IX.

CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 35 and 44)

Civil Code, Art. 46. Juridical persons may acquire and possess property of all kinds,
as well as incur obligations and bring civil or criminal actions, in conformity with the
laws and regulations of their organization.

SEC. 35. Corporate Powers and Capacity. - Every corporation incorporated under
this Code has the power and capacity:
a. To sue and be sued in its corporate name;
b. To have perpetual existence unless the certificate of incorporation provides
otherwise;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with the provisions of this
Code;
e. To adopt bylaws, not contrary to law, morals or public policy, and to amend or
repeal the same in accordance with this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a nonstock corporation;
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage,
and otherwise deal with such real and personal property, including securities
and bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
h. To enter into a partnership, joint venture, merger, consolidation, or any other
commercial agreement with natural and juridical persons;
i. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That
no foreign corporation shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
j. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers, and employees; and
k. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation.

SEC. 44. Ultra Vires Acts of Corporations. -No corporation shall possess or
exercise corporate powers other than those conferred by this Code or by its articles
of incorporation and except as necessary or incidental to the exercise of the powers
conferred.
 CLASSIFICATION OF CORPORATE POWERS
EXPRESS IMPLIED INCIDENTAL
These powers given to a corporation either: Those powers that exist as a Those powers that:
a.) By clear or express provision of the law. necessary consequence of: a.) attach to a corporation at the
 Some of the other powers expressly granted under Sec. a.) the exercise of express moment of its creation
36 are considered to be inherent or incidental powers powers of the corporation or b.) without regard to its express
which even if not given by express grant are b.) the pursuit of its purpose powers or particular primary
nevertheless deemed to be within the capacity of the as provided for in the article purposes and
foreign entities (such as the power to adopt by-laws) of incorporation c.) is said to be inherent in it as a legal
entity or a legal organization.
b.) By the charter or articles of incorporation.  the management of a
 Express grant of authority from the board of directors corporation, in the absence  Powers that go into the very nature
needed to validly bind the corporation. of express restrictions, has and corporation’s juridical entity
 Thus the SC held that absent any board resolution discretionary authority to cannot be presumed to be incidental
authorizing an officer or any person to exercise express enter into contracts or or inherent powers. This juridical
powers given to a corporation such as filing a suit on its transactions which may be entity is State-grant and cannot be
behalf, such an action is invalid. deemed reasonably altered or amended without State
 The power of a corporation to sue and be sued in any necessary or incidental to authority (egs. right of succession,
court is lodged with the board of directors that exercise its its business purpose. right to merger)
corporate powers.
 By-laws are not a source of powers.
 Art. 46 of the Civil Code expressly provides for the Sub-paragraph 11 of Sec. 36 Sec. 2 of the Corp. Code provides the
powers of a corporation as a juridical personality provide that a corporation has corporation as having “the powers,
possesses. the power and capacity to attributes and properties expressly
 Sec. 36 of the Corporation Code expressly “exercise such powers as authorized by law or incident to its
enumerates the ten powers which a corporation may may be essential or necessary existence.”
exercise. to carry out its purpose or
 Sec. 45 of the Corporation Code recognizes other purposes as stated in its
powers provided in the Article of Incorporation. articles of incorporation.
Generally exercised by the Board of Directors with Generally, purely members of Generally, purely members of the
exception to certain instances where shareholders’ assent the Board of Directors exercise Board of Directors exercise this.
are needed. this.
  Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent
authority and of (2) estoppel.
 One has to look at the corporation as a person before the law because of the
(1) issue of consent and (2) liability – who commits itself to obligation. The state
only gives a corporation limited powers and not general powers as an individual
has because of the consent and liability.

WHERE CORPORATE POWER IS LODGED

 A corporation has no power except those expressly conferred on it by the
Corporation Code and those that are implied or incidental to its existence. In
turn, a corporation exercises said powers through its board of directors and/or
its duly authorized officers and agents. . . In turn, physical acts of the
corporation, like the signing of documents, can be performed only by natural
persons duly authorized for the purpose by corporate by-laws or by a specific
act of the board of directors.
 Unless otherwise provided by the Corporation Code, corporate powers are
exercised by the Board of Directors, which they may delegate to either an
executive committee, officers or contracted managers. The delegation, except
for the executive committee, must be for specific purposes, which makes the
officers the agents of the corporation, and accordingly the general rules of
agency as to the binding effects of their acts would apply. For such officers to
be deemed fully clothed by the corporation to exercise a power of the Board,
the latter must specially authorize them to do so.

PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate

powers
 The source of power of the board of directors is therefore primary and not
delegated power from the stockholders or members of the corporation.
However, there are specified instances in the Corporation Code where the
particular exercise of power of the corporation by the board, in order to be
binding and effective, requires the consent and ratification of the stockholders
or members, on one hand, and the State, on the other hand.

IN CONSONANCE WITH CONTRACT LAW PRINCIPLES – in conformity with the

principles of contract law, that a party cannot relieve himself from the contractual
terms and conditions, much less amend or alter them, without the consent or approval
of the other party or parties.

EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is

required, majority rules. The consent or dissent of the stockholders is recognized by
their majority vote or their qualified two-thirds as the case may be which would bind
even those who abstained or dissented. For those who dissented, there is a way out
for them by way of exercising their appraisal right (depending on the issue).
ULTRA VIRES ACTS
(a) Concept and Types (Sec. 44)

SEC. 44. Ultra Vires Acts of Corporations. -No corporation shall possess or
exercise corporate powers other than those conferred by this Code or by its articles
of incorporation and except as necessary or incidental to the exercise of the powers
conferred.

BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles)

1. A corporation is a creature of the law and has only such powers and privileges
as are granted by the State – the ultra vires doctrine is a product of the theory
of concession as provided in Sec. 2.
2. The doctrine upholds the fiduciary duty of directors and officers to the
stockholders or members – such duty dictates that the corporation engage only
in transactions to which the stockholders and members bind themselves by way
of the provisions of the purposes clause. This is also necessarily include an
obligation not to enter into transactions which violate the law.

TEST TO DETERMINE ULTRA VIRES – Whether the act in question is in direct and
immediate furtherance of the corporation’s business, fairly incident to the express
powers and reasonably necessary to their exercise. The strict terms “direct and
immediate” refers to the business of the corporation while the liberal terms “fairly
incident” and “reasonably necessary” with reference to the powers of the corporation.
With regard to the business of the corporation as the reference point, much latitude is
given to the corporation to enter into various contracts as long as they have logical
relation to the pursuit of such business. On the other hand, when the purpose clause
used limiting words that Court will hold such corporation to such limited business.

POLICIES SUPERVENING IN ULTRA VIRES ISSUES – Acts not per se illegal,

liberal interpretation.
1. PUBLIC CONVENIENCE – if corporation contracts are strictly construed, the
public would be inconvenienced by having to verify and enter into contractual
safeguards when entering into contracts with corporations. As such liberal
construction is afforded to such corporate contracts.
2. CONTRAVENTIONOF CONTRACTUAL EXPECTATIONS – setting aside the
corporate contract on the ground of ultra vires would contravene the
expectations of both parties who entered into the contract expecting to be
bound.
3. PRINCIPLE OF BUSINESS JUDGMENT – the court will not sit in judgment to
substitute their business judgment for that of the directors; and that as much as
possible, directors in the exercise of their business judgment, should be given
leeway to adopt corporate policies and to engage in transactions as they deem
best for the corporation.
4. NATURE OF BUSINESS OF OPERATIONS – it is impossible to anticipate all
possible contingencies at the time the Articles are drawn thus there would be a
need to amend or revise the Articles to keep abreast with the various aspects
of the business.
ULTRA VIRES ACTS VS ACTS WHICH ARE ILLEGAL PER SE
 Illegal acts of a corporation are those acts which are contrary to law, morals, or
public order or contravenes some rule of public policy or public duty are void.
Such acts or contracts cannot be the basis of any court action nor acquire
validity by performance, ratification or estoppel.
 Ultra vires acts are those which are not illegal and void ab initio but are within
the scope of the articles of incorporation are merely voidable and may become
binding and enforceable when ratified by stockholders. Said ratification cures
the infirmity of the corporate act and makes it valid and enforceable.

TYPES OF ULTRA VIRES CASES

1. acts or contracts which are per se illegal as being contrary to law à VOID
2. acts done beyond the powers of the corporation as provided for in the law or its
articles of incorporation; and à VOID or VOIDABLE?
3. acts or contracts entered into in behalf of the corporation by persons who have
no corporate authority à UNENFORCEABLE

 Ultra vires acts of the second type are void as between the corporation and the
State or in the first level of corporate existence while it is merely voidable in the
third level because of public policy. The public who deals in good faith with the
corporation has the right to expect that the obligation entered into shall be
complied with.

RATIFICATION OF ULTRA VIRES ACTS:

Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954]

Facts:
 The story began with Enrico Perovano becoming President of the Dela Rama
Corporation. Under his management, the corporation grew into a multi-million
company until his death.
 Don Esteban dela Rama who owned and controlled the stock of the corporation,
distributed his shareholdings among his five daughters including Estefania.
 The company has a bonded indebtedness amounting to P7,500 in 1940 but had
assets/capitals of P15 M as of 1941 which were mortgaged as security for the debt
to the National Development Corp.
 This bonded indebtedness was converted to non-voting preferred shares of the
company under the condition that they would bear a fixed cumulative divisor of 6%
per annum and this was carried out in 1949.
 NDC now had the right to be represented by four out of nine members in the Board
of Directors.
 It was in 1946 that the Board of Directors adopted the questioned resolution where
the corporation ser aside P400,000 to the four minor children with the sum
convertible into shares of stock.
 Lourdes de la Rama later learned that since the company shares of stock was
actually 3.6 times their par value, the company would in effect be giving them an
 amount totaling to P1,440,000 and that stocks if were given to the children, the
voting strength of the De la Rama daughters would be adversely affected.
 This caused Lourdes to ask for the cancellation and waiver of her pre-emptive
rights. Don Esteban then advised the corporate secretary that the resolution be
nullified due to the misunderstanding as to its implications.
 In 1947, the Board adopted a resolution changing the form of donation from 4,000
shares to merely a renunciation in favor of the children of the corporate right, titles
and interests as beneficiary to the proceeds of the life insurance policy subject to
the condition that proceeds be retained by the company as a loan with 5% interest
($321,500).
 Estefania as guardian of the children, accepted the donation in their behalf. Said
donation was formally ratified in 1949 after Estefania bought a house in New York
for $75,000.
 In 1950 Osmena Jr. husband of Lourdes de la Rama addressed an inquiry to the
SEC asking for an opinion regarding the donation. SEC opined that the donation
was void because the corporation could not dispose of its assets by gifts.
Therefore, it acted beyond the scope of its powers. Thus, the stockholders revoked
the donation on this ground.
 With these revocation, plaintiff as represented by Estefania their mother, seek t
enforce this resolutions adopted by the Board of Directors and Stockholders of De
la Rama Steamship Co. giving to said children the proceeds of the insurance
policies of the deceased with the company as the beneficiary.
 The company contends that the resolution and the contract executed pursuant
thereto are ultra vires and if valid, the obligation to pay the amount given is not yet
due and demandable. Plaintiffs won in the lower court, hence this petition.

Issue: WON the said Board of Director’s resolution was an ultra vires act?

Held:
 The grant or donation in question is remunerative in nature and was given in
consideration of the services rendered by the heirs’ father to the corporation. The
donation has already been perfected such that the corporation could no loner
rescind it. It was embodied in a Board Resolution.
 Representatives of the corporation and even its creditors as the NDC have given
their concurrence.
 The resolution was actually carried out when the corporation and Estefania
entered into an agreement that the proceeds will be entered as a loan. Estefania
accepted the donation and such was recorded by the corporation.
 The Board of Directors approved Estefania’s purchase of the house in New York.
Company stockholders formally ratified the donation
 The donation was a corporate act carried out by the corporation not only with the
sanction of the Board of Directors but also of its stockholders.
 The donation has reached a stage of perfection which is valid and binding upon
the corporation and cannot be rescinded unless there exists legal grounds for
doing so. The SEC opinion nor the subsequent Board Resolution are not sufficient
reasons to nullify the donation.
 The donation is also not an ultra vires act. The corporation was given broad and
unlimited powers to carry out the purpose for which it was organized which
includes the power to:
1. invest and deal with corporate money not immediately required in such manner
as from time to time may be determined
2. aid in any other manner to any person, association or corporation of which any
obligation is held by this corporation. The donation undoubtedly comes within
the scope of this broad power.

 An ultra vires act is

1. an act contrary to law, morals, or public order or contravene some rules of
public policy or duty. It cannot acquire validity by performance, ratification,
estoppel. It is essentially void
2. those within the scope of the Articles of Incorporation and not always illegal. It
is merely voidable and may become binding and enforceable when ratified by
stockholders.
 Since it is not contended that the donation is illegal or contrary to any of the
expressed provisions of the Articles of Incorporation nor prejudicial to the creditors
of the corporation, said donation even if ultra vires is not void and if voidable, its
infirmity has been cured by ratification and subsequent atcs of the corporation.
 The corporation is now estopped or prevented from contesting the validity of the
donation. To allow the corporation to undo what it has done would be most unfair
and contravene the well-settled doctrine that the defense of ultra vires cannot be
se up or availed of in any completed transaction.

NOTE: The ratification of the stockholders of the donation made is the key in this case.
Because such ratification is meant to protect the contractual relationship or interest of
stockholders.

Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933])

Facts:
 Benguet Consolidated Mining and Balatoc Mining Co. are entities organized for
the purpose of engaging in the mining of gold in the Philippines and their
respective properties lie only a few miles apart.
 The original stockholders of Balatoc were unable to supply the means for profitable
operation thus, its board ordered a suspension of all work. A general meeting of
the stockholders approved to establish a committee to find investors.
 The committee in turn approached Bean, President and General manager of
Benguet to secure the necessary capital for the development of the Balatoc
properties.
 The management of both companies executed a contract where Benguet was to
proceed with the development and construction of a milling plant for the mine and
to erect a power plact. In return, Benguet would receive from Balatoc shares of
par value of P600,000 in payment of the first 600,000 to be advanced to it.
 By 1929, Benguet had spent P1,417,952,15 in pursuance of the contract. Balatoc
stockholders have been receiving large dividends.
 Harden and two other stockholders filed a suit against Benguet, Balatoc and the
officers to annul the certificate covering P600,000 shares of Balatoc issued to
Benguet and to recover a large sum of money alleged to have been unlawfully
collected by Benguet and to annul the contract. The trial court dismissed the
complaint, hence this petition.

Issue: WON it is lawful for Benguet to hold any interest in another mining corporation?

Held: No.
 Section 75 of the Philippine Bill of 1902 prohibits corporation engaged in mining
from being interested in any other corporation engaged in mining. This was
amended by Act No. 3518 which now provided that a corporation is prohibited to
hold more than 15% of the OCS of another corporation.
 The Corp. Law did not contain any clause directly penalizing the acts of a
corporation or member in an interest contrary to Sec. 13 of Act 1459. The penalties
imposed by the Corp.
 Law are of such nature that they can be enforced only by a criminal prosecution
or by an action of quo warranto which can only be maintained by the Atty. General.
Benguet Co. has committed no civil wrong against the plaintiff stockholders and if
a public wrong is committed, the directors of Balatoc and plaintiff Harden himself
were the active inducers of the commission of that wrong.
 The contracts have been performed on both sides and there is no possibility of
undoing what has been done.
 Plaintiffs then invoke Art. 1305 which declares that an innocent party to an illegal
contract may recover anything that he may have given while he is not bound to
fulfill any promise he may have made. Supposing this is applicable, the general
remedy provided by Art. 1305 cannot be invoked where a special remedy is
supplied in special law.
 In as much as the corporation law prohibits the acquisition by one mining
corporation of any interest in another and that these were enacted in the exercise
of general police power of the government, it results that where a corporation does
so, the stockholders cannot maintain an action to annul the contract by which such
interest was acquired.
 The remedy must be sought in a criminal proceeding or quo warranto action
instituted by the government. Until thus assailed in a direct proceeding, the
contract by which the interest was acquired will be treated as valid as between the
parties.

NOTE: We are studying Harden because of the pronouncement that even where
corporate contracts are illegal per se, when only public or government policy is at
stake and no private wrong is committed, the courts will leave the parties as they are
in accordance with their original contractual expectations. (The only contracts that the
courts will touch are contracts which are void for being illegal per se.)
(i) Theory of Estoppel or Ratification
 The principle of estoppel precludes a corporation and its Board of Directors from
denying the validity of the transaction entered into by its officer with a third party
who in good faith, relied on the authority of the former as manager to act on
behalf of the corporation.
 In order to ratify the unauthorized act of an agent and make it binding on the
corporation, it must be shown that the governing body or officer authorized to
ratify had full and complete knowledge of all the material facts connected with
the transaction to which it relates. Ratification can never be made on the part of
the corporation by the same person who wrongfully assume the power to make
the contract, but the ratification must be by the officer or governing body having
authority to make such contract.
 The admission by counsel on behalf of the corporation of the latter’s culpability
for personal loans obtained by its corporate officers cannot be given legal effect
when the admission was “without any enabling act or attendant ratification of
corporate act,” as would authorize or even ratify such admission. In the absence
of such ratification or authority, such admission does not bind the corporation.

Doctrine of Laches or “Stale Demands”: The principle of laches or “stale demands”

provides that the failure or neglect, for an unreasonable and unexplained length of
time, to do that which by exercising due diligence could or should have been done
earlier, or the negligence or omission to assert a right within a reasonable time,
warrants a presumption that the party entitled to assert it either has abandoned it or
declined to assert it.

PRINCIPLE OF ESTOPPEL - It being merely voidable, an ultra vires act can be

enforced or validated if there are equitable grounds for taking such action. Here it is
fair that the resolution be upheld at least on the ground of estoppel.
 Ratification
(a) the act must be consummated and not executory
(b) creditors are not prejudiced or all of them have given their consent
(c) rights of the public or the State are not involved
(d) all the stockholders must give their consent.

(ii) Theory of Apparent Authority

 Outward appearance, the agent’s apparent representation yields to the

principal’s true representation and the contract is considered as entered into
between the principal and the third person.
 If a corporation knowingly permits one of its officers to act within the scope of
an apparent authority, it holds him out to the public as possessing the power to
do those acts, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agent’s authority.
 The authority of a corporate officer dealing with third persons may be actual or
apparent . . . the principal is liable for the obligations contracted by the agent.
The agent’ apparent representation yields to the principal's true representation
 and the contract is considered as entered into between the principal and the
third person.
 Persons who deal with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation
liable.
 Apparent authority may be ascertained through (1) the general manner in which
the corporation holds out an officer or agent as having the power to act, or, in
other words the apparent authority to act in general with which is clothes them;
or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond the scope of his ordinary
powers.
 When a banking corporation, when an officers arranges a credit line agreement
and forwards the same to the legal department at its head officer, and the bank
did no disaffirm the contract, then it is bound by it.
 A corporation cannot disown its President’s act of applying to the bank for credit
accommodation, simply on the ground that it never authorized the President by
the lack of any formal board resolution. The following placed the corporation
and its Board of Directors in estoppel in pais: Firstly, the by-laws provides for
the powers of the President, which includes, executing contracts and
agreements, borrowing money, signing, indorsing and delivering checks;
secondly, there were already previous transaction of discounting the checks
involving the same personalities wherein any enabling resolution from the Board
was dispensed with and yet the bank was able to collect from the corporation.
 Per its Secretary’s Certificate, the foundation had given its President ostensible
and apparent authority to inter alia deal with the respondent Bank, and therefore
the foundation is estopped from questioning the President’s authority to obtain
the subject loans from the respondent Bank.
 A verbal promise given by the Chairman and President of the company to the
general manager and chief operating officer to give the latter unlimited sick
leave and vacation leave benefits and its cash conversion upon his retirement
or resignation, when not an integral part of the company’s rules and policies, is
not binding on the company when it is without the approval of the Board of
Directors.
 Corporate policies need not be in writing. Contracts entered into by a corporate
officer or obligations or prestations assumed by such officer for and in behalf of
such corporation are binding on the said corporation only if such officer acted
within the scope of his authority or if such officer exceeded the limits of his
authority, the corporation has ratified such contracts or obligations.
 The acceptance of the offer to purchase by the clerk of the branch of the bank,
and the representation that the manager had already approved the sale (which
in fact was not true), cannot bind the bank to the contract of sale, it being obvious
that such a clerk is not among the bank officers upon whom putative authority
may be reposed by a third party. There is, thus, no legal basis to bind the bank
into any valid contract of sale with the buyers, given the absolute absence of
any approval or consent by any responsible officer of the bank.
 Acts done in excess of corporate officers’ scope of authority cannot bind the
corporation. However, when subsequently a compromise agreement was on
 behalf of the corporation being represented by its President acting pursuant to
a Board of Directors’ resolution, such constituted as a confirmatory act signifying
ratification of all prior acts of its officers.

Due what seems to be and what happens otherwise.

Q: Upon whom is placed the burden of discovering that the agent has no authority?
A: In view of the authority of apparent authority, the third person dealing with the
corporation is not given the burden of discovering whether the agent has authority
or not. It is also therefore reasonable in a case where an officer of a corporation
has made a contract in its name, that the corporation should be required, if it denies
the authority of the officer, to state such defense in its answer, since it allows the
plaintiff to be appraised of the fact that the agent’s authority is contested; and he
is given an opportunity to adduce evidence showing either that the authority existed
or that the contract was ratified and approved.

NOTE: The theory of apparent authority is classified into two types by which such may
be manifested or proved, which are by position and by circumstance. The burden of
proof mentioned above applies to the second classification.

