Case Digests Corpo Law My Share-Telay

Case Digests Corpo Law My Share
1) YI Leisure Philippines, Inc vs Yu
EN BANC
G.R. No. 207161, September 08, 2015
Y-I LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD. AND Y-I CLUBS AND RESORTS,
INC., Petitioners, v. JAMES YU, Respondent.
DECISION
MENDOZA, J.:
The present case attempts to unravel whether the transfer of all or substantially all the assets of a
corporation under Section 40 of the Corporation Code carries with it the assumption of corporate liabilities.
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the January 30, 2012
Decision1 and the April 29, 2013 Resolution2 of the Court of Appeals (CA), in CA-G.R. CV No. 96036, which
affirmed with modification the August 31, 2010 Decision3 of the Regional Trial Court, Branch 81, Quezon City
(RTC).
The Facts
Mt. Arayat Development Co. Inc. (MADCI) was a real estate development corporation, which was
registered4 on February 7, 1996 before the Security and Exchange Commission (SEC). On the other hand,
respondent James Yu (Yu) was a businessman, interested in purchasing golf and country club shares.
Sometime in 1997, MADCI offered for sale shares of a golf and country club located in the vicinity of Mt.
Arayat in Arayat, Pampanga, for the price of P550.00 per share. Relying on the representation of MADCI's
brokers and sales agents, Yu bought 500 golf and 150 country club shares for a total price of P650,000.00
which he paid by installment with fourteen (14) Far East Bank and Trust Company (FEBTC) checks.5 cralawrednad
Upon full payment of the shares to MADCI, Yu visited the supposed site of the golf and country club and
discovered that it was non-existent. In a letter, dated February 5, 2000, Yu demanded from MADCI that his
payment be returned to him.6 MADCI recognized that Yu had an investment of P650,000.00, but the latter
had not yet received any refund.7 cralawred nad
On August 14, 2000, Yu filed with the RTC a complaint8 for collection of sum of money and damages with
prayer for preliminary attachment against MADCI and its president Rogelio Sangil (Sangil) to recover his
payment for the purchase of golf and country club shares. In his transactions with MADCI, Yu alleged that
he dealt with Sangil, who used MADCI's corporate personality to defraud him.
In his Answer,9 Sangil alleged that Yu dealt with MADCI as a juridical person and that he did not benefit
from the sale of shares. He added that the return of Yu's money was no longer possible because its approval
had been blocked by the new set of officers of MADCI, which controlled the majority of its board of directors.
In its Answer,10 MADCI claimed that it was Sangil who defrauded Yu. It invoked the Memorandum of
Agreement11 (MOA), dated May 29, 1999, entered into by MADCI, Sangil and petitioner Yats International
Ltd. (YIL). Under the MOA, Sangil undertook to redeem MADCI proprietary shares sold to third persons or
settle in full all their claims for refund of payments.12 Thus, it was MADCI's position that Sangil should be
ultimately liable to refund the payment for shares purchased.
After the pre-trial, Yu filed an Amended Complaint,13 wherein he also impleaded YIL, Y-I Leisure Phils., Inc.
(YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu, he discovered in the Registry of Deeds of
Pampanga that, substantially, all the assets of MADCI, consisting of one hundred twenty (120) hectares of
land located in Magalang, Pampanga, were sold to YIL, YILPI and YICRI. The transfer was done in fraud of
MADCI's creditors, and without the required approval of its stockholders and board of directors under
Section 40 of the Corporation Code. Yu also alleged that Sangil even filed a case in Pampanga which assailed
the said irregular transfers of lands.
In their Answer,14 YIL, YILPI and YICRI alleged that they only had an interest in MADCI in 1999 when YIL
bought some of its corporate shares pursuant to the MOA. This occurred two (2) years after Yu bought his
golf and country club shares from MADCI. As a mere stockholder of MADCI, YIL could not be held
responsible for the liabilities of the corporation. As to the transfer of properties from MADCI to YILPI15and
subsequently to YICRI,16 they averred that it was not undertaken to defraud MADCI's creditors and it was
done in accordance with the MOA. In fact, it was stipulated in the MOA that Sangil undertook to settle all
claims for refund of third parties.
During the trial, the MOA was presented before the RTC. It stated that Sangil controlled 60% of the capital
stock of MADCI, while the latter owned 120 hectares of agricultural land in Magalang, Pampanga, the
property intended for the development of a golf course; that YIL was to subscribe to the remaining 40% of
the capital stock of MADCI for a consideration of P31,000,000.00; that YIL also gave P500,000.00 to acquire
the shares of minority stockholders; that as a condition for YIL's subscription, MADCI and Sangil were
obligated to obtain several government permits, such as an environmental compliance certificate and land
conversion permit; that should MADCI and Sangil fail in their obligations, they must return the amounts paid
by YIL with interests; that if they would still fail to return the same, YIL would be authorized to sell the 120
hectare land to satisfy their obligation; and that, as an additional security, Sangil undertook to redeem all
the MADCI proprietary shares sold to third parties or to settle in full all their claims for refund.
Sangil then testified that MADCI failed to develop the golf course because its properties were taken over by
YIL after he allegedly violated the MOA.17 The lands of MADCI were eventually sold to YICRI for a
consideration of P9.3 million, which was definitely lower than their market price.18 Unfortunately, the case
assailing the transfers was dismissed by a trial court in Pampanga.19 cralawred nad
The president and chief executive officer of YILPI and YICRI, and managing director of YIL, Denny On Yat
Wang (Wang), was presented as a witness by YIL. He testified that YIL was an investment company
engaged in the development of real estates, projects, leisure, tourism, and related businesses.20 He
explained that YIL subscribed to. the shares of MADCI because it was interested in its golf course
development project in Pampanga.21 Thus, he signed the MOA on behalf of YIL and he paid P31.5 million to
subscribe to MADCI's shares, subject to the fulfilment of Sangil's obligations.22 cra lawredna d
Wang further testified that the MOA stipulated that MADCI would execute a special power of attorney in his
favor, empowering him to sell the property of MADCI in case of default in the performance of
obligations.23 Due to Sangil's subsequent default, a deed of absolute sale over the lands of MADCI was
eventually executed in favor of YICRI, its designated company.24 Wang also stated that, aside from its lands,
MADCI had other assets in the form of loan advances of its directors.25 cralaw redc ralawre dnad
The RTC Ruling
In its August 31, 2010 Decision, the RTC ruled that because MADCI did not deny its contractual obligation
with Yu, it must be liable for the return of his payments. The trial court also ruled that Sangil should be
solidarily liable with MADCI because he used the latter as a mere alter ego or business conduit. The RTC was
convinced that Sangil had absolute control over the corporation and he started selling golf and country club
shares under the guise of MADCI even without clearance from SEC.
The RTC, however, exonerated YIL, YILPI and YICRI from liability because they were not part of the
transactions between MADCI and Sangil, on one hand and Yu, on the other hand. It opined that YIL, YILPI
and YICRI even had the foresight of protecting the creditors of MADCI when they made Sangil responsible
for settling the claims of refunds of thirds persons in the proprietary shares. The decretal portion of the
decision reads:ChanRob lesvi rtua lLawl ibra ry
WHEREFORE, premises considered, judgment is hereby rendered as follows: ChanRob lesvi rtua lLawl ibra ry
1. Ordering defendants Mt. Arayat Development Corporation, Inc. and Rogelio Sangil to pay plaintiff James
Yu jointly and severally the amounts of P650,000.04 with 6% legal rate of interest from the filing of the
amended complaint until full payment and and P50,000.00 as attorney's fees.
2. Dismissing the instant case against defendant Y-I Leisure Philippines, Inc., YATS International Limited and
Y-I Clubs and Resorts, Inc.; and
3. Dismissing the counterclaims of Y-I Leisure Philippines, Inc., YATS International Limited and Y-I Clubs and
Resorts, Inc.
SO ORDERED.26
In two separate appeals, the parties elevated the case to the CA.
The CA Ruling
In its assailed Decision, dated January 30, 2012, the CA partly granted the appeals and modified the RTC
decision by holding YIL and its companies, YILPI and YICRI, jointly and severally, liable for the satisfaction of
Yu's claim.
The CA held that the sale of lands between MADCI and YIL must be upheld because Yu failed to prove that it
was simulated or that fraud was employed. This did not mean, however, that YIL and its companies were
free from any liability for the payment of Yu's claim.
The CA explained that YIL, YILPI and YICRI could not escape liability by simply invoking the provision in the
MOA that Sangil undertook the responsibility of paying all the creditors' claims for refund. The provision was,
in effect, a novation under Article 1293 of the Civil Code, specifically the substitution of debtors. Considering
that Yu, as creditor of MADCI, had no knowledge of the "change of debtors," the MOA could not validly take
effect against him. Accordingly, MADCI remained to be a debtor of Yu.
Consequently, as the CA further held, the transfer of the entire assets of MADCI to YICRI should not
prejudice the transferor's creditors. Citing the case of Caltex Philippines, Inc. v, PNOC Shipping and
Transport Corporation27 (Caltex), the CA ruled that the sale by MADCI of all its corporate assets to YIL and
its companies necessarily included the assumption of the its liabilities. Otherwise, the assets were put
beyond the reach of the creditors, like Yu. The CA stated that the liability of YIL and its companies was
determined not by their participation in the sale of the golf and country club shares, but by the fact that
they bought the entire assets of MADCI and its creditors might not have other means of collecting the
amounts due to them, except by going after the assets sold.
Anent Sangil's liability, the CA ruled that he could not use the separate corporate personality of MADCI as a
tool to evade his existing personal obligations under the MOA. The dispositive portion of the decision
reads:ChanRoblesvi rt ualLaw lib rary
WHEREFORE, the appeals are PARTLY GRANTED. Accordingly, the assailed Decision dated August 31, 2010
in Civil Case No. Q-oo-41579 of the RTC of Quezon City, Branch 81, is hereby AFFIRMED WITH
MODIFICATION, in that defendants-appellees YIL, YILPI and YICRI are hereby held jointly and severally
liable with defendant-appellee MADCI and defendant-appellant Sangil for the satisfaction of plaintiff-
appellant Yu's claim.
In all other respects, the assailed decision stands.
SO ORDERED.28
YIL and its companies, YILPI and YICRI, moved for reconsideration, but their motion was denied by the CA
in its assailed Resolution, dated April 29,2013.
Hence, this petition.
ISSUE
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT PETITIONERS YATS GROUP
SHOULD BE HELD JOINTLY AND SEVERALLY LIABLE TO RESPONDENT YU DESPITE THE ABSENCE
OF FRAUD IN THE SALE OF ASSETS AND BAD FAITH ON THE PART OF PETITIONERS YATS
GROUP.29
Petitioners YIL, YILPI and YICRI contend that the facts of Caltex are not on all fours with the case at bench.
In Caltex, there was an express stipulation of the assumption of all the obligations of the judgment debtor.
Here, there was no stipulation whatsoever stating that the petitioners shall assume the payment of MADCI's
debts.
The petitioners also argue that fraud must exist to hold third parties liable. The sale in this case was not in
any way tainted by any of the "badges of fraud" cited in Oria v. McMicking.30 The CA itself stated that the
alleged simulation of the sale was not established by respondent Yu. Moreover, Article 1383 of the Civil Code
requires that the creditor must prove that he has no other legal remedy to satisfy his claim. Such
requirement must be followed whether by an action for rescission or action for sum of money.
On September 20, 2013, respondent Yu filed his Comment.31 He asserted that the CA correctly
applied Caltex in the present case as the lands sold to the petitioners were the only assets of MADCI. After
the sale, MADCI became incapable of continuing its business, and its corporate existence has just remained
to this day in a virtual state of suspended animation. Thus, unless the creditors had agreed to the sale of all
the assets of the corporation and had accepted the purchasing corporation as the new debtor, sufficient
assets should have been reserved to pay their claims.
On June 19, 2014, the petitioners filed their Reply,32 reiterating their previous argument that the element of
fraud was required in order for a third party buyer to be liable to the seller's creditors.
The Court's Ruling
The petition lacks merit.
To recapitulate, respondent Yu bought several golf and country club shares from MADCI. Regrettably, the
latter did not develop the supposed project. Yu then demanded the return of his payment, but MADCI could
not return it anymore because all its assets had been transferred. Through the acts of YIL, MADCI sold all its
lands to YILPI and, subsequently to YICRI. Thus, Yu now claims that the petitioners inherited the obligations
of MADCI. On the other hand, the petitioners counter that they did not assume such liabilities because the
transfer of assets was not committed in fraud of the MADCI's creditors.
Hence, the issue at hand presents a complex question of law - whether fraud must exist in the transfer of all
the corporate assets in order for the transferee to assume the liabilities of the transferor. To resolve this
issue, a review of the laws and jurisprudence concerning corporate assumption of liabilities must be
undertaken.
Background on the corporate

assumption of liabilities
In the 1965 case of Nell v. Pacific Farms, Inc.,33 the Court first pronounced the rule regarding the transfer of
all the assets of one corporation to another (hereafter referred to as the Nell Doctrine) as follows: ChanRoblesvi rtual Lawli bra ry
Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently in order to escape liability for such debts.
The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall
not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions are
present, then the transferee corporation shall assume the liabilities of the transferor.
Legal bases of the Nell Doctrine
An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully supported by
Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity
under Article 131134 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are
valid and binding only between the contracting parties and their successors-in-interest. Thus, despite the
sale of all corporate assets, the transferee corporation cannot be prejudiced as it is not in privity with the
contracts between the transferor corporation and its creditors.
The first exception under the Nell Doctrine, where the transferee corporation expressly or impliedly agrees
to assume the transferor's debts, is provided under Article 204735 of the Civil Code. When a person binds
himself solidarity with the principal debtor, then a contract of suretyship is produced. Necessarily, the
corporation which expressly or impliedly agrees to assume the transferor's debts shall be liable to the same.
The second exception under the doctrine, as to the merger and consolidation of corporations, is well-
established under Sections 76 to 80, Title X of the Corporation Code. If the transfer of assets of one
corporation to another amounts to a merger or consolidation, then the transferee corporation must take
over the liabilities of the transferor.
Another exception of the doctrine, where the sale of all corporate assets is entered into fraudulently to
escape liability for transferor's debts, can be found under Article 1388 of the Civil Code. It provides that
whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered. Thus, if there is fraud in the transfer of all the assets of the transferor corporation, its
creditors can hold the transferee liable.
The legal basis of the last in the four (4) exceptions to the Nell Doctrine, where the purchasing corporation is
merely a continuation of the selling corporation, is challenging to determine. In his book, Philippine
Corporate Law,36 Dean Cesar Villanueva explained that this exception contemplates the "business-
enterprise transfer." In such transfer, the transferee corporation's interest goes beyond the assets of the
transferor's assets and its desires to acquire the latter's business enterprise, including its goodwill.
In Villa Rev Transit, Inc. v. Ferrer,37 the Court held that when one were to buy the business of another as a
going concern, he would usually wish to keep it going; he would wish to get the location, the building, the
stock in trade, and the customers. He would wish to step into the seller's shoes and to enjoy the same
business relations with other men. He would be willing to pay much more if he could get the "good will" of
the business, meaning by this, the good will of the customers, that they may continue to tread the old
footpath to his door and maintain with him the business relations enjoyed by the seller.
In other words, in this last exception, the transferee purchases not only the assets of the transferor, but also
its business. As a result of the sale, the transferor is merely left with its juridical existence, devoid of its
industry and earning capacity. Fittingly, the proper provision of law that is contemplated by this exception
would be Section 40 of the Corporation Code,38 which provides: ChanRob lesvi rtua lLawl ibra ry
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of
its property and assets, including its goodwill, upon 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, when authorized by the
vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of
non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
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.
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 any 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 said corporation
or if the proceeds of the sale or other disposition of such property and assets be appropriated for the
conduct of its remaining business.
In non-stock 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.
[Emphases Supplied]
To reiterate, Section 40 refers to the sale, lease, exchange or disposition of all or substantially all of the
corporation's assets, including its goodwill.39 The sale under this provision does not contemplate an
ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is
rendered incapable of continuing its business or its corporate purpose.40 cralaw rednad
Section 40 suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine
because the purchasing or transferee corporation necessarily continued the business of the selling or
transferor corporation. Given that the transferee corporation acquired not only the assets but also the
business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the former.
It must be clarified, however, that not every transfer of the entire corporate assets would qualify under
Section 40. It does not apply (1) if the sale of the entire property and assets is necessary in the usual and
regular course of business of corporation, or (2) if the proceeds of the sale or other disposition of such
property and assets will be appropriated for the conduct of its remaining business. 41 Thus, the litmus test
to determine the applicability of Section 40 would be the capacity of the corporation to continue its business
after the sale of all or substantially all its assets.
Jurisprudential recognition of the

business-enterprise transfer
Jurisprudence has held that in a business-enterprise transfer, the transferee is liable for the debts and
liabilities of his transferor arising from the business enterprise conveyed. Many of the application of the
business-enterprise transfer have been related by the Court to the application of the piercing doctrine.42 c ralawre dnad
In A.D. Santos, Inc. v. Vasquez,43 a taxi driver filed a suit for workmen's compensation against the
petitioner corporation therein. The latter's defense was that the taxi driver's employer was Amador Santos,
and not the corporation. Initially, the taxi driver was employed by City Cab, a sole proprietary by Amador
Santos. The taxi business was, however, transferred to the petitioner. Applying the piercing doctrine, the
Court held that the petitioner must still be held liable due to the transfer of the business and should not be
allowed to confuse the legitimate issues.
In Buan v. Alcantara,44 the Spouses Buan were the owners of Philippine Rabbit Bus Lines. They died in a
vehicular accident and the administrators of their estates were appointed. The administrators then
incorporated the Philippine Rabbit Bus Lines. The issue raised was whether the liabilities of the estates of the
spouses were conveyed to the new corporation due to the transfer of the business. Utilizing the alter-ego
doctrine, the Court ruled in the affirmative and stated that: ChanRoblesvirtual Lawlib ra ry
As between the estate and the corporation, the intention of incorporation was to make the corporation liable
for past and pending obligations of the estate as the transportation business itself was being transferred to
and placed in the name of the corporation. That liability on the part of the corporation, vis-a-vis the estate,
should continue to remain with it even after the percentage of the estate's shares of stock in the corporation
should be diluted.45
The Court, however, applied the business-enterprise transfer doctrine independent of the piercing doctrine in
other cases. In San Teodoro Development Enterprises v. SSS,46 the petitioner corporation therein attempted
to avoid the compulsory coverage of the Social Security Law by alleging that it was a distinct and separate
entity from its limited partnership predecessor, Chua Lam & Company, Ltd. The Court, however, upheld the
findings of the SSS that the entire business of the previous partnership was transferred to the corporation
ostensibly for a valuable consideration. Hence, "[t]he juridical person owning and operating the business
remain the same even if its legal personality was changed."47 cralawred nad
Similarly, in Laguna Trans. Co., Inc. v. SSS,48 the Court held that the transferee corporation continued the
same transportation business of the unregistered partnership therein, using the same lines and equipment.
There was, in effect, only a change in the form of the organization of the entity engaged in the business of
transportation of passengers.
Perhaps the most telling jurisprudence which recognized the business-enterprise transfer would be the
assailed case of Caltex. In that case, under an agreement of assumption of obligations, LUSTEVECO
transferred, conveyed and assigned to respondent PSTC all of its business, properties and assets pertaining
to its tanker and bulk business together with all the obligations, properties and assets.49Meanwhile,
petitioner Caltex, Inc. obtained a judgment debt against LUSTEVECO, and it sought to enforce the same
against PSTC. The Court ruled that PSTC was bound by its agreement with LUSTEVECO and the former
assumed all of the latter's obligations pertaining to such business.
More importantly, the Court held that, even without the agreement, PSTC was still liable to Caltex, Inc.
based on Section 40, as follows: ChanRoblesvi rtua lLawl ibra ry
While the Corporation Code allows the transfer of all or substantially all the properties and assets of a
corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can
proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor's liabilities, unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to
transfer all its business, properties and assets without the consent of its creditors and without requiring the
assignee to assume the assignor's obligations will defraud the creditors. The assignment will place the
assignor's assets beyond the reach of its creditors.
Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of execution could not be
satisfied because LUSTEVECO's remaining properties had been foreclosed by lienholders. In addition, all of
LUSTEVECO's business, properties and assets pertaining to its tanker and bulk business had been assigned
to PSTC without the knowledge of its creditors. Caltex now has no other means of enforcing the judgment
debt except against PSTC.50 cralawrednad
[Emphasis Supplied]
The Caltex case, thus, affirmed that the transfer of all or substantially all the proper from one corporation to
another under Section 40 necessarily entails the assumption of the assignor's liabilities, notwithstanding the
absence of any agreement on the assumption of obligations. The transfer of all its business, properties and
assets without the consent of its creditors must certainly include the liabilities; or else, the assignment will
place the assignor's assets beyond the reach of its creditors. In order to protect the creditors against
unscrupulous conveyance of the entire corporate assets, Caltex justifiably concluded that the transfer of
assets of a corporation under Section 40 must likewise carry with it the transfer of its liabilities.
Fraud is not an essential

consideration in a business-
enterprise transfer
Notably, an evaluation of the relevant jurisprudence reveals that fraud is not an essential element for the
application of the business-enterprise transfer.51 The petitioners in this case, however, assert otherwise.
They insist that under the Caltex case, there was an assumption of liabilities because fraud existed on the
part of PSTC, as the transferee corporation.
The Court disagrees.
The exception of the Nell doctrine,52 which finds its legal basis under Section 40, provides that the
transferee corporation assumes the debts and liabilities of the transferor corporation because it is merely a
continuation of the latter's business. A cursory reading of the exception shows that it does not require the
existence of fraud against the creditors before it takes full force and effect. Indeed, under the Nell Doctrine,
the transferee corporation may inherit the liabilities of the transferor despite the lack of fraud due to the
continuity of the latter's business.
The purpose of the business-enterprise transfer is to protect the creditors of the business by allowing them a
remedy against the new owner of the assets and business enterprise. Otherwise, creditors would be left
"holding the bag," because they may not be able to recover from the transferor who has "disappeared with
the loot," or against the transferee who can claim that he is a purchaser in good faith and for value.53 Based
on the foregoing, as the exception of the Nell doctrine relates to the protection of the creditors of the
transferor corporation, and does not depend on any deceit committed by the transferee -corporation, then
fraud is certainly not an element of the business enterprise doctrine.
The Court also agrees with the CA, in its assailed April 29, 2013 resolution, that there was no finding of
fraud in the Caltex case; otherwise it should have been clearly and categorically stated.54 The discussion
in Caltex relative to fraud seems more hypothetical than factual, thus: ChanRoblesvirt ual Lawlib rary
If PSTC refuses to honor its written commitment to assume the obligations of LUSTEVECO, there will be a
fraud on the creditors of LUSTEVECO. x x x To allow PSTC now to welsh on its commitment is to sanction a
fraud on LUSTEVECO's creditors.55
Besides, the supposed fraud in Caltex referred to PSTC's refusal to pay LUSTEVECO's creditors despite the
agreement on assumption of the latter's obligations. Again, the Court emphasizes in the said case, even
without the agreement, PSTC was still liable to Caltex, Inc. under Section 40, due to the transfer of all or
substantially all of the corporate assets. At best, transfers of all or substantially all of the assets to a
transferee corporation without the consent of the transferor corporation's creditor gives rise to a
presumption of fraud against the said creditors.56 cralawred nad
Applicability of the
in the present case
Bearing in mind that fraud is not required to apply the business-enterprise transfer, the next issue to be
resolved is whether the petitioners indeed became a continuation of MADCI's business. Synthesizing Section
40 and the previous rulings of this Court, it is apparent that the business-enterprise transfer rule applies
when two requisites concur: (a) the transferor corporation sells all or substantially all of its assets to another
entity; and (b) the transferee corporation continues the business of the transferor corporation. Both
requisites are present in this case.
According to its articles of incorporation, the primary purpose of MADCI was "[t]o acquire by purchase,
lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange,
lease, develop and hold for investment or otherwise, real estate of all kinds, whether improved, managed or
otherwise disposed of buildings, houses, apartment, and other structures of whatever kind, together with
their appurtenance."57 During the trial before the RTC, Sangil testified that MADCI was a development
company which acquired properties in Magalang, Pampanga to be developed into a golf course.58 cra lawredna d
The CA found that MADCI had an entire asset consisting of 120 hectares of land, and that its sale to the
petitioners rendered it incapable of continuing its intended golf and country club business.59 The Court holds
that such finding is fully substantiated by the records of the case. The MOA itself stated that MADCI had 120
hectares of agricultural land in Magalang, Pampanga, for the development of a golf course.60MADCI had the
right of ownership over these properties consisting of 97 land titles, except for the 27 titles previous
delivered to YIL.61 The 120-hectare land, however, was then sold to YILPI,62 and then transferred to
YICRI.63cralawrednad
Respondent Yu testified that he verified the landholdings of MADCI with the Register of Deeds in Pamapanga
and discovered that all its lands were transferred to YICRI.64 Because the properties of MADCI were already
conveyed, Yu had no other way of collecting his refund.65 cralaw rednad
Sangil also testified that MADCI had no more properties left after the sale of the lands to the petitioners: ChanRob lesvi rtual Lawl ibra ry
Atty. Nuguid: And after the sale, it has no more properties?

Sangil: That's right, Sir.
Q: And the business of MADCI was to operate and build golf course?
A: That's right, Sir.
Q: And because of the sale of all these properties, MADCI was not able to build the golf course?
A: Yes, Sir.
Q: And did not anymore operate as a corporation?

A: MADCI is still there but as far the development of the golf course, it was taken over by Mr.
Wang.66 cralawredna d
[Emphasis Supplied]
As a witness for the petitioners, Wang testified that Y1L bought the shares of stock of MADCI because it had
some interest in the project involving the development of a golf course. The petitioners then found that
MADCI had landholdings in Pampanga which it would be able to develop into a golf course.67 Hence, the
petitioners were fully aware of the nature of MADCFs business and its assets, but they continued to acquire
its lands through the designated company, YICRI.68 cralawred nad
Based on these factual findings, the Court is convinced that MADCI indeed had assets consisting of 120
hectares of landholdings in Magalang, Pampanga, to be developed into a golf course, pursuant to its primary
purpose. Because of its alleged violation of the MOA, however, MADCI was made to transfer all its assets to
the petitioners. No evidence existed that MADCI subsequently acquired other lands for its development
projects. Thus, MADCI, as a real estate development corporation, was left without any property to develop
eventually rendering it incapable of continuing the business or accomplishing the purpose for which it was
incorporated.
Section 40 must apply.
Consequently, the transfer of the assets of MADCI to the petitioners should have complied with the
requirements under Section 40. Nonetheless, the present petition is not concerned with the validity of the
transfer; but the respondent's claim of refund of his P650,000.00 payment for golf and country club shares.
Both the CA and the RTC ruled that MADCI and Sangil were liable.
On the question of whether the petitioners must also be held solidarily liable to Yu, the Court answers in the
affirmative.
While the Corporation Code allows the transfer of all or substantially all of the assets of a corporation, the
transfer should not prejudice the creditors of the assignor corporation.69 Under the business-enterprise
transfer, the petitioners have consequently inherited the liabilities of MADCI because they acquired all the
assets of the latter corporation. The continuity of MADCI's land developments is now in the hands of the
petitioners, with all its assets and liabilities. There is absolutely no certainty that Yu can still claim its refund
from MADCI with the latter losing all its assets. To allow an assignor to transfer all its business, properties
and assets without the consent of its creditors will place the assignor's assets beyond the reach of its
creditors. Thus, the only way for Yu to recover his money would be to assert his claim against the
petitioners as transferees of the assets.
The MOA cannot

prejudice respondent
The MOA, which contains a provision that Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments, should not prejudice respondent Yu.
The CA correctly ruled that such provision constituted novation under Article 129370 of the Civil Code.
When there is a substitution of debtors, the creditor must consent to the same; otherwise, it shall not in any
way affect the creditor. In this case, it was established that Yu's consent was not secured in the execution of
the MOA. Thus, insofar as the respondent was concerned, the debtor remained to be MADCI. And given that
the assets and business of MADCI have been transferred to the petitioners, then the latter shall be liable.
Interestingly, the same issue on novation was tackled in the Caltex case and the Court resolved it in this
wise:ChanRoble svirtual Lawli bra ry
The Agreement, under Article 1291 of the Civil Code, is also a novation of LUSTEVECO's obligations by
substituting the person of the debtor. Under Article 1293 of the Civil Code, a novation which consists in
substituting a new debtor in place of the original debtor cannot be made without the consent of the
creditor. Here, since the Agreement novated the debt without the knowledge and consent of
Caltex, the Agreement cannot prejudice Caltex. Thus, the assets that LUSTEVECO transferred to PSTC
in consideration, among others, of the novation, or the value of such assets, remain even in the hands of
PSTC subject to execution to satisfy the judgment claim of Caltex.71 cralawrednad
[Emphasis Supplied]
Free and Harmless Clause
The petitioners, however, are not left without recourse as they can invoke the free and harmless clause
under the MOA. In business-enterprise transfer, it is possible that the transferor and the transferee may
enter into a contractual stipulation stating that the transferee shall not be liable for any or all debts arising
from the business which were contracted prior to the time of transfer. Such stipulations are valid, but only
as to the transferor and the transferee. These stipulations, though, are not binding on the creditors of the
business enterprise who can still go after the transferee for the enforcement of the liabilities.72 cra lawred nad
An example of a free and harmless clause can be observed in the case of PCI Leasing v. UCPB.73 In that
case, a claim for damages was filed against the petitioner therein as the registered owner of the vehicle,
even though it was the latter's lessee that committed an infraction. The Court granted the claim against the
petitioner based on the registered-owner rule. Even so, the Court stated therein that: ChanRoblesvi rtua lLawl ib rary
xxx the Court believes that petitioner and other companies so situated are not entirely left without recourse.
They may resort to third-party complaints against their lessees or whoever are the actual operators of their
vehicles. In the case at bar, there is, in fact, a provision in the lease contract between petitioner and
SUGECO to the effect that the latter shall indemnify and hold the former free and harmless from any
"liabilities, damages, suits, claims or judgments" arising from the latter's use of the motor vehicle. Whether
petitioner would act against SUGECO based on this provision is its own option.
In the present case, the MOA stated that Sangil undertook to redeem MADCI proprietary shares sold to third
persons or settle in full all their claims for refund of payments. While this free and harmless clause cannot
affect respondent as a creditor, the petitioners may resort to this provision to recover damages in a third-
party complaint. Whether the petitioners would act against Sangil under this provision is their own option.
WHEREFORE, the petition is DENIED. The January 30, 2012 Decision and the April 29, 2013 Resolution of
the Court of Appeals in CA-G.R. CV No. 96036 are hereby AFFIRMED in toto.
SO ORDERED. chanrobles virtuallawlibrary
Sereno, C.J., Carpio, Leonardo-De Castro, Brion, Peralta, Bersamin, Del Castillo, Villarama, Jr., Perez,
Perlas-Bernabe, and Jardeleza, JJ., concur. ChanRoblesVirtualawl ibra ry
Velasco, Jr., J., please see concurring opinion.

Reyes, J., on leave.
Leonen, J., see separate concurring opinion.
Endnotes:
1
Penned by Associate Justice Remedios A. Salazar-Fernando, with Associate Justices Mario V. Lopez and
Amy C. Lazaro-Javier, concurring; rollo, pp. 31-57.
2
Id. at 58-60.
3
Penned by Judge Ma. Theresa L. Dcla Torre-Yadao; id. at 61-76.
4
Records, Vol. II, p. 787.
5
Id. at 770-782.
6
Id. at 783-785.
7
Id. at 857.
8
Records, Vol. I, pp. 1-6.
9
Id. at 97-100.
10
Id. at 138-141.
11
Id. at 142-149.
12
Id. at 163.
13
Id. at 239-248.
14
Id. at 584-591.
15
16
Id. at 822.
17
TSN, July 13,2007, p. 10.
18
Id. at 7.
19
Id. at 25.
20
TSN, November 7, 2008, p. 13.
21
TSN, September 11, 2009, p. 10.
22
TSN, November 7, 2008. p. 19.
23
Id. at 25.
24
Id. at 29.
25
cralaw red Id. at 32.
26
Rollo, pp. 75-76.
27
530 Phil. 149(2006).
28
Rollo, p. 56.
29
Id. at 17.
30
21 Phil. 243(1912).
31
Rollo, pp. 85-92.
32
Id. at 99-103.
33
122 Phil. 825 (1965).
34
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or
by provision of law. The heir is not liable beyond the value of the property he received from the decedent.
xxx
35
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarity with the principal debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract is called a suretyship.
36
2010 ed, p. 682.
37
134 Phil. 796(1968).
38
See Villanueva, Philippine Corporate Law, 2010 ed., p. 684.
Lopez Realty, Inc. v. Fontecha, 317 Phil. 216, 229 (1995).

39
40
See Paragraph 2, Section 40, Corporation Code.
41
See Paragraph 3, Section 40, Corporation Code.
42
Villanueva, Philippine Corporate Law, 2010 ed., p. 686, 687.
43
131 Phil. 262(1968).
44
212 Phil. 723(1984).
45
Id. at 733.
46
118 Phil. 103(1963).
47
Id. at 106.
48
107 Phil. 833(1960).
49
Supra note 27 at 158.
50
Id. at 159-160.
51
Id. at 688.
52
3. Where the purchasing corporation is merely a continuation of the selling corporation.
53
Villanueva, Philippine Corporate Law, 2010 ed., p. 686.
Rollo, p. 59.
54
Caltex v, PNOC, supra note 27, at 160.

