Cagayan Fishing Development Co. Inc. vs. Sandiko (GR No.

L-43350, their provisions; and if conditions precedent are prescribed in the statute, or certain
December 23, 1937) acts are required to be done, they are terms of the offer, and must be complied with
substantially before legal corporate existence can be acquired.
FACTS:
That a corporation should have a full and complete organization and existence as an
Manuel Tabora is the registered owner of four parcels of land. To guarantee entity before it can enter into any kind of a contract or transact any business, would
the payment of two loans, he executed in favor of PNB two mortgages over the seem to be self-evident. A corporation, until organized, has no being, franchises or
four parcels of land. Later, a third mortgage on the same lands was executed in favor faculties. Nor do those engaged in bringing it into being have any power to bind it by
of Severina Buzon. Thereafter, on May, 1930, Tabora executed a public document, contract, unless so authorized by the charter there is not a corporation nor does it
by virtue of which the four parcels of land were sold to the plaintiff company possess franchise or faculties for it or others to exercise, until it acquires a complete
(Cagayan), said to be under process of incorporation. Cagayan filed its article existence.
incorporation with the Bureau of Commerce and Industry only on October, 1930. A
year later, the board of directors of Cagayan adopted a resolution authorizing its
president to sell the four parcels of lands in question to Teodoro Sandiko. Through a
deed of sale, Cagayan sold, ceded and transferred to Sandiko all its right, titles, and
interest in and to the four parcels of land. A promissory note was drawn by the
Sandiko in favor of Cagayan, payable after one year from the date thereof. Sandiko
failed to pay. Cagayan brought this action in the Court of First Instance, which
absolved Sandiko.

ISSUE:

Whether or not Cagayan has juridical capacity to enter into contract with Tabora

HELD:

No. The transfer made by Tabora to Cagayan was affected on May 31, 1930 and the
actual incorporation of said company was affected later on October 22, 1930. In other
words, the transfer was made almost five months before the incorporation of the
company. Unquestionably, a duly organized corporation has the power to purchase
and hold such real property as the purposes for which such corporation was formed
may permit and for this purpose may enter into such contracts as may be necessary.
But before a corporation may be said to be lawfully organized, many things have to
be done. Among other things, the law requires the filing of articles of incorporation. In
this case, Cagayan was not yet incorporated when it entered into a contract of sale.
Not being in legal existence then, it did not possess juridical capacity to enter into the
contract. Boiled down to its naked reality, the contract was entered into not between
Tabora and a non-existent corporation, but between the Manuel Tabora as owner of
the four parcels of lands on the one hand and the same Manuel Tabora, his wife and
others, as mere promoters of a corporations on the other
hand. These promoters could not have acted as agent for a projected corporation
since that which has no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties.

Additional Notes:

Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation
of corporations are general offers to any persons who may bring themselves within

1
G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents
TOPIC: Theories on Liabilities for Promoter’s Contract
Author: Pasion
Doctrine: It is not necessary to determine whether it is the promoters of
the proposed corporation, or the corporation itself after its organization,
that shall be responsible for the expenses incurred in connection with the
corporation’s organization. The corporation should alone be liable for its
corporate acts as duly authorized by its officers and directors.
FACTS:
The lower court ordered the petitioners in this case ( initially defendant in the lower
court) to jointly and severally pay the respondent (claimant) the amount of
P50,000.00 for the preparation of the project study and his technical services that
led to the organization of the defendant corporation, plus P10,000.00 attorney's
fees.
The lower court’s ruling is based on the fact that it was upon the request of
defendants Barretto and Garcia that plaintiff handled the preparation of the project
study which project study was presented to defendant Caram so the latter was
convinced to invest in the proposed airlines. The project study was revised for
purposes of presentation to financiers and the banks. It was on the basis of this
study that defendant corporation was actually organized and rendered operational.
Defendants Garcia and Caram, and Barretto became members of the Board and/or
officers of defendant corporation. Since defendant Barretto was the moving spirit in
the pre-organization work of defendant corporation based on his experience and
expertise, hence he was logically compensated in the amount of P200,000.00 shares
of stock not as industrial partner but more for his technical services that brought to
fruition the defendant corporation. Thus the plaintiff should be similarly
compensated not only for having actively participated in the preparation of the
project study for several months and its subsequent revision but also in his having
been involved in the pre-organization of the defendant corporation, in the
preparation of the franchise, in inviting the interest of the financiers and in the
training and screening of personnel.
The petitioners contend that the order of the trial court has no support in fact and
law because they had no contract whatsoever with the private respondent regarding
the above-mentioned services. Their position is that as mere subsequent investors
in the corporation that was later created, they should not be held solidarily liable
with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and
Garcia, their co-defendants in the lower court, who were the ones who requested
the said services from the private respondent.
ISSUE:
Whether or not the petitioners themselves are also and personally liable for such
expenses and, if so, to what extent.
HELD:
NO. They are not liable.
Petitioners were not involved in the initial stages of the organization of the airline,
which were being directed by Barretto as the main promoter. It was he who was
putting all the pieces together, so to speak. The petitioners were merely among the
financiers whose interest was to be invited and who were in fact persuaded, on the
strength of the project study, to invest in the proposed airline.
In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the
services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services
that Barretto and Garcia presented to them and which persuaded them to invest in
the proposed airline. The most that can be said is that they benefited from such
services, but that surely is no justification to hold them personally liable therefor.
Otherwise, all the other stockholders of the corporation, including those who came
in later, and regardless of the amount of their share holdings, would be equally and
personally liable also with the petitioners for the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence.
Our impression is that it is opposed to the imposition of solidary responsibility upon
the Carams but seems to be willing, in a vague, unexpressed offer of compromise,
to accept joint liability. While it is true that it does here and there disclaim total
liability, the thrust of the petition seems to be against the imposition of solidary
liability only rather than against any liability at all, which is what it should have
categorically argued.
2
HALL v. PICCIO (1905) BP blg. 68. Sec. 20. De facto corporations. – The due incorporation of any
corporation claiming in good faith to be a corporation under this Code, and
its right to exercise corporate powers, shall not be inquired into collaterally
Petitioner: C. Arnold Hall and Bradley P. Hall in any private suit to which such corporation may be a party. Such inquiry
Respondents: Edmundo S. Piccio, Judge of CFI Leyte, Fred Brown, Emma Brown,
may be made by the Solicitor General in a quo warranto proceeding.
Hipolita Capuciong, in his capacity as Receiver of the Far Eastern Lumber And
Commercial Co., Inc.,
Issue: W/N the CFI had jurisdiction in the said case and to decree the dissolution of
Author: Plan
the company – Yes.
Topic: Corporate Contract Law; De Facto Corporation (Sec. 20); Elements
Doctrines: Elements for Existence of De Facto Corporation: Held: YES.
(1) Valid law under which incorporated; - The SC held that the said provision is not applicable in this case:
(2) Attempt in good faith to incorporate; “colorable compliance;”
(3) Assumption of corporate powers; and
- First, not having obtained the certificate of incorporation, the Far Eastern
Lumber and Commercial Co. — even its stockholders — may not probably
(4) Issuance of certificate of incorporation
claim "in good faith" to be a corporation.
Facts: - It is the issuance of a certificate of incorporation by the Director of the
Bureau of Commerce and Industry which calls a corporation into being. The
- 28 May 1947, the petitioners and private respondents signed and
immunity if collateral attack is granted to corporations "claiming in good faith
acknowledged in Leyte, the Article of Incorporation (AoI) of the Far Eastern
to be a corporation under this act." Such a claim is compatible with the
Lumber and Commercial Co., Inc., organized to engage in a general lumber
existence of errors and irregularities; but not with a total or substantial
business to carry on as general contractors, operators and managers, etc.
disregard of the law. Unless there has been an evident attempt to comply
Attached was an affidavit of the treasurer stating that 23,428 shares of stock
with the law the claim to be a corporation "under this act" could not be made
had been subscribed and fully paid with certain properties transferred to the
"in good faith."
corporation described in a list appended thereto.
- Immediately after the execution of said AoI, the corporation proceeded to
- Second, the case was not a suit in which the corporation is a party. It is a
litigation between stockholders of the alleged corporation, for the purpose of
do business with the adoption of by-laws and the election of its officers.
obtaining its dissolution. Even the existence of a de jure corporation may be
- 2 Dec 1947, the said AoI were filed in SEC for the issuance of the terminated in a private suit for its dissolution between stockholders, without
corresponding certificate of incorporation. the intervention of the state.
- 22 Mar 1948, while pending, the respondents filed before CFI Leyte alleging,
among other things, that the Far Eastern Lumber and Commercial Co. was Disposition: Petition DISMISSED.
an unregistered partnership; that they wished to have it dissolved because
of bitter dissension among the members, mismanagement and fraud by the Other Notes: (Yung elements nakita ko lang sa internet. Wala talaga siya sa case.)
managers and heavy financial losses.
- The petitioners filed a motion to dismiss (MTD), contesting the court's
jurisdiction and the sufficiently of the cause of action. Judge Piccio denied
the MTD and ordered the dissolution of the company; and at the request of
plaintiffs, appointed of the properties thereof, upon the filing of a P20,000
bond.
- Petitioners offered to file a counter-bond for the discharge of the receiver,
but the judge refused to accept the offer and to discharge the receiver.
Hence, this petition.

