Corporation Digested Cases 19 34

CASE #19 [ G.R. No. 157479, November 24, 2010 ]PHILIP TURNER AND ELNORA TURNER, PETITIONERS, VS. LORENZO SHIPPING CORPORATION, RESPONDENT.

FACTSThe petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged

primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of incorporation to remove the stockholders' pre-emptive rights to newly issued shares of stock. Feeling that the corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the amendment and demanded payment of their shares at the rate of P2.276/share based on the book value of the shares, or a total of P2,298,760.00.

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted that the market value on the date before the action to remove the pre-emptive right was taken should be the value, or P0.41/share (or a total of P414,100.00), considering that its shares were listed in the Philippine Stock Exchange, and that the payment could be made only if the respondent had unrestricted retained earnings in its books to cover the value of the shares, which was not the case.

The disagreement on the valuation of the shares led the parties to constitute an appraisal committee pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who together then nominated the third member who would be chairman of the appraisal committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco, the petitioners' nominee; Atty. Antonio Acyatan, the respondent's nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third member/chairman.

On October 27, 2000, the appraisal committee reported its valuation of P2.54/share, for an aggregate value of P2,565,400.00 for the petitioners.

Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee, plus 2%/month penalty from the date of their original demand for payment, as well as the reimbursement of the amounts advanced as professional fees to the appraisers.

In its letter to the petitioners dated January 2, 2001, the respondent refused the petitioners' demand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value of the shares, but that it had no retained earnings at the time of the petitioners' demand, as borne out by its Financial Statements for Fiscal Year 1999 showing a deficit of P72,973,114.00 as of December 31, 1999.

Upon the respondent's refusal to pay, the petitioners sued the respondent for collection and damages in the RTC in Makati City on January 22, 2001.

In the stockholders' suit to recover the value of their shareholdings from the corporation, the Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation, herein respondent, to pay. Execution was partially carried out against the respondent. On the respondent's petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners' suit on the ground that their cause of action for collection had not yet accrued due to the lack of unrestricted retained earnings in the books of the respondent.

ISSUE: Whether or not the Corporation shall made the payment to any dissenting stockholder even it has no unrestricted retained earning in its books to cover such paymentWhether the Trust Fund Doctrine protects the capital stock, property and assets of a Corporation

SUPREME COURT RULINGA corporation can purchase its own shares, provided payment is made out of surplus profits and the

acquisition is for a legitimate corporate purpose. In the Philippines, this new rule is embodied in Section 41 of the Corporation Code, to wit:

Digested Corporation Cases by Roli S. Arangote

Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:1. To eliminate fractional shares arising out of stock dividends;2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets. The creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void.


CASE #20 [ G.R. NO. 164588, October 19, 2005 ]NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME HOLDINGS, INC. AND FERNANDO R. ARGUELLES, JR., PETITIONERS, VS. ROBERTO C. YUMUL, RESPONDENT.

FACTSNautica Canning Corporation (Nautica) was organized and incorporated on May 11, 1994 with an

authorized capital stock of P40,000,000 divided into 400,000 shares with a par value of P100.00 per share. It had a subscribed capital stock of P10,000,000 with paid-in subscriptions from its incorporators, namely, Alvin Y. Dee,Jonathan Y. Dee, Joanna D. Laurel, Darlene Edsa Marie Gonzales, Jennifer Y. Dee, Roberto C. Yumul, Jerry Angping.

On December 19, 1994, respondent Roberto C. Yumul was appointed Chief Operating Officer/General Manager of Nautica with a monthly compensation of P85,000 and an additional compensation equal to 5% of the company's operating profit for the calendar year. On the same date, First Dominion Prime Holdings, Inc., Nautica's parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up to 15% of the total stocks it subscribed from Nautica.

In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul representing his 15% share.

After Yumul's resignation from Nautica on August 5, 1996, he wrote a letter to Dee requesting the latter to formalize his offer to buy Yumul's 15% share in Nautica on or before August 20, 1996; and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee, through Atty. Fernando R. Arguelles, Jr., Nautica's corporate secretary, denied the request claiming that Yumul was not a stockholder of Nautica.

On September 6, 1996 and September 9, 1996, Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records.

Yumul's requests were denied allegedly because he neither exercised the option to purchase the shares nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend received by Yumul is held by him only in trust for First Dominion Prime Holdings, Inc.

Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus with damages, with prayer that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the certificate of stocks corresponding thereto be issued in his name.

On October 12, 2000, the SEC En Banc rendered the Decision declaring petitioner as a stockholder of respondent Nautica.

On appeal, the Court of Appeals affirmed the decision of the SEC En Banc. Petitioners' motion for reconsideration was denied in a Resolution dated July 16, 2004.

ISSUE: Whether or not Yumul, a former Board Director and President, a stockholder of Nautica

SUPREME COURT RULINGNautica's Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the

SEC indicated that Yumul was an incorporator and subscriber of one share.Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the Philippines requires that every

director must own at least one share of the capital stock of the corporation of which he is a director. Before one may be elected president of the corporation, he must be a director. Since Yumul was elected as Nautica's Director and as President thereof, it follows that he must have owned at least one share of the corporation's capital stock.

Thus, from the point of view of the corporation, Yumul was the owner of one share of stock. As such, the SEC correctly ruled that he has the right to inspect the books and records of Nautica, pursuant to Section 74 of BP Blg. 68 which states that the records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.


CASE #21 [ G.R. No. 122174, October 03, 2002 ]INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, PETITIONER, VS. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION AND REFRACTORIES CORPORATION OF THE PHILIPPINES, RESPONDENTS.

FACTSRespondent Refractories Corporation of the Philippines (RCP) is a corporation duly organized on October

13, 1976 for the purpose of engaging in the business of manufacturing, producing, selling, exporting and otherwise dealing in any and all refractory bricks, its by-products and derivatives. On June 22, 1977, it registered its corporate and business name with the Bureau of Domestic Trade.

Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally under the name “Synclaire Manufacturing Corporation”. It amended its Articles of Incorporation on August 23, 1985 to change its corporate name to “Industrial Refractories Corp. of the Philippines”. It is engaged in the business of manufacturing all kinds of ceramics and other products, except paints and zincs.

Both companies are the only local suppliers of monolithic gunning mix.Discovering that petitioner was using such corporate name, respondent RCP filed on April 14, 1988 with

the Securities and Exchange Commission (SEC) a petition to compel petitioner to change its corporate name on the ground that its corporate name is confusingly similar with that of petitioner’s such that the public may be confused or deceived into believing that they are one and the same corporation.

The SEC decided in favor of respondent RCP and rendered judgment on July 23, 1993. The SEC rendered in favor of the petitioner and against the respondent declaring the latter’s corporate name ‘Industrial Refractories Corporation of the Philippines’ as deceptively and confusingly similar to that of petitioner’s corporate name ‘Refractories Corporation of the Philippines’. Accordingly, respondent is hereby directed to amend its Articles of Incorporation by deleting the name ‘Refractories Corporation of the Philippines’ in its corporate name within thirty (30) days from finality of the Decision.

Petitioner appealed to the SEC En Banc, arguing that it does not have any jurisdiction over the case, and that respondent RCP has no right to the exclusive use of its corporate name as it is composed of generic or common words. In its Decision dated July 23, 1993, the SEC En Banc modified the appealed decision in that petitioner was ordered to delete or drop from its corporate name only the word “Refractories”.

Petitioner IRCP elevated the decision of the SEC En Banc through a petition for review on certiorari to the Court of Appeals which then upheld the jurisdiction of the SEC over the case.