PRIME WHITE CEMENT CORP. V. INTERMEDIATE APPELLATE COURT

Facts:
 A director (Te) entered into an agreement of Dealership agreement with PWCC,
signed by its chairman and president of the corporation to supply 20,000 bags of
white cement per month for five years at a fixed price of P9.70 per bag.
 Subsequently, the Board refused to abide by the contract unless new conditions
are accepted providing for a new price formula. The dealing director sued for
specific performance on the contract.

Held:
 The Court held that under both the Corporation Law then and the present
Corporation Code, the doctrine is that all corporate powers shall be exercised by
the Board of Directors, except as those provided by law.
 Although it cannot completely abdicate its powers and responsibility to act for the
juridical entity, the Board may expressly delegate specific powers to its president
or any of its officers.
 In the absence of such express delegation, a contract entered into by its President
on behalf of the corporation may still bind the corporation if the Board should ratify
the same expressly or impliedly.
 Implied ratification takes various forms (1) silence or acquiescence (2) by acts
showing approval or adoption of the contract or (3) by acceptance and retention
of the benefits flowing therefrom.
 Even in the absence of express or implied authority by ratification, the President
as a general rule may bind the corporation by a contract in the ordinary course of
business, provided the same is reasonable under the circumstances. These rules
are basic but general and flexible. Applies where the President is dealing with third
persons but different where a director is dealing with his own corporation.
 The court herein held that the director holds a position of trust and as such he
owes a duty of loyalty to his corporation and his contracts with the corporation
must always be at reasonable terms, otherwise the contract is void or voidable at
the instance of the corporation.
 The court here found the terms of the Dealership Agreement were unreasonable
for the corporation and that the unfairness in the contract was a basis which
renders a contract entered into the President without authority from the Board,
void or voidable, although it may have been in the ordinary course of business.

NOTE: The President as the highest office of the corporation, by practice and
jurisprudence embodies apparent authority. On the other hand, the general manager
on its own may or may not embody such authority depending on the circumstances
that go with it. The corporate secretary and lawyer enjoy no such presumption
because their positions do entail much commercial significance.

FRANCISCO V. GSIS, 7 SCRA 577 [1963]

Facts:
 Trinidad Francisco mortgaged to GSIS a parcel of land with 21 bungalows (Vic-
Mari Compound) for a P400,000 loan of which P336,100 was released payable
within 10 years with 7% interest per annum compounded monthly.
 In 1959 GSIS extrajudicially foreclosed the mortgage on the ground of default of
payment in the amount of P32,000 ( total payment amounted to P130,000) where
GSIS was also the buyer.
 Atty. Francisco, the father of Trinidad proposed to the General Manager of GSIS
to pay P30,000 of the P52,000 and asked that the foreclosure be set aside and for
GSIS to take over the administration of the mortgaged property and to collect
installments due on the unpaid purchase price for more than 31 house and lot
payees to be applied to the arrearage and the loan.
 The GSIS approved this and Atty. Francisco was notifed by telegram. GSIS
accepted a check for P30,000 and remittances totaling to P44,121.29 for which
the corresponding OR’s were issued.
 GSIS then sent 3 letters signed by the GM asking a proposal for the payment of
the debt since the 1yr. Period for redemption had expired.
 Atty. Francisco protested and brought to the attention of GSIS the concluded
contract and its acceptance by telegram.
 GSIS replied asking payment for various expenses and that the telegram should
be disregarded for its failure toe express the content of a board resolution due to
error of its minor employees in the sending of the telegram.
 The approval was apparently conditioned on Atty. Francisco’s agreement to pay
all expenses incurred in foreclosure.
 GSIS held that the remittances were insufficient so that GSIS consolidated title to
the compound in its name. Hence, this suit for specific performance and damages.
The lower court ruled in favor of Francisco.
Held:
 The SC finds no reason for altering the conclusion that the offer of compromise
made by Francisco had been validly accepted and was binding on the defendant
GSIS.
 The terms of the offer were clear and the acceptance of the proposal was signed
by the GM Andal. The telegram hinted on no anomaly and was within Andal’s
apparent authority.
 Corporation transactions would speedily come to a standstill where every person
dealing with a corporation held duty-bound to disbelieve every act of its
responsible officers, no matter how regular they should appear on their face.
 If a corporation knowingly permits one of its officers or any other agent within the
scope of an apparent and thus holds him out to the public as possessing power to
do those acts, the corporation will as against any one who has in good faith dealt
with the corporation through such agent be estopped from denying such authority.
 Hence, even if it were the Board Secretary who sent the telegram, the corporation
could not evade the binding effect produced by the telegram. The corporation had
sufficient notice of the allegedly unauthorized telegram when it pocketed the
P30,000 but kept silent about it.
 Knowledge of facts acquired or possessed by an officer or agent of a corporation
in the course of his employment and in relation to matters within the scope of his
authority is notice to the corporation, whether he communicates such knowledge
or not.
 The silence taken together with the unconditional acceptance of 3 other
substantial remittances of the original agreement constitute a binding ratification
of the original agreement. Ratification may be effected expressly or tacitly. There
is tacit ratification if with knowledge of the reason which renders it voidable and
such reason having ceased, to a person who has a right to invoke it should execute
an act which necessarily implies an intention to waive his right.
 As between two innocent parties, the one who made it possible for the wrong to
be done should be the one t bear the resulting loss.

YAO KA SIN TRADING V. CA, 209 SCRA 763 [1992])

Facts:
 Maglana, the president and chairman of PWCC sent a letter to Yao Ka Sin Trading
represented by its manager Yao. It quoted the following P24.30/94 lbs. Bag net
FOB CEBU; P24.30/94 lbs. Bag FOB Asturias; 45,000 bags (15,000/month).
 On June 30, 1973 Mr. Yao accepted the letter offer and issued a check for
P243,000, PWCC Board of Directors disapproved the same.
 On July 5, 1973 PWCC informed YKS of the disapproval. However with respect
to the 10,000 bags of cement. YKS accepted without protest.
 On August 4, 1973 PWCC wrote a letter to YKS stating that it is withdrawing or
taking delivery of not less than 10,000 bags of cement.
 On September 10, 1973 YKS insisted on the delivery of the 45,000 bags of
cement.
 On December 7, 1973 PWCC only delivered 9,775 bags. YKS filed an action for
specific performance with the CFI.
 It was discovered that PWCC by-laws give the Chairman and the President the
power to execute and sign for and in behalf of the corporation all contracts or
agreements which the corporation enters into subject to the qualification that all
his actuations shall be given to the Board of Directors of the corporation.
 PWCC contends that Mr. Maglana was not authorized to make any offer and sign
a contract in behalf of the corporation and only the Board has the power to do so.
The lower court ruled in favor of YKS but the CA reversed. Hence, this peition.

Issue: WON the contract originally entered into by PWCC through President Maglana,
binds the corporation despite the rejection of the Board of Directors.

Held:
 The by-laws do not confer upon the President, the authority to enter into contracts
independently of the Board of Directors.
 The fact that contracts are signed through the President was only meant to
expedite its execution but still presupposes a prior act of the corporation, through
the Board of Directors.
 No greater authority can be implied from such express, but limited, delegated
authority.
 It may be presumed that the President has authority to make contracts if he is
given general control and supervision over affairs of the corporation. But here,
there is a general manager charged with direct management of the business which
Mr. Maglana was not involved in.
 The doctrine on apparent authority provide that if a private corporation intentionally
or negligently clothes its officers or agents with apparent power to perform acts for
it, the corporation will be estopped to deny that such apparent authority is real, as
to innocent 3rd persons dealing in good faith with such officers or agents. This
apparent authority may result from:
(1) the general manager by which the corporation holds out an officer or agents as
having power to act
(2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether with or without the scope of power.
 However, YKS failed to prove that PWCC indeed clothed Mr. Maglana with
apparent power. PWCC also showed that no contract can be signed by the
President without the Board of Directors’ approval (and clearance from the NIDC
representative and legal counsel). The first contract is at most unenforceable.
 The first contract was disapproved and rejected by the Board of Directors which
at the same time considered the P243,000 received by Maglana as payment for
10,000 bags of cement, treated as an entirely different contract. YKS had in fact
agreed to this by accepting the delivery receipt without protest.

NOTE: Under the doctrine of apparent authority and under the sub-classification of
apparent authority by circumstance, the first contract is unenforceable because
PWCC effectively proved through clear and convincing evidence that their President
cannot bind the corporation without authorization from the Board of Directors, so not
the burden shifted upon YKS for him to provide for such circumstances which have
led him to believe that the President has such apparent authority to bind the
corporation; however such was not effectively discharged by YKS, that is why the first
contract is unenforceable. Also, it is most important to note, that the contract for
10,000 bags of cement is enforceable because such is a contract of sale entered into
by the President in the regular course of business of the corporation. However, the
45,000 bags contract is unenforceable because it is a contract of dealership which is
in the extraordinary course of the business of the corporation., hence, not within the
purview of the apparent authority of the President.

NOTE: By-laws can bind third parties only when they have knowledge of such,
otherwise, such may not bind third parties. In the same manner, knowledge of a third
person of such by-laws may bind the corporation.

 If a corporation knowingly permits one of its officers to act within the scope of an
apparent authority, it holds him out to the public as possessing the power to do
those acts, the corporation will, as against anyone who has in good faith dealt with
it through such agent, be estopped from denying the agent’s authority.
 The authority of a corporate officer dealing with third persons may be actual or
apparent . . . the principal is liable for the obligations contracted by the agent. The
agent’ apparent representation yields to the principal's true representation and the
contract is considered as entered into between the principal and the third person.
 Persons who deal with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation
liable.
 Apparent authority may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act, or, in other
words the apparent authority to act in general with which is clothes them; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his ordinary powers
 When a banking corporation, when an officers arranges a credit line agreement and
forwards the same to the legal department at its head officer, and the bank did no
disaffirm the contract, then it is bound by it.
 A corporation cannot disown its President’s act of applying to the bank for credit
accommodation, simply on the ground that it never authorized the President by the
lack of any formal board resolution. The following placed the corporation and its
Board of Directors in estoppel in pais: Firstly, the by-laws provides for the powers
of the President, which includes, executing contracts and agreements, borrowing
money, signing, indorsing and delivering checks; secondly, there were already
previous transaction of discounting the checks involving the same personalities
wherein any enabling resolution from the Board was dispensed with and yet the
bank was able to collect from the corporation.
2. Specific (Express) Powers
(a) Enumerated Powers (Sec. 35)

SEC. 35. Corporate Powers and Capacity. - Every corporation incorporated under
this Code has the power and capacity:

(b)Power to Extend or Shorten Corporate Term (Secs. 36 and 80 [1]).

SEC. 36. Power to Extend or Shorten Corporate Term. -A private corporation may
extend or shorten its term as stated in the articles of incorporation when approved by
a majority vote of the board of directors or trustees, and ratified at a meeting by the
stockholders or members representing at least two-thirds (2/3) of the outstanding
capital stock or of its members. Written notice of the proposed action and the time
and place of the meeting shall be sent to stockholders or members at their respective
place of residence as shown in the books of the corporation, and must be deposited
to the addressee in the post office with postage prepaid, served personally, or when
allowed in the bylaws or done with the consent of the stockholder, sent electronically
in accordance with the rules and regulations of the Commission on the use of
electronic data messages. In case of extension of corporate term, a dissenting
stockholder may exercise the right of appraisal under the conditions provided in this
Code.

SEC. 80. When the Right of Appraisal May Be Exercised. -Any stockholder of a
corporation shall have the right to dissent and demand payment of the fair value of
the shares in the following instances:
a. In case an amendment to the articles of incorporation has the effect of changing
or restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class,
or of extending or shortening the term of corporate existence;
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition
of all or substantially all of the corporate property and assets as provided in this
Code;
c. In case of merger or consolidation; and
d. In case of investment of corporate funds for any purpose other than the primary
purpose of the corporation.

(c) Power to Increase or Decrease Capital Stock (Sec. 37)

SEC. 37. Power to Increase or Decrease Capital Stock; Incur, Create or Increase
Bonded Indebtedness. - No corporation shall increase or decrease its capital stock
or incur, create or increase any bonded indebtedness unless approved by a majority
vote of the board of directors and by two-thirds (2/3) of the outstanding capital stock
at a stockholders' meeting duly called for the purpose. Written notice of the time and
place of the stockholders' meeting and the purpose for said meeting must be sent to
the stockholders at their places of residence as shown in the books of the corporation
and served on the stockholders personally, or through electronic means recognized
in the corporation's bylaws and/or the Commission's rules as a valid mode for service
of notices.
A certificate must be signed by a majority of the directors of the corporation and
countersigned by the chairperson and secretary of the stockholders' meeting, setting
forth:
a. That the requirements of this section have been complied with;
b. The amount of the increase or decrease of the capital stock;
c. In case of an -increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the names,
nationalities and addresses of the persons subscribing, the amount of capital
stock or number of no-par stock subscribed by each, and the amount paid by
each on the subscription in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stockholder if such increase
is for the purpose of making effective stock dividend therefor authorized;
d. Any bonded indebtedness to be incurred, created or increased;
e. The amount of stock represented at the meeting; and
f. The vote authorizing the increase or decrease of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing
of any bonded indebtedness shall require prior approval of the Commission, and
where appropriate, of the Philippine Competition Commission. The application with
the Commission shall be made within six (6) months from the date of approval of the
board of directors and stockholders, which period may be extended for justifiable
reasons.
Copies of the certificate shall be kept on file in the office of the corporation and filed
with the Commission and attached to the original articles of incorporation. After
approval by the Commission and the issuance by the Commission of its certificate of
filing, the capital stock shall be deemed increased or decreased and the incurring,
creating or increasing of any bonded indebtedness authorized, as the certificate of
filing may declare: Provided, That the Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by a sworn statement of
the treasurer of the corporation lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five percent (25%) of the increase in capital
stock has been subscribed and that at least twenty-five percent (25%) of the amount
subscribed has been paid in actual cash to the corporation or that property, the
valuation of which is equal to twenty-five percent (25%) of the subscription, has been
transferred to the corporation: Provided, further, That no decrease in capital stock
shall be approved by the Commission if its effect shall prejudice the rights of corporate
creditors.
Nonstock corporations may incur, create or increase bonded indebtedness when
approved by a majority of the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Commission, which shall
have the authority to determine the sufficiency of the terms thereof.
(d)To Incur, Create or Increase Bonded Indebtedness (Sec. 37).
(e) Sell or Dispose of Assets (Sec. 39)

SEC. 39. Sale or Other Disposition of Assets. - Subject to the provisions of

Republic Act No. 10667, otherwise known as the "Philippine Competition Act", and
other related laws, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge, or otherwise dispose of its property
and assets, upon such terms and conditions and for such consideration, which may
be money, stocks, bonds, or other instruments for the payment of money or other
property or consideration, as its board of directors or trustees may deem expedient.
A sale of all or substantially all of the corporation's properties and assets,
including its goodwill, must be authorized by the vote of the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock, or at least two-thirds (2/3) of
the members, in a stockholders' or members' meeting duly called for the purpose.
In nonstock corporations where there are no members with voting rights, the vote of
at least a majority of the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by this section.
The determination of whether or not the sale involves all or substantially all of
the corporation's properties and assets must be computed based on its net asset
value, as shown in its latest financial statements. A sale or other disposition shall be
deemed to cover substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business or accomplishing
the purpose for which it was incorporated.
Written notice of the proposed action and of the time and place for the meeting
shall be addressed to stockholders or members at their places of residence as shown
in the books of the _corporation and deposited to the addressee in the post office with
postage prepaid, served personally, or when allowed by the bylaws or done with the
consent of the stockholder, sent electronically: Provided, That any dissenting
stockholder may exercise the right of appraisal under the conditions provided in this
Code.
After such authorization or approval by the stockholders or members, the board
of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge, or other disposition of property and assets, subject to
the rights of third parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of and corporation,
without the authorization by the stockholders or members, to sell, lease, exchange,
mortgage, pledge, or otherwise dispose of any of its property and assets if the same
is necessary in the usual and regular course of business of the corporation or if the
proceeds of the sale or other disposition of such property and assets shall be
appropriated for the conduct of its remaining business.

(f) To Invest Corporate Funds in Another Corporation or Business or For Any

Other Purpose (Sec. 41)
SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business
or for Any Other Purpose. Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation, 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 nonstock corporations, at a meeting
duly called for the purpose. Notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or member at the place of
residence as shown in the books of the corporation and deposited to the addressee
in the post office with postage prepaid, served personally, or sent electronically in
accordance with the rules and regulations of the Commission on the use of electronic
data message, when allowed by the bylaws or done with the consent of the
stockholders: Provided, That any dissenting stockholder shall have appraisal right as
provided in this Code: 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.

DE LA RAMA V. MA-AO SUGAR CENTRAL CO., 27 SCRA 247 [1969])

Facts:
De la Rama et.al. contend that Ma-ao Sugar Central through its President,
subscribed P300,000 worth of capital stock of the Philippine Fiber Processing Co. Inc.
They allege that the time of the first two payments were made there was no board
resolution authorizing the investment and that it was only before the third payment
that the President was so authorized by the Board of Directors. De la Rama also
contends that even assuming, arguendo, that the said Board Resolutions are valid,
the transaction is still wanting in legality, no resolution having been approved by the
affirmative vote of the stockholders holding shares in the corporation, entitling them
to at least 2/3 of the voting power.

Issue: WON the investment of corporate funds of Ma-ao were in violation of

corporation law.

Held:
Investment of corporate funds in another corporation if done in pursuance of the
corporate purpose, does not need the approval of the stockholders, but where the
purchase of the shares of another corporation is done solely for investment and not
to accomplish the purpose of its incorporation, the vote of approval of the stockholders
is necessary. The investment made in Philippine Fiber was upheld by the SC.
Philippine Fiber was engaged in the manufacture of bags or investments in another
corporation engaged in the manufacture of bags. Since the sugar central is engaged
in the manufacture of sugars, sugar bags necessarily would come under the purview
of its needs under the regular course of business
 Any corporation whatever its primary purpose has a choice of placing such fund
either in a savings or time deposit account or in money market placements, or
treasury bills, or even in shares of stocks of other corporations which are traded
 in the stock exchange. The exercise of such business judgment on the part of the
board in consistency with the primary purpose, since it is expected even from the
stockholders to believe, that it is within the ordinary business discretion of the
Board to place the corporation’s investible fund in the form of investment that
would yield the best possible return to the corporation and would not require the
ratification of the stockholders or members each time.
 Hotel Corporation invest 2M in 10M Bagoong Company à in this case while it
contemplates a situation where the Board exercises ordinary business discretion,
such investment would run contrary to the relationship of the Board to the
stockholders whereby they engaged to manage the hotel corporation alone, and
whereby they vowed to devote all their time and all their effort in such corporation.
By investing in 20% of another corporation, said Board obtained a very big role in
the management of such corporation, hence such would run contrary to its
obligation to the stockholders to take care of the business enterprise of the hotel
corporation and not any other corporation’s business enterprise. As such, it would
need a ratificatory vote of 2/3 of the stockholders.
 Hotel Company invest 2M in 100B San Miguel Corporation à in this case, the
ratificatory vote is not needed since such is really within the ordinary business
discretion of the Board. And by investing only in a relatively minimal share in the
assets of another company, it does not really engage in the business enterprise of
another corporation, hence, they still afford priority to the business enterprise of
the hotel corporation.

(g)To Declare Dividends (Sec. 42)

SEC. 42. Power to Declare Dividends. -The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be
payable in cash, property, or in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholders until their
unpaid subscription is fully paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing at least two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the
purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred percent (100%) of their paid-in capital stock, except:
a. when justified by definite corporate expansion projects or programs approved
by the board of directors; or
b. when the corporation is prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from declaring dividends
without their consent, and such consent has not yet been secured; or
c. when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.
NIELSON & CO. V. LEPANTO CONSOLIDATED MINING CO.
In 1937, Lepanto entered into a management contract with Nielson. In this
agreement, Nielson was to manage and operate the Mankayan mining claim of
Lepanto in consideration for (a) P2,500 a month and (b) 10% of dividends declared
and paid. In 1941, Lepanto declared dividends amounting to P175,000 10%of which
Nielson was entitled to P17,500. Lepanto however never paid Nielson a cent. During
the liberation in 1945, Lepanto unilaterally terminated the management contract with
Nielson. In 1958, Nielson instituted an action for its 10% share in the dividends
declared by Lepanto in 1941. The suit reached the SC and it decided against Lepanto
in 1941. The suit between Nielson and Lepanto was suspended in 1942 when the US
Army bombarded the Mankayan mining claims, thus preventing Nielson from
complying with its obligation (i.e. operating and managing the claim). The tribunal
further said that the contract remained suspended even after the war was over in 1945
until 1948 when the mines were fully operational; and that the management contract
still had five years to go from 1948. Thus, the SC stated that Nielson was entitled to
10% of the dividend declarations in 1949 and 1950 worth P3M. Lepanto sought
reconsideration of SC’s decision in 1966. It raised two main points at issue namely:
(1) What is the nature of the management contract? Is it one of agency and hence
terminable at the principal’s will or is it a contract of lease of services which may
be terminated only upon agreed causes?
(2) Is Nielson entitled to 10% of the stock dividend even though Lepanto is not a
stockholder?

