association for the year 1957.
The chairman of the committee shall receive a compensation of P50.00 per day and the members
thereof P30.00 each per day, said compensation to be paid by the association.
SO ORDERED. (Annexes E & 3.)
On 28 March the defendants moved for reconsideration of the foregoing order (Annex L). On 30 March
the Court denied the motion for reconsideration.
Claiming that in issuing the order of 27 March 1957 (Annexes E & 3) and in denying their motion for
reconsideration, the Court acted without or in excess of jurisdiction or with grave abuse of discretion;
and that there being no appeal or any plain, speedy and adequate remedy in the ordinary course of law,
the petitioners pray for a writ of certiorari to annul and set aside the order assailed, and a writ of
preliminary injunction to restrain the respondent court from enforcing its order of 27 March 1957
(Annexes E & 3) after the filing of a bond in the amount to be fixed by this Court; for costs to be taxed
against the respondents, and for such other just and equitable relief as may be granted to them. On 14
May 1957, after the petitioners had filed a bond in the sum of 429
430
430
al.
P200, this Court issued the writ of preliminary injunction prayed for.
Section 3, article III, of the constitution and by-laws of the association provides:
Notice of the time and place of holding of any annual meeting, or any special meeting, of the members,
shall be given either by posting the same in a postage prepaid envelope, addressed to each member on
record at the address left by such member with the Secretary of the Association, or at his known post-
office address, or by delivering the same in person, at least five (5) days before the date set for such
meeting. * * * In lieu of addressing or serving personal notices to the members, notice of a regular
annual meeting or of a special meeting of the members may be given by posting copies of said notice at
the different departments and plants of the San Miguel Brewery Inc., not less than five (5) days prior to
the date of the meeting. (Annex K.)
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.
As regards the creation of a committee of three vested with the authority to call, conduct and supervise
the election, and the appointment thereto of Cndido C. Viernes as chairman and representative of the
court and one representative each from the parties, the Court in the exercise of its equity jurisdiction
may appoint such committee, it having been shown that the Election Committee provided for in section
7 of the by-laws of the association that conducted the election annulled by the respondent court if
allowed to act as such may jeopardize the rights of the respondents.
In a proper proceeding a court of equity may direct the holding of a stockholders' meeting under the
control of a special master, and the action taken at such a meeting will not be set aside because of a
wrongful use of the court's interlocutory decree, where not brought to the attention of the court prior
to the meeting. (18 C.J.S. 1270.)
431
VOL. 105, MARCH 31, 1959

431
Somera, et al. vs. Galman and the Court of Agrarian Relations
A court of equity may, on showing of good reason, appoint a master to conduct and supervise an
election of directors when it appears that a fair election cannot otherwise be had. Such a court cannot
make directions contrary to statute and public policy with respect to the conduct of such election. (19
C.J.S. 41)
The writ prayed for is denied and the writ of preliminary injunction heretofore issued dissolved, with
costs against the petitioners.
Pars, C. J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcin, Reyes, J. B. L., and
Endencia, JJ., concur.
Writ denied.
al., 105 Phil. 426, No. L-12282 March 31, 1959
[No. L-5883. 28 November 1953]
DOMINGO PONCE and BUHAY L. PONCE, petitioners, vs. DEMETRIO B. ENCARNACION, Judge of the
Court of First Instance of Manila, Branch I, and POTENCIANO GAPOL, respondents.
1.CORPORATION LAW; STOCKHOLDERS' MEETING TO ELECT A NEW BOARD OF DlRECTORSJ CALL OF
MEETING BY A STOCKHOLDER ON
82
82
Ponce vs. Encarnacion etc., and Gapol
COURT'S AUTHORITY.Under and pursuant to section 26 of Act No. 1459, on the showing of good cause
therefor the court may authorize a stockholder to call a meeting and to preside thereat until the
majority stockholders representing a majority of the stockholders present and permitted to be voted
shall have chosen one among them to preside it. And this showing of good cause therefor exists when
the court is apprised of the fact that the by-laws of the corporation require the calling of a general
meeting of 'the stockholders to elect the board of directors but the call for such meeting has not been
done.
2.ID.; ID.; ID.; PETITION FOR SUCH PURPOSE NEED NOT BE SET FOR HEARING.The requirement that
"on the showing of good cause therefor," the court may grant to a stockholder the authority to call such
meeting and to preside thereat does not mean that the petition for such authority must be set for
hearing with notice served upon the board of directors. It may be likened to a writ of preliminary
injunction or of attachment which may be issued ex-parte upon compliance with the requirements of
the rules and upon the court being satisfied that the same should issue. Such provisional reliefs have not
been deemed and held as violative of the due process of law clause of the Constitution.
3.ID.; ID.; ID.; "QUO WARRANTO" TO QUESTION AN ILLEGALITY IN THE ELECTION OF A MEMBER OF THE
BOARD OF DIRECTORS.The alleged illegality of the election of one member of the board of directors at
the meeting called as authorized by the court being subsequent to the order complained of cannot
affect the validity and legality of the order. If it be true that one of the directors elected at such meeting
was not qualified in accordance with the provisions of the by-laws, the remedy of an aggrieved party
would be quo warranto.
4.ID.; ID.; ID.; AGREEMENT TO DISSOLVE CORPORATION, IS NO HINDRANCE TO THE COURT'S POWER TO
AUTHORIZE STOCKHOLDER TO CALL SUCH MEETING.An alleged previous agreement to dissolve the
corporation does not affect or render illegal the said order issued by the court.
ORIGINAL ACTION in the Supreme Court. Certiorari.
Marcelino Lontok for petitioners.
Zavalla, Bautista & Nuevas for respondents.
PADILLA, J.:
This is a petition for a writ of certiorari to annul an order of the respondent court granting Potenciano
Gapol
83