ISSUE: Whether or not the SEC has the jurisdiction over the said case

SUPREME COURT RULINGBy express mandate, SEC has absolute jurisdiction, supervision and control over all corporations. It also

exercises regulatory and administrative powers to implement and enforce the Corporation Code, one of which is Section 18, which provides: “SEC. 18. Corporate name. -- No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.”

It is the SEC’s duty to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public and it has authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to generate confusion. Clearly therefore, the present case falls within the ambit of the SEC’s regulatory powers.


CASE #22 [ G.R. No. 156819, December 11, 2003 ]ALICIA E. GALA, GUIA G. DOMINGO AND RITA G. BENSON, PETITIONERS, VS. ELLICE AGRO-INDUSTRIAL CORPORATION, MARGO MANAGEMENT AND DEVELOPMENT CORPORATION, RAUL E. GALA, VITALIANO N. AGUIRRE II, ADNAN V. ALONTO, ELIAS N. CRESENCIO, MOISES S. MANIEGO, RODOLFO B. REYNO, RENATO S. GONZALES, VICENTE C. NOLAN, NESTOR N. BATICULON, RESPONDENTS.

FACTSOn March 28, 1979, the spouses Manuel and Alicia Gala, their children Guia Domingo, Ofelia Gala, Raul

Gala, and Rita Benson, and their encargados Virgilio Galeon and Julian Jader formed and organized the Ellice Agro-Industrial Corporation. The total subscribed capital stock of the corporation was 3,500,000 with 35,000 shares.

As payment for their subscriptions, the Gala spouses transferred several parcels of land located in the provinces of Quezon and Laguna to Ellice.

In 1982, Manuel Gala, Alicia Gala and Ofelia Gala subscribed to an additional 3,299 shares, 10,652.5 shares and 286.5 shares, respectively.

On June 28, 1982, Manuel Gala and Alicia Gala acquired an additional 550 shares and 281 shares, respectively.

Subsequently, on September 16, 1982, Guia Domingo, Ofelia Gala, Raul Gala, Virgilio Galeon and Julian Jader incorporated the Margo Management and Development Corporation (Margo). The total subscribed capital stock of Margo was P 200,000.00 with 20,000 shares.

On November 10, 1982, Manuel Gala sold 13,314 of his shares in Ellice to Margo. Alicia Gala transferred 1,000 of her shares in Ellice to a certain Victor de Villa on March 2, 1983. That

same day, de Villa transferred said shares to Margo. A few months later, on August 28, 1983, Alicia Gala transferred 854.3 of her shares to Ofelia Gala, 500 to Guia Domingo and 500 to Raul Gala.

Years later, on February 8, 1988, Manuel Gala transferred all of his remaining holdings in Ellice, amounting to 2,164 shares, to Raul Gala.

On July 20, 1988, Alicia Gala transferred 10,000 of her shares to Margo.On June 23, 1990, a special stockholders' meeting of Margo was held, where a new board of directors

was elected. That same day, the newly-elected board elected a new set of officers. Raul Gala was elected as chairman, president and general manager. During the meeting, the board approved several actions, including the commencement of proceedings to annul certain dispositions of Margo's property made by Alicia Gala. The board also resolved to change the name of the corporation to MRG Management and Development Corporation.

Similarly, a special stockholders' meeting of Ellice was held on August 24, 1990 to elect a new board of directors. In the ensuing organizational meeting later that day, a new set of corporate officers was elected. Likewise, Raul Gala was elected as chairman, president and general manager.

On March 27, 1990, respondents filed against petitioners with the Securities and Exchange Commission (SEC) a petition for the appointment of a management committee or receiver, accounting and restitution by the directors and officers, and the dissolution of Ellice Agro-Industrial Corporation for alleged mismanagement, diversion of funds, financial losses and the dissipation of assets, docketed as SEC Case No. 3747. The petition was amended to delete the prayer for the appointment of a management committee or receiver and for the dissolution of Ellice. Additionally, respondents prayed that they be allowed to inspect the corporate books and documents of Ellice.

In turn, petitioners initiated a complaint against the respondents on June 26, 1991, docketed as SEC Case No. 4027, praying for, among others, the nullification of the elections of directors and officers of both Margo Management and Development Corporation and Ellice Industrial Corporation; the nullification of all board resolutions issued by Margo from June 23, 1990 up to the present and all board resolutions issued by


Ellice from August 24, 1990 up to the present; and the return of all titles to real property in the name of Margo and Ellice, as well as all corporate papers and records of both Margo and Ellice which are in the possession and control of the respondents.

The two cases were consolidated in an Order dated November 23, 1993. On November 3, 1998, the SEC rendered a Joint Decision dismissing the petition of the respondents and rendering in favor of the petition of the petitioners.

Respondents appealed to the SEC En Banc, which, on July 4, 2002, rendered its Decision and it reversed the decision of SEC.

Petitioners filed a petition for review with the Court of Appeals which dismissed the petition for review and affirmed the decision of the SEC En Banc.

They raised their petition to the Supreme Court. The petitioners' first contention is that the purposes for which Ellice and Margo were organized should be declared as illegal and contrary to public policy. They claim that the respondents never pursued exemption from land reform coverage in good faith and instead merely used the corporations as tools to circumvent land reform laws and to avoid estate taxes. Furthermore, they alleged that respondent corporations were run without any of the conventional corporate formalities.

ISSUE: Whether or not Ellice and Margo corporations illegal and contrary to public policy

SUPREME COURT RULINGThe best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of

incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.

In the case at bar, a perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the allegedly illegal purposes that petitioners are complaining of. It is well to note that, if a corporation's purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation.


CASE #23 [ G.R. NO. 161026, October 24, 2005 ]HYATT ELEVATORS AND ESCALATORS CORPORATION, PETITIONER, VS. GOLDSTAR ELEVATORS, PHILS., INC.,* RESPONDENT.

FACTSPetitioner [herein Respondent] Goldstar Elevator Philippines, Inc. (GOLDSTAR) is a domestic corporation

primarily engaged in the business of marketing, distributing, selling, importing, installing, and maintaining elevators and escalators, with address at 6th Floor, Jacinta II Building, 64 EDSA, Guadalupe, Makati City.

On the other hand, private respondent [herein petitioner] Hyatt Elevators and Escalators Company (HYATT ) is a domestic corporation similarly engaged in the business of selling, installing and maintaining/servicing elevators, escalators and parking equipment, with address at the 6th Floor, Dao I Condominium, Salcedo St., Legaspi Village, Makati, as stated in its Articles of Incorporation.

On February 23, 1999, HYATT filed a Complaint for unfair trade practices and damages under Articles 19, 20 and 21 of the Civil Code of the Philippines against LG Industrial Systems Co. Ltd. (LGISC) and LG International Corporation (LGIC). HYATT suffered P120,000,000.00 as actual damages, representing loss of earnings and business opportunities, P20,000,000.00 as damages for its reputation and goodwill, P1,000,000.00 as and by way of exemplary damages, and P500,000.00 as and by way of attorney's fees.

Decisions of Trial CourtOn March 17, 1999, LGISC and LGIC filed a Motion to Dismiss raising the following grounds: (1) lack of

jurisdiction over the persons of defendants, summons not having been served on its resident agent; (2) improper venue; and (3) failure to state a cause of action. The trial court denied the said motion in an Order dated January 7, 2000.

On March 6, 2000, LGISC and LGIC filed an Answer with Compulsory Counterclaim ex abundante cautela. Thereafter, they filed a "Motion for Reconsideration and to Expunge Complaint' which was denied.

