G.R. No. 111448.

January 16, 2002

AF REALTY & DEVELOPMENT, INC. and ZENAIDA R.

RANULLO, petitioners, vs. DIESELMAN FREIGHT SERVICES, CO.,
MANUEL C. CRUZ, JR. and MIDAS DEVELOPMENT
CORPORATION, Respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari assailing the Decision dated December 10,

1992 and the Resolution (Amending Decision) dated August 5, 1993 of the
Court of Appeals in CA-G.R. CV No. 30133.

Dieselman Freight Service Co. (Dieselman for brevity) is a domestic

corporation and a registered owner of a parcel of commercial lot consisting of
2,094 square meters, located at 104 E. Rodriguez Avenue, Barrio Ugong, Pasig
City, Metro Manila. The property is covered by Transfer Certificate of Title No.
39849 issued by the Registry of Deeds of the Province of Rizal.1cräläwvirtualibräry

On May 10, 1988, Manuel C. Cruz, Jr., a member of the board of directors of
Dieselman, issued a letter denominated as "Authority To Sell Real Estate"2 to
Cristeta N. Polintan, a real estate broker of the CNP Real Estate Brokerage.
Cruz, Jr. authorized Polintan "to look for a buyer/buyers and negotiate the
sale" of the lot at P3,000.00 per square meter, or a total of P6,282,000.00.
Cruz, Jr. has no written authority from Dieselman to sell the lot.

In turn, Cristeta Polintan, through a letter3 dated May 19, 1988, authorized

Felicisima ("Mimi") Noble4 to sell the same lot.

Felicisima Noble then offered for sale the property to AF Realty &
Development, Inc. (AF Realty) at P2,500.00 per square meter.5 Zenaida
Ranullo, board member and vice-president of AF Realty, accepted the offer
and issued a check in the amount of P300,000.00 payable to the order of
Dieselman. Polintan received the check and signed an "Acknowledgement
Receipt"6 indicating that the amount of P300,000.00 represents the partial
payment of the property but refundable within two weeks should AF Realty
disapprove Ranullo's action on the matter.

On June 29, 1988, AF Realty confirmed its intention to buy the lot. Hence,
Ranullo asked Polintan for the board resolution of Dieselman authorizing the
sale of the property. However, Polintan could only give Ranullo the original

1
copy of TCT No. 39849, the tax declaration and tax receipt for the lot, and a
photocopy of the Articles of Incorporation of Dieselman. 7cräläwvirtualibräry

On August 2, 1988, Manuel F. Cruz, Sr., president of Dieselman,

acknowledged receipt of the said P300,000.00 as "earnest money" but
required AF Realty to finalize the sale at P4,000.00 per square meter.8 AF
Realty replied that it has paid an initial down payment of P300,000.00 and is
willing to pay the balance.9 cräläwvirtualibräry

However, on August 13, 1988, Mr. Cruz, Sr. terminated the offer and
demanded from AF Realty the return of the title of the lot earlier delivered by
Polintan.10
cräläwvirtualibräry

Claiming that there was a perfected contract of sale between them, AF Realty
filed with the Regional Trial Court, Branch 160, Pasig City a complaint for
specific performance (Civil Case No. 56278) against Dieselman and Cruz, Jr..
The complaint prays that Dieselman be ordered to execute and deliver a final
deed of sale in favor of AF Realty.11 In its amended complaint,12 AF Realty
asked for payment of P1,500,000.00 as compensatory damages; P400,000.00
as attorneys fees; and P500,000.00 as exemplary damages.

In its answer, Dieselman alleged that there was no meeting of the minds
between the parties in the sale of the property and that it did not authorize
any person to enter into such transaction on its behalf.

Meanwhile, on July 30, 1988, Dieselman and Midas Development Corporation

(Midas) executed a Deed of Absolute Sale13 of the same property. The agreed
price was P2,800.00 per square meter. Midas delivered to Dieselman
P500,000.00 as down payment and deposited the balance of P5,300,000.00 in
escrow account with the PCIBank.

Constrained to protect its interest in the property, Midas filed on April 3, 1989
a Motion for Leave to Intervene in Civil Case No. 56278. Midas alleged that it
has purchased the property and took possession thereof, hence Dieselman
cannot be compelled to sell and convey it to AF Realty. The trial court granted
Midas' motion.

After trial, the lower court rendered the challenged Decision holding that the
acts of Cruz, Jr. bound Dieselman in the sale of the lot to AF
Realty.14 Consequently, the perfected contract of sale between Dieselman and
AF Realty bars Midas' intervention. The trial court also held that Midas acted in
bad faith when it initially paid Dieselman P500,000.00 even without seeing the
latter's title to the property. Moreover, the notarial report of the sale was not
submitted to the Clerk of Court of the Quezon City RTC and the balance of
2
P5,300,000.00 purportedly deposited in escrow by Midas with a bank was not
established.

The dispositive portion of the trial courts Decision reads:

WHEREFORE, foregoing considered, judgment is hereby rendered ordering

defendant to execute and deliver to plaintiffs the final deed of sale of the
property covered by the Transfer Certificate of Title No. 39849 of the Registry
of Deed of Rizal, Metro Manila District II, including the improvements thereon,
and ordering defendants to pay plaintiffs attorneys fees in the amount of
P50,000.00 and to pay the costs.

"The counterclaim of defendants is necessarily dismissed.

"The counterclaim and/or the complaint in intervention are likewise dismissed

"SO ORDERED.15 cräläwvirtualibräry

Dissatisfied, all the parties appealed to the Court of Appeals.

AF Realty alleged that the trial court erred in not holding Dieselman liable for
moral, compensatory and exemplary damages, and in dismissing its
counterclaim against Midas.

Upon the other hand, Dieselman and Midas claimed that the trial court erred in
finding that a contract of sale between Dieselman and AF Realty was
perfected. Midas further averred that there was no bad faith on its part when it
purchased the lot from Dieselman.

In its Decision dated December 10, 1992, the Court of Appeals reversed the
judgment of the trial court holding that since Cruz, Jr. was not authorized in
writing by Dieselman to sell the subject property to AF Realty, the sale was not
perfected; and that the Deed of Absolute Sale between Dieselman and Midas is
valid, there being no bad faith on the part of the latter. The Court of Appeals
then declared Dieselman and Cruz, Jr. jointly and severally liable to AF Realty
for P100,000.00 as moral damages; P100,000.00 as exemplary damages; and
P100,000.00 as attorney's fees.16 cräläwvirtualibräry

On August 5, 1993, the Court of Appeals, upon motions for reconsideration

filed by the parties, promulgated an Amending Decision, the dispositive portion
of which reads:

WHEREFORE, The Decision promulgated on October 10, 1992, is hereby

AMENDED in the sense that only defendant Mr. Manuel Cruz, Jr. should be
3
made liable to pay the plaintiffs the damages and attorneys fees awarded
therein, plus the amount of P300,000.00 unless, in the case of the said
P300,000.00, the same is still deposited with the Court which should be
restituted to plaintiffs.

"SO ORDERED.17 cräläwvirtualibräry

AF Realty now comes to this Court via the instant petition alleging that the
Court of Appeals committed errors of law.

The focal issue for consideration by this Court is who between petitioner AF
Realty and respondent Midas has a right over the subject lot.

The Court of Appeals, in reversing the judgment of the trial court, made the
following ratiocination:

From the foregoing scenario, the fact that the board of directors of Dieselman
never authorized, verbally and in writing, Cruz, Jr. to sell the property in
question or to look for buyers and negotiate the sale of the subject property is
undeniable.

"While Cristeta Polintan was actually authorized by Cruz, Jr. to look for buyers
and negotiate the sale of the subject property, it should be noted that Cruz, Jr.
could not confer on Polintan any authority which he himself did not
have. Nemo dat quod non habet. In the same manner, Felicisima Noble could
not have possessed authority broader in scope, being a mere extension of
Polintans purported authority, for it is a legal truism in our jurisdiction that a
spring cannot rise higher than its source. Succinctly stated, the alleged sale of
the subject property was effected through persons who were absolutely
without any authority whatsoever from Dieselman.

"The argument that Dieselman ratified the contract by accepting the

P300,000.00 as partial payment of the purchase price of the subject property
is equally untenable. The sale of land through an agent without any written
authority is void.

xxx

"On the contrary, anent the sale of the subject property by Dieselman to
intervenor Midas, the records bear out that Midas purchased the same from
Dieselman on 30 July 1988. The notice of lis pendens was subsequently
annotated on the title of the property by plaintiffs on 15 August 1988.
However, this subsequent annotation of the notice of lis pendens certainly
operated prospectively and did not retroact to make the previous sale of the
4
property to Midas a conveyance in bad faith. A subsequently registered notice
of lis pendens surely is not proof of bad faith. It must therefore be borne in
mind that the 30 July 1988 deed of sale between Midas and Dieselman is a
document duly certified by notary public under his hand and seal. x x x. Such
a deed of sale being public document acknowledged before a notary public is
admissible as to the date and fact of its execution without further proof of its
due execution and delivery (Bael vs. Intermediate Appellate Court, 169
SCRA617; Joson vs. Baltazar, 194 SCRA 114) and to prove the defects and
lack of consent in the execution thereof, the evidence must be strong and not
merely preponderant x x x.18 cräläwvirtualibräry

We agree with the Court of Appeals.

Section 23 of the Corporation Code expressly provides that the corporate

powers of all corporations shall be exercised by the board of directors. Just as
a natural person may authorize another to do certain acts in his behalf, so
may the board of directors of a corporation validly delegate some of its
functions to individual officers or agents appointed by it.19 Thus, contracts or
acts of a corporation must be made either by the board of directors or by a
corporate agent duly authorized by the board.20 Absent such valid
delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or
connected with, the performance of authorized duties of such director, are
held not binding on the corporation.21 cräläwvirtualibräry

In the instant case, it is undisputed that respondent Cruz, Jr. has no written
authority from the board of directors of respondent Dieselman to sell or to
negotiate the sale of the lot, much less to appoint other persons for the same
purpose. Respondent Cruz, Jr.s lack of such authority precludes him from
conferring any authority to Polintan involving the subject realty. Necessarily,
neither could Polintan authorize Felicisima Noble. Clearly, the collective acts of
respondent Cruz, Jr., Polintan and Noble cannot bind Dieselman in the
purported contract of sale.

Petitioner AF Realty maintains that the sale of land by an unauthorized agent

may be ratified where, as here, there is acceptance of the benefits involved. In
this case the receipt by respondent Cruz, Jr. from AF Realty of the
P300,000.00 as partial payment of the lot effectively binds respondent
Dieselman.22 cräläwvirtualibräry

We are not persuaded.

5
Involved in this case is a sale of land through an agent. Thus, the law on
agency under the Civil Code takes precedence. This is well stressed in Yao Ka
Sin Trading vs. Court of Appeals:23 cräläwvirtualibräry

Since a corporation, such as the private respondent, can act only through its
officers and agents, all acts within the powers of said corporation may be
performed by agents of its selection; and, except so far as limitations or
restrictions may be imposed by special charter, by-law, or statutory
provisions, the same general principles of law which govern the relation
of agency for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his power to act
for the corporation; and agents when once appointed, or members
acting in their stead, are subject to the same rules, liabilities, and
incapacities as are agents of individuals and private persons.
(Emphasis supplied)

Pertinently, Article 1874 of the same Code provides:

ART. 1874. When a sale of piece of land or any interest therein is through
an agent, the authority of the latter shall be in writing; otherwise, the
sale shall be void. (Emphasis supplied)

Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima Ranullo
were not authorized by respondent Dieselman to sell its lot, the supposed
contract is void. Being a void contract, it is not susceptible of ratification by
clear mandate of Article 1409 of the Civil Code, thus:

ART. 1409. The following contracts are inexistent and void from the very

beginning:

xxx

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived. (Emphasis supplied)

Upon the other hand, the validity of the sale of the subject lot to respondent
Midas is unquestionable. As aptly noted by the Court of Appeals, 24 the sale was
authorized by a board resolution of respondent Dieselman dated May 27,
1988.

The Court of Appeals awarded attorney's fees and moral and exemplary
damages in favor of petitioner AF Realty and against respondent Cruz, Jr.. The
6
award was made by reason of a breach of contract imputable to respondent
Cruz, Jr. for having acted in bad faith. We are no persuaded. It bears stressing
that petitioner Zenaida Ranullo, board member and vice-president of petitioner
AF Realty who accepted the offer to sell the property, admitted in her
testimony25 that a board resolution from respondent Dieselman authorizing the
 

sale is necessary to bind the latter in the transaction; and that respondent
Cruz, Jr. has no such written authority. In fact, despite demand, such written
authority was not presented to her.26 This notwithstanding, petitioner Ranullo
tendered a partial payment for the unauthorized transaction. Clearly,
respondent Cruz, Jr. should not be held liable for damages and attorney's fees.

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals

are hereby AFFIRMED withMODIFICATION in the sense that the award of
damages and attorney's fees is deleted. Respondent Dieselman is ordered to
return to petitioner AF Realty its partial payment of P300,000.00. Costs
against petitioners.

SO ORDERED.

Melo

7
 [G.R. NO. 149252. April 28, 2005]

DONALD KWOK, Petitioners, v. PHILIPPINE CARPET MANUFACTURING

CORPORATION, Respondents.

DECISION

CALLEJO, SR., J.:

This is a Petition for Review of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP No.
60232 dismissing Donald Kwok's Petition for Review on Certiorari and affirming the majority
Decision of the National Labor Relations Commission (NLRC), as well as its resolution in
NLRC NCR Case No. 00-12-07454-96 dismissing the motion for reconsideration of the said
decision.

The Antecedents

In 1965, petitioner Donald Kwok and his father-in-law Patricio L. Lim, along with some other
stockholders, established a corporation, the respondent Philippine Carpet Manufacturing
Corporation (PCMC). The petitioner became its general manager, executive vice-president
and chief operations officer. Lim, on the other hand, was its president and chairman of the
board of directors. When the petitioner retired 36 years later or on October 31, 1996, he was
receiving a monthly salary of P160,000.00.2 He demanded the cash equivalent of what he
believed to be his accumulated vacation and sick leave credits during the entire length of his
service with the respondent corporation, i.e., from November 16, 1965 to October 31, 1996, in
the total amount of P7,080,546.00 plus interest.3 However, the respondent corporation
refused to accede to the petitioner's demands, claiming that the latter was not entitled
thereto.4

The petitioner filed a complaint against the respondent corporation for the payment of his
accumulated vacation and sick leave credits before the NLRC. He claimed that Lim made a
verbal promise to give him unlimited sick leave and vacation leave benefits and its cash
conversion upon his retirement or resignation without the need for any application therefor. In
addition, Lim also promised to grant him other benefits, such as golf and country club
membership; the privilege to charge the respondent corporation's account; 6% profit-sharing
in the net income of the respondent corporation (while Lim got 4%); and other corporate
perquisites. According to the petitioner, all of these promises were complied with, except for
the grant of the cash equivalent of his accumulated vacation and sick leave credits upon his
retirement.5

The respondent corporation denied all these, claiming that upon the petitioner's retirement, he
received the amount of P6,902,387.19 representing all the benefits due him. Despite this, the
petitioner again demanded P7,080,546.00, which demand was without factual and legal
basis. The respondent corporation asserted that the chairman of its board of directors and its
president/vice-president had unlimited discretion in the use of their time, and had never been
required to file applications for vacation and sick leaves; as such, the said officers were not
1
entitled to vacation and sick leave benefits. The respondent corporation, likewise, pointed out
that even if the petitioner was entitled to the said additional benefits, his claim had already
prescribed. It further averred that it had no policy to grant vacation and sick leave credits to
the petitioner.6

In his Affidavit7 dated May 19, 1998, Lim denied making any such verbal promise to his son-
in-law on the grant of unlimited vacation and sick leave credits and the cash conversion
thereof. Lim averred that the petitioner had received vacation and sick leave benefits from
1994 to 1996. Moreover, assuming that he did make such promise to the petitioner, the same
had not been confirmed or approved via resolution of the respondent corporation's board of
directors.