Held:
The management contract is a contract for lease of service.
1. The theory of agency was raised only on reconsideration which is a belated
move by Lepanto
2. Agency is premised on representation while lease of service is based on
employment. While an agent can execute juridical acts in behalf of his principal;
an employee under a lease of service can only perform non-juridical acts or only
material acts.
3. Since the acts of Nielson (exploration, purchase, etc.) are subject to general
control and approval of the Board of Directors of Lepanto and cannot create,
modify, extinguish business relations between Lepanto and Nielson, these acts
can only be considered as material acts done for an employer for compensation.
The contract, is therefore, a contract of lease of services. Being such a contract,
it cannot be revocable at the will of the employer. The contract specifically
provided that Lepanto can cancel the contract only:
a. upon the 90-day written notice and
b. for Nielson’s failure to operate and develop the mining claims for any
cause except those causes due to the acts of God.
4. Since the war and the bombardment constitute acts of God, they cannot be
considered as grounds to terminate the contract. In fact, the contract is deemed
suspended from 1942 to 1948 when neither of the parties could comply with
their obligations under it. Under its terms, the contract is suspended in cases of
fortuitous events. And such terms must be interpreted to mean that a period
equal to the period of suspension must be added to the original term of the
 contract by way of extension. Thus, from 1948 the contract still had five more
years. And by virtue of this extension, Nielson is entitled to 10% of the dividends
declared in 1949 and 1950.
 Stock dividend is the amount that the corporation transfers from its surplus profit
account to its capital account. It is the same amount that can loosely be termed as
the “trust fund” of the corporation.

(h)To Enter into Management Contracts (Sec. 43)

SEC. 43. Power to Enter into Management Contract. - No corporation shall

conclude a management contract with another corporation unless such contract is
approved by the board of directors and by stockholders owning at least the majority
of the outstanding capital stock, or by at least a majority of the members in the case
of a nonstock corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That
a. where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third
(1/3) of the total outstanding capital stock entitled to vote of the managing
corporation; or
b. where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors
of the managed corporation, then the management contract must be approved
by the stockholders of the managed corporation owning at least two-thirds (2/3)
of the total outstanding capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a nonstock corporation.

These shall apply to any contract whereby a corporation undertakes to manage

or operate all or substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise: Provided,
however, That such service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources may be
entered into for such periods as may be provided by pertinent laws or regulations.
No management contract shall be entered into for a period longer than five (5)
years for any one (1) term.

Implied Powers
 When the articles expressly provide that the purpose of the corporation was to
“engage in the transportation of person by water,” such corporation cannot engage
in the business of land transportation, which is an entirely different line of business,
and, for which reason, may not acquire any certificate of public convenience to
operate a taxicab service.
 A corporation whose primary purpose is to generate electric power has no authority
to undertake stevedoring services to unload coal into its pier since it is not
reasonably necessary for the operation of its power plant.
 A corporation organized to engage as a lending investor cannot engage in
pawbroker.
 A mining company has not power to engage in real estate development.
 An officer who is authorized to purchase the stock of another corporation has
implied power to perform all other obligations arising therefrom such as payment
of the shares of stock.

Incidental Powers: The act of issuing checks is within the ambit of a valid corporate
act, for it as for securing a loan to finance the activities of the corporation, hence, not
an ultra vires act.

OTHER POWERS
1. Sell Land and Other Properties: When the corporation’s primary purpose is to
market, distribute, export and import merchandise, the sale of land is not within the
actual or apparent authority of the corporation acting through its officers, much less
when acting through the treasurer. Likewise Articles 1874 and 1878 of Civil Code
requires that when land is sold through an agent, the agent’s authority must be in
writing, otherwise the sale is void.
2. Borrow Funds: The power to borrow money is one of those cases where even a
special power of attorney is required under Art. 1878 of Civil Code. There is
invariably a need of an enabling act of the corporation to be approved by its Board
of Directors. The argument that the obtaining of loan was in accordance with the
ordinary course of business usages and practices of the corporation is devoid of
merit because the prevailing practice in the corporation was to explicitly authorize
an officer to contract loans in behalf of the corporation.
3. Power to Sue: Corporation Code, in relation to Sec. 23, where a corporation is an
injured party, its power to sue is lodged with its Board of Directors. A minority
stockholder who is a member of the Board has no such power or authority to sue
on the corporation’s behalf.
 Where the corporation is real party-in-interest, neither administrator or a
project manager could sign the certificate against forum-shopping without
being duly authorized by resolution of the Board of Directors, nor the General
Manager who has no authority to institute a suit on behalf of the corporation
even when the purpose is to protect corporate assets.
 When the power to sue is delegated by the by-laws to a particular officer,
such officer may appoint counsel to represent the corporation in a pre-trial
hearing without need of a formal board resolution.
 For counsel to sign the certification for the corporation, he must specifically
be authorized by the Board of Directors.

4. Provide Gratuity Pay for Employees: Providing gratuity pay for employees is an
express power of a corporation under the Corporation Code, and cannot be
considered to be ultra vires to avoid any liability arising from the issuance of
resolution granting such gratuity pay.
5. Donate
6. Enter Partnership or Joint Venture
X. DIRECTORS, TRUSTEES AND OFFICERS
1. Powers of the Board of Directors or Trustees (Sec. 22)

SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and

Term. -Unless otherwise provided in this Code, the board of directors or trustees shall
exercise the corporate powers, conduct all business, and control all properties of the
corporation.
Directors shall be elected for a term of one (1) year from among the holders of
stocks registered in the corporation's books, while trustees shall be elected for a term
not exceeding three (3) years from among the members of the corporation. Each
director and trustee shall hold office until the successor is elected and qualified. A
director who ceases to own at least one (1) share of stock or a trustee who ceases to
be a member of the corporation shall cease to be such.
The board of the following corporations vested with public interest shall have
independent directors constituting at least twenty percent (20%) of such board:
a. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise
known as "The Securities Regulation Code", namely those whose securities are
registered with the Commission, corporations listed with an exchange or with
assets of at least Fifty million pesos (P50,000,000.00) and having two hundred
(200) or more holders of shares. each holding at least one hundred (100) shares
of a class· of its equity shares;
b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, preneed, trust and insurance companies, and other financial
intermediaries· and
c. Other corporations engaged in businesses vested with pubhc interest similar to
the above, as may be determined by the Commission, after taking into account
relevant factors which are germane to the objective and purpose of requiring
the election of an independent director, such as the extent of minority
ownership, type of financial products or securities issued or offered to investors,
public interest involved in the nature of business operations, and other
analogous factors.

An independent director is a person who, apart from shareholdings and fees

received from the corporation, is independent of management and free from any
business or other relationship which could, or could reasonably be perceived to
materially interfere with the exercise of independent judgment in carrying out the
responsibilities as a director.
Independent directors must be elected by the shareholders present or entitled
to vote in absentia during the election of directors. Independent directors shall be
subject to rules and regulations governing their qualifications, disqualifications, voting
requirements, duration of term and term limit, maximum number of board
memberships and other requirements that the Commission will prescribe to
strengthen their independence and align with international best practices.
Rationale for “Centralized Management” Doctrine. – Section 23 of the
Corporation Code explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be controlled and held
by a board of directors. The raison d’etre behind the conferment of corporate powers
on the board of directors is not lost on the Court—indeed, the concentration in the
board of the powers of control of corporate business and appointment of corporate
officers and managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate organization
is for the stockholders to choose the directors who shall control and supervise the
conduct of corporate business.

“Board of Directors” is the 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 property of the corporation. Its members have been
characterized as trustees or directors clothed with a fiduciary character. It is
clearly separate and distinct from the corporate entity itself.
- A corporation is an artificial being and can only exercise its powers and transact
its business through the instrumentalities of its Board of Directors, and through
its officers and agents, when authorized by resolution or by its by-laws.
Consequently, when legal counsel was clothed with authority through formal
board resolution, his acts bind the corporation which must be held bound the
actuations of its counsel of record.
- “The physical acts of the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose by corporate
by-laws or by a special act of the board of directors.” Firme v. Bukal Enterprises
and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v. Court of Appeals, 352
SCRA 334 (2001).

GAMBOA V. VICTORIANO, 90 SCRA 40 [1979]).

The herein petitioners were sued by herein defendants to nullify the issuance of
823 shares of stock of the Inocentes de la Rama, Inc. in favor of the petitioners.
On April 4, 1972, the respondents, are the owners of 1,328 shares of stock of
the Inocentes de la Rama, Inc., a domestic corporation, with an authorized capital
stock of 3,000 shares, with a par value of P100.00 per share, 2,177 of which were
subscribed and issued, thus leaving 823 shares unissued. Then President and Vice-
President of the corporation, respectively, the defendants Mercedes R. Borromeo,
Honorio de la Rama, and Ricardo Gamboa, remaining members of the board of
directors of the corporation, in order to forestall the takeover by the plaintiffs of the
afore-named corporation, surreptitiously met and elected Ricardo L. Gamboa and
Honorio de la Rama as president and vice-president of the corporation, respectively,
and passed a resolution authorizing the sale of the 823 unissued shares of the
corporation to the defendants, at par value, after which the petitioners were elected
to the board of directors of the corporation.
 The respondents claimed that the sale of the unissued 823 shares of stock of
the corporation was in violation of the plaintiffs' and pre-emptive rights and made
without the approval of the board of directors representing 2/3 of the outstanding
capital stock and is in disregard of the strictest relation of trust existing between the
defendants, as stockholders. The respondents prayed that a writ of preliminary
injunction be issued restraining the defendants from committing or continuing the
performance of an act tending to prejudice, diminish or otherwise injure the plaintiffs'
rights in the corporate properties and funds of the corporation, and from disposing,
transferring, selling, or otherwise impairing the value of the 823 shares of stock
illegally issued. The respondent court granted the prayer.
On October 31, 1972, the respondents entered into a compromise agreement
with the petitioners, whereby the contracting parties withdrew their respective claims
against each other and the afore-named respondents waived and transferred their
rights and interests over the questioned 823 shares of stock in favor of the petitioners.
The compromise agreement was approved and as a result, the defendants filed
a motion to dismiss the complaint, on November 19, 1974, upon the grounds: (1) that
the plaintiffs' cause of action had been waived or abandoned; and (2) that they were
estopped from further prosecuting the case since they have, in effect, acknowledged
the validity of the issuance of the disputed 823 shares of stock. The motion was
denied.
On February 10, 1975, the defendants filed a motion for reconsideration
claiming that the respondent court has no jurisdiction to interfere with the
management of the corporation and that allowing the sale of the 823 shares of stock
to the defendants was purely a management concern which the courts could not
interfere with.

Issues:
Whether or not the court has jurisdiction over the case
Whether or not the proper action is a derivative suit
Held:
The well-known rule is that courts cannot undertake to control the discretion of
the board of directors about administrative matters as to which they have legitimate
power of, action and contracts intra vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such contracts are
so unconscionable and oppressive as to amount to a wanton destruction of the rights
of the minority. In the instant case, the respondents aver that petitioners have
concluded a transaction among themselves as will result to serious injury to the
interests of the plaintiffs, so that the trial court has jurisdiction over the case.
An individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is regarded
as a nominal party, with the corporation as the real party in interest. 12 In the case at
bar, however, the plaintiffs are alleging and vindicating their own individual interests
or prejudice, and not that of the corporation. At any rate, it is yet too early in the
proceedings since the issues have not been joined. Besides, misjoinder of parties is
not a ground to dismiss an action. Petition is dismissed.
TWO THEORIES ON THE SOURCE OF POWER OF THE BOARD OF DIRECTORS
- One of the most important rights of a qualified shareholder or member is the right
to vote— either personally or by proxy—for the directors or trustees who are to
manage the corporate affairs. The right to choose the persons who will direct,
manage and operate the corporation is significant, because it is the main way in
which a stockholder can have a voice in the management of corporate affairs, or
in which a member in a nonstick corporation can have a say on how the purposes
and goals of the corporation may be achieved. Once the directors or trustees are
elected, the stockholders or members relinquish corporate powers to the board in
accordance with law.

BOARD MUST ACT AS A BODY (SEC. 24)

- A corporation, through its Board of Directors, should act in the manner and within
the formalities prescribed by its charter or by the general law. Thus, directors must
act as a body in a meeting called pursuant, otherwise, any action taken therein
may be questioned by any objecting director or shareholder. Be that as it may,
jurisprudence tells us that an action of the board of directors during a meeting,
which was illegal for lack of notice, may be ratified either expressly, by the action
of the directors in subsequent legal meeting, or impliedly, by the corporation's
subsequent course of conduct.

SEC. 24. Corporate Officers. -Immediately after their election, the directors of a
corporation must formally organize and elect:
a. a president, who must be a director;
b. a treasurer, who must be a resident;
c. a secretary, who must be a citizen and resident of the Philippines; and
d. such other officers as may be provided in the bylaws.

If the corporation is vested with public interest, the board shall also elect a
compliance officer. The same person may hold two (2) or more positions concurrently,
except that no one shall act as president and secretary or as president and treasurer
at the same time, unless otherwise allowed in this Code.
The officers shall manage the corporation and perform such duties as may be
provided in the bylaws and/or as resolved by the board of directors.

 The general rule is that a corporation, through its broad of directors, should act
in the manner and within the formalities, if any, prescribed by 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 any objecting director or shareholder. Be that as it may,
jurisprudence tells us that an action of the board of directors during a meeting,
which was illegal for lack of notice, may be ratified either expressly, by the action
of the directors in subsequent legal meeting, or impliedly, by the corporation’s
subseqeunt course of conduct.
THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO M. KALAW
Maximo Kalaw is chairman of the board and general manager of the National
Coconut Corporation (NACOCO), a non-profit GOCC empowered by its charter to buy
sell barter export and deal in coconut, copra, and desiccated coconut. Bocar, Garcia
and Moll were directors. It entered into contracts for the trading and delivery of copra.
Nature intervened—4 typhoons devastated agriculture and copra production.
NACOCO was on the verge of sustaining losses and could not be able to make good
on the contracts. Sensing this, Kalaw submitted the contracts to the board for approval
and made a full disclosure of the situation. No action was taken, and no vote was
taken on the matter. On 20 Jan 1947 the board met again with Kalaw, Bocar, Garcia,
and Moll in attendance, and approved the contracts. NACOCO however only partially
performed the contracts. One of the contracts concerns the Louis Drayfus & Co.,
which sued NACOCO. NACOCO settled out-of-court and paid Drayfus P567,024.52
representing 70% of total claims. The total settlements sum up to P1.3M. NACOCO
sues Kalaw, and his directors Bocar, Moll and Garcia to recover this sum, alleging
negligence, bad faith and breach of trust in approving the contracts, by not having
them approved by the board. TC dismisses complaint. NACOCO claims that the by-
laws provide that prior board approval is required before the GM can perform or
execute in behalf of NACOCO all contracts necessary to accomplish its purpose.

ISSUE:
WON the Kalaw contracts are valid despite its lack of prior board approval as
required by the NACOCO by-laws.

HELD:
The contracts in question are “forward sales” contracts—a sales agreement
entered into, even though the goods are not yet in the hands of the seller. Given the
peculiar nature of copra trading, i.e. copra must be disposed of as soon as possible
else it would lose weight and would decrease its value, it necessitates a quick turnover
and execution of the contract on short notice (w/in 24 hours). It would be difficult if not
impractical to call a formal meeting of the board each time a contract is to be executed.
Kalaw was a corporate officer entrusted with general management and control
of NACOCO. He had implied authority to make any contract or do any act which is
necessary for the conduct of the business. He may, without authority from the board,
perform acts of ordinary nature for as long as these redound to the interest of the
corporation. Particularly, he contracted forward sales with business entities. Long
before some of these contracts were disputed, he contracted by himself alone, without
board approval. All of the members of the board knew about this practice and have
entrusted fully such decisions with Kalaw. He was never questioned nor reprimanded
nor prevented from this practice. In fact, the board itself, through its acts and by
acquiescence, have laid aside the by-law requirement of prior board approval. Thus,
it cannot now declare that these contracts (failures) are not binding on NACOCO.
Ratification by a corporation of an unauthorized act or contract by its officers
relates back to the time of the act or contract ratified and is equivalent to original
authority. The theory of corporate ratification is predicated upon the right of a
corporation to contract, and any ratification or adoption is equivalent to a grant of prior
authority. Ratification “cleanses the contract from all its defects from the moment it
was constituted. Thus, even in the face of an express by-law requirement of prior
approval, the law on corporations is not to be held too rigid and inflexible as to fail to
recognize equitable considerations.

 Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom, and policy, the general
manager may bind the company without formal authorization of the board of
directors. In varying language, existence of such authority is established, by
proof of the course of business, the usage and practices of the company and by
the knowledge which the board of directors has, or must be presumed to have,
of acts and doings of its subordinates in and about the affairs of the corporation.
 Contracts were ratified: Even assuming that Kalaw did not have the authority to
enter into said contracts, the Board RATIFIED said contracts on January 30,
1948, through a Board Resolution. This ratification retroacts to the time when
the contracts were perfected, equivalent to a grant of prior authority.
 No Bad Faith: No BF could therefore be attributed to Kalaw et al., for, through
the Board's own actions, they were led to believe that they had the authority to
enter into said contracts. If any, NACOCO is the one in bad faith. The Board did
not think of raising their voice in protest against past contracts which brought in
enormous profits to the corporation. By the same token, fair dealing disagrees
with the idea that similar contracts, when unprofitable, should not merit the same
treatment.

EFFECTS OF A “BOGUS” BOARD

 The acts or contracts effected by a bogus board would be void pursuant to Art.
1318 of the Civil Code because of the lack of “consent”.

EXECUTIVE COMMITTEE (SEC. 34)

SEC. 34. Executive, Management, and Other Special Committees. - If the bylaws
so provide, the board may create an executive committee composed of at least three
(3) directors. Said committee may act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be delegated to it in the
bylaws or by majority vote of the board, except with respect to the:
a. approval of any action for which shareholders' approval is also required;
b. filling of vacancies in the board;
c. amendment or repeal of bylaws or the adoption of new bylaws;
d. amendment or repeal of any resolution of the board which by its express terms
is not amendable or repealable; and
e. distribution of cash dividends to the shareholders.

The board of directors may create special committees of temporary or

permanent nature and determine the members' term, composition, compensation,
powers, and responsibilities.
BUSINESS JUDGMENT RULE
 Board members and officers who purport to act for and in behalf of the
corporation, keep within the lawful scope of their authority in so acting and act
in good faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts. Those acts, when they are such a nature and are
done under such circumstances, are properly attributed to the corporation alone
and no personal liability is incurred by such officers and Board members.
 If the cause of the losses is merely error in business judgment, not amounting
to bad faith or negligence, directors and/or officers are not liable. For them to
be held accountable, the mismanagement and the resulting losses on account
thereof are not the only matters to be proven; it is likewise necessary to show
that the directors and/or officers acted in bad faith and with malice in doing the
assailed acts. Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or interest or ill-will
partaking of the nature of fraud.
 No court can, as an integral part of resolving the issues between squabbling
stockholders, order the corporation to undertake certain corporate acts, since it
would be in violation of the business judgment rule.
 Directors and officers who purport to act for the corporation, keep within the
lawful scope of their authority and act in good faith, do not become liable,
whether civilly or otherwise, for the consequences of their acts, which are
properly attributed to the corporation alone.

MONTELIBANO V. BACOLOD-MURCIA MILING CO., INC., 5 SCRA 36 [1962];

Montelibano et al. are sugar planters adhered to the Bacolod-Murcia Milling Co.,
Inc’s sugar central mill under identical milling contracts originally executed in 1919. In
1936, it was proposed to execute amended milling contracts, increasing the planters’
share of the manufactured sugar, besides other concessions. To this effect, a
printed Amended Milling Contract form was drawn up.
The Board of Directors of Bacolod-Murcia Milling Co., Inc. adopted
a resolutiongranting further concessions to the planters over and above those
contained in the printed Amended Milling Contract on August 10, 1936.
The printed Amended Milling Contract was signed by the Appellants on September
10, 1936, but a copy of the resolution was not attached to the printed contract until
April 17, 1937.
In 1953, the appellants initiated an action, contending that 3 Negros sugar
centrals had already granted increased participation to their planters, and that under
paragraph 9 of the resolution of August 20, 1936, the appellee had become obligated
to grant similar concessions to the appellants herein.
The Bacolod-Murcia Milling Co., inc., resisted the claim, urging that
the resolution in question was null and void ab initio, being in effect a donation that
was ultra vires and beyond the powers of the corporate directors to adopt.

ISSUE: Was the act of the BOD ultra vires?

HELD: NO (The Bacolod-Murcia Milling Co., Inc. is ordered to pay appellants the
increase of participation in the milled sugar in accordance with paragraph 9 of the
Resolution of August 20, 1936.)
As the resolution in question was passed in good faith by the board of directors,
it is valid and binding, and whether or not it will cause losses or decrease the profits
of the central, the court has no authority to review them.
Xx It is a well-known rule of law that questions of policy or of management are
left solely to the honest decision of officers and directors of a corporation, and the
court is without authority to substitute its judgment of the board of directors; the board
is the business manager of the corporation, and so long as it acts in good faith its
orders are not reviewable by the courts.
__
It must be remembered that the controverted resolution was adopted by
appellee corporation as a supplement to, or further amendment of, the proposed
milling contract, and that it was approved on August 20, 1936, twenty-one days prior
to the signing by appellants on September 10, of the Amended Milling Contract itself;
so that when the Milling Contract was executed, the concessions granted by the
disputed resolution had been already incorporated into its terms.