- The petitioner contends that inasmuch as the Far Eastern Lumber and
Commercial Co., is a de facto corporation. Hence, sec 20 (sec 19 dati) of the
Corporation Code applies, and therefore the court had no jurisdiction to take
cognizance of said case:

3
CORPORATION BY ESTOPPEL DOCTRINE
SALVATIERRA V. GARLITOS (1958)
Petioner: Manuela T. Vda de Salvatierra
Respondent: Hon. Lorenzo Garlitos as Judge of CFI Leyte and Segundino Refuerzo
Author: Daniela
Doctrine: While as a general rule, a person who deals with an association in such a
way to recognize its existence as a corporate body is estopped from denying the same
in an action arising out of such transaction, yet this doctrine may not be held to be
applicable where fraud takes a part in the said transaction.
Facts:
 Manuela Salvatierra owns a parcel of land located in Maghobas, Poblacion,
Burauen, leyte.
 March 7, 1954 Salvatierra entered into a contract of lease with Philippine
Fibers Producers Co, Inc., allegedly a corporation duly organized and existing
under the Philippine laws, domiciled in Burauen, Leyte and represented by
Segundino Refuerzo as president.
 It was stated in the contract that the period of lease will be 10 years, the
land will be planted with kenaf, ramie or other crops suitable to the soil and
that the lessee will declare the income derived from the harvest and that the
lessor will be entitled to 30 % of the net income without being responsible
for the cost of production.
 Salvatierra filed a complaint with the CFI against Refuerzo and Philippine
Fibers. That the company planted kenaf on the 3 hectares of land and they
refused to make an accounting and deliver her share, estimated that the
gross income was P4,500 and the deductible expense was P1,000. The
refusal of the company to do their obligation creates a violation thereof and
rescission was but proper.
 Refuerzo failed to file an answer, declared in default and the court accepted
the evidence of Salvatierra. The court rendered a judgement in favour of
Salvatierra stating that Refuerzo and company should render an accounting,
give Salvatierra her share and the contract was rescinded. No appeal was
made, it was perfected and upon motion of Salvatierra the court issued a
writ of execution.
 Since there was no available property of the company to be attached, the
Sheriff attached 3 parcels of land of Refuerzo.
 Refuerzo filed a motion stating that the decision was null and void with
respect to him being that there was no allegation as to his personal liability
and it should be limited as to the liability of the company. It was granted and
the sheriff was ordered to return the property, as there was no evidence that
he is personally liable.
 Salvatierra petition for relief was denied. She instituted the present petition
to declare the ruling of the said judge as null and void and that the judge
acted with grave abuse of discretion.
Issue: Whether or not Refeurzo can be held personally liable?
Ruling + Ratio: Yes.
 While as a general rule, a person who deals with an association in such a
way to recognize its existence as a corporate body is estopped from denying
the same in an action arising out of such transaction, yet this doctrine may
not be held to be applicable where fraud takes a part in the said transaction.
In the instant case, on plaintiff's charge that she was unaware of the fact
that the defendant corporation had no juridical personality, its president
gave no confirmation or denial of the same and the circumstance surrounding
the execution of the contract lead to the inescapable conclusion that plaintiff
was really made to believe that such corporation was duly organized in
accordance with law.
 A corporation when registered has a juridical personality separate and
distinct from its component members or stockholders and officers, such that
a corporation cannot be held liable for the personal indebtedness of a
stockholder even if he should be its president (Walter A. Smith Co. vs. Ford,
SC-G. R. No. 42420) and conversely, a stockholder cannot be held personally
liable for any financial obligation by the corporation in excess of his unpaid
subscription. But this rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability of members of an
unincorporated association. The reason behind this doctrine is obvious— an
unincorporated association has no personality and would be incompetent to
act and appropriate for itself the power and attributes of a corporation as
provided by law, it cannot create agents or confer authority on another to
act in its behalf; thus, those who act or purport to act as its representatives
or agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without
authority or without a principal is himself regarded as the principal,
possessed of all the right and subject to all the liabilities of a principal, a
person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed as
such agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's
Commercial Laws of the Philippines, Fifth Ed., p. 689-690).
Other Notes:
 Rule 38, Section 3, of the Rules of Court treats of 2 periods within which
a petition for relief may be filed. The petition must be filed within 60
days after the petitioner learns of the judgment and not more than 6
4
months after the judgment or order was rendered, both of which must
be satisfied. In this case, Refuerzo filed it after 7 months and 23 days,
it was clearly made beyond the prescriptive period provided by the rules.

5
 Asia Banking Corp v. Standard Products 46 Phil 145 (1924)

 Petitioner: Asia Banking Corporation
 Defendant: Standard tProducts Co., Inc.

 Topic: Corporation by Estoppel Doctrine
 Doctrine: The general rule is that in the absence of fraud a person who has contracted
or otherwise dealt with an association in such a way as to recognize and in effect admit
its legal existence as a corporate body is thereby estopped to deny its corporate existence
in any action leading out of or involving such contract or dealing, unless its existence is
attacked for cause which have arisen since making the contract or other dealing relied on
as an estoppel and this applies to foreign as well as to domestic corporations.

 Facts:
 Standard Products borrowed PhP 37,757.22 from Asia Banking Corporation through a
promissory note executed last November 28, 1921. Defendant partly paid for their loan.
But when it failed to pay the remaining amount, Asia Banking instituted an action to
recover sum of PhP 24,147.34. The Court rendered judgment in favour of Asia Banking.
From this judgment, Standard Products appeals. Defendant contends that Asia Banking
failed to prove its corporate existence and the lower court erred in finding the party,
corporation with juridical personality.

 Issue: Whether Standard Products is estopped from denying the corporate existence of
Asia Banking

 Held: Yes

 The general rule is that in the absence of fraud a person who has contracted or
otherwise dealt with an association in such a way as to recognize and in effect admit its
legal existence as a corporate body is thereby estopped to deny its corporate existence in
any action leading out of or involving such contract or dealing, unless its existence is
attacked for cause which have arisen since making the contract or other dealing relied on
as an estoppel and this applies to foreign as well as to domestic corporations. (14 C. J.,
227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)

 The defendant having recognized the corporate existence of the plaintiff by making a
promissory note in its favor and making partial payments on the same is therefore
estopped to deny said plaintiff's corporate existence. It is, of course, also estopped from
denying its own corporate existence. Under these circumstances it was unnecessary for
the plaintiff to present other evidence of the corporate existence of either of the parties.
It may be noted that there is no evidence showing circumstances taking the case out of
the rules stated.

Disposition: Appeal was denied.

6
Paz v. New International Environmental Universality, Inc.,

Section 21 of the Corporation Code explicitly provides that one who assumes an obligation to an
ostensible corporation, as such, cannot resist performance thereof on the ground that there was in
fact no corporation. (Doctrine of Estoppel)

FACTS:

! Priscillo Paz, entered into a MOA with Captain Allan J. Clarke, president of

International Environmental University , for the use of the aircraft hangar space at the said airport
exclusively for “company aircraft/helicopter” for a period of four years, unless pre-terminated with 6-
months notice.

By letters to “MR ALLAN J. CLARK, International Environmental Universality Inc. , Paz threatened to
cancel the contract since the company was using it to park trucks and equipments instead of aircraft.
More letters were sent demanding compliance with the MOA, to no avail.

Paz then caused disconnection of electric and telephone lines of respondent’s premises; and ordered
security guards to prevent respondent’s employees from entering the premises - without giving
respondent the 6-month notice as required under the MOA

Respondent then filed an action for breach of contract against Paz, alleging that his acts violated the
terms of the MOA

In his answer, Paz alleged that the company had no cause of action since he dealt with Mr. Allan J.
Clark in his personal capacity; there was no need to wait for the expiration of the contract since the
company was performing high risk works in the leased premises and the six-month notice was given
thru his letters given to Mr. Allan J. Clarke.