It was further pointed out that as per the Memorandum dated November 6, 1981, only regular
employees and managerial and confidential employees falling under Category I were entitled
to vacation and sick leave credits. The petitioner, whose position did not fall under Category I,
was, thus, not entitled to the benefits under the said memorandum. The respondent
corporation alleged that this was admitted by the petitioner himself and affirmed by Raoul
Rodrigo, its incumbent executive vice-president and general manager.

In a Decision8 dated November 27, 1998, the Labor Arbiter ruled in favor of the petitioner.
The fallo of the decision reads:

WHEREFORE, all the foregoing premises being considered, judgment is hereby rendered
ordering the respondent company to pay complainant the sum of P7,080,546.00, plus ten
percent (10%) thereof as and for attorney's fees.

SO ORDERED.9

Undaunted, the respondent corporation appealed the decision to the NLRC, alleging that:

I. THE LABOR ARBITER ERRED IN CONCLUDING THAT KWOK WAS COVERED BY THE
NOVEMBER 6, 1981 MEMORANDUM ON VACATION AND SICK LEAVE CREDITS.10

II. THE LABOR ARBITER ERRED IN CONCLUDING THAT IT WAS DISCRIMINATORY NOT
TO GRANT KWOK THESE BENEFITS.11

III. KWOK'S CLAIMS ARE BASELESS.12

IV. KWOK'S CLAIMS FOR BENEFITS ACCRUING FROM 1966 ARE BARRED BY
PRESCRIPTION.13

V. THERE IS NO BASIS FOR THE AWARD OF P7,080,546.00.14

The respondent corporation averred that based on the petitioner's memorandum, his
admissions and the contract of employment, the petitioner was not entitled to the cash
conversion of his sick and vacation leave credits. While the respondent corporation conceded
that the petitioner may have been entitled to unlimited sick and vacation leave benefits during

2
his employment, it maintained that no such promise was made by Lim to convert the same;
even assuming that such verbal promise was made, the respondent corporation was not
bound thereby since the petitioner failed to adduce the written conformity of its board of
directors. The respondent corporation insisted that the claims of the petitioner were barred
under Article 291 of the Labor Code.

For his part, the petitioner made the following averments in his memorandum:

The non-performance by PCMC of this particular promise to convert in cash all of his unused
cash (sic) and sick leave credits was precipitated by the falling out of the marriage between
Mr. Kwok and his wife, the daughter of Mr. Lim. In fact, even while Mr. Kwok was still the
Executive Vice-President and General Manager of PCMC, when the falling out of the said
marriage became apparent, the other benefits or perquisites which Mr. Kwok used to enjoy
were immediately curtailed by Mr. Lim to the prejudice of Mr. Kwok.15

On November 29, 1999, the NLRC, by majority vote, rendered judgment granting the appeal,
reversing and setting aside the decision of the Labor Arbiter.16 The NLRC ordered the
dismissal of the complaint. Commissioner Angelita A. Gacutan filed a dissenting opinion.17

Aggrieved, the petitioner filed a Petition for Review with the CA, on the following grounds:

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
WHEN IT DECLARED THAT THE VERBAL PROMISE OF MR. LIM TO PETITIONER WAS
UNENFORCEABLE.

II

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
WHEN IT RULED THAT THE VERBAL PROMISE BY MR. LIM TO PETITIONER WAS NOT
BINDING AS IT WAS NOT APPROVED BY THE BOARD OF DIRECTORS.

III

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
WHEN IT IGNORED STRONG EVIDENCE THAT PCMC CLOTHED MR. LIM WITH
AWESOME POWERS TO GRANT BENEFITS TO ITS EMPLOYEES INCLUDING
PETITIONER AND RATIFIED THE SAME BY ITS SILENCE AND WHEN IT IGNORED TOO
EXISTING JURISPRUDENCE ON THE MATTER.

IV

3
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
WHEN IT IGNORED STRONG AND CLEAR EVIDENCE THAT IN PCMC THE GIVING OF
BENEFITS TO PETITIONER, THOUGH NOT IN WRITING, WAS A PREVALENT
PRACTICE.

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
WHEN IT RULED THAT THE MEMORANDUM DATED APRIL 26, 1997 APPLICABLE TO
MR. RAOUL RODRIGO WAS ALSO APPLICABLE TO PETITIONER.18

On February 28, 2001, the CA rendered judgment affirming the decision of the NLRC and
dismissing the petition.19 The petitioner's motion for reconsideration thereof was denied by the
appellate court, per its Resolution20 dated July 17, 2001.

The petitioner, thus, filed the instant Petition for Review on Certiorari with this Court, assailing
the decision and resolution of the CA on the following claims:

The Hon. Court of Appeals, contrary to law, gravely erred and disregarded established
jurisprudence in ruling that petitioner has not adduced sufficient evidence to support his claim
that he was, indeed, promised the cash conversion of his unused vacation and sick leave
credits upon retirement.21

II

The Hon. Court of Appeals gravely erred in ruling that even if private respondent's (sic) Mr.
Lim did make him such promise, the same cannot be enforced.22

III

The Hon. Court of Appeals gravely erred and disregarded clear jurisprudence on the matter
when it ruled that there is no showing that private respondent, thru its board of directors either
recognized, approved or ratified the promise made by Mr. Lim to petitioner.23

As gleaned from his Memorandum, the petitioner posits that he had adduced substantial
evidence to prove that Lim, as president and chairman of the respondent corporation's board
of directors, made a verbal promise to give him the cash conversion of his accumulated
vacation and sick leave credits upon his retirement (that is, benefits at par with the number of
days to which the officer next in rank to him was entitled). According to the petitioner, his
claim is fortified by the fact that his successor, Raoul Rodrigo, has unlimited vacation and sick
leave credits. The petitioner further asserts that he would not have accepted the positions in
the respondent corporation without such benefit, especially since his subordinates were also
enjoying the same. He posits that he was entitled to the said privilege because of his rank.

4
He, likewise, claims that, in contrast to the evidence he has presented, the respondent
corporation failed to adduce proof of its affirmative allegations.

The petitioner further argues that his complaint was not time-barred since he filed it on
December 5, 1996. Even if this were so, he is, nevertheless, entitled to the cash value of his
vacation and sick leave credits for three years before his retirement. Moreover, the evidence
on record shows that officers belonging to Category I had been granted the cash conversion
of their earned leave credits after the lapse of three years.

The respondent corporation, for its part, asserts that the petitioner failed to adduce substantial
evidence to the claims in his complaint. Even if Lim had made such verbal promise to the
petitioner, the same is not binding on the respondent corporation absent its conformity
through board resolution. Moreover, the petitioner is not covered by the Memorandum dated
November 6, 1981 because he had unlimited leave credits; hence, it cannot be gainsaid that
he still had unused leave credits to be converted. According to the respondent corporation,
the petitioner himself admitted that he was not included in the Memorandum dated November
6, 1981; and even assuming that he was covered by the said memorandum, the fact that his
complaint was filed only in 1996 precludes him from claiming the cash conversion of such
leave credits for the years 1966 to 1993.

The Court's Ruling

The petition has no merit.

The threshold issue in this case is factual - whether or not the petitioner is entitled, based on
the documentary and testimonial evidence on record, to the cash value of his vacation and
sick leave credits in the total amount of P7,080,546.00. The resolution of the issue is riveted
to our resolution of whether the petitioner's mainly testimonial evidence of an alleged verbal
promise made by a corporate officer to grant him the privilege of converting accumulated
vacation and sick leave credits after retirement or separation from employment is entitled to
probative weight.

Under Rule 45 of the Rules of Court, only questions of law may be raised under a Petition for
Review on Certiorari . The Court, not being a trier of facts, is not wont to reexamine and
reevaluate the evidence of the parties, whether testimonial or documentary. Moreover, the
findings of facts of the CA on appeal from the NLRC are, more often than not, given
conclusive effect by the Court. The Court may delve into and resolve factual issues only in
exceptional circumstances, such as when the findings of facts of the Labor Arbiter, on one
hand, and those of the NLRC and the CA, on the other, are capricious and arbitrary; or when
the CA has reached an erroneous conclusion based on arbitrary findings of fact; and when
substantial justice so requires. In this case, however, the petitioner failed to convince the
Court that the factual findings of the CA which affirmed the findings of the NLRC on appeal,
as well as its conclusions based on the said findings, are capricious and arbitrary.

While the petitioner was unequivocal in claiming that the respondent corporation, through its
president and chairman of the board of directors, obliged itself, as a matter of policy, to grant
him the cash value of his vacation and sick leave credits upon his retirement, he was
5
burdened to prove his claim by substantial evidence.24 The petitioner failed to discharge this
burden.

We agree with the petitioner's contention that for a contract to be binding on the parties
thereto, it need not be in writing unless the law requires that such contract be in some form in
order that it may be valid or enforceable or that it be executed in a certain way, in which case
that requirement is absolute and independent.25 Indeed, corporate policies need not be in
writing. Contracts entered into by a corporate officer or obligations or prestations assumed by
such officer for and in behalf of such corporation are binding on the said corporation only if
such officer acted within the scope of his authority or if such officer exceeded the limits of his
authority, the corporation has ratified such contracts or obligations.

In the present case, the petitioner relied principally on his testimony to prove that Lim made a
verbal promise to give him vacation and sick leave credits, as well as the privilege of
converting the same into cash upon retirement. The Court agrees that those who belong to
the upper corporate echelons would have more privileges. However, the Court cannot
presume the existence of such privileges or benefits. The petitioner was burdened to prove
not only the existence of such benefits but also that he is entitled to the same, especially
considering that such privileges are not inherent to the positions occupied by the petitioner in
the respondent corporation, son-in-law of its president or not.

In dismissing the petition before it, the CA disbelieved the petitioner's testimony and gave
credence and probative weight to the collective testimonies of the respondent corporation's
witnesses, who were its employees and officers, including Lim, whom the petitioner presented
as a hostile witness. We agree with the appellate court's encompassing synthesis and
analysis of the evidence on record:

Except for his bare assertions, petitioner has not adduced sufficient evidence to support his
claim that he was, indeed, promised the cash conversion of his unused vacation and sick
leaves upon retirement. Petitioner harps on what he calls the prevalent practice in PCMC of
giving him benefits, such as the use of golf and country club facilities, salary increases, the
use of the company vehicle and driver, and sharing in PCMC's annual net income, without
either a written contract or a Board resolution to back it up. Respondent PCMC denies all
these, however. According to respondent, petitioner's share in the income of the company is
actually part of the consultancy fee which PCMC pays DK Management Services, Inc., a firm
owned by petitioner's company. PCMC adds that the yearly salary increases of corporate
officers were always with the prior approval of the Board.

Nevertheless, assuming that petitioner was, indeed, given the benefits which he so claimed, it
does not necessarily follow that among those is the cash conversion of his accumulated
leaves. It is a basic rule in evidence that each party must prove his affirmative allegation.
Since the burden of proof lies with the party who asserts an affirmative allegation, the plaintiff
or complainant has to prove his affirmative allegations in the complaint and the defendant or
respondent has to prove the affirmative allegations in his affirmative defenses and
counterclaim. Petitioner, in the case at bar, has failed to discharge this burden.26

6
The CA made short shift of the claim of the petitioner that per Memorandum dated November
6, 1981, he was not entitled to the benefits of the company policy of commutation of leave
credits. Indeed, the company policy of conversion into equivalent cash of unused vacation
and sick leave credits applied only to its regular employees. The petitioner failed to offer
evidence to rebut the testimony of Nel Gopez, Chief Accountant of the respondent, that the
petitioner was not among the regular employees covered by the policy for the simple reason
that he had unlimited vacation leave benefits. As stated by the CA, the petitioner no less
corroborated the testimony of Gopez, thus:

ATTY. PIMENTEL

And, so you mention[ed] earlier that - the policy on vacation leave benefits apply for category
one employee(s) and rank-and-file employee(s)?chanroblesvirtualawlibrary

WITNESS (Mr. Nel Gopez)

Yes.

ATTY. PIMENTEL

And who are considered category one employee(s)?chanroblesvirtualawlibrary

WITNESS

Category One employees are from the rank and of Senior Vice-President and Assistant
General Manager and below, up to the level of department managers.

ATTY. PIMENTEL

How about the complainant, Mr. Kwok, does he falling (sic) to the category one?
chanroblesvirtualawlibrary

WITNESS

As far as I can remember, he is (sic) not belong to category one employee.

ATTY. PIMENTEL

Therefore, he is not entitled to the lump sum benefit?chanroblesvirtualawlibrary

WITNESS

Yes, Ma'am.

ATTY. PIMENTEL

7
And would you know, Mr. Witness, why he is (sic) not given the conversion of the vacation
leave benefits at the time category one employees sectors (sic) are given?
chanroblesvirtualawlibrary

WITNESS

Because he has, as far as I can remember, he has unlimited vacation leave."

This was corroborated by petitioner himself when he testified in this wise:

ATTY. PIMENTEL

Mr. Witness, you occupied the position of Executive Vice-President and General Manager.
You agree with me that this position or this office of Executive Vice-President and General
Manager are not covered by this policy.

WITNESS (Donald Kwok)

Yes, it is not covered by this policy.

ATTY. PIMENTEL

So this policy applies to persons below you and your father-in-law?chanroblesvirtualawlibrary

WITNESS

Yes, right.

ATTY. PIMENTEL

And this policy does not apply to you?chanroblesvirtualawlibrary

WITNESS

As far as I m concerned, it does not apply for (sic) me.

In all respects, therefore, petitioner, by virtue of his position as Executive Vice-President, is

not covered by the November 6, 1981 Memorandum granting PCMC employees the
conversion of their unused vacation and sick leaves into cash.27

We have reviewed the records and found no evidence to controvert the following findings of
the CA and its ratiocinations on its resolution of the petitioner's submissions:

Second, even assuming that petitioner is included among the "regular employees" of PCMC
referred to in said memorandum, there is no evidence that he complied with the cut-off dates
for the filing of the cash conversion of vacation and sick leaves. This being so, we find merit in
respondent's argument that petitioner's money claims have already been barred by the three-
year prescriptive period under Article 291 of the Labor Code, as amended.
8
Third, and this is of primordial importance, there is no proof that petitioner has filed vacation
and sick leaves with PCMC's personnel department. Without a record of petitioner's
absences, there is no way to determine the actual number of leave credits he is entitled to.
The P7,080,546.00 figure arrived at by petitioner supposedly representing the cash equivalent
of his earned sick and vacation leaves is thus totally baseless.

And, fourth, even assuming that PCMC President Patricio Lim did promise petitioner the cash
conversion of his leaves, we agree with respondent that this cannot bind the company in the
absence of any Board resolution to that effect. We must stress that the personal act of the
company president cannot bind the corporation. As explicitly stated by the Supreme Court
in People's Aircargo and Warehousing Co., Inc. v. Court of Appeals:

"The general rule is that, in the absence of authority from the board of directors, no person,
not even its officers, can validly bind a corporation. A corporation is a juridical person,
separate and distinct from its stockholders and members, 'having xxx powers, attributes and
properties expressly authorized by law or incident to its existence.'

"' the power and the responsibility to decide whether the corporation should enter into a
contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions of law."

Anent the third assigned error, petitioner maintains that the PCMC Board of Directors has
granted its President, Patricio Lim, awesome powers to grant benefits to its employees,
adding that the Board has always given its consent to the way Lim ran the affairs of the
company especially on matters relating to the benefits that its corporate officers enjoyed.