On December 4, 2000, HYATT filed a motion for leave of court to amend the complaint, alleging that subsequent to the filing of the complaint, it learned that LGISC transferred all its organization, assets and goodwill, as a consequence of a joint venture agreement with Otis Elevator Company of the USA, to LG Otis Elevator Company (LG OTIS). Thus, LGISC was to be substituted or changed to LG OTIS, its successor-in-interest. Likewise, the motion averred that GOLDSTAR was being utilized by LG OTIS and LGIC in perpetrating their unlawful and unjustified acts against HYATT. Consequently, in order to afford complete relief, GOLDSTAR was to be additionally impleaded as a party-defendant. Hence, in the Amended Complaint, HYATT impleaded GOLDSTAR as a party-defendant, and all references to LGISC were correspondingly replaced with LG OTIS.

On December 18, 2000, LG OTIS (LGISC) and LGIC filed their opposition to HYATT's motion to amend the complaint. They argued that the inclusion of GOLDSTAR as party-defendant would lead to a change in the theory of the case since the latter took no part in the negotiations which led to the alleged unfair trade practices subject of the case.

On January 8, 2001, the trial court admitted the Amended Complaint. LG OTIS (LGISC) and LGIC filed a motion for reconsideration thereto but was similarly rebuffed on October 4, 2001.

On April 12, 2002, GOLDSTAR filed a Motion to Dismiss the amended complaint. One of the grounds is the venue was improperly laid, as neither HYATT nor defendants reside in Mandaluyong City, where the original case was filed. In the Order dated May 27, 2002, which is the main subject of the present petition, the trial court denied the motion to dismiss.

From the aforesaid Order denying Goldstar's motion for reconsideration, it filed the petition for certiorari before the CA alleging grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the trial court in issuing the assailed Orders dated May 27, 2002 and October 1, 2002.


Decision of Court of AppealsThe CA ruled that the trial court had committed palpable error amounting to grave abuse of discretion

when the latter denied respondent's Motion to Dismiss. The appellate court held that the venue was clearly improper, because none of the litigants "resided" in Mandaluyong City, where the case was filed.

ISSUE: Whether or not the venue of an action is proper

SUPREME COURT RULINGWell established in our jurisprudence is the rule that the residence of a corporation is the place where

its principal office is located, as stated in its Articles of Incorporation.The resolution of this case rests upon a proper understanding of Section 2 of Rule 4 of the 1997 Revised

Rules of Court:"Sec. 2. Venue of personal actions. - All other actions may be commenced and tried where the plaintiff or any of the principal plaintiff resides, or where the defendant or any of the principal defendant resides, or in the case of a non-resident defendant where he may be found, at the election of the plaintiff."

Since both parties to this case are corporations, there is a need to clarify the meaning of "residence." The law recognizes two types of persons: (1) natural and (2) juridical. Corporations come under the latter in accordance with Article 44(3) of the Civil Code.

Residence is the permanent home -- the place to which, whenever absent for business or pleasure, one intends to return. Residence is vital when dealing with venue. A corporation, however, has no residence in the same sense in which this term is applied to a natural person. This is precisely the reason why the Court in Young Auto Supply Company v. Court of Appeals ruled that "for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation." Even before this ruling, it has already been established that the residence of a corporation is the place where its principal office is established.

This Court has also definitively ruled that for purposes of venue, the term "residence" is synonymous with "domicile." Correspondingly, the Civil Code provides:

"Art. 51. When the law creating or recognizing them, or any other provision does not fix the domicile of juridical persons, the same shall be understood to be the place where their legal representation is established or where they exercise their principal functions."

It now becomes apparent that the residence or domicile of a juridical person is fixed by "the law creating or recognizing" it. Under Section 14(3) of the Corporation Code, the place where the principal office of the corporation is to be located is one of the required contents of the articles of incorporation, which shall be filed with the Securities and Exchange Commission (SEC).

Jurisprudence has settled that the place where the principal office of a corporation is located, as stated in the articles, indeed establishes its residence. This ruling is important in determining the venue of an action by or against a corporation, as in the present case.


CASE #24 [ G.R. NO. 131394, March 28, 2005 ]JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES AND ARIEL REYES, PETITIONERS, VS. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL, INC., RESPONDENTS.

FACTSIn 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred

(700) founders’ shares and seventy-six (76) common shares as its initial capital stock subscription reflected in the articles of incorporation. However, private respondents and their predecessors who were in control of PMMSI registered the company’s stock and transfer book for the first time in 1978, recording thirty-three (33) common shares as the only issued and outstanding shares of PMMSI. Sometime in 1979, a special stockholders’ meeting was called and held on the basis of what was considered as a quorum of twenty-seven (27) common shares, representing more than two-thirds (2/3) of the common shares issued and outstanding.

In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and Exchange Commission (SEC) for the registration of their property rights over one hundred (120) founders’ shares and twelve (12) common shares owned by their father. The SEC hearing officer held that the heirs of Acayan were entitled to the claimed shares and called for a special stockholders’ meeting to elect a new set of officers. The SEC En Banc affirmed the decision. As a result, the shares of Acayan were recorded in the stock and transfer book.

On 06 May 1992, a special stockholders’ meeting was held to elect a new set of directors. Private respondents thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders’ meeting, alleging that the quorum for the said meeting should not be based on the 165 issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation. The petition was dismissed.

Appeal was made to the SEC En Banc, which granted said appeal, holding that the shares of the deceased incorporators should be duly represented by their respective administrators or heirs concerned. The SEC directed the parties to call for a stockholders meeting on the basis of the stockholdings reflected in the articles of incorporation for the purpose of electing a new set of officers for the corporation.

Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals.Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and Renato Cervantes, stockholders and directors of

PMMSI, earlier filed another petition for review of the same SEC En Banc’s orders.The Court of Appeals held that for purposes of transacting business, the quorum should be based on the

outstanding capital stock as found in the articles of incorporation

ISSUE: Whether the basis of quorum for a stockholders’ meeting is the outstanding capital stock as indicated in the articles of incorporation OR that contained in the company’s stock and transfer book

SUPREME COURT RULINGThe Articles of Incorporation has been described as one that defines the charter of the corporation and

the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders.

To disregard the contents of the articles of incorporation would be to pretend that the basic document which legally triggered the creation of the corporation does not exist and accordingly to allow great injustice to be caused to the incorporators and their heirs.

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation, but also on its shareholders. In the instant case, the articles of incorporation indicate that at the time of incorporation, the incorporators were bona fide stockholders of seven hundred (700) founders’ shares and seventy-six (76) common shares. Hence, at that time, the corporation had 776 issued and outstanding shares.

A stock and transfer book is necessary as a measure of precaution, expediency and convenience since it provides the only certain and accurate method of establishing the various corporate acts and transactions and of showing the ownership of stock and like matters. However, a stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein.


CASE #25 [ A.C. No. 5804, July 01, 2003 ]BENEDICTO HORNILLA AND ATTY. FEDERICO D. RICAFORT, COMPLAINANTS, VS. ATTY. ERNESTO S. SALUNAT, RESPONDENT.

FACTSOn November 21, 1997, Benedicto Hornilla and Federico D. Ricafort filed an administrative complaint

with the Integrated Bar of the Philippines (IBP) Commission on Bar Discipline, against respondent Atty. Ernesto S. Salunat for illegal and unethical practice and conflict of interest. They alleged that respondent is a member of the ASSA Law and Associates, which was the retained counsel of the Philippine Public School Teachers Association (PPSTA). Respondent's brother, Aurelio S. Salunat, was a member of the PPSTA Board which approved respondent's engagement as retained counsel of PPSTA.