RTC rendered judgment in favour of the corporation

CA dismissed Priscillo’s appeal, ruling that, while there was no corporate entity at the time of the
execution of the MOA on March 1, 2000 when Capt. Clarke signed as “President of International
Environmental University,” petitioner is nonetheless estopped from denying that he had contracted
with respondent as a corporation, having recognized the latter as the “Second Party” in the MOA that
“will use the hangar space exclusively for company aircraft

7
GR. No. 117010 April 18, 1997 (2) accused has not complied with the guidelines issued by the Secretary of Labor and Employment,
particularly with respect to the securing of a license or an authority to recruit and deploy workers, either
PEOPLE OF THE PHILIPPINES, plaintiff-appellee, locally or overseas; and
vs.
ENGR. CARLOS GARCIA y PINEDA, PATRICIO BOTERO y VALES, LUISA MIRAPLES (at (3) accused commits the same against three (3) or more persons, individually or as a group.
large), accused, It is a fact that Ricorn had no license to recruit from DOLE. In the office of Ricorn, a notice was
PATRICIO BOTERO y VALES, accused-appellant posted informing job applicants that its recruitment license is still being processed. Yet, Ricorn already
entertained applicants and collected fees for processing their travel documents.
For engaging in recruitment of workers without obtaining the necessary license from the POEA,
Facts Botero should suffer the consequences of Ricorn’s illegal act for “(i)f the offender is a corporation,
partnership, association or entity, the penalty shall be imposed upon the officer or officers of the
The complainantsEdgardo Belen, Gloria Silaras, Alfredo Estinoso, Jose Erwin Esclada, Elsa
corporation, partnership, association or entity responsible for violation; . . .
Delubio and Ariel Rivada testified that on various dates in March 1992, they went to Ricorn Philippine
International Shipping Lines, Inc. an entity which recruits workers for overseas employment. They The evidence shows that appellant Botero was one of the incorporators of Ricorn. For reasons that
applied as seamen, cook, waiter, chambermaid or laundrywoman overseas. Esclada applied to accused cannot be discerned from the records, Ricorn’s incorporation was not consummated. Even then,
Botero. All the other complainants coursed their application to accused Garcia who represented himself appellant cannot avoid his liabilities to the public as an incorporator of Ricorn. He and his co-accused
as president of Ricorn. Complainants were required to submit their NBI and police clearance, birth Garcia held themselves out to the public as officers of Ricorn. They received money from applicants
certificate, passport, seaman’s book and Survival of Life at Sea (SOLAS). As they did not have the last who availed of their services. They are thus estopped from claiming that they are not liable as corporate
three (3) documents, they were asked to pay five thousand pesos (P5,000.00) as processing fee. They officials of Ricorn. Section 25 of the Corporation Code provides that “(a)ll persons who assume to act
paid to Ricorn’s treasurer, Luisa Miraples. They were issued receipts signed by Miraples. The receipts as a corporation knowing it to be without authority to do so shall be liable as general partners for all
were under Ricorn’s heading. the debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when
any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
Garcia and Botero assured complainants of employment after the May 11, 1992 election.
committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.
Accused Botero, as the vice-president of Ricorn, followed-up their passports, seaman’s book and SOLAS.
He told some applicants to wait for their papers and informed the others that their papers were in order.
After the election, complainants went back to Ricorn to check on their applications. They
discovered that Ricorn had abandoned its office at Jovan Building for non-payment of rentals. Hoping
against hope, they went back to the building several times to recover their money. Their persistence
was to no avail for Garcia and Botero were nowhere to be found. They then went to the Mandaluyong
Police Station and filed their complaints. They also checked with the Securities and Exchange
Commission (SEC) and discovered that Ricorn was not yet incorporated. They also found that Ricorn
was not licensed by the Department of Labor and Employment (DOLE) to engage in recruitment
activities.
RTC: Garcia and Botero were held guilty for the crime of Illegal Recruitment.
Issue: WON Garcia and Botero should be held liable for the crime of Illegal Recruitment.

Ruling: YES.
Botero engaged in recruitment and placement activities in that he, through Ricorn, promised
the complainants employment abroad. Under the Labor Code, recruitment and placement refers to “any
act of canvassing, enlisting, contracting, transporting, utilizing, hiring or procuring workers, and
includes referrals, contract services, promising or advertising for employment, locally or abroad whether
for profit or not: Provided, That any person or entity which in any manner, offers or promises for a fee
employment to two or more persons shall be deemed engaged in recruitment, and placement.”
All the essential elements of the crime of illegal recruitment in large scale are present in this
case, to wit:
(1) the accused engages in the recruitment and placement of workers, as defined under Article 13 (b)
or in any prohibited activities under Article 34 of the Labor Code;

8
International Express Travel & Tours Services, Inc. v. CA
Petitioner: International Express Travel & Tours Services, Inc.
Respondent/s: CA, Henri Kahn, Philippine Football Federation
Topic: Two Levels: (i) with “Fraud”, and (ii) without “Fraud”
Doctrine: It is a settled principle in corporation law that any person acting or purporting to act on behalf
of a corporation which has no valid existence assumes such privileges and becomes personally liable
for contract entered into or for other acts performed as such agent.
cannot subscribe to the position taken by the appellate court that even assuming that the Federation
was defectively incorporated, the petitioner cannot deny the corporate existence of the Federation
because it had contracted and dealt with the Federation in such a manner as to recognize and in effect
admit its existence. The doctrine of corporation by estoppel is mistakenly applied by the respondent
court to the petitioner. The application of the doctrine applies to a third party only when he tries to
escape liability on a contract from which he has benefited on the irrelevant ground of defective
incorporation.16 In the case at bar, the petitioner is not trying to escape liability from the contract but
rather is the one claiming from the contract.

Facts:

The petitioner and Federation entered into an agreement wherein the former will be the travel agent of
the latter. Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation
to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic
of China and Brisbane. The total cost of the tickets amounted to P449,654.83. The Federation made
partial payments in the total amount of P176,467.50. Petitioner wrote the Federation, through the
private respondent a demand letter requesting for the unpaid balance. Henri Kahn issued a personal
check in the amount of P50,000 as partial payment for the outstanding balance of the Federation.
Thereafter, no further payments were made despite repeated demands.

Petitioner sued Henri Kahn in his personal capacity and as President of the Federation and impleaded
the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed
the said obligation. Henri Kahn averred that the petitioner has no cause of action against him either in
his personal capacity or in his official capacity as president of the Federation. He maintained that he did
not guarantee payment but merely acted as an agent of the Federation which has a separate and distinct
juridical personality.

Issue: WON Henri Kahn is not personally liable for the unpaid balance to petitioner.

Ruling: NO.

Henri Kahn is personally liable for the unpaid balance. It is a basic postulate that before a corporation
may acquire juridical personality, the State must give its consent either in the form of a special law or
a general enabling act. We cannot agree with the view of the appellate court and the private respondent
that the Philippine Football Federation came into existence upon the passage of these laws. Nowhere
can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These
laws merely recognized the existence of national sports associations and provided the manner by which
these entities may acquire juridical personality.

The Court ruled that the Philippine Football Federation is not a national sports association within the
purview of the aforementioned laws and does not have corporate existence of its own. Thus being said,
it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation.

It is a settled principle in corporation law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and becomes personally liable for
contract entered into or for other acts performed as such agent. As president of the Federation, Henri
Kahn is presumed to have known about the corporate existence or non-existence of the Federation. We

9
Pioneer Insurance & Surety Corporation vs Court of Appeals
Jacob Lim was the owner of Southern Air Lines, a single proprietorship. In 1965, Lim convinced
Constancio Maglana, Modesto Cervantes, Francisco Cervantes, and Border Machinery and Heavy
Equipment Company (BORMAHECO) to contribute funds and to buy two aircrafts which would form
part a corporation which will be the expansion of Southern Air Lines. Maglana et al then contributed
and delivered money to Lim.
But instead of using the money given to him to pay in full the aircrafts, Lim, without the knowledge of
Maglana et al, made an agreement with Pioneer Insurance for the latter to insure the two aircrafts which
were brought in installment from Japan Domestic Airlines (JDA) using said aircrafts as security. So when
Lim defaulted from paying JDA, the two aircrafts were foreclosed by Pioneer Insurance.
It was established that no corporation was formally formed between Lim and Maglana et al.
ISSUE: Whether or not Maglana et al must share in the loss as general partners.
HELD: No. There was no de facto partnership. Ordinarily, when co-investors agreed to do business
through a corporation but failed to incorporate, a de facto partnership would have been formed, and as
such, all must share in the losses and/or gains of the venture in proportion to their contribution. But in
this case, it was shown that Lim did not have the intent to form a corporation with Maglana et al. This
can be inferred from acts of unilaterally taking out a surety from Pioneer Insurance and not using the
funds he got from Maglana et al. The record shows that Lim was acting on his own and not in behalf of
his other would-be incorporators in transacting the sale of the airplanes and spare parts.
Other digest:
Facts:
1. In 1965, Jacob S. Lim was engaged in the airline business as owner-operator of Southern Air
Lines (SAL) a single proprietorship.
2. On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract for the sale and purchase of two DC-3A Type aircrafts and one set of
necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments.
3. On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed and issued its
Surety Bond in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.
4. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco
and Modesto Cervantes (Cervanteses) and ConstancioMaglana contributed some funds used in the
purchase of the aircrafts and spare parts.
5. The funds were supposed to be their contributions to a new corporation proposed by Lim to
expand his airline business.
6. They executed two separate indemnity agreements in favor of Pioneer, one signed by Maglana
and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses.
7. The indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become surety upon the bond/note and
to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of
money which it or its representatives should or may pay or cause to be paid or become liable to pay
on them of whatever kind and nature.
8. Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of
chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein
that Lim transfer and convey to the surety the two aircrafts.
9. Lim defaulted on his subsequent installment payments prompting JDA to request payments
from the surety. Pioneer paid a total sum of P298,626.12.
10. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage.
11. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners
of the aircrafts.
12. A decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint
against all other defendants.
Issues:
What legal rules govern the relationship among co-investors whose agreement was to do business
through the corporate vehicle but who failed to incorporate the entity in which they had chosen to
invest?
How are the losses to be treated in situations where their contributions to the intended 'corporation'
were invested not through the corporate form?
Ruling:
While it has been held that as between themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners, it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on business under the corporate name occupy
the position of partners inter se. Thus, where persons associate themselves together under articles to
purchase property to carry on a business, and their organization is so defective as to come short of
creating a corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be recognized. So,
where certain persons associated themselves as a corporation for the development of land for
irrigation purposes, and each conveyed land to the corporation, and two of them contracted to pay a
third the difference in the proportionate value of the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a trustee for the associates in an action between them for
an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds
distributed among them in proportion to the value of the property contributed by each. However, such
10
a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no partnership shall exist, and it should
HELD:
be implied only when necessary to do justice between the parties; thus, one who takes no part except
to subscribe for stock in a proposed corporation which is never legally formed does not become a
partner with other subscribers who engage in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the alleged partnership and contribution. A
partnership relation between certain stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter.
It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the petitioner reneged on their agreement.
No de facto partnership was created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation. The record shows that the
petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting
the sale of the airplanes and spare parts.
LIM TONG LIM vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC.
Petitoner: Lim Tong Lim
Respondent: Philippine Fishing Gear Industries, Inc.
- Yes. From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which they started by buying boats worth P3.35
million, financed by a loan secured from Jesus Lim. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats,
and to divide equally among them the excess or loss. These boats, the purchase and the repair
of which were financed with borrowed money, fell under the term “common fund” under Article
1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible
like credit or industry. That the parties agreed that any loss or profit from the sale and
operation of the boats would be divided equally among them also shows that they had indeed
formed a partnership.
- Lim Tong Lim cannot argue that the principle of corporation by estoppels can only be
imputed to Yao and Chua. Unquestionably, Lim Tong Lim benefited from the use of
the nets found in his boats, the boat which has earlier been proven to be an asset of
the partnership. Lim, Chua and Yao decided to form a corporation. Although it was
never legally formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of it. Clearly, under
the law on estoppel, those acting on behalf of a corporation and those benefited by
it, knowing it to be without valid existence, are held liable as general partners.