True, jurisprudence holds that the president of a corporation possesses the power to enter
into a contract for the corporation when "the conduct on the part of both the president and
corporation [shows] that he had been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act and had recognized, approved
and ratified his former and similar actions."

In the case at bar, however, there is no showing that PCMC had either recognized, approved
or ratified the cash conversion of petitioner's leave credits as purportedly promised to him by
Lim. On the contrary, PCMC has steadfastly maintained that "the Company, through the
Board, has long adopted the policy of granting its earlier mentioned corporate officers
unlimited leave benefits denying them the privilege of converting their unused vacation or sick
leave benefits into their cash equivalent."

As to the last assigned error, petitioner faults the NLRC for holding as applicable to petitioner,
the April 26, 1997 Memorandum issued by PCMC to Raoul Rodrigo, Donald Kwok's
successor as company executive vice-president. The said memo granted Rodrigo unlimited
sick and vacation leave credits but disallowed the cash conversion thereof. Before he became
executive vice-president, Rodrigo was senior vice-president and enjoyed the commutation of
his unused vacation and sick leaves.

9
We note that the April 26, 1997 memo was issued to Rodrigo when petitioner was already
retired from PCMC. While said memorandum was particularly directed to Rodrigo, however,
this does not necessarily mean that petitioner, as former executive vice-president, was then
not prohibited from converting his earned vacation and sick leaves into cash since he was not
issued a similar memo. On the contrary, the memo simply affirms the long-standing company
practice of excluding PCMC's top two positions, that of president and executive vice-
president, from the commutation of leaves. As heretofore discussed, among the perks of
those occupying these posts is the privilege of having unlimited leaves, which is totally
incompatible with the concept of converting unused leave credits into their cash equivalents.28

We are not convinced by the petitioner's claim that Lim capriciously deprived him of his
entitlement to the cash conversion of his accumulated vacation and sick leave credits simply
because of his estrangement from his wife, who happens to be Lim's daughter. The petitioner
did not adduce any evidence to show that he appealed to the respondent corporation's board
of directors for the implementation of the said privilege which was allegedly granted to him.
Even if Lim was the president and chairman of the respondent corporation's board of
directors, the rest of the membership of the board could have overruled him and granted to
the petitioner his claim if, indeed, the latter was entitled thereto. Indeed, even the petitioner
admitted that, after his retirement, the board of directors granted to him salary increase for
two years prior to his retirement. If the claim of the petitioner had been approved by the board
of directors, for sure, it would have approved the same despite his falling out with the
daughter of Lim.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against
the petitioner.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.

Endnotes:

10
 [G.R. NO. 140667 : August 12, 2004]

WOODCHILD HOLDINGS, INC., Petitioner, v. ROXAS ELECTRIC AND CONSTRUCTION

COMPANY, INC., Respondent.

DECISION CALLEJO, SR., J.:

This is a Petition for Review on Certiorari of the Decision1 of the Court of Appeals in CA-G.R.
CV No. 56125 reversing the Decision2 of the Regional Trial Court of Makati, Branch 57, which
ruled in favor of the petitioner.

The Antecedents

The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the Roxas
Electric and Construction Company, was the

owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer Certificate
of Title (TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A portion of
Lot No. 491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to the
Sumulong Highway, Antipolo, Rizal.

At a special meeting on May 17, 1991, the respondent's Board of Directors approved a
resolution authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot No.
491-A-3-B-2 covered by TCT No. 78086, with an area of 7,213 square meters, at a price and
under such terms and conditions which he deemed most reasonable and advantageous to the
corporation; and to execute, sign and deliver the pertinent sales documents and receive the
proceeds of the sale for and on behalf of the company.3

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by TCT
No. 78086 on which it planned to construct its warehouse building, and a portion of the
adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container van would be able to readily
enter or leave the property. In a Letter to Roxas dated June 21, 1991, WHI President
Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2 under stated terms and conditions for
P1,000 per square meter or at the price of P7,213,000.4 One of the terms incorporated in Dy's
offer was the following provision:

5. This Offer to Purchase is made on the representation and warranty of the

OWNER/SELLER, that he holds a good and registrable title to the property, which shall be
conveyed CLEAR and FREE of all liens and encumbrances, and that the area of 7,213
square meters of the subject property already includes the area on which the right of way
traverses from the main lot (area) towards the exit to the Sumulong Highway as shown in the
location plan furnished by the Owner/Seller to the buyer. Furthermore, in the event that the
right of way is insufficient for the buyer's purposes (example: entry of a 45-foot container), the
seller agrees to sell additional square meter from his current adjacent property to allow the
buyer to full access and full use of the property.5

Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later or
on July 1, 1991, Roxas, as President of RECCI, as vendor, and Dy, as President of WHI, as
vendee, executed a contract to sell in which RECCI bound and obliged itself to sell to Dy Lot
No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.6 On September 5, 1991, a Deed
of Absolute Sale7 in favor of WHI was issued, under which Lot No. 491-A-3-B-2 covered by
TCT No. 78086 was sold for P5,000,000, receipt of which was acknowledged by Roxas under
the following terms and conditions:

The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the beneficial use
of and a right of way from Sumulong Highway to the property herein conveyed consists of 25
square meters wide to be used as the latter's egress from and ingress to and an additional 25
square meters in the corner of Lot No. 491-A-3-B-1, as turning and/or maneuvering area for
Vendee's vehicles.

The Vendor agrees that in the event that the right of way is insufficient for the Vendee's use
(ex entry of a 45-foot container) the Vendor agrees to sell additional square meters from its
current adjacent property to allow the Vendee full access and full use of the property.

The Vendor hereby undertakes and agrees, at its account, to defend the title of the Vendee to
the parcel of land and improvements herein conveyed, against all claims of any and all
persons or entities, and that the Vendor hereby warrants the right of the Vendee to possess
and own the said parcel of land and improvements thereon and will defend the Vendee
against all present and future claims and/or action in relation thereto, judicial and/or
administrative. In particular, the Vendor shall eject all existing squatters and occupants of the
premises within two (2) weeks from the signing hereof. In case of failure on the part of the
Vendor to eject all occupants and squatters within the two-week period or breach of any of the
stipulations, covenants and terms and conditions herein provided and that of contract to sell
dated 1 July 1991, the Vendee shall have the right to cancel the sale and demand
reimbursement for all payments made to the Vendor with interest thereon at 36% per annum.8

On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted its quotation for
P8,649,000 to WHI for the construction of the warehouse building on a portion of the property
with an area of 5,088 square meters.9 WBI proposed to start the project on October 1, 1991
and to turn over the building to WHI on February 29, 1992.10

In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed
its lease agreement with WHI of a 5,000-square-meter portion of the warehouse yet to be
constructed at the rental rate of P65 per square meter. Ponderosa emphasized the need for
the warehouse to be ready for occupancy before April 1, 1992.11 WHI accepted the offer.
However, WBI failed to commence the construction of the warehouse in October 1, 1991 as
planned because of the presence of squatters in the property and suggested a renegotiation
of the contract after the squatters shall have been evicted.12 Subsequently, the squatters were
evicted from the property.
On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the
warehouse building for P11,804,160.13 The contractor started construction in April 1992 even
before the building officials of Antipolo City issued a building permit on May 28, 1992. After
the warehouse was finished, WHI issued on March 21, 1993 a certificate of occupancy by the
building official. Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as lessee,
executed a contract of lease over a portion of the property for a monthly rental of P300,000
for a period of three years from March 1, 1993 up to February 28, 1996.14

In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked
on a portion of the property over which WHI had been granted a right of way. Roxas promised
to look into the matter. Dy and Roxas discussed the need of the WHI to buy a 500-square-
meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in the deed
of absolute sale. However, Roxas died soon thereafter. On April 15, 1992, the WHI wrote the
RECCI, reiterating its verbal requests to purchase a portion of the said lot as provided for in
the deed of absolute sale, and complained about the latter's failure to eject the squatters
within the three-month period agreed upon in the said deed.

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT No.
78085 for its beneficial use within 72 hours from notice thereof, otherwise the appropriate
action would be filed against it. RECCI rejected the demand of WHI. WHI reiterated its
demand in a Letter dated May 29, 1992. There was no response from RECCI.

On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial Court
of Makati, for specific performance and damages, and alleged, inter alia, the following in its
complaint:

5. The "current adjacent property" referred to in the aforequoted paragraph of the Deed of
Absolute Sale pertains to the property covered by Transfer Certificate of Title No. N-78085 of
the Registry of Deeds of Antipolo, Rizal, registered in the name of herein defendant Roxas
Electric.

6. Defendant Roxas Electric in patent violation of the express and valid terms of the Deed of
Absolute Sale unjustifiably refused to deliver to Woodchild Holdings the stipulated beneficial
use and right of way consisting of 25 square meters and 55 square meters to the prejudice of
the plaintiff.

7. Similarly, in as much as the 25 square meters and 55 square meters alloted to Woodchild
Holdings for its beneficial use is inadequate as turning and/or maneuvering area of its 45-foot
container van, Woodchild Holdings manifested its intention pursuant to para. 5 of the Deed of
Sale to purchase additional square meters from Roxas Electric to allow it full access and use
of the purchased property, however, Roxas Electric refused and failed to merit Woodchild
Holdings' request contrary to defendant Roxas Electric's obligation under the Deed of
Absolute Sale (Annex "A").

8. Moreover, defendant, likewise, failed to eject all existing squatters and occupants of the
premises within the stipulated time frame and as a consequence thereof, plaintiff's planned
construction has been considerably delayed for seven (7) months due to the squatters who
continue to trespass and obstruct the subject property, thereby Woodchild Holdings incurred
substantial losses amounting to P3,560,000.00 occasioned by the increased cost of
construction materials and labor.

9. Owing further to Roxas Electric's deliberate refusal to comply with its obligation under
Annex "A," Woodchild Holdings suffered unrealized income of P300,000.00 a month or
P2,100,000.00 supposed income from rentals of the subject property for seven (7) months.

10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to comply
with its obligations and warranties under the Deed of Absolute Sale but notwithstanding such
demand, defendant Roxas Electric refused and failed and continue to refuse and fail to heed
plaintiff's demand for compliance.

Copy of the demand letter dated April 15, 1992 is hereto attached as Annex "B" and made an
integral part hereof.

11. Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to Roxas
Electric to particularly annotate on Transfer Certificate of Title No. N-78085 the agreement
under Annex "A" with respect to the beneficial use and right of way, however, Roxas Electric
unjustifiably ignored and disregarded the same.

Copy of the letter request dated 29 May 1992 is hereto attached as Annex "C" and made an
integral part hereof.

12. By reason of Roxas Electric's continuous refusal and failure to comply with Woodchild
Holdings' valid demand for compliance under Annex "A," the latter was constrained to litigate,
thereby incurring damages as and by way of attorney's fees in the amount of P100,000.00
plus costs of suit and expenses of litigation.15

The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of Woodchild

Holdings and ordering Roxas Electric the following:

a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square meters and
55 square meters;

b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full access
and use of the purchased property pursuant to para. 5 of the Deed of Absolute Sale;

c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use and right
of way granted to Woodchild Holdings under the Deed of Absolute Sale;

d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual damages

and unrealized income;

e) to pay attorney's fees in the amount of P100,000.00; andcralawlibrary

f) to pay the costs of suit.

Other reliefs just and equitable are prayed for.16

In its answer to the complaint, the RECCI alleged that it never authorized its former president,
Roberto Roxas, to grant the beneficial use of any portion of Lot No. 491-A-3-B-1, nor agreed
to sell any portion thereof or create a lien or burden thereon. It alleged that, under the
Resolution approved on May 17, 1991, it merely authorized Roxas to sell Lot No. 491-A-3-B-2
covered by TCT No. 78086. As such, the grant of a right of way and the agreement to sell a
portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 in the said deed are ultra vires.
The RECCI further alleged that the provision therein that it would sell a portion of Lot No. 491-
A-3-B-1 to the WHI lacked the essential elements of a binding contract.17

In its amended answer to the complaint, the RECCI alleged that the delay in the construction
of its warehouse building was due to the failure of the WHI's contractor to secure a building
permit thereon.18

During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot
No. 491-A-3-B-1 consisting of an area of 500 square meters, for the price of P1,000 per
square meter.

On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal
portion of which reads:

WHEREFORE, judgment is hereby rendered directing defendant:

(1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated 25 sq. m.
and 55 sq. m.;

(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to allow said
plaintiff full access and use of the purchased property pursuant to Par. 5 of their Deed of
Absolute Sale;

(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way granted by
their Deed of Absolute Sale;

(4) To pay plaintiff the amount of P5,568,000 representing actual damages and plaintiff's
unrealized income;

(5) To pay plaintiff P100,000 representing attorney's fees; andcralawlibrary

To pay the costs of suit.

SO ORDERED.19

The trial court ruled that the RECCI was estopped from disowning the apparent authority of
Roxas under the May 17, 1991 Resolution of its Board of Directors. The court reasoned that
to do so would prejudice the WHI which transacted with Roxas in good faith, believing that he
had the authority to bind the WHI relating to the easement of right of way, as well as the right
to purchase a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.

The RECCI appealed the decision to the CA, which rendered a decision on November 9,
1999 reversing that of the trial court, and ordering the dismissal of the complaint. The CA
ruled that, under the resolution of the Board of Directors of the RECCI, Roxas was merely
authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but not to grant right of
way in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to grant an option to the
petitioner to buy a portion thereof. The appellate court also ruled that the grant of a right of
way and an option to the respondent were so lopsided in favor of the respondent because the
latter was authorized to fix the location as well as the price of the portion of its property to be
sold to the respondent. Hence, such provisions contained in the deed of absolute sale were
not binding on the RECCI. The appellate court ruled that the delay in the construction of
WHI's warehouse was due to its fault.

The Present Petition

The petitioner now comes to this Court asserting that:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ABSOLUTE SALE
(EXH. "C") IS ULTRA VIRES.

II.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE

COURT A QUO ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL USE OF THE
EXISTING RIGHT OF WAY PLUS THE STIPULATED 25 SQUARE METERS AND 55
SQUARE METERS BECAUSE THESE ARE VALID STIPULATIONS AGREED BY BOTH
PARTIES TO THE DEED OF ABSOLUTE SALE (EXH. "C").

III.

THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS TO

RULE THAT THE STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH. "C") WERE
DISADVANTAGEOUS TO THE APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS
PROPERTY WITHOUT DUE PROCESS.

IV.

IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT DUE

PROCESS BY THE ASSAILED DECISION.

V.
THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE APPELLANT
TO EVICT THE SQUATTERS ON THE LAND AS AGREED IN THE DEED OF ABSOLUTE
SALE (EXH. "C").

VI.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE

COURT A QUO DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE AMOUNT
OF P5,568,000.00 REPRESENTING ACTUAL DAMAGES AND PLAINTIFF'S UNREALIZED
INCOME AS WELL AS ATTORNEY'S FEES.20

The threshold issues for resolution are the following: (a) whether the respondent is bound by
the provisions in the deed of absolute sale granting to the petitioner beneficial use and a right
of way over a portion of Lot

No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to the petitioner
to buy a portion thereof, and, if so, whether such agreement is enforceable against the
respondent; (b) whether the respondent failed to eject the squatters on its property within two
weeks from the execution of the deed of absolute sale; and, (c) whether the respondent is
liable to the petitioner for damages.