55
See also Act No. 3952 or the Bulk Sales Law. Section 3 thereof mandates that "[e]very person who shall
sell, mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions or materials in bulk,
for cash or on credit, before receiving from the vendee, mortgagee, or his, or its agent or representative any
part of the purchase price thereof, or any promissory note, memorandum, or other evidence therefor, to
deliver to such vendee, mortgagee, or agent xxx a written statement, sworn to substantially xxx of the
names and addresses of all creditors to whom said vendor or mortgagor may be indebted."
Section 4 therein provides any person who failed to comply with the submission of the sworn statement of
creditors under Section 3 is "[d]eemed to have violated this Act, and any such sale, transfer or mortgage
shall be fraudulent and void."
57
58
59
Rollo, p. 22.
60
Records, Vol. I, p. 161.
61
Id. at 162.
62
63
Id. at 822.
64
TSN, May 28, 2004, p. 13; TSN, July 2, 2004, p. 7.
65
TSN, September 24, 2004, p. 11,
66
TSN, July 13, 2007, p. 10.
67
68
TSN, November 7, 2008, p. 29.
STRADEC v. Radstock 622 Phil. 431, 535 (2009).

69
70
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)
Caltex v. PNOC, supra note 27, at 162-163.

71
72
Villanueva, Philippine Corporate Law, 2010 ed., p. 692.
73
579 Phil. 418, 431 (2008).
CONCURRING OPINION
VELASCO, JR., J.:
I concur with the findings and conclusions of the ponencia that the purchase by the petitioners of
substantially all of Mt. Arayat Development Co., Inc.'s (MADCI) assets which resulted in the cessation of the
latter's operations carried with it the assumption of MADCI's liabilities to third persons, including respondent
James Yu.
The Court is once again faced with the question of whether the sale by a corporation of all or substantially
all of its assets to another entity would carry with it the obligation to settle the transferor's liabilities.
Let us briefly recall the facts. MADCI, a real estate development corporation, ventured in the development of
a golf and country club in its 120-hectare property located in Mt. Arayat, Pampanga. Sometime in 1997,
pending the commencement of the project, MADCI sold to respondent golf and country club shares totaling
P650,000.00, which respondent paid on installment.
Thereafter, or on May 29, 1999, MADCI and its president Rogelio Sangil (Sangil) entered into a
Memorandum of Agreement (MOA) with petitioner Yats International Ltd. (YIL), an investment company
likewise engaged in the development of real estate, projects, leisure, tourism, and related businesses. Under
the MOA, Sangil controlled 60% of MADCI's capital stock and YIL was to subscribe to the remaining 40%,
priced at P31M, conditioned on the securing by MADCI and Sangil of the necessary government permits. It
was also embodied therein that MADCI owned said 120-hectare property which is intended for the
development of a golf course. Furthermore, Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments. YIL also gave P500,000.00 to acquire
the shares of minority stockholders. Lastly, per the Agreement, the parties agreed that should MADCI and
Sangil fall short in their obligations, YIL can recover the amounts that it paid to the former, plus interest,
and that should they fail to deliver said amounts, YIL would be authorized to sell said 120-hectare property
to satisfy their obligation.
Thus, pursuant to the Agreement, YIL, together with Y-I Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts,
Inc. (YICRI), bought some of MADCI's corporate shares. As it turned out, however, MADCI and Sangil
violated the terms of the MOA. The property was eventually sold to YICRI, its designated company, for
P9.3M.
Then, sometime in 2000, Yu discovered that the project never pushed through. This prompted him to
demand from MADCI the return of his payment for the golf and country club shares. While MADCI
recognized Yu's investment, it did not heed the latter's demand, reasoning that said payment was no longer
possible because MADCI's new set of officers did not give their imprimatur thereto. This prompted Yu to file
with the RTC a complaint for sum of money. Yu later filed an Amended Complaint, impleading YIL, YILPI,
and YICRI on the basis of the allegedly suspicious transfer of MADCI's property to petitioner which,
according to him, was done in fraud of MADCI's creditors.
In their defense, MADCI and petitioners YIL, YILPI, and YICRI insist, among other things, on the observance
of the MOA's stipulations, particularly Sangil's categorical undertaking to settle all claims for refund of third
parties. For his part, Sangil alleges that Yu dealt with MADCI as a juridical person and that he personally did
not benefit from the sale of shares. Too, according to Sangil, MADCI's new set of officers blocked the
approval of the refund.
The RTC, in its August 31, 2010 Decision, ruled in Yu's favor, holding MADCI and Sangil solidarity liable for
the refund. Petitioners YIL, YILPI, and YICRI were, however, exonerated since, according to the trial court,
they were not part of the transactions between Yu, MADCI, and Sangil. Furthermore, the stipulation in the
MOA whereby Sangil obliged himself to settle third party claims for refund was considered by the trial court
as foresight on petitioners' part to protect MADCFs creditors.
On appeal, the CA modified the RTC's decision and ruled that petitioners are jointly and severally liable for
the satisfaction of Yu's claim. Citing Caltex (Philippines), Inc. v. PNOC Shipping and Transport
Corporation,1 the appellate court ruled that the transfer of the entire assets of MADCI to YICRI carried with
it the assumption by the transferee of the transferor's liabilities and should not prejudice the transferor's
creditors, in this case, respondent Yu. Aggrieved, transferees YIL, YILPI, and YICRI come before this Court
insisting on the reversal of the CA's modification and the reinstatement of their exoneration from liability by
the trial court.
Simply put, the instant petition seeks to put an end to respondent James Yu's quandary as to who should be
liable for his claim, the existence of which was admitted by the transferor.
Petitioners fault the CA for relying heavily on Caltex,2 arguing that the instant case is not on all fours with
said case, for in the latter case, there was an express assumption of all obligations of the judgment debtor
by the transferee. They likewise insist that fraud, which if present would make the transferee liable for the
transferor's obligations to third persons, does not obtain in the instant case. Yu, for his part, contends that
the facts of the case properly call for the application of Caltex since the transfer resulted in MADCI's
paralysis.
In affirming the modification by the CA, the ponencia applied Section 40 of the Corporation Code which
reads:ChanRoblesvi rt ualLaw lib rary
Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon 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,
when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in
a stockholder's,or member's meeting duly called for the puipose. x x x.
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, (emphasis and underscoring added)
The provision adverted to, as correctly enunciated by the ponencia, citing Lopez Realty, Inc. v.
Fontecha,3 contemplates a business-enterprise transfer whereby one corporation (transferor) sells to
another entity (transferee) all or substantially all of its corporate assets, including its goodwill, rendering it
incapable of continuing its business or its purpose.
Object of the sale: Meaning of

"all or substantially all of the
corporation's business"
In SEC-OGC Opinion No. 13-13,4 the Securities and Exchange Commission (SEC), Office of the General
Counsel, clarifying the meaning of a sale of all or substantially all of the corporation's 'assets within the
context of Paragraph 2 of Sec. 40, explained that: ChanRoblesvirtual Lawli bra ry
In interpreting paragraph 2 of Section 40, this Commission has been guided not so much by the number
or volume of assets transferred but by the effect of such transfer on the corporation's business.
Any disposition which does not involve all or substantially all of the corporate assets x x x, made in the
ordinary course of business does not require the approval of the stockholders or members.(emphasis added)
The SEC then emphasized that in determining whether the sale is made in the ordinary course of business,
"the test is not the amount involved but the nature of the transaction."5 Hence, according to the SEC, "if the
sale thereof will not render the corporation incapable of continuing its business or if the disposition is
necessary in the usual or regular course of business, the requirements under Section 40 will not apply."6 cralaw rednad
Continuation by the transferee

of the transferor's business
Along with the above explanation from the SEC that the nature of the transaction determines the
applicability or non-applicability of Sec. 40, it is likewise material that, in addition to the transferor's
paralysis, said transfer must result in the continuation by the transferee of the former's business.
The sale or transfer by one corporation of all of its assets to another corporation for value, does not, by that
fact alone, render Sec. 40 applicable and make the transferee liable for the debts of the transferor.7 The
business-enterprise transfer doctrine involves an acquisition by the transferee of the transferor's business
enterprise which effectively results in:ChanRoble svi rtual Lawli bra ry
(1) the termination of the transferor's entire operations and the prevention of the fulfillment of the
transferor's purpose for incorporation; and
(2) the continuation by the transferee of said venture.
It does not, therefore, contemplate a mere purchase or sale of assets.
To distinguish a mere sale of assets from a business-enterprise transfer, the Court's ruling in China Banking
Corporation v. Dyne-Sem Electronics Corporation,8 on the basic but crucial characteristic of a sale of assets,
is instructive.
Briefly, China Banking Corporation involved the assertion by the creditor bank that the transferor's unpaid
loan with them should be paid by the transferee. There, the creditor bank argued that this should be so
since the transferee and the transferor are both engaged in the same line of business and that the
transferee acquired some of the transferor's machineries and equipment before the transferor ultimately
ceased its operations.9 cralaw rednad
There, the Court ruled in favor of the transferee and held that the "acquisition of some of the machineries
and equipment of [the transferor] was not proof that [the transferee] was formed to defraud petitioner. As
the [CA] found, no merger took place between [the transferor and the transferee]. What took place was a
sale of the assets of the former to the latter, x x x Thus, where one corporation sells or otherwise
transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable
for the debts and liabilities of the transferor."10 (emphasis and words in brackets added)
It was therein cited that "[i]n a sale of assets, the transferee is only interested in the raw assets of the
selling corporation perhaps to be used to establish his own business enterprise or as an addition to his on-
going business enterprise.11 In other words, the object of the disposition in a sale of assets is not the very
business itself, but simply the properties of the transferor. The Court further noted that in a sale of assets,
the purchasing corporation is not generally liable for the debts and liabilities of the selling corporation, the
selling corporation contemplates a liquidation of the enterprise, the transfer of title is by virtue of a contract,
and the selling corporation is not dissolved by the mere transfer of all its property.12 Clearly, this kind of
alienation of corporate assets is notthe sale contemplated under Section 40.
These facets and legal effects of a sale of assets became pivotal in Bank of Commerce v. Radio Philippines
Network, Inc.,13 which involved the issue of whether the purchase by the transferee of the transferor's
assets carried with it the liability for the latter's judgment debts.
In resolving the case and ultimately holding that the purchaser is not liable for the transferor's judgment
debt subject of the case, the Court clarified that no merger took place between the transferee and the
transferor, since therein transferor was still able to continue its operations despite the sale of its
banking venture to the transferee.14 There, this Court categorized the sale as one simply of the
transferor's assets (its entire banking business) with assumption of liabilities,15 and not a purchase of all or
substantially all of its corporate assets which would ultimately cripple it as a business entity. Therein
transferee, therefore, according to this Court, could not be considered as the transferor's successor-in-
interest.
Unlike Bank of Commerce, in the present petition, the transfer rendered MADCI incapable of continuing its
business. This is so since the only property that MADCI had in order for it to be able to conduct the very
reason for its incorporation - that is, "[t]o acquire by purchase, lease, donation, or otherwise, and to own,
use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop, and hold for investment or
otherwise, real estate of all kinds, whether improved, managed or otherwise disposed of buildings, houses,
apartments, and other structures of whatever'kind, together with their appurtenance - is the 120-hectare
property later sold to YICRI. Petitioners were unable to show that MADCI was still able to continue its
operations or to purchase other properties for that purpose. As such, the purchase by YICRI of the said
property effectively resulted in the cessation of MADCI's business.
It may be noted that MADCI actually still had other assets comprised of loan advances of its directors.
Petitioners, however, failed to show that said remaining assets were sufficient in order for MADCI to be able
to continue its operations. It is well to emphasize that Section 40 contemplates not only of a sale of all of
the corporation's assets, but also substantially all of said assets. This being the case, it is not necessary
for the transferor not to be left with any corporate property. What is only required under Sec. 40 is that, as
opined by the SEC, the nature of the transfer prevents the transferor from continuing its business or the
purpose for which it was incorporated.
Consideration in exchange
for transferor's assets
Aside from the nature of the transaction, the consideration to be paid in exchange for the transferor's assets
is likewise significant in determining the applicability of Sec. 40. In this respect, the Court distinguishes
between a de facto merger and a business-enterprise transfer.
For one, this Court has previously clarified that Sec. 40 does not contemplate a de factomerger because the
provision recognizes the separate existence of the two corporations that transact the sale.16 cralaw rednad
Further, and more importantly, even though a business-enterprise transfer and a de facto merger may both
involve the acquisition by another entity of all or substantially all of the transferor's assets which would
ultimately result in the continuation by the transferee of the transferor's business venture, the distinction
hinges on the consideration in exchange for said assets.
Citing with approval Dean Cesar Villanueva's explanation on the characteristics of a de facto merger, this
Court stated that: ChanRoblesvirt ualLawlib rary
"a de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of
another corporation in exchange of shares of stock of the acquiring corporation. The acquiring
corporation would end up with the business enterprise of the target corporation; whereas, the target
corporation would end up with basically its only remaining assets being the shares of stock of the
acquiring corporation."17 (emphasis Ours)
Thus, unlike in a business-enterprise transfer where the transfer is not in exchange for shares of stock in the
transferee and that the transferor does not become a stockholder thereat, in a de facto merger, the
acquisition of all or substantially all of the transferor's assets is precisely in exchange of shares of stock
of the acquiring corporation.
Here, suffice it to state that the consideration for the sale was not shares of stocks in any of the petitioners.
It was admitted by the parties that the amount of P9.3M was paid by petitioner YICRI for and in
consideration of the 120-hectare property, which, as argued, was way below the market value of said lot.
Thus, the . MOA in the instant case could not be said to have resulted into a de facto merger.
Absorption of Liabilities
Anent the issue of absorption or non-absorption by the transferee of the transferor's liabilities,
the ponencia pointed out that under the business-enterprise transfer doctrine, the transferee
inherits the liabilities of the transferor as a consequence of the purchase. This is so since the
transaction is not only limited to the assets of the transferor, as in a sale of assets as previously discussed,
but also extends to its goodwill. Additionally, holding the transferee liable for the debts of the transferor is a
protection afforded by law to the transferor's creditors.18 It, therefore, does not require a contractual
stipulation to that effect, nor must the transfer itself be in fraud of creditors before liability may attach to
the transferee. The mere operation of Section 40 imposes upon the transferee the obligation to answer for
the transferor's debts, as correctly observed by the ponencia.
The factual situation in the instant case can be distinguished from Bank of Commerce.19
In the instant dispute, petitioners, as transferees, replaced the transferor, MADCI, in the
undertaking of the development of the golf and country club, as a necessary consequence of the
sale. As observed by the ponencia, no evidence existed to show that MADCI subsequently acquired other
lands for its development projects. It was, thus, rendered incapable of continuing its operations and
accomplishing the purpose for which it was incorporated as it was left without any property to develop. As
held, after the transfer, MADCI was left in a state of suspended animation. But with respect to the golf
and country club development project, per Sangil's testimony, this was being undertaken by the managing
director of petitioner YIL. In other words, petitioners ventured in the project which MADCI could no longer
undertake. To my mind, this, in addition to MADCI's resulting state, calls for the application of Sec. 40.
In contrast, in Bank of Commerce, the transferee therein was not considered by the Court to be the
transferor's successor-in-interest. There, the Court categorized the sale therein as a mere sale of
assets and not a de facto merger. Furthermore, for the sake of discussion, neither can it be considered as a
business-enterprise transfer because the transferee remains existent and is able to continue its operations,
although not its banking venture - the business, the assets for which were sold to the transferee. In the
latter case, the transferee would still be able to, in fact continued to, operate since it has other ventures
remaining, unlike in the present case where MADCI only had one business - the development of the 120
hectare property into a golf and country club.
More important is the fact that in Bank of Commerce, an escrow fund of P50M was set aside for the payment
of the transferor's liabilities, in addition to the stipulation as to what liabilities are specifically shouldered by
the transferee. The intent is clear - to limit the liabilities of the transferee to those agreed upon and
those covered by the escrow fund. This, in proper cases, bolsters the fact that the transaction is a
mere sale of assetsand this intention is undoubtedly absent in the present case.
Considering these basic but material distinctions show that the requirement under Sec. 40 that the transfer
must render the transferor incapable of continuing its operations is not present in Bank of Commerce. That
being the case, therein transferee was not held liable for the debts of the transferor which it did not
expressly assume under their Agreement. The transferor, therefore, continued to be liable for its excluded
liabilities20 and the only liabilities that the transferee had to absorb and settle were those which it expressly
assumed under their Purchase and Assumption Agreement.
In Caltex (Phils.), Inc. v. PNOC,21 the Court also recognized this contractual assumption by the transferee of
the transferor's liabilities. There, the transferor -Luzon Stevedoring Corporation - and the transferee - PNOC
Shipping and Transport Corporation — entered into an Agreement of Assumption of Obligations whereby the
former "transferred, conveyed and assigned unto [the latter] all of the [former's] business, properties and
assets pertaining to its tanker and bulk all (sic) departments, together with all the obligations relating to
said business, properties and assets.22 cralawredna d
At this point it is well to mention that even in a mere sale of assets, as opposed to a business-enterprise
transfer, liability may still attach to the transferee if the alienation was done in fraud of the transferor's
creditors.23 In Bank of Commerce, this non-attachment of liability for excluded obligations was not only
supported by the fact that the existence and operations of the transferor continued even after the sale but
also, as observed by the Court, the transfer was entered into by the parties at arm's length.24 This bona fide
quality of the execution of said Agreement reinforced the transferee's exclusion from the entities upon which
the judgment debt may be enforced.
This element of fraud, however, is not required in order for the transferee to be liable under Section 40 of
the Corporation Code, as previously mentioned. This is so since the basis for the liability thereon is not that
the transfer was done in fraud of creditors but that it included the goodwill of the transferor, as discussed by
the ponencia, and to protect the creditors of the transferor since the alienation effectively removes the
transferor's properties from its creditors' reach.
With the above disquisition, I concur with the conclusion of the ponencia that the sale between MADCI and
petitioners of the 120-hectare property was a business-enterprise transfer contemplated under Section 40 of
the Corporation Code, which results in the solidary assumption by petitioners of MADCI's admitted
obligation.
I vote to DENY the present petition.
Endnotes:
1
Caltex (Philippines) Inc. v. PNOC Shipping and Transport Corporation, G.R. No. 150711, August 10. 2006.
498 SCRA 400.
2
Id.
3
317 Phil. 216. 229(1995).
4
Dated December 5, 2013. http://www.sec.gov.ph/investorinf-b/opinions/ogc/cy%202013/13-13.pdf, last
accessed, August 10, 2015.
5
See SEC-OGC Opinion No. 13-13. p. 5.
6
Id.
China Banking Corp. v. Dyne-Sem Electronics Corporation, G.R. No. 149237, July 11, 2006, 494 SCRA 493.
7
8
Id.
9
Id.
10
Id. at 501.
11
Footnote No. 21, id. at 501.
12
Footnote No. 22, id.
G.R. No. 195615, April 21, 2014. 722 SCRA 520. (While the Decision is not yet final, Bancom is cited to
13
make clear the dissimilar factual milieu in Bancom and the instant Petition).
14
Id. at 545. "The evidence in this case fails to show that Bancommerce was a mere continuation of TRB.
TRB retained its separate and distinct identity after the purchase. Although it subsequently changed its
name to Traders Royal Holding's, Inc. such change did not result in its dissolution, xxx. (emphasis
Ours)
15
Id.
16
Id. at 548.
17
Id. at 544.
18
proceed without prejudice to the crditors is to hold the assignee liable for the obligations of the assignor.
The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes
the assumption of the assignor's liabilities. [Caltex (PhUippines) lnc. v. PNOC Shipping and Transport
Corporation, supra note 1 at 41 1-412].
19
Supra note 13.
20
[Bancommerce agreed to assume those liabilities of TRB that arc specified in their P & A Agreement. That
agreement specifically excluded TRB's contingent liabilities that the latter might have arising from pending
litigations in court, including the claims of respondent RPN, et al.] Bank of Commerce v. Radio Philippines
Network, Inc. et al, G.R. No. 195615, April 21, 2014, 772 SCRA 520, 454.
21
Supra note 1.
22
Id. at 409.
Bank of Commerce v. Radio Philippines Network, Inc. el al, supra note 13 at 574-575.
23
24
Id. at 547.
25
cralaw red Supra note 1 at 412.
CONCURRING OPINION
LEONEN, J.:
I concur in holding petitioners Yats International Ltd., Y-l Leisure Philippines, Inc., and Y-l Clubs and
Resorts, Inc. liable to refund respondent James Yu's investment of P650,000.00 with legal interest.
The facts, as summarized in the ponencia,1 involve a creditor's claim against a corporation that sold all or
substantially all of its assets to another corporation. Respondent James Yu filed a collection suit against Mt.
Arayat Development Co. Inc. (MADCI) and its then President Rogelio Sangil for the P650.000.00 respondent
James Yu invested in shares of MADCI's golf and country club project in Arayat, Pampanga that turned out
to be nonexistent.2 He later amended his Complaint to implead petitioners after he had discovered that
MADCI had already sold substantially all of its assets to petitioners.3 The Regional Trial Court held that
MADCI and Rogelio Sangil are solidarity liable to pay respondent James Yu's claim for refund, but dismissed
the case against petitioners.4 The Court of Appeals affirmed the trial court with modification in that
petitioners are also liable to satisfy respondent James Yu's claim considering the transfer of MADCI's entire
assets to petitioners.5 The ponencia affirmed the Court of Appeals Decision in toto.6 cral awrednad
The Regional Trial Court found that MADCI did not deny its contractual obligation with respondent James
Yu.7 The issue before us involves the liability of petitioners as purchasing corporations.
Jurisprudence8 reiterates this court's ruling in Edward J. Nell Company v. Pacific Farms, Inc. 9that: ChanRoblesvirt ual Lawlib rary
Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or
impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of
the corporations; (3) where the purchasing corporation is merely a continuation of the selling
corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such
debts.10 (Emphasis supplied)
The four exceptions enumerated find basis from the Civil Code and Corporation Code.11 The third exception
grounds on Section 40 of the Corporation Code governing the sale or other disposition of assets.
This provision requires the ratificatory vote of the stockholders representing at least two-thirds of the
outstanding capital stock when the transaction amounts to a sale of "all or substantially all of [the
corporation's] property and assets."12 It contemplates a transfer of the entire business enterprise13since no
such ratificatory vote is required if the sale or other disposition of property and assets "is necessary in the
usual and regular course of business"14 or "if the proceeds of the sale or other disposition of such property
and assets be appropriated for the conduct of its remaining business."15 Thus, the scenario involves a
purchaser corporation continuing the business of a seller corporation that no longer conducts such specific
business.
Caltex (Phils.), Inc. v. PNOC Shipping & Transport Corp.16 discussed this third exception in holding that even
without the Agreement of Assumption of Obligations, respondent was still liable to petitioner since "[t]he
acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the
assumption of the assignor's liabilities, unless the creditors who did not consent to the transfer choose to
rescind the transfer on the ground of fraud."17cralawrednad
Corporation law provisions and concepts reflect a concern for protecting corporate creditors. The trust fund
doctrine,18 for example, provides that "subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its
debts."19cralawre dnad
Section 43 of the Corporation Code provides that the Board of Directors may declare dividends only from
unrestricted retained earnings.20 The term "unrestricted retained earnings" substituted the old Corporation
Code's wording of "surplus profits arising from its business."21cralawredna d
Section 122 of the Corporation Code on liquidation also provides that "[e]xcept by decrease of capital stock
and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and liabilities."22 cralaw rednad
The provisions of law, and as applied and interpreted in jurisprudence, shape and govern the legal fiction of
corporations. For one, the law vests in corporations a personality separate and distinct from those that
represent them.23 This separate personality, among other key features, sets the "economic superiority"24 of
a corporate legal structure among other business associations.25 This attracts investors by allowing small
cralawred
capital contributors to be part of a big business endeavor through the aggregation of their capital funds, and
by limiting their liability since corporate assets will answer for corporate debts.26 However, this legal
structure should not be abused.
While a separate corporate personality shields corporate officers acting in good faith and within their scope
of authority from personal liability, law and jurisprudence27 enumerate exceptions28 to this rule, such as
"gross negligence or bad faith [by directors] in directing the affairs of the corporation"29 when established by
clear and convincing evidence.30 This court has also disregarded the separate personality of corporations by
applying the doctrine of piercing the corporate veil in the following instances: ChanRoblesvi rtual Lawli bra ry
[T]he doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the
separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used
as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the corporate entity is used
to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e. where a
corporation is essentially a farce, since it is a mere alter ego or business conduit or a person, or where the
corporation is so organized and controlled and its affairs so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.31 (Emphasis and citations omitted)
The lower courts pierced the veil of corporate fiction against Rogelio Sangil after finding that he had control
of MADCI before the execution of the Memorandum of Agreement with petitioners, and he used MADCI as an
alter ego to sell golf and country club shares without authority from the Securities and Exchange
Commission.32 He also failed to redeem shares sold to third parties like respondent James Yu as agreed
upon in the Memorandum of Agreement, despite his receipt of money for this purpose, and he invoked
MADCI's separate personality to evade this existing obligation.33 These acts, in abuse of the corporate legal
fiction, resulted in the injury of investors and creditors such as respondent James Yu.
The third exception laid down in Edward J. Nell Company v. Pacific Farms, Inc.34 falls under this framework
of providing protection for corporate creditors and consequently encouraging investments in support of
economic development.
The ponencia discussed the factual findings supporting the conclusion that seller corporation MADCI can no
longer exist as a development company for the golf course, while petitioner purchaser corporation to whom
it transferred substantially all of its assets will continue its operations.35
cralaw rednad
The Court of Appeals found that the sale of MADCI's entire asset of 120 hectares of land in Pampanga
rendered it incapable of continuing its golf and country club business plan.36 On the other hand, petitioner
purchaser corporation's President and Chief Executive Officer testified that "[petitioner corporation] bought
the share[s] of stock of MADCI because it had some interest in the project involving the development of a
golf course [and] [t]he petitioners then found that MADCI had landholdings in Pampanga which it would be
able to develop into a golf course."37 cralawred nad
Since the third exception applies, petitioners Yats International Ltd., Y-l Leisure Philippines, Inc., and Y-l
Clubs and Resorts, Inc. are liable to respondent James Yu.
Endnotes:
1
Ponencia, pp. 2-6.
2
Id. at 2; Rollo, pp. 32 and 61..
3
Ponencia, p. 3; Rollo, pp. 35 and 64.
Rollo, p. 76.
4
5
Ponencia, p. 6; Rollo, pp. 53-54 and 56.
Ponencia, p. 20.
6
7
Id. at 5; Rollo, p. 72.
8
See Philippine National Bank v. Andrada Electric & Engineering Company, 430 Phil. 882, 893 (2002) [Per J.
Panganiban, Third Division] and McLeod v. National Labor Relations Commission, 541 Phil. 214 (2007) [Per
J. Carpio, Second Division].
9
122 Phil. 825 (1965) [Per J. Concepcion, En Banc].
10
Id. at 827.
See discussion in J. Leonen, Dissenting Opinion in Bank of Commerce v. Radio Philippines Network, Inc.,
11
G.R. No. 195615, April 21, 2014, 722 SCRA 520, 607-622 [Per J. Abad, Third Division].
12
Corp. Code, sec. 40.
13
See Cesar Villanueva, PHILIPPINE CORPORATE LAW 679-680, 682, 686, 692-693 (2010), cited in J.
Leonen, Dissenting Opinion in Bank of Commerce v. Radio Philippines Network, Inc., G.R. No. 195615, April
21, 2014, 722 SCRA 520, 617 [Per J. Abad, Third Division], for its discussion on the three levels of
Corporate Acquisitions and Transfers, namely: (1) pure assets-only transfer; (2) transfer of the business
enterprise; and (3) equity transfer. It discussed that in a pure assets-only transfer, "the purchaser is only
interested in the 'raw' assets and properties of the business, perhaps to be used to establish its own
business enterprise or to be used for its on-going business enterprise." In a transfer of business enterprise,
"[t]he purchaser's primary interest, is to obtain the 'earning capability' of the venture." An equity transfer is
when "[t]he purchaser takes control and ownership of the business by purchasing the controlling
shareholdings of the corporate owner." In this case, "[t]he control of the business enterprise is therefore
indirect [as] the corporate owner remains the direct owner of the business, and what the purchaser has
actually purchased is the ability to elect the members of the Board of Directors of the corporation which runs
the business."
For the first and third type, the transferee shall not be liable for the debts and liabilities of the transferor
except where the transferee expressly or impliedly agrees to assume such debts. The second type, the
transfer of business enterprise, makes the transferee iiable for the transferor's liabilities.
14
CORP. CODE, sec. 40.
15
16
530 Phil. 149 (2006) [Per J. Carpio, Third Division].
17
Id. at 159-160.
18
The American case of Wood v. Dummer (3 Mason 308, Fed Cas. No. 17, 944) first enunciated this doctrine,
which was later adopted in this jurisdiction with Philippine Trust Co. v. Rivera, 44 Phil. 469, 470 (1923) [Per
J. Street, En Banc]. This was discussed in Halley v. Printwell, Inc., 664 Phil. 361, 382 (2011) [Per J.
Bersamin, Third Division].
Halley v. Printwell, Inc., 664 Phil. 361, 382-383 (2011) [Per J. Bersamin, Third Division], citing Velasco v.
19
Poizat, 37 Phil. 802 (1918) [Per J. Street, En Banc].
20
21
Republic Planters Bank v. Hon. Agana, Sr., 336 Phil. 1, 10 (1997) [Per J. Hermosisima, Jr., First Division].
22
Solidbank Corporation v. Mindanao Ferroalloy Corporation, 502 Phil. 651, 664 (2005) [Per J. Panganiban,
23
Third Division], citing Monfort Hermanos Agricultural Development Corporation v. Monfort III, 478 Phil. 34,
42 (2004) [Per J. Ynares-Santiago, First Division], Spouses Firme v. Bukal Enterprises and Development
Corporation, 460 Phil. 321, 345 (2003) [Per J. Carpio, First Division], and People's Aircargo and
Warehousing Co. Inc. v. Court of Appeals, 357 Phil. 850, 863 (1998) [Per J. Panganiban, First Division].
24
See Paddy Ireland, Limited liability, shareholder rights and the problem of corporate
irresponsibility, Cambridge Journal of Economics 837, 838 (2010) (visited July 9, 2015).
25
cralaw red See Pioneer v. Morning Star, G.R. No. 198436, July 8, 2015 [Per J. Leonen, Second Division].
See Pioneer v. Morning Star, G.R. No. 198436, July 8, 2015 [Per J. Leonen, Second Division].
26
See Edsa Shangri-La Hotel and Resort, Inc., et al. v. BF Corporation, 578 Phil. 588, 607 (2008) [Per J.
27
Velasco, Jr., Second Division], Aratea v. Suico, 547 Phil. 407, 415-416 (2007) [Per J. Garcia, First
Division]; Solidbank Corporation v. Mindanao Ferroalloy Corporation, 502 Phil. 651, 665 (2005) [Per J.
Panganiban, Third Division], MAM Realty Development Corp. v. National Labor Relations Commission, 314
Phil. 838, 844-845 (1995) [Per J. Vitug, Third Division], citing Tramat Mercantile, Inc. v. Court of
Appeals, G.R. No. 111008, November 7, 1994, 238 SCRA 14, 19 [Per J. Vitug, Third Division].
28
Solidbank Corporation v. Mindanao Ferroalloy Corporation,502 Phil. 651, 665 (2005) [Per J. Panganiban,
Third Division], quoting Tramat Mercantile, Inc. v. Court of Appeals, G.R. No. 111008, November 7, 1994,
238 SCRA 14, 19 [Per J. Vitug, Third Division]. See also Aratea v. Suico, 547 Phil. 407, 415-416 (2007) [Per
J. Garcia, First Division], quoting MAM Realty Development Corp. v. National Labor Relations Commission,
314 Phil. 838, 844-845 (1995) [Per J. Vitug, Third Division]: ChanRoblesvi rt ualLaw lib rary
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 (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or
other persons;
'2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
'3. He agrees to hold himself personally and solidarity liable with the corporation; or
'4. He is made, by a specific provision of law, to personally answer for his corporate action.'
29
30
Francisco v. Mallen, Jr., 645 Phil. 369, 376 (2010) [Per J. Carpio, Second Division], quoting Carag v.
National Labor Relations Commission, 548 Phil. 581, 602 (2007) [Per J. Carpio, En Banc], emphasis
supplied.
WPM International Trading, Inc. v. Labayen, G.R. No. 182770, September 17, 2014, 735 SCRA 297, 307-
31
308 [Per J. Brion, Second Division].
Rollo, pp. 56 and 72.