DOCTRINE: Clearly, under the law on estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid existence, are held liable as general
partners.

FACTS:
- It was established that Lim Tong Lim requested Peter Yao to engage in commercial fishing with
him and one Antonio Chua. The three agreed to purchase two fishing boats but since they do
not have the money they borrowed from one Jesus Lim (brother of Lim Tong Lim). They again
borrowed money and they agreed to purchase fishing nets and other fishing equipments. Now,
Yao and Chua represented themselves as acting in behalf of “Ocean Quest Fishing Corporation”
(OQFC) they contracted with Philippine Fishing Gear Industries (PFGI) for the purchase of
fishing nets amounting to more than P500k. They were however unable to pay PFGI and so
they were sued in their own names because apparently OQFC is a non-existent corporation.
Chua admitted liability and asked for some time to pay. Yao waived his rights.
- Contention of the petitioner: Lim Tong Lim however argued that he’s not liable because he
was not aware that Chua and Yao represented themselves as a corporation; that the two acted
without his knowledge and consent.

ISSUE: Whether or not Lim Tong Lim is liable.

11
Phil. Trust Co. vs Rivera
Petitioner: PHILIPPINE TRUST COMPANY
Respondent: MARCIANO RIVERA

DOCTRINE: It is established doctrine that subscription 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.

FACTS:

 The Cooperativa Naval Filipina was duly incorporated under the laws of the Philippine.
 Mariano Rivera was one of the incorporators of the company.
 The articles of incorporation were duly registered in the Bureau of Commerce and Industry.
 In the course of time, the company became insolvent and went into the hands of the Philippine
Trust Company as assignee in bankruptcy.
 Philippine Trust Company instituted an action to recover one-half of the unpaid stock
subscription of the defendant.
 Defendant contends that a resolution was adopted to the effect that the capital should be
reduced by 50 per centum and the subscribers is released from the obligation to pay any
unpaid balance of their subscription in excess of 50 per centum of the same.

ISSUE: Whether or not the reduction of the capital by releasing the subscribers from payment of their
subscription is valid.

RULING: NO

It is established doctrine that subscription 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.

A corporation has no power to release an original subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner an under the conditions prescribed by
the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary

In this case, 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.

12
HALLEY VS PRINTWELL Held: YES
Petitioner: Donnina Halley It is established doctrine that subscriptions to the capital of a corporation
Respondent: Printwell, Inc. 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
Author: Barba subscription in order to realize assets for the payment of its debts.

The creditor is allowed to maintain an action upon any unpaid subscription

Topic: Nature and coverage of Trust Fund Doctrine
Doctrine:
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.
Facts:
and thereby steps into the shoes of the corporation for the satisfaction of its debts.
To make them compelled to contribute payment of its debts, it is only necessary to
establish that stockholders have not in good faith paid the value of the stocks of the
corporation.
In this case, the alleged full payment of petitioner on her stock subscription
was not established because it appears that she paid by means of a check. As a rule
since check is not a legal tender, defendant must establish that not only they delivered
the checks but also that these checks were encashed. Also, the documents presented
had no bearing to the issue of payment of subscription because, they did not by
themselves, prove payment. Here, petitioner was liable pursuant to the trust fund
doctrine for the corporate obligation of BMPI by virtue of her subscription being still
unpaid. Printwell, as BMPI’s creditor, had a right to reach her unpaid subscription in
satisfaction of its claim.

1. Petitioner was an incorporator and original director of Business Media Philippines

which has an authorized capital stock of 3,000,000 with 300,000 shares.

2. Respondent on the other hand is engaged in commercial and industrial printing.

3. On October 1988-July 1989, BMPI commissioned Printwell for printing its magazine
with wrappers and subscription cards that BMPI published and sold. Also, Printwell
extended a 30-day credit accommodation to BMPI.

4. BMPI thereafter placed its orders on credit for Php 316,342.76 but it only paid Php
25,000.00.

5. Printwell then filed a complaint suing BMPI for collection of the unpaid balance. It
impleaded the defendants as the original stockholders and incorporators to recover
the unpaid subscription.

6. Defendants averred however that they already paid the subscriptions in full and
that BMPI has a separate personality from those of its stockholder. For this purpose
BMPI submitted official receipt together with other documents such as a) audit report;
b) BMPI balance sheet; c) income statement; d) BMPI income tax return; e) journal
voucher; f) cash deposit slip; g) BPI savings account.

7. RTC ruled in favor of Printwell. It rejected the allegation of full payment because
of the irregularity of the receipts. It also observed that defendants used BMPI
corporate personality to evade payment and create injustice. RTC also held that
applying the trust fund doctrine, stockholders are liable pro rata.

8. Sps Halley and Vineza appealed. CA Affirmed RTC’s decision. Hence, this petition
for review.

Issue: Whether or not Printwell can enforce its claim against the stockholders.