Complainants, who are members of the PPSTA, filed an intra-corporate case against its members of the Board of Directors for the terms 1992-1995 and 1995-1997 before the Securities and Exchange Commission, and a complaint before the Office of the Ombudsman, for unlawful spending and the undervalued sale of real property of the PPSTA. Respondent entered his appearance as counsel for the PPSTA Board members in the said cases. Complainants contend that respondent was guilty of conflict of interest because he was engaged by the PPSTA, of which complainants were members, and was being paid out of its corporate funds where complainants have contributed. Despite being told by PPSTA members of the said conflict of interest, respondent refused to withdraw his appearance in the said cases.

In his Answer, respondent stressed that he entered his appearance as counsel for the PPSTA Board Members for and in behalf of the ASSA Law and Associates. As a partner in the said law firm, he only filed a "Manifestation of Extreme Urgency" in the complaint filed at Ombudsman. On the other hand, SEC Case was handled by another partner of the firm, Atty. Agustin V. Agustin.

Respondent pointed out that his relationship to Aurelio S. Salunat was immaterial; and that when he entered into the retainer contract with the PPSTA Board, he did so, not in his individual capacity, but in representation of the ASSA Law Firm. Anent the SEC case, respondent alleged that the same was being handled by the law firm of Atty. Eduardo de Mesa, and not ASSA.

IBP Commission on Bar Discipline, after investigation, recommended that respondent be suspended from the practice of law for six (6) months.

ISSUE: Whether or not Atty. Salunat, retainer of the Corporation, guilty of conflict of interest

SUPREME COURT RULINGWhere corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or

negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation's behalf is only nominal party. The corporation should be included as a party in the suit.

Can a lawyer engaged by a corporation defend members of the board of the same corporation in a derivative suit? Outside counsel must thus be retained to represent one of the defendants. The cases and ethics opinions differ on whether there must be separate representation from the outset or merely from the time the corporation seeks to take an active role. Furthermore, this restriction on dual representation should not be waivable by consent in the usual way; the corporation should be presumptively incapable of giving valid consent.

In other jurisdictions, the prevailing rule is that a situation wherein a lawyer represents both the corporation and its assailed directors unavoidably gives rise to a conflict of interest. The interest of the corporate client is paramount and should not be influenced by any interest of the individual corporate officials. The rulings in these cases have persuasive effect upon us. After due deliberation on the wisdom of this doctrine, we are sufficiently convinced that a lawyer engaged as counsel for a corporation cannot represent members of the same corporation's board of directors in a derivative suit brought against them. To do so would be tantamount to representing conflicting interests, which is prohibited by the Code of Professional Responsibility.

In the case at bar, the records show that SEC Case No. 05-97-5657, entitled "Philippine Public School Teacher's Assn., Inc., et al. v. 1992-1995 Board of Directors of the Philippine Public School Teacher's Assn. (PPSTA), et al.," was filed by the PPSTA against its own Board of Directors. Respondent admits that the ASSA Law Firm, of which he is the Managing Partner, was the retained counsel of PPSTA. Yet, he appeared as counsel of record for the respondent Board of Directors in the said case. Clearly, respondent was guilty of conflict of interest when he represented the parties against whom his other client, the PPSTA, filed suit.


CASE #26 [ G.R. NO. 166862, December 20, 2006 ]MANILA METAL CONTAINER CORPORATION, PETITIONER, REYNALDO C. TOLENTINO, INTERVENOR, VS. PHILIPPINE NATIONAL BANK, RESPONDENT, DMCI-PROJECT DEVELOPERS, INC., INTERVENOR.

FACTSPetitioner was the owner of a 8,015 square meter parcel of land located in Mandaluyong (now a City),

Metro Manila. The property was covered by Transfer Certificate of Title (TCT) No. 332098 of the Registry of Deeds of Rizal. To secure a P900,000.00 loan it had obtained from respondent Philippine National Bank (PNB), petitioner executed a real estate mortgage over the lot. Respondent PNB later granted petitioner a new credit accommodation of P1,000,000.00; and, on November 16, 1973, petitioner executed an Amendment of Real Estate Mortgage over its property. On March 31, 1981, petitioner secured another loan of P653,000.00 from respondent PNB, payable in quarterly installments of P32,650.00, plus interests and other charges.

On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the real estate mortgage and sought to have the property sold at public auction for P911,532.21, petitioner's outstanding obligation to respondent PNB as of June 30, 1982, plus interests and attorney's fees.

After due notice and publication, the property was sold at public auction on September 28, 1982 where respondent PNB was declared the winning bidder for P1,000,000.00. The Certificate of Sale issued in its favor was registered with the Office of the Register of Deeds of Rizal, and was annotated at the dorsal portion of the title on February 17, 1983. Thus, the period to redeem the property was to expire on February 17, 1984.

Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it be granted an extension of time to redeem/repurchase the property. In its reply dated August 30, 1983, respondent PNB informed petitioner that the request had been referred to its Pasay City Branch for appropriate action and recommendation.

Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT No. 32098 on June 1, 1984, and issued a new title in favor of respondent PNB. Petitioner's offers had not yet been acted upon by respondent PNB.

Meanwhile, the Special Assets Management Department (SAMD) had prepared a statement of account, and as of June 25, 1984 petitioner's obligation amounted to P1,574,560.47. This included the bid price of P1,056,924.50, interest, advances of insurance premiums, advances on realty taxes, registration expenses, miscellaneous expenses and publication cost. When apprised of the statement of account, petitioner remitted P725,000.00 to respondent PNB as "deposit to repurchase," and Official Receipt No. 978191 was issued to it.

In the meantime, the SAMD recommended to the management of respondent PNB that petitioner be allowed to repurchase the property for P1,574,560.00. In a letter dated November 14, 1984, the PNB management informed petitioner that it was rejecting the offer and the recommendation of the SAMD. It was suggested that petitioner purchase the property for P2,660,000.00, its minimum market value.

Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote another letter dated December 12, 1984 requesting for a reconsideration.

On February 25, 1985, petitioner, through counsel, requested that PNB reconsider its letter dated December 28, 1984. Petitioner declared that it had already agreed to the SAMD's offer to purchase the property for P1,574,560.47, and that was why it had paid P725,000.00. Petitioner warned respondent PNB that it would seek judicial recourse should PNB insist on the position.

On June 4, 1985, respondent PNB informed petitioner that the PNB Board of Directors had accepted petitioner's offer to purchase the property, but for P1,931,389.53 in cash less the P725,000.00 already deposited with it.

Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It maintained that respondent PNB had agreed to sell the property for P1,574,560.47, and that since its P725,000.00 downpayment had been accepted, respondent PNB was proscribed from increasing the purchase price of the property.


On August 28, 1989, petitioner filed a complaint against respondent PNB for "Annulment of Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with Damages."

In its Answer to the complaint, respondent PNB averred, as a special and affirmative defense, that it had acquired ownership over the property after the period to redeem had elapsed. It claimed that no contract of sale was perfected between it and petitioner after the period to redeem the property had expired.

While the case was pending, respondent PNB demanded, on September 20, 1989, that petitioner vacate the property within 15 days from notice, but petitioners refused to do so.

On May 31, 1994, the trial court rendered judgment dismissing the amended complaint and respondent PNB's counterclaim. It ordered respondent PNB to refund the P725,000.00 deposit petitioner had made. The trial court ruled that there was no perfected contract of sale between the parties; hence, petitioner had no cause of action for specific performance against respondent.

The CA rendered judgment on May 11, 2000 affirming the decision of the RTCPetitioner filed a motion for reconsideration, which the CA likewise denied.