PHILIPPINE STOCK EXCHANGE, INC. V. COURT OF APPEALS, 281 SCRA 232

[1997])

Facts: The Puerto Azul Land Inc. (PALI), a domestic real estate corporation, had
sought to offer its shares to the public in order to raise funds allegedly to develop its
properties and pay its loans with several banking institutions. In January, 1995, PALI
was issued a permit to sell its shares to the public by the Securities and Exchange
Commission (SEC). To facilitate the trading of its shares among investors, PALI
sought to course the trading of its shares through the Philippine Stock Exchange Inc.
(PSEi), for which purpose it filed with the said stock exchange an application to list its
shares, with supporting documents attached pending the approval of the PALI’s listing
application, a letter was received by PSE from the heirs of Ferdinand Marcos to which
the latter claims to be the legal and beneficial owner of some of the properties forming
part of PALI’s assets. As a result, PSE denied PALI’s application which caused the
latter to file a complaint before the SEC. The SEC issued an order to PSE to grant
listing application of PALI on the ground that PALI have certificate of title over its
assets and properties and that PALI have complied with all the requirements to enlist
with PSE.

Issue: Whether or not the denial of PALI’s application is proper.

Held: Yes. This is in accord with the “Business Judgement Rule” whereby the SEC
and the courts are barred from intruding into business judgements of corporations,
when the same are made in good faith. The same rule precludes the reversal of the
decision of the PSE, to which PALI had previously agreed to comply, the PSE retains
the discretion to accept of reject applications for listing. Thus, even if an issuer has
complied with the PSE listing rules and requirements, PSE retains the discretion to
accept or reject the issuer’s listing application if the PSE determines that the listing
shall not serve the interests of the investing public.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that
although it is clothed with the markings of a corporate entity, it functions as the primary
channel through which the vessels of capital trade ply. The PSEi’s relevance to the
continued operation and filtration of the securities transaction in the country gives it a
distinct color of importance such that government intervention in its affairs becomes
justified, if not necessarily. Indeed, as the only operational stock exchange in the
country today, the PSE enjoys monopoly of securities transactions, and as such it
yields a monopoly of securities transactions, and as such, it yields an immerse
influence upon the country’s economy.
The SEC’s power to look into the subject ruling of the PSE, therefore, may be
implied from or be considered as necessary or incidental to the carrying out of the
SEC’s express power to insure fair dealing in securities traded upon a stock exchange
or to ensure the fair administration of such exchange. It is likewise, observed that the
principal function of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that investment in these entities
may be encouraged and protected and their activities for the promotion of economic
development.
A corporation is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself as
a collective body, it waives no constitutional immunities and requisites appropriate to
such a body as to its corporate and management decisions, therefore, the state will
generally not interfere with the same. Questions of policy and management are left to
the honest decision of the officers and directors of a corporation, and the courts are
without authority to substitute their judgements for the judgement of the board of
directors. The board is the business manager of the corporation and so long as it acts
in good faith, its orders are not reviewable by the courts.
In matters of application for listing in the market the SEC may exercise such
power only if the PSE’s judgement is attended by bad faith.
The petitioner was in the right when it refused application of PALI, for a contrary
ruling was not to the best interest of the general public.

QUALIFICATIONS OF DIRECTORS AND TRUSTEES (SECS. 22 AND 27)

1. A director must own at least one share of stock
2. Mere beneficial ownership in a voting trust arrangement no longer qualifies

SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and

Term. -Unless otherwise provided in this Code, the board of directors or trustees shall
exercise the corporate powers, conduct all business, and control all properties of the
corporation.
Directors shall be elected for a term of one (1) year from among the holders of
stocks registered in the corporation's books, while trustees shall be elected for a term
not exceeding three (3) years from among the members of the corporation. Each
director and trustee shall hold office until the successor is elected and qualified. A
director who ceases to own at least one (1) share of stock or a trustee who ceases to
be a member of the corporation shall cease to be such.
 The board of the following corporations vested with public interest shall have
independent directors constituting at least twenty percent (20%) of such board:
d. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise
known as "The Securities Regulation Code", namely those whose securities are
registered with the Commission, corporations listed with an exchange or with
assets of at least Fifty million pesos (P50,000,000.00) and having two hundred
(200) or more holders of shares. each holding at least one hundred (100) shares
of a class· of its equity shares;
e. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, preneed, trust and insurance companies, and other financial
intermediaries· and
f. Other corporations engaged in businesses vested with pubhc interest similar to
the above, as may be determined by the Commission, after taking into account
relevant factors which are germane to the objective and purpose of requiring
the election of an independent director, such as the extent of minority
ownership, type of financial products or securities issued or offered to investors,
public interest involved in the nature of business operations, and other
analogous factors.

An independent director is a person who, apart from shareholdings and fees

received from the corporation, is independent of management and free from any
business or other relationship which could, or could reasonably be perceived to
materially interfere with the exercise of independent judgment in carrying out the
responsibilities as a director.
Independent directors must be elected by the shareholders present or entitled
to vote in absentia during the election of directors. Independent directors shall be
subject to rules and regulations governing their qualifications, disqualifications, voting
requirements, duration of term and term limit, maximum number of board
memberships and other requirements that the Commission will prescribe to
strengthen their independence and align with international best practices.

SEC. 27. 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 in a nonstock corporation, by
a vote of at least two-thirds (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 for the purpose of removing any director or trustee must be called by the
secretary on order of the president, or upon written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or a
majority of the members entitled to vote. If there is no secretary, or if the secretary,
despite demand, fails or refuses to call the special meeting or to give notice thereof,
the stockholder or member of the corporation signing the demand may call for the
meeting by directly addressing the stockholders or members. Notice of the time and
place of such meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they ruay be
entitled under Section 23 of this Code.
The Commission shall, motu proprio or upon verified complaint, and after due
notice and hearing, order the removal of a director or trustee elected despite the
disqualification, or whose disqualification arose or is discovered subsequent to an
election. The removal of a disqualified director shall be without prejudice to other
sanctions that the Commission may impose on the board of directors or trustees who,
with knowledge of the disqualification, failed to remove such director or trustee.

GOKONGWEI, JR. V. SEC, 89 SCRA 336 [1979]

Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for the
declaration of nullity of the by-laws etc. against the majority members of the BOD and
San Miguel. It is stated in the by-laws that the amendment or modification of the by-
laws may only be delegated to the BOD’s upon an affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 could have been computed on the basis of the capitalization at
the time of the amendment. Petitioner contends that the amendment was based on
the 1961 authorization, the Board acted without authority and in usurpation of the
power of the stockholders in amending the by-laws in 1976. He also contends that the
1961 authorization was already used in 1962 and 1963. He also contends that the
amendment deprived him of his right to vote and be voted upon as a stockholder
(because it disqualified competitors from nomination and election in the BOD of SMC),
thus the amended by-laws were null and void.
While this was pending, the corporation called for a stockholder’s meeting for
the ratification of the amendment to the by-laws. This prompted petitioner to seek for
summary judgment. This was denied by the SEC. In another case filed by petitioner,
he alleged that the corporation had been using corporate funds in other corporations
and businesses outside the primary purpose clause of the corporation in violation of
the Corporation Code.

ISSUE: Are the amendments in the by-laws are valid?

HELD: YES. The validity and reasonableness of a by-law is purely a question of law.
Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation or is in legal sense unreasonable and therefore unlawful is a question of
law. However, this is limited where the reasonableness of a by-law is a mere matter
of judgment, and one upon which reasonable minds must necessarily differ, a court
would not be warranted in substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have exercised authority.
The Court held that a corporation has authority prescribed by law to prescribe
the qualifications of directors. It 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.
 A corporation, under the Corporation law, may prescribe in its by-laws the
qualifications, duties and compensation of directors, officers, and employees. Any
person who buys stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the acts of incorporation and
lawfully enacted by-laws and not forbidden by law.
Any corporation may amend its by-laws by the owners of the majority of the
subscribed stock. It cannot thus be said that petitioners has the vested right, as a
stock holder, to be elected director, in the face of the fact that the law at the time such
stockholder's right was acquired contained the prescription that the corporate charter
and the by-laws shall be subject to amendment, alteration and modification.
A Director stands in a fiduciary relation to the corporation and its shareholders,
which is characterized as a trust relationship. An amendment to the corporate by-laws
which renders a stockholder ineligible to be director, if he be also director in a
corporation whose business is in competition with that of the other corporation, has
been sustained as valid. This is based upon the principle that where the director is
employed in the service of a rival company, he cannot serve both, but must betray
one or the other. The amendment in this case serves to advance the benefit of the
corporation and is good. Corporate officers are also not permitted to use their position
of trust and confidence to further their private needs, and the act done in furtherance
of private needs is deemed to be for the benefit of the corporation. This is called the
doctrine of corporate opportunity.

LEE V. CA, 205 SCRA 752 [1992])

On 15 November 1985, a complainant for sum of money was filed by the
International Corporate Bank, Inc. against Sacoba Manufacturing Corp., Pablo
Gonzales Jr., and Tomas Gonzales who, in turn, filed a third party complaint against
Alfa Integrated Textile Mills (ALFA), Ramon C. Lee (ALFA's president) and Antonio
DM. Lacdao (ALFA's vice president) on 17 March 1986. On 17 September 1987, Lee
and Lacdao filed a motion to dismiss the third party complaint which the Regional Trial
Court of Makati, Branch 58 denied in an Order dated 27 June 1988. On 18 July 1988,
Lee and Lacdao filed their answer to the third party complaint. Meanwhile, on 12 July
1988, the trial issued an order requiring the issuance of an alias summons upon ALFA
through the DBP as a consequence of Lee and Lacdao's letter informing the court that
the summons for ALFA was erroneously served upon them considering that the
management of ALFA had been transferred to the DBP. In a manifestation dated 22
July 1988, the DBP claimed that it was not authorized to receive summons on behalf
of ALFA since the DBP had not taken over the company which has a separate and
distinct corporate personality and existence. On 4 August 1988, the trial court issued
an order advising Sacoba Manufacturing, et. al. to take the appropriate steps to serve
the summons to ALFA. On 16 August 1988, Sacoba Manufacturing, et. al. filed a
Manifestation and Motion for the Declaration of Proper Service of Summons which
the trial court granted on 17 August 1988.
On 12 September 1988, Lee and Lacdao filed a motion for reconsideration
submitting that the Rule 14, section 13 of the Revised Rules of Court is not applicable
since they were no longer officers of ALFA and Sacoba Manufacturing, et. al. should
have availed of another mode of service under Rule 14, Section 16 of the said Rules,
i.e., through publication to effect proper service upon ALFA. On 2 January 1989, the
trial court upheld the validity of the service of summons on ALFA through Lee and
Lacdao, thus, denying the latter's motion for reconsideration and requiring ALFA to
file its answer through Lee and Lacdao as its corporate officers. On 19 January 1989,
a second motion for reconsideration was filed by Lee and Lacdao reiterating their
stand that by virtue of the voting trust agreement they ceased to be officers and
directors of ALFA, hence, they could no longer receive summons or any court
processes for or on behalf of ALFA. In support of their second motion for
reconsideration, Lee and Lacdao attached thereto a copy of the voting trust
agreement between all the stockholders of ALFA (Lee and Lacdao included), on the
one hand, and the DBP, on the other hand, whereby the management and control of
ALFA became vested upon the DBP. On 25 April 1989, the trial court reversed itself
by setting aside its previous Order dated 2 January 1989 and declared that service
upon Lee and Lacdao who were no longer corporate officers of ALFA cannot be
considered as proper service of summons on ALFA. On 15 May 1989, Sacoba
Manufacturing, et. al. moved for a reconsideration of the Order which was affirmed by
the court in is Order dated 14 August 1989 denying Sacoba Manufacturing, et. al.'s
motion for reconsideration.
On 18 September 1989, a petition for certiorari was belatedly submitted by
Sacoba Manufacturing, et. al. before the Court of Appeals which, nonetheless,
resolved to give due course thereto on 21 September 1989. On 17 October 1989, the
trial court, not having been notified of the pending petition for certiorari with the
appellate court issued an Order declaring as final the Order dated 25 April 1989.
Sacoba Manufacturing, et. al. in the said Order were required to take positive steps in
prosecuting the third party complaint in order that the court would not be constrained
to dismiss the same for failure to prosecute. Subsequently, on 25 October 1989
Sacoba Manufacturing, et. al. filed a motion for reconsideration on which the trial court
took no further action. On 19 March 1990, after Lee and Lacdao filed their answer to
Sacoba Manufacturing, et. al.'s petition for certiorari, the appellate court rendered its
decision, setting aside the orders of trial court judge dated 25 April 1989 and 14
August 1989. On 11 April 1990, Lee and Lacdao moved for a reconsideration of the
decision of the appellate court which resolved to deny the same on 10 May 1990. Lee
and Lacdao filed the petition for certiorari. In the meantime, the appellate court
inadvertently made an entry of judgment on 16 July 1990 erroneously applying the
rule that the period during which a motion for reconsideration has been pending must
be deducted from the 15-day period to appeal. However, in its Resolution dated 3
January 1991, the appellate court set aside the aforestated entry of judgment after
further considering that the rule it relied on applies to appeals from decisions of the
Regional Trial Courts to the Court of Appeals, not to appeals from its decision to the
Supreme Court pursuant to the Supreme Court's ruling in the case of Refractories
Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989].

Issue:
1. Whether the execution of the voting trust agreement by Lee and Lacdao whereby
all their shares to the corporation have been transferred to the trustee deprives
the stockholder of their positions as directors of the corporation.
2. Whether the five-year period of the voting trust agreement in question had lapsed
in 1986 so that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to Lee and Lacdao as beneficial owners pursuant
to the 6th paragraph of section 59 of the new Corporation Code.
3. Whether there was proper service of summons on ALFA through Lee and Lacdao,
to bind ALFA.
Held:

1. Lee and Lacdao, by virtue of the voting trust agreement executed in 1981 disposed
of all their shares through assignment and delivery in favor of the DBP, as trustee.
Consequently, Lee and Lacdao ceased to own at least one share standing in their
names on the books of ALFA as required under Section 23 of the new Corporation
Code. They also ceased to have anything to do with the management of the
enterprise. Lee and Lacdao ceased to be directors. Hence, the transfer of their
shares to the DBP created vacancies in their respective positions as directors of
ALFA. The transfer of shares from the stockholders of ALFA to the DBP is the
essence of the subject voting trust agreement. Considering that the voting trust
agreement between ALFA and the DBP transferred legal ownership of the stocks
covered by the agreement to the DBP as trustee, the latter because the stockholder
of record with respect to the said shares of stocks. In the absence of a showing that
the DBP had caused to be transferred in their names one share of stock for the
purpose of qualifying as directors of ALFA, Lee and Lacdao can no longer be
deemed to have retained their status as officers of ALFA which was the case before
the execution of the subject voting trust agreement. There is no dispute from the
records that DBP has taken over full control and management of the firm.

2. The 6th paragraph of section 59 of the new Corporation Code reads that "Unless
expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificates as well as
the certificates of stock in the name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall be reissued in the name of
the transferors." However, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the agreement is
contingent upon the fulfillment of certain obligations of ALFA with the DBP. Had the
five-year period of the voting trust agreement expired in 1986, the DBP would not
have transferred an its rights, titles and interests in ALFA "effective June 30, 1986"
to the national government through the Asset Privatization Trust (APT) as attested
to in a Certification dated 24 January 1989 of the Vice President of the DBP's
Special Accounts Department II. In the same certification, it is stated that the DBP,
from 1987 until 1989, had handled s account which included ALFA's assets
pursuant to a management agreement by and between the DBP and APT. Hence,
there is evidence on record that at the time of the service of summons on ALFA
through Lee and Lacdao on 21 August 1987, the voting trust agreement in question
was not yet terminated so that the legal title to the stocks of ALFA, then, still
belonged to the DBP.
3. It is a basic principle in Corporation Law that a corporation has a personality
separate and distinct from the officers or members who compose it. Thus, the role
on service of processes on a corporation enumerates the representatives of a
corporation who can validly receive court processes on its behalf. Not every
stockholder or officer can bind the corporation considering the existence of a
corporate entity separate from those who compose it. The rationale of the rule is
that service must be made on a representative so integrated with the corporation
sued as to make it a priori supposable that he will realize his responsibilities and
know what he should do with any legal papers served on him. Herein, Lee and
Lacdao do not fall under any of the enumerated officers. The service of summons
upon ALFA, through Lee and Lacdao, therefore, is not valid. To rule otherwise will
contravene the general principle that a corporation can only be bound by such acts
which are within the scope of the officer's or agent's authority.

ELECTION OF DIRECTORS AND TRUSTEES

(a) Directors (Secs. 23 and 25)

SEC. 23. Election of Directors or Trustees. -Except when the exclusive right is
reserved for holders of founders' shares under Section 7 of this Code, each
stockholder or member shall have the right to nominate any director or trustee who
possesses all of the qualifications and none of" the disqualifications set forth in this
Code.
At all elections of directors or trustees, there must be present, either in person
or through a representative authorized to act by written proxy, the owners of majority
of the outstanding capital stock, or if there be no capital stock, a majority of the
members entitled to vote. When so authorized in the bylaws or by a majority of the
board of directors, the stockholders or members may also vote through remote
communication or in absentia: Provided, That the right to vote through such modes
may be exercised in corporations vested with public interest, notwithstanding the
absence of a provision in the bylaws of such corporations.
A stockholder or member who participates through remote communication or in
absentia, shall be deemed present for purposes of quorum.
The election must be by ballot if requested by any voting stockholder or
member.
In stock corporations, stockholders entitled to vote shall have the right to vote
the number of shares of stock standing in their own names in the stock books of the
corporation at the time fixed in the bylaws or where the bylaws are silent, at the time
of the election. The said stockholder may:
a. vote such number of shares for as many persons as there are directors to be
elected;
b. cumulate said shares and give one (1) candidate as many votes as the
number of directors to be elected multiplied by the number of the shares
owned; or
c. distribute them on the same principle among as many candidates as may be
seen fit:
Provided, That the total number of votes cast shall not exceed the number of
shares owned by the stockholders as shown in the books of the corpodtion multiplied
by the whole number of directors to be elected: Provided, however, That no delinquent
stock shall be voted. Unless otherwise provided in the articles of incorporation or in
the bylaws, members of nonstock corporations may cast as many votes as there are
trustees to be elected but may not cast more than one (1) vote for one (1) candidate.
Nominees for directors or trustees receiving the highest number of votes shall be
declared elected.
If no election is held, or the owners of majority of the outstanding capital stock
or majority of the members entitled to vote are not present in person, by proxy, or
through remote communication or not voting in absentia at the meeting, such meeting
may be adjourned and the corporation shall proceed in accordance with Section 25
of this Code.
The directors or trustees elected shall perform their duties as prescribed by law,
rules of good corporate governance, and bylaws of the corporation.

SEC. 25. Report of Election of Directors, Trustees and Officers, Non-holding of

Election and Cessation from Office. - Within thirty (30) days after the election of the
directors, trustees and officers of the corporation, the secretary, or any other officer
of the corporation, shall submit to the Commission, the names, nationalities,
shareholdings, and residence addresses of the directors, trustees and officers
elected.
The non-holding of elections and the reasons therefor shall be reported to the
Commission within thirty (30) days from the date of the scheduled election. The report
shall specify a new date for the election, which shall not be later than sixty (60) days
from the scheduled date.
If no new date has been designated, or if the rescheduled election is likewise
not held, the Commission may, upon the application of a stockholder, member,
director or trustee, and after verification of the unjustified non-holding of the election,
summarily order that an election be held. The Commission shall have the power to
issue such orders as may be appropriate, including orders directing the issuance of a
notice stating the time and place of the election, designated presiding officer, and the
record date or dates for the determination of stockholders or members entitled to vote.
Notwithstanding any provision of the articles of incorporation or bylaws to the
contrary, the shares of stock or membership represented at such meeting and entitled
to vote shall constitute a quorum for purposes of conducting an election under this
section.
Should a director, trustee or officer die, resign or in any manner cease to hold
office, the secretary, or the director, trustee or officer of the corporation, shall, within
seven (7) days from knowledge thereof, report in writing such fact to the Commission.

PREMIUM Marble Resources v. Court of Appeals, 264 SCRA 11 [1996]).

Premium Marble Resources, assisted by Atty. Dumadag as counsel, filed an
action for damages against respondent bank on the ground that the latter allowed the
checks issued to petitioner to be deposited to the account of the former officer of
Premium and that respondent bank refused to restitute the value of the checks to the
prejudice of Premium. Meantime, the same corporation Premium but this time
represented by Siguion Reyna, Montecillo and Ongsiako Law Office as counsel,
moved to dismiss on the ground that the filing of the case was without authority from
its duly constituted board of directors. Premium thru Atty. Dumadag opposed
contending that based on the Articles of Incorporation the persons who signed the
board resolution are not majority stockholders. On the other hand, Siguion Reyna law
firm asserted that it is the general information sheet filed with the SEC that is the best
evidence to show who the stockholders of a corporation are. The lower court and CA
both ruled to dismiss the case.

Issue: Whether or not the filing of the case for damages against private respondent
was authorized by a duly constituted Board of Directors of the petitioner corporation.

Ruling: NO. While the Minutes of the Meeting of the Board on April 1, 1982 states
that the newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla,
Aderito Yujuico and Rodolfo Millare, petitioner failed to show proof that this election
was reported to the SEC. In fact, the last entry in their General Information Sheet with
the SEC, as of 1986 appears to be the set of officers elected in March 1981 who were
Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes. These officers
presented a Resolution dated July 30, 1986, to show that Premium did not authorize
the filing in its behalf of any suit against the private respondent International Corporate
Bank.
We agree with the finding of public respondent Court of Appeals, that “in the
absence of /any board resolution from its board of directors the [sic] authority to act
for and in behalf of the corporation, the present action must necessarily fail. The power
of the corporation to sue and be sued in any court is lodged with the board of directors
that exercises its corporate powers. The claim, therefore, of petitioners as represented
by Atty. Dumadag, that Zaballa, et al., are the incumbent officers of Premium has not
been fully substantiated. In the absence of an authority from the board of directors,
no person, not even the officers of the corporation, can validly bind the corporation.
By the express mandate of the Corporation Code (Section 26), all corporations
duly organized pursuant thereto are required to submit within the period therein stated
(30 days) to the Securities and Exchange Commission the names, nationalities and
residences of the directors, trustees and officers elected.