83
authority, pursuant to section 26, Act No. 1459, otherwise known as the Corporation Law, to call a
meeting of the stockholders of the Daguhoy Enterprises, Inc. and to preside at such meeting by giving
proper notice to the stockholders, as required by law or the by-laws of the corporation, until after the
majority of the stockholders present and qualified to vote shall have chosen one of them to act as
presiding officer of the meeting; another order denying a motion of the petitioners to have the previous
order set aside; and a third order denying a motion to the same eff ect as the one previously filed.
The petitioners aver that the Daguhoy Enterprises, Inc., was duly registered as such on 24 June 1948;
that on 16 April 1951 at a meeting duly called, the voluntary dissolution of the corporation and the
appointment of Potenciano 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; that instead of
filing the petition f or voluntary dissolution of the corporation as agreed upon, the respondent
Potenciano Gapol, who is the largest stockholder, changed his mind and filed a complaint in the Court of
First Instance of Manila (civil No. 13753) to compel the petitioners to render an accounting of the funds
and assets of the corporation, to reimburse it, jointly and severally, in the sum of P4,500, the purchase
price of a parcel of land acquired by the corporation; P6,190 loaned to the wife of petitioner Domingo
Ponce; and F8,000 spent by the latter in his trip to the United States, or a total sum of P18,690, plus
interest, or such sum as may be found after the accounting shall have been rendered to have been
misspent, misapplied, misappropriated and converted by the petitioner Domingo Ponce to his own use
and benefit; that on 18 May 1951 the plaintiff in that case, the respondent Potenciano Gapol in this
case, filed a motion praying that the petitioners be removed as members of the board of directors which
was denied by the court; that on 3
84
84
January 1952 respondent Potenciano Gapol filed a petition (civil No. 15445, Exhibit L) 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; that 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 (Exhibit M) ; that the petitioners learned only of this
order of the court on 27 February, when the Bank of America refused to recognize the new board of
directors elected at such meeting and returned the checks drawn upon it by the said board of directors;
that the election of Juanito R. Tianzon as member of the board of directors was illegal because to be
elected to the board of directors of the corporation he must be a member of the Legionarios del
Trabajo, as required and provided for in article 7 of the by-laws of the corporation; that on 5 March the
petitioners filed a petition in the respondent court to have the order of 5 January set aside but on 5
April, the date set for the hearing of the petition, as the respondent judge was on leave the vacation
judge directed its transfer to the branch of the respondent judge; that without having set the motion for
hearing, the respondent court denied the motion of 5 March in its order of 7 May; that on 14 May the
petitioners filed another motion inviting the attention of the respondent court to the irregularity and.
illegality of its procedure and setting the motion for hearing on 21 May, but the court denied the motion
by its order of 13 June.
The only question to determine in this case is whether under and pursuant to section 26 of Act No.
1459, known as the Corporation Law, the respondent court may issue the order complained of. Said
section provides:
Whenever, from any cause, there is no person authorized to call a meeting, or when the officer
authorized to do so refuses, fails,
85
85
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.
On the showing of good cause therefor, the court may authorize a stockholder to call a meeting and to
preside thereat until the majority stockholders representing a majority of the stock present and
permitted to be voted shall have chosen one among them to preside it. And this showing of good cause
therefor exists when the court is apprised of the fact that the by-laws of the corporation require the
calling of a general meeting of the stockholders to elect the board of directors but the call for such
meeting has not been done.
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 20 of the by-laws in part provides:
* * * Regular general meetings are those which shall be called for every even year, * * *.
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.
The requirement that "on the showing of good cause therefor," the court may grant to a stockholder the
authority to call such meeting and to preside thereat does not mean that the petition must be set for
hearing with
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86
notice served upon the board of directors. The respondent court was satisfied that there was a showing
of good cause for authorizing the respondent Potenciano Gapol to call a meeting of the stockholders for
the purpose of electing the board of directors as required and provided for in the by-laws, because the
chairman of the board of directors called upon to do so had failed, neglected, or refused to perform his
duty. It may be likened to a writ of preliminary injunction or of attachment which may be issued ex-
parte upon compliance with the requirements of the rules and upon the court being satisfied that the
same should issue. Such provisional reliefs have not been deemed and held as violative of the due
process of law clause of the Constitution.
In several states of the Union1 the remedy which may be availed of or resorted to in a situation such as
the one brought about in this case is mandamus to compel the officer or incumbent board of directors
to perform a duty specifically enjoined by law or the by-laws, to wit: to call a meeting of the
stockholders. Delaware is the state that has a law similar to ours and there the chancellor of a chancery
court may summarily issue or enter an order authorizing a stockholder to call a meeting of the
stockholders of the corporation and preside thereat.2 It means that the chancellor may issue such order
without notice and hearing.
That the relief granted by the respondent court lies within its jurisdiction is not disputed. Having the
authority to grant the relief, the respondent court did not exceed its jurisdiction; nor did it abuse its
discretion in granting it.
_______________
1 Alabama, California, Connecticut, Georgia, Illinois, Kentucky, Massachusetts, Minnesota, Nevada, New
Jersey, New York, North Carolina. See 5 Fletcher Cyclopedia (of) Corporations, p. 15, footnotes.
2 In re Jackson, 9 Del. 279, 81 Atl., 992; In re Gullah, 13 Del. Ch. 1, 114 Atl., 596.
87

87
Nahag et al. vs. Roldan etc., et al.
With persistency petitioners claim that they have been deprived of their right without due process of
law. They had no right to continue as directors of the corporation unless re-elected by the stockholders
in a meeting called for that purpose every even year. They had no right to a hold-over brought about by
the failure to perform the duty incumbent upon one of them. If they felt they were sure to be re-
elected, why did they fail, neglect, or refuse to call the meeting to elect the members of the board? Or,
why did they not seek their re-election at the meeting called to elect the directors pursuant to the order
of the respondent court?
The alleged illegality of the election of one member of the board of directors at the meeting called by
the respondent Potenciano Gapol as authorized by the court being subsequent to the order complained
of cannot affect the validity and legality of the order. If it be true that one of the directors elected at the
meeting called by the respondent Potenciano Gapol, as authorized by the order of the court complained
of, was not qualified in accordance with the provisions of the by-laws, the remedy of an aggrieved party
would be quo warranto. Also, the alleged previous agreement to dissolve the corporation does not
affect or render illegal the order issued by the respondent court.
The petition is denied, with costs against the petitioners.
Pars, C. J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo, Bautista Angelo, and Labrador, JJ.,
concur.
Petition denied.
Ponce vs. Encarnacion etc., and Gapol, 94 Phil., 81, No. L-5883 November 28, 1953
No. L-34192. June 30,1988.*
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA, MARIO Y. CONSING
and ROBERTO S. BENEDICTO, petitioners, vs. HON. BENJAMIN AQUINO, in his official capacity as
Presiding Judge of Branch VIII of the Court of First Instance of Rizal, BATJAK, INC., GRACIANO A. GARCIA
and MARCELINO CALINAWAN, JR., respondents.
No. L-34213. June 30,1988.*
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. BENJAMIN H. AQUINO, in his capacity as Presiding
Judge of the Court of First Instance of Rizal, Branch VIII and BATJAK, INCORPOEATED, respondents.
Remedial Law; Certiorari; Mjotion to Quash; General Rule; An order denying a motion to quash or to
dismiss is interlocutory and cannot be subject ofa petition for certiorari; Remedies ofthe aggrieved
party; Exceptions to the general ruJe.As a general rule, an order denying a motion to quash or to
dismiss is interlocutory and cannot be the subject of a petition for certiorari. The remedy of the
aggrieved party in a denied motion to dismiss is to file an answer and interpose, as defense or defenses,
the objection or objections raised by him in said motion to dismiss, then proceed to trial and, in case of
adverse decision, to elevate the entire case by appeal in due course. However, under certain situations,
recourse to the extraordinary legal remedies of certiorari, prohibition and mandamus to question the
denial of
________________
* SECOND DIVISION.
154
154
National Investment and Development Corp. vs. Aquino
a motion to dismiss or quash is considered proper, in the interest of more enlightened and substantial
justice. As the Court said in Pineda andAmpil Manufacturing Co. vs. Bartolome, 95 Phil. 930, 938: "For
analogous reasons it may be said that the petition for certiorari interposed by the accused against the
order of the court a quo denying the motion to quash may be entertained, not only because it was
rendered in a criminal case, but because it was rendered, as claimed, with grave abuse of discretion, as
found by the Court of Appeals, xxx." and reiterated in Mead v. Argel citing Yap v. Lutero (105 Phil. 1307):
"However, were we to require adherence to this pretense, the case at bar would have to be dismissed
and petitioner required to go through the inconvenience, not to say the mental agony the torture, of
submitting himself to trial on the merits in Case No. 166443, apart from the expenses incidental thereto,
despite the fact that his trial and conviction therein would violate one of this [sic] constitutional rights,
and that, an appeal to this Court, we would, therefore, have to set aside the judgment of conviction of
the lower court. This would, obviously, be most unfair and unjust. Under the circumstances obtaining in
the present case, the flaw in the procedure followed by petitioner herein may be overlooked, in the
interest of a more enlightened and substantial justice." Thus, where there is patent grave abuse of
discretion, in denying the motion to disrniss, as in the present case, this Court may entertain the petition
for certiorari interposed by the party against whom the said order is issued.
Same; Same; Same; Jurisdiction; Jurisdiction of CFI to issue a writ of preliminary or permanent injunction
is confmed within the province where the land in question is situated.Anent the first ground, it is a
well-settled rule that the jurisdiction of a Court of First Instance to issue a writ of preliminary permanent
injunction is confmed within the boundaries of the province where the land in controversy is situated.
The petition for mandamus of Batjak prayed that NIDC and PNB be ordered to surrender, relinquish and
turnover to Batjak the assets, management and operation of Batjak particularly the three (3) oil mills
located in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte.
Same; Same; Same; Venue; Respondent Batjak's complaint should have been filed in the provinces
where the oil mills are located pursuajit to Sec. 2, Rule 4, par. A ofRules ofCourt.On the matter of
proper venue, Batjak's complaint should have been filed in the provinces where said oil mills are
located. Under Rule 4, Sec. 2, paragraph A of the Rules of Court, "actions affecting title to, or for
recovery of possession, or for partition or condemnation of, or foreclo-
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VOL. 163, JUNE 30, 1988