ISSUE: Whether or not the Special Assets Management Department of PNB is authorized to accept petitioner’s offer

SUPREME COURT RULINGThere is no evidence that the SAMD was authorized by respondent's Board of Directors to accept

petitioner's offer and sell the property for P1,574,560.47. Any acceptance by the SAMD of petitioner's offer would not bind respondent.

As this Court ruled in AF Realty Development, Inc. vs. Diesehuan Freight Services, Inc.: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. 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. 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.

Thus, a corporation can only execute its powers and transact its business through its Board of Directors and through its officers and agents when authorized by a board resolution or its by-laws.


CASE #27 [ G.R. No. 140667, August 12, 2004 ]WOODCHILD HOLDINGS, INC., PETITIONER, VS. ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., RESPONDENT.

FACTSThe 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.

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.

One of the terms incorporated in Dy’s offer was the following provision: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.

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. On September 5, 1991, a Deed of Absolute Sale 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.

Years later, 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.

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.

On November 11, 1996, the trial court rendered judgment in favor of the WHI.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.

ISSUE: Whether or not the act of Roberto Roxas, President of RECCI, in entering into contract binding on the Corporation

SUPREME COURT RULINGIn San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 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.

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.

(In this case, SC affirmed the decision of trial court’s award of damages and attorney’s fees to the petitioner due to other reason - non-performance of obligation of respondent)


CASE #28 [ G.R. No. 161886, March 16, 2007 ]FILIPINAS PORT SERVICES, INC., REPRESENTED BY STOCKHOLDERS, ELIODORO C. CRUZ AND MINDANAO TERMINAL AND BROKERAGE SERVICES, INC., PETITIONERS, V.S. VICTORIANO S. GO, RSENIO LOPEZ CHUA, EDGAR C. TRINIDAD HERMENEGILDO M. TRINIDAD, JESUS SYBICO, MARY JEAN D. CO, HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, AND ELIEZER B. DE JESUS, RESPONDENTS.

FACTSOn 4 September 1992, petitioner Eliodoro C. Cruz, Filport's president from 1968 until he lost his bid for

reelection as Filport's president during the general stockholders' meeting in 1991, wrote a letter to the corporation's Board of Directors questioning the board's creation of the following positions with a monthly remuneration of P13,050.00 each, and the election thereto of certain members of the board.

In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover from those elected to the aforementioned positions the salaries they have received.

On 15 September 1992, the board met and took up Cruz's letter. The records do not show what specific action/actions the board had taken on the letter. Evidently, whatever action/actions the board took did not sit well with Cruz.

On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition which he describes as a derivative suit against the herein respondents who were then the incumbent members of Filport's Board of Directors, for alleged acts of mismanagement detrimental to the interest of the corporation and its shareholders at large,

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite demands made upon the respondent members of the board of directors to desist from creating the positions in question and to account for the amounts incurred in creating the same, the demands were unheeded. Cruz thus prayed that the respondent members of the board of directors be made to pay Filport, jointly and severally, the sums of money variedly representing the damages incurred as a result of the creation of the offices/positions complained of and the aggregate amount of the questioned increased salaries.

In their common Answer with Counterclaim, the respondents denied the allegations of mismanagement and materially averred as follows:

1. the creation of the executive committee and the grant of per diems for the attendance of each member are allowed under the by-laws of the corporation;

2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer and Assistant General Manager were well within the financial capacity of the corporation and well-deserved by the officers elected thereto; and

3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration were already in existence during the tenure of Cruz as president of the corporation, and were merely recreated by the Board, adding that all those appointed to said positions of Assistant Vice Presidents, as well as the additional position of Special Assistants to the Chairman and the President, rendered services to deserve their compensation.

As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC for a long period of time. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on respondents' motion, it was eventually transferred to the RTC of Davao City whereat it was docketed as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.

On 10 December 2001, RTC-Davao City rendered its decision in the case. The counter claim is dismissed.From the adverse decision of the trial court, herein respondents went on appeal to the CA and it was

granted and reversed the decision of RTC.

ISSUE: (1) Whether or not Board of Directors of Filport guilty of mismanagement(2) Whether or not the suit filed by petitioners is a derivative suit


SUPREME COURT RULING(1) The election of officers of a corporation is provided for under Section 25 of the Code which reads:

Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws .

In turn, the amended Bylaws of Filport provides the following:Officers of the corporation, as provided for by the by-laws, shall be elected by the board of

directors at their first meeting after the election of Directors. The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a

Secretary, a Treasurer, a General Manager and such other officers as the Board of Directors may from time to time provide, and these officers shall be elected to hold office until their successors are elected and qualified. Likewise, the fixing of the corresponding remuneration for the positions in question is provided for in

the same by-laws of the corporation, viz:The Board of Directors shall fix the compensation of the officers and agents of the corporation.The Board of Directors has the power to create positions not provided for in Filport's bylaws since the

board is the corporation's governing body, clearly upholding the power of its board to exercise its prerogatives in managing the business affairs of the corporation.

But even assuming that there was mismanagement resulting to corporate damages and/or business losses, still the respondents may not be held liable in the absence, as here, of a showing of bad faith in doing the acts complained of.

If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable. For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud.

Besides, the determination of the necessity for additional offices and/or positions in a corporation is a management prerogative which courts are not wont to review in the absence of any proof that such prerogative was exercised in bad faith or with malice.

So it is that in Philippine Stock Exchange, Inc. v. CA, the Court unequivocally held:Questions of policy or of management are left solely to the honest decision of the board as the

business manager of the corporation, and the court is without authority to substitute its judgment for that of the board, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders are not reviewable by the courts.

(2) Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or because they hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party.

Besides, the requisites before a derivative suit can be filed by a stockholder are present in this case, to wit:a) the party bringing suit should be a shareholder as of the time of the act or transaction

complained of, the number of his shares not being material;b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of

directors for the appropriate relief but the latter has failed or refused to heed his plea; andc) the cause of action actually devolves on the corporation, the wrongdoing or harm having been,

or being caused to the corporation and not to the particular stockholder bringing the suit. The Court rules and so hold that the petition filed with the SEC at the instance of Cruz, which ultimately

found its way to the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit of which Cruz has the necessary legal standing to institute.


CASE #29 [ G.R. NO. 153468, August 17, 2006 ]PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P. LIZARES AND GRACE CHRISTIAN HIGH SCHOOL, PETITIONERS, VS. PAUL SYCIP AND MERRITTO LIM, RESPONDENTS.

FACTSPetitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with

fifteen (15) regular members, who also constitute the board of trustees. During the annual members' meeting held on April 6, 1998, there were only eleven (11) living member-trustees, as four (4) had already died. Out of the eleven, seven (7) attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members automatically lost all their rights (including the right to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She held that the basis for determining the quorum in a meeting of members should be their number as specified in the articles of incorporation, not simply the number of living members. She explained that the qualifying phrase "entitled to vote" in Section 24 of the Corporation Code, which provided the basis for determining a quorum for the election of directors or trustees, should be read together with Section 89.

The hearing officer also opined that Article III (2) of the By-Laws of GCHS, insofar as it prescribed the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section 29 of the Corporation Code. The SEC en banc denied the appeal of petitioners and affirmed the Decision of the hearing officer in toto. It found to be untenable their contention that the word "members," as used in Section 52 of the Corporation Code, referred only to the living members of a nonstock corporation.

As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney had been attached to show his authority to sign for the rest of the petitioners.

ISSUE: Whether or not dead members shall be counted in determining the existence of a quorum during members' meetings

SUPREME COURT RULINGFor stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on the

number of outstanding voting stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members' meetings. Dead members shall not be counted.

Section 52 of the Corporation Code states:"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations."