(b) Trustee (Secs. 91 and 174)

SEC. 91. Election and Term of Trustees. - The number of trustees shall be fixed in
the articles of incorporation or bylaws which may or may not be more than fifteen (15).
They shall hold office for not more than three (3) years until their successors are
elected and qualified. Trustees elected to fill vacancies occurring before the expiration
of a particular term shall hold office only for the unexpired period.
Except with respect to independent trustees of nonstock corporations vested
with public interest, only a member of the corporation shall be elected as trustee.
Unless otherwise provided in the articles of incorporation or the bylaws, the
members may directly elect officers of a nonstock corporation.
SEC. 174. Designation of Governing Boards. - The provisions of specific provisions
of this Code to the contrary notwithstanding, nonstock or special corporations may,
through their articles of incorporation or their bylaws, designate their governing boards
by any name other than as board of trustees.

(c) Cumulative Voting (Sec. 23)

- Cumulative Voting in Corporate Elections: Introducing Strategy in
the Equation, 35 SOUTH CAROLINA L. REV. 295)

VACANCY IN THE BOARD (SEC. 28)

SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board. - Any
vacancy occurring in the board of directors or trustees other than by removal or by
expiration of term may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders or members in a regular or special meeting called for that
purpose.
When the vacancy is due to term expiration, the election shall be held no later
than the day of such expiration at a meeting called for that purpose. When the vacancy
arises as a result of removal by the stockholders or members, the election may be
held on the same day of the meeting authorizing the removal and this fact must be so
stated in the agenda and notice of said meeting. In all other cases, the election must
be held no later than forty-five (45) days from the time the vacancy arose. A director
or trustee elected to fill a vacancy shall be referred to as replacement director or
trustee and shall serve only for the unexpired term of the predecessor in office.
However, when the vacancy prevents the remaining directors from constituting
a quorum and emergency action is required to prevent grave, substantial, and
irreparable loss or damage to the corporation, the vacancy may be temporarily filled
from among the officers of the corporation by unanimous vote of the remaining
directors or trustees. The action by the designated director or trustee shall be limited
to the emergency action necessary, and the term shall cease within a reasonable time
from the termination of the emergency or upon election of the replacement director or
trustee, whichever comes earlier. The corporation must notify the Commission within
three (3) days from the creation of the emergency board, stating therein the reason
for its creation.
Any directorship or trusteeship to be filled by reason of an increase in the
number of directors or trustees shall be filled only by an election at a regular or at a
special meeting of stockholders or members duly called for the purpose, or in the
same meeting authorizing the increase of directors or trustees if so stated in the notice
of the meeting.
In all elections to fill vacancies under this section. the procedure set forth in
Sections 23 and 25 of this Code shall apply.

 By-law provision or the practice giving a stockholder a permanent seat in the

Board of Directors would be against the provision of Sections 28 and 29 of the
Corporation Code which requires member of the board of corporations to be
elected. In addition, Section 23 of the Corporation Code which provides for the
 powers of the Board of Directors or Trustees expressly requires them “to be
elected from among the holders of stock, or where there is no stock, from among
the members of the corporation.

TERM OF OFFICE, HOLD-OVER PRINCIPLE

 Directors may lawfully fill vacancies occurring in the board, and such officials,
as well as the original directors, hold until qualification of their successors.
 The remedy is quo warranto to question the legality and proper qualification of
persons elected to the board.

REMOVAL OF DIRECTORS OR TRUSTEES (SEC. 27)

- Only stockholders or members have the power to remove the directors or trustees
elected by them

SEC. 27. 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 in a nonstock corporation, by
a vote of at least two-thirds (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 for the purpose of removing any director or trustee must be called by the
secretary on order of the president, or upon written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or a
majority of the members entitled to vote. If there is no secretary, or if the secretary,
despite demand, fails or refuses to call the special meeting or to give notice thereof,
the stockholder or member of the corporation signing the demand may call for the
meeting by directly addressing the stockholders or members. Notice of the time and
place of such meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they ruay be
entitled under Section 23 of this Code.
The Commission shall, motu proprio or upon verified complaint, and after due
notice and hearing, order the removal of a director or trustee elected despite the
disqualification, or whose disqualification arose or is discovered subsequent to an
election. The removal of a disqualified director shall be without prejudice to other
sanctions that the Commission may impose on the board of directors or trustees who,
with knowledge of the disqualification, failed to remove such director or trustee.

ROXAS V. DE LA ROSA, 49 PHIL. 609 [1926]).

DOCTRINE: CONTROL AND MANAGEMENT OF CORPORATION

Removal of Directors: Under the law the directors of a corporation can only be
removed from office by a vote of the stockholders representing at least two-thirds of
the subscribed capital stock entitled to vote (Act No. 1459, sec. 34); while vacancies
in the board, when they exist, can be filled by mere majority vote, (Act No. 1459, sec.
25).

Moreover, the law requires that when action is to be taken at a special meeting to
remove the directors, such purpose shall be indicated in the call (Act No. 1459, sec.
34)

SUMMARY:
Representatives of the voting trust, holding majority of the shares, calls for a
shareholders meeting with the purpose of electing the members of the board of
directors notwithstanding the fact that all the positions in the board are occupied by
the members elected in a previous shareholders meeting. A civil action was filed to
enjoin such meeting and the petitioners filed a certiorari proceeding for the issuance
of the CFI judge of a restraining order to enjoin the meeting. SC held that the
restraining order was valid because in order to remove the current members of the
BOD, a vote of at least 2/3 of the shareholders is necessary.

FACTS:
Binalbagan Estate, Inc. (BEI), is a corporation having its principal plant in
Occidental Negros where it is engaged in the manufacture of raw sugar from canes
grown upon farms accessible to its central.
In July, 1924, the possessors of a majority of the shares of the Binalbagan
Estate, Inc., formed a voting trust composed of three members, namely, Salvador
Laguna, Segunda Monteblanco, and Arthur F. Fisher, as trustee.
By the document constituting this voting trust, the trustees were authorized to
represent and vote the shares pertaining to their constituents, and to this end the
shareholders undertook to assign their shares to the trustees on the books of the
company.
The total number of outstanding shares of the corporation is somewhat over
5,500, while the number of shares controlled by the voting trust is less than 3,000.
On 26 Feb 1926, BEI held its General Annual Shareholders Meeting at which
Mr. J. P. Heilbronn appeared as representative of the voting trust, his authority being
recognized by the holders of all the other shares present at this meeting.
Heilbronn having the control of the majority of the shares (the case didn’t say
how that happened – maybe he owned several shares plus the shares of the voting
trust he was representing to make up the majority – it’s just an inference) was able to
nominate and elect a board of directors to his own liking, without opposition from the
minority.
After the board of directors had been thus elected and had qualified, they chose
a set of officers constituting of Jose M. Yusay, president, Timoteo Unson, vice-
president, Jose G. Montalvo, secretary-treasurer, and H. W. Corp and Agustin
Coruna, as members. Said officials immediately entered upon the discharged of their
duties and have continued in possession of their respective offices until the present
time.
Since the creation of the voting trust there have been a number of vacancies
caused by resignation or the absence of members from the Philippine Islands, with
the result that various substitutions have been made in the personnel of the voting
trust. At the present time the petitioners Roxas, Echaus, and Lacson presumably
constitute its membership.
The current members of the voting trust (petitioners) wanted to oust the current
officers/directors of the corporation, even though it was the previous representative of
the voting trust (Heilbronn) who elected them. Thus, the petitioners in their character
as members of the voting trust, on August 2, 1926, caused the secretary of the
Binalbagan Estate, Inc., to issue to the shareholders a notice calling for a special
general meeting of shareholders to be held at 10 a. m., on August 16, 1926, "for the
election of the board of directors, for the amendment of the By-Laws, and for any other
business that can be dealt with in said meeting."
Respondents Coruna and Ledesma, as director and shareholder of the
corporation respectively, filed a civil action before CFI to enjoin the meeting to be held
on Aug. 16, 1926. Respondent judge De La Rosa issued a restraining order or
preliminary injunction to enjoin the meeting which gave rise to the present certiorari
proceeding filed by petitioners.

ISSUE: Whether or not it was within the judicial powers of Judge De La Rosa to issue
the restraining order or preliminary injunction? (YES)

MAIN ISSUE: W/N the petitioners can hold another shareholders meeting for the
election of board of directors even though no vacancies have occurred to justify such
election? (NO)

RULING:
Vacancies in the Board of Directors occur either due to death, resignation,
removal, or otherwise. The law requires that for a director to be removed, a vote of at
least two-thirds of the subscribed capital stock is necessary. In this case, the voting
trust only has the majority of the shares. Majority is not equivalent to two-thirds.
It must be noted that there are no vacancies in the board of directors. Therefore,
a call for an election of the board of directors made by the petitioners is tantamount
to an ousting of the current members of the board. The present board of directors are
de facto incumbents of the office whose acts will be valid until they shall be lawfully
removed from the office or cease from the discharge of their functions. In this case it
is not necessary for us to agitate ourselves over the question whether the respondent
judge properly exercised his judicial discretion in granting the order complained of. If
suffices to know that in making the order he was acting within the limits of his judicial
powers.
Now, upon examining into the number of shares controlled by the voting trust, it
will be seen that, while the trust controls a majority of the stock, it does not have a
clear two-thirds majority. It was therefore impolitic for the petitioners, in forcing the call
for the meeting of August 16, to come out frankly and say in the notice that one of the
purpose of the meeting was to removed the directors of the corporation from office.
Instead, the call was limited to the election of the board of directors, it being the
evident intention of the voting trust to elect a new board as if the directorate had been
then vacant.
But the complaint in civil No. 3840 directly asserts that the members of the
present directorate were regularly elected at the general annual meeting held in
February, 1926; and if that assertion be true, the proposal to elect, another directorate,
as per the call of August 2, if carried into effect, would result in the election of a rival
set of directors, who would probably need the assistance of judgment of court in an
independent action of quo warranto to get them installed into office, even supposing
that their title to the office could be maintained. That the trial judge had jurisdiction to
forestall that step and enjoin the contemplated election is a matter about which there
cannot be the slightest doubt. The law contemplates and intends that there will be one
of directors at a time and that new directors shall be elected only as vacancies occur
in the directorate by death, resignation, removal, or otherwise.

DIRECTORS' OR TRUSTEES' MEETINGS (SECS. 48, 52, 53)

SEC. 48. Kinds of Meetings. - Meetings of directors, trustees, stockholders, or

members may be regular or special.

SEC. 52. Regular and Special Meetings of Directors or Trustees; Quorum. -

Unless the articles of incorporation or the bylaws provides for a greater majority, a
majority of the directors or trustees as stated in the articles of incorporation shall
constitute a quorum to transact corporate business, and every decision reached by at
least a majority of the directors or trustees constituting a quorum, except for the
election of officers which shall require the vote of a majority of all the members of the
board, shall be valid as a corporate act.
Regular meetings of the board of directors or trustees of every corporation shall
be held monthly, unless the bylaws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time
upon the call of the president or as provided in the bylaws.
Meetings of directors or trustees of corporations may be held anywhere in or
outside of the Philippines, unless the bylaws provide otherwise. Notice of regular or
special meetings stating the date, time and place of the meeting must be sent to every
director or trustee at least two (2) days prior to the scheduled meeting, unless a longer
time is provided in the bylaws. A director or trustee may waive this requirement, either
expressly or impliedly.
Directors or trustees who cannot physically attend or vote at board meetings
can participate and vote through remote communication such as videoconferencing,
teleconferencing, or other alternative modes of communication that allow them
reasonable opportunities to participate. Directors or trustees cannot attend or vote by
proxy at board meetings.
A director or trustee who has a potential interest in any related party transaction
must recuse from voting on the approval of the related party transaction without
prejudice to compliance with the requirements of Section 31 of this Code.

SEC. 53. Who Shall Preside at Meetings. - The chairman or, in his absence, the
president shall preside at all meetings of the directors or trustees as well as of the
stockholders or members, unless the bylaws provide otherwise.

 In a board meeting, an abstention is presumed to be counted as an affirmative

vote insofar as it may be construed as an acquiescence in the action of those
 who voted affirmatively; but such presumption, being merely prima facie would
not hold in the face of clear evidence to the contrary.
 Quorum:
o For stock corporations, the “quorum” referred to in Section 52 of the
Corporation Code is based on the number of outstanding voting stocks.
For nonstok corporations, only those who are actual, living members with
voting rights shall be counted in determining the existence of a quorum
during members’ meetings. Dead members shall not be counted.
o In stock corporations, the presence of a quorum is ascertained and
counted on the basis of the outstanding capital stock, as defined by
Section 137 of the Corporation Code.
o When the principle for determining quorum for stock corporations is
applied by analogy to nonstick corporations, only those who are actual
members with voting rights should be counted. Tan v. Sycip, 499 SCRA
216 (2006).
 Abstention: In a board meeting, an abstention is presumed to be counted as an
affirmative vote insofar as it may be construed as an acquiescence in the action
of those who voted affirmatively; but such presumption, being merely prima
facie would not hold in the face of clear evidence to the contrary

COMPENSATION OF DIRECTORS (SEC. 29)

SEC. 29. Compensation of Directors or Trustees. - In the absence of any provision

in the bylaws fixing their compensation, the directors or trustees shall not receive any
compensation in their capacity as such, except for reasonable per diems: Provided,
however, That the stockholders representing at least a majority of the outstanding
capital stock or majority of the members may grant directors or trustees with
compensation and approve the amount thereof at a regular or special meeting.
In no case shall the total yearly compensation of directors exceed ten percent
(10%) of the net income before income tax of the corporation during the preceding
year.
Directors or trustees shall not participate in the determination of their own per
diems or compensation.
Corporations vested with public interest shall submit to their shareholders and
the Commission, an annual report of the total compensation of each of their directors
or trustees.

 Directors and trustees are not entitled to salary or other compensation when
they perform nothing more than the usual and ordinary duties of their office,
founded on the presumption that directors and trustees render service
gratuitously, and that the return upon their shares adequately furnishes the
motives for service, without compensation.
 Under Section 30 of the Corporation Code, there are two (2) ways by which
members of the board can be granted compensation apart from reasonable per
diems: (a) when there is a provision in the by-laws fixing their compensation;
and (b) when the stockholders representing a majority of the outstanding capital
stock at a regular or special meeting agree to give them compensation. From
 the language of Section 30, it may also be deduced that members of the board
may also receive compensation, when they render services to the corporation
in a capacity other than as directors or trustees of the corporation.
 The position of being Chairman and Vice-Chairman, like that of Treasurer and
Secretary, were considered by the officers as not mere directorship position, but
officership position that would entitle the occupants to compensation. Likewise,
the limitation placed under Section 30 of the Corporation that directors cannot
receive compensation exceeding 10% of the net income of the corporation,
would not apply to the compensation given to such positions since it is being
given in their capacity as officers of the corporation and not as board members.

WESTERN INSTITUTE OF TECHNOLOGY, INC. V. SALAS, 278 SCRA 216, 223

[1997])
Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas,
and Richard S. Salas, belonging to the same family, are the majority and controlling
members of the Board of Trustees of Western Institute of Technology, Inc. (WIT), a
stock corporation engaged in the operation, among others, of an educational
institution. According to Homero L. Villasis, Dimas Enriquez, peston F. Villasis, and
Reginald F. Villasis, the minority stockholders of WIT, sometime on 1 June 1986 in
the principal office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In
attendance were other members of the Board including Reginald Villasis. Prior to said
Special Board Meeting, copies of notice thereof, dated 24 May 1986, were distributed
to all Board Members. The notice allegedly indicated that the meeting to be held on 1
June 1986 included Item 6 which states that "Possible implementation of Art. III, Sec.
6 of the Amended By-Laws of Western Institute of Technology, Inc. on compensation
of all officers of the corporation." In said meeting, the Board of Trustees passed
Resolution 48, series 1986, granting monthly compensation to Salas, et. al. as
corporate officers retroactive 1 June 1985, in the following amounts: “Chairman
9,000.00/month, Vice Chairman P3,500.00/month, Corporate Treasurer
P3,500.00/month and Corporate Secretary P3,500.00/month, retroactive June 1,
1985 and the ten percentum of the net profits shall be distributed equally among the
ten members of the Board of Trustees. This shall amend and supercede any previous
resolution.” A few years later, or on 13 March 1991, Homero Villasis, Preston Villasis,
Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against Salas, et. al.
before the Office of the City Prosecutor of Iloilo, as a result of which 2 separate
criminal informations, one for falsification of a public document under Article 171 of
the Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the
RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge
for falsification of public document was anchored on Salas, et. al.'s submission of
WIT's income statement for the fiscal year 1985-1986 with the Securities and
Exchange Commission (SEC) reflecting therein the disbursement of corporate funds
for the compensation of Salas, et. al. based on Resolution 4, series of 1986, making
it appear that the same was passed by the board on 30 March 1986, when in truth,
the same was actually passed on 1 June 1986, a date not covered by the corporation's
fiscal year 1985-1986 (beginning May 1, 1995 and ending April 30, 1986). Thereafter,
trial for the two criminal cases (Criminal Cases 37097 and 37098), was consolidated.
After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on
both counts dated 6 September 1993 without imposing any civil liability against the
accused therein. Villasis, et. al. filed a Motion for Reconsideration of the civil aspect
of the RTC Decision which was, however, denied in an Order dated 23 November
1993. Villasis, et. al. filed the petition for review on certiorari. Significantly on 8
December 1994, a Motion for Intervention, dated 2 December 1994, was filed before
this Court by Western Institute of Technology, Inc., disowning its inclusion in the
petition and submitting that Atty. Tranquilino R. Gale, counsel for Villasis, et. al., had
no authority whatsoever to represent the corporation in filing the petition. Intervenor
likewise prayed for the dismissal of the petition for being utterly without merit. The
Motion for Intervention was granted on 16 January 1995.

Issue: Whether the grant of compensation to Salas, et. al. is proscribed under Section
30 of the Corporation Code.

Held: Directors or trustees, as the case may be, are not entitled to salary or other
compensation when they perform nothing more than the usual and ordinary duties of
their office. This rule is founded upon a presumption that directors/trustees render
service gratuitously, and that the return upon their shares adequately furnishes the
motives for service, without compensation. Under Section 30 of the Corporation Code,
there are only two (2) ways by which members of the board can be granted
compensation apart from reasonable per diems: (1) when there is a provision in the
by-laws fixing their compensation; and (2) when the stockholders representing a
majority of the outstanding capital stock at a regular or special stockholders' meeting
agree to give it to them. Also, the proscription, however, against granting
compensation to director/trustees of a corporation is not a sweeping rule. Worthy of
note is the clear phraseology of Section 30 which state: "[T]he directors shall not
receive any compensation, as such directors." The phrase as such directors is not
without significance for it delimits the scope of the prohibition to compensation given
to them for services performed purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board may receive compensation, in
addition to reasonable per diems, when they render services to the corporation in a
capacity other than as directors/trustees. Herein, resolution 48, s. 1986 granted
monthly compensation to Salas, et. al. not in their capacity as members of the board,
but rather as officers of the corporation, more particularly as Chairman, Vice-
Chairman, Treasurer and Secretary of Western Institute of Technology. Clearly,
therefore, the prohibition with respect to granting compensation to corporate
directors/trustees as such under Section 30 is not violated in this particular case.
Consequently, the last sentence of Section 30 which provides that "In no case shall
the total yearly compensation of directors, as such directors, exceed ten (10%)
percent of the net income before income tax of the corporation during the preceding
year" does not likewise find application in this case since the compensation is being
given to Salas, et. al. in their capacity as officers of WIT and not as board members.
ROLE OF DIRECTORS

(a) Directors as Fiduciaries.

- Pre-Corporation Code

PALTING V. SAN JOSE PETROLEUM, INC., 18 SCRA 924 (1966).

SAN JOSE OIL, is a domestic mining corporation, 90% of the outstanding
capital stock of which is owned by respondent SAN JOSE PETROLEUM, a foreign
(Panamanian) corporation, the majority interest of which is owned by OIL
INVESTMENTS, INC., another foreign (Panamanian) company.
This latter corporation in turn is wholly (100%) owned by PANTEPEC OIL
COMPANY, C. A., and PANCOASTAL PETROLEUM COMPANY, C. A., both
organized and existing under the laws of Venezuela. As of September 30, 1956, there
were 9,979 stockholders of PANCOASTAL PETROLEUM found in 49 American
states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of
November 30, 1956, PANTEPEC OIL COMPANY was said to have 3,077,916 shares
held by 12,373 stockholders scattered in 49 American states.
In the two lists of stockholders, there is no indication of the citizenship of these
stockholders, or of the total number of authorized stocks of each corporation for the
purpose of determining the corresponding percentage of these listed stockholders in
relation to the respective capital stock of said corporation.

ISSUE: Whether or not the "tie-up" between the two corporations is violative of the
Constitution, the Laurel-Langley Agreement, the Petroleum Act of 1949, and the
Corporation Law.