13
ONG YONG VS TIU
FACTS:
 Construction of Masagana Citimall which was owned by First Landlink Asia
Development Corporation (FLADC) and in turn owned by respondents were
threatened with stoppage due to financial capabilities.
 Ongs and Tius entered into Pre-Subscription Agreement where they agreed
to have equal shareholdings of 1,000,000 shares at P100 par value each.
Ong paid P190M to settle the indebtedness of FLADC.
 Tius being the original owner, subscribe to an additional 549,800 shares in
addition to their already existing subscription of 450,200 shares. Additional
shares were in the following form: contribute to FLADC a 4-storey
building P20M (for 200K shares)and 2 parcels of land P30M (for 300K shares)
and P49.8M (for 49,800 shares). Ong added P100M share in addition to the
amount used to settle the indebtedness
 Tius were given the right to nominate the Vice-President and the Treasurer
plus 5 directors while Ongs nominate the President, the Secretary and 6
directors (including the chairman) to the board of directors of FLADC and
right to manage and operate the mall.
 Tius then rescinded their agreement and filed it to the SEC for confirmation
which it later on approved.
 Ongs filed reconsideration that their P70M was not a premium on capital
stock but an advance loan
 SEC en banc affirmed it was a premium on capital stock
 While CA, on the other hand mentioned that Ongs and the Tius were in pari
delicto but, "for practical considerations," that is, their inability to work
together, it was best to separate the two groups by rescinding the Pre-
Subscription Agreement, returning the original investment of the Ongs and
awarding practically everything else to the Tius.
 Tius claim that they are not provided appropriate offices and certain
provisions in the agreement were breached.
ISSUE:
WON the Tius could legally rescind the Pre-Subscription Agreement
RULING + RATIO:
NO. The court ruled that the subscription contract was between Ong and FLADC.
The act of providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-
President and Treasurer, respectively, had no bearing on their obligations under the
Pre-Subscription Agreement since the obligation pertained to FLADC itself. The initial
objective was to raise the amount needed to settle the indebtedness.
What the law requires is that the breach of contract should be so "substantial or
fundamental" as to defeat the primary objective of the parties in making the
agreement. Since the cash and other contributions now sought to be returned already
belong to FLADC, an innocent third party, said remedy may no longer be availed of
under the law.
Considering therefore that the real contracting parties to the subscription agreement
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of
contract filed by the Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC had the legal personality to file suit rescinding the
subscription agreement with the Ongs inasmuch as it was the real party in interest
therein.
The Corporation Code, SEC rules and even the Rules of Court provide for appropriate
and adequate intra-corporate remedies, other than rescission, in situations like this.
Rescission is certainly not one of them, specially if the party asking for it has no legal
personality to do so and the requirements of the law therefor have not been met.
Even assuming that Tius have the legal standing to sue, said action will nevertheless
still not prosper since rescission will violate the Trust Fund Doctrine (see notes below)
and the procedures for the valid distribution of assets and property under the
Corporation Code.
Further, the court also ruled that a judicial order to decrease capital stock without the
assent of FLADC's directors and stockholders is a violation of the "business judgment
rule".
Such an act infringes on the law on reduction of capital stock. Ordering the return and
distribution of the Ongs' capital contribution without dissolving the corporation or
decreasing its authorized capital stock is not only against the law but is also prejudicial
to corporate creditors who enjoy absolute priority of payment over and above any
individual stockholder thereof.
The Ongs' shortcomings were far from serious and certainly less than substantial;
they were in fact remediable and correctable under the law. It would be totally against
all rules of justice, fairness and equity to deprive the Ongs of their interests on petty
and tenuous grounds.
DISPOSITION: MOTION FOR RECONSIDERATION GRANTED
OTHER NOTES: Section 60 Title VII
Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription within the meaning of
this Title, notwithstanding the fact that theparties refer to it as a purchase or some
other contract
Trust fund doctrine are subscriptions to the capital stock of a corporation constitute
a fund to which the creditors have a right to look for the satisfaction of their claims.
It allows the distribution of corporate capital only in three instances: (1) amendment
of the Articles of Incorporation to reduce the authorized capital stock,24 (2) purchase
of redeemable shares by the corporation, regardless of the existence of unrestricted
retained earnings,25 and (3) dissolution and eventual liquidation of the corporation.
GSIS Family Bank-Thrift Bank V BPI Family Bank
14

Topic: Corporate Names; Deceptively Similar Corporate Names
Author: De Guia
Facts:
Petitioner was originally organized as Royal Savings Bank which started its
operation in 1971. In 1983 and 1984 GSIS encountered liquidity problema hence it
was placed under receivership and later closed by Central Bank of the Philippines.
After 2 months it re opened under the name of Comsavings Bank Inc. under the
management of Commercial Bank of Manila.
In 1987 GSIS acquired Comsavings from Commercial Bank of Manila, hence its
management is transferred to GSIS. It sought SECs approval to change its name to
“GSIS Family Bank, a Thrift Bank”
BPI Family Bank was a product of the merger between FBTC and the BPI. On
June 27,1969 the Gotianum family registered with SEC the corporate name “Family
First Savings Bank” which was amended to “Family Savings Bank”.
BPI Family Savings Banks was registered with the SEC as a wholly-owned
subsidiary of BPI it then registered with the Bureau of Domestic Trade the business
name “BPI Family Bank” and acquired reputation and goodwill under the name.
It reached the respondents attention that the petitioner is using or attempting
to use the name Family Bank hence it petitioned SEC-CRMD to disallow or prevent
the regustration of the name “GSIS Family Bank”.
ISSUE:
WON the use of GSIS Family Bank of the words “Family Bank” is deceptively and
confusingly similar to the name BPI Family Bank?
RULING:
YES!
CA ruled that the approvals by the BSP and by the DTI of petitioners
application to use the name “GSIS Family Bank” do not constitute authority for its
valid and lawful use. SEC has absolute jurisdiction, supervision and control over all
the corporations.
The SC uphold the ruling of CA.
Section 18 of the Corporation Code provides,
Section 18. Corporate name. - No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. When
a change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.chanrobleslaw
to fall within the prohibition of the law on the right to the exclusive use of a corporate
name, two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such
corporate name; and
(2) the proposed name is either
(a) identical or
(b) deceptive or confusingly similar to that of any existing corporation or to
any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.35
These two requisites are present in this case.
In this case, respondent was incorporated in 1969 as Family Savings Bank and in
1985 as BPI Family Bank. Petitioner, on the other hand, was incorporated as GSIS
Family - Thrift Bank only in 2002,38 or at least seventeen (17) years after respondent
started using its name. Following the precedent in the IRCP case, we rule that
respondent has the prior right over use of the corporate name.
The proposed name is (a) identical or (b) deceptive or confusingly similar to that of
any existing corporation or to any other name already protected by law.
On the first point (a), the words "Family Bank" present in both petitioner and
respondent's corporate name satisfy the requirement that there be identical names
in the existing corporate name and the proposed one. Respondent cannot justify its
claim under Section 3 of the Revised Guidelines in the Approval of Corporate and
Partnership Names,39 to wit:cralawlawlibrary
3. The name shall not be identical, misleading or confusingly similar to one already
registered by another corporation or partnership with the Commission or a sole
proprietorship registered with the Department of Trade and Industry.
If the proposed name is similar to the name of a registered firm, the proposed name
must contain at least one distinctive word different from the name of the company
already registered.chanrobleslaw
Section 3 states that if there be identical, misleading or confusingly similar name to
one already registered by another corporation or partnership with the SEC, the
proposed name must contain at least one distinctive word different from the name of
the company already registered. To show contrast with respondent's corporate name,
petitioner used the words "GSIS" and "thrift." But these are not sufficiently distinct
words that differentiate petitioner's corporate name from respondent's. While "GSIS"
is merely an acronym of the proper name by which petitioner is identified, the word
"thrift" is simply a classification of the type of bank that petitioner is. Even if the
classification of the bank as "thrift" is appended to petitioner's proposed corporate
name, it will not make the said corporate name distinct from respondent's because
the latter is likewise engaged in the banking business.
On the second point (b), there is a deceptive and confusing similarity between
petitioner's proposed name and respondent's corporate name, as found by the SEC.
In determining the existence of confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a person using ordinary care and
discrimination. And even without such proof of actual confusion between the two
corporate names, it suffices that confusion is probable or likely to occur.
15
Petitioner's corporate name is "GSIS Family Bank—A Thrift Bank" and respondent's
corporate name is "BPI Family Bank." The only words that distinguish the two are
"BPI," "GSIS," and "Thrift." The first two words are merely the acronyms of the proper
names by which the two corporations identify themselves; and the third word simply
describes the classification of the bank. The overriding consideration in determining
whether a person, using ordinary care and discrimination, might be misled is the
circumstance that both petitioner and respondent are engaged in the same business
of banking. "The likelihood of confusion is accentuated in cases where the goods or
business of one corporation are the same or substantially the same to that of another
corporation."

Under the facts of this case, the word "family" cannot be separated from the word
"bank." In asserting their claims before the SEC up to the Court of Appeals, both
petitioner and respondent refer to the phrase "Family Bank" in their submissions. This
coined phrase, neither being generic nor descriptive, is merely suggestive and may
properly be regarded as arbitrary. Arbitrary marks are "words or phrases used as a
mark that appear to be random in the context of its use. They are generally considered
to be easily remembered because of their arbitrariness. They are original and
unexpected in relation to the products they endorse, thus, becoming themselves
distinctive." Suggestive marks, on the other hand, "are marks which merely suggest
some quality or ingredient of goods. The strength of the suggestive marks lies on how
the public perceives the word in relation to the product or service."

The enforcement of the protection accorded by Section 18 of the Corporation Code to

corporate names is lodged exclusively in the SEC. The jurisdiction of the SEC is not
merely confined to the adjudicative functions provided in Section 5 of the SEC
Reorganization Act, as amended. By express mandate, the SEC has absolute
jurisdiction, supervision and control over all corporations. It is the SEC's duty to
prevent confusion in the use of corporate names not only for the protection of the
corporations involved, but more so for the protection of the public. It has authority to
de-register at all times, and under all circumstances corporate names which in its
estimation are likely to generate confusion.

The SEC correctly applied Section 18 of the Corporation Code.

The SEC, after finding merit in respondent's claims, can compel petitioner to abide by
its commitment "to change its corporate name in the event that another person, firm
or entity has acquired a prior right to use of said name or one similar to it.