32
33
Id. at 54 and 56.
34
122 Phil. 825 (1965) [Per J. Concepcion, En Banc].
35
Ponencia, pp. 16-18.
36
Id. at 17; Rollo, p. 52.
37
Ponencia, pp. 4 and 18.
Case digest:
G.R. No. 207161, September 08, 2015
Y-I LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD. AND Y-I CLUBS AND RESORTS,
INC., Petitioners, v. JAMES YU, Respondent.
The Facts
James Yu was a businessman, interested in purchasing golf and country club shares from Mt. Arayat
Development Co., Inc. (MADCI) which was a real estate development corporation.MADCI offered for sale
shares of a golf and country club located in the vicinity of Mt. Arayat in Arayat, Pampanga, for the price of
P550.00 per share. Relying on the representation of MADCI's brokers and sales agents, Yu bought 500
golf and 150 country club shares for a total price of P650,000.00 which he paid by installment. Upon full
payment of the shares to MADCI, Yu visited the supposed site of the golf and country club and
discovered that it was non-existent.
Yu filed with the RTC a complaint for collection of sum of money and damages with prayer for
preliminary attachment against MADCI and its president Rogelio Sangil (Sangil) to recover his payment.
In his transactions with MADCI, Yu alleged that he dealt with Sangil, who used MADCI's corporate
personality to defraud him.
RTC ruled that because MADCI did not deny its contractual obligation with Yu, it must be liable
for the return of his payments. The trial court also ruled that Sangil should be solidarily liable with MADCI
because he used the latter as a mere alter ego or business conduit. In two separate appeals, the parties
elevated the case to the CA.
The CA partly granted the appeals and modified the RTC decision by holding YIL and its
companies, YILPI and YICRI, jointly and severally, liable for the satisfaction of Yu's claim.The CA held
that the sale of lands between MADCI and YIL must be upheld because Yu failed to prove that it was
simulated or that fraud was employed.
The CA explained that YIL, YILPI and YICRI could not escape liability by simply invoking the
provision in the MOA that Sangil undertook the responsibility of paying all the creditors' claims for refund.
The provision was, in effect, a novation under Article 1293 of the Civil Code, specifically the substitution
of debtors. Considering that Yu, as creditor of MADCI, had no knowledge of the "change of debtors," the
MOA could not validly take effect against him. Accordingly, MADCI remained to be a debtor of Yu.
Anent Sangil's liability, the CA ruled that he could not use the separate corporate personality of
MADCI as a tool to evade his existing personal obligations under the MOA.
YIL and its companies, YILPI and YICRI, moved for reconsideration, but their motion was denied
by the CA
ISSUE
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT PETITIONERS YATS
GROUP SHOULD BE HELD JOINTLY AND SEVERALLY LIABLE TO RESPONDENT YU DESPITE
THE ABSENCE OF FRAUD IN THE SALE OF ASSETS AND BAD FAITH ON THE PART OF
PETITIONERS YATS GROUP.
The Court's Ruling
The petition lacks merit.
Upon Yu’s demandof return of his payment, MADCI could not return it anymore because all its assets had
been transferred. Through the acts of YIL, MADCI sold all its lands to YILPI and, subsequently to YICRI.
Thus, Yu now claims that the petitioners inherited the obligations of MADCI. On the other hand, the
petitioners counter that they did not assume such liabilities because the transfer of assets was not
committed in fraud of the MADCI's creditors.Hence, the issue at hand presents a complex question of law
- whether fraud must exist in the transfer of all the corporate assets in order for the transferee to assume
the liabilities of the transferor. To resolve this issue, a review of the laws and jurisprudence concerning
corporate assumption of liabilities must be undertaken.
Background on the corporate

assumption of liabilities
In the 1965 case of Nell v. Pacific Farms, Inc., the Court first pronounced the rule regarding the transfer of
all the assets of one corporation to another (hereafter referred to as the Nell Doctrine) as follows:
Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently in order to escape liability for such
debts.
The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall
not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions are
present, then the transferee corporation shall assume the liabilities of the transferor.
Legal bases of the Nell Doctrine
An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully supported by
Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity
under Article 1311 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are
valid and binding only between the contracting parties and their successors-in-interest. Thus, despite the
sale of all corporate assets, the transferee corporation cannot be prejudiced as it is not in privity with the
contracts between the transferor corporation and its creditors.
Jurisprudential recognition of the

Jurisprudence has held that in a business-enterprise transfer, the transferee is liable for the debts and
liabilities of his transferor arising from the business enterprise conveyed. Many of the application of the
business-enterprise transfer have been related by the Court to the application of the piercing doctrine.
proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor's liabilities, unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to
transfer all its business, properties and assets without the consent of its creditors and without requiring
the assignee to assume the assignor's obligations will defraud the creditors. The assignment will place
the assignor's assets beyond the reach of its creditors.
Fraud is not an essential

consideration in a business-
enterprise transfer
Notably, an evaluation of the relevant jurisprudence reveals that fraud is not an essential element for the
application of the business-enterprise transfer which the court disagrees. The exception of the Nell
doctrine provides that the transferee corporation assumes the debts and liabilities of the transferor
corporation because it is merely a continuation of the latter's business. A cursory reading of the exception
shows that it does not require the existence of fraud against the creditors before it takes full force and
effect. Indeed, under the Nell Doctrine, the transferee corporation may inherit the liabilities of the
transferor despite the lack of fraud due to the continuity of the latter's business.
The purpose of the business-enterprise transfer is to protect the creditors of the business by allowing
them a remedy against the new owner of the assets and business enterprise. Otherwise, creditors would
be left "holding the bag," because they may not be able to recover from the transferor who has
"disappeared with the loot," or against the transferee who can claim that he is a purchaser in good faith
and for value. Based on the foregoing, as the exception of the Nell doctrine relates to the protection of the
creditors of the transferor corporation, and does not depend on any deceit committed by the transferee -
corporation, then fraud is certainly not an element of the business enterprise doctrine.
Applicability of the
in the present case
Bearing in mind that fraud is not required to apply the business-enterprise transfer, the next issue to be
resolved is whether the petitioners indeed became a continuation of MADCI's business. Synthesizing
Section 40 and the previous rulings of this Court, it is apparent that the business-enterprise transfer rule
applies when two requisites concur: (a) the transferor corporation sells all or substantially all of its assets
to another entity; and (b) the transferee corporation continues the business of the transferor corporation.
Both requisites are present in this case.
MADCI was a development company which acquired properties in Magalang, Pampanga to be developed
into a golf course however, was then sold to YILPI, and then transferred to YICRI.Its sale to the
petitioners rendered it incapable of continuing its intended golf and country club business.
The MOA cannot

prejudice respondent
The MOA, which contains a provision that Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments, should not prejudice respondent Yu.
The CA correctly ruled that such provision constituted novation under Article 1293of the Civil Code.
When there is a substitution of debtors, the creditor must consent to the same; otherwise, it shall not in
any way affect the creditor. In this case, it was established that Yu's consent was not secured in the
execution of the MOA. Thus, insofar as the respondent was concerned, the debtor remained to be
MADCI. And given that the assets and business of MADCI have been transferred to the petitioners, then
the latter shall be liable.
Free and Harmless Clause
The petitioners, however, are not left without recourse as they can invoke the free and harmless clause
under the MOA. In business-enterprise transfer, it is possible that the transferor and the transferee may
enter into a contractual stipulation stating that the transferee shall not be liable for any or all debts arising
from the business which were contracted prior to the time of transfer. Such stipulations are valid, but only
as to the transferor and the transferee. These stipulations, though, are not binding on the creditors of the
business enterprise who can still go after the transferee for the enforcement of the liabilities.
In the present case, the MOA stated that Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments. While this free and harmless clause
cannot affect respondent as a creditor, the petitioners may resort to this provision to recover damages in
a third-party complaint. Whether the petitioners would act against Sangil under this provision is their own
option.
WHEREFORE, the petition is DENIED. The January 30, 2012 Decision and the April 29, 2013 Resolution
of the Court of Appeals are hereby AFFIRMED in toto.
2) Dela Rama vs Ma-ao Sugar Central co, Inc
Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17504 & L-17506 February 28, 1969
RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and

PATRIA SALAS, heirs of Magdalena Salas, as stockholders on their own behalf and for the
benefit of the Ma-ao Sugar Central Co., Inc., and other stockholders thereof who may wish to
join in this action, plaintiffs-appellants,
vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA,
ROMUALDO M. ARANETA, and RAMON A. YULO, defendants-appellants.
San Juan, Africa and Benedicto for plaintiffs-appellants.

Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendants-appellants.
CAPISTRANO, J.:
This was a representative or derivative suit commenced on October 20, 1953, in the Court of First
Instance of Manila by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J.
Amado Araneta and three other directors of the corporation.
The complaint comprising the period November, 1946 to October, 1952, stated five causes of action,
to wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and
unauthorized investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of
corporate rights warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for
receivership.
Plaintiffs prayed, in substance, as follows:
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his individual co-
defendants be ordered to render an accounting of all transactions made and carried out by them for
defendant corporation, and "to collect, produce and/or pay to the defendant corporation the
outstanding balance of the amounts so diverted and still unpaid to defendant corporation";
Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and be
ordered to pay to the defendant corporation "whatever amounts may be recovered by the plaintiffs in
Civil Case No. 20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar Central Co.'"; to return to the
defendant corporation all amounts withdrawn by way of discretionary funds or backpay, and to
account for the difference between the corporation's crop loan accounts payable and its crop loan
accounts receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net assets be
distributed to the stockholders; and
Under the FOURTH CAUSE OF ACTION, that the defendants be ordered "to pay the sum of
P300,000.00 by way of compensatory, moral and exemplary damages and for expenses of litigation,
including attorney's fees and costs of the suit."
THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of receivership.
In their answer originally filed on December 1, 1953, and amended on February 1, 1955, defendants
denied "the allegations regarding the supposed gross mismanagement, fraudulent use and diversion
of corporate funds, disregard of corporate requirements, abuse of trust and violation of fiduciary
relationship, etc., supposed to have been discovered by plaintiffs, all of which are nothing but
gratuitous, unwarranted, exaggerated and distorted conclusions not supported by plain and specific
facts and transactions alleged in the complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the
complaint "is premature, improper and unjustified"; (2) that plaintiffs did not make an "earnest, not
simulated effort" to exhaust first their remedies within the corporation before filing their complaint; (3)
that no actual loss had been suffered by the defendant corporation on account of the transactions
questioned by plaintiffs; (4) that the payments by the debtors of all amounts due to the defendant
corporation constituted a full, sufficient and adequate remedy for the grievances alleged in the
complaint and (5) that the dissolution and/or receivership of the defendant corporation would violate
and impair the obligation of existing contracts of said corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among others, that the
complaint was premature, improper and malicious, and that the language used was "unnecessarily
vituperative abusive and insulting, particularly against defendant J. Amado Araneta who appears to
be the main target of their hatred." Wherefore, the defendant sought to recover "compensation for
damages, actual, moral, exemplary and corrective, including reasonable attorney's fees."
After trial, the Lower Court rendered its Decision (later supplemented by an Order resolving
defendants' Motion for Reconsideration), the dispositive portion of which reads:
IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns J.
Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. the amount of P46,270.00 with
8% interest from the date of the filing of this complaint, plus the costs; the Court reiterates
the preliminary injunction restraining the Ma-ao Sugar Central Co., Inc. management to give
any loans or advances to its officers and orders that this injunction be as it is hereby made,
permanent; and orders it to refrain from making investments in Acoje Mining, Mabuhay
Printing, and any other company whose purpose is not connected with the Sugar Central
business; costs of plaintiffs to be borne by the Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme Court.
Before taking up the errors respectively, assigned by the parties, we should state that the following
findings of the Lower Court on the commission of corporate irregularities by the defendants have not
been questioned by the defendants:
1. Failure to hold stockholders' meetings regularly. No stockholders' meetings were held in

1947, 1950 and 1951;
2. Irregularities in the keeping of the books. Untrue entries were made in the books which
could not simply be considered as innocent errors;
3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000.00.
The investments were made not in pursuance of the corporate purpose and without the
requisite authority of two-thirds of the stockholders;
4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to the
defendants, had been fully paid), in violation of the by-laws of the corporation which prohibits
any director from borrowing money from the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:
J. Amado Araneta & Co. P243,415.62

Luzon Industrial Corp. 585,918.17
Associated Sugar 463,860.36
General Securities 86,743.65
Bacolod Murcia 501,030.61
Central Azucarera del Danao 97,884.42
Talisay-Silay 4,365.90
The Court found that sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc. and
delivered to these affiliated companies, and vice versa, without the approval of the Ma-ao Board of
Directors, in violation of Sec. III, Art. 6-A of the by-laws.
The errors assigned in the appeal of the plaintiffs, as appellants, are as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE

FUNDS OF THE MA-AO SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER
PROCESSING CO., INC. WAS NOT A VIOLATION OF SEC. 17-½ OF THE
CORPORATION LAW.
II.
THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL
CO., INC. WAS INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS

COMMITTED AGAINST PLANTERS DID NOT CONSTITUTE MISMANAGEMENT.
IV.
THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE ACTS WERE
INSUFFICIENT FOR THE DISSOLUTION OF THE CORPORATION.
The portions of the Decision of the Lower Court assailed by the plaintiffs as appellants are as
follows:
(1) ".... Finally, as to the Philippine Fiber, the Court takes it that defendants admit having
invested P655,000.00 in shares of stock of this company but that this was ratified by the
Board of Directors in Resolutions 60 and 80, Exhibits "R" and "R-2"; more than that,
defendants contend that since said company was engaged in the manufacture of sugar bags
it was perfectly legitimate for Ma-ao Sugar either to manufacture sugar bags or invest in
another corporation engaged in said manufacture, and they quote authorities for the
purpose, pp. 28-31, memorandum; the Court is persuaded to believe that the defendants on
this point are correct, because while Sec. 17-1/2 of the Corporation Law provides that:
No corporation organized under this act shall invest its funds in any other corporation
or business or for any purpose other than the main purpose for which it was
organized unless its board of directors has been so authorized in a resolution by the
affirmative vote of stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such proposal at the stockholders'
meeting called for the purpose.
the Court is convinced that that law should be understood to mean as the authorities state,
that it is prohibited to the Corporation to invest in shares of another corporation unless such
an investment is authorized by two-thirds of the voting power of the stockholders, if the
purpose of the corporation in which investment is made is foreign to the purpose of the
investing corporation because surely there is more logic in the stand that if the investment is
made in a corporation whose business is important to the investing corporation and would
aid it in its purpose, to require authority of the stockholders would be to unduly curtail the
Power of the Board of Directors; the only trouble here is that the investment was made
without any previous authority of the Board of Directors but was only ratified afterwards; this
of course would have the effect of legalizing the unauthorized act but it is an indication of the
manner in which corporate business is transacted by the Ma-ao Sugar administration, the
fact that off and on, there would be passed by the Board of Directors, resolutions ratifying all
acts previously done by the management, e.g. resolutions passed on February 25, 1947, and
February 25, 1952, by the Board of Directors as set forth in the affidavit of Isidro T. Dunca p.
127, etc. Vol. 1. (Decision, pp. 239-241 of Record on Appeal.)
xxx xxx xxx
(2) "On the other hand, the Court has noted against plaintiffs that their contention that Ma-ao
Sugar is on the verge of bankruptcy has not been clearly shown; against this are Exh. C to
Exh. C-3 perhaps the best proof that insolvency is still far is that this action was filed in 1953
and almost seven years have passed since then without the company apparently getting
worse than it was before; ..." (Decision, pp. 243-244, supra.)
xxx xxx xxx
(3) "As to the crop loan anomalies in that instead of giving unto the planters the entire
amount alloted for that, the Central withheld a certain portion for their own use, as can be
seen in Appendix A of Exh. C-1, while the theory of plaintiffs is that since between the
amount of P3,791,551.78 the crop loan account payable, and the amount of P1,708,488.22,
the crop loan receivable, there is a difference of P2,083,063.56, this would indicate that this
latter sum had been used by the Central itself for its own purposes; on the other hand,
defendants contend that the first amount did not represent the totality of the crop loans
obtained from the Bank for the purpose of relending to the planters, but that it included the
Central's own credit line on its 40% share in the standing crop; and that this irregularity
amounts to a grievance by plaintiffs as planters and not as stockholders, the Court must find
that as to this count, there is really reason to find that said anomaly is not a clear basis for
the derivative suit, first, because plaintiffs' evidence is not very sufficient to prove clearly the
alleged diversion in the face of defendants' defense; there should have been a showing that
the Central had no authority to make the diversion; and secondly, if the anomaly existed,
there is ground to hold with defendants that it was an anomaly pernicious not to the Central
but to the planters; it was not even pernicious to the stockholders.
Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of cane

allotments, withholding of molasses and alcohol shares, withholding of trucking allowance,
formation of rival planters associations, refusal to deal with legitimate planters group, Exh. S;
the Court notices that as to the failure to provide hauling transportation, this in a way is
corroborated by Exh. 7, that part containing the decision of the Court of First Instance of
Manila, civil 20122, Francisco Rodriguez v. Ma-ao Sugar; for the reason, however, that even
if these were true, those grievances were grievances of plaintiffs as planters and not as
stockholders — just as the grievance as to the crop loans already adverted to, — this Court
will find insufficient merit on this count. (Decision, pp. 230-231, supra.)
xxx xxx xxx
(4) "...; for the Court must admit its limitations and confess that it cannot pretend to know
better than the Board in matters where the Board has not transgressed any positive statute
or by-law especially where as here, there is the circumstance that presumably, an impartial
representative in the Board of Directors, — the one from the Philippine National Bank, —
against whom apparently plaintiffs have no quarrel, does not appear to have made any
protest against the same; the net result will be to hold that the culpable acts proved are not
enough to secure a dissolution; the Court will only order the correction of abuses, proved as
already mentioned; nor will the Court grant any more damages one way or the other.
(Decision, p. 244, supra.)
On the other hand, the errors assigned in the appeal of the defendants as appellants are as follows:
I.
THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO

SUGAR CENTRAL CO., INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST FROM
THE DATE OF FILING OF THE COMPLAINT.
II.
THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE
DEFENDANTS, PARTICULARLY J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN
THE COUNTERCLAIM OF SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the defendants as appellants are as
follows:
(1) "As to the alleged juggling of books in that the personal account of J. Amado Araneta of
P46,270.00 was closed on October 31, 1947 by charges transferred to loans receivable nor
was interest paid on this amount, the Court finds that this is related to charge No. 1, namely,
the granting of personal loans to J. Amado Araneta; it is really true that according to the
books, and as admitted by defendants, J. Amado Araneta secured personal loans; in 1947,
the cash advance to him was P132,082.00 (Exh. A); the Court has no doubt that this was
against the By-Laws which provided that:
The Directors shall not in any case borrow money from the Company. (Sec. III, Art.
7);
the Court therefore finds this count to be duly proved; worse, the Court also finds that as
plaintiffs contend, while the books of the Corporation would show that the last balance of
P46,270.00 was written off as paid, as testified to by Auditor Mr. Sanchez, the payment
appeared to be nothing more than a transfer of his loan receivable account, stated otherwise,
the item was only transferred from the personal account to the loan receivable account, so
that again the Court considers established the juggling of the books; and then again, it is also
true that the loans were secured without any interest and while it is true that in the Directors'
meeting of 21 October, 1953, it was resolved to collect 8%, the Court does not see how such
a unilateral action of the Board could bind the borrowers. Be it stated that defendants have
presented in evidence Exh. 5 photostatic copy of the page in loan receivable and it is sought
to be proved that J. Amado Araneta's debt was totally paid on 31 October, 1953; to the
Court, in the absence of definite primary proof of actual payment having found out that there
had already been a juggling of books, it cannot just believe that the amount had been paid as
noted in the books. (Decision, pp. 233-235 of Record on Appeal.)
(2) "With respect to the second point in the motion for reconsideration to the effect that the
Court did not make any findings of fact on the counterclaim of defendants, although the
Court did not say that in so many words, the Court takes it that its findings of fact on pages
17 to 21 of its decision were enough to justify a dismissal of the counterclaim, because the
counterclaims were based on the fact that the complaint was premature, improper, malicious
and that the language is unnecessarily vituperative abusive and insulting; but the Court has
not found that the complaint is premature; nor has the Court found that the complaint was
malicious; these findings can be gleaned from the decision with respect to the allegation that
the complaint was abusive and insulting, the Court does not concur; for it has not seen
anything in the evidence that would justify a finding that plaintiffs and been actuated by bad
faith, nor is there anything in the complaint essentially libelous; especially as the rule is that
allegations in pleading where relevant, are privileged even though they may not clearly
proved afterwards; so that the Court has not seen any merit in the counterclaims; and the
Court had believed that the decision already carried with it the implication of the dismissal of
the counterclaims, but if that is not enough, the Court makes its position clear on this matter
in this order, and clarifies that it has dismissed the counterclaims of defendant; ..." (Order of
September 3, 1960, pp. 248-249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as appellants,
it appears to us that the Lower Court was correct in its appreciation (1) that the evidence presented
did not show that the defendant Ma-ao Sugar Company was insolvent (2) that the alleged
discriminatory acts committed by the defendant Central against the planters were not a proper
subject of derivative suit, but, at most, constituted a cause of action of the individual planters; and (3)
that the acts of mismanagement complained of and proved do not justify a dissolution of the
corporation.
Whether insolvency exists is usually a question of fact, to be determined from an inventory of

the assets and their value, as well as a consideration of the liabilities.... But the mere
impairment of capital stock alone does not establish insolvency there being other evidence
as to the corporation being a going concern with sufficient assets. Also, the excess of
liabilities over assets does not establish insolvency, when other assets are available.
(Fletcher Cyc. of the Law of Private Corporations, Vol. 15A, 1938 Ed pp. 34-37; Emphasis
supplied).
But relief by dissolution will be awarded in such cases only where no other adequate remedy
is available, and is not available where the rights of the stockholders can be, or are,
protected in some other way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing
"Thwing v. McDonald", 134 Minn. 148, 156 N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann.
Cas. 1918 E 420; Mitchell v. Bank of St. Paul, 7 Minn. 252).
The First Assignment of Error in the brief of the plaintiffs as appellants, contending that the
investment of corporate funds by the Ma-ao Sugar Co., Inc., in another corporation (the Philippine
Fiber Processing Co., Inc.) constitutes a violation of Sec. 17-½ of the Corporation Law, deserves
consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through its President, J.
Amado Araneta,, subscribed for P300,000.00 worth of capital stock of the Philippine Fiber
Processing Co. Inc., that payments on the subscription were made on September 20, 1950, for
P150,000.00, on April 30, 1951, for P50,000.00, and on March 6, 1952, for P100,000.00; that at the
time the first two payments were made there was no board resolution authorizing the investment;
and that it was only on November 26, 1951, that the President of Ma-ao Sugar Central Co., Inc., was
so authorized by the Board of Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by
Luzon Industrial, corporation were transferred on May 31, 1952, to the defendant Ma-ao Sugar
Central Co., Inc., with a valuation of P355,000.00 on the basis of P1.00 par value per share. Again
the "investment" was made without prior board resolution, the authorizing resolution having been
subsequentIy approved only on June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board Resolutions are
valid, the transaction, is still wanting in legality, no resolution having been approved by the
affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power, as required in Sec. 17-½ of the Corporation Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 17-½ of the Corporation Law,
provides:
No corporation organized under this act shall invest its funds in any other corporation or
business, or for any purpose other than the main purpose for which it was organized, unless
its board of directors has been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise at least two-thirds of
the voting power on such proposal at a stockholders' meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law,
which provides:
SEC. 13. — Every corporation has the power:
xxx xxx xxx
(9) To enter into any obligation or contract essential to the proper administration of its
corporate affairs or necessary for the proper transaction of the business or accomplishment
of the purpose for which the corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its purpose as
stated in the articles of incorporation, to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities and other evidences of indebtedness of any domestic or foreign
corporation.
A reading of the two afore-quoted provisions shows that there is need for interpretation of the
apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th edition, Professor Sulpicio S.
Guevara of the University of the Philippines, College of Law, a well-known authority in commercial
law, reconciled these two apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities. — A private corporation, in order to

accomplish its purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic
or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not
need the approval of the stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the limitations established by the
Corporation Law; namely, (a) that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation; or (b) that a non-agricultural or non-
mining corporation shall be restricted to own not more than 15% of the voting stock of any
agricultural or mining corporation; and (c) that such holdings shall be solely for investment
and not for the purpose of bringing about a monopoly in any line of commerce or
combination in restraint of trade. (The Philippine Corporation Law by Sulpicio S. Guevara,
1967 Ed., p. 89.) (Emphasis ours.) lawphi1.nêt
40. Power to invest corporate funds. — A private corporation has the power to invest its
corporate funds in any other corporation or business, or for any purpose other than the main
purpose for which it was organized, provided that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
proposal at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural or
mining corporation. When the investment is necessary to accomplish its purpose or purposes
as stated in it articles of incorporation, the approval of the stockholders is not necessary. (Id.,
p. 108.) (Emphasis ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the investment in question does not fall
under the purview of Sec. 17- ½ of the Corporation Law.
With respect to the defendants' assignment of errors, the second (referring to the counterclaim) is
clearly without merit. As the Lower Court aptly ruled in its Order of September 3, 1960 (resolving the
defendants' Motion for Reconsideration) the findings of fact were enough to justify a dismissal of the
counterclaim, "because the counterclaims were based on the fact that the complaint was premature,
improper, malicious and that the language is unnecessarily vituperative abusive and insulting; but
the Court has not found that the complaint is premature; nor has the Court found that the complaint
was malicious; these findings can be gleaned from the decision; with respect to the allegation that
the complaint was abusive and insulting, the Court does not concur; for it has not seen anything in
the evidence that would justify a finding that plaintiffs had been actuated by bad faith, nor is there
anything in the complaint essentially libelous especially as the rule is that allegations in pleadings
where relevant, are privileged even though they may not be clearly proved afterwards; ..."
As regards defendants' first assignment of error, referring to the status of the account of J. Amado
Araneta in the amount of P46,270.00, this Court likewise agrees with the finding of the Lower Court
that Exhibit 5, photostatic copy of the page on loans receivable does not constitute definite primary
proof of actual payment, particularly in this case where there is evidence that the account in question
was transferred from one account to another. There is no better substitute for an official receipt and
a cancelled check as evidence of payment.
In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to
refrain from making investments in Acoje Mining, Mabuhay Printing and any other company whose
purpose is not connected with the sugar central business." This portion of the decision should be
reversed because, Sec. 17-½ of the Corporation Law allows a corporation to "invest its fund in any
other corporation or business, or for any purpose other than the main purpose for which it was
organized," provided that its board of directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-thirds of the voting power.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao Sugar
Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing, and any
other: company whose purpose is not connected with the sugar central business," is reversed. The
other parts of the judgment are, affirmed. No special pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando and Barredo, JJ., concur.
Makalintal, Sanchez and Teehankee, JJ., took no part.
3) Gokongwei vs SEC 89 SCRA 336

SUPREME COURT
Manila
EN BANC
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-
laws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for
a preliminary injunction" against the majority of the members of the Board of Directors and San
Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres
Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde,
Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent
corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share
and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding
and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended
that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation,
the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of
Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed
and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of
the capitalization at the time of the amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without authority and in usurpation of the
power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors had
changed since the authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all
the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof;
that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights
to vote and to be voted upon in the election of directors; and that in amending the by-laws,
respondents purposely provided for petitioner's disqualification and deprived him of his vested right
as afore-mentioned hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to disqualify
a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and
void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations,
entered into contracts (specifically a management contract) with respondent corporation, which was
allowed because the questioned amendment gave the Board itself the prerogative of determining
whether they or other persons are engaged in competitive or antagonistic business; that the portion
of the amended bylaws which states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business and family relationship, is
unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws
which requires that "all nominations for election of directors ... shall be submitted in writing to the
Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise
unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of
filing thereof be cancelled, and that individual respondents be made to pay damages, in specified
amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that
the Secretary of respondent corporation refused to allow him to inspect its records despite request
made by petitioner for production of certain documents enumerated in the request, and that
respondent corporation had been attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b)
copy of the management contract between San Miguel Corporation and A. Soriano Corporation
(ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the
stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e)
lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M.
Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents,
alleging, among others that the motion has no legal basis; that the demand is not based on good
faith; that the motion is premature since the materiality or relevance of the evidence sought cannot
be determined until the issues are joined, that it fails to show good cause and constitutes continued
harrasment, and that some of the information sought are not part of the records of the corporation
and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation, Enrique
Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial
allegations therein and stating, by way of affirmative defenses that "the action taken by the Board of
Directors on September 18, 1976 resulting in the ... amendments is valid and legal because the
power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961
and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined
in relation to the total subscribed capital stock at the time the delegation of said power is made, not
when the Board opts to exercise said delegated power"; that petitioner has not availed of his intra-
corporate remedy for the nullification of the amendment, which is to secure its repeal by vote of the
stockholders representing a majority of the subscribed capital stock at any regular or special
meeting, as provided in Article VIII, section I of the by-laws and section 22 of the Corporation law,
hence the, petition is premature; that petitioner is estopped from questioning the amendments on the
ground of lack of authority of the Board. since he failed, to object to other amendments made on the
basis of the same 1961 authorization: that the power of the corporation to amend its by-laws is
broad, subject only to the condition that the by-laws adopted should not be respondent corporation
inconsistent with any existing law; that respondent corporation should not be precluded from
adopting protective measures to minimize or eliminate situations where its directors might be
tempted to put their personal interests over t I hat of the corporation; that the questioned amended
by-laws is a matter of internal policy and the judgment of the board should not be interfered with:
That the by-laws, as amended, are valid and binding and are intended to prevent the possibility of
violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the petition
states no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner
be ordered to pay damages and attorney's fees to respondents. The application for writ of
preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition,
denying the material averments thereof and stating, as part of their affirmative defenses, that in
August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began acquiring shares therein. until September 1976
when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated Foods
Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its total holdings
amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president
and controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares
of stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted
malevolent and malicious publicity campaign against SMC" to generate support from the stockholder
"in his effort to secure for himself and in representation of Robina and CFC interests, a seat in the
Board of Directors of SMC", that in the stockholders' meeting of March 18, 1976, petitioner was
rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue
that petitioner was engaged in a competitive business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat
in the Board of Directors at the next annual meeting; that thereafter the Board of Directors amended
the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection
of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors
and they accordingly filed their oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as
follows:
Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing,
by or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel Corporation held on March 13,
1961, which are in the possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues involved in the main
case. Accordingly, the respondents should allow petitioner-movant entry in the
principal office of the respondent Corporation, San Miguel Corporation on January
14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the rights herein
granted; it being understood that the inspection, copying and photographing of the
said documents shall be undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or papers not heretofore
included are not covered by this Order and any inspection thereof shall require the
prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of
salaries, allowances, bonuses, compensation and/or remuneration received by
respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International,
Inc. and/or its successors-in- interest, the Petition to produce and inspect the same is
hereby DENIED, as petitioner-movant is not a stockholder of San Miguel
International, Inc. and has, therefore, no inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29, 1976,

withdrawing his request to copy and inspect the management contract between San
Miguel Corporation and A. Soriano Corporation and the renewal and amendments
thereof for the reason that he had already obtained the same, the Commission takes
note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of

production and inspection of the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation in San Miguel International,
Inc., until after the hearing on the merits of the principal issues in the above-entitled
case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation
issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of
the amendment to the By-laws", setting such meeting for February 10, 1977. This prompted
petitioner to ask respondent Commission for a summary judgment insofar as the first cause of action
is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid
purpose, private respondents admitted the invalidity of the amendments of September 18, 1976. The
motion for summary judgment was opposed by private respondents. Pending action on the motion,
petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that
pending the determination of petitioner's application for the issuance of a preliminary injunction
and/or petitioner's motion for summary judgment, a temporary restraining order be issued,
restraining respondents from holding the special stockholder's meeting as scheduled. This motion
was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.
A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed
by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the
time of the filing of the instant petition, the said motion had not yet been scheduled for hearing.
Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner's
motion for production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had been
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that
he intended to run for the position of director of respondent corporation. Thereafter, respondents
filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors
of respondent corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications
specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason
thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents were seeking to nullify and render
ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner's irreparable
damage and prejudice, Allegedly despite a subsequent Manifestation to prod respondent
Commission to act, petitioner was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to
act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have private respondents Andres M.
Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such
violation, and ordered to account for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February
4, 1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to
dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on
April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof,
the following:
6. Re-affirmation of the authorization to the Board of Directors by the stockholders at

the meeting on March 20, 1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for which the Corporation
has been organized, and ratification of the investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of
the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May
3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission,
however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17,
1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding,
no action has been taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch
on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon
his rights as stockholder of respondent corporation, and that respondent are acting oppressively
against petitioner, in gross derogation of petitioner's rights to property and due process. He prayed
that this Court direct respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private respondents
from disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court
or until the Securities and Ex-change Commission acts on the matters complained of in the instant
petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had
been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner
copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part petitioner's
motion for production of documents, petitioner's motion for reconsideration of the order denying the
issuance of a temporary restraining order denying the issuance of a temporary restraining order, and
petitioner's consolidated motion to declare respondents in contempt and to nullify the stockholders'
meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of
the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for summary
judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared null and void
and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings
relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and controls a
greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in business directly and substantially competing with
the allied businesses of respondent SMC and of corporations in which SMC has substantial
investments. Further, when CFC and Robina had accumulated investments. Further, when CFC and
Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and
present danger that competitors or antagonistic parties may be elected directors and thereby have
easy and direct access to SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear
and present danger that business competitors, if allowed to become directors, will illegally and
unfairly utilize their direct access to its business secrets and plans for their own private gain to the
irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that
membership of a competitor in the Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve
and protect itself by excluding competitors and antogonistic parties, under the law of self-
preservation, and it should be allowed a wide latitude in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on
May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and academic
because respondent Commission has acted on the pending incidents, complained of. It was,
therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition
has become moot and academic for the reason, among others that the acts of private respondent
sought to be enjoined have reference to the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the
order of respondent Commission, petitioner was allowed to run and be voted for as director; and that
in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed.
Further it was averred that the questions and issues raised by petitioner are pending in the
Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing
on the merits has been had; hence the elevation of these issues before the Supreme Court is
premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
questions for the determination of this Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court;
(2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to
the bylaws which specifically bars petitioner from being a director is void since it deprives him of his
vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did
not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC
Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation,
took into consideration an urgent manifestation filed with the Commission by petitioner on May 3,
1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The
reason given for denial of deferment was that "such action is within the authority of the corporation
as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to express
their wishes regarding disposition of corporate funds considering that their investments are the ones
directly affected." It was alleged that the main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent
Commission are now before this Honorable Court which has the authority and the competence to act
on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for
an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San
Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of
Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of
the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2
of the Corporation Law.
Whether or not amended by-laws are valid is purely a legal question which public interest requires to
be resolved —
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for
an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle
of exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to
what the provisions are and evidence is not necessary to determine whether such amended by-laws
are valid as framed and approved ... "; second: "it is for the interest and guidance of the public that
an immediate and final ruling on the question be made ... "; third: "petitioner was denied due process
by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather than serve
the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the
legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court
should always strive to settle the entire controversy in a single proceeding leaving no root or branch
to bear the seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is the prayer of
San Miguel Corporation that this Court resolve on the merits the validity of its amended by laws and
the rights and obligations of the parties thereunder, otherwise "the time spent and effort exerted by
the parties concerned and, more importantly, by this Honorable Court, would have been for naught
because the main question will come back to this Honorable Court for final resolution." Respondent
Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC for
hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and
decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the ends of justice would not be
subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et
al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v. Central Surety
and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for
further proceedings, citing precedent where this Court, in similar situations resolved to decide the
cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would
not be subserved by the remand of the case; or (b) where public interest demand an early
disposition of the case; or (c) where the trial court had already received all the evidence presented
by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the
case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only
a question of law is involved. 8a Because uniformity may be secured through review by a single
Supreme Court, questions of law may appropriately be determined in the first instance by
courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws
were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a
special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were
ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong
Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or
election to the Board of Directors of SMC are valid and reasonable —
The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the
by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal
sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to
the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon
which reasonable minds must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-laws and who have
exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored
to suppress the minority and prevent them from having representation in the Board", at the same
time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided
Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San
Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with
the promotion of the corporate enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of petitioner and respondent San Miguel
Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of
the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is
further argued that there is not vested right of any stockholder under Philippine Law to be voted as
director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or
thru two corporations owned or controlled by him, control over the following shareholdings in San
Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation
— 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the
outstanding capital stock of San Miguel Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner
represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also
contended that petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members
of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation
are engaged in businesses directly and substantially competing with the alleged businesses of San
Miguel Corporation, and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN

MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its
Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total

1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved
product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC.
Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken,
poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of such
dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines
which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina
was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex,
excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with
Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The
areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the
total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because
they "realized the grave dangers to the corporation in the event a competitor gets a board seat in
SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it
by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of
February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders'
Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the
outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801
shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders,
owning more than 30 million shares, or more than 90% of the total outstanding shares. voted against
petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS

EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board of
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the
clear and present danger that the election of a business competitor to the Board may cause upon
the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore,
is the issue — whether or not respondent San Miguel Corporation could, as a measure of self-
protection, disqualify a competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for
its internal government, and to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of its affairs. 12 At
common law, the rule was "that the power to make and adopt by-laws was inherent in every
corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the
United States that in the absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and inseparable legal incidents,
independent of any specific enabling provision in its charter or in general law, such power of self-
government being essential to enable the corporation to accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-
laws "the qualifications, duties and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of the capital stock of the
stock corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the
validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their
action, on the ground that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majorityof the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted
by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be considered to
have "parted with his personal right or privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied,
between the corporation and the stockholders is infringed ... by any act of the former which is
authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least two-thirds of the
subscribed capital stock of the corporation If the amendment changes, diminishes or restricts the
rights of the existing shareholders then the disenting minority has only one right, viz.: "to object
thereto in writing and demand payment for his share." Under section 22 of the same law, the owners
of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-
laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face
of the fact that the law at the time such right as stockholder was acquired contained the prescription
that the corporate charter and the by-law shall be subject to amendment, alteration and
modification. 17
It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is whether the disqualification of a competitor from being
elected to the Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary
relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of directors of
a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or
technical law. It springs from the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries
thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of
the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such
fiduciary position cannot serve himself first and his cestuis second. ... He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters ... He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of
fair play by doing indirectly through the corporation what he could not do so directly.
He cannot violate rules of fair play by doing indirectly though the corporation what he
could not do so directly. He cannot use his power for his personal advantage and to
the detriment of the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can
a director. Human nature is too weak -for this. Take whatever statute provision you
please giving power to stockholders to choose directors, and in none will you find any
express prohibition against a discretion to select directors having the company's
interest at heart, and it would simply be going far to deny by mere implication the
existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from
being a director, the same reasoning would apply to disqualify the wife and immediate member of
the family of such stockholder, on account of the supposed interest of the wife in her husband's
affairs, and his suppose influence over her. It is perhaps true that such stockholders ought not to be
condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So
it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of control in this corporation as in many
others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test
that we can apply is as to whether or not the action of the Board is authorized and sanctioned by
law. ... . 22
These principles have been applied by this Court in previous cases.23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER

INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have the power
to make by-laws declaring a person employed in the service of a rival company to be ineligible for
the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected,
subjects to removal, a director if he be also a director in a corporation whose business is in
competition with or is antagonistic to the other corporation is valid." 24This is based upon the principle
that where the director is so employed in the service of a rival company, he cannot serve both, but
must betray one or the other. Such an amendment "advances the benefit of the corporation and is
good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law
in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to
add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because
as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may
make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation
cannot engage in a business in direct competition with that of the corporation where he is a director
by utilizing information he has received as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a
rival business, the directors entered into a new contract themselves with the foreign firm for
exclusive sale of its products, the court held that equity would regard the new contract as an offshoot
of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not
reap the fruits of his misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an
officer or director taking advantage of an opportunity for his own personal profit when the interest of
the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure;
(b) budget for expansion and diversification; (c) research and development; and (d) sources of
funding, availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of
the information which he acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-
laws was made. Certainly, where two corporations are competitive in a substantial sense, it would
seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to
satisfy his loyalty to both corporations and place the performance of his corporation duties above his
personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be
directors, officers, employees, agents, nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court,
thus:
... A bank director has access to a great deal of information concerning the business
and plans of a bank which would likely be injurious to the bank if known to another
bank, and it was reasonable and prudent to enlarge this minimum disqualification to
include any director, officer, employee, agent, nominee, or attorney of any other bank
in California. The Ashkins case, supra, specifically recognizes protection against
rivals and others who might acquire information which might be used against the
interests of the corporation as a legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney for another bank, in
addition to the direct conflict or potential conflict of interest, there is also the danger
of inadvertent leakage of confidential information through casual office discussions or
accessibility of files. Defendant's directors determined that its welfare was best
protected if this opportunity for conflicting loyalties and potential misuse and leakage
of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in any

other firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in
any other firm, company, or association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any
other firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding

office.
(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience — that a person cannot
serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of
his position as director of San Miguel Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the validity and reasonableness of
the by-laws here involved. Apart from the impractical results that would ensue from such
arrangement, it would be inconsistent with petitioner's primary motive in running for board
membership — which is to protect his investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted principles underlying a director's duty of
fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate
management. As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors ...
without active and conscientious participation in the managerial functions of the company. As
directors, it is their duty to control and supervise the day to day business activities of the company or
to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that these
policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to
the corporation."
Sound principles of corporate management counsel against sharing sensitive information with a
director whose fiduciary duty of loyalty may well require that he disclose this information to a
competitive arrival. These dangers are enhanced considerably where the common director such as
the petitioner is a controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to appropriate for the benefit
of his own corporation the corporate plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and
unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new products could enable said competitor to
utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair
competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or
prohibit private monopolies when the public interest so requires. No combinations in restraint of
trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or

commerce, or shall combine with any other person or persons to monopolize said
merchandise or object in order to alter the price thereof by spreading false rumors or
making use of any other artifice to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any

merchandise or object of commerce or an importer of any merchandise or object of
commerce from any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with any person likewise
engaged in the manufacture, production, processing, assembling or importation of
such merchandise or object of commerce or with any other persons not so similarly
engaged for the purpose of making transactions prejudicial to lawful commerce, or of
increasing the market price in any part of the Philippines, or any such merchandise
or object of commerce manufactured, produced, processed, assembled in or
imported into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of
commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in
restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter
in free markets. These laws are designed to preserve free and unfettered competition as the rule of
trade. "It rests on the premise that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices and the highest quality ... ." 34 they
operate to forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a
well defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general sense, or to control prices to the detriment
of the public. 37 In short, it is the concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when desired. 38 Further, it
must be considered that the Idea of monopoly is now understood to include a condition produced by
the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the
suppression of competition by the qualification of interest or management, or it may be thru
agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination
or conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what the parties
actually did and not the words they used. For instance, the Clayton Act prohibits a person from
serving at the same time as a director in any two or more corporations, if such corporations are, by
virtue of their business and location of operation, competitors so that the elimination of competition
between them would constitute violation of any provision of the anti-trust laws. 42 There is here a
statutory recognition of the anti-competitive dangers which may arise when an individual
simultaneously acts as a director of two or more competing corporations. A common director of two
or more competing corporations would have access to confidential sales, pricing and marketing
information and would be in a position to coordinate policies or to aid one corporation at the expense
of another, thereby stifling competition. This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one director
is that the interlock permits the coordination of policies between nominally
independent firms to an extent that competition between them may be completely
eliminated. Indeed, if a director, for example, is to be faithful to both corporations,
some accommodation must result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that would injure B without
violating his duty of loyalty to B at the same time he could hardly abstain from voting
without depriving A of his best judgment. If the firms really do compete — in the
sense of vying for economic advantage at the expense of the other — there can
hardly be any reason for an interlock between competitors other than the
suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of
men have been able to dominate and control a great number of corporations ... to the detriment of
the small ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the
prices of his products or vary its marketing strategies by region or by brand in order to get the most
out of the consumers. Where the two competing firms control a substantial segment of the market
this could lead to collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry between the corporations, to
seek out ways of compromising opposing interests, and thus eliminate competition. As respondent
SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in
the country win enable the former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups and change varying prices in
order to maximize profits from every market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product line in which it competes with SMC.
Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive
the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then
the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained
in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more
than one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder
but waived in the case of another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders.
The equal protection clause of the Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible to run for director, there
must be hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support the view that
a by-law which disqualifies a competition from election to the Board of Directors of another
corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to
the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment
of those who are authorized to make by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the
terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or
more forces, each possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more advantageous terms as an inducement to
secure trade. 46 The test must be whether the business does in fact compete, not whether it is
capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristics
activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same
kind is a competitor. Such factors as quantum and place of business, Identity of products and area of
competition should be taken into consideration. It is, therefore, necessary to show that petitioner's
business covers a substantial portion of the same markets for similar products to the extent of not
less than 10% of respondent corporation's market for competing products. While We here sustain
the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner
is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing
at which the petitioner must be given the fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of
directors to act with fairness to the stockholders.48Pursuant to this obligation and to remove any
suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities behind Exchange Commission en banc and its decision shall
be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public
policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste,
dissipation or misapplication of the corporation assets, a court of equity has the power to grant
appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was
denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over
a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a
complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes
of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment
in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries,
allowances, bonuses and other compensation or remunerations received by the directors and
corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC;
and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May
1976, with deletions of sensitive data, which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976;
(1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in
Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948
with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign
bank under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that
as of December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that
the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and
(4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used
in line with a program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of
the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of
the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection.
It is generally held by majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other
words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular
Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest
purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial
opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court
to inquire into and consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused
when the information is not sought in good faith or is used to the detriment of the corporation." 57 But
the "impropriety of purpose such as will defeat enforcement must be set up the corporation
defensively if the Court is to take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general
rule that stockholders are entitled to full information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such information, especially where it
appears that the company is being mismanaged or that it is being managed for the personal benefit
of officers or directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for a lawful
purpose is a matter of law, the right of such stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has
been held that where a corporation owns approximately no property except the shares of stock of
subsidiary corporations which are merely agents or instrumentalities of the holding company, the
legal fiction of distinct corporate entities may be disregarded and the books, papers and documents
of all the corporations may be required to be produced for examination, 60 and that a writ of
mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes,
the records of the parent even though subsidiary was not named as a party. 61 mandamus was
likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof
of sufficient control or dominion by the parent showing the relation of principal or agent or something
similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
corporation is a separate and distinct corporation domiciled and with its books and records in
another jurisdiction, and is not legally subject to the control of the parent company, although it owned
a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an allied
corporation by stockholder of the parent company which owns all the stock of the subsidiary has
been refused on the ground that the stockholder was not within the class of "persons having an
interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in corporation's possession and control in
its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and
directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress information for
the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies
of some documents which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the books and records
of a corporation in order to investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the stewardship of the officers and
directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and
fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of such wholly subsidiary which are in
respondent corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for ratification is
a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was organized"
provided that its Board of Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is
made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is
only when the purchase of shares is done solely for investment and not to accomplish the purpose of
its incorporation that the vote of approval of the stockholders holding shares entitling them to
exercise at least two-thirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is
to manufacture and market beer. It appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong
Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as
a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the
stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the
manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is important to the investing corporation and
would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the
power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and,
quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. — A private corporation, in

order to accomplish is purpose as stated in its articles of incorporation, and subject to
the limitations imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the approval of stockholders; but
when the purchase of shares of another corporation is done solely for investment
and not to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of such shares or securities
must be subject to the limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to own not more than
15% of the voting stock of nay agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the purpose of bringing about a
monopoly in any line of commerce of combination in restraint of trade." The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis
supplied.)
40. Power to invest corporate funds. — A private corporation has the power to invest
its corporate funds "in any other corporation or business, or for any purpose other
than the main purpose for which it was organized, provide that 'its board of directors
has been so authorized in a resolution by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of the voting
power on such a propose at a stockholders' meeting called for that purpose,' and
provided further, that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby render
binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because
the questioned investment is neither contrary to law, morals, public order or public policy. It is a
corporate transaction or contract which is within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said
this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within
the scope of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted
the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977
cannot be construed as an admission that respondent corporation had committed an ultra vires act,
considering the common practice of corporations of periodically submitting for the gratification of
their stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted
to sustain the validity per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation being decided, after a new and
proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to
the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately
to this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-
mentioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on
the validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending
hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a
separate opinion, wherein they voted against the validity of the questioned amended bylaws and that
this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They
concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in
the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing
by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the
petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as
specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and
the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is
hereby DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.

Separate Opinions
TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ., concurring:
As correctly stated in the main opinion of Mr. Justice Antonio, the Court is unanimous in its judgment
granting the petitioner as stockholder of respondent San Miguel Corporation the right to inspect,
examine and secure copies of the records of San Miguel International, inc. (SMI), a wholly owned
foreign subsidiary corporation of respondent San Miguel Corporation. Respondent commissions en
banc Order No. 449, Series of 19 7 7, denying petitioner's right of inspection for "not being a
stockholder of San Miguel International, Inc." has been accordingly set aside. It need be only pointed
out that:
a) The commission's reasoning grossly disregards the fact that the stockholders of
San Miguel Corporation are likewise the owners of San Miguel International, Inc. as
the corporation's wholly owned foreign subsidiary and therefore have every right to
have access to its books and records. otherwise, the directors and management of
any Philippine corporation by the simple device of organizing with the corporation's
funds foreign subsidiaries would be granted complete immunity from the
stockholders' scrutiny of its foreign operations and would have a conduit for
dissipating, if not misappropriating, the corporation funds and assets by merely
channeling them into foreign subsidiaries' operations; and
b) Petitioner's right of examination herein recognized refers to all books and records
of the foreign subsidiary SMI which are which are " in respondent corporation's
possession and control" 1, meaning to say regardless of whether or not such books
and records are physically within the Philippines. all such books and records of SMI
are legally within respondent corporation's "possession and control" and if nay books
or records are kept abroad, (e.g. in the foreign subsidiary's state of domicile, as is to
be expected), then the respondent corporation's board and management are obliged
under the Court's judgment to bring and make them (or true copies thereof available
within the Philippines for petitioner's examination and inspection.
II
On the other main issue of the Validity of respondent San Miguel Corporation's amendment of its by-
laws 2 whereby respondent corporation's board of directors under its resolution dated April 29, 1977
declared petitioner ineligible to be nominated or to be voted or to be elected as of the board of
directors, the Court, composed of 12 members (since Mme. Justice Ameurfina Melencio Herrera
inhibited herself from taking part herein, while Mr. Justice Ramon C. Aquino upon submittal of the
main opinion of Mr. Justice Antonio decided not to take part), failed to reach a conclusive vote or, the
required majority of 8 votes to settle the issue one way or the other.
Six members of the Court, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and
De Castro, considered the issue purely legal and voted to sustain the validity per se of the
questioned amended by-laws but nevertheless voted that the prohibition and disqualification therein
provided shall not apply to petitioner Gokongwei until and after he shall have been given a new and
proper hearing" by the corporation's board of directors and the board's decision of disqualification
she'll have been sustained on appeal by respondent Securities and Exchange Commission and
ultimately by this Court.
The undersigned Justices do not consider the issue as purely legal in the light of respondent
commission's Order No. 451, Series of 1977, denying petitioner's "Motion for Summary Judgment"
on the ground that "the Commission en banc finds that there (are) unresolved and genuine issues of
fact" 3 as well as its position in this case to the Solicitor General that the case at bar is "premature"
and that the administrative remedies before the commission should first be availed of and
exhausted. 4
We are of the opinion that the questioned amended by-laws, as they are, (adopted after almost a
century of respondent corporation's existence as a public corporation with its shares freely
purchased and traded in the open market without restriction and disqualification) which would bar
petitioner from qualification, nomination and election as director and worse, grant the board by 3/4
vote the arbitrary power to bar any stockholder from his right to be elected as director by the simple
expedient of declaring him to be engaged in a "competitive or antagonistic business" or declaring
him as a "nominee" of the competitive or antagonistic" stockholder are illegal, oppressive, arbitrary
and unreasonable.
We consider the questioned amended by-laws as being specifically tailored to discriminate against
petitioner and depriving him in violation of substantive due process of his vested substantial rights as
stockholder of respondent corporation. We further consider said amended by-laws as violating
specific provisions of the Corporation Law which grant and recognize the right of a minority
stockholder like petitioner to be elected director by the process of cumulative voting ordained by the
Law (secs 21 and 30) and the right of a minority director once elected not to be removed from office
of director except for cause by vote of the stockholders holding 2/3 of the subscribed capital stock
(sec. 31). If a minority stockholder could be disqualified by such a by-laws amendment under the
guise of providing for "qualifications," these mandates of the Corporation Law would have no
meaning or purpose.
These vested and substantial rights granted stockholders under the Corporation Law may not be
diluted or defeated by the general authority granted by the Corporation Law itself to corporations to
adopt their by-laws (in section 21) which deal principally with the procedures governing their internal
business. The by-laws of any corporation must, be always within the character limits. What the
Corporation Law has granted stockholders may not be taken away by the corporation's by-laws. The
amendment is further an instrument of oppressiveness and arbitrariness in that the incumbent
directors are thereby enabled to perpetuate themselves in office by the simple expedient of
disqualifying any unwelcome candidate, no matter how many votes he may have.
However, in view of the inconclusiveness of the vote, we sustain respondent commission's stand as
expressed in its Orders Nos. 450 and 451, Series of 1977 that there are unresolved and genuine
issues of fact" and that it has yet to rule on and finally decide the validity of the disputed by-law
provision", subject to appeal by either party to this Court.
In view of prematurity of the proceedings here (as likewise expressed by Mr. Justice Fernando), the
case should as a consequence be remanded to the Securities and Exchange Commission as the
agency of primary jurisdiction for a full hearing and reception of evidence of all relevant facts (which
should property be submitted to the commission instead of the piecemeal documents submitted as
annexes to this Court which is not a trier of facts) concerning not only the petitioner but the members
of the board of directors of respondent corporation as well, so that it may determine on the basis
thereof the issue of the legality of the questioned amended by-laws, and assuming Chat it holds the
same to be valid whether the same are arbitrarily and unreasonably applied to petitioner vis a vis
other directors, who, petitioner claims, should in such event be likewise disqualified from sitting in
the board of directors by virtue of conflict of interests or their being likewise engaged in competitive
or antagonistic business" with the corporation such as investment and finance, coconut oil mills
cement, milk and hotels. 5
It should be noted that while the petition may be dismissed in view of the inconclusiveness of the
vote and the Court's failure to affair, the required 8-vote majority to resolve the issue, such as
dismissal (for lack of necessary votes) is of no doctrine value and does not in any manner resolve
the issue of the validity of the questioned amended by-laws nor foreclose the same. The same
should properly be determined in a proper case in the first instance by the Securities and Exchange
Commission as the agency of primary jurisdiction, as above indicated.
The Court is unanimous, therefore, in its judgment that petitioner Gokongwei may run for the office
of, and if elected, sit as, member of the board of directors of respondent San Miguel Corporation as
stated in the dispositive portion of the main opinion of Mr. Justice Antonio, to wit: Until and
after petitioner has been given a "new and proper hearing by the board of directors of said
corporation, whose decision shall be appealable Lo the respondent Securities and Exchange
Commission deliverating and acting en banc and ultimately to this Court" and until ' disqualified in
the manner herein provided, the prohibition in the aforementioned amended by-laws shall not apply
to petitioner," In other words, until and after petitioner shall have been given due process and proper
hearing by the respondent board of directors as to the question of his qualification or disqualification
under the questioned amended by-laws (assuming that the respondent Securities and Exchange C
commission ultimately upholds the validity of said by laws), and such disqualification shall have been
sustained by respondent Securities and Exchange Commission and ultimately by final judgment of
this Court, petitioner is deemed eligible for all legal purposes and effects to be nominated and voted
and if elected to sit as a member of the hoard of directors of respondent San Miguel Corporation.
In view of the Court's unanimous judgment on this point the portion of respondent commission's
Order No. 450, Series of 977 which imposed "the condition that he [petitioner] cannot sit as board
member if elected until after the Commission shall have finally decided the validity of the disputed
by-law provision" has been likewise accordingly set aside.
III
By way of recapitulation, so that the Court's decision and judgment may be clear and not subject to
ambiguity, we state the following.
1. With the votes of the six Justices concurring unqualifiedly in the main opinion added to our four
votes, plus the Chief Justice's vote and that of Mr. Justice Fernando, the Court has by twelve (12)
votes unanimously rendered judgment granting petitioner's right to examine and secure copies of the
books and records of San Miguel International, Inc. as a foreign subsidiary of respondent corporation
and respondent commission's Order No. 449, Series of 1977, to the contrary is set aside:
2. With the same twelve (12) votes, the Court has also unanimously rendered judgment declaring
that until and afterpetitioner shall have been given due process and proper hearing by the
respondent board of directors as to the question of his disqualification under the questioned
amended by- laws (assuming that the respondent Securities and Exchange Commission ultimately
upholds the validity of said by laws), and such disqualification shall have been sustained by
respondent Securities and Exchange Commission and ultimately by final judgment of this Court
petitioner is deemed eligible for all legal purposes and effect to be nominated and voted and if
elected to sit as a member of the board of directors of respondent San Miguel Corporation.
Accordingly, respondent commission's Order No. 450, Series of 1977 to the contrary has likewise
been set aside; and
3. The Court's voting on the validity of respondent corporation's amendment of the by-laws (sec. 2,
Art. 111) is inconclusive without the required majority of eight votes to settle the issue one way or the
other having been reached. No judgment is rendered by the Court thereon and the statements of the
six Justices who have signed the main opinion on the legality thereof have no binding effect, much
less doctrinal value.
The dismissal of the petition insofar as the question of the validity of the disputed by-laws
amendment is concerned is not by an judgment with the required eight votes but simply by force of
Rule 56, section II of the Rules of Court, the pertinent portion of which provides that "where the
court en banc is equally divided in opinion, or the necessary majority cannot be had, the case shall
be reheard, and if on re-hearing no decision is reached, the action shall be dismissed if originally
commenced in the court ...." The end result is that the Court has thereby dismissed the petition
which prayed that the Court bypass the commission and directly resolved the issue and therefore the
respondent commission may now proceed, as announced in its Order No. 450, Series of 1977, to
hear the case before it and receive all relevant evidence bearing on the issue as hereinabove
indicated, and resolve the "unresolved and genuine issues of fact" (as per Order No. 451, Series of
1977) and the issues of legality of the disputed by-laws amendment.
Teehankee, Concepcion, Jr., and Fernandez, JJ., concur.
Guerrero, J., concurred.
TEEHANKEE, CONCEPCION JR.,
FERNANDEZ and GUERRERO, JJ., concurring:
This supplemental opinion is issued with reference to the advance separate opinion of Mr. Justice
Barredo issued by him as to "certain misimpressions as to the import of the decision in this case"
which might be produced by our joint separate opinion of April 11, 1979 and "urgent(ly) to clarify (his)
position in respect to the rights of the parties resulting from the dismissal of the petition herein and
the outline of the procedure by which the disqualification of petitioner Gokongwei can be made
effective."
1. Mr. Justice Barredo's advances separate opinion "that as between the parties herein, the issue of
the validity of the challenged by-laws is already settled" had, of course, no binding effect. The
judgment of the Court is found on pages 59-61 of the decision of April 11, 1979, penned by Mr.
Justice Antonio, wherein on the question of the validity of the amended by-laws the Court's
inconclusive voting is set forth as follows:
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-
laws, pending hearing by this Court on the applicability of section 13(5) of the
Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-
laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez and
Guerrero filed a separate opinion, wherein they voted against the validity of the
questioned amended by-laws and that this question should properly be resolved first
by the SEC as the agency of primary jurisdiction ... 1
As stated in said judgment itself, for lack of the necessary votes, the petition, insofar as it assails the
validity of the questioned by-laws, was dismissed.
2. Mr. Justice Barredo now contends contrary to the undersigned's understanding, as stated on
pages 8 and 9 of our joint separate opinion of April 11, 1979 that the legal effect of the dismissal of
the petition on the question of validity of the amended by-laws for lack of the necessary votes simply
means that "the Court has thereby dismissed the petition which prayed that the Court by-pass the
commission and directly resolve the issue and therefore the respondent commission may now
proceed, as announced in its Order No. 450, Series of 1977, to hear the case before it and
receive all relevant evidence bearing on the issue as hereinabove indicated, and resolve
the 'unresolved and genuine issues of fact' (as per Order No. 451, Series of 1977) and the issue of
legality of the disputed by-laws amendment," that such dismissal "has no other legal consequence
than that it is the law of the case as far as the parties are concerned, albeit the majority of the
opinion of six against four Justices is not doctrinal in the sense that it cannot be cited as necessarily
a precedent for subsequent cases."
We hold on our part that the doctrine of the law of the case invoked by Mr. Justice Barredo has no
applicability for the following reasons:
a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has been
a final and conclusive determination of an issue in the first case later invoked as the law of the case.
Thus, in People vs. Olarte, 2 we held that
"Law of the case" has been defined as the opinion delivered on a former
appeal More specifically, it means that whatever is once irrevocably established as
the controlling legal rule of decision between the same parties in the same case
continues to he the law of the case, whether correct on general principles or not, so
long as the facts on which such decision was predicated continue to be the facts of
the case before the court. ...
It need not be stated that the Supreme Court, being the court of last resort, is the
final arbiter of all legal questions properly brought before it and that its decision in
any given case constitutes the law of that particular case. Once its judgment
becomes final it is binding on all inferior courts, and hence beyond their power and
authority to alter or modify Kabigting vs. Acting Director of Prisons, G. R. No. L-
15548, October 30, 1962).
The decision of this Court on that appeal by the government from the order of
dismissal, holding that said appeal did not place the appellants, including Absalon
Bignay, in double jeopardy, signed and concurred in by six Justices as against three
dissenters headed by the Chief Justice, promulgated way back in the year 1952, has
long become the law of the case. It may be erroneous, judged by the law on double
jeopardy as recently interpreted by this same Tribunal Even so, it may not be
disturbed and modified. Our recent interpretation of the law may be applied to new
cases, but certainly not to an oldone finally and conclusively determined. As already
stated, the majority opinion in that appeal is now the law of the case. (People vs.
Pinuila)
The doctrine of the law of the case, therefore, has no applicability whatsoever herein insofar as the
question of the validity or invalidity of the amended by-laws is concerned. The Court's judgment of
April 11, 1979 clearly shows that the voting on this question was inconclusive with six against four
Justices and two other Justices (the Chief Justice and Mr. Justice Fernando) expressly reserving
their votes thereon, and Mr. Justice Aquino while taking no part in effect likewise expressly reserved
his vote thereon. No final and conclusive determination could be reached on the issue and pursuant
to the provisions of Rule 56, section 11, since this special civil action originally commenced in this
Court, the action was simply dismissed with the result that no law of the case was laid down insofar
as the issue of the validity or invalidity of the questioned by-laws is concerned, and the relief sought
herein by petitioner that this Court by-pass the SEC which has yet to hear and determine the same
issue pending before it below and that this Court itself directly resolve the said issue stands denied.
b) The contention of Mr. Justice Barredo that the result of the dismiss of the case was that "petitioner
Gokongwei may not hereafter act on the assumption that he can revive the issue of the validity
whether in the Securities and Exchange Commission, in this Court or in any other forum, unless he
proceeds on the basis of a factual milieu different from the setting of this case Not even the
Securities and Exchange Commission may pass on such question anymore at the instance of herein
petitioner or anyone acting in his stead or on his behalf, " appears to us to be untenable.
The Court through the decision of April 11, 1979, by the unanimous votes of the twelve participating
Justices headed by the Chief Justice, ruled that petitioner Gokongwei was entitled to a "new and
proper hearing" by the SMC board of directors on the matter of his disqualification under the
questioned by-laws and that the board's "decision shall be appealable to the respondent Securities
and Exchange Commission deliberating and acting en banc and ultimately to this Court (and) unless
disqualified in the manner herein provided, the prohibition in the aforementioned amended by-laws
shall not apply to petitioner."
The entire Court, therefore, recognized that petitioner had not been given procedural due process by
the SMC board on the matter of his disqualification and that he was entitled to a "new and proper
hearing". It stands to reason that in such hearing, petitioner could raise not only questions of fact but
questions of law, particularly questions of law affecting the investing public and their right to
representation on the board as provided by law — not to mention that as borne out by the fact that
no restriction whatsoever appears in the court's decision, it was never contemplated that petitioner
was to be limited to questions of fact and could not raise the fundamental questions of law bearing
on the invalidity of the questioned amended by-laws at such hearing before the SMC board.
Furthermore, it was expressly provided unanimously in the Court's decision that the SMC board's
decision on the disqualification of petitioner ("assuming the board of directors of San Miguel
Corporation should, after the proper hearing, disqualify him" as qualified in Mr. Justice Barredo's own
separate opinion, at page 2) shall be appealable to respondent Securities and Exchange
Commission "deliberating and acting en banc and "untimately to this Court." Again, the Court's
judgment as set forth in its decision of April 11, 1979 contains nothing that would warrant the opinion
now expressed that respondent Securities and Exchange Commission may not pass anymore on the
question of the invalidity of the amended by-laws. Certainly, it cannot be contended that the Court in
dismissing the petition for lack of necessary votes actually by-passed the Securities and Exchange
Commission and directly ruled itself on the invalidity of the questioned by-laws when it itself could
not reach a final and conclusive vote (a minimum of eight votes) on the issue and three other
Justices (the Chief Justice and Messrs. Justices Fernando and Aquino) had expressly reserved their
vote until after further hearings (first before the Securities and Exchange Commission and ultimately
in this Court).
Such a view espoused by Mr. Justice Barredo could conceivably result in an incongruous situation
where supposedly under the law of this case the questioned by-laws would be held valid as against
petitioner Gokongwei and yet the same may be stricken off as invalid as to all other SMC
shareholders in a proper case.
3. It need only be pointed out that Mr. Justice Barredo's advance separate opinion can in no way
affect or modify the judgment of this Court as set forth in the decision of April 11, 1979 and
discussed hereinabove. The same bears the unqualified concurrence of only three Justices out of
the six Justices who originally voted for the validity per se of the questioned by-laws, namely,
Messrs. Justices Antonio, Santos and De Castro. Messrs. Justices Fernando and Makasiar did not
concur therein but they instead concurred with the limited concurrence of the Chief Justice touching
on the law of the case which guardedly held that the Court has not found merit in the claim that the
amended bylaws in question are invalid but without in any manner foreclosing the issue and as a
matter of fact and law, without in any manner changing or modifying the above-quoted vote of the
Chief Justice as officially rendered in the decision of April 11, 1979, wherein he precisely "reserved
(his) vote on the validity of the amended by-laws."
4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached to the advance
separate opinion of Mr. Justice Barredo. Mr. Justice De Castro advances his interpretation as to a
restrictive construction of section 13(5) of the Philippine Corporation Law, ignoring or disregarding
the fact that during the Court's deliberations it was brought out that this prohibitory provision was and
is not raised in issue in this case whether here or in the Securities and Exchange Commission below
(outside of a passing argument by Messrs. Angara, Abello, Concepcion, Regala & Cruz, as counsels
for respondent Sorianos in their Memorandum of June 26, 1978 that "(T)he disputed By-Laws does
not prohibit petitioner from holding onto, or even increasing his SMC investment; it only restricts any
shifting on the part of petitioner from passive investor to a director of the company." 3
As a consequence, the Court abandoned the Idea of calling for another hearing wherein the parties
could properly raise and discuss this question as a new issue and instead rendered the decision in
question, under which the question of section 13(5) could be raised at a new and proper hearing
before the SMC board and in the Securities and Exchange Commission and in due course before
this Court (but with the clear understanding that since both corporations, the Robina and SMC are
engaged in agriculture as submitted by the Sorianos' counsel in their said memorandum, the issue
could be raised likewise against SMC and its other shareholders, directors, if not against SMC itself.
As expressly stated in the Chief Justices reservation of his vote, the matter of the question of the
applicability of the said section 13(5) to petitioner would be heard by this Court at the appropriate
time after the proceedings below (and necessarily the question of the validity of the amended by-
laws would be taken up anew and the Court would at that time be able to reach a final and
conclusive vote).
Mr. Justice De Castro's personal interpretation of the decision of April 11, 1979 that petitioner may
be allowed to run for election despite adverse decision of both the SMC board and the Securities
and Exchange Commission "only if he comes to this Court and obtains an injunction against the
enforcement of the decision disqualifying him" is patently contradictory of his vote on the matter as
expressly given in the judgment in the Court's decision of April 11, 1979 (at page 59) that petitioner
could run and if elected, sit as director of the respondent SMC and could be disqualified only after a
"new and proper hearing by the board of directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange Commission deliberating and acting en
banc and ultimately to this Court. Unless-disqualified in the manner herein provided, the prohibition
in the aforementioned amended by-laws shall not apply to petitioner."
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.