RULING: YES.
The privilege to utilize, exploit, and develop the natural resources of this country
was granted, by Article III of the Constitution, to Filipino citizens or to corporations or
associations 60% of the capital of which is owned by such citizens. With the Parity
Amendment to the Constitution, the same right was extended to citizens of the United
States and business enterprises owned or controlled, directly or indirectly, by citizens
of the United States.
There could be no serious doubt as to the meaning of the word "citizens" used
in the aforementioned provisions of the Constitution. The right was granted to 2 types
of persons: natural persons (Filipino or American citizens) and juridical persons
(corporations 60% of which capital is owned by Filipinos and business enterprises
owned or controlled directly or indirectly, by citizens of the United States). In American
law, "citizen" has been defined as "one who, under the constitution and laws of the
United States, has a right to vote for representatives in congress and other public
officers, and who is qualified to fill offices in the gift of the people."
SAN JOSE PETROLEUM an American business is not entitled to parity rights
in the Philippines. In the circumstances, we have to hold that the respondent SAN
JOSE PETROLEUM, as presently constituted, is not a business enterprise that is
authorized to exercise the parity privileges under the Parity Ordinance, the Laurel-
Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is,
consequently, illegal.
Palting VS. San Jose Petroleum, Inc. (1966)

Facts:
San Jose Petroleum filed with the SEC a sworn registration statement for
the registration and licensing for sale in the Philippine voting trust certificate
representing 2 million shares of its capital stock of a par value of $0.35/share at
P1/share. It was alleged that the proceeds thereof will be used to finance the
operations of San Jose Oil Co. which has 14 petroleum exploration concessions
in various provinces. It was expressly conditioned that instead of stock certificates,
registered or bearer-voting trust certificates from voting trustees (Americans)
will be given. San Jose Petroleum amended the application from P2M to P5M a
reduced offering at P0.70/share.
Palting, et.al filed with the SEC an opposition to said registration on the following
grounds: (1) the tie-up between SJP, a Panamanian corporation and SJO, a
domestic corporation violates the Constitution, the Corp. Law and the Petroleum Act
of 1949 (2) the issuer is not licensed to transact business in the Philippines (3) the
sale of shares is fraudulent (4) the issuer is based on unsound business principles
(sic).
Some of the provisions of the Articles of Incorporation of respondent SAN
JOSE PETROLEUM are noteworthy; viz:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director may be
represented and may vote through a proxy who also need not be a director or
stockholder; and
(3) that no contract or transaction between the corporation and any other
association or partnership will be affected, except in case of fraud, by the fact that any
of the directors or officers of the corporation is interested in, or is a director or officer
of, such other association or partnership, and that no such contract or transaction of
the corporation with any other person or persons, firm, association or partnership shall
be affected by the fact that any director or officer of the corporation is a party to or has
an interest in, such contract or transaction, or has in anyway connected with such
other person or persons, firm, association or partnership; and finally, that all and any
of the persons who may become director or officer of the corporation shall be relieved
from all responsibility for which they may otherwise be liable by reason of any contract
entered into with the corporation, whether it be for his benefit or for the benefit of any
other person, firm, association or partnership in which he may be interested.

Issue: W/N said provisions are contrary to the corporation law.

Ruling:
Yes, these provisions are in direct opposition to our corporation law and
corporate practices in this country. These provisions alone would outlaw any
corporation locally organized or doing business in this jurisdiction. Consider the
unique and unusual provision that no contract or transaction between the company
and any other association or corporation shall be affected except in case of fraud, by
the fact that any of the directors or officers of the company may be interested in or are
directors or officers of such other association or corporation; and that none of such
contracts or transactions of this company with any person or persons, firms,
associations or corporations shall be affected by the fact that any director or officer of
this company is a party to or has an interest in such contract or transaction or has any
connection with such person or persons, firms associations or corporations; and that
any and all persons who may become directors or officers of this company are hereby
relieved of all responsibility which they would otherwise incur by reason of any
contract entered into which this company either for their own benefit, or for the benefit
of any person, firm, association or corporation in which they may be interested.
The impact of these provisions upon the traditional judiciary relationship
between the directors and the stockholders of a corporation is too obvious to escape
notice by those who are called upon to protect the interest of investors. The directors
and officers of the company can do anything, short of actual fraud, with the affairs of
the corporation even to benefit themselves directly or other persons or entities in
which they are interested, and with immunity because of the advance condonation or
relief from responsibility by reason of such acts. This and the other provision which
authorizes the election of non-stockholders as directors, completely disassociate the
stockholders from the government and management of the business in which they
have invested.

- Nature of Duties of Directors and Officers.

PRIME WHITE CEMENT CORP. V. IAC, 220 SCRA 103 (1993)

On or about 16 July 1969, Alejandro Te and Prime White Cement Corporation
(PWCC) thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of
the Board, entered into a dealership agreement whereby Te was obligated to act as
the exclusive dealer and/or distributor of PWCC of its cement products in the entire
Mindanao area for a term of 5 years.
Right after Te entered into the dealership agreement, he placed an
advertisement in a national, circulating newspaper the fact of his being the exclusive
dealer of PWWC's white cement products in Mindanao area, more particularly, in the
Manila Chronicle dated 16 August 1969 and was even congratulated by his business
associates, so much so, he was asked by some of his businessmen friends and close
associates if they can be his sub-dealer in the Mindanao area.

ISSUE: Whether the "dealership agreement" referred by the President and Chairman
of the Board of PWCC is a valid and enforceable contract.

RULING: NO.
The “dealership agreement” is not valid and unenforceable. Under the
Corporation Law, which was then in force at the time the case arose, as well as under
the present Corporation Code, all corporate powers shall be exercised by the Board
of Directors, except as otherwise provided by law. Although it cannot completely
abdicate its power and responsibility to act for the juridical entity, the Board may
expressly delegate specific powers to its President or any of its officers.
In the absence of such express delegation, a contract entered into by its
President, on behalf of the corporation, may still bind the corporation if the board
should ratify the same expressly or impliedly. Implied ratification may take various
forms — like silence or acquiescence; by acts showing approval or adoption of the
contract; or by acceptance and retention of benefits flowing therefrom. Furthermore,
even in the absence of express or implied authority by ratification, the President as
such may, as a general rule, bind the corporation by a contract in the ordinary course
of business, provided the same is reasonable under the circumstances. These rules
are basic, but are all general and thus quite flexible. They apply where the President
or other officer, purportedly acting for the corporations, is dealing with a third person,
i.e., a person outside the corporation. The situation is quite different where a director
or officer is dealing with his own corporation. Herein, Te was not an ordinary
stockholder; he was a member of the Board of Directors and Auditor of the corporation
as well. He was what is often referred to as a "self-dealing" director.

(b)Duty of Obedience: A corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general
law.

(c) Duty of Diligence (Sec. 30)

- To hold a director personally liable for debts of the corporation, and thus pierce
the veil of corporate fiction, the bad faith or wrongdoing of the director must be
established clearly and convincingly. Bad faith is never presumed. Bad faith
does not connote bad judgment or negligence. Bad faith imports a dishonest
purpose. Bad faith means [a] breach of a known duty through some ill motive or
interest. Bad faith partakes of the nature of fraud.
- For wrongdoing to make a director personally liable for debts of the corporation,
the wrongdoing approved or assented to by the director must be a patently
unlawful act. Mere failure to comply with the notice requirement of labor laws on
company closure or dismissal of employees does not amount to a patently
unlawful act. Patently unlawful acts are those declared unlawful by law which
imposes penalties for commission of such unlawful acts. There must be a law
declaring the act unlawful and penalizing the act.

SEC. 30. Liability of Directors, Trustees or Officers. - Directors or trustees who

willfully and knowingly vote for or assent to patently unlawful acts of the corporation
or who are guilty of gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other persons.
A director, trustee or officer shall not attempt to acquire, or acquire any interest
adverse to the corporation in respect of any matter which has been reposed in them
in confidence, and upon which, equity imposes a disability upon themselves to deal
in their own behalf; otherwise, the said director, trustee or officer shall be liable as a
trustee for the corporation and must account for the profits which otherwise would
have accrued to the corporation.
STEINBERG V. VELASCO, 52 PHIL. 953 [1929];
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of the Philippine Islands. It is alleged that
the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president,
Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading
Company, at a meeting of the board of directors, approved and authorized various
lawful purchases already made of a large portion of the capital stock of the company
from its various stockholders with total amount of the capital stock unlawfully
purchased was P3,300. At the time of such purchase, the corporation had accounts
payable amounting to P13,807.50, most of which were unpaid at the time petition for
the dissolution of the corporation was its financial condition, in contemplation of an
insolvency and dissolution. That on September 11, 1923, when the petition was filed
for its dissolution upon the ground that it was insolvent, its accounts payable
amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset
of P3,271.28 over and above its liabilities.

ISSUE: Whether or not the Corporation acted in bad faith in acquiring its own shares
of stocks.

RULING: YES.
There is no stipulation or finding of facts as to what was the actual cash value
of its accounts receivable. Neither is there any stipulation that those accounts or any
part of them ever have been or will be collected, and it does appear that after his
appointment on February 28, 1924, the receiver made a diligent effort to collect them,
and that he was unable to do so, and it also appears from the minutes of the board of
directors that the president and manager "recommended that P3,000 — out of the
surplus account to be set aside for dividends payable, and that payments be made in
installments so as not to effect the financial condition of the corporation."
It is very apparent that on June 24, 1922, the board of directors acted on
assumption that, because it appeared from the books of the corporation that it had
accounts receivable of the face value of P19,126.02, therefore it had a surplus over
and above its debts and liabilities. Thus, in the purchase of its own stock to the amount
of P3,300 and in declaring the dividends to the amount of P3,000, the real assets of
the corporation were diminished P6,300. The corporation did not then have an actual
bona fide surplus from which the dividends could be paid, and that the payment of
them in full at the time would "affect the financial condition of the corporation."
Creditors of a corporation have the right to assume so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.

BATES V. DRESSER, 251 U.S. 524, 64 L. ED. 388, 40 S. CT. 247 [1919]
1. This is a bill in equity brought by the receiver of a national bank to charge its former
president and directors with the loss of a great part of its assets through the thefts
of an employee of the bank while they were in power.
2. Case was sent to a master, who found for the defendants, but the district court
entered a decree against all of them.
3. Circuit court of appeals reversed this decree, dismissed the bill as against all except
the administrator of Edwin Dresser, the president.
4. Before and during the time of the losses, Dresser was its president and executive
officer, a large stockholder, with an inactive deposit of from $35,000 to $50,000.
5. From July, 1903, to the end, Frank L. Earl was cashier. Coleman, who made the
trouble, entered the service of the bank as messenger in September, 1903. In
January, 1904, he was promoted to be bookkeeper, being then not quite eighteen
but having studied bookkeeping.
6. an auditor employed on the retirement of a cashier had reported that the daily
balance book was very much behind, that it was impossible toprove the deposits,
and that a competent bookkeeper should be employed upon the work immediately
7. In May, 1906, Coleman took $2,000 cash from the vaults of the bank, but restored
it the next morning. In November of the same year, he began the thefts that come
into question here. Perhaps in the beginning he took the money directly. But as he
ceased to have charge of the cash in November, 1907, he invented another way
8. By May 1, 1907, Coleman had abstracted $17,000, concealing the fact by false
additions in the column of total checks and false balances in the deposit ledger.
9. a total of $310,143.02 was stolen, when the bank closed on February 21, 1910. As
a result of this, the amount of the monthly deposits seemed to decline noticeably,
and the directors considered the matter in September, but concluded that the falling
off was due in part to the springing up of rivals, whose deposits were increasing,
but was parallel to a similar decrease in New York. An examination by a bank
examiner in December, 1909, disclosed nothing wrong to him.

ISSUE: whether they (the directors) neglected their duty by accepting the cashier's
statement of liabilities and failing to inspect the depositors' ledger

HELD: No. but the president is responsible.

- That directors, serving gratuitously, who were without knowledge of the
cashier's negligence or of the possibility of such a fraud, and who had assurance
from the president, as from the bank examiners' reports, were not negligent in
accepting the cashier's statements of liabilities, like his statements of assets, which
always were correct, and were not bound to inspect the depositors' ledger or call in
the pass-books and compare them with it, although there was a bylaw, nearly
obsolete, calling for examinations by a committee semiannually
- That the president, who, beside being a large depositor, was habitually at the
bank, in control of its affairs, with immediate access to the depositors' ledger, and
who had received certain warnings that the bookkeeper was living fast and dealing
in stocks, was guilty of negligence in failing to make an examination. One who
accepts the presidency of a national bank accepts responsibility for any losses the
bank may suffer through his fault.

SMITH V. VAN GORKAM, 488 A.2D 858, SUPREME COURT OF DELAWARE,

1985).
 A corporation called Marmon was attempting a leveraged buy-out of TransUnion.
TransUnion's CEO, Van Gorkom proposed a price of $55 a share.
 Turns out, Van Gorkom and his CFO didn't bother to do any research to see how
much the company was actually worth. He didn't even inform TransUnion's legal
department about the transaction.
o $55 a share was only about 60% of what the company was later appraised at.
 In Van Gorkom's defense, at the time of the merger, the stock was only selling for
$37.25 a share, so $55 seemed like a lot.
 Van Gorkom called an emergency meeting of the board of directors, proposed the
merger, and the directors gave preliminary approval.
o Van Gorkom failed to disclose a number of things at the board meeting where the
vote was taken, including the fact that there was no basis for the $55 price, and that
there had been objections by TransUnion management regarding the merger. Van
Gorkom didn't even provide the directors with copies of the merger agreement.
 The facts get a little complicated, but basically, there was some wheeling and
dealing and the directors eventually wound up recommending that the shareholders
approve the merger, even though the directors never really bothered to learn if the
terms of the merger were a good deal for the company or not.
 Some shareholders instituted a derivative lawsuit against the directors for breach
of fiduciary duty.
 The Trial Court found for Van Gorkom. The shareholders appealed.
o The Trial Court found that Van Gorkom's actions fell within the business judgment
rule.
 The business judgment rule says that the courts should not second guess business
decisions made by directors.
 The Appellate Court reversed.
o The Appellate Court found that the directors were grossly negligent because they
approved the merger without substantial inquiry or any expert advice. Therefore
they breached their duty to care.
 The Court found that the directors breached their fiduciary duty by their failure to
inform themselves of all information reasonably available to them and relevant to
their decision to recommend the merger, and
 The Court found that there was a failure to disclose all material information such as
a reasonable stockholder would consider important in deciding whether to approve
the merger.
 The Court found that Van Gorkom breached his duty to careby offering $55 a share
because, "the record is devoid of any competent evidence that $55 represented the
per share intrinsic value of the Company."
o The Court found that the business judgment rule was not a defense because the
directors and Van Gorkom didn't use any "business judgment" when they came to
their decision.
 "The rule itself 'is a presumption that in making a business decision, the directors
of a corporation acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interests of the company.' ...Thus, the party
attacking a board decision as uninformed must rebut the presumption that its
business judgment was an informed one."
 "Under the business judgment rule there is no protection for directors who have
made an unintelligent or unadvised judgment."
 Basically, the actual decision is not so important, what the courts will look to is
whether there was an adequate decision-making process.
 In this case, the Court basically said that in order to hide behind the business
judgment rule, you have to show that you made an informed decision based on
some principle of business. If you pull numbers out of thin air or cast votes without
doing due diligence, then the courts can overturn your decisions.
o The idea behind the business judgment rule is that people who work in the business
have more experience and are better judges of what a corporation should do than
a court would be. But when businessmen show that they didn't use any of that
experience to make a decision, then there is no reason for the courts to defer to
them.
 Almost immediately after this decision, Delaware passed a law (DGCL §102(b)(7))
that allows corporations to limit the liability of their directors for breaches of the duty
of care.

(d)Duty of Loyalty (Secs. 30 to 33)

SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. - A

contract of the corporation with one (1) or more of its directors, trustees, officers or
their spouses and relatives within the fourth civil degree of consanguinity or affinity is
voidable, at the option of such corporation, unless all the following conditions are
present:
a. The presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
b. The vote of such director or trustee was not necessary for the approval of the
contract;
c. The contract is fair and reasonable under the circumstances;
d. In case of corporations vested with public interest, material contracts are
approved by at least two-thirds (2/3) of the entire membership of the board, with
at least a majority of the independent directors voting to approve the material
contract; and
e. In case of an officer, the contract has been previously authorized by the board
of directors.
Where any of the first three (3) conditions set forth in the preceding paragraph
is absent, in the case of a contract with a director or trustee, such contract may be
ratified by the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting and the contract is fair and
reasonable under the circumstances.

SEC. 32. Contracts Between Corporations with Interlocking Directors. - Except

in cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between two (2) or more corporations having interlocking
directors shall not be invalidated on that ground alone: Provided, That if the interest
of the interlocking director in one (1) corporation is substantial and the interest in the
other corporation or corporations is merely nominal, the contract shall be subject to
the provisions of the preceding section insofar as the latter corporation or corporations
are concerned.
Stockholdings exceeding twenty percent (20%) of the outstanding capital stock
shall be considered substantial for purposes of interlocking directors.

SEC. 33. Disloyalty of a Director. - Where a director, by virtue of such office,

acquires a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, the director must account for
and refund to the latter all such profits, unless the act has been ratified by a vote of
the stockholders owning or representing at least two-thirds (2/3) ofthe outstanding
capital stock. This provision shall be applicable, notwithstanding the fact that the
director risked one's own funds in the venture.

- Doctrine of Corporate Opportunity

- Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]): When a
director, who also owns ¾ of the equity of the corporation, who has also been
designated as the administrator of corporate affairs, and who was directly
negotiating the sale of the corporations large landholdings to the Government at
great prices, purchases the shares of stock of a shareholder without informing the
latter of the on-going negotiations, such director is deemed to have fraudulently
acquired the shareholdings by way of deceit practiced by means of concealing his
knowledge of the state of the negotiations and their probable successful result.
- Self-dealings (Secs. 31 and 32)

(e) Duty to Creditors and Outsiders

(f) Corporate Dealings with Directors and Officers (Sec. 31)
(g)Contracts Between Corporations with Interlocking Directors (Sec.
32): The rule under Sec. 33 of Corporation Code allowing annulment of
contracts between corporations with interlocking directors resulting in the
prejudice to one of the corporation, has no application to cases where fraud
is alleged to have been committed to third parties.

WHO IS AN "OFFICER" OF THE CORPORATION (SEC. 24)

- The general principles of agency govern the relation between the corporation
and its officers or agents, subject to the articles of incorporation, by-laws, or
relevant provisions of law —when authorized, their acts bind the corporation,
otherwise, their acts cannot bind it.

SEC. 24. Corporate Officers. -Immediately after their election, the directors of a
corporation must formally organize and elect:
a. a president, who must be a director;
b. a treasurer, who must be a resident;
c. a secretary, who must be a citizen and resident of the Philippines; and
d. such other officers as may be provided in the bylaws.
 If the corporation is vested with public interest, the board shall also elect a
compliance officer. The same person may hold two (2) or more positions concurrently,
except that no one shall act as president and secretary or as president and treasurer
at the same time, unless otherwise allowed in this Code.
The officers shall manage the corporation and perform such duties as may be
provided in the bylaws and/or as resolved by the board of directors.

- Corporations act only through their officers and duly authorized agents. All acts
within the powers of a corporation may be performed by agents of its selection;
except so far as limitations or restrictions imposed by special charter, buy-laws, or
statutory provisions.
- A mere manager not so named in the by-laws does is not an officer of the
corporation
- An “office” is created by the charter of the corporation and the officer is elected by
the directors or stockholders. . . Note that a corporate officer’s removal from his
office is a corporate act. If such removal occasions an intra-corporate controversy,
its nature is not altered by the reason or wisdom, or lack thereof, with which the
Board of Directors might have in taking such action. When petitioner, as Executive
Vice-President allegedly diverted company funds for his personal use resulting in
heavy financial losses in the company, this matter would amount to fraud. Such
fraud would be detrimental to the interest not only of the corporation but also of its
members. This type of fraud encompasses controversies in a relationship within
the corporation covered by the SEC jurisdiction [now with the regular courts].
Perforce, the matter would come within the area of corporate affairs and
management, and such a corporate controversy would call for the adjudicative
expertise of the SEC, not the Labor Arbiter or the NLRC.”
- When the by-laws of the condominium corporation specifically includes the position
of “Superintendent/Administrator” in is roster of corporate officers, then such
position is clearly a corporate officer position and issues of reinstatement would be
within the jurisdiction of the SEC and not the NLRC.
- When the by-laws provide that one of the powers of the Board of Trustees is “[t]o
appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such
other officers as it may deem necessary and prescribe their powers and duties,”
then such specifically designated positions should be considered “corporate
officers” position. The determination of the rights and the concomitant liability
arising from any ouster from such positions, would be intra-corporate controversy
subject to the jurisdiction of the SEC (now RTC).
- An “office” is created by the charter of the corporation and the officer is elected by
the directors or stockholders (2 Fletcher Cyc. Corp. Ch. II, Sec. 266). On the other
hand, an “employee” usually occupies no office and generally is employed not by
action of the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such employee.
(Ibid) . . . A corporate officer’s dismissal is always a corporate act, or an intra-
corporate controversy, and the nature is not altered by the reason or wisdom with
which the Board of Directors may have in taking such action.
- The fact that “Comptroller” is not mentioned in the by-laws does not undermine the
appointment to such position since under Sec. 25 of Corporation Code, the Board
 of Directors is authorized to appoint such other officers as it may deem necessary.
In this case the by- laws provided “and such other officers as the Board of Directors
may from time to time does fit to provide for. Said officers shall be elected by
majority vote of the Board of Directors.” By- laws may and usually do provide for
such other officers, and that where a corporate office is not specifically indicated in
the roster of corporate offices in the by-laws of a corporation, the Board of Directors
may also be empowered under the by-laws to create additional officers as may be
necessary
- The president, vice-president, secretary and treasurer are commonly regarded as
the principal or executive officers of a corporation, and modern corporation statutes
usually designate them as the officers of the corporation. However, other offices
are sometimes created by the charter or by-laws of a corporation, or the board of
directors may be empowered under the by-laws of a corporation to create
additional offices as may be necessary.