On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the
respondent authorized Roxas, then its president, to grant a right of way over a portion of Lot
No. 491-A-3-B-1 in favor of the petitioner, and an option for the respondent to buy a portion of
the said property. The petitioner contends that when the respondent sold Lot No. 491-A-3-B-2
covered by TCT No. 78086, it (respondent) was well aware of its obligation to provide the
petitioner with a means of ingress to or egress from the property to the Sumulong Highway,
since the latter had no adequate outlet to the public highway. The petitioner asserts that it
agreed to buy the property covered by TCT No. 78085 because of the grant by the
respondent of a right of way and an option in its favor to buy a portion of the property covered
by TCT No. 78085. It contends that the respondent never objected to Roxas' acceptance of
its offer to purchase the property and the terms and conditions therein; the respondent even
allowed Roxas to execute the deed of absolute sale in its behalf. The petitioner asserts that
the respondent even received the purchase price of the property without any objection to the
terms and conditions of the said deed of sale. The petitioner claims that it acted in good faith,
and contends that after having been benefited by the said sale, the respondent is estopped
from assailing its terms and conditions. The petitioner notes that the respondent's Board of
Directors never approved any resolution rejecting the deed of absolute sale executed by
Roxas for and in its behalf. As such, the respondent is obliged to sell a portion of Lot No. 491-
A-3-B-1 covered by TCT No. 78085 with an area of 500 square meters at the price of P1,000
per square meter, based on its evidence and Articles 649 and 651 of the New Civil Code.

For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991
Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of
the petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner.
Hence, the respondent was not bound by such provisions contained in the deed of absolute
sale. Besides, the respondent contends, the petitioner cannot enforce its right to buy a portion
of the said property since there was no agreement in the deed of absolute sale on the price
thereof as well as the specific portion and area to be purchased by the petitioner.

We agree with the respondent.

In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,21 we held that:

A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members
and may not be sold by the stockholders or members without express authorization from the
corporation's board of directors. Section 23 of BP 68, otherwise known as the Corporation
Code of the Philippines, provides:

"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."

Indubitably, a corporation may act only through its board of directors or, when authorized
either by its by-laws or by its board resolution, through its officers or agents in the normal
course of business. The general principles of agency govern the relation between the
corporation and its officers or agents, subject to the articles of incorporation, by-laws, or
relevant provisions of law. - 22

Generally, the acts of the corporate officers within the scope of their authority are binding on
the corporation. However, under Article 1910 of the New Civil Code, acts done by such
officers beyond the scope of their authority cannot bind the corporation unless it has ratified
such acts expressly or tacitly, or is estopped from denying them:

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.

Thus, contracts entered into by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the corporation.23

In BA Finance Corporation v. Court of Appeals,24 we also ruled that persons dealing with an
assumed agency, whether the assumed agency be a general or special one, are bound at
their peril, if they would hold the principal liable, to ascertain not only the fact of agency but
also the nature and extent of authority, and in case either is controverted, the burden of proof
is upon them to establish it.
In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a
portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to create a lien or burden
thereon. The petitioner was thus burdened to prove that the respondent so authorized Roxas
to sell the same and to create a lien thereon.

Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the
respondent, which is worded as follows:

RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any
interested buyer, its 7,213-sq.-meter property at the Sumulong Highway, Antipolo, Rizal,
covered by Transfer Certificate of Title No. N-78086, at a price and on terms and conditions
which he deems most reasonable and advantageous to the corporation;

FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the corporation, be, as
he is hereby authorized to execute, sign and deliver the pertinent sales documents and
receive the proceeds of sale for and on behalf of the company.25

Evidently, Roxas was not specifically authorized under the said resolution to grant a right of
way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the
petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491-
A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the
adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may such
authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the
petitioner "on such terms and conditions which he deems most reasonable and
advantageous." Under paragraph 12, Article 1878 of the New Civil Code, a special power of
attorney is required to convey real rights over immovable property.26 Article 1358 of the New
Civil Code requires that contracts which have for their object the creation of real rights over
immovable property must appear in a public document.27 The petitioner cannot feign
ignorance of the need for Roxas to have been specifically authorized in writing by the Board
of Directors to be able to validly grant a right of way and agree to sell a portion of Lot No. 491-
A-3-B-1. The rule is that if the act of the agent is one which requires authority in writing, those
dealing with him are charged with notice of that fact.28

Powers of attorney are generally construed strictly and courts will not infer or presume broad
powers from deeds which do not sufficiently include property or subject under which the agent
is to deal.29 The general rule is that the power of attorney must be pursued within legal
strictures, and the agent can neither go beyond it; nor beside it. The act done must be legally
identical with that authorized to be done.30 In sum, then, the consent of the respondent to the
assailed provisions in the deed of absolute sale was not obtained; hence, the assailed
provisions are not binding on it.

We reject the petitioner's submission that, in allowing Roxas to execute the contract to sell
and the deed of absolute sale and failing to reject or disapprove the same, the respondent
thereby gave him apparent authority to grant a right of way over Lot No. 491-A-3-B-1 and to
grant an option for the respondent to sell a portion thereof to the petitioner. Absent estoppel
or ratification, apparent authority cannot remedy the lack of the written power required under
the statement of frauds.31 In addition, the petitioner's fallacy is its wrong assumption of the
unproved premise that the respondent had full knowledge of all the terms and conditions
contained in the deed of absolute sale when Roxas executed it.

It bears stressing that apparent authority is based on estoppel and can arise from two
instances: first, the principal may knowingly permit the agent to so hold himself out as having
such authority, and in this way, the principal becomes estopped to claim that the agent does
not have such authority; second, the principal may so clothe the agent with the indicia of
authority as to lead a reasonably prudent person to believe that he actually has such
authority.32 There can be no apparent authority of an agent without acts or conduct on the part
of the principal and such acts or conduct of the principal must have been known and relied
upon in good faith and as a result of the exercise of reasonable prudence by a third person as
claimant and such must have produced a change of position to its detriment. The apparent
power of an agent is to be determined by the acts of the principal and not by the acts of the
agent.33

For the principle of apparent authority to apply, the petitioner was burdened to prove the
following: (a) the acts of the respondent justifying belief in the agency by the petitioner; (b)
knowledge thereof by the respondent which is sought to be held; and, (c) reliance thereon by
the petitioner consistent with ordinary care and prudence.34 In this case, there is no evidence
on record of specific acts made by the respondent35 showing or indicating that it had full
knowledge of any representations made by Roxas to the petitioner that the respondent had
authorized him to grant to the respondent an option to buy a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085, or to create a burden or lien thereon, or that the respondent
allowed him to do so.

The petitioner's contention that by receiving and retaining the P5,000,000 purchase price of
Lot No. 491-A-3-B-2, the respondent effectively and impliedly ratified the grant of a right of
way on the adjacent lot, Lot No. 491-A-3-B-1, and to grant to the petitioner an option to sell a
portion thereof, is barren of merit. It bears stressing that the respondent sold Lot No. 491-A-3-
B-2 to the petitioner, and the latter had taken possession of the property. As such, the
respondent had the right to retain the P5,000,000, the purchase price of the property it had
sold to the petitioner. For an act of the principal to be considered as an implied ratification of
an unauthorized act of an agent, such act must be inconsistent with any other hypothesis than
that he approved and intended to adopt what had been done in his name.36 Ratification is
based on waiver - the intentional relinquishment of a known right. Ratification cannot be
inferred from acts that a principal has a right to do independently of the unauthorized act of
the agent. Moreover, if a writing is required to grant an authority to do a particular act,
ratification of that act must also be in writing.37 Since the respondent had not ratified the
unauthorized acts of Roxas, the same are unenforceable.38 Hence, by the respondent's
retention of the amount, it cannot thereby be implied that it had ratified the unauthorized acts
of its agent, Roberto Roxas.

On the last issue, the petitioner contends that the CA erred in dismissing its complaint for
damages against the respondent on its finding that the delay in the construction of its
warehouse was due to its (petitioner's) fault. The petitioner asserts that the CA should have
affirmed the ruling of the trial court that the respondent failed to cause the eviction of the
squatters from the property on or before September 29, 1991; hence, was liable for
P5,660,000. The respondent, for its part, asserts that the delay in the construction of the
petitioner's warehouse was due to its late filing of an application for a building permit, only on
May 28, 1992.

The petitioner's contention is meritorious. The respondent does not deny that it failed to cause
the eviction of the squatters on or before September 29, 1991. Indeed, the respondent does
not deny the fact that when the petitioner wrote the respondent demanding that the latter
cause the eviction of the squatters on April 15, 1992, the latter were still in the premises. It
was only after receiving the said letter in April 1992 that the respondent caused the eviction of
the squatters, which thus cleared the way for the petitioner's contractor to commence the
construction of its warehouse and secure the appropriate building permit therefor.

The petitioner could not be expected to file its application for a building permit before April
1992 because the squatters were still occupying the property. Because of the respondent's
failure to cause their eviction as agreed upon, the petitioner's contractor failed to commence
the construction of the warehouse in October 1991 for the agreed price of P8,649,000. In the
meantime, costs of construction materials spiraled. Under the construction contract entered
into between the petitioner and the contractor, the petitioner was obliged to pay
P11,804,160,39 including the additional work costing P1,441,500, or a net increase of
P1,712,980.40 The respondent is liable for the difference between the original cost of
construction and the increase thereon, conformably to Article 1170 of the New Civil Code,
which reads:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay and those who in any manner contravene the tenor thereof, are liable for damages.

The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the
lease of the property to the Ponderosa Leather Goods Company. The respondent is, thus,
liable to the petitioner for the said amount, under Articles 2200 and 2201 of the New Civil
Code:

Art. 2200. Indemnification for damages shall comprehend not only the value of the loss
suffered, but also that of the profits which the obligee failed to obtain.

Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in
good faith is liable shall be those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen or could have reasonably
foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to the non-performance of the obligation.

In sum, we affirm the trial court's award of damages and attorney's fees to the petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the

assailed Decision of the Court of Appeals WITH MODIFICATION. The respondent is ordered
to pay to the petitioner the amount of P5,612,980 by way of actual damages and P100,000 by
way of attorney's fees. No costs.

SO ORDERED.

Puno, J., Chairman, Austria-Martinez, TINGA, and Chico-Nazario, JJ., concur.

 [G.R. No. 108905. October 23, 1997.]

GRACE CHRISTIAN HIGH SCHOOL, Petitioner, v. THE COURT OF APPEALS, GRACE VILLAGE

ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO, Respondents.

DECISION

MENDOZA, J.

The question for decision in this case is the right of petitioner’s representative to sit in the board of
directors of respondent Grace Village Association, Inc. as a permanent member thereof. For fifteen
years — from 1975 until 1989 — petitioner’s representative had been recognized as a "permanent
director" of the association. But on February 13, 1990, petitioner received notice from the
association’s committee on election that the latter was "reexamining" (actually, reconsidering) the
right of petitioner’s representative to continue as an unelected member of the board. As the board
denied petitioner’s request to be allowed representation without election, petitioner brought an action
for mandamus in the Home Insurance and Guaranty Corporation. Its action was dismissed by the
hearing officer whose decision was subsequently affirmed by the appeals board. Petitioner appealed
to the Court of Appeals, which in turn upheld the decision of the HIGC’s appeals board. Hence this
petition for review based on the following contentions:chanrob1es virtual 1aw library

1. The Petitioner herein has already acquired a vested right to a permanent seat in the Board of
Directors of Grace Village Association;

2. The amended By-laws of the Association drafted and promulgated by a Committee on December
20, 1975 is valid and binding; and

3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board
of Directors of the Association without the benefit of election is allowed under the law. 1

Briefly stated, the facts are as follows:chanrob1es virtual 1aw library

Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten
and secondary courses at the Grace Village in Quezon City. Private respondent Grace Village
Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and
residents at Grace Village, while private respondents Alejandro G. Beltran and Ernesto L. Go were its
president and chairman of the committee on election, respectively, in 1990, when this suit was
brought.

As adopted in 1968, the by-laws of the association provided in Article IV, as follows:chanrob1es
virtual 1aw library

The annual meeting of the members of the Association shall be held on the first Sunday of January in
each calendar year at the principal office of the Association at 2:00 P.M. where they shall elect by
plurality vote and by secret balloting, the Board of Directors, composed of eleven (11) members to
serve for one year until their successors are duly elected and have qualified. 2

It appears, that on December 20, 1975, a committee of the board of directors prepared a draft of an
amendment to the by-laws, reading as follows: 3

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall be held on the second Thursday of
January of each year. Each Charter or Associate Member of the Association is entitled to vote. He
shall be entitled to as many votes as he has acquired thru his monthly membership fees only
computed on a ratio of TEN (P10.00) PESOS for one vote.

The Charter and Associate Members shall elect the Directors of the Association. The candidates
receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until
their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.

This draft was never presented to the general membership for approval. Nevertheless, from 1975,
after it was presumably submitted to the board, up to 1990, petitioner was given a permanent seat in
the board of directors of the association. On February 13, 1990, the association’s committee on
election in a letter informed James Tan, principal of the school, that "it was the sentiment that all
directors should be elected by members of the association" because "to make a person or entity a
permanent Director would deprive the right of voters to vote for fifteen (15) members of the Board,"
and "it is undemocratic for a person or entity to hold office in perpetuity." 4 For this reason, Tan was
told that "the proposal to make the Grace Christian High School representative as a permanent
director of the association, although previously tolerated in the past elections should be reexamined."
Following this advice, notices were sent to the members of the association that the provision on
election of directors of the 1968 by-laws of the association would be observed.

Petitioner requested the chairman of the election committee to change the notice of election by
following the procedure in previous elections, claiming that the notice issued for the 1990 elections
ran "counter to the practice in previous years" and was "in violation of the by-laws (of 1975)" and
"unlawfully deprive[d] Grace Christian High School of its vested right [to] a permanent seat in the
board." 5

As the association denied its request, the school brought suit for mandamus in the Home Insurance
and Guaranty Corporation to compel the board of directors of the association to recognize its right to
a permanent seat in the board. Petitioner based its claim on the following portion of the proposed
amendment which, it contended, had become part of the by-laws of the association as Article VI,
paragraph 2, thereof:chanrob1es virtual 1aw library

The Charter and Associate Members shall elect the Directors of the Association. The candidates
receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until
their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission on the validity of this provision
was sought by the association and that in reply to the query, the SEC rendered an opinion to the
effect that the practice of allowing unelected members in the board was contrary to the existing by-
laws of the association and to §92 of the Corporation Code (B.P. Blg. 68).

Private respondent association cited the SEC opinion in its answer. Additionally, the association
contended that the basis of the petition for mandamus was merely "a proposed by-laws which has not
yet been approved by competent authority nor registered with the SEC or HIGC." It argued that "the
by-laws which was registered with the SEC on January 16, 1969 should be the prevailing by-laws of
the association and not the proposed amended by-laws." 6

In reply, petitioner maintained that the "amended by-laws is valid and binding" and that the
association was estopped from questioning the by-laws. 7

A preliminary conference was held on March 29, 1990 but nothing substantial was agreed upon. The
parties merely agreed that the board of directors of the association should meet on April 17, 1990 and
April 24, 1990 for the purpose of discussing the amendment of the by-laws and a possible amicable
settlement of the case. A meeting was held on April 17, 1990, but the parties failed to reach an
agreement. Instead, the board adopted a resolution declaring the 1975 provision null and void for lack
of approval by members of the association and the 1968 by-laws to be
effective.chanroblesvirtuallawlibrary

On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing petitioner’s action.
The hearing officer held that the amended by-laws, upon which petitioner based its claim," [was]
merely a proposed by-laws which, although implemented in the past, had not yet been ratified by the
members of the association nor approved by competent authority" ; that, on the contrary, in the
meeting held on April 17, 1990, the directors of the association declared ‘the proposed by-law dated
December 20, 1975 prepared by the committee on by-laws . . . null and void" and the by-laws of
December 17, 1968 as the "prevailing by-laws under which the association is to operate until such
time that the proposed amendments to the by-laws are approved and ratified by a majority of the
members of the association and duly filed and approved by the pertinent government agency." The
hearing officer rejected petitioner’s contention that it had acquired a vested right to a permanent seat
in the board of directors. He held that past practice in election of directors could not give rise to a
vested right and that departure from such practice was justified because it deprived members of
association of their right to elect or to be voted in office, not to say that "allowing the automatic
inclusion of a member representative of petitioner as permanent director [was] contrary to law and the
registered by-laws of respondent association." 8

The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated
September 13, 1990. It cited the opinion of the SEC based on §92 of the Corporation Code which
reads:chanrob1es virtual 1aw library

§92. Election and term of trustees. — Unless otherwise provided in the articles of incorporation or the
by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in
number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so
classify themselves that the term of office of one-third (1/3) of the number shall expire every year; and
subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill
vacancies occurring before the expiration of a particular term shall hold office only for the unexpired
period.