BARREDO, J., concurring:
I reserved the filing of a separate opinion in order to state my own reasons for voting in favor of the
validity of the amended by-laws in question. Regrettably, I have not yet finished preparing the same.
In view, however, of the joint separate opinion of Justices Teehankee, Concepcion Jr., Fernandez
and Guerrero, the full text of which has just come to my attention, and which I am afraid might
produce certain misimpressions as to the import of the decision in this case, I consider it urgent to
clarify my position in respect to the rights of the parties resulting from the dismissal of the petition
herein and the outlining of the procedure by which the disqualification of petitioner Gokongwei can
be made effective, hence this advance separate opinion.
To start with, inasmuch as petitioner Gokongwei himself placed the issue of the validity of said
amended by-laws squarely before the Court for resolution, because he feels, rightly or wrongly, he
can no longer have due process or justice from the Securities and Exchange Commission, and the
private respondents have joined with him in that respect, the six votes cast by Justices Makasiar,
Antonio, Santos, Abad Santos, de Castro and this writer in favor of validity of the amended by-laws
in question, with only four members of this Court, namely, Justices Teehankee, Concepcion Jr.,
Fernandez and Guerrero opining otherwise, and with Chief Justice Castro and Justice Fernando
reserving their votes thereon, and Justices Aquino and Melencio Herrera not voting, thereby
resulting in the dismissal of the petition "insofar as it assails the validity of the amended by- laws ...
for lack of necessary votes", has no other legal consequence than that it is the law of the case as far
as the parties herein are concerned, albeit the majority opinion of six against four Justices is not
doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases. This
means that petitioner Gokongwei and the respondents, including the Securities and Exchange
Commission, are bound by the foregoing result, namely, that the Court en banc has not found merit
in the claim that the amended by-laws in question are invalid. Indeed, it is one thing to say that
dismissal of the case is not doctrinal and entirely another thing to maintain that such dismissal
leaves the issue unsettled. It is somewhat of a misreading and misconstruction of Section 11 of Rule
56, contrary to the well-known established norm observed by this Court, to state that the dismissal of
a petition for lack of the necessary votes does not amount to a decision on the merits.
Unquestionably, the Court is deemed to find no merit in a petition in two ways, namely, (1) when
eight or more members vote expressly in that sense and (2) when the required number of justices
needed to sustain the same cannot be had.
I reiterate, therefore, that as between the parties herein, the issue of validity of the challenged by-
laws is already settled. From which it follows that the same are already enforceable-insofar as they
are concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can revive the
issue of validity whether in the Securities and Exchange Commission, in this Court or in any other
forum, unless he proceeds on the basis of a factual milieu different from the setting of this case. Not
even the Securities and Exchange Commission may pass on such question anymore at the instance
of herein petitioner or anyone acting in his stead or on his behalf. The vote of four justices to remand
the case thereto cannot alter the situation.
It is very clear that under the decision herein, the issue of validity is a settled matter for the parties
herein as the law of the case, and it is only the actual implementation of the impugned amended by-
laws in the particular case of petitioner that remains to be passed upon by the Securities and
Exchange Commission, and on appeal therefrom to Us, assuming the board of directors of San
Miguel Corporation should, after the proper hearing, disqualify him.
To be sure, the record is replete with substantial indications, nay admissions of petitioner himself,
that he is a controlling stockholder of corporations which are competitors of San Miguel Corporation.
The very substantial areas of such competition involving hundreds of millions of pesos worth of
businesses stand uncontroverted in the records hereof. In fact, petitioner has even offered, if he
should be elected, as director, not to take part when the board takes up matters affecting the
corresponding areas of competition between his corporation and San Miguel. Nonetheless, perhaps,
it is best that such evidence be formally offered at the hearing contemplated in Our decision.
As to whether or not petitioner may sit in the board if he wins, definitely, under the decision in this
case, even if petitioner should win, he will have to immediately leave his position or should be ousted
the moment this Court settles the issue of his actual disqualification, either in a full blown decision or
by denying the petition for review of corresponding decision of the Securities and Exchange
Commission unfavorable to him. And, of course, as a matter of principle, it is to be expected that the
matter of his disqualification should be resolved expeditiously and within the shortest possible time,
so as to avoid as much juridical injury as possible, considering that the matter of the validity of the
prohibition against competitors embodied in the amended by-laws is already unquestionable among
the parties herein and to allow him to be in the board for sometime would create an obviously
anomalous and legally incongruous situation that should not be tolerated. Thus, all the parties
concerned must act promptly and expeditiously.
Additionally, my reservation to explain my vote on the validity of the amended by-laws still stands.
Castro, C.J., concurs in Justice Barredo's statement that the dismissal (for lack of necessary votes)
of the petition to the extent that "it assails the validity of the amended by laws," is the law of the case
at bar, which means in effect that as far and only in so far as the parties and the Securities and
Exchange Commission are concerned, the Court has not found merit in the claim that the amended
by-laws in question are invalid.
Antonio and Santos, JJ., concur.
DE CASTRO, J., concurring:
As stated in the decision penned by Justice Antonio, I voted to uphold the validity of the amendment
to the by-laws in question. What induced me to this view is the practical consideration easily
perceived in the following illustration: If a person becomes a stockholder of a corporation and gets
himself elected as a director, and while he is such a director, he forms his own corporation
competitive or antagonistic to the corporation of which he is a director, and becomes Chairman of
the Board and President of his own corporation, he may be removed from his position as director,
admittedly one of trust and confidence. If this is so, as seems undisputably to be the case, a person
already controlling, and also the Chairman of the Board and President of, a corporation, may be
barred from becoming a member of the board of directors of a competitive corporation. This is my
view, even as I am for a restrictive interpretation of Section 13(5) of the Philippine Corporation Law,
under which I would limit the scope of the provision to corporations engaged in agriculture, but only
as the word agriculture" refers to its more stated meaning as distinguished from its general and
broad connotation. The term would then mean "farming" or raising the natural products of the soil,
such as by cultivation, in the manner as is required by the Public Land Act in the acquisition of
agricultural land, such as by homestead, before the patent may be issued. It is my opinion that under
the public land statute, the development of a certain portion of the land applied for as specified in the
law as a condition precedent before the applicant may obtain a patent, is cultivation, not let us say,
poultry raising or piggery, which may be included in the term Is agriculture" in its broad sense. For
under Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it
should, because the provision is in derogation of property rights, the petitioner in this case would be
disqualified from becoming an officer of either the San Miguel Corporation or his own supposedly
agricultural corporations. It is thus beyond my comprehension why, feeling as though I am the only
member of the Court for a restricted interpretation of Section 13(5) of Act 1459, doubt still seems to
be in the minds of other members giving the cited provision an unrestricted interpretation, as to the
validity of the amended by-laws in question, or even holding them null and void.
I concur with the observation of Justice Barredo that despite that less than six votes are for
upholding the validity of the by-laws, their validity is deemed upheld, as constituting the "law of the
case." It could not be otherwise, after the present petition is dismissed with the relief sought to
declare null and void the said by-laws being denied in effect. A vicious circle would be created if,
should petitioner Gokongwei be barred or disqualified from running by the Board of Directors of San
Miguel Corporation and the Securities and Exchange Commission sustain the Board, petitioner
could come again to Us, raising the same question he has raised in the present petition, unless the
principle of the "law of the case" is applied.
Clarifying therefore, my position, I am of the opinion that with the validity of the by-laws in question
standing unimpaired it is now for petitioner to show that he does not come within the disqualification
as therein provided, both to the Board and later to the Securities and Exchange Commission, it
being a foregone conclusion that, unless petitioner disposes of his stockholdings in the so-called
competitive corporations, San Miguel Corporation would apply the by-laws against him, His right,
therefore, to run depends on what, on election day, May 8, 1979, the ruling of the Board and/or the
Securities and Exchange Commission on his qualification to run would be, certainly, not the final
ruling of this Court in the event recourse thereto is made by the party feeling aggrieved, as intimated
in the "Joint Separate Opinion" of Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero,
that only after petitioner's "disqualification" has ultimately been passed upon by this Court should
petitioner, not be allowed to run. Petitioner may be allowed to run, despite an adverse decision of
both the Board and the Securities and Exchange Commission, only if he comes to this Court and
obtain an injunction against the enforcement of the decision disqualifying him. Without such
injunction being required, all that petitioner has to do is to take his time in coming to this Court, and
in so doing, he would in the meantime, be allowed to run, and if he wins, to sit. This would, however,
be contrary to the doctrine that gives binding, if not conclusive, effect of findings of facts of
administrative bodies exercising quasi-judicial functions upon appellate courts, which should,
accordingly, be enforced until reversed by this Tribunal.
Fernando and Makasiar, JJ., concurs.
Antonio and Santos, JJ., concur
DE CASTRO, J.: concurring:
admittedly one of trust case, a person already controlling, and also the Chairman of the Board and
President of, a corporation, may be barred from becoming a member of the board of directors of a
competitive corporation. This is my view, even as I am for restrictive interpretation of Section 13(5) of
the Philippine Corporation Law, under which I would limit the scope of the provision to corporations
engaged in agriculture, but only as the word "agriculture" refers to its more limited meaning as
distinguished from its general and broad connotation. The term would then mean "farming" or raising
the natural products of the soil, such as by cultivation, in the manner as in required by the Public
Land Act in the acquisition of agricultural land, such as by homestead, before the patent may be
issued. It is my opinion that under the public land statute, the development of a certain portion of the
land applied for as specified in the law as a condition precedent before the applicant may obtain a
patent, is cultivation, not let us say, poultry raising or peggery, whch may be included in the term
"agriculture" in its broad sense. For under Section 13(5) of the Philippine Corporation Law, construed
not in the strict way as I believe it should, because the provision is in derogation of property rights,
the petitioner in this case would be disqualified from becoming an officer of either the San Miguel
Corporation or his own supposedly agricultural corporations. It is thus beyond my comprehension
why, feeling as though I am the only members of the Court for a restricted interpretation of Section
13(5) of Act 1459, doubt still seems to be in the minds of other members giving the cited provision
an unrestricted interpretation, as to the validity of the amended by-laws in question, or even holding
them null and void.
case." It could not be otherwise, after the present petition is dimissed with the relief sought to declare
null and void the said by-laws being denied in effect. A vicious circle would be created if, should
petitioner Gokongwei be barred or disqualified from running by the Board, petitioner could come
again to Us, raising the same question he has raised in the present petition, unless the principle of
the "law of the case" is applied.
standing unimpaired, it is nowfor petitioner to show that he does not come paired, it is now for
petitioner to show that he does not come within the disqualification as therein provided, both to the
Board and later to the Securities and Exhange Commission, it being a foregone conclusion that,
unless petitioner disposes of his stockholdings in the so-called competitive corporations, San Miguel
Corporation would apply the by-laws against him. His right, therefore, to run depends on what, on
election day, May 8, 1979, the ruling of the Board and/or the Securities and Exchange Commission
on his qualification to run would be, certainly, not the final ruling of this Court in the event recourse
thereto is made by the party feeling aggrieved, as intimated in the "Joint Separate Opinion" of
Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's
"disqualification" has ultimately been passed upon by this Court should petitioner not be allowed to
run. Petitioner may be allowed to run, despite anadverse decision of both the Board and the
Securities and Exchange Commission, only if he comes to this Court and obtain an injunction
against the enforcement of the decision disqualifying him. Without such injunction being required, all
that petitioner has to do is to take his time in coming to this Court, and in so doing, he would in the
meantime, be allowed to run, and if he wins, to sit. This would, however, be contrary to the doctrine
that gives binding, if not conclusive, effect of findings of facts of administrative bodies exercising
quasi-judicial functions upon appellate courts, which should, accordingly, be enforced until reversed
by this Tribunal.
Separate Opinions
out that:
II
exhausted. 4
and unreasonable.
meaning or purpose.
III
been set aside; and
effective."
15548, October 30, 1962).
"The decision of this Court on that appeal by the government from the order of
stated, the majority opinion in that appeal is now the law of the case." (People vs.
Pinuila)
in this Court).
conclusive vote).
Fernando and Makasiar, JJ., concurs.
Antonio and Santos, JJ., concur
# Separate Opinions
out that:
II
exhausted. 4
and unreasonable.
meaning or purpose.
III
been set aside; and
effective."
15548, October 30, 1962).
"The decision of this Court on that appeal by the government from the order of
stated, the majority opinion in that appeal is now the law of the case." (People vs.
Pinuila)
in this Court).
conclusive vote).
#Footnotes
1 The pertinent amendments reads as follows:
RESOLVED, That Section 2, Article III of the By-laws of San Miguel

Corporation, which reads as follows:
SECTION 2. Any stockholder having at least five thousand shares
registered in his name may be elected director, but he shall not be
qualified to hold office unless he pledges said five thousand shares to
the Corporation to answer for his conduct.
SECTION 2. Any stockholder having at least five thousand shares

registered in his name may be elected Director, provided, however,
that no person shall qualify or be eligible for nomination or election to
the Board of Directors if he is engaged in any business which
competes with or is antagonistic to that of the Corporation. Without
limiting the generality of the foregoing, a person shall be deemed to
be so engaged:
(a) if he is an officer, manager or controlling person of, or the owner

(either of record or beneficially) of 10% or more of any outstanding
class of shares of, any corporation (other than one in which the
corporation owns at least 30% of the capital stock) engaged in a
business which the Board, by at least three-fourths vote, determines
to be competitive or antagonistic to that of the Corporation; or
(b) If he is an officer, manager or controlling person of, or the owner

(either of record or beneficially) or 10% or more of any oustanding
class of shares of, any other corporation or entity engaged in any line
of business of the Corporation, when in the judgment of the Board, by
at least three-fourths vote, the laws against combinations in restraint
of trade shall be violated by such person's membership in the Board
of Directors.
(c) If the Board, in the exercise of its judgment in good faith,

determines by at least three-fourths vote that he is the nominee of
any person set forth in (a) or (b).
In determining whether or not a person is a controlling person,

beneficial owner, or the nominee of another, the Board may take into
account such factors as business and family relationship.
For the proper implementation of this provision, all nominations for

election of Directors by the stockholders shall be submitted in writing
to the Board of Directors at least five working days before the date of
the Annual Meeting.' " (Rollo, pp. 462-463).
2 Annex "H", petition, pp. 168-169, Rollo.
3 L-27812, September 26, 1975, 67 SCRA 146.
4 Gayos v. Gayos, Ibid., citing Marquez v. Marquez, No. 47792, July 24, 1941, 73
Phil. 74, 78; Keramik Industries, Inc. v. Guerrero, L-38866, November 29, 1974, 61
SCRA 265.
5 L-20654, December 24, 1964, 12 SCRA 628.

6 L-20583, January 23, 1967, 19 SCRA 58.
7 L-27802, October 26, 1968, 25 SCRA 641.
8 Samal v. Court of Appeals, L-8579, May 25, 1956, 99 Phil. 230.
8a 2 Am. Jur. 2d 696. 697.
8b Pan American P. Corp. v. Supreme Court of Delaware, 336 US 656, 6 L. ed. 2d

584.
9 Fleischer v. Botica Nolasco Co., Inc., No. 23241. March 14, 1925, 47 Phil. 583,
590.
10 C.J.S. Corporation, Sec. 189, p. 603.
11 People ex rel. Wildi v. Ittner, 165 III. App. 360, 367 (1911), cited in Flectcher,
Cyclopedia Corporations, Sec. 4191.
12 Mckee & Company v. First National Bank of San Diego, 265 F. Supp. 1 (1967),
citing Olicy v. Merle Norman Cosmetics, Inc., 200 Cal. App. 20, 260, 19 Cal. Reptr.
387 (1962).
13 Fletcher, Cyclopedia Corporations, Sec. 4171, cited in McKee & Company, supra.
14 No. 26649, July 13, 1927, 50 Phil. 399, 441.
15 6 Thompson 369, Sec. 4490.
16 Ibid.
17 Mobile Press Register, Inc., v. McGowin, 277 Ala. 414, 124 So. 2d 812; Brundage
v. The New Jersey Zinc Co., 226 A 2d 585.
18 Fletcher, Cyclopedia Corporations, 1975 Ed., Vol. 3 p. 144, Sec. 838.
19 101 Fed. 2d 85, cited in Aleck, Modern Corporation Law, Vol. 2, Sec. 959.
20 308 U.S. 309; 84 L.ed. 281, 289-291.
21 16 S.E. 587, 18 L.R.A. 582.
22 265 F. Supp., pp. 8-9.
23 Barreto v. Tuason, No. 23923, Mar. 23, 1926, 50 Phil. 888; Severino v. Severino,
No. 18058, Jan. 16, 1923, 44 Phil. 343; Thomas v. Pineda, L-2411, June 28, 1951,
89 Phil. 312, 326.
24 2 Fletcher Cyclopedia Corporations, Sec. 297 (1969), p. 87.

25 Costello v. Thomas Cusack co., 125 A. 15, 94 N.J. Eq. 923, (1923).
26 hall v. Dekker, 115 P. 2d 15, July 9, 1941.
27 Thaver v. Gaebler, 232 NW 563.
28 Sialkot Importing Corporation v. Berlin, 68 NE 2d 501, 503.
29 Schildberg Rock Products Co. v. Brooks, 140 NW 2d 132, 137. Chief Justice
Garfield quotes the doctrine as follows:
(5) The doctrine "corporate opportunity" is not new to the law and is
but one phase of the cardinal rule of undivided loyalty on the part of
the fiduciaries. 3 Flecther Cyc. Corporations, Perm. Ed., 1965
Revised Volume, section 861.1, page 227; 19 Am. Jur. 2d.
corporations, section 1311, page 717. Our own consideration of the
quoted terms as such is mainly in Ontjes v. MacNider, supra, 232
Iowa 562, 579, 5 N.W., 2d 860, 869, which quotes at length with
approval from Guth v. Loft, Inc., 23 Del. Ch. 255, 270, 5 A 2d 503,
511, a leading case in this area of the law. The quotation cites
several precedents for this: "*** if there is presented to a corporate
officer or director a business opportunity which the corporation is
financially able to undertake, is from its nature, in the line of the
corporation's business and is of practical advantage to it, is one in
which the corporation has an interest or a reasonable expectancy,
and by embracing the opportunity, the self-interest of the officer or
director will be brought into seize the opportunity for himself. And, if,
in such circumstances, the interests of the corporation are betrayed,
the corporation may elect to claim all of the benefits of the transaction
for itself. and the law will impress a trust in favor of the corporation
upon the property. interests and profits so acquired.
30 Paulman v. Kritzer, 74 III. App. 2d 284, 291 NE 2d 541; Tower Recreation, Inc. v.
Beard, 141 Ind. App. 649, 231 NE 2d 154.
31 Oleck, Modern Corporation Law, Vol. 2, Section 960.
32 The CFC and Robina companies, which are reportedly worth more than P500
Million, are principally owned and controlled by Mr. Gokongwei and are in substantial
competition to San Miguel. As against his almost 100% ownership in these basically
family companies, Mr. Gokongwei's holding in San Miguel are approximately 4% of
the total shareholdings of your Company. As a consequence, One Peso (P1.00) of
profit resulting from a sale by CFC and Robina in the lines competing with San
Miquel, is earned almost completely by Mr. Gokongwei, his immediate family and
close associates. On the other hand, the loss of that sale to San Miguel, resulting in
a One Peso (P1.00) loss of profit to San Miquel, in the lines competing with CFC and
Robina, would result in a loss in profit of only Four Centavos (0.04) to Mr.
Gokongwei." (Letter to stockholders of SMC, dated April 3, 1978, Annex "R", Memo
for respondent San Miguel Corporation, rollo, p. 1967.
33 Article 28, Civil Code; Section 4, par. 5, of Rep. Act No. 5455; and Section 7 (g) of
Rep. Act No. 6173. Cf. Section 17, paragraph 2. of the Judiciary Act.
34 Standard Oil Co. v. United States, 55 L.Ed. 619.
35 Blake & Jones, Contracts in Antitrust Theory, 65 Columbia L. Rev. 377, 383
(1965).
36 Filipinas Compania de Seguros v. Mandanas, L-19638, June 20, 1966, 17 SCRA

391.
37 Love v. Kozy Theater Co., 236 SW 243, 245, 26 ALR 364.
38 Aldea-Rochelle, Inc. v. American Society of Composers, Authors and Publishers,

D.D. N.Y., 80 F. Suppl. 888, 893:
39 National Cotton Oil Co. v. State of Texas, 25 S.T. 379, 383, 49 L. Ed. 689.
40 Norfolk Monument Co. v. Woodlawn Memorial Gardens, Inc., 394 U.S. 700; v.
General Motors Corp., 384 U.S. 127.
41 U.S. v. Paramount Pictures, 334 U.S. 131.
42 Section 8, 15 U.S.C.A. 19.
43 Travers, Interlocks in Corporate Management and the Anti Trust Laws, 46 Texas
L. Rev. 819, 840 (1968).
44 51 Cong. Rec. 9091.
45 People ex rel. Wildi v. Ittner, supra, citing Thompson on Corporation, Section

1002 (2nd Ed.).
46 Schill v. Remington Putnam Book Co., 17 A 2d 175, 180, 179 Md. 83.
47 People ex rel. Broderick v. Goldfogle, 205 NYS 870, 877, 123 Misc. 399.
48 Swanson v. American Consumer Industries, Inc., 288 F. Supp. 60.
49 Sections 3 and 5 of Presidential Decree No. 902-A provides:
SEC. 3. The Commission shall have absolute jurisdiction supervision

and control over all corporations *** who are grantees of *** license or
permit issued by the government ***
SEC. 5. In addition to the regulatory and adjudicative functions of the

Securities and Exchange Commission over corporations partnerships
and other forms of associations registered with its as expressly
granted under existing laws and decrees, it shall have original and
exclusive jurisdiction to hear and decide cases involving.
a) Devices or schemes employed by or nay acts, of the board of

directors, business associates, its officers or partners amounting to
fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholders, partners, members of
associations or organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership

relations, between and among stockholders, members or associates;
between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporations their individual francise
or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees,

officers or managers of such corporations, partnership or
associations.
50 Moore v. Keystone Macaroni Mfg. Co., 29 ALR 2d 1256.
51 Annex "A" of SMC's Comment on Supplemental Petition pp. 680-688, Rollo.
52 Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. Ed. Section 2213, p. 693.
53 Fletcher, Ibid., Section 2218, p. 709.
54 Fletcher, Ibid., Section 2222, p. 725.
55 40 O.G., 1st Suppl. 1. April 3, 1939, citing 14 C.J.S. 854, 855.
56 Fletcher, supra, p. 716.
57 State v. Monida & Yellowstone Stage Co., 110 Minn. 193, 124 NW 791, 125 NW
676; State v. Cities Service Co., 114 A 463.
58 Fletcher, supra, Section 2220, p. 717.
59 Fletcher, supra, Section 2223, p. 728.
60 Martin v. D. B. Martin Co., 10 Del. Ch. 211, 88 A. 612, 102 A. 373.
61 Woodward v. Old Second National Bank, 154 Mich, 459, 117 NW 893, 118 NW
581.
62 Martin v. D.B. Martin Co., supra.
63 State v. Sherman Oil Co., 1 W.W. Harr. (31 Del) 570, 117 A. 122.
64 Lisle v. Shipp, 96 Cal. App. 264, 273 P. 1103.
65 Nash v. Gay Apparel Corp., 193 NYS 2d 246.
66 Bailey v. Boxbound Products Co., 314 Pa. 45, 170 A. 127.

67 Rollo, pp. 50-51.
68 18 Am. Jur. 2d 718.
69 De la Rama v. Ma-ao Sugar Central Co., Inc., L-17504 and L-17506, February 28,
1969, 27 SCRA 247, 260.
70 Boyce v. Chemical Plastics, 175 F 2d 839, citing 13 Am. Jur., Section 972.
71 Pirovano v. De la Rama Steamship Co., L-53-7, 96 Phil. 335, December 29, 1954.
* Includes the Supplemental petitions filed by petitioner.
JOINT SEPARATE OPINION
1 Main opinion, p. 55.
2 Sec. 2, Art. III of respondent corporation's By-Laws, reproduced in footnote 1 of the

main opinion, pages 3 and 4.
3 Rollo, Vol. I, page 392-E.
4 SEC memo, page 9 and 10.
5 Petitioner's memorandum in support of oral argument, pp. 18-20
SUPPLEMENT TO JOINT SEPARATE OPINION
1 At p. 60; emphasis supplied.
2 19 SCRA 494; citing People vs. Pinnila, L-11374, May 30, 1958, cited in Lee vs.
Aligaen, 76 SCRA 416 (1977) per Antonio, J.
3 Soriano's Memorandum at page 94.
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Wednesday, December 19, 2012
Gokongwei vs. SEC Case Digest

Gokongwei vs. Securities and Exchange Commission
[GR L-45911, 11 April 1979]
Facts: [SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of San Miguel
Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and
damages with prayer for a preliminary injunction" against the majority of the members of the Board
of Directors and San Miguel Corporation as an unwilling petitioner. As a first cause of action,
Gokongwei alleged that on 18 September 1976, Andres Soriano, Jr., Jose M. Soriano, Enrique
Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on 13 March 1961, when the outstanding capital stock of the corporation was
only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000
preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up
shares totalled 30,127,043, with a total par value of P301,270,430.00.
It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws
of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to
the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of
the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed
on the basis of the capitalization at the time of the amendment. Since the amendment was based on
the 1961 authorization, Gokongwei contended that the Board acted without authority and in
usurpation of the power of the stockholders. As a second cause of action, it was alleged that the
authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of
the Board ceased to exist. As a third cause of action, Gokongwei averred that the membership of the
Board of Directors had changed since the authority was given in 1961, there being 6 new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, Gokogwei had
all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that
as a stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to
vote and to be voted upon in the election of directors; and that in amending the by-laws, Soriano, et.
al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as afore-
mentioned, hence the amended by-laws are null and void. As additional causes of action, it was
alleged that corporations have no inherent power to disqualify a stockholder from being elected as a
director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or
Jose M. Soriano, while representing other corporations, entered into contracts (specifically a
management contract) with the corporation, which was avowed because the questioned amendment
gave the Board itself the prerogative of determining whether they or other persons are engaged in
competitive or antagonistic business; that the portion of the amended by-laws which states that in
determining whether or not a person is engaged in competitive business, the Board may consider
such factors as business and family relationship, is unreasonable and oppressive and, therefore,
void; and that the portion of the amended by-laws which requires that "all nominations for election of
directors shall be submitted in writing to the Board of Directors at least five (5) working days before
the date of the Annual Meeting" is likewise unreasonable and oppressive. It was, therefore, prayed
that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled,
and that Soriano, et. al. be made to pay damages, in specified amounts, to Gokongwei. On 28
October 1976, in connection with the same case, Gokongwei filed with the Securities and Exchange
Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the
Secretary of the corporation refused to allow him to inspect its records despite request made by
Gokongwei for production of certain documents enumerated in the request, and that the corporation
had been attempting to suppress information from its stockholders despite a negative reply by the
SEC to its query regarding their authority to do so.
The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and
their opposition to the petition, respectively. Meanwhile, on 10 December 1976, while the petition
was yet to be heard, the corporation issued a notice of special stockholders' meeting for the purpose
of "ratification and confirmation of the amendment to the By-laws", setting such meeting for 10
February 1977. This prompted Gokongwei to ask the SEC for a summary judgment insofar as the
first cause of action is concerned, for the alleged reason that by calling a special stockholders'
meeting for the aforesaid purpose, Soriano, et. al. admitted the invalidity of the amendments of 18
September 1976. The motion for summary judgment was opposed by Soriano, et. al. Pending action
on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a Temporary Restraining
Order", praying that pending the determination of Gokongwei's application for the issuance of a
preliminary injunction and or Gokongwei's motion for summary judgment, a temporary restraining
order be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as
scheduled. This motion was duly opposed by Soriano, et. al. On 10 February 1977, Cremation
issued an order denying the motion for issuance of temporary restraining order. After receipt of the
order of denial, Soriano, et. al. conducted the special stockholders' meeting wherein the
amendments to the by-laws were ratified. On 14 February 1977, Gokongwei filed a consolidated
motion for contempt and for nullification of the special stockholders' meeting. A motion for
reconsideration of the order denying Gokongwei's motion for summary judgment was filed by
Gokongwei before the SEC on 10 March 1977.
[SEC Case 1423] Gokongwei alleged that, having discovered that the corporation has been
investing corporate funds in other corporations and businesses outside of the primary purpose
clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he filed with SEC, on
20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and Jose M. Soriano, as well as
the corporation declared guilty of such violation, and ordered to account for such investments and to
answer for damages. On 4 February 1977, motions to dismiss were filed by Soriano, et. al., to which
a consolidated motion to strike and to declare Soriano, et. al. in default and an opposition ad
abundantiorem cautelam were filed by Gokongwei. Despite the fact that said motions were filed as
early as 4 February 1977, the Commission acted thereon only on 25 April 1977, when it denied
Soriano, et. al.'s motions to dismiss and gave them two (2) days within which to file their answer, and
set the case for hearing on April 29 and May 3, 1977. Soriano, et. al. issued notices of the annual
stockholders' meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the
Board of Directors by the stockholders at the meeting on 20 March 1972 to invest corporate funds in
other companies or businesses or for purposes other than the main purpose for which the
Corporation has been organized, and ratification of the investments thereafter made pursuant
thereto." By reason of the foregoing, on 28 April 1977, Gokongwei filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain Soriano, et. al. from taking up
Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for
hearing on 3 May 1977, the date set for the second hearing of the case on the merits. The SEC,
however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17,
1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the
Commission to act, Gokongwei filed an urgent manifestation on 3 May 1977, but this
notwithstanding, no action has been taken up to the date of the filing of the instant petition.
Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for
issuance of writ of preliminary injunction, with the Supreme Court, alleging that there appears a
deliberate and concerted inability on the part of the SEC to act.
Issue:
1. Whether the corporation has the power to provide for the (additional) qualifications of
its directors.
2. Whether the disqualification of a competitor from being elected to the Board of
Directors is a reasonable exercise of corporate authority.
3. Whether the SEC gravely abused its discretion in denying Gokongwei's request for
an examination of the records of San Miguel International, Inc., a fully owned subsidiary of
San Miguel Corporation.
4. Whether the SEC gravely abused its discretion in allowing the stockholders of San
Miguel Corporation to ratify the investment of corporate funds in a foreign corporation.
Held:
1. It is recognized by all authorities that "every corporation has the inherent power to adopt by-laws
'for its internal government, and to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of its affairs.'" In this
jurisdiction under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the
qualifications, duties and compensation of directors, officers and employees." This must necessarily
refer to a qualification in addition to that specified by section 30 of the Corporation Law, which
provides that "every director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director." Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws and not forbidden by law." To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or privilege to regulate the
disposition of his property which he has invested in the capital stock of the corporation, and
surrendered it to the will of the majority of his fellow incorporators. It can not therefore be justly said
that the contract, express or implied, between the corporation and the stockholders is infringed by
any act of the former which is authorized by a majority." Pursuant to section 18 of the Corporation
Law, any corporation may amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital stock of the corporation. If the
amendment changes, diminishes or restricts the rights of the existing shareholders, then the
dissenting minority has only one right, viz.: "to object thereto in writing and demand payment for his
share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock
may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that Gokongwei
has a vested right to be elected director, in the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that the corporate charter and the by-law shall
be subject to amendment, alteration and modification.
2. Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary
relation, and in this sense the relation is one of trust." "The ordinary trust relationship of directors of a
corporation and stockholders is not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property and hence of the property
interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof." A director is a fiduciary. Their powers are
powers in trust. He who is in such fiduciary position cannot serve himself first and his cestuis
second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity violate the
ancient precept against serving two masters. He cannot utilize his inside information and strategic
position for his own preferment. He cannot violate rules of fair play by doing indirectly through the
corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter how absolute in terms
that power may be and no matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not be exercised for the
aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the
cestuis. The doctrine of "corporate opportunity" is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities with
competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances,
of an officer or director taking advantage of an opportunity for his own personal profit when the
interest of the corporation justly calls for protection. It is not denied that a member of the Board of
Directors of the San Miguel Corporation has access to sensitive and highly confidential information,
such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification;
(c) research and development; and (d) sources of funding, availability of personnel, proposals of
mergers or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an
officer or director of San Miguel Corporation, who is also the officer or owner of a competing
corporation, from taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that
the questioned amendment of the by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he
were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the
performance of his corporation duties above his personal concerns. The offer and assurance of
Gokongwei that to avoid any possibility of his taking unfair advantage of his position as director of
San Miguel Corporation, he would absent himself from meetings at which confidential matters would
be discussed, would not detract from the validity and reasonableness of the by-laws involved. Apart
from the impractical results that would ensue from such arrangement, it would be inconsistent with
Gokongwei's primary motive in running for board membership — which is to protect his investments
in San Miguel Corporation. More important, such a proposed norm of conduct would be against all
accepted principles underlying a director's duty of fidelity to the corporation, for the policy of the law
is to encourage and enforce responsible corporate management.
3. Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all
business transactions of the corporation and minutes of any meeting shall be open to the inspection
of any director, member or stockholder of the corporation at reasonable hours." The stockholder's
right of inspection of the corporation's books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable ownership, a beneficial
ownership, or a quasi-ownership. This right is predicated upon the necessity of self-protection. It is
generally held by majority of the courts that where the right is granted by statute to the stockholder, it
is given to him as such and must be exercised by him with respect to his interest as a stockholder
and for some purpose germane thereto or in the interest of the corporation. In other words, the
inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and
lawful in character and not inimical to the interest of the corporation. The "general rule that
stockholders are entitled to full information as to the management of the corporation and the manner
of expenditure of its funds, and to inspection to obtain such information, especially where it appears
that the company is being mismanaged or that it is being managed for the personal benefit of
officers or directors or certain of the stockholders to the exclusion of others." While the right of a
stockholder to examine the books and records of a corporation for a lawful purpose is a matter of
law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of
the corporation in which he is a stockholder is a different thing. Stockholders are entitled to inspect
the books and records of a corporation in order to investigate the conduct of the management,
determine the financial condition of the corporation, and generally take an account of the
stewardship of the officers and directors. herein, considering that the foreign subsidiary is wholly
owned by San Miguel Corporation and, therefore, under Its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to
inspect the books and records of the corporation as extending to books and records of such wholly
owned subsidiary which are in the corporation's possession and control.
4. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was organized"
provided that its Board of Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is
made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is
only when the purchase of shares is done solely for investment and not to accomplish the purpose of
its incorporation that the vote of approval of the stockholders holding shares entitling them to
exercise at least two-thirds of the voting power is necessary. As stated by the corporation, the
purchase of beer manufacturing facilities by SMC was an investment in the same business stated as
its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears
that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc.,
purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture
and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971
thru the organization of SMI in Bermuda as a tax free reorganization. Assuming arguendo that the
Board of Directors of SMC had no authority to make the assailed investment, there is no question
that a corporation, like an individual, may ratify and thereby render binding upon it the originally
unauthorized acts of its officers or other agents. This is true because the questioned investment is
neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract
which is within the corporate powers, but which is defective from a purported failure to observe in its
execution the requirement of the law that the investment must be authorized by the affirmative vote
of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify
the investment and its ratification by said stockholders obliterates any defect which it may have had
at the outset. Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that the corporation
submitted the assailed investment to the stockholders for ratification at the annual meeting of 10
May 1977 cannot be construed as an admission that the corporation had committed an ultra vires
act, considering the common practice of corporations of periodically submitting for the ratification of
their stockholders the acts of their directors, officers and managers.
5. Nielson and Co. vs Lepanto Consolidated Mining Co 26 SCRA 542
FACTS:
On January 30, 1937, the parties have entered into an operating agreement
wherein Nielson & Co. would operate and manage the mining properties owned by
Lepanto Consolidated Mining Co. for a period of five years. Before the lapse of the
five year period, the parties have renewed the contract for another five years with
modifications made by Lepanto on the management fee.
On its modified contract Nielson will receive (1) 10% of the dividends declared and
paid, when and as paid during the period of the contract and at the end of each year,
(2) 10% of any depletion reserve that may set up, and (3) 10% of any amount
expended during the year out of surplus earnings for capital account.
In January, 1942 operation of the mining properties was disrupted on account