GURREA V. LEZAMA, 103 PHIL. 553 [1958]

Plaintiff instituted this action in the Court of First Instance of Iloilo to have
Resolution No. 65 of the Board of Directors of the La Paz Ice Plant and Cold Storage
Co., Inc., removing him from his position of manager of said corporation declared null
and void and to recover damages incident thereto. The action is predicated on the
ground that said resolution was adopted in contravention of the provisions of the by-
laws of the corporation, of the Corporation Law and of the understanding, intention
and agreement reached among its stockholders.
Defendant answered the complaint setting up as defense that plaintiff had been
removed by virtue of a valid resolution.

Issue: Whether or not managers are considered officers of the corporation.

Ruling: No.
Section 33 of the Corporation Law provides: "Immediately after the election, the
directors of a corporation must organize by the election of a president, who must be
one of their number, a secretary or clerk who shall be a resident of the Philippines . .
. and such other officers as may be provided for in the by-laws." The by-laws of the
instant corporation in turn provide that in the board of directors there shall be a
president, a vice-president, a secretary and a treasurer. These are the only ones
mentioned therein as officers of the corporation. The manager is not included although
the latter is mentioned as the person in whom the administration of the corporation is
vested, and with the exception of the president, the by-laws provide that the officers
of the corporation may be removed or suspended by the affirmative vote of 2/3 of the
corporation.
From the above the following conclusion is clear: that we can only regard as
officers of a corporation those who are given that character either by the Corporation
Law or by its by-laws. The rest can be considered merely as employees or
subordinate officials. And considering that plaintiff has been appointed manager by
the board of directors and as such does not have the character of an officer, the
conclusion is inescapable that he can be suspended or removed by said board of
directors under such terms as it may see fit and not as provided for in the by-laws.
Evidently, the power to appoint carries with it the power to remove, and it would be
incongruous to hold that having been appointed by the board of directors he could
only be removed by the stockholders.
Therefore hold that plaintiff has been properly removed when the board of
directors of the instant corporation approved its Resolution No. 65 on June 3, 1948.

DY V. NLRC, 145 SCRA 211 [1986]

Doctrine: It is the Securities and Exchange Commission (SEC) and not the National
Labor Relations Commission (NLRC) that has jurisdiction over a dispute involving the
termination of a bank manager as a result of his non-reelection, thereto, as prescribed
in the Bank’s by-laws.
It is no hindrance to SEC jurisdiction that a person raises in his complaint the
issues that he was illegally dismissed and asks for remuneration where complainant
is not a mere employee but a stockholder and officer of the corporation.

FACTS: Petitioners Lorenzo C. Dy, Zosimo Dy, Sr., William Ibero, Ricardo Garcia and
Rural Bank of Ayungon, Inc. assail in this Court the resolution of public respondent
NLRC dismissing their appeal from the decision of the Executive Labor Arbiter in Cebu
City which found private respondent Carlito H. Vailoces to have been illegally
dismissed by them.
Private respondent Vailoces was the manager of the Rural Bank of Ayungon
(Negros Oriental), a banking institution duly organized under Philippine laws. He was
also a director and stockholder of the bank.
On June 4, 1983, a special stockholders’ meeting was called for the purpose of
electing the members of the bank’s Board of Directors. Immediately after the election,
the new Board proceeded to elect the bank’s executive officers.
Pursuant to Article 4 of the bank’s by-laws, providing for the election by the
entire membership of the Board of the executive officers of the bank, i.e., the
president, vice president, secretary, cashier and bank manager, in that board meeting
of June 4, 1983, petitioners Lorenzo Dy, William Ibero and Ricardo Garcia were
elected president, vice president, and corporate secretary, respectively. Private
respondent Vailoces was not re-elected as bank manager. Because of this, the Board
passed a Resolution relieving him as bank manager.
Subsequently, Vailoces filed a complaint for illegal dismissal and damages with
the Ministry of Labor and Employment against herein petitioners, asserting that an
illegal stockholders’ meeting was held. In their answer, petitioners denied the charge
of illegal dismissal. The Executive Labor Arbiter found that Vailoces was illegally
dismissed due to the resentment of petitioners against Vailoces and consequently
ordered the individual petitioners Lorenzo Dy and Zosimo Dy, Sr. to pay Vailoces
jointly and severally the sum of P111,480.60 and reinstate the latter to his position as
bank manager, with additional backwages.
Petitioner Lorenzo Dy appealed to the NLRC, assigning error to the decision of
the Labor Arbiter, one being that the matter of Vailoces’ relief was within the
adjudicatory powers of the Securities and Exchange Commission. The NLRC
bypassed the issues and dismissed the appeal for having been filed late. Hence, this
petition.
ISSUE: Whether or not the SEC, and not respondent NLRC, has jurisdiction over the
dispute.

RULING: YES. While the comment of Vailoces traverses the averments of the petition
that of the Solicitor General on behalf of public respondents perceives the matter as
an intra-corporate controversy of the class described in Section 5, par. (c) of
Presidential Decree No. 902-A, namely:
‘Original and exclusive jurisdiction to hear and decide cases involving:
Xxxx
Xxxx
“(c) Controversies in the election or appointments of directors,
trustees, officers or managers of such corporations, partnerships or
associations.”’
explicitly declared to be within the original jurisdiction of the SEC, and recommends
that the questioned resolution of the NLRC as well as the decision of the Labor Arbiter
be set aside as null and void.
The judgment of the Labor Arbiter and the resolution of the NLRC are void for
lack of jurisdiction. It is of no moment that Vailoces, in his amended complaint, seeks
other relief which would seemingly fall under the jurisdiction of the Labor Arbiter,
because underpayment of salary and non-payment of living allowance show that they
are actually part of the perquisites of his elective position, hence, intimately linked with
his relations with the corporation. The question of remuneration involving a person
who is not a mere employee but a stockholder and officer of a corporation is not a
simple labor problem but a matter that comes within the area of corporate affairs and
management, and is in fact a corporate controversy in contemplation of the Corporate
Code.
Wherefore, the questioned decision of the Labor Arbiter and the
Resolution of the NLRC dismissing petitioners’ appeal are hereby set aside for being
rendered without jurisdiction.

DE ROSSI V. NLRC, 314 SCRA 245 [1999])

An Italian citizen, petitioner was the Executive Vice-President and General
Manager of private respondent, Matling Industrial and Commercial Corporation
(MICC). He started work on July 1, 1985. On August 10, 1988, MICC terminated his
employment.
Aggrieved, petitioner filed with the NLRC, National Capital Region on
September 21, 1989, a complaint for illegal dismissal with corresponding damages.
MICC based petitioner's dismissal on the ground that the petitioner failed to secure
his employment permit, grossly mismanaged the business affairs of the company, and
misused corporate funds. However, petitioner argued that it was the duty of the
company to secure his work permit during the term of his office, and that his
termination was illegal for lack of just cause.
Labor Arbiter Asuncion rendered a decision in favor of petitioner.
Private respondents contended that the position of executive vice-president is
an elective post, specifically provided by the corporate's by-laws. Thus, the dismissal
of the petitioner was an intra-corporate matter within the jurisdiction of the Securities
and Exchange Commission (SEC) and neither with the Labor Arbiter nor the NLRC.
They argued that the SEC and not the NLRC has original and exclusive jurisdiction
over the subject matter which involves the removal of a corporate officer.
NLRC rendered its decision recognizing the SEC's jurisdiction over the case.

ISSUE: whether or not the national labor relations commission committed grave
abuse of discretion amounting to lack of jurisdiction or acted in excess of its
jurisdiction in holding that the securities and exchange commission has jurisdiction
over the complaint for illegal dismissal filed by petitioner.

RULING: In a string of cases this Court has consistently held that the SEC, and not
the NLRC, has original and exclusive jurisdiction over cases involving the removal of
corporate officers. Section 5, paragraph (c) of P.D. 902-A unequivocally provides that
SEC has jurisdiction over intra-corporate affairs regarding the election or appointment
of officers of a corporation.
We have earlier pronounced that an "office" is created by the charter of the
corporation under which a corporation is organized, and the officer is elected by the
directors or stockholders. In the present case, private respondents aver that the
officers and their terms of office are prescribed by the corporation's by-laws, which
provide as follows:
BY-LAW NO. III Directors and Officers
xxx xxx xxx
The officers of the corporation shall be the President, Executive Vice President,
Secretary and Treasurer, each of whom may hold his office until his successor is
elected and qualified, unless sooner removed by the Board of Directors;
Provided, That for the convenience of the corporation the office of the Secretary
and Treasurer may be held by one and the same person. Officers shall be
designated by the stockholders' meeting at the time they elect the members of
the Board of Directors. Any vacancy occurring among the officers of the
Corporation on account of removal or resignation shall be filled by a stockholder's
meeting. Stockholders holding one half, or more of the subscribed capital stock
of the corporation may demand and compel the resignation of any officer at any
time. 10
The by-laws being in force, clearly petitioner is considered an officer of MICC,
elected and/or designated by its board of directors. Following Section 5(c) of P.D. No.
902-A, the SEC exercises exclusive jurisdiction over controversies regarding the
election and/or designation of directors, trustees, officers or managers of a
corporation, partnership or association. This provision is indubitably applicable to the
petitioner's case. Jurisdiction here is not with the Labor Arbiter nor the NLRC, but with
the SEC.
Note that a corporate officer's removal from his office is a corporate act. If such
removal occasions an intra-corporate controversy, its nature is not altered by the
reason or wisdom, or lack thereof, with which the Board of Directors might have in
taking such action. When petitioner, as Executive Vice-President allegedly diverted
company funds for his personal use resulting in heavy financial losses to the
company, this matter would amount to fraud. Such fraud would be detrimental to the
interest not only of the corporation but also of its members. This type of fraud
encompasses controversies in a relationship within the corporation covered by SEC
jurisdiction. Perforce, the matter would come within the area of corporate affairs and
management, and such a corporate controversy would call for the adjudicative
expertise of the SEC, not the Labor Arbiter or the NLRC.

POWERS OF CORPORATE OFFICERS:

- While the Court agrees that those who belong to the upper corporate echelons
would have more privileges, it cannot be presume the existence of such
privileges or benefits—he who claims the same is burdened to prove not only
the existence of such benefits but also that he is entitled to the same.
- Even though a judgment, decree or order is addressed to the corporation only,
the officers as well as the corporation itself, may be punished for contempt for
disobedience to its terms, at least if they knowingly disobey the court’s mandate,
since a lawful judicial command to a corporation is in effect a command to the
officers.

(a) The Rule on Corporate Officer’s Power to Bind the Corporation: An officer’s
power as an agent of the corporation must be sought from the statute, charter, the
by-laws or in a delegation of authority to such officer, from the acts of the board of
directors formally expressed or implied from a habit or custom of doing business.
- As a general rule, the acts of corporate officers within the scope of their
authority are binding on the corporation, but when these officers exceeded
their authority, their actions cannot bind the corporation, unless it has ratified
such acts or is estopped from disclaiming them.
(b)When Corporation Bound by the Act of Its President

PEOPLE’S AIRCARGO V. COURT OF APPEALS, 297 SCRA 170 (1998)

People's Aircargo and Warehousing Co. Inc. (PAWCI) is a domestic
corporation, which was organized in the middle of 1986 to operate a customs bonded
warehouse at the old Manila International Airport in Pasay City. To obtain a license
for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation
president, solicited a proposal from Stefani Saño for the preparation of a feasibility
study. Saño submitted a letter-proposal dated 17 October 1986 ("First Contract") to
Punsalan, for the project feasibility study (market, technical, and financial feasibility)
and preparation of pertinent documentation requirements for the application, worth
P350,000. Initially, Cheng Yong, the majority stockholder of PAWCI, objected to
Saño's offer, as another company priced a similar proposal at only P15,000. However,
Punsalan preferred Saño's services because of the latter's membership in the task
force, which was supervising the transition of the Bureau of Customs from the Marcos
government to the Aquino Administration. On 17 October 1986, PAWCI, through
Punsalan, sent Saño a letter confirming their agreement. Accordingly, Saño prepared
a feasibility study for PAWCI which eventually paid him the balance of the contract
price, although not according to the schedule agreed upon. On 4 December 1986,
upon Punsalan's request, Saño sent PAWCI another letter-proposal ("Second
Contract") formalizing its proposal for consultancy services in the amount of
P400,000. On 10 January 1987, Andy Villaceren, vice president of PAWCI, received
the operations manual prepared by Saño. PAWCI submitted said operations manual
to the Bureau of Customs in connection with the former's application to operate a
bonded warehouse; thereafter, in May 1987, the Bureau issued to it a license to
operate, enabling it to become one of the three public customs bonded warehouses
at the international airport. Saño also conducted, in the third week of January 1987 in
the warehouse of PAWCI, a three-day training seminar for the latter's employees. On
25 March 1987, Saño joined the Bureau of Customs as special assistant to then
Commissioner Alex Padilla, a position he held until he became technical assistant to
then Commissioner Miriam Defensor-Santiago on 7 March 1988. Meanwhile,
Punsalan sold his shares in PAWCI and resigned as its president in 1987. On 9
February 1988, Saño filed a collection suit against PAWCI. He alleged that he had
prepared an operations manual for PAWCI, conducted a seminar-workshop for its
employees and delivered to it a computer program; but that, despite demand, PAWCI
refused to pay him for his services. PAWCI, in its answer, denied that Saño had
prepared an operations manual and a computer program or conducted a seminar-
workshop for its employees. It further alleged that the letter-agreement was signed by
Punsalan without authority, in collusion with Saño in order to unlawfully get some
money from PAWCI, and despite his knowledge that a group of employees of the
company had been commissioned by the board of directors to prepare an operations
manual. The Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a
Decision dated 26 October 1990 declared the Second Contract unenforceable or
simulated. However, since Saño had actually prepared the operations manual and
conducted a training seminar for PAWCI and its employees, the trial court awarded
P60,000 to the former, on the ground that no one should be unjustly enriched at the
expense of another (Article 2142, Civil Code). The trial Court determined the amount
"in light of the evidence presented by defendant on the usual charges made by a
leading consultancy firm on similar services." Upon appeal, and on 28 February 1994,
the appellate court modified the decision of the trial court, and declared the Second
Contract valid and binding on PAWCI, which was held liable to Saño in the full amount
of P400,000, representing payment of Saño services in preparing the manual of
operations and in the conduct of a seminar for PAWCI. As no new ground was raised
by PAWCI, reconsideration of the decision was denied in the Resolution promulgated
on 28 October 1994. PAWCI filed the Petition for Review.

Issue: Whether a single instance where the corporation had previously allowed its
president to enter into a contract with another without a board resolution expressly
authorizing him, has clothed its president with apparent authority to execute the
subject contract.

Held: Apparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words, the apparent authority
to act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers. It requires presentation of evidence of
similar act(s) executed either in its favor or in favor of other parties. It is not the quantity
of similar acts which establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation. Herein, PAWCI, through its president
Antonio Punsalan Jr., entered into the First Contract without first securing board
approval. Despite such lack of board approval, PAWCI did not object to or repudiate
said contract, thus "clothing" its president with the power to bind the corporation. The
grant of apparent authority to Punsalan is evident in the testimony of Yong — senior
vice president, treasurer and major stockholder of PAWCI. The First Contract was
consummated, implemented and paid without a hitch. Hence, Sano should not be
faulted for believing that Punsalan's conformity to the contract in dispute was also
binding on petitioner. It is familiar doctrine that if a corporation knowingly permits one
of its officers, or any other agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts; and thus, the
corporation will, as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent's authority. Furthermore, Saño prepared
an operations manual and conducted a seminar for the employees of PAWCI in
accordance with their contract. PAWCI accepted the operations manual, submitted it
to the Bureau of Customs and allowed the seminar for its employees. As a result of
its aforementioned actions, PAWCI was given by the Bureau of Customs a license to
operate a bonded warehouse. Granting arguendo then that the Second Contract was
outside the usual powers of the president, PAWCI's ratification of said contract and
acceptance of benefits have made it binding, nonetheless. The enforceability of
contracts under Article 1403(2) is ratified "by the acceptance of benefits under them"
under Article 1405.

(c) The Corporate Secretary

- In the absence of provisions to the contrary, the corporate secretary is the
custodian of corporate records—he keeps the stock and transfer book and
makes proper and necessary entries therein. It is the duty and obligation of the
corporate secretary to register valid transfers of stock in the books of the
corporation; and in the event he refuses to comply with such duty, the transferor-
stockholder may rightfully bring suit to compel performance.
- When a Secretary’s Certificate is regular on its face, it can be relied upon by a
third party who does not have to investigate the truths of the facts contained in
such certification; otherwise business transactions of corporations would
become tortuously slow and unnecessarily hampered.
- Although the corporate secretary’s duty to record transfers of stock is ministerial,
he cannot be compelled to do so when the transferee’s title to said shares has
no prima facie validity or is uncertain. More specifically, a pledgor, prior to
foreclosure and sale, does not acquire ownership rights over the pledged shares
and thus cannot compel the corporate secretary to record his alleged ownership
of such shares on the basis merely of the contract of pledge. Mandamus will
not issue to establish a right, but only to enforce one that is already established.
- A sale that fails to comply with Sec. 40 of Corporation Code, cannot be
invalidated when the buyer relies upon a Secretary’s Certificate confirming
authority. A secretary’s certificate which is regular on its face can be relied upon
by a third party who does not have to investigate the truths of the facts contained
in such certification; otherwise business transactions of corporations would
become tortuously slow and unnecessarily hampered.
(d)Corporate Treasurer
- A corporate treasurer’s function have generally been described as “to receive and
keeps funds of the corporation, and to disburse them in accordance with the
authority given him by the board or the properly authorized officers.” Unless duly
authorized, a treasurer, whose power are limited, cannot bind the corporation in a
sale of its assets. Selling is obviously foreign to a corporate treasurer’s function.
When the corporation categorically denies ever having authorized its treasurer to
sell the subject parcel of land, the buyer had the burden of proving that the
treasurer was in fact authorized to represent and bind the allegedly selling
corporation in the transaction. And failing to discharge such burden, and failing to
show any provision of the articles of incorporation, by-laws or board resolution to
prove that the treasurer possessed such power, the sale is void and not binding
on the alleged selling corporation.
- A corporate treasurer whose negligence in signing a confirmation letter for
rediscounting of crossed checks, knowing fully well that the checks were strictly
endorsed for deposit only to the payee’s account and not to be further negotiated,
may be personally liable for the damaged caused the corporation.

COVERAGE OF CORPORATE “AGENTS”

- Black’s Law Dictionary defines an “agent” as “a business representative, whose
function is to bring about, modify, affect, accept performance of, or terminate
contractual obligations between principal and third persons.” To this extent, an
“agent” may also be shown to represent his principal in some one or more of his
relations to others, even though he may not have the power to enter into contracts.
The rules on service of process make service on “agent” sufficient. It does not in
any way distinguish whether the “agent” be general or special, but is complied with
even by a service upon an agent having limited authority to represent his principal.
As such, it does not necessarily connote an officer of the corporation. However,
though this may include employees other than officers of a corporation, this does
not include employees whose duties are not so integrated to the business that
their absence or presence will not toll the entire operation of the business.

LIABILITIES OF CORPORATE OFFICERS: (SEC. 30)

- The general rule is that corporate officers are not personally liable for their official
acts unless it is shown that they have exceeded their authority
- Officers of a corporation may become liable for its loans when they have breached
their duty of diligence under Section 31 of the Corporation Code.
- To hold a director personally liable for debts of the corporation, and thus pierce
the veil of corporate fiction, the bad faith or wrongdoing of the director must be
established clearly and convincingly. Bad faith is never presumed. Bad faith does
not connote bad judgment or negligence. Bad faith imports a dishonest purpose.
Bad faith means [a] breach of a known duty through some ill motive or interest.
Bad faith partakes of the nature of fraud.
- Generally, officers or directors under the old corporate name bear no personal
liability for acts done or contracts entered into for the corporation, if duly
authorized.
- Corporate officers who entered into and signed contracts on behalf of the
corporation in their official capacities cannot be made personally liable thereunder
in the absence of stipulation to that effect, due to the personality of the corporation
being separate and distinct from the persons composing it.
- A president cannot be held solidarily liable personally with the corporation absent
evidence of showing that he acted maliciously or in bad faith.
- The finding of solidary liability among the corporation, its officers and directors
would patently be baseless when the decision contains no allegation, finding or
conclusion regarding particular acts committed by said officers and director that
show them to have been individually guilty of unmistakable malice, bad faith, or
ill-motive in their personal dealings with third parties. When corporate officers and
directors are sued merely as nominal parties in their official capacities as such,
they cannot be held liable personal for the judgment rendered against the
corporation.
- An officer-stockholder who signs in behalf of the corporation to a fraudulent
contract cannot claim the benefit of separate juridical entity: “Thus, being a party
to a simulated contract of management, petitioner Uy cannot be permitted to
escape liability under the said contract by using the corporate entity theory. This
is one instance when the veil of corporate entity has to be pierced to avoid injustice
and inequity.”