16
Petitioner: John Gokongwei
Respondent: SEC, Soriano et. al., San Miguel Corp
DOCTRINE: Every corporation has the inherent power to adopt by-laws and the
power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents.
FACTS: Gokongwei, as stockholder of San Miguel Copr, filed with SEC a petition for
declaration of nullity of amended by-laws against the majority members of the Board
of Directors.
Gokongwei alleged that the respondents amended the by-laws of the
corporation,basing their authority to do so on a resolution of the stockholders adopted
on March 13, 1961, when the outstanding capital stock of respondent corporation was
only P70,139.740.00, divided into 5,513,974 common shares.
At the time of the amendment, the outstanding and paid up shares totalled
30,127,047 with a total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article VIII of the by-laws of the
corporation the power to amend, modify, repeal or adopt new by-laws may be
delegated to the Board of Directors only by affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation.
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.
Gokongwei prayed that the amended by-laws be declared null and void.
It was claimed that prior to the questioned amendment, Gokogwei had all
the qualifications to be a director of the corporation, being a substantial stockholder
thereof; that as a stockholder, Gokongwei had acquired rights inherent in stock
ownership, such as the rights to vote and to be voted upon in the election of directors;
and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's
disqualification and deprived him of his vested right as afore-mentioned, hence the
amended by-laws are null and void. As additional causes of action, it was alleged that
corporations have no inherent power to disqualify a stockholder from being elected
as a director and, therefore, the questioned act is ultra vires and void.
Soriano et. al. and San Migue opposed. The corporation issued a notice of
special stockholders' meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws". Soriano, et. al. conducted the special stockholders'
meeting wherein the amendments to the by-laws were ratified.
ISSUE: WON the corporation has the power to amend the by-laws, particularly the
authority to prescribe qualification of directors . WON they are valid an reasonable.
RULING: YES. The corporation has the power to amend.
The validity or reasonableness of a by-law of a corporation in 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.
Gokongwei 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
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano
and San Miguel Corporation content that ex. conclusion 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. There are alleged
areas of competition between Gokongwie corporation, Universal Robina, and San
Miguel.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Soriano et al. contends that the amended by-laws were adopted 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 which may cause to the
corporation and stockholder prejudice.
It is recognized by an authorities that 'every corporation has the
inherent power to adopt by-laws 'for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.
At common law, the rule was ‘the power to make and adopt by-laws was
inherent in every corporation as one of its necessary and inseparable legal incidents.
Under US jurisprudence, 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.
Under the Corporation Law, a corporation may prescribe in its by-laws "the
qualifications, duties and compensation of directors, officers and employees”. 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.
In the present case, the Court found that the amendment to the corporation
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, is
valid.
17
CHING v. QUEZON CITY SPORTS CLUB, INC
G.R. No. 200150, November 07, 2016
Author: Jay Dedicatoria
Facts:
Respondent Club is a duly registered domestic corporation providing recreational
activities, sports facilities, and exclusive privileges and services to its members.
Petitioner Catherine became a member and regular patron of respondent Club in
1989. Per policy of respondent Club, petitioner Catherine's membership privileges
were extended to immediate family members.
On June 15, 1999, the National Labor Relations Commission (NLRC) rendered a
Decision in NLRC NCR Case No. 00-07-06219, ordering respondent Club to pay
backwages, 13th and 14th month pay, and allowances to six illegally dismissed
employees. The successive appeals of respondent Club to the Court of Appeals and
this Court were unsuccessful, and the judgment for illegal dismissal against
respondent Club became final and executory. As a result, an alias writ of execution of
said judgment was served on respondent Club on September 19, 200 1 for the total
amount of P4,433,550.00.
Because respondent Club was not in a financial position to pay the monetary awards
in NLRC NCR Case, respondent BOD approved on September 20, 200I Board
Resolution No. 7-2001,entitled "Special Assessment for Club Members in Relation to
the Marie Rose Navarro, et al. v. QCSI, et al. Case," resolving to "seek the assistance
of its members by assessing each member the amount of TWO THOUSAND FIVE
HUNDRED PESOS (P2,500.00) payable in five (5) equal monthly payments starting
the month of September 2001."
Petitioner Catherine was duly notified of the implementation of the special assessment
through a Letter from the Treasurer of respondent Club. The amount of P500.00 was
debited and/or charged to Catherine's account each, as reflected in the Statements
of Account issued by respondent Club.
Petitioner Catherine believed that the imposition of the special assessment in Board
Resolution was unjust and/or illegal, however, she took no action against the same.
Petitioner Catherine simply avoided paying the special assessment by settling the
amounts due in her Statements of Account from September 2001 to January 2002
short of P500.00.
Respondent BOD then passed Board Resolution No. 3-2002 on April 18, 2002 which
suspended the privileges of the members of respondent Club who had not yet paid
the special assessment
To fully enforce Board Resolution and in order to be fair with the other members who
have already paid, the Board deemed it appropriate to suspend the privileges of those
members who would continue not to pay the said special assessment despite receipt
of the demand to do so.
Petitioner Laurence went to respondent Club intending to avail himself of its services
using the account of his mother, petitioner Catherine. Respondent Club refused to
accommodate petitioner Laurence because his mother's membership privileges had
been suspended.
Petitioner Catherine, through counsel, sent respondents a letter demanding the
immediate recall of the suspension of her membership privileges, an explanation why
she should not file a case for damages against respondents, and an apology for
besmirching her name and good reputation.
Issue:
Whether or not the non-payment of special assessment pursuant to a board resolution
grounds for suspension? Yes
Ruling:
Yes. The Court had previously recognized in Forest Hills Golf and Country Club, Inc.
v. Gardpro, Inc.,that articles of incorporation and by-laws of a country club are the
fundamental documents governing the conduct of the corporate affairs of said club;
they establish the norms of procedure for exercising rights, and reflected the purposes
and intentions of the incorporators. The by-laws are the self-imposed rules
resulting from the agreement between the country club and its members to
conduct the corporate business in a particular way. In that sense, the by-
laws are the private "statutes" by which the country club is regulated, and
will function. Until repealed, the by-laws are the continuing rules for the government
of the country club and its officers, the proper function being to regulate the
transaction of the incidental business of the country club. The by-laws constitute a
binding contract as between the country club and its members, and as among the
members themselves. The by-laws are self-imposed private laws binding on all
members, directors, and officers of the country club. The prevailing rule is that the
provisions of the articles of incorporation and the by-laws must be strictly complied
with and applied to the letter.
Being guided accordingly, the Court now turns to the pertinent By-Laws of respondent
Club.
At cursory glance, it would seem that the suspension of petitioner Catherine's
privileges was due to the P2,500.00 special assessment charged in her Statements of
Account from September 2001 to January 2002, which remained unpaid for over three
months by the time respondent BOD passed Board Resolution No. 3-2002 on April 18,
2002; and for one year and four months by the time respondent Lopez issued her
Memorandum dated May 22, 2003. However, tracing back, the P2,500.00 special
assessment was not an ordinary account or bill incurred by petitioners in respondent
Club, as contemplated in Section 33(a) of the By-Laws.
18
Section 33(a) of the By-Laws refers to the regular dues and ordinary
accounts or bills incurred by members as they avail of the services at
respondent Club, and for which the members are charged in their monthly
Statement of Account. The immediate payment or collection of the amount charged
in the member's monthly Statement of Account is essential so respondent Club can
carry-on its day-to-day operations, which is why Section 33(a) allows for the
automatic suspension of a nonpaying member after a specified period and notification.

The special assessment in the instant case arose from an extraordinary

circumstance, i.e., the necessity of raising payment for the monetary
judgment against respondent Club in an illegal dismissal case. Thus, petitioner
Catherine's nonpayment of the special assessment was, ultimately, a violation of
Board Resolution No. 7-2001, covered by Section 35(a) of the By-Laws.

Section 35(a) of the By-Laws requires notice and hearing prior to a member's
suspension. Definitely, in this case, petitioner Catherine did not receive notice
specifically advising her that she could be suspended for nonpayment of the
special assessment imposed by Board Resolution No. 7-2001 and affording
her a hearing prior to her suspension through Board Resolution No. 3-2002.
Respondents merely relied on the general notice printed in petitioner Catherine's
Statements of Account from September 2001 to April 2002 warning of automatic
suspension for accounts of over P20,000.00 which are past due for 60 days, and
accounts regardless of amount which are 75 days in arrears. While said general notice
in the Statements of Account might have been sufficient for purposes of Section 33(a)
of the By-Laws, it fell short of the stricter requirement under Section 35(a) of the
same By-Laws. Petitioner Catherine's right to due process was clearly violated.

In all, there was no evidence that respondents acted in bad faith by particularly
singling out petitioners, from among all other members of respondent Club who did
not pay the assessment, to be harassed or humiliated.

Considering that there was justifiable ground for the suspension of petitioner
Catherine's privileges in respondent Club, but her right to due process was violated
as she was not afforded notice and hearing prior to the suspension, the Court proceeds
to determine the reliefs to which petitioners are entitled.

19
Rosita Peña v. The Honorable Court of Appeals, Sps. Yap (1991) (void The issue regarding the validity of the resolution resulting to the sale of the
resolution, no quorum) property was properly cognizable by the RTC.