of the war. The Japanese forces thereafter occupied the mining properties, operated
the mines during the continuance of the war, and who were ousted from the mining
properties only in August of 1945.
After the mining properties were liberated from the Japanese forces, Lepanto
took possession thereof and embarked in rebuilding and reconstructing the mines and
mill. The restoration lasted for nearly three years and the mines have resumed its
operation under the exclusive management of Lepanto.
Shortly after the mines were liberated from the Japanese invaders in 1945, a
disagreement arose between NIELSON and LEPANTO over the status of the
operating contract in question which as renewed expired in 1947.
ISSUE: Whether or not Nielson is entitled to his share in the stock dividends.
HELD:
Stock dividends cannot be issued to a person who is not a stockholder in

payment of services rendered.
Section 16 of the Corporation Law, in part, provides a follows:
No corporation organized under this Act shall create or issue bills, notes or
other evidence of debt, for circulation as money, and no corporation shall issue stock
or bonds except in exchange for actual cash paid to the corporation or for: (1) property
actually received by it at a fair valuation equal to the par or issued value of the stock
or bonds so issued; and in case of disagreement as to their value, the same shall be
presumed to be the assessed value or the value appearing in invoices or other
commercial documents, as the case may be; and the burden or proof that the real
present value of the property is greater than the assessed value or value appearing in
invoices or other commercial documents, as the case may be, shall be upon the
corporation, or for (2) profits earned by it but not distributed among its stockholders
or members; Provided, however, That no stock or bond dividend shall be issued
without the approval of stockholders representing not less than two-thirds of all stock
then outstanding and entitled to vote at a general meeting of the corporation or at a
special meeting duly called for the purpose.
In the case at bar Nielson can not be paid in shares of stock which form part of
the stock dividends of Lepanto for services it rendered under the management
contract. We sustain the contention of Lepanto that the understanding between
Lepanto and Nielson was simply to make the cash value of the stock dividends
declared as the basis for determining the amount of compensation that should be paid
to Nielson, in the proportion of 10% of the cash value of the stock dividends declared.
In other words, Nielson must still be paid his 10% fee using as the basis for
computation the cash value of the stock dividends declared.
Moreover, from the above-quoted provision of Section 16 of the Corporation

Law, the consideration for which shares of stock may be issued are: (1) cash; (2)
property; and (3) undistributed profits. Shares of stock are given the special name
“stock dividends” only if they are issued in lieu of undistributed profits. If shares of
stocks are issued in exchange of cash or property then those shares do not fall under
the category of “stock dividends”. A corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a stockholder, or in payment of
its indebtedness. A share of stock issued to pay for services rendered is equivalent to a
stock issued in exchange of property, because services is equivalent
to property.14 Likewise a share of stock issued in payment of indebtedness is
equivalent to issuing a stock in exchange for cash. But a share of stock thus issued
should be part of the original capital stock of the corporation upon its organization, or
part of the stocks issued when the increase of the capitalization of a corporation is
properly authorized. In other words, it is the shares of stock that are originally issued
by the corporation and forming part of the capital that can be exchanged for cash or
services rendered, or property; that is, if the corporation has original shares of stock
unsold or unsubscribed, either coming from the original capitalization or from the
increased capitalization. Those shares of stock may be issued to a person who is not a
stockholder, or to a person already a stockholder in exchange for services rendered or
for cash or property. But a share of stock coming from stock dividends declared
cannot be issued to one who is not a stockholder of a corporation.
A “stock dividend” is any dividend payable in shares of stock of the

corporation declaring or authorizing such dividend.
So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced
use of the dividend money to purchase additional shares of stock at par.16 When a
corporation issues stock dividends, it shows that the corporation’s accumulated profits
have been capitalized instead of distributed to the stockholders or retained as surplus
available for distribution, in money or kind, should opportunity offer. Far from being
a realization of profits for the stockholder, it tends rather to postpone said realization,
in that the fund represented by the new stock has been transferred from surplus to
assets and no longer available for actual distribution.17 Thus, it is apparent that stock
dividends are issued only to stockholders. This is so because only stockholders are
entitled to dividends. They are the only ones who have a right to a proportional share
in that part of the surplus which is declared as dividends. A stock dividend really adds
nothing to the interest of the stockholder; the proportional interest of each stockholder
remains the same.18If a stockholder is deprived of his stock dividends – and this
happens if the shares of stock forming part of the stock dividends are issued to a non-
stockholder — then the proportion of the stockholder’s interest changes radically.
Stock dividends are civil fruits of the original investment, and to the owners of the
shares belong the civil fruits.
5) Aranas vs Tutaan 127 SCRA 828
Aranas v. Tutaan Digest

Payment or Performance
Aranas v Tutaan
127 SCRA 828
Facts: The stocks of Universal Textile Mills (UTEX) were issued to co-defendants Manuel and Castaneda.
Subsequently, in 1971, the lower court declared that Luisa Aranas is the rightful owner of the 400 shares
of stocks at Universal Textile Mills (UTEX. Further, it ordered that dividends in cash or stocks pertaining
to the same be delivered to Aranas. UTEX then filed a motion to clarify the phrase in said decision which
states “to deliver to her all dividends appertaining to the same, whether in cash or in stocks” meant
dividends properly pertaining to the plaintiffs after the court’s declaration of her ownership. The said
motion was granted, where the court ordered UTEX to pay the plaintiff the cash dividends which
accrued to the stocks in question after the current decision was rendered but the cash dividends already
paid to the co-defendants before the court decision may not be claimed by the plaintiffs.
The co-defendants filed for a new trial and the decision was the same as the the 1971 ruling. Upon
appeal to the CA, the said ruling was affirmed. The lower court issued a writ of execution in 1979
directed to UTEX to 1) cancel the certificate of stocks of the co-defendants and issue new ones in the
name of the petitioners, and 2) Pay the cash dividends accrued from 1972 to 1979 (period from the new
trial to the issuance of writ of execution). UTEX alleged that the cash dividends had already been paid.
ISSUE: Whether or not there was valid payment
RULING: No. It is elementary that payment made by a judgment

debtor to a wrong party cannot extinguish the obligation of such debtor
to its creditor. It was clear in the motion for clarification that all
dividends accruing to the said shares after the rendition of judgement
belonged to the Aranas. When UTEX paid the wrong parties, despite
its knowledge and understanding of the final judgment, it is still liable
to pay Aranas as the lawful declared owners of the said shares. The
burden to recover the wrong payment is on UTEX and cannot be
passed on to the Aranas as the innocent parties.
212 Phil. 776
TEEHANKEE, J.:
In a decision rendered on May 3, 1971 by the now defunct Court of First
Instance of Rizal, Branch V, at Quezon City, in Civil Case No. Q-4689
thereof, entitled "Jose Arañas, et al. vs. Juanito Castañeda, et al.," the said
court declared that petitioner Luisa Quijencio as plaintiff (assisted by her
spouse co-petitioner Jose Arañas) was the owner of 400 shares of stock of
respondent Universal Textile Mills, Inc. (UTEX) as defendant issued "in the
names of its co-defendants Gene Manuel and B.R. Castañeda, including the
stock dividends that accrued to said shares, and ordering defendant
Universal Textile Mills, Inc. to cancel said certificates and issue new ones in
the name of said plaintiff Luisa Quijencio Arañas and to deliver to her all
dividends appertaining to same, whether in cash or in stocks."
In a motion for clarification and/or motion for reconsideration, respondent
UTEX manifested, inter alia, that "(I)f this Honorable Court by the phrase
'to deliver to her all dividends appertaining to same, whether in cash or in
stocks,' meant dividends properly pertaining to plaintiffs after the court's
declaration of plaintiffs' ownership of said 400 shares of stock, then as
defendant UTEX has always maintained it would rightfully abide by
whatever decision may be rendered by this Honorable Court since such
would be the logical consequence after the declaration or ruling in respect
to the rightful ownership of the said shares of stock." The motion for
clarification was granted by the trial court which ruled that its judgment
against UTEX was to pay to Luisa Quijencio Arañas the cash dividends
which accrued to the stocks in question after the rendition of this
decision excluding cash dividends already paid to its co-defendants Gene
Manuel and B.R. Castañeda which accrued before its decision and could
not be claimed by the petitioners-spouses, as follows:
"This in mind, clarification of the dispositive portion of the decision as
aforequoted is indeed necessary, and thus made as to ordain the payment
to plaintiff Luisa Quijencio Arañas of cash dividends which accrue to the
stocks in question after the rendition of this decision. Cash dividends
already paid to defendants which accrued before this decision may not,
therefore, be claimed by plaintiffs."
Apparently satisfied with the clarification, UTEX neither moved for
reconsideration of the order nor appealed from the judgment. Subse-
quently, the trial court granted the motion for new trial of the two co-
defendants Manuel and Castañeda, and after such new trial, it rendered
under date of October 23, 1972 its decision against them which was
substantially the same as its first decision of May 3, 1971 which had already
become final and executory as against UTEX, declaring petitioners-spouses
the owners of the questioned shares of stock in the names of
aforementioned co-defendants Castañeda and Manuel and ordering the
cancellation of the certificates in their names and to issue new ones in the
names of petitioners.
Co-defendants Castañeda and Manuel appealed this judgment of October
23, 1972 against them to the Court of Appeals (now Intermediate Appellate
Court), which rendered on September 1, 1978 its judgment affirming in toto
the trial court's judgment. Said co-defendants sought to appeal the
appellate court's adverse judgment on a petition for review with this Court,
which rendered its Resolution of March 7, 1979 denying the petition for
review for lack of merit and the judgment against the defendants
accordingly became final and executory.
At petitioners' instance, the lower court issued a writ of execution and a
specific order of December 5, 1979 directing UTEX
"1. To effect the cancellation of the certificates of stock in question in the
names of B. R. Castañeda and Gene G. Manuel and the issuance of new
ones in the names of the plaintiffs;
"2. To pay the amount of P100, 701. 45 representing the cash dividends that
accrued to the same stocks from 1972 to 1979 with interest thereon at the
rate of 12% per annum from the date of the service of the writ of execution
on October 3, 1979 until fully paid."
Upon UTEX motion for partial reconsideration alleging that the cash
dividends of the stocks corresponding to the period from 1972 to 1979 had
already been paid and delivered by it to co-defendants Castañeda and
Manuel who then still appeared as the registered owners of the said shares,
the lower court issued its order of January 4, 1980 granting said motion of
UTEX and partially reconsidered its order "to the effect that the defendant
Universal Textile Mills, Inc. is absolved from paying the cash dividend
corresponding to the stocks in question to the plaintiffs for the period 1972
to 1979. "
Hence, the present action for certiorari to set aside respondent judge's
questioned order of January 4, 1980 as having been issued without
jurisdiction and for mandamus to compel respondent judge to perform his
ministerial duty of ordering execution of the final and executory judgment
against UTEX according to its terms.
The Court finds merit in the petition and accordingly grants the same.
The final and executory judgment against UTEX in favor of petitioners,
declared petitioners as the owners of the questioned UTEX shares of stock
as againsts its co-defendants Castañeda and Manuel. It was further made
clear upon UTEX' own motion for clarification that all dividends accruing
to the said shares of stock after the rendition of the decision of August 7,
1971 which for the period from 1972 to 1979 amounted to P100, 701.45 were
to be paid by UTEX to petitioners, and UTEX, per the trial court's order of
clarification of June 16, 1971 above quoted had expressly maintained "it
would rightfully abide by whatever decision may be rendered by this
Honorable Court since such would be the logical consequence after the
declaration or ruling in respect to the rightful ownership of the said shares
of stock."
Consequently, there is no legal nor equitable basis for respondent judge's
position "that it would indeed be most unjust and inequitable to require the
defendant Universal Textile Mills, Inc. to pay twice cash dividends on
particular shares of stocks."[1] If UTEX nevertheless chose to pay the wrong
parties, notwithstanding its full knowledge and understanding of the final
judgment, that it was liable to pay all dividends after the trial court's
judgment in 1971 to petitioners as the lawfully declared owners of the
questioned shares of stock (but which could not be enforced against it
pending the outcome of the appeal filed by the co-defendants Castañeda
and Manuel in the Court of Appeals), it only had itself to blame therefor.
The burden of recovering the supposed payment of the cash dividends
made by UTEX to the wrong parties Castañeda and Manuel squarely falls
upon itself by its own action and cannot be passed by it to petitioners as
innocent parties. It is elementary that payment made by a judgment debtor
to a wrong party cannot extinguish the judgment obligation of such debtor
to its creditor. It is equally elementary that once a judgment becomes final
and executory, the court which rendered it cannot change or modify the
same in any material aspect such as what respondent judge has without
authority attempted to do with his questioned order, which would relieve
the judgment debtor UTEX of its acknowledged judgment obligation to pay
to petitioners as the lawful owners of the questioned shares of stock, the
cash dividends that accrued after the rendition of the judgment recognizing
them as the lawful owners. (Miranda vs. Tiangco, 96 Phil. 526 [1995]).
Execution of a final and executory judgment according to its terms is a
matter of right for the prevailing party and becomes the ministerial duty of
the court (De los Angeles vs. Victoriano, 109 Phil.12).
ACCORDINGLY, judgment is rendered setting aside the questioned order
of January 4, 1980 of respondent judge and a writ of mandamusis hereby
issued commanding said respondent judge to order the execution of his
judgment against respondent Universal Textile Mills, Inc., pursuant to his
first order of June 16, 1971 ordering it to pay the sum of P100, 701. 45,
representing the cash dividends that accrued to petitioners' UTEX shares of
stock from 1972 to 1979, with interest thereon at the rate of 12% per annum
from the date of service of the writ of execution on October 3, 1979 until
fully paid, as well as to pay petitioners any subsequent cash dividends that
may have been issued by it thereafter, with interest from due date of
payment until actual payment, and directing the sheriff to satisfy such
judgment out of the properties of respondent UTEX. With costs against
respondent UTEX. This judgment is immediately executory.
Plana, Escolin, Gutierrez, Jr., and De La Fuente, JJ., concur.
6) UM vs BSP-na digest na ata ni
SECOND DIVISION
G.R. No. 194964-65, January 11, 2016
UNIVERSITY OF MINDANAO, INC., Petitioner, v. BANGKO SENTRAL PILIPINAS, ET AL., Respondents.
DECISION
LEONEN, J.:
Acts of an officer that arc not authorized by the board of directors/trustees do not bind the corporation
unless the corporation ratifies the acts or holds the officer out as a person with authority to transact on its
behalf.
This is a Petition for Review on Certiorari1 of the Court of Appeals' December 17, 2009 Decision2 and
December 20, 2010 Resolution.3 The Court of Appeals reversed the Cagayan De Oro City trial court's and
the Iligan City trial court's Decisions to nullify mortgage contracts involving University of Mindanao's
properties.4
University of Mindanao is an educational institution. For the year 1982, its Board of Trustees was chaired by
Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of Mindanao's Assistant Treasurer.5
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2) thrift banks: (1)
First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings and Loan Association, Inc.
(DSLAI). Guillermo B. Torres chaired both thrift banks. He acted as FISLAI's President, while his wife,
Dolores P. Torres, acted as DSLAI's President and FISLAI's Treasurer.6
Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas issued a P1.9 million standby emergency
credit to FISLAI. The release of standby emergency credit was evidenced by three (3) promissory notes
dated February 8, 1982, April 7, 1982, and May 4, 1982 in the amounts of P500,000.00, P600,000.00, and
P800,000.00, respectively. All these promissory notes were signed by Guillermo B. Torres, and were co-
signed by either his wife, Dolores P. Torres, or FISLAI's Special Assistant to the President, Edmundo G.
Ramos, Jr.7
On May 25, 1982, University of Mindanao's Vice President for Finance, Saturnino Petalcorin, executed a deed
of real estate mortgage over University of Mindanao's property in Cagayan de Oro City (covered by Transfer
Certificate of Title No. T-14345) in favor of Bangko Sentral ng Pilipinas.8 "The mortgage served as security
for FISLAI's PI.9 Million loan[.]"9 It was allegedly executed on University of Mindanao's behalf.10
As proof of his authority to execute a real estate mortgage for University of Mindanao, Saturnino Petalcorin
showed a Secretary's Certificate signed on April 13, 1982 by University of Mindanao's Corporate Secretary,
Aurora de Leon.11 The Secretary's Certificate stated: chanRoblesvi rtual Lawli bra ry
That at the regular meeting' of the Board of Trustees of the aforesaid corporation [University of Mindanao]
duly convened on March 30, 1982, at which a quorum was present, the following resolution was
unanimously adopted: chanRoblesvi rtua lLaw lib rary
"Resolved that the University of Mindanao, Inc. be and is hereby authorized, to mortgage real estate
properties with the Central Bank of the Philippines to serve as security for the credit facility of First Iligan
Savings and Loan Association, hereby authorizing the President and/or Vice-president for Finance, Saturnino
R. Petalcorin of the University of Mindanao,- Inc. to sign, execute and deliver the covering mortgage
document or any other documents which may be proper[l]y required."12
cralawlawl ibra ry
The Secretary's Certificate was supported by an excerpt from the minutes of the January 19, 1982 alleged
meeting of University of Mindanao's Board of Trustees. The excerpt was certified by Aurora de Leon on
March 13, 1982 to be a true copy of University of Mindanao's records on file.13 The excerpt reads: chanRo blesvi rtua lLaw lib rary
3 - Other Matters:
(a) Cagayan de Oro and Iligan properties:

Resolution No. 82-1-8
Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President for Finance, to represent the
University of Mindanao to transact, transfer, convey, lease, mortgage, or otherwise hypothecate any or all of
the following properties situated at Cagayan de Oro and Iligan City and authorizing further Mr. Petalcorin to
sign any or all documents relative thereto: cha nRoblesv irt ual Lawlib rary
1. A parcel of land situated at Cagayan de Oro City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE No. T-14345 of the Registry of Deeds of Cagayan de Oro City;
2. A parcel of land situated at Iligan City, covered and technically described in TRANSFER CERTIFICATE
OF TITLE NO..T-15696 (a.t.) of the Registry of Deeds of Iligan City; and
3. A parcel of land situated at Iligan City, covered and technically described in TRANSFER CERTIFICATE
OF TITLE NO. T-15697 (a.f.) of the Registry of Deeds of Iligan City.14
cralawlawl ibra ry
The mortgage deed executed by Saturnino Petalcorin in favor of Bangko Sentral ng Pilipinas was annotated
on the certificate of title of the Cagayan de Oro City property (Transfer Certificate of Title No. 14345) on
June 25, 1982. Aurora de Leon's'certification was also annotated on the Cagayan de Oro City property's
certificate of title (Transfer Certificate of Title No. 14345).15
On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an additional loan of P620,700.00.
Guillermo B. Torres and Edmundo Ramos executed a promissory note on October 21, 1982 to cover that
amount.16
On November 5, 1982, Saturnino Petalcorin executed another deed of real estate mortgage, allegedly on
behalf of University of Mindanao, over its two properties in Iligan City. This mortgage served as additional
security for FISLAI's loans. The two Iligan City properties were covered by Transfer Certificates of Title Nos,
T-15696 and T-15697.17
On January 17, 1983, Bangko Sentral ng Pilipinas' mortgage lien over the Iligan City properties and Aurora
de Leon's certification were annotated on Transfer Certificates of Title Nos. T-15696 and T-15697.18 On
January 18, 1983, Bangko Sentral ng Pilipinas' mortgage lien over the Iligan City properties was also
annotated on the tax declarations covering the Iligan City properties.19
Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI on May 27, 1983 and on August 20,
1984 in the amounts of P1,633,900.00 and P6,489,000.00, respectively.20
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered into a Memorandum of
Agreement intended to rehabilitate the thrift banks, which had been suffering from their depositors' heavy
withdrawals. Among the terms of the agreement was the merger of FISLAI and DSLAI, with DSLAI as the
surviving corporation. DSLAI later became known as Mindanao Savings and Loan Association, Inc.
(MSLAI).21
Guillermo B. Torres died on March 2, 1989.22
MSLAI failed to recover from its losses and was liquidated on May 24, 1991.23
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of Mindanao, informing it that the
bank would foreclose its properties if MSLAI's total outstanding obligation of P12,534,907.73 remained
unpaid.24
In its reply to Bangko Sentral ng Pilipinas' June 18, 1999 letter, University of Mindanao, through its Vice
President for Accounting, Gloria E. Detoya, denied that University of Mindanao's properties were mortgaged.
It also denied having received any loan proceeds from Bangko Sentral ng Pilipinas.25 cralaw red
On July 16, 1999, University of Mindanao filed two Complaints for nullification and cancellation of mortgage.
One Complaint was filed before the Regional Trial Court of Cagayan de Oro City, and the other Complaint
was filed before the Regional Trial Court of Iligan City.26
University of Mindanao alleged in its Complaints that it did not obtain any loan from Bangko Sentral ng
Pilipinas. It also did not receive any loan proceeds from the bank.27
University of Mindanao also alleged that Aurora de Leon's certification was anomalous. It never authorized
Saturnino Petalcorin to execute real estate mortgage contracts involving its properties to secure FISLAI's
debts. It never ratified the execution of the mortgage contracts. Moreover, as an educational institution, it
cannot mortgage its properties to secure another person's debts.28
On November 23, 2001, the Regional Trial Court of Cagayan de Oro City rendered a Decision in favor of
University of Mindanao,29 thus: chanRoblesv irt ual Lawlib rary
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and against
defendants: chanRoblesv irt ual Lawlib rary
1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in favor of BANGKO SENTRAL NG
PILIPINAS involving Lot 421-A located in Cagayan de Oro City with an area of 482 square meters covered by
TCT No. T-14345 as annuled [sic];
2. ORDERING the Register of Deeds of Cagayan de Oro City to cancel Entry No. 9951 and Entry No. 9952
annotated at the back of said TCT No. T-14345, Registry of Deeds of Cagayan de Oro City;
Prayer for attorney's fee [sic] is hereby denied there being no proof that in demanding payment of the
emergency loan, defendant BANGKO SENTRAL NG PILIPINAS was motivated by evident bad faith,
SO ORDERED.30 (Citation omitted) c ralawlawli bra ry
The Regional Trial Court of Cagayan de Oro City found that there was no board resolution giving Saturnino
Petalcorin authority to execute mortgage contracts on behalf of University of Mindanao. The Cagayan de Oro
City trial court gave weight to Aurora de Leon's testimony that University ofMindanao's Board of Trustees did
not issue a board resolution that would support the Secretary's Certificate she issued. She testified that she
signed the Secretary's Certificate only upon Guillermo B. Torres' orders.31
Saturnino Petalcorin testified that he had no authority to execute a mortgage contract on University
ofMindanao's behalf. He merely executed the contract because of Guillermo B. Torres' request.32
Bangko Sentral ng Pilipinas' witness Daciano Pagui, Jr. also admitted that there was no board resolution
giving Saturnino Petalcorin authority to execute mortgage contracts on behalf of University of Mindanao.33
The Regional Trial Court of Cagayan de Oro City ruled that Saturnino Petalcorin was not authorized to
execute mortgage contracts for University of Mindanao. Hence, the mortgage of University ofMindanao's
Cagayan de Oro City property was unenforceable. Saturnino Petalcorin's unauthorized acts should be
annulled.34
Similarly, the Regional Trial Court of Iligan City rendered a Decision on December 7, 2001 in favor of
University of Mindanao.35 The dispositive portion of the Decision reads: chanRob lesvi rtua lLawl ibra ry
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendants, as follows: chanRoblesvi rtua lLawl ibra ry
1. Nullifying and canceling [sic] the subject Deed of Real Estate Mortgage dated November 5, 1982 for being
unenforceable or void contract;
2. Ordering the Office of the Register of Deeds of Iligan City to cancel the entries on TCT No. T-15696 and
TCT No. T- 15697 with respect to the aforesaid Deed of Real Estate Mortgage dated November 5, 1982 and
all other entries related thereto;
3. Ordering the defendant Bangko Sentral ng Pilipinas to return the owner's duplicate copies of TCT No. T-
15696 and TCT No. 15697 to the plaintiff;
4. Nullifying the subject [foreclosure [proceedings and the [a]uction [s]ale conducted by defendant Atty.
Gerardo Paguio, Jr. on October 8, 1999 including all the acts subsequent thereto and ordering the Register
of Deeds of Iligan City not to register any Certificate of Sale pursuant to the said auction sale nor make any
transfer of the corresponding titles, and if already registered and transferred, to cancel all the said entries in
TCT No. T-15696 and TCT No. T-15697 and/or cancel the corresponding new TCTs in the name of defendant
Bangko Sentral ng Pilipinas;
5. Making the Preliminary Injunction per Order of this Court dated October 13, 2000 permanent.
No pronouncement as to costs.36 (Citation omitted) cralawlawl ibrary
The Iligan City trial court found that the Secretary's Certificate issued by Aurora de Leon was fictitious37and
irregular for being unnumbered.38 It also did not specify the identity, description, or location of the
mortgaged properties.39
The Iligan City trial court gave credence to Aurora de Leon's testimony that the University of Mindanao's
Board of Trustees did not take up the documents in its meetings. Saturnino Petalcorin corroborated her
testimony.40
The Iligan City trial court ruled that the lack of a board resolution authorizing Saturnino Petalcorin to
execute documents of mortgage on behalf of University of Mindanao made the real estate mortgage contract
unenforceable under Article 140341 of the Civil Code.42 The mortgage contract and the subsequent acts of
foreclosure and auction sale were void because the mortgage contract was executed without University of
Mindanao' s authority.43
The Iligan City trial court also ruled that the annotations on the titles of University of Mindanao's properties
do not operate as notice to the University because annotations only bind third parties and not
owners.44 Further, Bangko Sentral ng Pilipinas' right to foreclose the University of Mindanao's properties had
already prescribed.45
Bangko Sentral ng Pilipinas separately appealed the Decisions of both the Cagayan de Oro City and the
Iligan City trial courts.46
After consolidating both cases, the Court of Appeals issued a Decision on December 17, 2009 in favor of
Bangko Sentral ng Pilipinas, thus: chanRoblesvi rtua lLawl ibrary
FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial Court of Cagayan
de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7 December 2001 of the Regional
Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 are REVERSED and SET ASIDE. The Complaints
in both cases before the trial courts are DISMISSED. The Writ of Preliminary Injunction issued by the
Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 is LIFTED and SET ASIDE.
SO ORDERED.47 cralawlawlib rary
The Court of Appeals ruled that "[although BSP failed to prove that the UM Board of Trustees actually passed
a Board Resolution authorizing Petalcorin to mortgage the subject real properties,"48 Aurora de Leon's
Secretary's Certificate "clothed Petalcorin with apparent and ostensible authority to execute the mortgage
deed on its behalf[.]"49 Bangko Sentral ng Pilipinas merely relied in good faith on the Secretary's
Certificate.50 University of Mindanao is estopped from denying Saturnino Petalcorin's authority.51
Moreover, the Secretary's Certificate was notarized. This meant that it enjoyed the presumption of regularity
as to the truth of its statements and authenticity of the signatures.52 Thus, "BSP cannot be faulted for
relying on the [Secretary's Certificate.]"53
The Court of Appeals also ruled that since University of Mindanao's officers, Guillermo B. Torres and his wife,
Dolores P. Torres, signed the promissory notes, University of Mindanao was presumed to have knowledge of
the transaction.54 Knowledge of an officer in relation to matters within the scope of his or her authority is
notice to the corporation.55
The annotations on University of Mindanao's certificates of title also operate as constructive notice to it that
its properties were mortgaged.56 Its failure to disown the mortgages for more than a decade was implied
ratification.57
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas' action for foreclosure had not yet
prescribed because the due date extensions that Bangko Sentral ng Pilipinas granted to FISLAI extended the
due date of payment to five (5) years from February 8, 1985.58 The bank's demand letter to Dolores P.
Torres on June 18, 1999 also interrupted the prescriptive period.59
University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for Reconsideration60 and Motion for
Partial Reconsideration respectively of the Court of Appeals' Decision. On December 20, 2010, the Court of
Appeals issued a Resolution, thus: chanRoblesvi rtua lLawl ibrary
Acting on the foregoing incidents, the Court RESOLVES to: chanRoble svirtual Lawlib ra ry
1. GRANT the appellant's twin motions for extension of time to file comment/opposition and NOTE the
Comment . on the appellee's Motion for Reconsideration it subsequently filed on June 23, 2010;
2. GRANT the appellee's three (3) motions for extension of time to file comment/opposition
and NOTE the Comment on the appellant's Motion for Partial Reconsideration it filed on July 26,
2010;
3. NOTE the appellant's "Motion for Leave to File Attached Reply Dated August 11, 2010" filed on
August 13, 2010 and DENY the attached "Reply to Comment Dated July 26, 2010";
4. DENY the appellee's Motion for Reconsideration as it does' not offer any arguments sufficiently
meritorious to warrant modification or reversal of the Court's 17 December 2009 Decision. The
Court finds that there is no compelling reason to reconsider its ruling; and
5. GRANT the appellant's Motion for Partial Reconsideration, as the Court finds it meritorious,
considering that it ruled in its Decision that "BSP can still foreclose on the UM's real property in
Cagayan de Oro City covered by TCT No. T- 14345." It then follows that the injunctive writ issued
by the RTC of Cagayan de Oro City, Branch 24 must be lifted. The Court's 17 December 2009
Decision is accordingly MODIFIED and AMENDED to read as follows: chanRoblesv irt ual Lawlib rary
"FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial Court of
Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7 December 2001
of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 are REVERSED and SET
ASIDE. The Complaints in both cases before the trial courts are DISMISSED. The Writs of
Preliminary Injunction issued by the Regional Trial Court of Iligan City, Branch 1 in Civil Case No.
4790 and in the Regional Trial Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414
are LIFTED and SET ASIDE."
SO ORDERED.61 (Citation omitted)