155
sure of mortgage on, real property, shall be commenced and tried in the province where the property or
any part thereof lies."
Same; Same; Same;Actions; Every action must beprosecuted and defended in the name ofthe real party
in interest.In support of the third ground of their motion to dismiss, PNB and NIDC contend that
Batjak's complaint for mandamus is based 011 its claim or right to recovery of possession of the three
(3) oil mills, on the ground of an alleged breach of fiduciary relationship. Noteworthy is the fact that, in
the Voting Trust Agreement, the parties thereto were NIDC and certain stockholders of Batjak. Batjak
itself was not a signatory thereto. Under Sec. 2, Rule 3 of the Rules of Court, every action must be
prosecuted and defended in the name of the real party in interest. Applying the rule in the present case,
the action should have been filed by the stockholders of Batjak, who executed the Voting Trust
Agreement with NIDC; and not by Batjak itself which is not a party to said agreement, and therefore, not
the real party in interest in the suit to enforce the same.
Same; Same; Same; Mandamus, nature of; Legal Right, defined in Sec. 3, Rule 65 ofRules of Court.
Moreover, the action instituted by Batjak before the respondent court was a special civil action for
mandamus with prayer for preliminajy mandatory injunction. Generally, mandamus is not a writ of
righiand its allowance or refusal is a matter of discretion to be exercised on equitable principles and in
accordance with well-settled rules of law, and that it should never be used to effectuate an injustice, but
only to prevent a failure of justice. The writ does not issue as a matter of course. It will issue only where
there is a clear legal right sought to be enforced. It will not issue to enforce a doubtful right. A clear legal
right within the meaning of Sec. 3, Rule 65 of the Rules of Court means a right clearly founded in or
granted by law, a right which is enforceable as a matter of law.
Same; Same; Same; Same; Writ of mandamus will not issue to give the applicant anything to which he is
not entitled by law; Case at bar.Applymg the above-cited principles of law in the present case, the
Court fmds no clear right in Batjak to be entitled to the writ prayed for. It should be noted that the
petition for mandamus filed by it prayed that NIDC and PNB be ordered to surrender, relinquish and
turn-over to Batjak the assets, management, and operation of Batjak particularly the three (3) oil mills
and to make the order permanent, after trial, and ordering NIDC and PNB to submit a complete
accounting of the assets, management and operation of Batjak from 1965. In effect, what Batjak seeks
to recover is title to, or
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156
possession of, real property (the three (3) oil mills which really made up the assets of Batjak) but which
the records show already belong to NIDC. It is not disputed that the mortgages on the three (3) oil mills
were foreclosed by PNB and NIDC and acquired by them as the highest bidder in the appropriate
foreclosure sales. Ownership thereto was subsequently consolidated by PNB and NIDC, after Batjak
failed to exercise its right of redemption. The three (3) oil mills are now titled in the name of NIDC. From
the foregoing, it is evident that Batjak had no clear right to be entitled to the writ prayed for. In Lamb vs.
Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs. The Board ofPharmacy, 20 Phil. 367,
the Court said that the writ of mandamus will not issue to give to the applicant anything to which he is
not entitled by law.
Same; Same; Same; Receivership; A receiver ofproperty subject of the action may be appointed by the
court when the party applying for the appointment of a receiver has an interest in said property.A
receiver of real or personal property, which is the subject of the action, may be appointed by the court
when it appears from the pleadings that the party applying for the appointment of receiver has an
interest in said property. The right, interest, or claim in property, to entitle one to a receiver over it,
must be present and existing.
Same; Same; Same; Same; Prevention of imminent danger to property, the guiding principle that
governs courts in appointing receivers.Moreover, the prevention of imminent danger to property is
the guiding principle that governs courts in the matter of appointing receivers. Under Sec. l(b), Rule 59
of the Rules of Court, it is necessary in granting the relief of receivership that the property or fund be in
danger of loss, removal or material injury. In the case at bar, Batjak in its petition for receivership, or in
its amended petition therefor, failed to present any evidence to establish the requisite condition that
the property is in danger of being lost, removed or materially injured unless a receiver is appointed to
guard and preserve it.
Corporations; 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.ln any event, a voting trust transfers
only voting or other rights pertaining to the shares subject of the agreement, or control over the stock.
The law on the matter is Section 59, paragraph 1 of the Corporation Code (BP 68) which provides: "Sec.
59. Voting TrustsOne or more stockholders of a stock corporation may create a voting trust for the
purpose of confer-
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VOL. 163, JUNE 30, 1988

157
ing upon a trustee or trusties the right to vote and other rights pertaining to the shares for a period not
exceeding five (5) years at any one time: x x x"
PETITIONS for certiorari and prohibition with preliminary injunction to review the orders of the Court of
First Instance of Rizal, Br. VIII. Aquino, J.

Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No. 34192.
The ChiefLegal Counsel for petitioner PNB in G.R. No. 34213.
Reyes and Sundiam Law Office for respondent Batjak, Inc.
Duran, Chuanico, Oebanda, Benemerito & Associates for private respondents in G.R. Nos. 34192 &
34213.
Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L34192.
PADILLA, J.:
These two (2) separate petitions for certiorari and prohibition, with preliminary injunction, seek to annul
and set aside the orders of respondent judge, dated 16 August 1971 and 30 September 1971, in Civil
Case No. 14452 of the Court of First Instance of Rizal, entitled "Batjak, Inc. vs. NIDC, et al." The order of
16 August 19711 granted the alternative petition of private respondent Batjak, Inc. (Batjak, for short) for
the appointment of receiver and denied petitioners' motion to dismiss the complaint of said private
respondent. The order dated 30 September 19712 denied petitioners' motion for reconsideration of the
order dated 16 August 1971.
The herein petitions likewise seek to prohibit the respondent judge from hearing and/or conducting any
further proceedings in Civil Case No. 14452 of said court.
Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a Filipino-American corporation
organized under
________________
1 Annex B, p. 114, Rollo of G.R. No. 34192.

2 Annex C, p. 136, Rollo of G.R. No. 34192.
158
158
SUFKEME COURT REPORTS ANNOTATED
the laws of the Philippines, primarily engaged in the manufacture of coconut oil and copra cake for
export. In 1965, Batjak's financial condition deteriorated to the point of bankruptcy. As of that year,
Batjak's indebtedness to some private banks and to the Philippine National Bank (PNB) amounted to
Pll,915,000.00, shown as follows:
Republic Bank
P2,324,000.00
Philippine Commercial and
Industrial Bank
1,346,000.00
Manila Banking Corporation
2,000,000.00
Manufacturers Bank
440,000.00
Hongkong and Shanghai
Banking Corporation
250,000.00
Foreign Export Advances
(against immediate shipment)
555,000.00
PNB export advance line
(against immediate shipment)
5,000,000.00
TOTAL
11,915,000.00
As security for the payment of its obligations and advances against shipments, Batjak mortgaged its
three (3) coco-processing oil mills in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte
to Manila Banking Corporation (Manilabank), Republic Bank (RB), and Philippine Commercial and
Industrial Bank (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. On 5 October 1965, a Financial Agreement was submitted by PNB to
Batjak for acceptance. The Financial Agreement reads:
"PHILIPPINE NATIONAL BANK
Manila, Philippines
International Department
October 5,1965
BATJAK, INCORPORATED
3rd Floor, G. Puyat Bldg.
Escolta, Manila
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159
Attn.: Mr. CIRIACO B. MENDOZA
Vice-President & General Manager
Gentlemen:
We are pleased to advise that our Board of Directors approved for you the following:
1) That NIDC shall invest P6,722,500.00 in the form of preferred shares of stocks at 9% cumulative,
participating and convertible within 5 years at par into common stocks to liquidate your accounts with
the Republic Bank, Manufacturers Bank & Trust Company and the PCIB which, however, shall be applied
to the latter three (3) banks accounts with the Loans & Discounts Dept. NIDC shall match your PIO
million subscription by an additional investment of P3,277,500 within a period of one to two years at
NIDC's option;
2) That NIDC will guaranty for five (5) years your account with the Manila Banking Corporation;
3) That the above banks (Republic Bank, PCIB, MBTC and Manila Banking Corp.) shall release in favor of
PNB the first and any mortgage they hold on your properties;
4) That you shall exercise (execute) a first mortgage on all your properties located at Sasa, Davao City;
Jimenez, Misamis Occidental; and Tanauan, Leyte and assign leasehold rights on the property on which
your plant at Sasa, Davao City is erected in favor of PNB;
5) That a voting trust agreement for five (5) years over 60% of the oustanding paid up and subscribed
shares shall be executed by your stockholders in favor of NIDC;
6) That this accomodation shall be secured by the joint and several signatures of officers and directors;
7) That the number of the Board of Directors shall be increased to seven (7), three (3) from your firm
and the other four (4) from the PNB-NIDC;
8) That a comptroller, at your expense, shall be appointed by PNB-NIDC to supervise the financial
management of your firm;
9) That the past due accounts of P5 million with the International Department of the PNB shall be
transferred to the Loans & Discount Department and to be treated as a Demand Loan;
10) That any excess of NIDC investment as required in Condition 1 after payment of the obligations to
three (3) Banks (RB, MBTC, & PCIB) shall be applied to reduce the above Demand Loan of P5 million;
11) That we shall grant you an export advance of P3 million to be used for copra purchases, subject to
the following conditions:
160
160
a) That the line shall expire on September 30,1966 but revocable at the Bank(s) option;
b) That drawings against the line shall be allowed only when an irrevocable export L/C for coconut
products has been established or assigned in your favor and you shall assign to us all proceeds of
negotiations to be received from your export letters of credit;
c) That drawings against the line shall be limited to 50% of the peso value of the export letters of credit
computed at P3.50 per $1.00 but total drawings shall not in any event exceed P3,000,000.00;
d) That release or releases against the line shall be covered by promissory note or notes for 90 days but
not beyond the expiry dates of the covering L/C and proceeds of said L/C shall first be applied to the
correspondent drawings on the line;
e) That drawings against the line shall be charged interest at the rate of 9% per annum and subject to
1/2% penalty charge on all drawings not paid or extended on maturity date; and
f) That within 90 days from date of release against the line, you shall negotiate with us on equivalent
amount in export bills, otherwise, the line shall be temporarily suspended until the outstanding export
advance is fully liquidated.
We are writing the National Investment & Development Corporation, the Republic Bank, the Philippine
Commercial & Industrial Bank and the Manufacturers Bank & Trust Company and the Manila Banking
Corporation regarding the above.
In connection with the above, kindly submit to us two (2) copies of your board resolution certifled to
under oath by your corporate secretary accepting the conditions enumerated above authorizing the
above transactions and the officer or officers to sign on behalf of the corporation.
Thank you.
Very truly yours,
(SGD.) JOSE B. SAMSON"3
The terms and conditions of the Financial Agreement were duly accepted by Batjak, Under said
Agreement, NIDC would, as it actually did, invest P6,722,500.00 in Batjak in the form of preferred shares
of stock convertible within five (5) years at
________________
3 Annex E, p. 152, Rollo of G.R. No. 34192.