The HIGC appeals board denied claims that the school" [was] being deprived of its right to be a
member of the Board of Directors of respondent association," because the fact was that "it may
nominate as many representatives to the Association’s Board as it may deem appropriate." It said that
"what is merely being upheld is the act of the incumbent directors of the Board of correcting a long
standing practice which is not anchored upon any legal basis." 9

Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court on
February 9, 1993, affirmed the decision of the HIGC. The Court of Appeals held that there was no
valid amendment of the association’s by-laws because of failure to comply with the requirement of its
existing by-laws, prescribing the affirmative vote of the majority of the members of the association at a
regular or special meeting called for the adoption of amendment to the by-laws. Article XIX of the by-
laws provides: 10

The members of the Association by an affirmative vote of the majority at any regular or special
meeting called for the purpose, may alter, amend, change or adopt any new by-laws.

This provision of the by-laws actually implements §22 of the Corporation Law (Act No. 1459) which
provides:chanrob1es virtual 1aw library

§22. The owners of a majority of the subscribed capital stock, or a majority of the members if there be
no capital stock, may, at a regular or special meeting duly called for the purpose, amend or repeal any
by-law or adopt new by-laws. The owners of two-thirds of the subscribed capital stock, or two-thirds of
the members if there be no capital stock, may delegate to the board of directors the power to amend
or repeal any by-law or to adopt new by-laws: Provided, however, That any power delegated to the
board of directors to amend or repeal any by-law or adopt new by-laws shall be considered as
revoked whenever a majority of the stockholders or of the members of the corporation shall so vote at
a regular or special meeting. And provided, further, That the Director of the Bureau of Commerce and
Industry shall not hereafter file an amendment to the by-laws of any bank, banking institution or
building and loan association, unless accompanied by certificate of the Bank Commissioner to the
effect that such amendments are in accordance with law.

The proposed amendment to the by-laws was never approved by the majority of the members of the
association as required by these provisions of the law and by-laws. But petitioner contends that the
members of the committee which prepared the proposed amendment were duly authorized to do so
and that because the members of the association thereafter implemented the provision for fifteen
years, the proposed amendment for all intents and purposes should be considered to have been
ratified by them. Petitioner contends: 11

Considering, therefore, that the "agents" or committee were duly authorized to draft the amended by-
laws and the acts done by the "agents" were in accordance with such authority, the acts of the
"agents" from the very beginning were lawful and binding on the homeowners (the principals) per se
without need of any ratification or adoption. The more has the amended by-laws become binding on
the homeowners when the homeowners followed and implemented the provisions of the amended by-
laws. This is not merely tantamount to tacit ratification of the acts done by duly authorized "agents"
but express approval and confirmation of what the "agents" did pursuant to the authority granted to
them.

Corollarily, petitioner claims that it has acquired a vested right to a permanent seat in the board. Says
petitioner:chanrob1es virtual 1aw library

The right of the petitioner to an automatic membership in the board of the Association was granted by
the members of the Association themselves and this grant has been implemented by members of the
board themselves all through the years. Outside the present membership of the board, not a single
member of the Association has registered any desire to remove the right of herein petitioner to an
automatic membership in the board. If there is anybody who has the right to take away such right of
the petitioner, it would be the individual members of the Association through a referendum and not the
present board some of the members of which are motivated by personal interest.

Petitioner disputes the ruling that the provision in question, giving petitioner’s representative a
permanent seat in the board of the association, is contrary to law. Petitioner claims that that is not so
because there is really no provision of law prohibiting unelected members of boards of directors of
corporations. Referring to §92 of the present Corporation Code, petitioner says:chanrob1es virtual
1aw library

It is clear that the above provision of the Corporation Code only provides for the manner of election of
the members of the board of trustees of non-stock corporations which may be more than fifteen in
number and which manner of election is even subject to what is provided in the articles of
incorporation or by-laws of the association thus showing that the above provisions [are] not even
mandatory.

Even a careful perusal of the above provision of the Corporation Code would not show that it prohibits
a non-stock corporation or association from granting one of its members a permanent seat in its board
of directors or trustees. If there is no such legal prohibition then it is allowable provided it is so
provided in the Articles of Incorporation or in the by-laws as in the instant case.

x       x       x

If fact, the truth is that this is allowed and is being practiced by some corporations duly organized and
existing under the laws of the Philippines.

One example is the Pius XII Catholic Center, Inc. Under the by-laws of this corporation, that whoever
is the Archbishop of Manila is considered a member of the board of trustees without benefit of
election. And not only that. He also automatically sits as the Chairman of the Board of Trustees, again
without need of any election.

Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also provided in the by-
laws of this corporation that whoever is the Archbishop of Manila is considered a member of the board
of trustees year after year without benefit of any election and he also sits automatically as the
Chairman of the Board of Trustees.

It is actually §§28 and 29 of the Corporation Law — not §92 of the present law or §29 of the former
one — which require members of the boards of directors of corporations to be elected. These
provisions read:chanrob1es virtual 1aw library

§28. Unless otherwise provided in this Act, the corporate powers of all corporations formed under this
Act shall be exercised, all business conducted and all property of such corporations controlled and
held by a board of not less than five nor more than eleven directors to be elected from among the
holders of stock or, where there is no stock, from the members of the corporation: Provided, however,
That in corporations, other than banks, in which the United States has or may have a vested interest,
pursuant to the powers granted or delegated by the Trading with the Enemy Act, as amended, and
similar Acts of Congress of the United States relating to the same subject, or by Executive Order No.
9095 of the President of the United States, as heretofore or hereafter amended, or both, the directors
need not be elected from among the holders of the stock, or, where there is no stock from the
members of the corporation. (emphasis added)

§29. At the meeting for the adoption of the original by-laws, or at such subsequent meeting as may be
then determined, directors shall be elected to hold their offices for one year and until their successors
are elected and qualified. Thereafter the directors of the corporation shall be elected annually by the
stockholders if it be a stock corporation or by the members if it be a nonstock corporation, and if no
provision is made in the by-laws for the time of election the same shall be held on the first Tuesday
after the first Monday in January. Unless otherwise provided in the by-laws, two weeks’ notice of the
election of directors must be given by publication in some newspaper of general circulation devoted to
the publication of general news at the place where the principal office of the corporation is established
or located, and by written notice deposited in the post-office, postage pre-paid, addressed to each
stockholder, or, if there be no stockholders, then to each member, at his last known place of
residence. If there be no newspaper published at the place where the principal office of the
corporation is established or located, a notice of the election of directors shall be posted for a period
of three weeks immediately preceding the election in at least three public places, in the place where
the principal office of the corporation is established or located. (Emphasis added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980, 12 similarly
provides:chanrob1es virtual 1aw library

§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.
(Emphasis added)

These provisions of the former and present corporation law leave no room for doubt as to their
meaning: the board of directors of corporations must be elected from among the stockholders or
members. There may be corporations in which there are unelected members in the board but it is
clear that in the examples cited by petitioner the unelected members sit as ex officio members, i.e., by
virtue of and for as long as they hold a particular office. But in the case of petitioner, there is no
reason at all for its representative to be given a seat in the board. Nor does petitioner claim a right to
such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in
1975 that a proposed amendment to the by-laws sought to give it one.

Since the provision in question is contrary to law, the fact that for fifteen years it has not been
questioned or challenged but, on the contrary, appears to have been implemented by the members of
the association cannot forestall a later challenge to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity. For that matter the members of the association may have formally
adopted the provision in question, but their action would be of no avail because no provision of the by-
laws can be adopted if it is contrary to law. 13

It is probable that, in allowing petitioner’s representative to sit on the board, the members of the
association were not aware that this was contrary to law. It should be noted that they did not actually
implement the provision in question except perhaps insofar as it increased the number of directors
from 11 to 15, but certainly not the allowance of petitioner’s representative as an unelected member
of the board of directors. It is more accurate to say that the members merely tolerated petitioner’s
representative and tolerance cannot be considered ratification.chanroblesvirtual|awlibrary

Nor can petitioner claim a vested right to sit in the board on the basis of "practice." Practice, no matter
how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is
petitioner’s claim that its right is "coterminus with the existence of the association." 14

Finally, petitioner questions the authority of the SEC to render an opinion on the validity of the
provision in question. It contends that jurisdiction over this case is exclusively vested in the HIGC.

But this case was not decided by the SEC but by the HIGC. The HIGC merely cited as authority for its
ruling the opinion of the SEC chairman. The HIGC could have cited any other authority for the view
that under the law members of the board of directors of a corporation must be elected and it would be
none the worse for doing so.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Puno and Torres, Jr., JJ., concur.

Regalado, J., on leave.
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 majority of the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be considered to
have "parted with his personal right or privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. ... It 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." 24 This 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.48 Pursuant to this obligation and to remove any
suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities 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. 63 Likewise, 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.

 
G.R. Nos. 163356-57               July 10, 2015

JOSE A. BERNAS, CECILE H. CHENG, VICTOR AFRICA, JESUS B. MARAMARA, JOSE T.

FRONDOSO, IGNACIO T. MACROHON, JR., AND PAULINO T. LIM, ACTING IN THEIR CAP A
CITY AS INDIVIDUAL DIRECTORS OF MAKATI SPORTS CLUB, INC., AND ON BEHALF OF THE
BOARD OF DIRECTORS OF MAKATI SPORTS CLUB, Petitioners,
vs.
JOVENCIO F. CINCO, VICENTE R. AYLLON, RICARDO G. LIBREA, SAMUEL L. ESGUERRA,
ROLANDO P. DELA CUESTA, RUBEN L. TORRES, ALEX Y. PARDO, MA. CRISTINA SIM,
ROGER T. AGUILING, JOSE B. QUIMSON, CELESTINO L. ANG, ELISEO V. VILLAMOR, FELIPE
L. GOZON, CLAUDIO B. ALTURA, ROGELIO G. VILLAROSA, MANUEL R. SANTIAGO,
BENJAMIN A. CARANDANG, REGINA DE LEON-HERLIHY, CARLOS Y. RAMOS, JR.,
ALEJANDRO Z. BARIN, EFRENILO M. CAYANGA AND JOHN DOES, Respondents.

x-----------------------x

G.R. Nos. 163368-69

JOVENCIO F. CINCO, RICARDO G. LIBREA AND ALEX Y. PARDO, Petitioners,

vs.
JOSE A BERNAS, CECILE H. CHENG AND IGNACIO A. MACROHON, Respondents.

DECISION

PEREZ, J.:

Before us are two consolidated Petitions for Review on Certiorari1 assailing the 28 April 2003 Decision
and the 27 April 2004 Resolution of the Court of Appeals in CA-G.R. SP No. 62683,2 which declared
the 17 December 1997 Special Stockholders' Meeting of the Makati Sports Club invalid for having
been improperly called but affirmed the actions taken during the Annual Stockholders' Meeting held
on 20 April 1998, 19 April 1999 and 17 April 2000. The dispositive portion of the assailed decision
reads:

WHEREFORE, foregoing considered, the instant petition for review is hereby GRANTED. The
appealed Decision dated December 12, 2000 of the SEC en bane is SET ASIDE and the Decision
dated April 20, 1998 of the Hearing Officer is REINSTATED and AMENDED as follows:

1. The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or
invalidly called by the [Cinco Group]. It therefore failed to produce any legal effects and did not
effectively remove [the Bernas Group] as directors of the Makati Sports Club, Inc.;

2. The expulsion of petitioner Jose A. Bernas as well as the public auction of his share[s] is
hereby declared void and without legal effect;

3. The ratification of the removal of [the Bernas Group] as directors, the expulsion of petitioner
Bernas and the sale of his share by the defendants and by the stockholders held in their
Regular Stockholders' Meeting held in April of 1998, 1999 and 2000, is void and produces no
effects as they were not the proper party to cause the ratification;
 4. All other actions of the [Cinco Group] and stockholders taken during the Regular
Stockholders' Meetings held in April 1998, 1999 and 2000, including the election of the [Cinco
Group] as directors after the expiration of the term of office of petitioners as directors, are
hereby declared valid;

5. No awards for damages and attorney's fees.3

The Facts

Makati Sports Club (MSC) is a domestic corporation duly organized and existing under Philippine
laws for the primary purpose of establishing, maintaining, and providing social, cultural, recreational
and athletic . activities among its members.

Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. Cheng, Victor Africa, Jesus
Maramara, Jose T. Frondoso, Ignacio T. Macrohon and Paulino T. Lim (Bernas Group) were among
the Members of the Board of Directors and Officers of the corporation whose terms were to expire
either in 1998 or 1999.

Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea · and Alex Y. Pardo (Cinco
Group) are the members and stockholders of the corporation who were elected Members of the Board
of Directors and Officers of the club during the 17 December 1997 Special Stockholders Meeting.

The antecedent events of the meeting and its results, follow:

Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight Committee
(MSCOC), composed of the past presidents of the club, demanded from the Bernas Group, who were
then incumbent officers of the corporation, to resign from their respective positions to pave the way for
the election of new set of officers.4 Resonating this clamor were the stockholders of the corporation
representing at least 100 shares who sought the assistance of the MSCOC to call for a special
stockholders meeting for the purpose of removing the sitting officers and electing new
ones.5 Pursuant to such request, the MSCOC called a Special Stockholders' Meeting and sent out
notices6 to all stockholders and members stating therein the time, place and purpose of the meeting.
For failure of the Bernas Group to secure an injunction before the Securities Commission (SEC), the
meeting proceeded wherein Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T.
Frondoso, Ignacio T. Macrohon, Jr. and Paulino T. Lim were removed from office and, in their place
and stead, Jovencio F. Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling, Rogelio G. ·
Villarosa, Armando David, Norberto Maronilla, Regina de Leon-Herlihy and Claudio B. Altura, were
elected.7

Aggrieved by the turn of events, the Bernas Group initiated an action before the Securities
Investigation and Clearing Department (SICD) of the SEC docketed as SEC Case No. 5840 seeking
for the nullification of the 17 December 1997 Special Stockholders Meeting on the ground that it was
improperly called. Citing Section 28 of the Corporation Code, the Bernas Group argued that the
authority to call a meeting lies with the Corporate . Secretary and not with the MSCOC which
functions merely as an oversight body and is not vested with the power to call corporate meetings.
For being called by the persons not authorized to do so, the Bernas Group urged the SEC. to declare
the 17 December 1997 Special Stockholders' Meeting, including the removal of the sitting officers and
the election of new ones, be nullified.
For their part, the Cinco Group insisted that the 17 December 1997 Special Stockholders' Meeting is
sanctioned by the Corporation Code and the MSC by-laws. In justifying the call effected by the
MSCOC, they reasoned that Section 258 of the MSC by-laws merely authorized the Corporate
Secretary to issue notices of meetings and nowhere does it state that such authority solely belongs to
him. It was further asseverated by the Cinco Group that it would be useless to course the request to
call a meeting thru the Corporate Secretary because he repeatedly refused to call a special
stockholders' meeting despite demands and even "filed a suit to restrain the holding of a special
meeting.9

Meanwhile, the newly elected directors initiated an investigation on the alleged anomalies in
administering the corporate affairs and after finding Bernas guilty of irregularities,10 the Board resolved
to expel him from the club by selling his shares at public auction.11 After the notice12 requirement was
complied with, Bernas' shares was accordingly sold for ₱902,000.00 to the highest bidder:

Prior to the resolution of SEC Case No. 5840, an Annual Stockholders' Meeting was held on 20 April
1998 pursuant to Section 8 of the MSC bylaws.13 During the said meeting, which was attended by
1,017 stockholders representing 2/3 of the outstanding shares, the majority resolved to approve,
confirm and ratify, among others, the calling and · holding of 17 December 1997 Special
Stockholders' Meeting, the acts and resolutions adopted therein including the removal of Bernas
Group from the Board and the election of their replacements.14

Due to the filing of several petitions for and against the removal of the Bernas Group from the Board
pending before the SEC resulting in the piling up of legal controversies involving MSC, the SEC En
Banc, in its Decision15 dated 30 March 1999, resolved to supervise the holding of the 1999 Annual
Stockholders' Meeting. During the said meeting, the stockholders once again approved, ratified and
confirmed the holding of the 17 December 1997 Special Stockholders' Meeting.