In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by the Code thus:"SECTION 137. Outstanding capital stock defined. – The term "outstanding capital stock" as used in this Code, means the total shares of stock issuedunder binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares."

The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders' meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted. Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent under Section 67 of the Code.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor.

On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of whether or not "dead members" are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members' meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members' meeting, conducted with six members present, was valid.

As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code provides:"SECTION 29. Vacancies in the office of director or trustee. — Any vacancy occurring in the board of

directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office."

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a quorum. The phrase "may be filled" in Section 29 shows that the filling of vacancies in the board by the remaining directors or trustees constituting a quorum is merely permissive, not mandatory. Corporations, therefore, may choose how vacancies in their respective boards may be filled up -- either by the remaining directors constituting a quorum, or by the stockholders or members in a regular or special meeting called for the purpose.

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a majority vote of the remaining members of the board.

While a majority of the remaining corporate members were present, however, the "election" of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the remaining trustees. In other words, these remaining member-trustees must sit as a board in order to validly elect the new ones.


CASE #30 [ G.R. No. 183196, August 19, 2009 ]CHONA ESTACIO AND LEOPOLDO MANLICLIC, PETITIONERS, VS. PAMPANGA I ELECTRIC COOPERATIVE, INC., AND LOLIANO E. ALLAS, RESPONDENTS.

FACTSThis is a Petition for Review on Certiorari. Respondent PELCO I is an electric cooperative duly organized,

incorporated, and registered pursuant to Presidential Decree No. 269. Respondent Engr. Allas is the General Manager.

Petitioner Estacio had been employed at respondent PELCO I as a bill custodian since 1977, while petitioner Manliclic had been working for respondent PELCO I as a bill collector since June 1992.

On 22 August 2002, Nelia D. Lorenzo (Lorenzo), the Internal Auditor of respondent PELCO I, submitted her Audit Findings:

Evaluation of the results of physical inventory of bills through reconciliation of records such as aging schedule of consumer accounts receivable balance, collection reports and other related documents revealed 87 bills amounting to One Hundred Twenty Six Thousand Seven Hundred Fifty and 93/100 (P126,750.93) remained unremitted as of August 20, 2002. Accounting of which includes the accountability of Ms. Estacio amounting to One Hundred Twenty Three Thousand Eight Hundred Seven and 14/100 (P123,807.14) representing 86 bills.

Respondent Engr. Allas issued a Memorandum to petitioner Estacio informing her of the audit findings, and directing her to explain in writing, within 72 hours upon receipt thereof, why no disciplinary action should be imposed upon her for Gross Negligence of Duty.

In her written explanation, petitioner Estacio averred that she had no control over and should not be held answerable for the failure of the bill collectors at the San Luis Area Office to remit their daily collections.

Unsatisfied with petitioner Estacios explanation, respondent Engr. Allas issued a Memorandum charging Estacio with gross negligence of duty. A formal investigation/hearing then ensued, during which petitioner Estacio was duly represented by counsel.

Respondent Engr. Allas rendered a Decision which adopted the recommendation of the investigation committee dismissing petitioner Estacio from service, with forfeiture of her benefits, with the modification deleting the charge of dishonesty. Petitioner Estacio sought a reconsideration of the said decision but it was denied by respondent Engr. Allas.

In the same "Audit Findings at the San Luis Area Office" submitted to respondent Engineer Allas on 22 August 2002, Internal Auditor Lorenzo reported that petitioner Manliclic, a bill collector, failed to remit to respondent PELCO I management his collection amounting to P4,813.11, as of 20 August 2002. Respondent Engr. Allas issued a Memorandum dated 6 September 2002 directing petitioner Manliclic to explain in writing, within 48 hours from receipt thereof, why no disciplinary action should be taken against him for committing offenses against respondent PELCO I properties,[12] under Section 2.1 of Board Policy No. 01-04 dated 23 July 2001.

On 11 September 2002, petitioner Manliclic submitted his written explanation admitting the he used the amount of P4,813.11 from his collection to cover pressing family obligations and requesting two months to pay the same. With this admission, respondent Engr. Allas issued another Memorandum dated 28 September 2002 dismissing petitioner Manliclic from service effective 1 October 2002, with forfeiture of benefits. Petitioner Manliclic sought reconsideration of his dismissal, but was rebuffed by respondent Engr. Allas.

From respondent Engr. Allas' actions on their administrative case, petitioners Estacio and Manliclic separately filed with the Board of Directors of respondent PELCO I their memoranda of appeal. The Board of Directors of respondent PELCO I subsequently passed two resolutions, with essentially the same contents, i.e., Resolutions No. 38 dated 15 November 2002 and No. 39, dated 25 November 2002, respectively. In said


Resolutions, the Board of Directors of respondent PELCO I reinstated petitioners to their positions without loss of seniority, and ordered respondent Engr. Allas to pay in full the salaries and other incentives accruing to petitioners after deducting the first 15 days of their suspension.

Notwithstanding the approval of Resolutions No. 38 and No. 39, respondent Engr. Allas refused to reinstate petitioners and proceeded to dismiss them from service. He thn wrote to the Board of Directors.

In a letter dated 10 December 2002 by Regional Director Alberto A. Guiang of the National Electrification Administration (NEA) to the Board of Directors of respondent PELCO I, he stated disapproving the Board resolution of granting petitioners appeal.

In a Decision dated 30 April 2004, Labor Arbiter ruled in favor of respondents. The NLRC, in its Decision dated 30 June 2005, disagreed with the Labor Arbiter. NLRC denied also the

appeal of respondents.With Board Resolution No. 53-06, it authorized Allas to file the appeal, on behalf of respondent PELCO

I, to the Court of Appeals.Court of Appeals, in its Resolution dated January 24, 2006, it annulled and set aside the decision of

NLRC and the petition of respondent was granted.

ISSUE: Whether or not respondent Engr. Allas had the legal personality to file before the Court of AppealsWhether or not by issuing Board Resolution No. 53-06, the Board of Directors of respondent PELCO I committed false representation or concealment of material facts in its earlier Resolutions No. 38 and No. 39

SUPREME COURT RULINGIt bears to stress that petitioners themselves filed their Complaints before the NLRC against both

respondents PELCO I and Engr. Allas. Respondent Engr. Allas participated in the proceedings before the Labor Arbiter and the NLRC. As a party aggrieved by the NLRC decision and resolution, respondent Engr. Allas had a substantial interest to file with the Court of Appeals the Petition for Certiorari under Rule 65 of the 1997 Revised Rules of Civil Procedure, on his own behalf.

As for respondent Engr. Allas' authority to file the same Petition on behalf of respondent PELCO I, it is evidenced by Board Resolution No. 53-06, approved by the Board of Directors of the cooperative on 5 August 2006.

In issuing Resolutions No. 38 and No. 39, the Board of Directors of respondent PELCO I relayed its initial determination that petitioners' dismissal from service was harsh and drastic. These Resolutions merely expressed the position of the Board of Directors of respondent PELCO I at the time of their issuance. The subsequent passing of Board Resolution No. 53-06 by the same Board of Directors of respondent PELCO I, explicitly conveyed a change of mind, i.e., the Board now wanted to contest, through respondent Engr. Allas, the finding of the NLRC that petitioners were illegally dismissed.

Without any basis, the Court cannot conclude that by the mere issuance of Board Resolution No. 53-06, the Board of Directors of respondent PELCO I committed false representation or concealment of material facts in its earlier Resolutions No. 38 and No. 39. What is apparent to this Court, on the face of these Resolutions, is that the Board of Directors of respondent PELCO I eventually arrived at a different conclusion after reviewing the very same facts, which it considered for Resolutions No. 38 and No. 39.