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161
par into common stock, to liquidate Batjak's obligations to Republic Bank (RB), Manufacturers Bank and
Trust Company (MBTC) and Philippine Commercial & Industrial Bank (PCIB), and the balance of the
investment was to be applied to Batjak's past due account of P5 million with the PNB.
Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any mortgages they
held on the properties of Batjak.
As agreed, PNB also granted Batjak an export-advance line of P3 million, later increased to P5 million,
and a standby letter of credit facility in the amount of P5,850,000.00. As of 29 September 1966, the
financial accomodation that had been extended by PNB to Batjak amounted to a total ofPl 4,207,859.51.
As likewise agreed, Batjak executed a first mortgage in favor of PNB on all its properties located at
Jimenez, Misamis Occidental and Tanauan, Leyte. Batjak's plant in Sasa, Davao City was mortgaged to
the Manila Bank which, in 1967, instituted foreclosure proceedings against the same but which were
aborted by the payment by Batjak of the sum of P2,400,000.00 to Manila Bank, and which amount was
advanced to Batjak by NIDC, a wholly-owned subsidiary of PNB. To secure the advance, Batjak
mortgaged the oil mill in Sasa, Davao City to NIDC.4
Next, a Voting Trust Agreement was executed on 26 October 1965 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.
The voting Trust Agreement reads:
"VOTING TRUST AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT made and executed by the undersigned stockholders of BATJAK, INC., a corporation
duly organized and existing under the laws of the Philippines, whose names are hereinbelow subscribed
hereinafler called the SUBSCRIBERS, and the NATIONAL
________________
4 Annex G, p. 155, Rollo of G.R. No. 34192.

162
162
INVESTMENT AND DEVELOPMENT CORPORATION, hereinafter referred to as the trustee.
WITNESSETH:
WHEREAS, the SUBSCRIBERS are owners respectively of the capital stock of the BATJAK, INC.
(hereinafter called the CORPORATION) in the amounts represented by the number of shares set forth
opposite their respective names hereunder;
AND WHEREAS, with a view of establishing a safe and competenl management to operate the
corporation for the best interest of all the stockholders thereof, and as mutually agreed between the
SUBSCRIBERS and the TRUSTEE, this Voting Tmst Agreement has been executed under the following
terms and conditions.
NOW THEREFORE, the undcrsigned stockholders, in considoration of the premises and of the mutual
covenants and agreements herein contained and to carry out the foregoing purposes in ordel* to vest in
the TRUSTEE the voting righfc of the shares of stock held by the undersigned in the CORPORATION as
hereinafter stated it is mutually agreed as follows:
1. PERIOD OF DESIGNATIONFor a period of five (5) years from and after date hereof, without power of
revocation on the part of the SUBSCRIBERS, the TRUSTEE designated in the manner herein provided is
hereby made, constituted and appointed as a VOTING TRUSTEE to act for and in the name of the
SUBSCRIBERS, it being understood, however, that this Voting Trust Agreement shall, upon its expiration
be subject to a re-negotiation between the parties, as may be warranted by the balance and attending
circumstance of the loan investment of the TRUSTEE or otherwise in the CORPORATION.
2. ASSIGNMENT OF STOCK CERTIFICATES UPON ISSUANCEThe undersigned stockholders hercby
transfer and assigii their common shares to the capital stock of the CORPORATION to the extent shown
hereunder:
JAMES A. KEISTER
21,500 shares
JOHNNY LIEUSON
20,300 shares
CBM FINANCE & INVESTMENT
CORP. (C.B. Mendoza, Pres.)
5,000 shares
ALEJANDRO G. BELTRAN
4,000 shares
ESPERANZA A. ZAMORA
3,000 shares
CIRIACO B. MENDOZA
2,000 shares
FIDELA DE GUZMAN
2,000 shares
LLOYD D. COMBS
2,000 shares
RENATO B. BEJAR
200 shares
TOTAL
60,000 shares
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VOL. 163, JUNE 30, 1988

163
to the TRUSTEE by virtue of the provisions hereof and do hereby authorize the Secretary of the
CORPORATION to issue the corresponding certificate directly in the name of the TRUSTEE and on which
certificates it shall appear that they have been issued pursuant to this Voting Trust Agreement and the
said TRUSTEE shall hold in escrow all such certificates during the term of the Agreement. In turn, the
TRUSTEE shall deliver to the undersigned stockholders the corresponding Voting Trust certificates
provided for in Sec. 36 of Act No. 1459.
3. VOTING POWER OF TRUSTEETbe TRUSTEE and its successors in trust, if any, shall have the power
and it shall be its duty to vote the shares of the undersigned subject hereof and covered by this
Agreement at all annual, adjourned and special meetings of the CORPORATION on all questions,
motions, resolutions and matters including the election of directors and such matters on which the
stockholders, by virtue of the by-laws of the CORPORATION and of the ezisting legislations are entitled
to vote, which may be voted upon at any and all said meetings and shall also have the power to execute
and acknowledge any agreements or documents that may'be necessary in its opinion to express the
consent or assent of all or ahy of the stockholders of the CORPORATION with respect to any matter or
thing to which any consent or assent of the stockholders may be necessary, proper or convenient.
4. FILING OF AGREEMENTAn executed copy of this Agreement shall be filed with the CORPORATION at
its office in the City of Manila wherever it may be transferred therefrom and shall constitute irrevocable
authority and absolute direction to tbe Officers of the CORPORATION whose duty is to sign and deliver
stock certificates to make delivery only to said voting trustee of the sbares and certificates of stock
subject to the provisions of this Agreement as aforesaid. Such copy of this Agreement shajl at all times
be open to inspection by any stockholder, as provided by law.
5. DIVIDENDThe fiill and absolute beneficial interest in tfce shares subject of this Agreement shall
remain with the stockholders executing the same and any and all dividends wbich may be declared by
the CORPORATION shall belong and be paid to them exclusively in accordance with their stockholdings
after deducting therefrom or applying the same to whatever liabilities the stockholders may have in
favor of the TRUSTEE by virtue of any Agreement or Contract that may have been or will be executed by
and between tbe TRUSTEE and the CORPORATION or between the former and the undersigned
stockholders.
6. COMPENSATION; IMMUNITYThe TRUSTEE or its successor in trust shall not receive any
compensation for its service
164
164
except perhaps that which the CORPORATION may grant to the TRUSTEE's authorized representative, if
any. Expenses, costs, charges, and other liabilities incurred in the carrying out of the trust herein
established or by reason thereof, shall be paid for with the funds of the CORPORATION. The TRUSTEE -or
any of its duly authorized representative shall incur no liability by reason of any error of law or of any
matter or thing done or omitted under this Agreement, except for his own individual malfeasance.
7. REPRESENTATIONThe TRUSTEE, being a corporation and a juridical person shall accomplish the
foregoing objectives and perform its functions under this Agreement as well as enjoy and exercise the
powers, privileges, rights and interests herein established through its duly authorized and accredited
representative/s with full authority under the speeific appointment or designation or Proxy.
8. IRREVOCABILITYThis Agreement shall during its 5-year term or any extension thereof be binding
upon and inure to the benefit of the undersigned stockholders and their respective legal
representatives, pledges, transferees, and/or assigns and shall be irrevocable during the said terms
and/or its extension pursuant to the provisions of paragraph 1 hereof. It is hereby understood and the
undersigned stockholders have bound as they hereby bind themselves to make a condition of every
pledge, transfer of assignment of their interests in the CORPORATION that the interests and
participation so pledged, transferred or assigned is evidenced by annotations in the certificates of stocks
or in the books of the corporation, shall be subject to this Agreement and the same shall be binding
upon the pledgees, transferees and assigns while the trust herein created still subsists.
9. TERMINATIONUpon termination of this Agreement as heretofore provided, the certificates
delivered to the TRUSTEE by virtue hereof shall be returned and delivered to the undersigned
stockholders as the absolute owners thereof, upon surrender of their respective voting trust certificates,
and the duties of the TRUSTEE shall cease and terminate.
10. ACCEPTANCE OF TRUST-The TRUSTEE hereby accepts the trust created by this Agreement under the
signature of its duly authorized representative affixed hereinbelow and agrees to perform the same in
accordance with the term/s hereof.
IN WITNESS HEREOF, the undersigned stockholders and the TRUSTEE by its representatives, have
hereunto affixed their signatures this 26 day of October, 1965 in the City of Manila, Philippines.
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VOL. 163, JUNE 30, 1988