cralawlawl ibra ry
Hence, University of Mindanao filed this Petition for Review. The issues for resolution are: chanRoble svirtual Lawlib ra ry
First, whether respondent Bangko Sentral ng Pilipinas' action to foreclose the mortgaged properties had
already prescribed; and
Second, whether petitioner University of Mindanao is bound by the real estate mortgage contracts executed
by Saturnino Petalcorin.
We grant the Petition.
Petitioner argues that respondent's action to foreclose its mortgaged properties had already prescribed.
Petitioner is mistaken.
Prescription is the mode of acquiring or losing rights through the lapse of time.62 Its purpose is "to protect
the diligent and vigilant, not those who sleep on their rights."63
The prescriptive period for actions on mortgages is ten (10) years from the day they may be
brought.64Actions on mortgages may be brought not upon the execution of the mortgage contract but upon
default in payment of the obligation secured by the mortgage.65
A debtor is considered in default when he or she fails to pay the obligation on due date and, subject to
exceptions, after demands for payment were made by the creditor. Article 1169 of the Civil Code
provides:c hanRoble svirtual Lawli bra ry
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist: chanRob lesvi rtua lLawl ibra ry
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. c ralawlawli bra ry
Article 1193 of the Civil'Code provides that an obligation is demandable only upon due date. It provides: chanRoble svirtual Lawli bra ry
ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when
that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.
A day certain is understood to be that which must necessarily come, although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be
regulated by the rules of the preceding Section. cra lawlawlib ra ry
In other words, as a general rule, a person defaults and prescriptive period for action runs when (1) the
obligation becomes due and demandable; and (2) demand for payment has been made.
The prescriptive period neither runs from the date of the execution of a contract nor does the prescriptive
period necessarily run on the date when the loan becomes due and demandable.66 Prescriptive period runs
from the date of demand,67 subject to certain exceptions.
In other words, ten (10) .years may lapse from the date of the execution of contract, without barring a
cause of action on the mortgage when there is a gap between the period of execution of the contract and
the due date or between the due date and the demand date in cases when demand is necessary.68
The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The maturity dates of
FISLAI's loans were repeatedly extended until the loans became due and demandable only in 1990.
Respondent informed petitioner of its decision to foreclose its properties and demanded payment in 1999.
The running of the prescriptive period of respondent's action on the mortgages did not start when it
executed the mortgage contracts with Saturnino Petalcorin in 1982.
The prescriptive period for filing an action may run either (1) from 1990 when the loan became due, if the
obligation was covered by the exceptions under Article 1169 of the Civil Code; (2) or from 1999 when
respondent demanded payment, if the obligation was not covered by the exceptions under Article 1169 of
the Civil Code.
In either case, respondent's Complaint with cause of action based on the mortgage contract was filed well
within the prescriptive period.
Given the termination of all traces of FISLAI's existence,70 demand may have been rendered unnecessary
under Article 1169(3)71 of the Civil Code. Granting that this is the case,.respondent would have had ten (10)
years from due date in 1990 or until 2000 to institute an action on the mortgage contract.
However, under Article 115572 of the Civil Code, prescription of actions may be interrupted by (1) the filing
of a court action; (2) a written extrajudicial demand; and (3) the written acknowledgment of the debt by the
debtor.
Therefore, the running of the prescriptive period was interrupted when respondent sent its demand letter to
petitioner on June 18, 1999. This eventually led to petitioner's filing of its annulment of mortgage complaints
before the Regional Trial Courts of Iligan City and Cagayan De Oro City on July 16, 1999.
Assuming that demand was necessary, respondent's action was within the ten (10)-year prescriptive period.
Respondent demanded payment of the loans in 1999 and filed an action in the same year.
II
Petitioner argues that the execution of the mortgage contract was ultra vires. As an educational institution,
it may not secure the loans of third persons.73 Securing loans of third persons is not among the purposes for
which petitioner was established.74
Petitioner, is correct.
Corporations are artificial entities granted legal personalities upon their creation by their incorporators in
accordance with law. Unlike natural persons, they have no inherent powers. Third persons dealing with
corporations cannot assume that corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly defined by the law and their articles of
incorporation.75
A corporation may exercise its powers only within those definitions. Corporate acts that are outside those
express definitions under the law or articles of incorporation or those "committed outside the object for
which a corporation is created"76 are ultra vires.
The only exception to this, rule is when acts are necessary and incidental to carry out a corporation's
purposes, and to the exercise of powers conferred by the Corporation Code and under a corporation's
articles of incorporation.77 This exception is specifically included in the general powers of a corporation under
Section 36 of the Corporation Code: chanRoblesvi rt ualLaw lib rary
SEC. 36. Corporate powers and capacity.—Every corporation incorporated under this Code has the power
and capacity: chanRoblesv irt ual Lawlib rary
1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
6. 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 non
stock corporation;
7. 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;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation. (Emphasis supplied)
cralawlawl ibra ry
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated the test to determine if a corporate act is in
accordance with its purposes: chanRoble svirtual Lawlib ra ry
It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed
in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the
purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter powers. The
test to be applied is 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. If so, the
corporation has the power to do it; otherwise, not.79 (Emphasis supplied) c ralawlawl ibra ry
As an educational institution, petitioner serves: chanRob lesvi rtua lLawl ibra ry
a. To establish, conduct and operate a college or colleges, and/or university;

b. To acquire properties,, real and/or personal, in connection with the establishment and operation of
such college or colleges;
c. To do and perform the various and sundry acts and things permitted by the laws of the Philippines
unto corporations like classes and kinds;
d. To engage in agricultural, industrial, and/or commercial pursuits in line with educational program of
the corporation and to acquire all properties, real and personal [,] necessary for the purposes[;]
e. To establish, operate, and/or acquire broadcasting and television stations also in line with the
educational program of the corporation and for such other purposes as the Board of Trustees may
determine from time to time;
f. To undertake housing projects of faculty members and employees, and to acquire real estates for
this purpose;
g. To establish, conduct and operate and/or invest in educational foundations; [As amended on
December 15, 1965][;]
h. To establish, conduct and operate housing and dental schools, medical facilities and other related
undertakings;
i. To invest in other corporations. [As amended on December 9, 1998]. [Amended Articles of
Incorporation of the University of Mindanao, Inc. - the Petitioner].80
cralawlawl ibra ry
Petitioner does not have the power to mortgage its properties in order to secure loans of other persons. As
an educational institution, it is limited to developing human capital thrpugh formal instruction. It is not a
corporation engaged in the business of securing loans of others.
Hiring professors, instructors, and personnel; acquiring equipment and real estate; establishing housing
facilities for personnel and students; hiring a concessionaire; and other activities that can be directly
connected to the operations and conduct of the education business may constitute the necessary and
incidental acts of an educational institution.
Securing FISLAI's loans by mortgaging petitioner's properties does not appear to have even the remotest
connection to the operations of petitioner as an educational institution. Securing loans is not an adjunct of
the educational institution's conduct of business.81 It does not appear that securing third-party loans was
necessary to maintain petitioner's business of providing instruction to individuals.
This court upheld the validity of corporate acts when those acts were shown to be clearly within the
corporation's powers or were connected to the corporation's purposes.
In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid the donation given to the
children of a deceased person who contributed to the growth of the corporation.83 This court found that this
donation was within the broad scope of powers and purposes of the corporation to "aid in any other manner
any person . . . in which any interest is held by this corporation or in the affairs or prosperity of which this
corporation has a lawful interest."84
In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this court declared valid a rule by
Twin Towers Condominium denying delinquent members the right to use condominium facilities. This court
ruled that the condominium's power to promulgate rules on the use of facilities and to enforce provisions of
the Master Deed was clear in the Condominium Act, Master Deed, and By-laws of the
condominium.87 Moreover, the promulgation of such rule was "reasonably necessary" to attain the purposes
of the condominium project.88
This court has, in effect, created a presumption that corporate acts are valid if, on their face, the acts were
within the corporation's powers or purposes. This presumption was explained as early as in 1915 in Coleman
v. Hotel De France,89 where this court ruled that contracts entered into by corporations in the exercise of
their incidental powers are not ultra vires.90
Coleman involved a hotel's cancellation of an employment contract it executed with a gymnast. One of the
hotel's contentions was the supposed ultra vires nature of the contract.- It was executed outside its express
and implied powers under the articles of incorporation.91
In ruling in favor of the contract's validity, this court considered the incidental powers of the hotel to include
the execution of employment contracts with entertainers for the purpose of providing its guests
entertainment and increasing patronage.92
This court ruled that a contract executed by a corporation shall be presumed valid if on its face its execution
was not beyond the powers of the corporation to do.93 Thus: chanRoblesvi rt ual Lawlib rary
When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it
was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are
presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal
wrong.94cralaw lawlib rary
However, this should not be interpreted to mean that such presumption applies to all cases, even when the
act in question is on its face beyond the corporation's power to do or when the evidence contradicts the
presumption.
Presumptions are "inference[s] as to the existence of a fact not actually known, arising from its usual
connection with another which is known, or a conjecture based on past experience as to what course human
affairs ordinarily take."95 Presumptions embody values and revealed behavioral expectations under a given
set of circumstances.
Presumptions may be conclusive96 or disputable.97
Conclusive presumptions are presumptions that may not be overturned by evidence, however strong the
evidence is.98 They are made conclusive not because there is an established uniformity in behavior
whenever identified circumstances arise. They are conclusive because they are declared as such under the
law or the rules. Rule 131, Section 2 of the Rules of Court identifies two (2) conclusive presumptions: cha nRoblesvi rt ualLaw lib rary
SEC. 2. Conclusive presumptions.— The following are instances of conclusive presumptions: chanRob lesvi rtual Lawli bra ry
(a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out
of such declaration, act or omission, be permitted to falsify it;
(b) The tenant is not permitted to deny the title of his landlord at the time of the commencement of the
relation of landlord and tenant between them. cralawlawli bra ry
On the other hand, disputable, presumptions are presumptions that may be overcome by contrary
evidence.99 They are disputable in recognition of the variability of human behavior. Presumptions are not
always true. They may be wrong under certain circumstances, and courts are expected to apply them,
keeping in mind the nuances of every experience that may render the expectations wrong.
Thus, the application of disputable presumptions on a given circumstance must be based on the existence of
certain facts on which they are meant to operate. "[Presumptions are not allegations, nor do they supply
their absence[.]"100 Presumptions are conclusions. They do not apply when there are no facts or allegations
to support them.
If the facts exist to set in motion the operation of a disputable presumption, courts may accept the
presumption. However, contrary evidence may be presented to rebut the presumption.
Courts cannot disregard contrary evidence offered to rebut disputable presumptions. Disputable
presumptions apply only in the absence of contrary evidence or explanations. This court explained
in Philippine Agila Satellite Inc. v. Usec. Trinidad-Lichauco:101 chan roble svi rtual lawlib rary
We do not doubt the existence of the presumptions of "good faith" or "regular performance of official
duty," yet these presumptions are disputable and may be contradicted and overcome by other
evidence. Many civil actions are oriented towards overcoming any number of these presumptions, and a
cause of action can certainly be geared towards such effect. The very purpose of trial is to allow a party to
present evidence to overcome the disputable presumptions involved. Otherwise, if trial is deemed irrelevant
or unnecessary, owing to the perceived indisputability of the presumptions, the judicial exercise would be
relegated to a mere ascertainment of what presumptions apply in a given case, nothing more. Consequently,
the entire Rules of Court is rendered as excess verbiage, save perhaps for the provisions laying down the
legal presumptions.
If this reasoning of the Court of Appeals were ever adopted as a jurisprudential rule, no public officer could
ever be sued for acts executed beyond their official functions or authority, or for tortious conduct or
behavior, since such acts would "enjoy the presumption of good faith and in the regular performance of
official duty." Indeed, few civil actions of any nature would ever reach the trial stage, if a case can be
adjudicated by a mere determination from the complaint or answer as to which legal presumptions are
applicable. For-example, the presumption that a person is innocent of a wrong is a disputable presumption
on the same level as that of the regular performance of official duty. A civil complaint for damages
necessarily alleges that the defendant committed a wrongful act or omission that would serve as basis for
the award of damages. With the rationale of the Court of Appeals, such complaint can be dismissed upon a
motion to dismiss solely on the ground that the presumption is that a person is innocent of a
wrong.102 (Emphasis supplied, citations omitted) cralaw lawlib rary
In this case, the presumption that the execution of mortgage contracts was within petitioner's corporate
powers does not apply. Securing third-party loans is not connected to petitioner's purposes as an
educational institution.
III
Respondent argues that petitioner's act of mortgaging its properties to guarantee FISLAI's loans was
consistent with petitioner's business interests, since petitioner was presumably a FISLAI shareholder whose
officers and shareholders interlock with FISLAI. Respondent points out that petitioner and its key officers
held substantial shares in MSLAI when DSLAI and FISLAI merged. Therefore, it was safe to assume that
when the mortgages were executed in 1982, petitioner held substantial shares in FISLAI.103
Parties dealing with corporations cannot simply assume that their transaction is within the corporate powers.
The acts of a corporation are still limited by its powers and purposes as provided in the law and its articles of
incorporation.
Acquiring shares in another corporation is not a means to create new powers for the acquiring corporation.
Being a shareholder of another corporation does not automatically change the nature and purpose of a
corporation's business. Appropriate amendments must be made either to the law or the articles of
incorporation before a corporation can validly exercise powers outside those provided in law or the articles of
incorporation. In other words, without an amendment, what is ultra vires before a corporation acquires
shares in other corporations is still ultra vires after such acquisition.
Thus, regardless of the number of shares that petitioner had with FISLAI, DSLAI, or MSLAI, securing loans
of third persons is still beyond petitioner's power to do. It is still inconsistent with its purposes under the
law104 and its articles of incorporation.105
In attempting to show petitioner's interest in securing FISLAI's loans by adverting to their interlocking,
directors and shareholders, respondent disregards petitioner's separate personality from its officers,
shareholders, and other juridical persons.
The separate personality of corporations means that they are "vest[ed] [with] rights, powers, and attributes
[of their own] as if they were natural persons[.]"106 Their assets and liabilities are their own and not their
officers', shareholders', or another corporation's. In the same vein, the assets and liabilities of their officers
and shareholders are not the corporations'. Obligations incurred by corporations are not obligations of their
officers and shareholders. Obligations of officers and shareholders are not obligations of corporations.107 In
other words, corporate interests are separate from the personal interests of the natural persons that
comprise corporations.
Corporations are given separate personalities to allow natural persons to balance the risks of business as
they accumulate capital. They are, however, given limited competence as a means to protect the public from
fraudulent acts that may be committed using the separate juridical personality given to corporations.
Petitioner's key officers, as shareholders of FISLAI, may have an interest in ensuring the viability of FISLAI
by obtaining a loan from respondent and securing it by whatever means. However, having interlocking
officers and stockholders with FISLAI does not mean that petitioner, as an educational institution, is or must
necessarily be interested in the affairs of FISLAI.
Since petitioner is an entity distinct and separate not only from its own officers and shareholders but also
from FISLAI, its interests as an educational institution may not be consistent with FISLAI's.
Petitioner and FISLAI have different constituencies. Petitioner's constituents comprise persons who have
committed to developing skills and acquiring knowledge in their chosen fields by availing the formal
instruction provided by petitioner. On the other hand, FISLAI is a thrift bank, which constituencies comprise
investors.
While petitioner and FISLAI exist ultimately to benefit their stockholders, their constituencies affect the
means by which they can maintain their existence. Their interests are congruent with sustaining their
constituents' needs because their existence depends on that. Petitioner can exist only if it continues to
provide for the kind and quality of instruction that is needed by its constituents. Its operations and existence
are placed at risk when resources are used on activities that are not geared toward the attainment of its
purpose. Petitioner has no business in securing FISLAI, DSLAI, or MSLAI's loans. This activity is not
compatible with its business of providing quality instruction to its constituents.
Indeed, there are instances when we disregard the separate corporate personalities of the corporation and
its stockholders, directors, or officers. This is called piercing of the corporate veil.
Corporate veil is pierced when the separate personality of the corporation is being used to perpetrate fraud,
illegalities, and injustices.108 In Lanuza, Jr. v. BF Corporation:109
chan roble svirtual lawlib rary
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues." It is also warranted in alter ego cases "where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation."110 cralawlawl ibra ry
These instances have not been shown in this case. There is no evidence pointing to the possibility that
petitioner used its separate personality to defraud third persons or commit illegal acts. Neither is there
evidence to show that petitioner was merely a farce of a corporation. What has been shown instead was that
petitioner, too, had been victimized by fraudulent and unauthorized acts of its own officers and directors.
In this case, instead of guarding against fraud, we perpetuate fraud if we accept respondent's contentions.
IV
Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties on its behalf. There
was no board resolution to that effect. Thus, the mortgages executed by Saturnino Petalcorin were
unenforceable.111
The mortgage contracts executed in favor of respondent do not bind petitioner. They were executed without
authority from petitioner.
Petitioner must exercise its.powers and conduct its business through its Board of Trustees. Section 23 of the
Corporation Code provides: chanRob l esvirt ual Lawlib rary
SEC. 23. The board of directors or trustees—Unless otherwise provided in this Code, the corporate powers of
all corporations formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for
one (1) year and until their successors are elected and qualified. c ralawlawl ibra ry
Being a juridical person, petitioner cannot conduct its business, make decisions, or act in any manner
without action from its Board of Trustees. The Board of Trustees must act as a body in order to exercise
corporate powers. Individual trustees are not clothed with corporate powers just by being a trustee. Hence,
the individual trustee cannot bind the corporation by himself or herself.
The corporation may, however, delegate through a board resolution its corporate powers or functions to a
representative, subject to limitations under the law and the corporation's articles of incorporation.112
The relationship between a corporation and its representatives is governed by the general principles of
agency.113 Article 1317 of the Civil Code provides that there must be authority from the principal before
anyone can act in his or her name: chanRoblesvi rt ualLaw lib rary
ART. 1317. No one may contract in the name of another without being authorized by the latter, or unless he
has by law a right to represent him. cralawlawli bra ry
Hence, without delegation by the board of directors or trustees, acts of a person—including those of the
corporation's directors, trustees, shareholders, or officers—executed on behalf of the corporation are
generally not binding on the corporation.114
Contracts entered into in another's name without authority or valid legal representation are generally
unenforceable. The Civil Code provides: chanRoble svi rtual Lawli bra ry
ART. 1317. . . .
A contract entered into in the name of another by one who has no authority or legal representation, or who
has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the
person on whose behalf it has been executed, before it is revoked by the other contracting party.
....
ART. 1403. The following contracts are unenforceable, unless they are ratified: cha nRoblesv irt ual Lawlib rary
(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers[.] cra lawlawli brary
The unenforceable status of contracts entered into by an unauthorized person on behalf of another is based
on the basic principle that contracts must be consented to by both parties.115 There is no contract without
meeting of the minds as to the subject matter and cause of the obligations created under the contract.116
Consent of a person cannot be presumed from representations of another, especially if obligations will be
incurred as a result. Thus, authority is required to make actions made on his or her behalf binding on a
person. Contracts entered into by persons without authority from the corporation shall generally be
considered ultra vires and unenforceable117 against the corporation.
Two trial courts118 found that the Secretary's Certificate and the board resolution were either non-existent or
fictitious. The trial courts based their findings on the testimony of the Corporate Secretary, Aurora de Leon
herself. She signed the Secretary's Certificate and the excerpt of the minutes of the alleged board meeting
purporting to authorize Saturnino Petalcorin to mortgage petitioner's properties. There was no board
meeting to that effect. Guillermo B. Torres ordered the issuance of the Secretary's Certificate. Aurora de
Leon's testimony was corroborated by Saturnino Petalcorin.
Even the Court of Appeals, which reversed the trial courts' decisions, recognized that "BSP failed to prove
that the UM Board of Trustees actually passed a Board Resolution authorizing Petalcorin to mortgage the
subject real properties[.]"119
Well-entrenched is the rule that this court, not being a trier of facts, is bound by the findings of fact of the
trial courts and the Court of Appeals when such findings are supported by evidence on record.120 Hence, not
having the proper board resolution to authorize Saturnino Petalcorin to execute the mortgage contracts for
petitioner, the contracts he executed are unenforceable against petitioner. They cannot bind petitioner.
However, personal liabilities may be incurred by directors who assented to such unauthorized act121 and by
the person who contracted in excess of the limits of his or her authority without the corporation's
knowledge.122
Unauthorized acts that are merely beyond the powers of the corporation under its articles of incorporation
are not void ab initio.
In Pirovano, et al, this court explained that corporate acts may be ultra vires but not void.123 Corporate acts
may be capable of ratification:124chan roble svirtual lawlib rary
[A] distinction should be made between corporate acts or contracts which are illegal and those which are
merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or public
order, or contravene some rules of public policy or public duty, and are, like similar transactions between
individuals, void. They cannot serve as basis of a court action, nor acquire validity by performance,
ratification, or estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal and void ab
initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.125 c ralawlawli bra ry
Thus, even though a person did not give another person authority to act on his or her behalf, the action may
be enforced against him or her if it is shown that he or she ratified it or allowed the other person to act as if
he or she had full authority to do so. The Civil Code provides: cha nRoblesv irt ual Lawlib rary
ART. 1910. The principal must comply with all the obligations which the agent may have contracted within
the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he
ratifies it expressly or tacitly.
ART. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if
the former allowed the latter to act as though he had full powers.(Emphasis supplied) cralawlaw lib rary
Ratification is a voluntary and deliberate confirmation or adoption of a previous unauthorized act. It.converts
the unauthorized act of an agent into an act of the principal.127 It cures the lack of consent at the time of the
execution of the contract entered into by the representative, making the contract valid and enforceable.128 It
is, in essence, consent belatedly given through express or implied acts that are deemed a confirmation or
waiver of the right to impugn the unauthorized act.129 Ratification has the effect of placing the principal in a
position as if he or she signed the original contract. In Board of Liquidators v. Heirs ofM. Kalaw, et al.:130chanrob lesvi rtua llawli bra ry
Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or
contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to
original authority;" and that "[t]he corporation and the other party to the transaction are in precisely the
same position as if the act or contract had been authorized at the time." The language of one case is
expressive: "The adoption or ratification of a contract by a corporation is nothing more nor less than the
making of an original contract. The theory of corporate ratification is predicated on the right of a corporation
to contract, and any ratification or adoption is equivalent to a grant of prior authority."131 (Citations
omitted)c ralawlawli bra ry
Implied ratification may take the form of silence, acquiescence, acts consistent with approval of the act,, or
acceptance or retention of benefits.132 However, silence, acquiescence, retention of benefits, and acts that
may be interpreted as approval of the act do not by themselves constitute implied ratification. For an act to
constitute an implied ratification, there must be no acceptable explanation for the act-other than that there
is an intention to adopt the act as his or her own.133 "[It] cannot be inferred from acts that a principal has a
right to do independently of the unauthorized act of the agent."134
No act by petitioner can be interpreted as anything close to ratification. It was not shown that it issued a
resolution ratifying the execution of the mortgage contracts. It was not shown that it received proceeds of
the loans secured by the mortgage contracts. There was also no showing that it received any consideration
for the execution of the mortgage contracts. It even appears that petitioner was unaware of the mortgage
contracts until respondent notified it of its desire to foreclose the mortgaged properties.
Ratification must be knowingly and voluntarily done.135 Petitioner's lack of knowledge about the mortgage
executed in its name precludes an interpretation that there was any ratification on its part.
Respondent further argues that petitioner is presumed to have knowledge of its transactions with
respondent because its officers, the Spouses Guillermo and Dolores Torres, participated in obtaining the
loan.136
Indeed, a corporation, being a person created by mere fiction of law, can act only through natural persons
such as its directors, officers, agents, and representatives. Hence, the general rule is that knowledge of an
officer is considered knowledge of the corporation.
However, even though the Spouses Guillermo and Dolores Torres were officers of both the thrift banks and
petitioner, their knowledge of the mortgage contracts cannot be considered as knowledge of the corporation.
The rule that knowledge of an officer is considered knowledge of the corporation applies only when the
officer is acting within the authority given to him or her by the corporation. In Francisco v. Government
Service Insurance System:137 chan roblesv irt uallawl ibrary
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.138 cralaw lawlib rary
The public should be able to rely on and be protected from the representations of a corporate representative
acting within the scope of his or her authority. This is why an authorized officer's knowledge is considered
knowledge of corporation. However, just as the public should be able to rely on and be protected from
corporate representations, corporations should also be able to expect that they will not be bound by
unauthorized actions made on their account.
Thus, knowledge should be actually communicated to the corporation through its authorized representatives.
A corporation cannot be expected to act or not act on a knowledge that had not been communicated to it
through an authorized representative. There can be no implied ratification without actual communication.
Knowledge of the existence of contract must be brought to the corporation's representative who has
authority to ratify it. Further, "the circumstances must be shown from which such knowledge may be
presumed."139
The Spouses Guillermo and Dolores Torres' knowledge cannot be interpreted as knowledge of petitioner.
Their knowledge was not obtained as petitioner's representatives. It was not shown that they were acting for
and within the authority given by petitioner when they acquired knowledge of the loan transactions and the
mortgages. The knowledge was obtained in the interest of and as representatives of the thrift banks.
VI
Respondent argues that Satnrnino Petalcorin was clothed with the authority to transact on behalf of
petitioner, based on the board resolution dated March 30, 1982 and Aurora de Leon's notarized Secretary's
Certificate.140 According to respondent, petitioner is bound by the mortgage contracts executed by Saturnino
Petalcorin.141
This court has recognized presumed or apparent authority or capacity to bind corporate representatives in
instances when the corporation, through its silence or other acts of recognition, allowed others to believe
that persons, through their usual exercise of corporate powers, were conferred with authority to deal on the
corporation's behalf.142
The doctrine of apparent authority does not go into the question of the corporation's competence or power
to do a particular act. It involves the question of whether the officer has the power or is clothed with the
appearance of having the power to act for the corporation. A finding that there is apparent authority is not
the same as a finding that the corporate act in question is within the corporation's limited powers.
The rule on apparent authority is based on the principle of estoppel. The Civil Code provides: c hanRoble svirtual Lawlib ra ry
ART. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making
it, and cannot be denied or disproved as against the person relying thereon.
....
ART, 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without
authority.
Agency may be oral, unless the law requires a specific form. cralawlawl ibra ry
A corporation is estopped by its silence and acts of recognition because we recognize that there is
information asymmetry between third persons who have little to no information as to what happens during
corporate meetings, and the corporate officers, directors, and representatives who are insiders to corporate
affairs.143
In People's Air car go and Warehousing Co. Inc. v. Court of Appeals,144 this court held that the contract
entered into by the corporation's officer without a board resolution was binding upon the corporation
because it previously allowed the officer to contract on its behalf despite the lack of board resolution.145
In Francisco, this court ruled that Francisco's proposal for redemption of property was accepted by and
binding upon the Government Service Insurance System. This court did not appreciate the Government
Service Insurance System's defense that since it was the Board Secretary and not the General Manager who
sent Francisco the acceptance telegram, it could not be made binding upon the Government Service
Insurance System. It did not authorize the Board Secretary to sign for the General Manager. This court
appreciated the Government Service Insurance System's failure to disown the telegram sent by the Board
Secretary and its silence while it accepted all payments made by Francisco for the redemption of property.146
There can be no apparent authority and the corporation cannot be estopped from denying the binding affect
of an act when there is no evidence pointing to similar acts and other circumstances that can be interpreted
as the corporation holding out a representative as having authority to contract on its behalf. In Advance
Paper Corporation v. Arma Traders Corporation,147 this court had the occasion to say: chanRoble svirtual Lawli bra ry
The doctrine of apparent authority does not apply if the principal did not commit any acts or conduct which a
third party knew and relied upon in good faith as a result of the exercise of reasonable prudence. Moreover,
the agent's acts or conduct must have produced a change of position to the third party's detriment. (Citation
omitted)c ralawlawli bra ry
Saturnino Petalcorin's authority to transact on behalf of petitioner cannot be presumed based on a

Secretary's Certificate and excerpt from the minutes of the alleged board meeting that were found to have
been simulated. These documents cannot be considered as the corporate acts that held out Saturnino
Petalcorin as petitioner's authorized representative for mortgage transactions. They were not supported by
an actual board meeting.149
VII
Respondent argues that it may rely on the Secretary's Certificate issued by Aurora de Leon because it was
notarized.
The Secretary's Certificate was void whether or not it was notarized.
Notarization creates a presumption of regularity and authenticity on the document. This presumption may
be rebutted by "strong, complete and conclusive proof"150 to the contrary. While notarial acknowledgment
"attaches full faith and credit to the document concerned[,]"151 it does not give the document its validity or
binding effect. When there is evidence showing that the document is invalid, the presumption of regularity
or authenticity is not applicable.
In Basilio v. Court of Appeals152 this court was convinced that the purported signatory on a deed of sale was
not as represented, despite testimony from the notary public that the signatory appeared before him and
signed the instrument.153 Apart from finding that there was forgery,154 this court noted: chanRob lesvi rtual Lawl ibra ry
The notary public, Atty. Ruben Silvestre, testified that he was the one who notarized the document and that
Dionisio Z. Basilio appeared personally before him and signed the. instrument himself. However, he
admitted that he did not know Dionisio Z. Basilio personally to ascertain if the person who signed the
document was actually Dionisio Z. Basilio himself, or another person who stood in his place. He could not
even recall whether the document had been executed in his office or not.
Thus, considering the testimonies of various witnesses and a comparison of the signature in question with
admittedly genuine signatures, the Court is convinced that Dionisio Z. Basilio did not execute the questioned
deed of sale. Although the questioned deed of sale was a public document having in its favor the
presumption of regularity, such presumption was adequately refuted by competent witnesses showing its
forgery and the Court's own visual analysis of the document. (Emphasis supplied, citations omitted) cra lawlawlib ra ry
In Suntay v. Court of Appeals,156 this court held that a notarized deed of sale was void because it was a
mere sham.157 It was not intended to have any effect between the parties.158 This court said: chanRoble svirtual Lawlib ra ry
[I]t is not the intention nor the function of the notary public to validate and make binding' an instrument
never, in the first place, intended to have any binding legal effect upon the parties thereto.159 cra lawlawlib ra ry
Since the notarized Secretary's Certificate was found to have been issued without a supporting board
resolution, it produced no effect. It is not binding upon petitioner. It should not have been relied on by
respondent especially given its status as a bank.
VIII
The banking institution is "impressed with public interest"160 such that the public's faith is "of paramount
importance."161 Thus, banks are required to exercise the highest degree of diligence in their
transactions.162 In China Banking Corporation v. Lagon,163 this court found that the bank was not a
mortgagee in good faith for its failure to question the due execution of a Special Power of Attorney that was
presented to it in relation to a mortgage contract.164 This court said: chanRoblesv irt ual Lawlib rary
Though petitioner is not expected to conduct an exhaustive investigation on the history of the mortgagor's
title, it cannot be excused from the duty of exercising the due diligence required of a banking institution.
Banks are expected to exercise more care and prudence than private individuals in their dealings, even
those that involve registered lands, for their business is affected with public interest.165 (Citations
omitted) cra lawlawlib ra ry
For its failure to exercise the degree of diligence required of banks, respondent cannot claim good faith in
the execution of the mortgage contracts with Saturnino Petalcorin. Respondent's witness, Daciano Paguio,
Jr., testified that there was no board resolution authorizing Saturnino Petalcorin to act on behalf of
petitioner.166 Respondent did not inquire further as to Saturnino Petalcorin's authority.
Banks cannot rely on assumptions. This will be contrary to the high standard of diligence required of them.
VI
According to respondent, the annotations of respondent's mortgage interests on the certificates of titles of
petitioner's properties operated as constructive notice to petitioner of the existence of such
interests.167Hence, petitioners are now estopped from claiming that they did not know about the mortgage.
Annotations of adverse claims on certificates of title to properties operate as constructive notice only to third
parties—not to the court or the registered owner. In Sajonas v. Court of Appeals:168 chan roblesvi rtual lawlib rary
[Annotation of an adverse claim is a measure designed to protect the interest of a person over a piece of
real property where the registration of such interest or right is not otherwise provided for by the Land
Registration Act or Act 496 (now [Presidential Decree No.] 1529 or the Property Registration Decree), and
serves a warning to third parties dealing with said property that someone is claiming an interest on the
same or a better right than that of the registered owner thereof.169 (Emphasis supplied) cra lawlawlib ra ry
Annotations are merely claims of interest or claims of the legal nature and incidents of relationship between
the person whose name appears on the document and the person who caused the annotation. It does not
say anything about the validity of the claim or convert a defective claim or document into a valid
one.170 These claims may be proved or disproved during trial.
Thus, annotations are not conclusive upon courts or upon owners who may not have reason to doubt the
security of their claim as their properties' title holders.
WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December 17, 2009
is REVERSED and SET ASIDE. The Regional Trial Courts' Decisions of November 23, 2001 and December 7,
2001 are REINSTATED.
SO ORDERED.
Carpio, (Chairperson), Brion, Del Castillo, and Mendoza, JJ., cocnur.
Endnotes:
Rollo, pp. 69-98.