Also, Board Resolution No. 53-06 was unanimously passed by all the directors of respondent PELCO I. There is no allegation, much less, evidence, of any irregularity committed by the Board in the approval and issuance of said Board Resolution. Hence, the Court cannot simply brush Board Resolution No. 53-06 aside. Questions of policy and of management are left to the honest decision of the officers and directors of a corporation (or in this case, cooperative), and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts


CASE #31 G.R. No. 142435 April 30, 2003ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs. PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D. TRINIDAD, respondents.

FACTSThe spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export Trading" (BET), a single

proprietorship with principal office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was engaged in the manufacture of garments for domestic and foreign consumption. The Lipats also owned the "Mystical Fashions" in the United States, which sells goods imported from the Philippines through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to manage BET in the Philippines while she was managing "Mystical Fashions" in the United States. In order to facilitate the convenient operation of BET, Estelita Lipat executed on 14 December 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to obtain loans and other credit accommodations from Pacific Banking Corporation (Pacific Bank). She likewise authorized Teresita to execute mortgage contracts on properties owned or co-owned by her as security for the obligations to be extended by Pacific Bank including any extension or renewal thereof.

Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to "Mystical Fashions" in the United States. As security therefore, the Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage over their property located at No. 814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure other additional or new loans, etc.

On 5 September 1979, BET was incorporated into a family corporation named Bela's Export Corporation (BEC) in order to facilitate the management of the business. BEC was engaged in the business of manufacturing and exportation of all kinds of garments of whatever kind and description and utilized the same machineries and equipment previously used by BET. Its incorporators and directors included the Lipat spouses who owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the vice-president and general manager.

Eventually, the loan was later restructured in the name of BEC and subsequent loans were obtained by BEC with the corresponding promissory notes duly executed by Teresita on behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding trust receipt therefore. Export bills were also executed in favor of Pacific Bank for additional finances. These transactions were all secured by the real estate mortgage over the Lipats' property. The promissory notes, export bills, and trust receipt eventually became due and demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank's demand letters, Estelita Lipat went to the office of the bank's liquidator and asked for additional time to enable her to personally settle BEC's obligations. The bank acceded to her request but Estelita failed to fulfill her promise. Consequently, the real estate mortgage was foreclosed and after compliance with the requirements of the law the mortgaged property was sold at public auction.

On 31 January 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder. On 28 November 1989, the spouses Lipat filed before the Quezon City RTC a complaint for annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint alleged, among others, that the promissory notes, trust receipt, and export bills were all ultra vires acts of Teresita as they were executed without the requisite board resolution of the Board of Directors of BEC. The Lipats also averred that assuming said acts were valid and binding on BEC, the same were the corporation's sole obligation, it having a personality distinct and separate


from spouses Lipat. It was likewise pointed out that Teresita's authority to secure a loan from Pacific Bank was specifically limited to Mrs. Lipat's sole use and benefit and that the real estate mortgage was executed to secure the Lipats' and BET's P583,854.00 loan only.

In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat cannot evade payments of the value of the promissory notes, trust receipt, and export bills with their property because they and the BEC are one and the same, the latter being a family corporation.

Trinidad further claimed that he was a buyer in good faith and for value and that the Lipat spouses are estopped from denying BEC's existence after holding themselves out as a corporation.

After trial on the merits, the RTC dismissed the complaint. The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV 41536. Said appeal,

however, was dismissed by the appellate court for lack of merit. The Lipats then moved for reconsideration, but this was denied by the appellate court in its Resolution

of 23 February 2000. The Lipat spouses filed the petition for review on certiorari.

ISSUE : Whether the Doctrine of Apparent Authority applicable in this case

SUPREME COURT RULINGThe principle of estoppel precludes petitioners from denying the validity of the transactions entered into

by Teresita Lipat with Pacific Bank, who in good faith, relied on the authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET and BEC. While the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in its board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law, yet, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees, or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course of business.

Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as the manager of both BEC and BET and had been deciding business matters in the absence of Estelita Lipat. Further, the export bills secured by BEC were for the benefit of "Mystical Fashion" owned by Estelita Lipat. Hence, Pacific Bank cannot be faulted for relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of attorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority.


CASE #32 [ G.R. No. 148444, July 14, 2008 ]ASSOCIATED BANK (NOW UNITED OVERSEAS BANK [PHILS.]), PETITIONER, VS. SPOUSES RAFAEL AND MONALIZA PRONSTROLLER, RESPONDENTS.

FACTSOn April 21, 1988, the spouses Eduardo and Ma. Pilar Vaca (spouses Vaca) executed a Real Estate

Mortgage (REM) in favor of the petitioner over their parcel of residential land located at Quezon City. For failure of the spouses Vaca to pay their obligation, the subject property was sold at public auction with the petitioner as the highest bidder. The spouses Vaca, however, commenced an action for the nullification of the real estate mortgage and the foreclosure sale. During the pendency of the aforesaid cases, Respondents Rafael and Monaliza Pronstroller offered to purchase the property for P7,500,000.00. Said offer was made through Atty. Jose Soluta, Jr. (Atty. Soluta), petitioner’s Vice-President, Corporate Secretary and a member of its Board of Directors. Petitioner accepted respondents’ offer of P7.5 million. Consequently, respondents paid petitioner P750,000.00, or 10% of the purchase price, as down payment. On March 18, 1993, petitioner, through Atty. Soluta, and respondents, executed a Letter-Agreement setting forth therein that respondents shall, within 90 days, deposit the balance of P6,750,000.00 under an escrow agreement.

On July 14, 1993, respondents and Atty. Soluta, acting for the petitioner, executed another Letter-Agreement allowing the former to pay the balance of the purchase price upon receipt of a final order from this Court (in the Vaca case) and/or the delivery of the property to them free from occupants.

In early 1994, Atty. Braulio Dayday (Atty. Dayday) became petitioner’s Assistant Vice-President and Head of the Documentation Section, while Atty. Soluta was relieved of his responsibilities. Atty. Dayday reviewed petitioner’s records of its outstanding accounts and discovered that respondents failed to deposit the balance of the purchase price of the subject property. He, likewise, found that respondents requested for an extension of time within which to pay. The said request was disapproved by Asset Recovery and Remedial Management Committee (ARRMC) on March 4, 1994 and invoked the rescission or cancellation of the contract due to respondents’ breach thereof. Respondents went to the petitioner’s office, talked to Atty. Dayday and gave him the Letter-Agreement of July 14, 1993 to show that they were granted an extension. However, Atty. Dayday claimed that the letter was a mistake and that Atty. Soluta was not authorized to give such extension.

On June 6, 1994, respondents proposed to pay the balance of the purchase price as follows: P3,000,000.00 upon the approval of their proposal and the balance after six (6)months. However, the proposal was disapproved by the petitioner’s President. For failure of the parties to reach an agreement, respondents, through their counsel, informed petitioner that they would be enforcing their agreement dated July 14, 1993.

Petitioner countered that it was not aware of the existence of the July 14 agreement and that Atty. Soluta was not authorized to sign for and on behalf of the bank. It, likewise, reiterated the rescission of their previous agreement because of the breach committed by respondents.

On July 28, 1994, respondents commenced the instant suit by filing a Complaint for Specific Performance before the RTC of Antipolo, Rizal. Respondents prayed that petitioner be ordered to sell the subject property to them in accordance with their letter-agreement of July 14, 1993.

For its part, petitioner contended that their contract had already been rescinded because of respondents’ failure to deposit in escrow the balance of the purchase price within the stipulated period.