165
National Investment arid Development Corp. vs. Aquino
(SGD) JAMES A. KEISER
(SGD) JOHNNY LIEUSON
Stockholder
Stockholder
CBM FINANCE & INVESTMENT CORPORATION
By: (SGD) C.B. MENDOZA
President
ESPERANZA A. ZAMORA
(SGD) ALEJANDRO G. BELTRAN
By: (SGD) MARIANO ZAMORA
Stockholder
ESPERANZA A. ZAMORA
(SGD) FIDELA DE GUZMAN

(SGD) CIRIACO B. MENDOZA
Stockholder
Stockholder
(SGD) RENATO B. BEJAR
(SGD) LLOYD D. COMBS
Stockholder
Stockholder
NATIONAL INVESTMENT AND
DEVELOPMENT CORPORATION
By:
(SGD) IGNACIO DEBUQUE, JR.
Vice-President"5
In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings
against the oil mills of Batjak located in Tanauan, Leyte and Jimenez, Misamis Occidental. The properties
were sold to PNB as the highest bidder. One year thereafter, or in September 1968, final Certificates of
Sale were issued by the provincial sheriffs of Leyte6 and Misamis Occidental7 for the two (2) oil mills in
Tanauan and Jimenez in favor of PNB, after Batjak failed to exercise its right to redeem the foreclosed
properties within the allowable one year period of redemption. Subsequently, PNB transferred the
ownership of the two (2) oil mills to NIDC which, as aforestated, was a wholly-owned PNB subsidiary.
As regards the oil mill located at Sasa, Davao City, the same was similarly foreclosed extrajudicial by
NIDC. It was sold to NIDC as the highest bidder. After Batjak failed to redeem the property, NIDC
consolidated its ownership of the oil mill.8
________________
5 Annex 2, p. 469, Rollo of G.R. No. 34213.

6 Annex M, p. 177, Rollo of G.R. No. 34192.
7 Annex N, p. 195, Rollo of G.R. No. 34192.
8 Annex O, p. 265, Rollo of G.R. No. 34192.
166
166
Three (3) years thereafter, or on 31 August 1970, Batjak represented by majority stockholders, through
Atty. Amado Duran, legal counsel of private respondent Batjak, wrote a letter to NIDC inquiring if the
latter was still interested in negotiating the renewal of the Voting Trust Agreement.9 On 22 September
1970, legal counsel of 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 and, in
view thereof, requested for the turn-over and transfer of all Batjak assets, properties, management and
operations.10
On 23 September 1970, legal counsel of Batjak sent still another letter to NIDC, this time asking for a
complete accounting of the assets, properties, management and operation of Batjak, preparatory to
their turn-over and transfer to the stockholders of Batjak.11
NIDC replied, confirming the fact that it had no intention whatsoever to comply with the demands of
Batjak.12
On 24 February 1971, Batjak filed before the Court of First Instance of Rizal a special civil action for
mandamus with preliminary injunction against herein petitioners docketed as Civil Case No. 14452.13
On 14 April 1971, in said Civil Case No. 14452, Batjak filed an urgent exparte motion for the issuance of a
writ of preliminary prohibitory and mandatory injunction.14 On the same day, respondent judge issued
a restraining order "prohibiting defendants (herein petitioners) from removing any record, books,
commercial papers or cash, and leasing, renting out, disposing of or othprwise transferring ariy or all of
the properties, machineries, raw materials and finished products and/or by-products thereof now in the
factory sites of the three (3) inodern coco milling plants situated in Jimenez, Misamis Occidental, Sasa,
Davao City, and Tanauan, Leyte."15
________________
9 Annex Q, p. 226, Rollo of G.R. No. 34192.

10 Annex R, p. 228, Rollo of G.R. No. 34192.
11 Annex S, p. 230, Rollo of G.R. No. 34192.
12 Annex T, p. 232, Rollo of G.R. No. 34192.
13 Annex P. p. 206, Rollo of G.R. No. 34192.
14 Annex Z, p. 264, Rollo of G.R. No. 34192.
15 Annex AA, p. 273, Rollo of G.R. No. 34192.
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VOL. 163, JUNE 30, 1988

167
The order of 14 April 1971 was subsequently amended by respondent judge upon an ex parte motion of
private respondent Batjak so as to include the premises of NIDC in Makati and those of PNB in Manila, as
among the premises which private respondent Batjak was authorized to enter in order to conduct an
inventory.
On 24 April 1971, NIDC and PNB filed an opposition to the ex parte application for the issuance of a writ
of preliminary prohibitory and mandatory injunction and a motion to set aside restraining order.
Before the court could act on the said motion, private respondent Batjak filed on 3 May 1971 a petition
for receivership as alternative to writ of preliminary prohibitory and mandatory injunction.16 This was
opposed by PNB and NIDC.17
On 8 May 1971, NIDC and PNB filed a motion to dismiss Batjak's complaint.18
On 16 August 1971, respondent judge issued the now assailed order denying petitioners' motion to
dismiss and appointing a set of three (3) receivers.19 NIDC moved for reconsideration of the aforesaid
order.20 On 30 September 1971, respondent judge denied the motion for reconsideration,21
Hence, these two (2) petitions, which have been consolidated, as they involve a resolution of the same
issues.
In their manifestation with motion for early decision, dated 25 August 1986, private respondent, Batjak
contends that the NIDC has already been abolished or scrapped by its parent company, the PNB.
After a careful study and examination of the records of the case, the Court finds and holds for the
petitioners.
1. On the denial of petitioriers' motion to dis?niss.
As a general rule, an order denying a motion to quash or to
________________
16 Annex H, p. 138, Rollo of G.R. No. 34213.