1
7) Magallanes Watercraft Association Inc vs Augustin
SECOND DIVISION
G.R. No. 211485, May 30, 2016
MAGALLANES WATERCRAFT ASSOCIATION, INC., AS REPRESENTED BY ITS BOARD OF TRUSTEES,

NAMELY: EDILBERTO M. BAJAO, GERARDO O. PLAZA, ISABELITA MULIG, EDNA ABEJAY, MARCELO
DONAN, NENITA O. VARQUEZ, MERLYN ALVAREZ, EDNA EXCLAMADOR, AND CESAR
MONSON, Petitioner, v. MARGARITO C. AUGUIS AND DIOSCORO C. BASNIG, Respondents.
DECISION
MENDOZA, J.:
This petition for review on certiorari, filed under Rule 45 of the Rules of Court, seeks to reverse and set
aside the March 14, 2013 Decision1 and the January 17, 2014 Resolution2 of the Court of Appeals (CA) in
CA-G.R. CV No. 01170-MIN, which affirmed with modification the January 11, 2007 Decision of the Regional
Trial Court, Branch 33, Butuan City (RTC) in SEC Case No. 11-2004 (Civil Case No. 5420).
Petitioner Magallanes Watercraft Association, Inc. (MWAI) is a local association of motorized bancaowners
and operators ferrying cargoes and passengers from Magallanes, Agusan del Norte, to Butuan City and back.
Respondents Margarito C. Auguis (Auguis) and Dioscoro C. Basnig (Basnig) were members and officers of
MWAI - vice-president and secretary, respectively.3
On December 5, 2003, the Board of Trustees (Board) of MWAI passed Resolution No. 1, Series of 2003, and
thereafter issued Memorandum No. 001 suspending the rights and privileges of Auguis and Basnig as
members of the association for thirty (30) days for their refusal to pay their membership dues and berthing
fees because of their pending oral complaint and demand for financial audit of the association funds. Auguis
had an accumulated unpaid obligation of P4,059.00 while Basnig had P7,552.00.4
In spite of the suspension of their privileges as members, Auguis and Basnig still failed to settle their
obligations with MWAI. For said reason, the latter issued Memorandum No. 002, Series of 2004, dated
January 8, 2004, suspending their rights and privileges for another thirty (30) days.5
On February 6, 2004y respondents filed an action for damages and attorney's fees with a prayer for the
issuance of a writ of preliminary injunction before the RTC. In its January 11, 2007 decision, the trial court
ordered Auguis and Basnig to pay their unpaid accounts. It, nonetheless, required MWAI to pay them actual
damages and attorney's fees.6
Aggrieved, MWAI appealed before the CA.
The CA Ruling
In its March 14, 2013 decision, the CA affirmed with modification the RTC decision. According to the
appellate court, the RTC correctly held that MWAI was guilty of an ultra vires act. The CA noted that neither
MWAI's Articles of Incorporation nor its By-Laws7 contained any provision that expressly and/or impliedly
vested power or authority upon its Board to recommend the imposition of disciplinary sanctions on its
delinquent officers and/or members. It further noted that MWAI lacked the authority to suspend the right of
the respondents to operate their bancas, which was granted through a Certificate of Public Convenience. The
appellate court pointed out that the Maritime Industry Authority (MARINA) expressly reminded MWAI that it
was the sole government agency which had the authority to suspend, cancel and'or revoke the franchise of
the two. The CA explained that the suspension of their berthing privileges resulted in the failure of the latter
to operate their bancas—contrary to the express reminder of the MARINA. Hence, the CA concluded that
MWAI acted beyond the scope of its powers when it suspended the rights of Auguis and Basnig as members
of MWAI to berth on the seaport of Magallanes and operate their bancas.
It also ruled that MWAI was bound to indemnify respondents because they suffered financial losses as a
result of the illegal suspension of their berthing privileges and their right to operate their bancas. The
appellate court agreed with the RTC that MWAI was liable for damages in favor of the respondents. The CA,
however, deleted the award of actual damages for their failure to adduce evidence to prove the claimed loss
of actual income. It, nonetheless, awarded them temperate damages in recognition of the pecuniary loss
they suffered. Moreover, the CA saw it fit to grant a reduced amount of attorney's fees because Auguis and
Basnig were compelled to litigate or incur expenses to protect their interests. The dispositive portion of the
CA decision reads: chanRoblesvi rt ual Lawlib rary
WHEREFORE, for lack of merit, the present appeal is hereby DISMISSED. The assailed Decision dated 11
January 2007 of the Regional Trial Court (RTC), 10th Judicial Region, Branch 33 of Libertad, Butuan City in
SEC Case No. 11-2004 (Civil Case No. 5420) is AFFIRMED with MODIFICATION as follows:
1. DELETING the award for actual damages. In lieu thereof, temperate damages in the
amount of P40,000.00 and P20,000.00 are respectively awarded to appellees Dioscoro C.
Basnig and Margarito C. Auguis;
2. IMPOSING legal interest at the rate of 12% per annum from the finality of this decision
until its full satisfaction; and
3. REDUCING the attorney's fees to P30,000.00.
SO ORDERED.8 cralawred
MWAI moved for reconsideration, but its motion was denied by the CA in its January 17, 2014 resolution.
Undaunted, it filed this present petition with the sole

ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT AWARDED

TEMPERATE DAMAGES WITH A LEGAL RATE OF INTEREST OF 12% PER ANNUM FROM THE
FINALITY OF THE DECISION UNTIL FULLY PAID AS WELL AS REDUCED ATTORNEY'S FEES IN
FAVOR OF THE RESPONDENTS.9 cralawred
MWAI insists that the award of temperate damages and attorney's fees was baseless. It faults the CA in
finding that it was guilty of an ultra vires act when it suspended respondents' berthing rights because its by-
laws obliged Auguis and Basnig as members to: (1) obey and comply with the bylaws, rules and regulations
that may be promulgated by the association from time to time; and (2) to pay its membership dues and
other assessments. Thus, MWAI argues that respondents cannot claim either actual or temperate damages
because the suspension of their rights and privileges was anchored on its by-laws.
Petitioner also contends that respondents are not entitled to attorney's fees either because the award of
attorney's fees is the exception rather than the rule. It points out that it was through respondents' own fault
that their rights were suspended. Hence, they cannot be considered as having been compelled to litigate.
In their Comment,10 dated July 16, 2015, respondents countered that they were entitled to temperate
damages as the suspension of their operations was arbitrary, baseless and contrary to law and public policy.
They claimed that attorney's fees were rightfully awarded because they were compelled to litigate as a
consequence of MWAI's ultra vires act.
In its Reply to the Comment,11 dated January 5, 2016, MWAI reiterated the arguments it presented in its
petition for review.
The Court's Ruling
The petition is meritorious.
Corporate powers include implied and incidental powers
Central to the resolution of the propriety of the award of temperate damages and attorney's fees is the
contested authority of MWAI to suspend rights and privileges of its members for the latter's failure to pay
their obligations. If the suspension of rights and privileges of members is not among the corporate powers
granted to MWAI, then the same is an ultra vires act which exposes MWAI to possible liability.
Section 45 of the Corporation Code provides for the powers possessed by a corporation, to wit: chanRoblesv irt ual Lawlib rary
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its articles of incorporation and except such as
are necessary or incidental to the exercise of the powers so conferred. cralaw red
From a reading of the said provision, it is clear that a corporation has: (1) express powers, which are
bestowed upon by law or its articles of incorporation; and (2) necessary or incidental powers to the exercise
of those expressly conferred. An act which cannot fall under a corporation's express or necessary or
incidental powers is an ultra vires act. In University of Mindanao, Inc. v. Bangko Sentral ng
Pilipinas12] (University of Mindanao), the Court explained:
chanRoble svirtual Lawli bra ry
Corporations are artificial entities granted legal personalities upon their creation by their incorporators in
accordance with law. Unlike natural persons, they have no inherent powers. Third persons dealing with
corporations cannot assume that corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly defined by the law and their articles of
incorporation.
A corporation may exercise its powers only within those definitions. Corporate acts that are
outside those express definitions under the law or articles of incorporation or those "committed
outside the object for which a corporation is created" are ultra vires.
xxxx
[Emphasis supplied]
The CA concluded that the suspension by MWAI of respondents' rights as members for their failure to settle
membership dues was an ultra vires act as MWAFs articles of incorporation and by-laws were bereft of any
provision that expressly and impliedly vested power or authority upon its Board to recommend the
imposition of disciplinary actions on its delinquent officers and/or members.
The Court disagrees.
Under Section 3(a) and Section 3(c) Article V of MWAI's By-Laws, its members are bound "[t]o obey and
comply with the by-laws, rules and regulations that may be promulgated by the association from time to
time" and "[t]o pay membership dues and other assessments of the association."13 Thus, the respondents
were obligated to pay the membership dues of which they were delinquent. MWAI could not be faulted in
suspending the rights and privileges of its delinquent members.
The fact alone that neither the articles of incorporation nor the bylaws of MWAI granted its Board the
authority to discipline members does not make the suspension of the rights and privileges of the
respondents ultra vires. In National Power Corporation v. Vera,14 the Court stressed that an act might be
considered within corporate powers, even if it was not among the express powers, if the same served the
corporate ends, to wit:chanRoble svirtual Lawlib ra ry
For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of
serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not
in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers.
This Court is guided by jurisprudence in the application of the above standard. In the 1963 case of Republic
of the Philippines v. Acoje Mining Company, Inc. [G.R. No. L-18062, February 28, 1963, 7 SCRA 361] the
Court affirmed the rule that a corporation is not restricted to the exercise of powers expressly
conferred upon it by its charter, but has the power to do what is reasonably necessary or proper
to promote the interest or welfare of the corporation.
[Emphasis supplied]
In University of Mindanao, the Court wrote that corporations were not limited to the express powers
enumerated in their charters, but might also perform powers necessary or incidental thereto, to wit: chanRoble svirtual Lawli bra ry
A corporation may exercise its powers only within those definitions. Corporate acts that are outside those
express definitions under the law or articles of incorporation or those "committed outside the object for
which a corporation is created" are ultra vires.
The only exception to this rule is when acts are necessary and incidental to carry out a
corporation's purposes, and to the exercise of powers conferred by the Corporation Code and
under a corporation's articles of incorporation. xxx
xxxx
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc. stated the test to determine if a corporate act is in
accordance with its purposes: chanRoble svirtual Lawlib ra ry
It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed
in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the
purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter powers. The
test to be applied is 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. If so, the corporation has the power to do it; otherwise, not. cralawre d
[Emphases Supplied; citations omitted]

Based on the foregoing, MWAI can properly impose sanctions on Auguis and Basnig for being delinquent
members considering that the payment of membership dues enables MWAI to discharge its duties and
functions enumerated under its charter. Moreover, respondents were obligated by the by-laws of the
association to pay said dues. The suspension of their rights and privileges is not an ultra vires act as it is
reasonably necessary or proper in order to further the interest and welfare of MWAI. Also, the imposition of
the temporary ban on the use of MWAI's berthing facilities until Auguis and Basnig have paid their
outstanding obligations was a reasonable measure that the former could undertake to ensure the prompt
payment of its membership dues.15 Otherwise, MWAI will be rendered inutile as it will have no means of
ensuring that its members will promptly settle their obligations. It will be exposed to deleterious
consequences as it will be unable to continue with its operations if the members continue to be delinquent in
the payment of their obligations, without fear of possible sanctions.
Award of Temperate Damages improper
Having settled the propriety of respondents' suspension of privileges, the Court finds that the grant of
temperate damages in their favor is baseless. Temperate damages may be recovered when the court finds
that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved
with certainty.16 As such, its award is premised on the fact that actual damages could have been recovered
were it not for the fact that the precise amount of damages could not be accurately ascertained. In other
words, if a party-claimant had not suffered any damages, no damages either actual nor temperate, are
recoverable.
Damages resulting from a person's valid exercise of a right, is damnum absque injuria.17 In Diaz v. Davao
Light and Power Co., Inc.,18 the Court further expounded, to wit: chanRoble svirtual Lawli bra ry
Petitioner may have suffered damages as a result of the filing of the complaints. However, there is a
material distinction between damages and injury. Injury is the illegal invasion of a legal right; damage is the
loss, hurt or harm which results from the injury; and damages are the recompense or compensation
awarded for the damage suffered. Thus, there can be damage without injury in those instances in which the
loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be
borne by the injured person alone; the law affords no remedy for damages resulting from an act which does
not amount to a legal injury or wrong. These situations are often called damnum absque injuria. Whatever
damages Diaz may have suffered would have to be borne by him alone since it was his acts which led to the
filing of the complaints against him. cralawred
Considering that the suspension of Auguis and Basnig was in the lawful exercise of MWAFs rights and powers
as a corporation, no remedy for any consequent damage, which they could have suffered, is available. They
shall bear the losses they may have suffered as a consequence of their lawful suspension. Further, the Court
notes that in suspending the rights and privileges of the said respondents, MWAI merely denied them access
from its berthing facilities and in no way suspended or revoked their certificates of public convenience.
Anent the award of attorney's fees, the Court likewise finds it without basis. It is a settled rule that
attorney's fees shall not be recovered as cost where the party's persistence in litigation is based on his
mistaken belief in the righteousness of his cause.19
WHEREFORE, the petition is GRANTED. The March 14, 2013 Decision and the January 17, 2014 Resolution
of the Court of Appeals in CA-G.R. CV No. 01170-MIN are REVERSED and SET ASIDE. The complaint for
damages against petitioner Magallanes Watercraft Association, Inc. is DISMISSED for lack of merit.
SO ORDERED. chanroblesvi rtua llawli bra ry

Carpio, (Chairperson), Brion, Del Castillo, and Leonen, JJ., concur. cralawlawlib rary
8) Atrium Managemen Corporation vs CA
FIRST DIVISION
[G.R. No. 109491. February 28, 2001]
ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF

APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE
LEON, RAFAEL DE LEON, JR., AND HI-CEMENT
CORPORATION, respondents.
[G.R. No. 121794. February 28, 2001]
LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM

MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION, respondents.
DECISION
PARDO, J.:
What is before the Court are separate appeals from the decision of the Court of
Appeals,[1] ruling that Hi-Cement Corporation is not liable for four checks amounting to P2
million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court,
Manila an action for collection of the proceeds of four postdated checks in the total amount of P2
million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de
Leon,[2] treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T.
Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to
petitioner Atrium Management Corporation for valuable consideration. Upon presentment for
payment, the drawee bank dishonored all four checks for the common reason payment
stopped. Atrium, thus, instituted this action after its demand for payment of the value of the
checks was denied.[3]
After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes
M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation
to pay petitioner Atrium, jointly and severally, the amount of P2 million corresponding to the
value of the four checks, plus interest and attorneys fees.[4]
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its
decision modifying the decision of the trial court, absolving Hi-Cement Corporation from
liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M.
de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The
issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas
constituted ultra vires acts; and (3) The subject checks were not issued for valuable
consideration.[5]
At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February
1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to
discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of
E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-
Cement the fact that the checks represented payment for petroleum products which E.T. Henry
delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and
February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the
issuance of the four checks in favor of E.T. Henry in payment for petroleum products.[6]
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was
once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was
familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry
upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan
which the subject checks would secure as collateral.[7]
On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing considerations, and plaintiff having proved

its cause of action by preponderance of evidence, judgment is hereby rendered
ordering all the defendants except defendant Antonio de las Alas to pay plaintiff
jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with the
legal rate of interest from the filling of the complaint until fully paid, plus the sum of
TWENTY THOUSAND (P20,000.00) PESOS as and for attorneys fees and the cost
of suit.
All other claims are, for lack of merit dismissed.
SO ORDERED.[8]
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.[9]
Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly
liable with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that
Atrium was an ordinary holder, not a holder in due course of the rediscounted checks.[10]
Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement
did not authorize the issuance of the checks, it could still be held liable for the checks. And
assuming that the checks were issued with its authorization, the same was without any
consideration, which is a defense against a holder in due course and that the liability shall be
borne alone by E.T. Henry.[11]
On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of
the trial court, the dispositive portion of which reads:
Judgement is hereby rendered:
(1) dismissing the plaintiffs complaint as against defendants Hi-Cement Corporation and
Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and
severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with
interest at the legal rate from the filling of the complaint until fully paid, plus P20,000.00 for
attorneys fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon,
jointly and severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and
for attorneys fees.
With cost in this instance against the appellee Atrium Management

Corporation and appellant Lourdes Victoria M. de Leon.
So ordered.[12]
Hence, the recourse to this Court.[13]

The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra vires act;
2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it
to pay P20,000.00 as attorneys fees.[14]
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement
checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory
of the checks was personally liable for the value of the checks, which were declared to be
issued without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorneys fees
and costs.[15]
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra vires act. The
record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial
assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil
delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart
checks from E.T. Henry if the checks were in payment for hydro oil delivered by E.T. Henry to
Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for consideration and that
Lourdes and E.T. Henry engaged in a kiting operation to raise funds for E.T. Henry, who
admittedly was in need of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation
and is authorized to sign checks for the corporation. At the time of the issuance of the checks,
there were sufficient funds in the bank to cover payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing the checks was well
within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of
the corporation, hence, not an ultra vires act.
An ultra vires act is one committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the power conferred upon it by
law[16]The term ultra vires is distinguished from an illegal act for the former is merely voidable
which may be enforced by performance, ratification, or estoppel, while the latter is void and
cannot be validated.[17]
The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas
were personally liable for the checks issued as corporate officers and authorized signatories of
the check.
"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 (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. 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;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.[18]
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of
Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she
signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for
the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the
checks were strictly endorsed for deposit only to the payees account and not to be further
negotiated. What is more, the confirmation letter contained a clause that was not true, that is, that
the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T.
Henry. Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held
personally liable therefor.
The next issue is whether or not petitioner Atrium was a holder of the checks in due
course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.
In the instant case, the checks were crossed checks and specifically indorsed for deposit to
payees account only. From the beginning, Atrium was aware of the fact that the checks were all
for deposit only to payees account, meaning E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.
However, it does not follow as a legal proposition that simply because petitioner Atrium was
not a holder in due course for having taken the instruments in question with notice that the same
was for deposit only to the account of payee E.T. Henry that it was altogether precluded from
recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not
in due course can not recover on the instrument.[19]
The disadvantage of Atrium in not being a holder in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable.[20] One such defense is absence or
failure of consideration.[21] We need not rule on the other issues raised, as they merely follow as a
consequence of the foregoing resolutions.
WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court
of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto.
No costs.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.
[1]
In CA-G. R. CV No. 26686, promulgated on March 17, 1973, Francisco, C., J., ponente, Ramirez and Gutierrez,
JJ., concurring.
[2]
In G. R. No. 121794.
[3]
Consolidated Memorandum, G. R. No. 121794, Rollo, pp. 191-226, at pp. 192-193.
[4]
Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356-362.
[5]
Petition, Annex C, in G. R. No. 109491, Rollo, pp. 319-339 and Petition, Annex A, in G. R. No. 121794, Rollo,
pp. 30-49.
[6]
TSN, September 30, 1985, pp. 6-19.
[7]
TSN, January 29, 1988, pp. 15-16.
[8]
Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356-362.
[9]
Ibid., Notice of Appeal, Lourdes, p. 366, and Notice of Appeal Hi-Cement, p. 365.
[10]
CA Rollo, Defendant-Appellant Lourdes M. De Leons Brief, pp. 10-10N.
[11]
Ibid., Defendant Appellants Brief, pp. 23C-23II.
[12]
CA Rollo, Decision, pp. 78-99, Francisco, C., J., ponente, Ramirez and Gutierrez, JJ., concurring.
[13]
G. R. No. 109491, Petition filed on April 13, 1993, Rollo, pp. 3-18; G. R. No. 121794, Petition filed on October
20, 1995, Rollo, pp. 10-28. On January 31, 2000, we gave due course to the petition. G. R. No. 109491, Rollo, pp.
244-245; G. R. No. 121794, Rollo, pp. 152-153.
[14]
Petition, G. R. No. 1109491, Rollo, pp. 10-16.
[15]
Petition, G. R. No. 121794, Rollo, p. 16.
[16]
Republic v. Acoje Mining Co., Inc., 117 Phil. 379, 383 [1963]; Corporation Code Sec. 45.
[17]
Republic v. Acoje Mining Co., Inc., supra, Note 16, at pp. 383-384.
[18]
FCY Construction Group, Inc. v. Court of Appeals, G. R. No. 123358,
February 1, 2000, citing Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA 14, 18-19 [1994];
Equitable Banking Corporation v. NLRC, 339 Phil. 541, 566 (1997).
[19]
Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960).
[20]
State Investment House v. Intermediate Appellate Court, 175 SCRA 310, 317 (1989).
[21]
Negotiable Instruments Law, Sec. 28.
353 SCRA 23 – Business Organization – Corporation Law – Ultra Vires Act – Liability of
Corporate Officers
In 1981, Hi-Cement Corporation through Lourdes De Leon (its Treasurer) and Antonio De
Las Alas (its Chairman, now deceased) issued four postdated checks to E.T. Henry and Co.
The checks amount to P2 million. The checks are crossed checks and are only made
payable to E.T. Henry’s account. However, E.T. Henry still indorsed the checks to Atrium
Management Corporation (AMC). AMC then made sure that the checks were validly issued
by requesting E.T. Henry to get some confirmation from Atrium. Interestingly, De Leon
confirmed the checks and advised that the checks are okay to be rediscounted by AMC
notwithstanding the fact that the checks are crossed checks payable to no other accounts
but that of E.T. Henry. So when AMC presented the check, it was dishonored because Hi-
Cement stopped payment. Eventually, AMC sued Hi-Cement, E.T. Henry, and De Leon.
The trial court ruled in favor of AMC and made all the respondents liable.
On appeal, Hi-Cement averred that De Leon’s act in signing the check was ultra vires
hence De Leon should be personally liable for the check. De Leon, on the other hand,
insisted that the checks were authorized by the corporation.
ISSUE: Whether or not De Leon’s act of signing the check constitutes an ultra vires act
hence making her personally liable.
HELD: No, the act is not ultra vires but De Leon is still personally liable. The act is not ultra
vires because the act of issuing the checks was well within the ambit of a valid corporate
act. De Leon as treasurer is authorized to sign checks. When the checks were issued, Hi-
Cement has sufficient funds to cover the P2 million.
As a rule, there are four instances that will make a corporate director, trustee or officer
along (although not necessarily) with the corporation personally liable to certain obligations.
They are:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. 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;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.
In the case at bar, De Leon is negligent. She was aware that the checks were only payable
to E.T. Henry’s account yet she sent a confirmation to Atrium to the effect that the checks
can be negotiated to them (Atrium) by E.T. Henry. Therefore, she may be held personally
liable along with E.T. Henry (but not with Hi-Cement where she is an officer).
9) republic vs Acoje Mining Co

SUPREME COURT
Manila
EN BANC
G.R. No. L-18062 February 28, 1963
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
ACOJE MINING COMPANY, INC., defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.

Jalandoni & Jamir for defendant-appellant.
BAUTISTA ANGELO, J.:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts requesting the
opening of a post, telegraph and money order offices at its mining camp at Sta. Cruz, Zambales, to
service its employees and their families that were living in said camp. Acting on the request, the
Director of Posts wrote in reply stating that if aside from free quarters the company would provide for
all essential equipment and assign a responsible employee to perform the duties of a postmaster
without compensation from his office until such time as funds therefor may be available he would
agree to put up the offices requested. The company in turn replied signifying its willingness to
comply with all the requirements outlined in the letter of the Director of Posts requesting at the same
time that it be furnished with the necessary forms for the early establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter to the company stating among other
things that "In cases where a post office will be opened under circumstances similar to the present, it
is the policy of this office to have the company assume direct responsibility for whatever pecuniary
loss may be suffered by the Bureau of Posts by reason of any act of dishonesty, carelessness or
negligence on the part of the employee of the company who is assigned to take charge of the post
office," thereby suggesting that a resolution be adopted by the board of directors of the company
expressing conformity to the above condition relative to the responsibility to be assumed buy it in the
event a post office branch is opened as requested. On September 2, 1949, the company informed
the Director of Posts of the passage by its board of directors of a resolution of the following tenor:
"That the requirement of the Bureau of Posts that the Company should accept full responsibility for
all cash received by the Postmaster be complied with, and that a copy of this resolution be
forwarded to the Bureau of Posts." The letter further states that the company feels that that
resolution fulfills the last condition imposed by the Director of Posts and that, therefore, it would
request that an inspector be sent to the camp for the purpose of acquainting the postmaster with the
details of the operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with one Hilario M. Sanchez as
postmaster. He is an employee of the company. On May 11, 1954, the postmaster went on a three-
day leave but never returned. The company immediately informed the officials of the Manila Post
Office and the provincial auditor of Zambales of Sanchez' disappearance with the result that the
accounts of the postmaster were checked and a shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the shortage in line with the
liability it has assumed having failed, the government commenced the present action on September
10, 1954 before the Court of First Instance of Manila seeking to recover the amount of Pl3,867.24.
The company in its answer denied liability for said amount contending that the resolution of the
board of directors wherein it assumed responsibility for the act of the postmaster is ultra vires, and in
any event its liability under said resolution is only that of a guarantor who answers only after the
exhaustion of the properties of the principal, aside from the fact that the loss claimed by the plaintiff
is not supported by the office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts.1äwphï1.ñët
After trial, the court a quo found that, of the amount claimed by plaintiff totalling P13,867.24, only the
sum of P9,515.25 was supported by the evidence, and so it rendered judgment for the plaintiff only
for the amount last mentioned. The court rejected the contention that the resolution adopted by the
company is ultra vires and that the obligation it has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31, 1949 is ultra vires in
the sense that it has no authority to act on a matter which may render the company liable as a
guarantor has no factual or legal basis. In the first place, it should be noted that the opening of a
post office branch at the mining camp of appellant corporation was undertaken because of a request
submitted by it to promote the convenience and benefit of its employees. The idea did not come from
the government, and the Director of Posts was prevailed upon to agree to the request only after
studying the necessity for its establishment and after imposing upon the company certain
requirements intended to safeguard and protect the interest of the government. Thus, after the
company had signified its willingness to comply with the requirement of the government that it
furnish free quarters and all the essential equipment that may be necessary for the operation of the
office including the assignment of an employee who will perform the duties of a postmaster, the
Director of Posts agreed to the opening of the post office stating that "In cases where a post office
will be opened under circumstances similar to the present, it is the policy of this office to have the
company assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of
Posts by reason of any act of dishonesty, carelessness or negligence on the part of the employee of
the company who is assigned to take charge of the post office," and accepting this condition, the
company, thru its board of directors, adopted forthwith a resolution of the following tenor: "That the
requirement of the Bureau of Posts that the company should accept full responsibility for all cash
received by the Postmaster, be complied with, and that a copy of this resolution be forwarded to the
Bureau of Posts." On the basis of the foregoing facts, it is evident that the company cannot now be
heard to complain that it is not liable for the irregularity committed by its employee upon the technical
plea that the resolution approved by its board of directors is ultra vires. The least that can be said is
that it cannot now go back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of appellant company is an ultra
vires act cannot also be entertained it appearing that the same covers a subject which concerns the
benefit, convenience and welfare of its employees and their families. While as a rule an ultra
vires act is one committed outside the object for which a corporation is created as defined by the law
of its organization and therefore beyond the powers conferred upon it by law (19 C.J.S., Section 965,
p. 419), there are however certain corporate acts that may be performed outside of the scope of the
powers expressly conferred if they are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that "although not expressly authorized to do so a corporation
may become a surety where the particular transaction is reasonably necessary or proper to the
conduct of its business,"1 and here it is undisputed that the establishment of the local post office is a
reasonable and proper adjunct to the conduct of the business of appellant company. Indeed, such
post office is a vital improvement in the living condition of its employees and laborers who came to
settle in its mining camp which is far removed from the postal facilities or means of communication
accorded to people living in a city or municipality..
Even assuming arguendo that the resolution in question constitutes an ultra vires act, the same
however is not void for it was approved not in contravention of law, customs, public order or public
policy. The term ultra vires should be distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and
cannot be validated.2 It being merely voidable, an ultra vires act can be enforced or validated if there
are equitable grounds for taking such action. Here it is fair that the resolution be upheld at least on
the ground of estoppel. On this point, the authorities are overwhelming:
The weight of authority in the state courts is to the effect that a transaction which is
merely ultra vires and not malum in se or malum prohibitum, is, if performed by one party,
not void as between the parties to all intents and purposes, and that an action may be
brought directly on the transaction and relief had according to its terms. (19 C.J.S., Section
976, p. 432, citing Nettles v. Rhett, C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private corporations, one party
cannot receive the benefits which are embraced in total performance of a contract made with
it by another party and then set up the invalidity of the transaction as a defense." (London &
Lancashire Indemnity Co. of America v. Fairbanks Steam Shovel Co., 147 N.E. 329, 332,
112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty toward stockholders, and should
not be entertained where its allowance will do greater wrong to innocent parties dealing with
corporation..
The acceptance of benefits arising from the performance by the other party may give rise to
an estoppel precluding repudiation of the transaction. (19 C.J.S., Section 976, p. 433.)
The current of modern authorities favors the rule that where the ultra vires transaction has
been executed by the other party and the corporation has received the benefit of it, the law
interposes an estoppel, and will not permit the validity of the transaction or contract to be
questioned, and this is especially true where there is nothing in the circumstances to put the
other party to the transaction on notice that the corporation has exceeded its powers in
entering into it and has in so doing overstepped the line of corporate privileges. (19 C.J.S.,
Section 977, pp. 435-437, citing Williams v. Peoples Building & Loan Ass'n, 97 S.W. 2d 930,
193 Ark. 118; Hays v. Galion Gas Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is only that of a guarantor. On this
point, we agree with the following comment of the court a quo: "A mere reading of the resolution of
the Board of Directors dated August 31, 1949, upon which the plaintiff based its claim would show
that the responsibility of the defendant company is not just that of a guarantor. Notice that the
phraseology and the terms employed are so clear and sweeping and that the defendant
assumed 'full responsibility for all cash received by the Postmaster.' Here the responsibility of the
defendant is not just that of a guarantor. It is clearly that of a principal."
WHEREFORE, the decision appealed from is affirmed. No costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and
Makalintal, JJ. concur.
Footnotes
1Thomson on Corporations, 3rd ed. Vol. 3, p. 973 citing Deming v. Maas, 18 Cal. App. 330,
123 Pac. 204; Depot Realty Syndicate v. Enterprise Brewing Co., 87 Ore. 560, 170 Pac. 294,
171 Pac. 223, L.R.A. 1918C, 1001.
219 C.J.S., Section 966, p. 422, citing Smith v. Baltimore and O. R. Co., D. C. Pa., 48 F. 2d
861, 870.

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1) YI Leisure Philippines, Inc vs Yu

G.R. No. 207161, September 08, 2015

The RTC Ruling

In all other respects, the assailed decision stands.

Hence, this petition.

The Court's Ruling

The petition lacks merit.

Background on the corporate

1. Where the purchaser expressly or impliedly agrees to assume such debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;

Jurisprudential recognition of the

Fraud is not an essential

The Court disagrees.

Atty. Nuguid: And after the sale, it has no more properties?

Q: And did not anymore operate as a corporation?

Section 40 must apply.

The MOA cannot

Free and Harmless Clause

SO ORDERED. chanrobles virtuallawlibrary

Velasco, Jr., J., please see concurring opinion.

Lopez Realty, Inc. v. Fontecha, 317 Phil. 216, 229 (1995).

Caltex v, PNOC, supra note 27, at 160.

STRADEC v. Radstock 622 Phil. 431, 535 (2009).

Caltex v. PNOC, supra note 27, at 162-163.

VELASCO, JR., J.:

Object of the sale: Meaning of

Continuation by the transferee

(2) the continuation by the transferee of said venture.

It does not, therefore, contemplate a mere purchase or sale of assets.

I vote to DENY the present petition.

Poizat, 37 Phil. 802 (1918) [Per J. Street, En Banc].

308 [Per J. Brion, Second Division].

Rollo, pp. 56 and 72.

G.R. No. 207161, September 08, 2015

The Court's Ruling

The petition lacks merit.

Background on the corporate

1. Where the purchaser expressly or impliedly agrees to assume such debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;

Legal bases of the Nell Doctrine

Jurisprudential recognition of the

Fraud is not an essential

The MOA cannot

Free and Harmless Clause

2) Dela Rama vs Ma-ao Sugar Central co, Inc

Republic of the Philippines

G.R. No. L-17504 & L-17506 February 28, 1969

RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and

San Juan, Africa and Benedicto for plaintiffs-appellants.

Plaintiffs prayed, in substance, as follows:

1. Failure to hold stockholders' meetings regularly. No stockholders' meetings were held in

J. Amado Araneta & Co. P243,415.62

THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE

THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS

xxx xxx xxx

xxx xxx xxx

Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of cane

xxx xxx xxx

THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO

Whether insolvency exists is usually a question of fact, to be determined from an inventory of

SEC. 13. — Every corporation has the power:

xxx xxx xxx