The conduct of the 17 December 1997 Special Stockholders' Meeting was likewise ratified by the
stockholders during the 2000 Annual Stockholders' Meeting which was held on 17 April 2000.16

On 9 May 2000, the SICD rendered a Decision17 in SEC Case No. 12-. 97-5840 finding, among
others, that the 17 December 1997 Special Stockholders' Meeting and the Annual Stockholders'
Meeting conducted on 20 April 1998 and 19 April 1999 are invalid. The SICD likewise nullified the
expulsion of Bernas from the corporation and the sale of his share at the public auction. The
dispositive portion of the said decision reads:

WHEREFORE, in view of the foregoing considerations this Office, through the undersigned Hearing
Officer, hereby declares as follows:

(1) The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or
invalidly called by the [the Cinco Group]. It therefore failed to produce any legal effects and did
not effectively remove [the Bernas Group] as directors of the Makati Sports Club, Inc.

(2) The April 20, 1998 meeting was not attended by a sufficient number of valid proxies. No
quorum could have been present at the said meeting. No corporate business could have been
validly completed and/or transacted during the said meeting. Further, it was not called by the
validly elected Corporate Secretary Victor Africa nor presided over by the validly elected
president Jose A. Bernas. Even if the April 20, 1998 meeting was valid, it could not ratify the
 December 17, 1997 meeting because being a void meeting, the December 1 7, 1997 meeting
may not be ratified.

(3) The April 1998 meeting was null and void and therefore produced no legal effect.

(4) The April 1999 meeting has not been raised as a defense in the Answer nor assailed in a
supplemental complaint. However, it has been raised by [the Cinco Group] in a manifestation
dated April 21, 1999 and in their position paper dated April 8, 2000. Its legal effects must be the
subject of this Decision in order to put an end to the controversy at hand. In the first place, by
[the Cinco Group's] own admission, the alleged attendance at the April 1999 meeting amounted
to less than 2/3 of the stockholders entitled to vote, the minimum number required to effect a
removal. No removal or ratification of a removal may be effected by less than 2/3 vote of the
stockholders. Further, it cannot ratify the December 1997 meeting for failure to adhere to the
requirement of the By-laws on notice as explained in paragraph (2) above, even if it was
accompanied by valid proxies, which it was not.

(5) The [the Cinco Group], their agents, representatives and all persons acting for and
conspiring on their behalf, are hereby permanently enjoined from carrying into effect the
resolutions and actions adopted during the 17 December 1997 and April 20, 1998 meetings
and of the Board of Directors and/or other stockholders' meetings resulting therefrom, and from
performing acts of control and management of the club.

(6) The expulsion of complainant Jose A. Bernas as well as the public auction of his share is
hereby declared void and without legal effect, as prayed for. While it is true that [the Cinco
Group] were no.t restrained from acting as directors during the pendency of this case, their
tenure as directors prior to this Decision is in the nature of de facto directors of a de facto
Board. Only the ordinary acts of administration which [the Cinco Group] carried out de facto in
good faith are valid. Other acts, such as political acts and the expulsion or other disciplinary
acts imposed on the [the Bernas Group] may not be appropriately taken by de facto officers
because the legality of their tenure as directors is not complete and subject to the outcome of
this case. (7) No awards for damages and attorney's fees.18

On appeal, the SEC En Banc, in its 12 December 2000 Decision19 reversed the findings of the SICD
and validated the holding of the 17 December 1997 Special Stockholders' Meeting as well as the
Annual Stockholders' Meeting held on 20 April 1998 and 19 April 1999.

On 28 April 2003, the Court of Appeals rendered a Decision20 declaring the 17 December 1997
Special Stockholders' Meeting invalid for being improperly called but affirmed the actions taken during
the Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000.

In a Resolution21 dated 27 April 2004, the appellate court refused to reconsider its earlier decision.

Aggrieved by the disquisition of the Court of Appeals, both parties elevated the case before this Court
by filing their respective Petitions for Review on Certiorari. While the Bernas Group agrees with the
disquisition of the appellate court that the Special Stockholders' Meeting is invalid for being called by
the persons not authorized to do so, they urge the Court to likewise invalidate the holding of the
subsequent Annual Stockholders' Meetings invoking the application of the holdover principle. The
Cinco Group, for its part, insists that the holding. of 17 December 1997 Special Stockholders' Meeting
is valid and binding underscoring the overwhelming ratification made by the stockholders during the
subsequent annual stockholders' meetings and the previous refusal of the Corporate Secretary to call
a special stockholders' meeting despite demand. For the resolution of the Court are the following
issues:

The Issues

I.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE 17
DECEMBER 1997 SPECIAL STOCKHOLDERS' MEETING IS INVALID; AND

II.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO NULLIFY

THE HOLDING OF THE ANNUAL STOCKHOLDERS' MEETING ON 20 APRIL 1998, 19 APRIL 1999
AND 17 APRIL 2000.

The Court's Ruling

The Corporation Code laid down the rules on the removal of the Directors of the corporation by
providing, inter alia, the persons authorized to call the meeting and the number of votes required for
the purpose of removal, thus:

Sec. 28. Removal of directors or trustees. -Any director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-
thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a
regular meeting of the corporation or at a special meeting called for the purpose, and in either case,
after previous notice to stockholders or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must be called by the secretary on order
of the president or on the written demand of the stockholders representing or holding at least a
majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of
a majority of the members entitled to vote. Should the secretary fail or refuse to call the special
meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for
the meeting may be addressed directly to the stockholders or members by any stockholder or
member of the corporation signing the demand. Notice of the time and place of such meeting, as well
as of the intention to propose such removal, must be given by publication or by written notice
prescribed in this Code. Removal may be with or without cause: Provided, That removal without
cause may not be used to deprive minority stockholders or members of the right of representation to
which they may be entitled under Section 24 of this Code. (Emphasis supplied)

Corollarily, the pertinent provisions of MSC by-laws which govern the manner of calling and sending
of notices of the annual stockholders' meeting and the special stockholders' meeting provide:

SEC. 8. Annual Meetings. The annual meeting of stockholders shall be held at the Clubhouse on the
third Monday of April of every year unless such day be a holiday in which case the annual meeting
shall be held on the next succeeding business day. At such meeting, the President shall render a
report to the stockholders of the clubs.
 xxxx

SEC. 10. Special Meetings. Special meetings of stockholders shall be held at the Clubhouse when
called by the President or by the Board of Directors or upon written request of the stockholders
representing not less than one hundred (100) shares. Only matters specified in the notice and call will
be taken up at special meetings.

xxxx

SEC. 25. Secretary. The Secretary shall keep the stock and transfer book and the corporate seal,
which he shall stamp on all documents requiring such seal, fill and sign together with the President, all
the certificates of stocks issued, give or caused to be given all notices required by law of these By-
laws as well as notices of all meeting of the Board and of the stockholders; shall certify as to quorum
at meetings; shall approve and sign all correspondence pertaining to the Office of the Secretary; shall
keep the minutes of all meetings of the stockholders, the Board of Directors and of all committees in a
book or books kept for that purpose; and shall be acting President in the absence of the President
and Vice-:President. The Secretary must be a citizen and a resident of the Philippines. The Secretary
shall keep a record of all the addresses and telephone numbers of all stockholders.22

Textually, only the President and the Board of Directors are authorized by the by-laws to call a special
meeting. In cases where the person authorized to call a meeting refuses, fails or neglects to call a
meeting, then the stockholders representing at least 100 shares, upon written request, may file a
petition to call a special stockholder's meeting.

In the instant case, there is no dispute that the 17 December 1997 Special Stockholders' Meeting was
called neither by the President nor by the Board of Directors but by the MSCOC. While the MSCOC,
as its name suggests, is created for the purpose of overseeing the affairs of the corporation, nowhere
in the by-laws does it state that it is authorized to exercise corporate powers, such as the power to
call a special meeting, solely vested by law and the MSC by-laws on the President or the Board of
Directors.

The board of directors is the directing and controlling body of the corporation. It is a creation of the
stockholders and derives its power to control and direct the affairs of the corporation from them. The
board of directors, in drawing to itself the power of the corporation, occupies a position of trusteeship
in relation to the stockholders, in the sense that the board should exercise not only care and diligence,
but utmost good faith in the management of the corporate affairs.23

The underlying policy of the Corporation Code is that the business and affairs of a corporation must
be governed by a board of directors whose members have stood for election, and who have actually
been elected by the stockholders, on an annual basis. Only in that way can the continued
accountability to shareholders, and the legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of
power by the directors or officers over the properties that they do not own.24

Even the Corporation Code is categorical in stating that a corporation exercises its powers through its
board of directors and/or its duly authorized officers and agents, except in instances where the
Corporation Code requires stockholders' approval for certain specific acts:
SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate
powers of all the 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 and trustees x x x.

A corporation's board of directors is understood to be that body which (1) exercises all powers
provided for under the Corporation Code; (2) conducts all business of the corporation; and (3) controls
and holds all the property of the corporation. Its members have been characterized as trustees or
directors clothed with fiduciary character.25

It is ineluctably clear that the fiduciary relation is between the stockholders and the board of directors
and who are vested with the power to manage the affairs of the corporation. The ordinary trust
relationship of · directors of a corporation and stockholders is not a matter of statutory or technical
law.26 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.27 Equity recognizes that stockholders
are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof.28 Should
the board fail to perform its fiduciary duty to safeguard the interest of the stockholders or commit acts
prejudicial to their interest, the law and the by-laws provide mechanisms to remove and replace the
erring director.29

Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in the MSC by-
laws can it be gathered that the Oversight Committee is authorized to step in wherever there is
breach of fiduciary duty and call a special meeting for the purpose of removing the existing officers
and electing their replacements even if such call was made upon the request of shareholders.
Needless to say, the MSCOC is neither · empowered by law nor the MSC by-laws to call a meeting
and the subsequent ratification made by the stockholders did not cure the substantive infirmity, the
defect having set in at the time the void act was done. The defect goes into the very authority of the
persons who made the call for the meeting. It is apt to recall that illegal acts of a corporation which
contemplate the doing of an act which is contrary to law, morals or public order, or contravenes some
rules of public policy or public duty, are, like similar transactions between individuals, void.30 They
cannot serve as basis for a court action, nor acquire validity by performance, ratification or
estoppel.31 The same principle can apply in the present case. The void election of 17 December 1997
cannot be ratified by the subsequent Annual Stockholders' Meeting.

A distinction should be made between corporate acts or contracts which are illegal and those which
are merely ultra vires. The former contemplates the doing of an act which are contrary to law, morals
or public policy or public duty, and are, like similar transactions between individuals, void: They
cannot serve as basis of a court action nor acquire validity by performance, ratification or estoppel.
Mere ultra vires acts, on the other hand, or those which are not illegal or void ab initio, but are not
merely within the scope of the articles of incorporation, are merely voidable and may become binding
and enforceable when ratified by the stockholders.32 The 1 7 December 1997 Meeting belongs to the
category of the latter, that is, it is void ab initio and cannot be validated.

Consequently, such Special Stockholders' Meeting called by the Oversight Committee cannot have
any legal effect. The removal of the Bernas Group, as well as the election of the Cinco Group,
effected by the assembly in that improperly called meeting is void, and since the Cinco Group has no
legal right to sit in the board, their subsequent acts of expelling Bernas from the club and the selling of
his shares. at the public auction, are likewise invalid.
The Cinco Group cannot invoke the application of de facto officership doctrine to justify the actions
taken after the invalid election since the operation of the principle is limited to third persons who were
originally not part of the corporation but became such by reason of voting of government-sequestered
shares.33 In Cojuangco v. Roxas,34 the Court deemed the directors who were elected through the
voting of government of sequestered shares who assumed office in good faith as de facto officers, viz:

In the light of the foregoing discussion, the Court finds and so holds that the PCGG has no right to
vote the sequestered shares of petitioners including the sequestered corporate shares. Only their
owners, duly authorized representatives or proxies may vote the said shares. Consequently, the
election of private respondents Adolfo Azcuna, Edison Coseteng and Patricio Pineda as members of
the board of directors of SMC for 1990-1991 should be set aside. However, petitioners cannot be
declared as duly elected members of the board of directors thereby. An election for the purpose
should be held where the questioned shares may be voted by their owners and/or their proxies. Such
election may be held at the next shareholders' meeting in April 1991 or at such date as may be set
under the by-laws of SMC.

Private respondents in both cases are hereby declared to be de facto officers who in good faith
assumed their duties and responsibilities as duly elected members of the board of directors of the
SMC. They are thereby legally entitled to emoluments of the office including salary, fees and other
compensation attached to the office until they vacate the same. (Emphasis supplied)

Apparently, the assumption of office of the Cinco Group did not bear parallelism with the factual milieu
in Cojuangco and as such they cannot be considered as de facto officers and thus, they are without
colorable authority to authorize the removal of Bernas and the sale of his shares at the public auction.
They cannot bind the corporation to third persons who acquired the shares of Bernas and such third
persons cannot be deemed as buyer in good faith.35

The case would have been different if the petitioning stockholders went directly to the SEC and
sought its assistance to call a special stockholders' meeting citing the previous refusal of the
Corporate Secretary to call a meeting. Where there is an officer authorized to call a meeting and that
officer refuses, fails, or neglects to call a meeting, the SEC can assume jurisdiction and issue an
order to the petitioning stockholder to call a meeting pursuant to its regulatory and administrative
powers to implement the Corporation Code.36 This is clearly provided for by Section 50 of the
Corporation Code which we quote:

Sec. 50. Regular and special meetings of stockholders or members. - x x x

xxxx

Whenever, for any cause, there is no person authorized to call a meeting, the Securities and
Exchange Commission, upon petition of a stockholder or member, and on a showing of good cause
therefore, may issue an order to the petitioning stockholder or member directing him to call a meeting
of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning
stockholder or member shall preside thereat until at least majority of the stockholders or members
present have chosen one of their member[s] as presiding officer.

As early as Ponce v. Encarnacion, etc. and Gapol,37 the Court of First Instance (now the SEC)38 is
empowered to call a meeting upon petition of the stockholder or member and upon showing of good
cause, thus:
On the showing of good cause therefore, the court may authorize a stockholder to call a meeting and
to preside thereat until the majority stockholders representing a majority of the stock present and
permitted to be voted shall have chosen one among them to preside it. And this showing of good
cause therefor exists when the court is apprised of the fact that the by-laws of the corporation require
the calling of a general meeting of the stockholders to elect the board of directors but the call for such
meeting has not been done.39

The same jurisprudential rule resonates in Philippine National Construction Corporation v.