17 Annex FF, p. 323, Rollo of G.R. No. 34192 for PNB.
18 Annex GG, p. 331, Rollo of G.R. No. 34192 for NIDC; Annex J, p. 178, Rollo of G.R. No. 34213 for PNB.
19 Annex B, p. 114, Rollo of G.R. No. 34192.
20 Annex LL, p. 416, Rollo of G.R. No. 34192.
21 Annex C, p. 136, Rollo of G.R. No. 34192.
168
168
dismiss is interlocutory and cannot be the subject of a petition for certiorari. The remedy of the
aggrieved party in a denied motion to dismiss is to file an answer and interpose, as defense or defenses,
the objection or objections raised by him in said motion to dismiss, then proceed to trial and, in case of
adverse decision, to elevate the entire case by appeal in due course. However, under certain situations,
recourse to the extraordinary legal remedies of certiorari, prohibition and mandamus to question the
denial of a motion to dismiss or quash is considered proper, in the interest of more enlightened and
substantial justice. As the court said in Pineda and Ampil Manufacturing Co. vs. Bartolome, 95 Phil. 930,
938:
"For analogous reasons it may be said that the petition for certiorari interposed by the accused against
the order of the court a quo denying the motion to quash may be entertained, not only because it was
rendered in a criminal case, but because it was rendered, as claimed, with grave abuse of discretion, as
found by the Court of Appeals. x x x."
and reiterated in Mead v. Argel 22 citing Yap v. Lutero (105 Phil. 1307):
"However, were we to require adherence to this pretense, the case at bar would have to be dismissed
and petitioner required to go through the inconvenience, not to say the mental agony and torture, of
submitting himself to trial on the merits in Case No. 166443, apart from the expenses incidental thereto,
despite the fact that his trial and cpnviction therein would violate one of this [sic] constitutional rights,
and that, an appeal to this Court, we would, therefore, have to set aside the judgment of conviction of
the lower court. This would, obviously, be most unfair and unjust. Under the circumstances obtaining in
the present case, the flaw in the procedure followed by petitioner herein may be overlooked, in the
interest of a more enlightened and substantial justice."
Thus, where there is patent grave abuse of discretion, in denying the motion to dismiss, as in the
present case, this Court may entertain the petition for certiorari interposed by the party against whom
the said order is issued.
________________
22 G.R. No. L-41958, July 20,1982,115 SCRA 256, 262.

169
VOL. 163, JUNE 30, 1988
169
In their motion to dismiss Batjak's complaint, in Civil Case No. 14452, NIDC and PNB raised common
grounds for its allowance, to wit:
1. This Honorable Court (the trial court) has no jurisdiction over the subject of the action or suit;
2. The venue is improperly laid; and
3. Plaintiff has no legal capacity to sue.
In addition, PNB contended that the complaint states no cause of action (Rule 16, Sec. 1, Par. a, c, d & g,
Rules of Court).
Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of First Instance to issue a
writ of preliminary or permanent injunction is confined within the boundaries of the province where the
land in controversy is situated.23 The petition for mandamus of Batjak prayed that NIDC and PNB be
ordered to surrender, relinquish and turnover to Batjak the assets, management and operation of Batjak
partieularly the three (3) oil mills located in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan,
Leyte.
Clearly, what Batjak asked of respondent court was the exercise of power or authority outside its
jurisdiction.
On the matter of proper venue, Batjak's complaint should have been filed in the provinces where said oil
mills are located. Under Rule 4, Sec. 2, paragraph A of the Rules of Court, "actions affecting title to, or
for recovery of possession, or for partition or condemnation of, or foreclosure of mortgage on, real
property, shall be commeneed and tried in the province where the property or any part thereof lies."
In support of the third ground of their motion to dismiss, PNB and NIDC contend that Batjak's complaint
for mandamus is based on its claim or right to recovery of possession of the three (3) oil mills, on the
ground of an alleged breach of fiduciary relationship. Noteworthy is the fact that, in the Voting Trust
Agreement, the parties thereto were NIDC and
________________
23 Acosta vs. Alvendia, G.R. No. L-14598, Oct. 31,1960; Central Bank of the Philippines vs. Cajigal, G.R.
No. L-19278, Dec. 29,1962, 6 SCRA1072,1076.
23a (NOTE: Dagupan Electric vs. Pario, 95 SCRA 693, cannot be applied since the principal offices of PNB
and NIDC are in Manila)
170
170
certain stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec. 2, Rule 3 of the Rules
of Court, every action must be prosecuted and defended in the name of the real party in interest.
Applying the rule in the present case, the action should have been filed by the stockholders of Batjak,
who executed the Voting Trust Agreement with NIDC, and not by Batjak itself which is not a party to said
agreement, and therefore, not the real party in interest in the suit to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays that the petition for mandamus be
dismissed. A careful reading of the Voting Trust Agreement shows that PNB was really not a party
thereto. Hence, mandamus will not lie against PNB.
Moreover, the action instituted by Batjak before the respondent court was a special civil action for
mandamus with prayer for preliminary mandatory injunction. Generally, mandamus is not a writ of right
and its allowance or refusal is a matter of discretion to be exercised on equitable principles and in
accordance with well-settled rules of law, and that it should never be used to effectuate an injustice, but
only to prevent a failure of justice.24 The writ does not issue as a matter of course. It will issue only
where there is a clear legal right sought to be enforced. It will not issue to enforce a doubtful right. A
clear legal right within the meaning of Sec. 3, Rule 65 of the Rules of Court means a right clearly founded
in or granted by law, a right which is enforceable as a matter of law.
Applying the above-cited principles of law in the present case, the Court finds no clear right in Batjak to
be entitled to the writ prayed for. It should be noted that the petition for mandamus filed by it prayed
that NIDC and PNB be ordered to surrender, relinquish and turn-over to Batjak the assets, management,
and operation of Batjak particularly the three (3) oil mills and to make the order permanent, after trial,
and ordering NIDC and PNB to submit a complete accounting of the assets, management and operation
of Batjak from 1965. In effect, what Batjak seeks to recover is title to, or possession of,
_________________
24 Marcelo Steel Corporation vs. Import Central Board, 87 Phil. 375.