Doctrine:
The by-laws of a corporation are its own private laws which substantially have the
same effect as the laws of the
corporation. In this sense they become part of the fundamental law of the
corporation with which the corporation
and its directors and officers must comply.
Facts:
 Pampanga Bus Co. (PAMBUSCO) owned several mortgaged lots. The
lots were foreclosed and were sold to Rosita Peña, as highest bidder, in
a public bidding.
 PAMBUSCO, through three of its five directors resolved to authorize one of
their directors, Briones, to execute a deed of assignment of their right
of redemption in favor of Marcelino Enriquez. It must be noted that the
three who voted were the only ones who attended the meeting.
 Enriquez then redeemed the properties. A day after he executed a deed of
sale covering the same properties in favor of the spouses Yap (private
respondents).
[Pambusco assigned to ->Enriquez, sold to - > Spouses Yap]
2. YES. The By-laws are the corporation’s own private laws. They become the
fundamental laws of the corporation which the corporation and its officers should
follow. Sec. 4 of PAMBUSCO’s by-laws provided that at least four directors
should be present to constitute a quorum. According to the Corporation Code
any action resolved by the board with less than the number provided in the by-laws
of the corporation to constitute a quorum
would not bind the corporation. When a quorum is not reached, all the
present directors could do is to adjourn. Moreover, the purported directors who
attended the meeting and voted in favor of the assignment were bogus directors as
they were not listed in the SEC as directors, nor were they stockholders of the
company.
[Side issue: Because there was no consideration for the deed of assignment, the
Court deemed it as merely a donation and because it lacked the proper formalities
for a valid donation, the donation is void.]

 Petitioner’s contention:
o Peña contends that there could be no valid sale to the spouses Yap
because the deed of assignment in favor of Enriquez was void.
She prays that a final deed of sale be executed in her favor because
the redemption period had already lapsed without a valid redemption
being effected. According to her, the deed of assignment was executed
ultra vires and against the by-laws of the corporation which provided:
Sec. 4. ... No failure or irregularity of notice of meeting shall invalidate
any regular meeting or proceeding thereat; Provided a quorum of
the Board is present, nor of any special meeting; Provided at
least four Directors are present.In the case at bar, only three
out of five directors were present.

o The RTC ruled in favor of Peña, the CA, however reversed. According to the
CA, the section would only apply if there were failure or irregularity of
notice, which according to them, Peña failed to prove. They also
ruled that the by-laws provided no categorical declaration that
failure to abide by the “four directors” requirements would
result to a void resolution. Moreover, the CA ruled that the RTC had
no jurisdiction to hear the case.

Issues:
1. W/N the RTC had jurisdiction to hear the case
2. W/N the act of the board was against the corporation’s by-laws, and
consequently, void.

Held:
1. YES. The SEC only has jurisdiction over intra-corporate disputes. In the case at
bar, neither respondents Yap, nor petitioner Peña were stockholders of PAMBUSCO.

20
CHINA BANKING CORPORATION v. CA

Petitioner: China Banking Corporation

Respondents: Court of Appeals and Valley Golf and Country Club, Inc.

Doctrine: The nature of by-laws being intramural instruments would mean that they
are not binding on third-praties, except those who have actual knowledge of their
contents.

Facts:
- Calapatia pledged his stock in respondent VGCCI to petitioner CBC to secure
his loans with the latter.
- The deed of pledge executed in CBC’s favor was duly recorded in VGCCI’s
corporate books. Calapatia failed to pay his loan obligation. CBC petitioned
for extrajudicial foreclosure and requested VGCCI to transfer the pledged
stock in its name.
- VGCCI informed CBC of its inability to accede to the request in view of
Calapatia's unsettled accounts with the club. Notwithstanding, CBC
proceeded to foreclose the pledge. It emerged as the highest bidder and was
issued the corresponding certificate of sale.
- Subsequently, VGCCI sold Calapatia’s stock at public auction for his failure
to settle his accounts with it (monthly dues). Thus when CBC requested that
a new certificate of stock be issued in its name, VGCCI replied it has already
been sold.
- At the SEC, CBC sought to cancel the latter sale and have a new certificate
of stock issued in its name.
- VGCCI anchors its prior right over the subject stock on a provision of its by-
laws: “after a member shall have been posted as delinquent, the Board may
order his x x x share sold to satisfy the claims of the Club...” VGCCI maintains
that CBC is bound by its by-laws arguing that CBC had actual knowledge of
its by-laws when CBC foreclosed the pledge and when CBC purchased the
pledged stocks.

Issue/s: W/N CBC is bound by VGCCI's by-laws. - NO

Ruling+Ratio:
No. A third person is not privy to the contract created by the by-laws between the
shareholder and the corporation. Concededly, it is the generally accepted rule that
third persons are not bound by by-laws, except when they have knowledge of their
contents.

Disposition: The assailed decision of the Court of Appeals is REVERSED and the
order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.

21
De la Rama vs. Ma-Ao Sugar Central Co., Inc. ISSUE: WON the investment to a sugar bag manufacturing company used in packing
sugar does not need ratification by stockholders.
TOPIC: Invest Corporation Funds for non-primary purpose endeavour. (Sec.
42)

DOCTRINE: a private corporation may invest its funds in any other corporation or
business or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock,
or by at least two thirds (2/3) of the members in the case of non-stock corporations,
at a stockholder's or member's meeting duly called for the purpose. Provided,
however, That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval
of the stockholders or members shall not be necessary.
FACTS:
This was a representative or derivative suit by four minority stockholders against the
Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three other directors of the
corporation.
The complaint stated five causes of action, (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 attorney's fees; and (5) for
receivership.
HELD: Yes. The investment to a sugar bag manufacturing company used in packing
sugar falls within the implied poers of the sugar central as part of its primary purpose
and does not need ratification by the stockholders.
Under Sec. 17-1/2 (now sec 42) 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
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 foreign
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.

On the other hand, 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 defendant 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.

The Lower Court dismisses the petition for dissolution but condemns J. Amado Araneta
to pay unto Ma-ao Sugar Central Co., Inc. and orders Ma-ao from making investments
in Acoje Mining, Mabuhay Printing, and any other company whose purpose is not
connected with the Sugar Central business. This includes investment to the Philippine
Fiber, where the defendants admit having invested shares of stock of this company
but was ratified by the Board of Directors in later on. 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.

Both Parties appealed to the SC.

22
Bernas v. CA
DOCTRINE: 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. The by-laws of a corporation are its own private laws which substantially
have the same effect as the laws of the corporation. They are in effect written into
the charter. In this sense they become part of the fundamental law of the corporation
with which the corporation and its directors and officers must comply. The general
rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed in its charter or by the general law. Thus,
directors must act as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be questioned by the
objecting director or shareholder
APPLICABLE LAWS:
The Corporation Code laid down the rules on the removal of the Directors of the
corporation by
providing, inter alia, the persons authorized to call the meeting and the number of
votes required for the purpose of removal, thus: Sec. 28. Removal of directors or
trustees. -Any director or trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock corporation, by a vote
of at least twothirds (2/3) of the members entitled to vote: Provided, That such
removal shall take place either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose such removal
at the meeting. A special meeting of the stockholders or members of a corporation
for the purpose of removal of directors or trustees, or any of them, must be called by
the secretary on order of the president or on the written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or, if it be
a non-stock corporation, on the written demand of a majority of the members entitled
to vote. Should the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary, the call for the
meeting may be addressed directly to the stockholder
Facts
Makati Sports Club (MSC) is a domestic corporation duly organized and existing under
Philippine laws for the primary purpose of establishing, maintaining, and providing
social, cultural, recreational and athletic . activities among its members. Bernas group
were members of the BOD whose term to expire on 1998 or 1999. While
Cinco group were elected as member of BOD on a Special Stockholders Meeting (17
December 1997) The MSC Oversight Committee (MSCOC) composed of past
presidents demanded from
Bernas group to resign due to anomalies in handling corporate fund to pave new
election. New officers were elected (CinCo group)
Bernas group initiated an action before the Securities Investigation and Clearing
Department (SICD) of the SEC docketed as SEC Case No. 5840 seeking for the
nullification of the 17 December 1997 Special Stockholders Meeting on the ground
that it was improperly called. Citing Section 28 of the Corporation Code, the Bernas
Group argued that the authority to call a meeting lies with the Corporate . Secretary
and not with the MSCOC which functions merely as an oversight body and is not
vested with the power to call corporate meetings. For being called by the persons not
authorized to do so, the Bernas Group urged the SEC. to declare the 17
DecembDecember 1997, stockholders Meeting on the ground that it was improperly
called. Citing Section 28 of the Corporation Code, the Bernas Group argued that the
authority to call a meeting lies with the Corporate . Secretary and not with the MSCOC
which functions merely as an oversight body and is not vested with the power to call
corporate meetings. For being called by the persons not authorized to do so, the
Bernas Group urged the SEC. to declare the 17 December 1997 Special Stockholders'
Meeting, including the removal of the sitting officers and the election of new ones, be
nullified.
23