Pabion,40 where the Court validated the order of the SEC to compel the corporation to conduct a
stockholders' meeting in the exercise of its regulatory and administrative powers to implement the
Corporation Code:

SEC's assumption of jurisdiction over this case is proper, as the controversy involves the election of
PNCC's directors. Petitioner does not really contradict the nature of the question presented and
agrees that there is an intra-corporate question involved.

xxxx

Prescinding from the above premises, it necessarily follows that SEC can compel PNCC to hold a
stockholders' meeting for the purpose of electing members of the latter's board of directors.

xxxx

As respondents point out, the SEC's action is also justified by its regulatory and administrative powers
to implement the Corporation Code, specifically to compel the PNCC to hold a stockholders' meeting
for election purposes.41

Given the broad administrative and regulatory powers of the SEC outlined under Section 50 of the
Corporation Code and Section 6 of Presidential Decree (PD) No. 902-A, the Cinco Group cannot
claim that if was left without recourse after the Corporate Secretary previously refused to heed its
demand to call a special stockholders' meeting. If it be true that the Corporate Secretary refused to
call a meeting despite fervent demand from the MSCOC, the remedy of the stockholders would have
been to file a petition to the SEC to direct him to call a meeting by giving proper notice required under
the Code. To rule otherwise would open the floodgates to abuse where any stockholder, who consider
himself aggrieved by certain corporate actions, could call a special stockholders' meeting for the
purpose of removing the sitting officers in direct violation of the rules pertaining to the call of meeting
laid down in the by-laws.

Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate
the conduct and prescribe the rights and duties of its members towards itself and among themselves
in reference to the management of its affairs.42 The by-laws of a corporation are its own private laws
which substantially have the same effect as the laws of the corporation. They are in effect written into
the charter. In this sense they become part of the fundamental law of the corporation with which the
corporation and its directors and officers must comply.43 The general rule is that a corporation,
through its board of directors, should act in the manner and within the formalities, if any, prescribed in
its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant to
the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by the
objecting director or shareholder.44
Certainly, the rules set in the by-laws are mandatory for every member of the corporation to
respect.1âwphi1 They are the fundamental law of the corporation with which the corporation and its
officers and members must comply. It is on this score that we cannot upon the other hand sustain the
Bernas Group's stance that the subsequent annual stockholders' meetings were invalid.

First, the 20 April 1998 Annual Stockholders Meeting was valid because it was sanctioned by Section
845 of the MSC bylaws. Unlike in Special Stockholders Meeting46 wherein the bylaws mandated that
such meeting shall be called by specific persons only, no such specific requirement can be obtained
under Section 8.

Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because in addition to the
fact that it was conducted in accordance to Section 8 of the MSC bylaws, such meeting was
supervised by the SEC in the exercise of its regulatory and administrative powers to implement the
Corporation Code.47

Needless to say, the conduct of SEC supervised Annual Stockholders Meeting gave rise to the
presumption that the corporate officers who won the election were duly elected to their positions and
therefore can be rightfully considered as de jure officers. As de jure officials, they can lawfully
exercise functions and legally perform such acts that are within the scope of the business of the
corporation except ratification of actions that are deemed void from the beginning.

Considering that a new set of officers were already duly elected in 1998 and 1999 Annual
Stockholders Meetings, the Bernas Group cannot be permitted to use the holdover principle as a
shield to perpetuate in office. Members of the group had no right to continue as directors of the
corporation unless reelected by the stockholders in a meeting called for that purpose every
year.48 They had no right to hold-over brought about by the failure to perform the duty incumbent upon
them.49 If they were sure to be reelected, why did they fail, neglect, or refuse to call the meeting to
elect the members of the board?50

Moreover, it is fundamental rule that factual findings of quasi-judicial agencies like the SEC, if
supported by substantial evidence, are generally accorded not only great respect but even finality,
and are binding upon this Court unless it was shown that the quasi-judicial agencies had arbitrarily
disregarded evidence before it had misapprehended evidence to such an extent as to compel a
contrary conclusion if such evidence had been properly appreciated.51 It is not the function of this
Court to analyze or weigh all over again the evidence and credibility of witnesses presented before
the lower court, tribunal, or office, as we are not trier of facts.52 Our jurisdiction is limited to reviewing
and revising errors of law imputed to the lower court, the latter's finding of facts being conclusive and
not reviewable by this Court.53 However, when it can be shown that administrative bodies grossly
misappreciated evidence of such nature as to compel a contrary conclusion, the Court will not
hesitate to reverse its factual findings.54 In the case at bar, the incongruent findings of the SEC on the
one hand, and the Court of Appeals on the other, constrained the Court to review the records to
ascertain which body correctly appreciated the facts vis-a-vis the standing statutory and
jurisprudential principles.

After finding that the ruling of the appellate court was in accordance with the existing laws and
jurisprudence as exhaustively discussed above, we hereby quote with approval its disquisition: (1)
The supposed Special Stockholders' Meeting of 1 7 December 1997 was prematurely or invalidly
called by the [Cinco Group]. It therefore failed to produce any legal effects and did not effectively
remove [the Bernas Group] as directors of the Makati Sports Club, Inc.;
 (2) The expulsion of [Bernas] as well as the public auction of his shares is hereby declared void
and without legal effect;

(3) The ratification of the removal of [the Bernas Group] as directors, the expulsion of Bernas
and the sale of his share by the [Cinco Group] and by the stockholders held in their Regular
Stockholders' Meeting held in April of 1998, 1999 and 2000, is void and produces no effects as
they were not the proper party to cause the ratification;

(4) All other actions of the [Cinco Group] and stockholders taken during the Regular
Stockholders' Meetings held in April 1998, 1999 and 2000, including the election of the [Cinco
Group] as directors after the expiration of the term of office of [Bernas Group] as directors, are
hereby declared valid.55

In fine, we hold that 17 December 1997 Special Stockholders' Meeting is null and void and produces
no effect; the resolution expelling the Bernas Group from the corporation and authorizing the sale of
Bernas' shares at the public auction is likewise null and void. The subsequent Annual Stockholders'
Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000 are valid and binding except the
ratification of the removal of the Bernas Group and the sale of Bernas' shares at the public auction
effected by the body during the said meetings. The expulsion of the Bernas Group and the
subsequent auction of Bernas' shares are void from the very beginning and therefore the ratifications
effected during the subsequent meetings cannot be sustained. A void act cannot be the subject of
ratification.56

WHEREFORE, premises considered, the petitions of Jose A. Bernas, Cecile. H. Cheng, Victor Africa,
Jesus B. Maramara, Jose T. Frondoso, Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos. 163356-
57 and of Jovencio Cinco, Ricardo Librea and Alex Y. Pardo in G.R. Nos. 163368-69 are hereby
DEN~ED. The assailed Decision dated 28 April 2003 and Resolution dated 27 April 2004 of the Court
of Appeals are hereby AFFIRMED.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR:
 SECOND DIVISION

G.R. No. 228799, January 10, 2018

MACTAN ROCK INDUSTRIES, INC. AND ANTONIO TOMPAR, Petitioners, v. BENFREI S.

GERMO, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated August 8, 2016 and the
Resolution3 dated October 14, 2016 of the Court of Appeals (CA) in CA-G.R. CV No. 104431, which
affirmed the Decision4 dated January 14, 2015 of the Regional Trial Court of Muntinlupa City, Branch 276
(RTC) in Civil Case No. 11-029, finding petitioners Mactan Rock Industries, Inc. (MRII) and Antonio
Tompar (Tompar) solidarily liable to pay respondent Benfrei S. Germo (Germo) the amount of
P4,499,412.84 plus interest, damages, and attorney's fees.

The Facts

This case stemmed from a Complaint5 for sum of money and damages filed by Germo against MRII – a
domestic corporation engaged in supplying water, selling industrial maintenance chemicals, and water
treatment and chemical cleaning services6 – and its President/Chief Executive Officer (CEO), Tompar.
The complaint alleged that on September 21, 2004, MRII, through Tompar, entered into a Technical
Consultancy Agreement (TCA)7 with Germo, whereby the parties agreed, inter alia, that: (a) Germo shall
stand as MRII's marketing consultant who shall take charge of negotiating, perfecting sales, orders,
contracts, or services of MRII, but there shall be no employer-employee relationship between them;
and (b) Germo shall be paid on a purely commission basis, including a monthly allowance of P5,000.00.8

On May 2, 2006 and during the effectivity of the TCA, Germo successfully negotiated and closed with
International Container Terminal Services, Inc. (ICTSI) a supply contract of 700 cubic meters of purified
water per day. Accordingly, MRII commenced supplying water to ICTSI on February 22,  2007, and in tum,
the latter religiously paid MRII the corresponding monthly fees.9 Despite the foregoing, MRII allegedly
never paid Germo his rightful commissions amounting to P2,225,969.56 as of December 2009, inclusive
of interest.10 Initially, Germo filed a complaint before the National Labor Relations Commission (NLRC),
but the same was dismissed for lack of jurisdiction due to the absence of employer-employee relationship
between him and MRII. He then filed a civil case before the Regional Trial Court of Muntinlupa, Branch
256, but the same was dismissed without prejudice to its re-filing due to his counsel's failure to mark all
his documentary evidence at the pre-trial conference.11 Hence, Germo filed the instant complaint praying
that MRII and Tompar be made to pay him the amounts of P2,225,969.56 as unpaid commissions with
legal interest from the time they were due until fully paid, P1,000,000.00 as moral damages,
P1,000,000.00 as exemplary damages, and the costs of suit.12

In their Answer,13 MRII and Tompar averred, among others, that: (a) there was no employer-employee
relationship between MRII and Germo as the latter was hired as a mere consultant; (b) Germo failed to
prove that the ICTSI account materialized through his efforts as he did not submit the required periodic
reports of his negotiations with prospective clients; and (c) ICTSI became MRII's client through the efforts
of a certain Ed Fornes.14 Further, MRII and Tompar claimed that Germo should be made to pay them
litigation expenses and attorney's fees as they were compelled to litigate and engage the services of
counsel to protect their interest.15

Due to MRII, Tompar, and their counsel's multiple absences at the various schedules for pre-trial
conference, the RTC considered them as "in default," thereby allowing Germo to present his evidence ex-
parte.16

The RTC Ruling

In a Decision17 dated January 14, 2015, the RTC ruled in Germo's favor, and accordingly, ordered MRII
and Tompar to solidarily pay him the amounts of: (a) P4,499,412.84 representing Germo's unpaid
commissions from February 2007 until March 2012 with legal interest from judicial demand until fully
satisfied; (b) P100,000.00 as moral damages; (c) P100,000.00 as exemplary damages;
and (d) P50,000.00 as attorney's fees.18

The RTC found that MRII and Germo validly entered into a TCA whereby the latter shall act as the
former's marketing consultant, to be paid on a commission basis.19 It also found that MRII's contract with
ICTSI was made possible through Germo's negotiation and marketing skills, and as such, the latter should
be paid the commissions due to him. In this regard, Germo presented various sales invoices spanning the
period of February 2007 to March 2012, wherein he should have been paid commissions in the amount of
P4,499,412.84.20 Further, based on the evidence presented and in order to deter those who intend to
negate the fulfillment of an obligation to the prejudice of another, the RTC found it appropriate to award
Germo moral damages, exemplary damages, and attorney's fees in the foregoing amounts.21 Finally, the
RTC imposed a lien equivalent to the appropriate legal fees on the monetary awards in Germo's favor,
noting that the latter litigated the instant suit as an indigent.22

Aggrieved, MRII and Tompar appealed23 to the CA, this time claiming, among others, that: (a) the
jurisdiction over the case lies before the NLRC as the same is a monetary dispute arising from an
employer-employee relationship; and (b) Germo had no legal personality to pursue the instant case since
he only signed the TCA as a representative of another entity.24

The CA Ruling

In a Decision25 dated August 8, 2016, the CA affirmed the RTC ruling.26 It held that Germo had sufficiently
proven through the required quantum of evidence that: (a) he and MRII, through Tompar, entered into a
TCA and thus, the provisions thereof are binding between them; (b) MRII's contract with ICTSI was
realized through Germo's efforts; and (c) MRII failed to pay Germo the commissions due to him pursuant
to the TCA and the ICTSI contract.27

Anent MRII and Tompar's additional arguments, the CA held that the same constitutes a new case theory,
which cannot be introduced for the first time on appeal. The CA further pointed out that such new theory is
directly contradictory to the judicial admissions they made in their Answer,28 which are already binding on
them.29

Undaunted, MRII and Tompar moved for reconsideration,30 but the same was denied in a
Resolution31 dated October 14, 2016; hence, this petition.32
 The Issue Before the Court

The issue for the Court's resolution is whether or not the CA correctly upheld MRII and Tompar's solidary
liability to Germo.

The Court's Ruling

The petition is partly meritorious.

In the instant petition, MRII and Tompar insist, among others that: (a) the regular courts have no
jurisdiction over the case as the present dispute involves an employment dispute cognizable by the NLRC;
and (b) Germo had no legal personality to pursue the case as he signed the TCA not in his personal
capacity, but as a representative of another entity.33

Such insistence is untenable.

As aptly pointed out by the CA, the foregoing constitutes a new theory raised for the first time on appeal,
considering that in their Answer34 before the RTC, MRII and Tompar admitted, inter alia, the: (a) lack of
employer-employee relationship between MRII and Germo as the latter was hired as a mere consultant;
and (b) genuineness, authenticity, and due execution of the TCA, among other documents proving
Germo's claims.35 "As a rule, a party who deliberately adopts a certain theory upon which the  case is tried
and decided by the lower court, will not be permitted to change theory on appeal. Points of law, theories,
issues and arguments not brought to the attention of the lower court need not be, and ordinarily will not
be, considered by a reviewing court, as these cannot be raised for the first time at such late stage. It
would be unfair to the adverse party who would have no opportunity to present further evidence material
to the new theory, which it could have done had it been aware of it at the time of the hearing before the
trial court."36 While this rule admits of an exception,37 such is not applicable in this case.

More importantly, MRII and Tompar's statements in their Answer constitute judicial admissions,38 which
are legally binding on them.39 Case law instructs that even if such judicial admissions place a party at a
disadvantageous position, he may not be allowed to rescind them unilaterally and that he must assume
the consequences of such disadvantage,40 as in this case.

As to the merits of the case, the courts a quo correctly found that: (a) Germo entered into a valid and
binding TCA with MRII where he was engaged as a marketing consultant; (b) aside from the P5,000.00
monthly allowance, Germo was going to be paid on a purely commission basis; (c) during the effectivity of
the TCA and in the performance of his duties as marketing consultant of MRII, Germo successfully
brokered MRII's contract of services with ICTSI, obviously resulting in revenues in MRII's favor; (d) despite
the foregoing and demands from Germo, MRII refused to pay Germo's rightful commission fees;
and (e) MRII's refusal to pay Germo resulted – or at the very least, contributed to – Germo's financial
hardships. In light of the foregoing, the courts a quo correctly found MRII liable to Germo for the various
monetary obligations as stated in their respective rulings. Time and again, it has been consistently held
that the factual findings of the trial court, especially when affirmed by the CA, deserve great weight and
respect and will not be disturbed on appeal unless it appears that there are facts of weight and substance
that were overlooked or misinterpreted and that would materially affect the disposition of the case;41 none
of which are present insofar as this matter is concerned.

Be that as it may, the Court finds that the courts a quo erred in concluding that Tompar, in his capacity as
then-President/CEO of MRII, should be held solidarily liable with MRII for the latter's obligations to Germo.
It is a basic rule that a corporation is a juridical entity which is vested with legal and personality separate
and distinct from those acting for and in behalf of, and from the people comprising it. As a general rule,
directors, officers, or employees of a corporation cannot be held personally liable for the obligations
incurred by the corporation, unless it can be shown that such director/officer/employee is guilty of
negligence or bad faith, and that the same was clearly and convincingly proven. Thus, before a director or
officer of a corporation can be held personally liable for corporate obligations, the following requisites must
concur: (1) the complainant must allege in the complaint that the director or officer assented to patently
unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.42 In this
case, Tompar's assent to patently unlawful acts of the MRII or that his acts were tainted by gross
negligence or bad faith was not alleged in Germo's complaint, much less proven in the course of trial.
Therefore, the deletion of Tompar's solidary liability with MRII is in order.