171
VOL. 163, JUNE 30, 1988

171
real property (the three (3) oil mills which really made up the assets of Batjak) but which the records
show already belong to NIDC. It is not disputed that the mortgages on the three (3) oil mills were
foreclosed by PNB and NIDC and acquired by them as the highest bidder in the appropriate foreclosure
sales. Ownership thereto was subsequently consolidated by PNB and NIDC, after Batjak failed to
exercise its right of redemption. The three (3) oil mills are now titled in the name of NIDC. From the
foregoing, it is evident that Batjak had no clear right to be entitled to the writ prayed for. In Lamb vs.
Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs. The Board ofPharmacy, 20 Phil. 367,
the Court said that the writ of mandamus will not issue to give to the applicant anything to which he is
not entitled by law.
2. On the appointment ofreceiver.
A receiver of real or personal property, which is the subject of the action, may be appointed by the court
when it appears from the pleadings that the party applying for the appointment of receiver has an
interest in said property.25 The right, interest, or claim in property, to entitle one to a receiver over it,
must be present and existing.
As borne out by the records of the case, PNB acquired ownership of two (2) of the three (3) oil mills by
virtue of mortgage foreclosure sales. NIDC acquired ownership of the third oil mill also under a
mortgage foreclosure sale. Certificates of title were issued to PNB and NIDC after the lapse of the one
(1) year redemption period. Subsequently, PNB transferred the ownership of the two (2) oil mills to
NIDC. There can be no doubt, therefore, that NIDC not only has possession of, but also title to the three
(3) oil mills formerly owned by Batjak. The interest of Batjak over the three (3) oil mills ceased upon the
issuance of the certificates of title to PNB and NIDC confirming their ownership over the said properties.
More so, where Batjak does not impugn the validity of the foreclosure proceedings. Neither Batjak nor
its stockholders have instituted any legal proceedings to annul the mortgage foreclosure sales
aforementioned.
_________________
25 Sec. l(b), Rule 59 of the Rules of Court.

172
172
Batjak premises its right to the possession of the three (3) oil mills on the Voting Trust Agreement,
claiming that under said agreement, NIDC was constituted as trustee of the assets, management and
operations of Batjak, that due to the expiration of the Voting Trust Agreement, on 26 October 1970,
NIDC should turn over the assets of the three (3) oil mills to Batjak.
The relevant provisions of the Voting Trust Agreement, particularly paragraph 4 & No. 1 thereof, are
hereby reproduced:
"NOW THEREFORE, the undersigned stockholders, in consideration of the premises and of the mutual
covenants and agreements herein contained and to carry out the foregoing purposes in order to vest in
the TRUSTEE the voting rights of the shares of stock held by the undersigned in the CORPORATION as
hereinafter stated it is mutually agreed as follows:
"1. PERIOD OF DESIGNATIONFor a period of five (5) years from and after date hereof, without power
of revocation on the part of the SUBSCRIBERS, the TRUSTEE designated in the manner herein provided is
hereby made, constituted and appointed as a VOTING TRUSTEE to act for and in the name of the
SUBSCRIBERS, it being understood, however, that this Voting Trust Agreement shall, upon its expiration
be subject to a re-negotiation between the parties, as may be warranted by the balance and attending
circumstance of the loan investment of the TRUSTEE or otherwise in the CORPORATION.
and No. 3 thereof reads:
"3. VOTING POWER OF TRUSTEEThe TRUSTEE and its successors in trust, if any, shall have the power
and it shall be its duty to vote the shares of the undersigned subject hereof and covered by this
Agreement at all annual, adjourned and special meetings of the CORPORATION on all questions,
motions, resolutions and matters including the election of directors and all such matters on which the
stockholders, by virtue of the by-laws of the CORPORATION and of the existing legislations are entitled
to vote, which may be voted upon at any and all said meetings and shall also have the power to execute
and acknowledge any agreements or documents that may be necessary in its opinion to express the
consent or assent of all or any of the stockholders of the CORPORATION with respect to any matter or
thing to which any consent or assent of the stockholders may be necessary, proper or convenient."
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VOL. 163, JUNE 30, 1988

173
From the foregoing provisions, it is clear that 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. This is confirmed by paragraph No. 9 of the same Voting Trust
Agreement, thus:
"9. TERMINATIONUpon termination of this Agreement as heretofore provided, the certificates
deiivered to the TRUSTEE by virtue hereof shall be returaed and delivered to the undersigned
stockholders as the absolute owners thereof, upon surrender of their respective voting trust certificates,
and the duties of the TRUSTEE shall cease and terminate."
Under the aforecited provision, 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.
In any event, a voting tmst transfers only voting or other rights pertaining to the shares subject of the
agreement, or control over the stock. The law on the matter is Section 59, paragraph 1 of the
Corporation Code (BP 68) which provides:
"Sec. 59. Voting TrustsOne or more stockholders of a stock corporation may create a voting trust for
the purpose of confering upon a trustee or trusties the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: x x x"26
________________
26 Formerly Sec. 36 of the Corporation Law or Act. No. 1459.

174
174
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.
Moreover, the prevention of imminent danger to property is the guiding principle that governs courts in
the matter of appointing receivers. Under Sec. 1 (b), Rule 59 of the Rules of Court, it is necessary in
granting the relief of receivership that the property or fund be in danger of loss, removal or material
injury.
In the case at bar, Batjak in its petition for receivership, or in its amended petition therefor, failed to
present any evidence to establish the requisite condition that the property is in danger of being lost,
removed or materially injured uxiless a receiver is appointed to guard and preserve it.
WHEREFORE, the petitions are GRANTED. The orders of the respondent judge, dated 16 August 1971
and 30 September 1971, are hereby ANNULLED and SET ASIDE. The respondent judge and/or his
successors are ordered to desist from hearing and/or conducting any further proceedings in Civil Case
No. 14452, except to dismiss the same. With costs against private respondents.
SOORDERED.
Yap (C.J.), Melencio-Herrera, Paras and Sarmiento, JJ., concur.
Petitions granted; orders annulled and set aside.
Note.Special civil action of certiorari dpes not lie where motion to dismiss or demurrer to evidence is
denied by the court. (Cruz vs. People, 144 SCRA 677.)
National Investment and Development Corp. vs. Aquino, 163 SCRA 153, No. L-34192, No. L-34213 June
30, 1988

Corporation Law Chapters 6-8

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Corporation Law Chapters 6-8

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[No. 6217. December 26, 1911.

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VOL. 49, NOVEMBER 3, 1926

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The facts are stated in the opinion of the Court.

VOL. 19, MARCH 30, 1967

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VOL. 176, AUGUST 11, 1989

The facts are stated in the opinion of the Court.

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12 Annex 1 of Undated Kahn Comment.

16 Id., pp. 5-6.

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23 150 SCRA 181.

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30 Sec. 5, P.D. 902-A.

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34 Evangelista v. Santos, 86 Phil. 387.

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VOL. 136, MAY 13, 1985

The facts are stated in the opinion of the Court.

VOL. 136, MAY 13, 1985

1 Joint Record on Appeal, Vol 1 pages 19-116.

4 Joint Record on Appeal, Vol. 1, pages 139-217.

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In not holding that plaintiff is in estoppel;

In voiding the assignment of credit;

In holding that Dr. Buencamino is guilty of breach of trust;

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6 Pages 6-7, TSN, November 3, 1960.

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