In the Annual Stockholder's meeting (April 20, 1998) the majority approved, confirm
and ratify the special election
Due to the filing of several petitions for and against the removal of the Bernas Group
from
the Board pending before the SEC resulting in the piling up of legal controversies
involving MSC, the SEC En Banc, in its Decision dated 30 March 1999, resolved to
supervise the holding of the 1999 Annual Stockholders' Meeting. During the said
meeting, the stockholders once again approved, ratified and confirmed the holding of
the 17 December 1997 Special Stockholders' Meeting. This was ratified in 2000
Stockholders meeting. The SICD render invalid December 1997, April 20, 1998, and
April 19, 1999. The expulsion of Bernas was held invalid. The SEC En Banc reversed.
The CA invalid
RULING OF THE LOWER COURTS: CA – Reversed SEC
ISSUE: Whether the election is valid (December 1997)- NO Whether holding of
annual stockholders' meeting is valid– YES
RULING + RATIO: Corollarily, the pertinent provisions of MSC by-laws which govern
the manner of calling and sending of notices of the annual stockholders' meeting and
the special stockholders' meeting provide: SEC. 8. Annual Meetings. The annual
meeting of stockholders shall be held at the Clubhouse on the third Monday of April
of every year unless such day be a holiday in which case the annual meeting shall be
held on the next succeeding business day. At such meeting, the President shall render
a report to the stockholders of the clubs. x x x x
SEC. 10. Special Meetings. Special meetings of stockholders shall be held at the
Clubhouse when called by the President or by the Board of Directors or upon written
request of the stockholders representing not less than one hundred (100) shares.
Only matters specified in the notice and call will be taken up at special meetings. x x
xx
SEC. 25. Secretary. The Secretary shall keep the stock and transfer book and the
corporate seal, which he shall stamp on all documents requiring such seal, fill and
sign together with the President, all the certificates of stocks issued, give or caused
to be given all notices required by law of these By-laws as well as notices of all
meeting of the Board and of the stockholders; shall certify as to quorum at meetings;
shall approve and sign all correspondence pertaining to the Office of the Secretary;
shall keep the minutes of all meetings of the stockholders, the Board of Directors and
of all committee
The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the continued accountability to shareholders, and the legitimacy
of their decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over the properties that they do not own. A corporation's board
of directors is understood to be that body which (1) exercises all powers provided for
under the Corporation Code; (2) conducts all business of the corporation; and (3)
controls and holds all the property of the corporation. Its members have been
characterized as trustees or directors clothed with fiduciary character.25 It is
ineluctably clear that the fiduciary relation is between the stockholders and the board
of directors and who are vested with the power to manage the affairs of the
corporation. The ordinary trust relationship of · directors of a corporation and
stockholders is not a matter of statutory or technical law. It springs from the fact
that directors have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the only
beneficiaries thereof. Should the board fail to perform its fiduciary duty to safeguard
24
the interest of the stockholders or commit acts prejudicial to their interest, the law
and the by-laws provide mechanisms to remove and replace the erring director.. 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
are contrary to law, morals or 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 or 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. The 17 December 1997
Meeting belongs to the category of the latter, that is, it is void ab initio and cannot be
validated.
Consequently, such Special Stockholders' Meeting called by the Oversight Committee
cannot have any legal effect. The removal of the Bernas Group, as well as the election
of the Cinco Group, effected by the assembly in that improperly called meeting is
void, and since the Cinco Group has no legal right to sit in the board, their subsequent
acts of expelling Bernas from the club and the selling of his shares. at the public
auction, are likewise invalid. Apparently, the assumption of office of the Cinco Group
did not bear parallelism with the factual milieu in Cojuangco and as such they cannot
be considered as de facto officers and thus, they are without colorable authority to
authorize the removal of Bernas and the sale of his shares at the public auction. They
cannot bind the corporation to third persons who acquired the shares of Bernas and
such third persons cannot be deemed as buyer in good faith.
SEC's assumption of jurisdiction over this case is proper, as the controversy involves
the election of PNCC's directors. Petitioner does not really contradict the nature of the
question presented and agrees that there is an intra-corporate question involved. x x
x x Prescinding from the above premises, it necessarily follows that SEC can compel
PNCC to hold a stockholders' meeting for the purpose of electing members of the
latter's board of directors. x x x As respondents point out, the SEC's action is also
justified by its regulatory and administrative powers to implement the corporation
code, specifically to compel PNCC to hold a stockholder's meeting for election
purposes.
Given the broad administrative and regulatory powers of the SEC outlined under
Section 50 of the Corporation Code and Section 6 of Presidential Decree (PD) No.
902-A, the Cinco Group cannot claim that if was left without recourse after the
Corporate Secretary previously refused to heed its demand to call a special
stockholders' meeting. If it be true that the Corporate Secretary refused to call a
meeting despite fervent demand from the MSCOC, the remedy of the stockholders
would have been to file a petition to the SEC to direct him to call a meeting by giving
proper notice required under the Code. To rule otherwise would open the floodgates
to abuse where any stockholder, who consider himself aggrieved by certain corporate
actions, could call a special stockholders' meeting for the purpose of removing the
sitting officers in direct violation of the rules pertaining to the call of meeting laid
down in the by-laws. 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. The by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation. They are in effect
written into the charter. In this sense they become part of the fundamental law of the
corporation with which the corporation and its directors and officers must comply. The
general rule that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed in its charter or by the general
law. Thus, directors must act as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be questioned by
the objecting director or shareholder. Certainly, the rules set in the by-laws are
mandatory for every member of the corporation to respect.1âwphi1 They are the
fundamental law of the corporation with which the corporation and its officers and
members must comply. It is on this score that we cannot upon the other hand sustain
the Bernas Group's stance that the subsequent annual stockholders' meetings were
invalid. First, the 20 April 1998 Annual Stockholders Meeting was valid because it was
sanctioned by Section 845 of the MSC bylaws. Unlike in Special Stockholders
Meeting46 wherein the bylaws mandated that such meeting shall be called by specific
persons only, no such specific requirement can be obtained under Section 8.
Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because in
addition to the fact that it was conducted in accordance to Section 8 of the MSC
bylaws, such meeting was supervised by the SEC in the exercise of its regulatory and
administrative powers to implement the Corporation Code. Needless to say, the
conduct of SEC supervised Annual Stockholders Meeting gave rise to the presumption
that the corporate officers who won the election were duly elected to their positions
and therefore can be rightfully considered as de jure officers. As de jure officials, they
25
can lawfully exercise functions and legally perform such acts that are within the scope
of the business of the corporation except ratification of actions that are deemed void
from the beginning. Considering that a new set of officers were already duly elected
in 1998 and 1999 Annual Stockholders Meetings, the Bernas Group cannot be
permitted to use the holdover principle as a shield to perpetuate in office. Members
of the group had no right to continue as directors of the corporation unless reelected
by the stockholders in a meeting called for that purpose every year. They had no right
to hold-over brought about by the failure to perform the duty incumbent upon them
In fine, we hold that 17 December 1997 Special Stockholders' Meeting is null and void
and produces no effect; the resolution expelling the Bernas Group from the
corporation and authorizing the sale of Bernas' shares at the public auction is likewise
null and void. The subsequent Annual Stockholders' Meeting held on 20 April 1998,
19 April 1999 and 17 April 2000 are valid and binding except the ratification of the
removal of the Bernas Group and the sale of Bernas' shares at the public auction
effected by the body during the said meetings. The expulsion of the Bernas Group
and the subsequent auction of Bernas' shares are void from the very beginning and
therefore the ratifications effected during the subsequent meetings cannot be
sustained. A void act cannot be the subject of ratification. WHEREFORE, premises
considered, the petitions of Jose A. Bernas, Cecile. H. Cheng, Victor Africa, Jesus B.
Maramara, Jose T. Frondoso, Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos.
16335657 and of Jovencio Cinco, Ricardo Librea and Alex Y. Pardo in G.R. Nos.
163368-69 are hereby DEN~ED. The assailed Decision dated 28 April 2003 and
Resolution dated 27 April 2004 of the Court of Appeals are hereby AFFIRMED.

26
SEC-OGC Opinion No. 16-22

Author: Masangcay

FACTS:

This letter is to address the want of the FODCC to enter into a Joint Venture
Agreement with another company having a similar purpose.

ISSUE:

Whether or not FODCC can enter into a Joint Venture Agreement with another
company having similar purpose.

RULING:

YES. SEC, in its opinion, stated that while the corporation has no power to enter into
a contract of partnership with an individual or another corporation (EXCEPTIONS: 1)
the authority to enter into a partnership is expressly conferred upon on its charter of
Articles of Incorporation; 2)if foreign corp, must obtain license to transact business
in Phils, in accordance with the Corpo Code), nevertheless it may validly enter into a
joint venture agreement, whenever the nature of that venture is in line with the
business authorized by its charter. SEC also provides that while joint venture is a
type of partnership as held by the Supreme Court, joint venture as distinguish to a
partnership is only limited to a particular project that will allow the Boards of the co-
venturers to anticipate and evaluate the corporations’ liabilities and responsibilities.
Therefore, SEC is of opinion that two or more corporations may enter into a joint
venture through a contact or agreement if the nature of the venture is in line with the
business authorized by its charters; that JV will not result in the formation of a
partnership or corporation.

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