Further, the Court deems it proper to adjust the interests imposed on the monetary awards in Germo's
favor. To recapitulate, he was awarded the amounts of P4,499,412.84 representing his unpaid
commissions from February 2007 to March 2012, P100,000.00 as moral damages, P100,000.00 as
exemplary damages, and P50,000.00 as attorney's fees. Pursuant to prevailing jurisprudence, his unpaid
commissions shall earn legal interest at the rate of twelve percent (12%) per annum from judicial
demand, i.e., the filing of the complaint on February 28, 2011 until June 30, 2013, and thereafter, at the
rate of six percent (6%) per annum from July 1, 2013 until the finality of this Decision. Thereafter, all
monetary awards due to him shall then earn legal interest at the rate of six percent (6%) per annum from
the finality of this ruling until fully paid.43

Finally, since Germo litigated the instant suit as an indigent party as defined in Section 21, Rule 344 of the
Rules of Court, it is only proper that the appropriate filing fees be considered as a lien on the monetary
awards due to him, pursuant to the second paragraph of Section 19, Rule 14145 of the same Rules.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated August 8, 2016 and the
Resolution dated October 14, 2016 of the Court of Appeals in CA-G.R. CV No. 104431 are
hereby AFFIRMED with MODIFICATION, DELETING petitioner Antonio Tompar's solidary liability with
petitioner Mactan Rock Industries, Inc. (MRII). Accordingly, MRII is solely liable to respondent Benfrei S.
Germo (Germo) for the following amounts: (a) P4,499,412.84 representing his unpaid commissions from
February 2007 to March 2012 with legal interest at the rate of twelve percent (12%) per annum from
judicial demand, i.e., the filing of the complaint on February 28, 2011 until June 30, 2013, and thereafter,
at the rate of six percent (6%) per annum from July 1, 2013 until the finality of this
Decision; (b) P100,000.00 as moral damages; (c) P100,000.00 as exemplary damages;
and (d) P50,000.00 as attorney's fees. The total monetary awards shall then earn legal interest at the rate
of six percent (6%) per annum from the finality of this ruling until fully paid.

Finally, let the appropriate filing fees be considered as a lien on the monetary awards due to Germo, who
litigated the instant case as an indigent party, in accordance with Section 19, Rule 141 of the Rules of
Court.

SO ORDERED.

Carpio, (Chairperson), Peralta, and Caguioa, JJ., concur.

Reyes, Jr., J., on leave.
 G.R. No. 211535, July 22, 2015

BANK OF COMMERCE, Petitioner, v. MARILYN P. NITE, Respondent.

DECISION

CARPIO, ACTING C.J.:

The Case

Before the Court is a petition for review on certiorari assailing the 22 November 2013
Decision1 and 28 February 2014 Resolution2 of the Court of Appeals in CA-G.R. CV No.
81500. The Court of Appeals affirmed in toto the Order dated 4 April 20033 and the Omnibus
Order dated 5 January 20044 of the Regional Trial Court of Makati, Branch 150 (trial court)
in Criminal Case Nos. 94-5267 and 94-5268.

The Antecedent Facts

Respondent Marilyn Nite (Nite) was charged, together with Nunelon Bradley (Bradley) and
Victoria Magalona-Escalambre (Escalambre), with violation of Section 19 of Batas Pambansa
Bilang 1785 (BP Blg. 178) in an Information that reads:chanRoblesvirtualLawlibrary
That on or about April 25, 1994, in the Municipality of Makati, Metro Manila, and within the
jurisdiction of this Honorable Court, the above-named accused, doing business under the
name and style of Bancapital Development Corporation (Bancap) did then and there, willfully
and feloniously engage in the business of selling securities, particularly treasury bills (T-bills)
with Bank of Commerce (Bancom) in the amount of Php250 Million without having been
registered as a broker, dealer or salesman with the Securities and Exchange Commission, in
violation of said law.

CONTRARY TO LAW.6
The case was docketed as Criminal Case No. 94-5267.

Nite was also charged, together with Bradley, Escalambre, and Eugene Yang (Yang), with
Estafa in an Information that reads:chanRoblesvirtualLawlibrary
That on or about April 25, 1994, in Makati, Metro Manila, and within the jurisdiction of this
Honorable Court, the above-named accused, confederating together and mutually helping
each other, by means of deceit, with unfaithfulness or abuse of confidence on the part of
accused Eugene Yang and taking advantage of his position as senior manager of the Bank of
Commerce (Bancom), did then and there willfully, unlawfully and feloniously defraud
Bancom as follows: That Bancapital Development Corporation (Bancap) thru accused Nite,
Bradley and Escalambre by means of fraudulent misrepresentations; offered and confirmed
for sale Php250 Million worth of Treasury bills at a discounted price of Php243,215,972.52 to
Bancom which was actually purchased and fully paid by Bancom, when in truth and in fact
Bancap which was not authorized to trade security did not actually have such Treasury bills
worth Php250 Million as only Php88 Million worth of Treasury bills was delivered to Bancom
upon receipt by Bancap of the full payment thereof; that accused Eugene Yang, senior
manager of Bancom, willfully, unlawfully and feloniously caused the preparation, issuance
and signing of the manager's check in payment of the treasury bills in question on the basis
of the trading order he himself approved and Bancap's confirmation of sale signed by
accused Nite and Escalambre, and, once in possession of the full payment thereof, the
above-named accused misappropriated, misapplied and converted the same to their own
personal use and benefit and despite repeated demands failed to deliver the remaining
Treasury bills worth Phpl62 Million, to the damage and prejudice of Bancom, its creditors
and stockholders, in the amount of Phpl62 Million Pesos.

CONTRARY TO LAW.7

The case was docketed as Criminal Case No. 94-5268. The two cases were tried jointly.

Since Bradley was still at large during the trial, and the proceedings against Escalambre and
Yang were suspended pending their petition for certiorari and mandamus before the Court of
Appeals in connection with the denial of their demurrer to evidence, a separate trial was
conducted against Nite after she was arrested in the United States of America for
overstaying and brought back to the Philippines.

In Criminal Case No. 94-5267, the thrust of the prosecution's argument was that Nite, as
President of Bancapital Development Corporation (Bancap), violated Section 19 of BP Blg.
178 when Bancap sold P250 million worth of treasury bills to Bank of Commerce (Bancom)
without being registered as broker, dealer, or salesman of securities. In Criminal Case No.
94-5268, the prosecution alleged that Nite defrauded Bancom by falsely pretending to
possess and own P250 million worth of treasury bills that Bancap supposedly sold to Bancom
when none of the treasury bills described in the Confirmation of Sale and Letter of
Undertaking issued by Bancap were ever delivered to Bancom. The prosecution alleged that
Bancom paid Bancap the amount of P243,215,972.52 as payment for the treasury bills but
Bancap only delivered substitute bills in the amount of P88 million.

The Ruling of the Trial Court

In a Decision dated 6 December 2002,8 the trial court ruled as

follows:chanRoblesvirtualLawlibrary
WHEREFORE, the foregoing considered, accused MARILYN NITE is hereby ACQUITTED of the
charge of violating Sec. 19 of Batas Pambansa Bilang 178 under Criminal Case No. 94-5267
and likewise acquitted of the charge of Estafa under Criminal Case No. 94-5268.

She, however, is hereby ordered to pay BANK OF COMMERCE the amount of Phpl62 million,
representing the civil obligation of BANCAPITAL.

Let, therefore, the cash bond of accused Nite be released to her by the Office of the Clerk of
Court, RTC, Makati City, upon surrender of the original official receipt.

SO ORDERED.9
The trial court ruled that in Criminal Case No. 94-5267, the prosecution was not able to
establish that Bancap acted as a primary dealer that needed to be accredited. According to
the trial court, Bancap acted as a secondary dealer and did not buy the treasury bills directly
from the Central Bank. In Criminal Case No. 94-5268, the trial court ruled that the element
of deceit was non-existent and that at the time of the transaction, Bancom was aware that
Bancap was not in physical possession of the treasury bills subject of the sale.

However, the trial court ruled that Nite, being a responsible officer of Bancap, was civilly
liable to Bancom in the amount of P162 million which represented the treasury bills that
Bancap undertook to deliver to Bancom since only P88 million worth of substitute treasury
bills had been delivered to and accepted by Bancom.

Nite filed a partial motion for reconsideration.

In the assailed 4 April 2003 Order, the trial court granted the partial motion for
reconsideration. In resolving the motion, the trial court ruled that Bancap's charter allowed
it to engage in the buying and selling of government securities as part of its secondary
purpose. The trial court added that even if the buying and selling of securities were outside
the scope of Bancap's primary purpose, the acts could only be considered as ultra vires and
not illegal. The trial court could not disregard the rule on separate corporate identity absent
any evidence that Bancap was used as a tool to commit fraud, injustice, or crime against
Bancom. The dispositive portion of the Order reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the Motion for Partial Reconsideration is hereby
GRANTED. The DECISION dated December 6, 2002 insofar as the civil aspect of the case is
concerned, rinding accused Nite civilly liable to BANCOM in the amount of Phpl62 million,
representing the treasury bills BANCAP failed to deliver to BANCOM is hereby set aside.
Accordingly, the dispositive portion of the said decision shall now read as
follows:chanRoblesvirtualLawlibrary
"WHEREFORE, the foregoing considered, accused MARILYN NITE is hereby acquitted of the
charge of violating Sec. 19 of Batas Pambansa Bilang 178 under Criminal Case No. 94-5267
and likewise acquitted of the charge of Estafa under Criminal Case No. 94-5268.

Let, therefore, the cash bond of accused Nite be released to her by the Office of the Clerk of
Court, RTC, Makati City, upon surrender of the original official receipt.

SO ORDERED."
SO ORDERED.10

It was the prosecution's turn to file a motion for reconsideration, alleging that the trial court
erred in absolving Nite of her civil liability to Bancom. The prosecution alleged that the trial
court erred in not piercing the corporate veil of Bancap when it was adequately shown that
Nite used the company to perpetuate fraud and to evade an existing obligation.

In its Omnibus Order dated 5 January 2004, the trial court denied the motion for lack of
merit.

Bancom sought relief from the Court of Appeals in CA-G.R. CV No. 81500.

The Ruling of the Court of Appeals

In its 22 November 2013 Decision, the Court of Appeals affirmed the trial court's Order
dated 4 April 2003 and Omnibus Order dated 5 January 2004.
The Court of Appeals ruled that Bancom wanted to impose the civil liability of Bancap on Nite
when the claim for the contractual obligation should have been against Bancap itself. The
Court of Appeals agreed with the trial court that Bancap was only a secondary dealer and as
such, there was no need for it to secure the license required for primary dealers under BP
Blg. 178. The Court of Appeals further ruled that the transaction between Bancom and
Bancap was not patently unlawful. The Court of Appeals ruled that Bancom was aware of the
risks it was taking when it entered into a contract with Bancap and agreed for the delivery of
the treasury bills at a future particular time.

The Court of Appeals ruled that it could not automatically make Bancap's contractual
obligation as the contractual obligation of Nite. Further, the doctrine of piercing the veil of
corporate fiction imposed the burden of the corporation's obligations on its erring officers
and shareholders. In this case, none of Bancap's other officers, and not even the corporation
itself, were impleaded, and thus, the Court of Appeals could not make a complete
determination of the corporation's liability. According to the Court of Appeals, the remedy of
Bancom was to file a civil action impleading all the parties to the contract.

The dispositive portion of the Decision reads:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the assailed Order of the Regional Trial Court of Makati
City, Branch 150 dated 4 April 2003, and its subsequent Omnibus Order dated 5 January
2004 are hereby AFFIRMED IN TOTO.

SO ORDERED.11

Bancom filed a motion for reconsideration. In its Resolution promulgated on 28 February

2014, the Court of Appeals denied the motion for lack of merit.

Hence, Bancom filed a petition for review before this Court.

The Issues

Bancom raises the following issues before this Court:chanRoblesvirtualLawlibrary

I. The Court of Appeals gravely erred in ruling that the civil liability was only attributable to
Bancap and not to respondent Nite despite the latter's active participation in the commission
of patently unlawful acts against petitioner Bancom.

II. The Court of Appeals erred in not piercing the corporate veil of Bancap even though the
same was being used to perpetuate fraud.chanroblesvirtuallawlibrary
The Ruling of this Court

We deny the petition.

Nite was acquitted by the trial court of violation of Section 19 of BP Blg. 178 and estafa.
Hence, the only issue here is Nite's civil liability after her acquittal.

Bancom asserts that the Court of Appeals erred in ruling that the civil liability it is claiming
pertains to Bancap's and not to Nite's. Bancom cites Section 31 of the Corporation Code
which provides:chanRoblesvirtualLawlibrary
Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation,
its stockholders or members and other persons.

xxxx
Bancom insists that while the question raised is one of fact, the factual findings of the lower
court, sustained by the Court of Appeals, are based on a misapprehension of facts. Bancom
alleges that since Nite actively participated in the commission of a patently unlawful act, she
is personally liable to Bancom for the amount of treasury bills undelivered by Bancap.

We do not agree.

The general rule is that a corporation is invested by law with a personality separate and
distinct from that of the persons composing it, or from any other legal entity that it may be
related to.12 The obligations of a corporation, acting through its directors, officers, and
employees, are its own sole liabilities.13 Therefore, the corporation's directors, officers, or
employees are generally not personally liable for the obligations of the
corporation.14chanrobleslaw

Bancom alleges that this case falls under the exception to the general rule and that Nite
should be held personally liable for Bancap's obligation. Bancom alleges that Nite signed the
Confirmation of Sale knowing that Bancap did not have the treasury bills, and thus, the sale
was illegal.

Bancom's arguments have no merit.

To hold a director or officer personally liable for corporate obligations, two requisites must
concur: (1) complainant must allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or
bad faith; and (2) complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.15 To hold a director personally liable for debts of the corporation,
and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the director must
be established clearly and convincingly.16chanrobleslaw

It is settled that the transaction between Bancom and Bancap is an ordinary sale. We give
weight to the finding of both the trial court and the Court of Appeals that Bancap's liability
arose from its contractual obligation to Bancom. The trial court and the Court of Appeals
found that Bancom and Bancap had been dealing with each other as seller and buyer of
treasury bills from December 1991 until the transaction subject of this case on 25 April
1994, which was no different from their previous transactions. Nite, as Bancap's President,
cannot be held personally liable for Bancap's obligation unless it can be shown that she
acted fraudulently. However, the issue of fraud had been resolved with finality when the trial
court acquitted Nite of estafa on the ground that the element of deceit is non-existent in the
case. The acquittal had long become final and the finding is conclusive on this Court. The
prosecution failed to show that Nite acted in bad faith. It is no longer open for review. Nite's
act of signing the Confirmation of Sale, by itself, does not make the corporate liability her
personal liability.

In addition, we consider the testimony of Lagrimas Nuqui, the Legal Officer in Charge of the
Government Securities Department of the Bangko Sentral ng Pilipinas from 1994 to 1998,
who explained that primary issues of treasury bills are supposed to be issued only to
accredited dealers but these accredited banks can sell to anyone who need not be
accredited, and such buyers, who may be corporations or individuals, are classified as the
secondary market. The trial court and the Court of Appeals found that Bancap sold the
treasury bills as a secondary dealer.17 As such, Bancap's act of selling securities to Bancom
is at most ultra vires and not patently unlawful.

Based on the foregoing, we cannot hold Nite personally liable for Bancap's corporate liability.

WHEREFORE, we DENY the petition.

SO ORDERED.cralawlawlibrary

Brion, Del Castillo, Mendoza, and Leonen, JJ., concur.