On November 14, 1997, the trial court finally resolved the matter in favor of respondents. On appeal, the CA affirmed the RTC decision and upheld Atty. Soluta’s authority to represent the

petitioner. Petitioner’s motion for reconsideration was denied on May 31, 2001. Hence, the present petition.

ISSUE: Whether or not the petitioner is bound by the July 14, 1993 Letter-Agreement signed by Atty.Soluta under the doctrine of apparent authority?


SUPREME COURT RULINGThe authority of a corporate officer or agent in dealing with third persons may be actual or apparent.

The doctrine of "apparent authority," with special reference to banks, had long been recognized in this jurisdiction. Apparent authority is derived not merely from practice.

Its existence may be ascertained through 1) the general manner in which the corporation holds out an officer or agent as having the power to act,

or in other words, the apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,

within or beyond the scope of his ordinary powers.Accordingly, the authority to act for and to bind a corporation may be presumed from acts of

recognition in other instances, wherein the power was exercised without any objection from its board or shareholders. Undoubtedly, petitioner had previously allowed Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same via the second letter-agreement. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation.

Naturally, the third person has little or no information as to what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the scope of Atty. Soluta's authority. Indeed, the public has the right to rely on the trustworthiness of bank officers and their acts.


CASE #33 [ G.R. No. 45493, April 21, 1939 ]GERARDO GARCIA, PLAINTIFF AND APPELLEE, VS. ANGEL SUAREZ, DEFENDANT AND APPELLANT.

FACTSOn October 4, 1924, the appellant Angel Suarez subscribed to sixteen shares of the capital stock of the

Compania Hispano-Filipina, Inc., a corporation which is duly formed and organized. Of the sixteen subscribed shares, at the par value of P100 each, the appellant only paid P400, the value of four shares.

On June 5, 1931, the plaintiff-appellee was appointed by the court receiver of the Compañia Hispano-Filipina, Inc., to collect all the credits of said corporation, pay its debts and dispose of the remainder of its assets and of its properties.

On June 18, 1931, the plaintiff-appellee in vain made demand upon the defendant-appellant to pay the balance of his subscription.

On July 10, 1933, the plaintiff, as receiver, brought an action in the Court of First Instance of Manila to recover from the defendant-appellant and other shareholders the balance of their subscriptions, but the complaint was dismissed for lack of prosecution.

On October 10, 1935, a similar complaint was filed against the appellant, and after trial, judgment was rendered therein ordering the said defendant to pay to the plaintiff, as receiver of Compania Hispano-Filipina, Inc., the sum of P1,200, with legal interest thereon from October 4, 1924, and the costs.

The defendant appealed and in this instance contends that the trial court erred in holding that the action of the plaintiff-appellee has not prescribed, and that the appellant has not been released from his obligation to pay the balance of his subscription.

ISSUE: Whether or not the Corporation or its officers have the power to release subscriber to its capital stock from the obligation of paying for his shares

SUPREME COURT RULINGBy the same token, the subscription to the capital stock of a corporation, unless otherwise stipulated, is

not payable at the moment of the subscription but on a subsequent date which may be fixed by the corporation. Hence, section 38 of the Corporation Law, amended by Act No. 3518, provides that:"The board of directors or trustees of any stock corporation formed, organized, or existing under this Act may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock * * *."

The board of directors of the Compania Hispano-Filipina, Inc., not having declared due and payable the stock subscribed by the appellant, the prescriptive period of the action for the collection thereof only commenced to run from June 18, 1931 when the plaintiff, in his capacity as receiver and in the exercise of the power conferred upon him by the said section 38 of the Corporation Law, demanded of the appellant to pay the balance of his subscription.

The appellant adduced as evidence a letter, allegedly signed by R. Pando, acting president of the Corporation, wherein the appellant was released by Pando from all obligations with respect to the payment of his subscription in consideration of his transfer of his shares to the corporation.

The very citation of authorities made by the appellant in his brief destroys his contention. It says:"Release of subscribers by the corporation.—There can be no doubt that a corporation may effectually release a subscriber from liability on his subscription, in whole or in part, or allow him to modify his contract, if all the stockholders expressly or impliedly consent * * *.

"The agents or officers of the corporation have no such power, however, unless it is expressly conferred upon them by the charter or statute, or by the stockholders by a by-law or otherwise. * * * (Thomas vs. Wentworth Hotel Co., 117 Pac, 1041; Fletcher, Encyc. of Private Corporations, sec. 638)."

"A corporation has no legal capacity to release a subscriber to its capital stock from the obligation to pay for his shares; and any agreement to this effect Is Invalid." (Velasco vs. Poizat, 37 Phil., 802.)

"A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; * * *." (Philippine Trust Co. vs. Rivera, 44 Phil., 469.)

"A stock subscription is a contract between the corporation and the subscriber, and courts will enforce it for or against either. A corporation has no legal capacity to release a subscriber to its capital stock from the obligation to pay for his shares, and any agreement to this effect is invalid. (Velasco vs. Poizat, 37 Phil, 802.)" (Miranda vs. Tarlac Rice Mill Co., 57 Phil., 619.)


CASE #34 GR No. 176579, June 28, 2011 GAMBOA V. TEVES

FACTSPLDT was granted a franchise to engage in the telecommunications business in 1928 through Act. No.

3436. During Martial Law 26 percent of the outstanding common shares were sold by General Telephone and Electronics Corporation (GTE) (an American company) to Philippine Telecommunications Investment Corporation (PTIC), who in turn assigned 111,415 shares of stock of PTIC (46 percent of outstanding capital stock) to Prime Holdings Inc. (PHI). These shares of PTIC were later sequestered by PCGG and adjudged by the court to belong to the Republic.

54 percent of PTIC shares were sold to Hong Kong-based firm First Pacific, and the remaining 46 percent was sold through public bidding by the Inter-Agency Privatization Council, and eventually ended up being bought by First Pacific subsidiary Metro Pacific Asset Holdings Inc. (MPAH) after the corporation exercised it’s right of first refusal. The transaction was an indirect sale of 12 million shares or 6.3 percent of the outstanding common shares of PLDT, making First Pacific’s common shareholdings of PLDT to 37 percent and the total common shareholdings of foreigners in PLDT to 81.47 percent. Japanese NTT DoCoMo owns 51.56 percent of the other foreign shareholdings/equity.

Petitioner Gamboa, alleged that the sale of 111,415 shares to MPAH violates Sec. 11 of Art. XII of the Constitution, which limits foreign ownership of the capital of a public utility to not more than 40 percent.

ISSUE: Whether the term “capital” under Sec. 11, Article XII of the Constitution refers only to the total common shares or to the total outstanding stock of PLDT (public utility)?

SUPEREME COURT RULINGCompliance with the required Filipino ownership of a corporation shall be determined on the basis of

outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine nationals.

The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares. The SC directed the SEC to apply this definition in determining what was the extent of allowable foreign ownership in PLDT, and in case of violation, impose the appropriate penalty under the law.

Consistent with the constitutional mandate that the “State shall develop a self-reliant and independent national economy effectively controlled by Filipinos,” the term "capital" means the outstanding capital stock entitled to vote (voting stock), coupled with beneficial ownership, both of which results to "effective control."

"Mere legal title is insufficient to meet the 60 percent Filipino owned “capital” required in the Constitution for certain industries. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required." In this case, such twin requirements must apply uniformly and across the board to all classes of shares comprising the capital. Thus, "the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares." This guarantees that the “controlling interest” in public utilities always lies in the hands of Filipino citizens.

A broader definition would unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public utility would be contrary to Sec. 11, Art. XII, a self-executing provision of the Constitution.


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