VAZQUEZ V. BORJA, 74 PHIL. 560 (1944);

This action was commenced in the Court of First Instance of Manila by
Francisco de Borja against Antonio Vazquez and Fernando Busuego to recover from
them jointly and severally the total sum of P4,702.70 upon three alleged causes of
action, to wit:
First, that the defendants jointly and severally obligated themselves to sell to
the plaintiff 4,000 cavans of palay at P2.10 per cavan, to be delivered during the month
of February, 1932, the said defendants having subsequently received from the plaintiff
in virtue of said agreement the sum of P8,400; that the defendants delivered to the
plaintiff during the months of February, March, and April, 1932, only 2,488 cavans of
palay of the value of P5,224.80 and refused to deliver the balance of 1,512 cavans of
the value of P3,175.20 notwithstanding repeated demands.
Second, that because of defendants' refusal to deliver to the plaintiff the said
1,512 cavans of palay within the period above mentioned, the plaintiff suffered
damages in the sum of P1,000.
And, third, that on account of the agreement above mentioned the plaintiff
delivered to the defendants 4,000 empty sacks, of which they returned to the plaintiff
only 2,490 and refused to deliver to the plaintiff the balance of 1,510 sacks or to pay
their value amounting to P377.50; and that on account of such refusal the plaintiff
suffered damages in the sum of P150.
The defendant Antonio Vazquez denied having entered into the contract
mentioned in the first cause of action in his own individual and personal capacity,
either solely or together with his co defendant Fernando Busuego, and alleging that
the agreement for the purchase of 4,000 cavans of palay and the payment of the price
of P8,400 were made by the plaintiff with and to the Natividad-Vasquez Sabani
Development Co., Inc., a corporation organized and existing under the laws of the
Philippines, of which the defendant Antonio Vazquez was the acting manager at the
time the transaction took place.
The trial court rendered judgment ordering the defendant Antonio Vazquez to
pay the plaintiff the sum of P3,175.20 plus the sum of P377.50, with legal interest on
both sums, and absolving the defendant Fernando Busuego (treasurer of the
corporation) from the complaint and the plaintiff from the defendant Antonio Vazquez'
counterclaim.
Upon appeal to the Court of Appeals, the latter modified that judgment. But by
a subsequent resolution upon the defendant's motion for reconsideration, the Court
of Appeals set aside its judgment and ordered that the case be remanded to the court
of origin for further proceedings.
The defendant Vazquez, not being agreeable to that result, filed the present
petition for certiorari to review and reverse the judgment of the Court of Appeals.

Issue: W/N de Borja entered into the contract with the defendant Antonio Vazquez in
his personal capacity or as manager of the Natividad-Vazquez Sabani Development
Co., Inc.

Ruling: No. It is well known that a corporation is an artificial being invested by law
with a personality of its own, separate and distinct from that of its stockholders and
from that of its officers who manage and run its affairs. The mere fact that its
personality is owing to a legal fiction and that it necessarily has to act thru its agents,
does not make the latter personally liable on a contract duly entered into, or for an act
lawfully performed, by them for an in its behalf. The legal fiction by which the
personality of a corporation is created is a practical reality and necessity. Without it
no corporate entities may exists and no corporate business may be transacted. Such
legal fiction may be disregarded only when an attempt is made to use it as a cloak to
hide an unlawful or fraudulent purpose. No such thing has been alleged or proven in
this case. It has not been alleged nor even intimated that Vazquez personally
benefited by the contract of sale in question and that he is merely invoking the legal
fiction to avoid personal liability. Neither is it contended that he entered into said
contract for the corporation in bad faith and with intent to defraud the plaintiff. We find
no legal and factual basis upon which to hold him liable on the contract either
principally or subsidiarily.

PALAY, INC. V. CLAVE, 124 SCRA 638 [1093]

That Palay, Inc., through its President, Albert Onstott executed in favor of private
respondent, Nazario Dumpit, a Contract to Sell a parcel of Land payable with a
downpayment and monthly installments until fully paid. Paragraph 6 of the contract
provided for automatic extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the grace period of one
month, without need of notice and with forfeiture of all installments paid. Private
respondent Dumpit paid the downpayment and several installments. However,
Dumpit failed to continue paying the installments for almost 6 years. Thereafter,
Dumpit wrote petitioner offering to update all his overdue accounts with interest, and
seeking its written consent to the assignment of his rights to a certain Lourdes Dizon.
Petitioners replied that the Contract to Sell had long been rescinded pursuant to
paragraph 6 of the contract, and that the lot had already been resold. Consequently,
Dumpit filed a complaint questioning the validity of the rescission with the National
Housing Authority (NHA) for reconveyance with an alternative prayer for refund. The
NHA found the rescission void in the absence of either judicial or notarial demand.
Thus, it ordered Palay, Inc. and Alberto Onstott in his capacity as President of the
corporation, jointly and severally, to refund immediately to Dumpit the amount paid
with 12% interest from the filing of the complaint. On appeal, respondent Clave, the
Presidential Executive Assistant affirmed. Hence, this petition.

Issues:
(1) Whether or not the doctrine of piercing the veil of corporate fiction applies.
(2) Whether or not petitioner Onstott is solidarily liable with Palay, Inc. for the refund.

Held:
(1) No. The SC held that a corporation is invested by law with a personality separate
and distinct from those of the persons composing it as well as from that of any other
legal entity to which it may be related. As a general rule, a corporation may not be
made to answer for acts or liabilities of its stockholders or those of the legal entities
to which it may be connected and vice versa. However, the veil of corporate fiction
may be pierced when it is used as a shield to further an end subversive of justice; or
for purposes that could not have been intended by the law that created it; or to defeat
public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate
fraud or confuse legitimate issues; or to circumvent the law or perpetuate deception;
or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.
In this case, there was no finding of fraud on petitioners' part. They had literally relied,
although mistakenly, on paragraph 6 of its contract with private respondent when it
rescinded the contract to sell extrajudicially and had sold it to a third person.

(2) No. The SC held that no sufficient proof exists on record that said petitioner used
the corporation to defraud private respondent. He cannot, therefore, be made
personally liable just because he "appears to be the controlling stockholder". Mere
ownership by a single stockholder or by another corporation is not of itself sufficient
ground for disregarding the separate corporate personality.

TRAMAT MERCANTILE, INC. V. CA, 238 SCRA 14 [1994])

On 09 April 1984, Melchor de la Cuesta, doing business under the name and
style of "Farmers Machineries," sold to Tramat Mercantile, Inc. one unit Hinomoto
Tractor Model MB 1100D powered by a 13 H.P. diesel engine. In payment, David
Ong, Tramat's president and manager, issued a check for P33,500.00 (apparently
replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor,
together with an attached lawn mower fabricated by it, to the Metropolitan Waterworks
and Sewerage System/NAWASA for P67,000.00. David Ong caused a stop payment
of the check when NAWASA refused to pay the tractor and lawn mower after
discovering that, aside from some stated defects of the attached lawn mower, the
engine (sold by de la Cuesta) was a reconditioned unit.
On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00,
as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his answer,
averred, among other things, that de la Cuesta had no cause of action; that the
questioned transaction was between plaintiff and Tramat Mercantile, Inc., and not with
Ong in his personal capacity; and that the payment of the check was stopped because
the subject tractor had been priced as a brand new, not as a reconditioned unit.

ISSUE: Whether or not Ong should be held liable for the unpaid tractor.

RULING: NO.
It is an error to hold David Ong jointly and severally liable with TRAMAT to de
la Cuesta under the questioned transaction. Ong had acted, not in his personal
capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate
personality. As such, it should only be the corporation, not the person acting for and
on its behalf, that properly could be made liable thereon.
Tramat, however, should be held liable for the unpaid tractor because at the
time of the purchase, the appellants did not reveal to the appellee the true purpose
for which the tractor would be used. Granting that the appellants informed the appellee
that they would be reselling the unit to the MWSS, an entity admittedly not engaged
in farming, and that they ordered the tractor without the power tiller, an indispensable
accessory if the tractor would be used in farming, these in themselves would not
constitute the required implied notice to the appellee as seller.

Jurisprudential Enumeration of Officer Liabilities:

- The hornbook law is that corporate personality is a shield against personal
liability of its officers. Thus, when the trust receipt sued upon was clearly entered
into in behalf of the corporation by its Executive Vice-President, then such officer
and his spouse cannot be made personally liable; the personality of the
corporation is separate and distinct from the persons composing it.

Personal liability of a corporate director, trustee or officer along (although not

necessarily) with the corporation may so validly attach, as a rule, only when:
1. He assents to a patently unlawful act of the corporation;
2. Guilty of bad faith or gross negligence in directing its affairs;
3. for conflict on interest resulting in damages to the corporation, its stockholders or
other persons;
4. He consents to the issuance of watered down stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
5. He agrees to hold himself personally and solidarily liable with the corporation; or
6. He is made, by a specific provisions of law, to personally answer for his corporate
action.

- The finding of solidary liability among the corporation and its officers and directors
would patently be baseless when the decision contains no allegation, finding or
conclusion regarding particular acts committed by said officers and members of
the Board of Directors that show them to have been individually guilty of
unmistakable malice, bad faith, or ill-motive in their personal dealings with third
parties. When corporate officers and directors are sued merely as nominal parties
 in their official capacities as such, they cannot be held liable personal for the
judgment rendered against the corporation.
- When corporate officers are sued in their official capacity, the suit is equivalent to
a suit against the corporation, and judgment may be enforced against corporate
assets.
- An attempt by the corporation to avoid liability by distancing itself from the acts of
the its President was struck down with the Court holding that a corporation may
not distance itself from the acts of a senior officer: “the dual roles of Romulo F.
Sugay should not be allowed to confuse the facts.”
- Generally, officers or directors under the old corporate name bear no personal
liability for acts done or contracts entered into by officers of the corporation, if duly
authorized.
- An officer-stockholder who is a party signing in behalf of the corporation to a
fraudulent contract cannot claim the benefit of separate juridical entity: “Thus, being
a party to a simulated contract of management, petitioner Uy cannot be permitted
to escape liability under the said contract by using the corporate entity theory. This
is one instance when the veil of corporate entity has to be pierced to avoid injustice
and inequity.”

MAM REALTY V. NLRC, 244 SCRA 797, (1995)

The cases originated from a complaint filed with the Labor Arbiter by private
respondent Celso B. Balbastro against herein petitioners, MAM Realty Development
Corporation (“MAM”) and its Vice President Manuel P. Centeno, for wage differentials,
“ECOLA,” overtime pay, incentive leave pay, 13th month pay (for the years 1988 and
1989), holiday pay and rest day pay. Balbastro alleged that he was employed by MAM
as a pump operator in 1982 and had since performed such work at its Rancho Estate,
Marikina, Metro Manila. He earned a basic monthly salary of P1,590.00 for seven
days of work a week that started from 6:00 a.m. to up until 6:00 p.m. daily.
On appeal to it, respondent National Labor Relations Commission (“NLRC”) rendered
judgment (a) setting aside the questioned decision of the Labor Arbiter and (b)
referring the case, pursuant to Article 218(c) of the Labor Code, to Arbiter Cristeta D.
Tamayo for further hearing and submission of a report within 20 days from receipt of
the Order. On 21 March 1994, respondent Commissioner, after considering the report
of Labor Arbiter Tamayo, ordered:
“WHEREFORE, the respondents are hereby directed to pay jointly and severally
complainant the sum of P86,641.05 as abovecomputed.”

Issue: Whether or not Centeno is solidarily liable with herein petitioner MAM Realty.

Held: No. We agree with petitioners, however, that the NLRC erred in holding
Centeno jointly and severally liable with MAM. A corporation, being a juridical entity,
may act only through its directors, officers and employees. Obligations incurred by
them, acting as such corporate agents, are not theirs but the direct accountabilities of
the corporation they represent. True, solidarily liabilities may at times be incurred but
only when exceptional circumstances warrant such as, generally, in the following
cases:
1. When directors and trustees or, in appropriate cases, the officers of a corporation
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders
or members, and other persons.
2. When a director or officer has consented to the issuance of watered stock or who,
having knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto.
3. When the director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarily liable with the Corporation.
4. When a director, trustee or officer is made, by specific provision of law, personally
liable for his corporate action.
In labor cases, for instance, the Court has held corporate directors and officers
solidarily liable with the corporation for the termination of employment of employees
done with malice or in bad faith.
In the case at bench, there is nothing substantial on record that can justify, prescinding
from the foregoing, petitioner Centeno’s solidary liability with the corporation.

(a) Special Provisions in Labor Laws

- In the Labor Code since a corporate employer is an artificial person, it must
have an officer who can be presumed to be the employer, being the “person
acting in the interest of (the) employer” as provided in the Labor Code.
- Under the Labor Code, in the case of corporations, it is the president who
responds personally for violation of the labor pay laws.
- For the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established.
- A corporate officer cannot be held personally liable for a corporate debt simply
because he had executed the contract for and in behalf of the corporation. It
held that when a corporate officer acts in behalf of a corporation pursuant to his
authority, is “a corporate act for which only the corporation should be made
liable for any obligations arising from them.”
- Only the responsible officer of a corporation who had a hand in illegally
dismissing an employee should be held personally liable for the corporate
obligations arising from such act.
- The case of Ransom v. NLRC is not in point because there the debtor
corporation actually ceased operations after the decision of the Court of
Industrial Relations was promulgated against it, making it necessary to enforce
it against its former president. When the corporation is still existing and able to
satisfy the judgment in favor of the private respondent, the corporate officers
cannot be held personally liable.
- The aforecited cases will not apply to the instant case, however, because the
persons who were there made personally liable for the employees’ claims were
stockholders-officers of the respondent corporation. In the case at bar, the
petitioner while admittedly the highest ranking local representative of the
corporation, is nevertheless not a stockholder and much less a member of the
board of directors or an officer thereof.
 - A mere general manager cannot be held solidarily liable with the corporation for
unpaid labor claims, especially when he is neither a stockholder or a member
of the board of the corporation.
- A president cannot be held solidarily liable personally with the corporation
absent evidence of showing that he acted maliciously or in bad faith.
- A judgment rendered against a person “in his capacity as President” of the
corporation was enforceable against the assets of such officer when the
decision itself found that he merely used the corporation as his alter-ego or as
his business conduit.
- The President and General Manager of a corporation who entered into and
signed a contract in his official capacity cannot be made liable thereunder in his
individual capacity in the absence of stipulation to that effect due to the
personality of the corporation being separate and distinct from the persons
composing it.

A.C. RANSOM LABOR UNION-CCLU V. NLRC, 142 SCRA 269 (1986)

AC Ransom Labor Union is claiming unfair labor practice against AC Ransom.
The CIR and the Labor Arbiter ruled in favor of the labor union stating that the strike
was legal and justified thereby requiring the company to pay for backwages and to
immediately reinstate the members of the union which the NLRC reversed the
decision. Hence the special civil action of certiorari filed by the Union moving for the
Officers of AC Ransom and ROSARIO Company to be held liable because although
RANSOM had assumed a posture of suffering from business reverse, its officers and
principal stockholders had organized a new corporation, the Rosario Industrial
Corporation (thereinafter called ROSARIO), using the same equipment, personnel,
business stocks and the same place of business. AC Ransom used as a defense the
clearance given by SEC to cease to operate due to financial difficulties in order to
lessen the award given by the court. It also declared that ROSARIO is a distinct and
separate corporation, which was organized long before these instant cases were
decided adversely against RANSOM.

Issue/s:
 Whether or not ROSARIO Company should be held liable for the claims of AC
Ransom Labor Union?
 Whether or not the officers and directors of AC Ransom should be held liable
for backwages?

Held:
The questioned Decision of the National Labor Relations Commission is SET
ASIDE, and the Order of Labor Arbiter Tito F. Genilo of March 11, 1980 is reinstated
with the modification that Rosario Industrial Corporation and its officers and agents
are hereby held jointly and severally liable with the surviving private respondents for
the payment of the backwages due the 22 union members.
Rosario Industrial Corporation is hereby ordered to reinstate the 22 union members
or, if this is not possible, to award them separation pay equivalent at least to one (1)
month pay or to one (1) month salary for every year of service actually rendered by
them with A.C. Ransom (Phils). Corporation, whichever is higher.
 Rosario Company is held liable because the organization of a "run-away
corporation," ROSARIO, in 1969 at the time the unfair labor practice case was
pending before the CIR by the same persons who were the officers and stockholders
of RANSOM, engaged in the same line of business as RANSOM, producing the same
line of products, occupying the same compound, using the same machineries,
buildings, laboratory, bodega and sales and accounts departments used by
RANSOM, and which is still in existence. Both corporations were closed corporations
owned and managed by members of the same family. Its organization proved to be a
convenient instrument to avoid payment of backwages and the reinstatement of the
22 workers. This is another instance where the fiction of separate and distinct
corporate entities should be disregarded.
It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it
was deliberately and maliciously designed to evade its financial obligation to its
employees.... When a notion of legal entity is used to. defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an
association or persons, or, in the case of two corporations, will merge them into one.
As to the officers and agents
The inclusion of the officers and agents was but proper since a corporation, as an
artificial being, can act only through them.

DEL ROSARIO V. NLRC, 187 SCRA 777 (1990)

In POEA Case No. 85-06-0394, the POEA promulgated a decision dismissing
the complaint for money claims for lack of merit. The decision was appealed to the
NLRC, which reversed the POEA decision and ordered Philsa Construction and
Trading Co., Inc., the recruiter and Arieb Enterprises, the foreign employer to jointly
and severally pay private respondent their salary differentials and vacation leave
benefits.
A writ of execution was issued by the POEA but it was returned unsatisfied as
Philsa was no longer operating and was financially incapable of satisfying the
judgment. Private respondent moved for the issuance of an alias writ against the
officers of Philsa. This motion was opposed by the officers, led by petitioner, the
president and general manager of the corporation.
Petitioner appealed to the NLRC. On September 23, 1988, the NLRC dismissed
the appeal on the theory that the corporate personality of Philsa should be
disregarded. According to the NLRC, Philsa Construction & Trading Co., Inc. and
Philsa International Placement & Services Corp are one and the same because both
corporations has the same set of directors and officers. Petitioner's motion for
reconsideration was denied.
Thus, this petition was filed, alleging that the NLRC gravely abused its discretion.

ISSUE: Whether or not the NLRC acted with grave abuse of discretion.

RULING: YES.
Under the law a corporation is bestowed juridical personality, separate and
distinct from its stockholders. But when the juridical personality of the corporation is
used to defeat public convenience, justify wrong, protect fraud or defend crime, the
corporation shall be considered as a mere association of persons and its responsible
officers and/or stockholders shall be held individually liable. For the same reasons, a
corporation shall be liable for the obligations of a stockholder, or a corporation and its
successor-in-interest shall be considered as one and the liability of the former shall
attach to the latter.
But for the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be presumed.
Thus, at the time Philsa allowed its license to lapse in 1985 and even at the time it
was delisted in 1986, there was yet no judgment in favor of private respondent. An
intent to evade payment of his claims cannot therefore be implied from the expiration
of Philsa's license and its delisting. Likewise, substantial identity of the incorporators
of the two corporations does not necessarily imply fraud.
In this case, not only has there been a failure to establish fraud, but it has also
not been shown that petitioner is the corporate officer responsible for private
respondent's predicament. It must be emphasized that the claim for differentials and
benefits was actually directed against the foreign employer. Philsa became liable only
because of its undertaking to be jointly and severally bound with the foreign employer,
an undertaking required by the rules of the POEA, together with the filing of cash and
surety bonds, in order to ensure that overseas workers shall find satisfaction for
awards in their favor.

MAGLUTAC V. NLRC,189 SCRA 767 (1990)

Jose M. Maglutac, petitioner in G.R. No. 78345 (hereinafter referred to as
complainant) was employed by Commart (Phils.), Inc. (hereinafter referred to as
Commart) rose to become the Manager of its Energy Equipment Sales. He received
a notice of termination signed by Joaquin S. Cenzon, Vice-President-General
Manager and Corporate Secretary of CMS International, a corporation controlled by
Commart.
Thereafter, Jose Maglutac filed a complaint for illegal dismissal against
Commart and Jesus T. Maglutac, President and Chairman of the Board of Directors
of Commart. The complainant alleged that his dismissal was part of a vendetta drive
against his parents who dared to expose the massive and fraudulent diversion of
company funds to the company president's private accounts, stressing that
complainant's efficiency and effectiveness were never put to question when very
suddenly he received his notice of termination.
Commart and Jesus T. Maglutac, on the other hand, justified the dismissal for
lack of trust and confidence brought about by complainant and his family's
establishment of a company, MM International, in direct competition with Commart.
the Labor Arbiter rendered a decision finding that complainant was illegally dismissed.
Commart and Jesus T. Maglutac filed a motion for reconsideration. The NLRC
affirmed the finding of the Labor Arbiter that complainant was illegally dismissed by
Commart but it deleted the award for moral and exemplary damages in favor of
complainant and absolved Jesus T. Maglutac from any personal liability to the
complainant.
Both parties filed their respective motions for reconsideration of the decision
of the NLRC but both were denied. Hence, the instant petitions both alleging grave
abuse of discretion on the part of respondent NLRC.
Issue: Whether or not respondent Maglutac should be held jointly and severally liable
with Commart?

Ruling: Yes, The responsible officer of an employer corporation can be held

personally, not to say even criminally, liable for non-payment of backwages. In the
case of Chua v. NLRC, G.R. 81450, Feb. 15, 1990, citing the case of A.C. Ransom
Labor Union-CCLU v. NLRC, 142 SCRA 269, We affirmed the finding of the Labor
Arbiter and the NLRC that the vice-president of a corporation who was the most
ranking officer of the corporation can be held jointly and severally liable with the
corporation for the payment of the unpaid wages of its president. It was held:
We resolve the issue in the light of the precedent set in the case of A.C.
Ransom Labor Union-CCLU v. National Labor Relations Commission (142 SCRA 269
[1986]). In this case, the Court set aside the decision of the NLRC upholding the
personal non-liability of the individual officers and agents of the corporation unless
they have acted beyond the scope of their authority. In thus reversing the NLRC
decision, the Court ruled that the president or presidents of the corporation may be
held liable for the corporations's obligations to its workers.