Christopher C. Luzon Business Organization II LLB 3 3pm – 7pm Sunday

Corporation Law Case Analysis Set 3

ARMANDO DAVID, Petitioner, versus NATIONAL FEDERATION OF LABOR UNION and MARIVELES APPAREL CORPORATION, Respondents., G.R. No. 148263 and 148271-72, 2009 April 21, 1st Division

The Case :

This is a petition for review on certiorari assailing the Joint Decision dated 29 February 2000 and the Resolution dated 27 March 2001 of the Court of Appeals (appellate court) in CA-G.R. SP Nos. 54404-06. The appellate court affirmed the Decision dated 17 June 1994 of Labor Arbiter Isabel Panganiban-Ortiguerra (Arbiter Ortiguerra) in RAB-III-08-5198-93 where petitioner Armando David (David) was held solidarily liable, along with Mariveles Apparel Corporation (MAC) and MAC Chairman of the Board Antonio Carag (Carag), for money claims of the employees of MAC.

The Facts :

The present case arose from the same circumstances as Antonio C. Carag v. National Labor Relations Commission, et al.

MAC hired David as IMPEX and Treasury Manager on 16 September 1988. David began serving as MAC’s President in May 1990. David served as President in the nature of a nominee as he did not own any of MAC’s shares. David tendered his irrevocable resignation from MAC on 30 September 1993. David’s resignation was made effective on 15 October 1993.

In a complaint for illegal dismissal dated 12 August 1993, National Federation of Labor Unions (NAFLU) and Mariveles Apparel Corporation Labor Union (MACLU) alleged that MAC ceased operations on 8 July 1993 without prior notice to its employees. MAC allegedly gave notice of its closure on the same day that it ceased operations. MACLU and NAFLU further alleged that, at the time of MAC’s closure, employees who had rendered one to two weeks work were not paid their corresponding salaries.

Arbiter Ortiguerra immediately summoned the parties for settlement of the case. However, MAC failed to appear before Arbiter Ortiguerra. MAC’s non-appearance compelled Arbiter Ortiguerra to declare the case submitted for resolution based on the pleadings.

On 3 January 1994, MACLU and NAFLU filed their position paper wherein MACLU and NAFLU also moved to implead Carag and David to guarantee satisfaction of any judgment award in MACLU and NAFLU’s favor.

Atty. Joshua Pastores, as MAC’s counsel, submitted a position paper dated 21 February 1994 and argued that Carag and David should not be held liable because MAC is owned by a consortium of banks. Carag’s and David’s ownership of MAC shares only served to qualify them to serve as officers in MAC.

The Ruling of the Labor Arbiter

Arbiter Ortiguerra proceeded to render her Decision on 17 June 1994 without further proceedings or submissions from the parties. Arbiter Ortiguerra granted MACLU and NAFLU’s motion to implead Carag and David, as well as declared Carag and David solidarily liable with MAC to complainants. Pertinent portions of Arbiter Ortiguerra’s decision are quoted below:

The complainants claim that Atty. Antonio Carag and Mr. Armando David should be held jointly and severally liable with respondent corporation [MAC]. This bid is premised on the belief that the impleader of the aforesaid officers will guarantee payment of whatever may be adjudged in complainants’ favor by virtue of this case. It is a basic principle in law that corporations have personality [sic] distinct and separate from the stockholders. This concept is known as corporate fiction. Normally, officers acting for and in behalf of a corporation are not held personally liable for the obligation of the corporation. In instances where corporate officers dismissed employees in bad faith or wantonly violate labor standard laws or when the company had already ceased operations and there is no way by which a judgment in favor of employees could be satisfied, corporate officers can be held jointly and severally liable with the company. This Office after a careful consideration of the factual backdrop of the case is inclined to grant complainants’ prayer for the impleader of Atty. Antonio Carag and Mr. Armando David, to assure that valid claims of employees would not be defeated by the closure of [MAC].

x x x x

WHEREFORE, premises considered, judgment is hereby rendered declaring respondents jointly and severally guilty of illegal closure and they are hereby ordered as follows:

1. To pay complainants’ separation pay computed on the basis of one (1) month for every year of service, a fraction of six (6) months to be considered as one (1) year in the total amount of P49,101,621.00; and

2. To pay complainants attorney’s fees in an amount equivalent to 10% of the judgment award.

The claims for moral, actual and exemplary damages are dismissed for lack of evidence.

SO ORDERED.

David claimed that he was not notified of Arbiter Ortiguerra’s decision. David alleged that it was only during a chance encounter with Carag that he learned of Arbiter Ortiguerra’s decision against him. Neither did David know that MAC filed an appeal on his behalf before the NLRC.

David then filed a petition for certiorari under Rule 65, docketed as G.R. No. 118880, before this Court. We also consolidated David’s petition with that of MACLU and NAFLU (G.R. No. 118880) and of MAC and Carag (G.R. No. 118820). On 12 July 1999, after all the parties had filed their memoranda, we referred the consolidated cases to the appellate court in accordance with our decision in St. Martin Funeral Home v. NLRC. MAC, Carag, and David filed separate petitions before the appellate court.

David asked the appellate court to rule on whether the labor arbiter acquired jurisdiction over his person. David emphasized that he was impleaded as a party respondent not in a separate order prior to

the promulgation of the decision, but in the decision itself. David also questioned his solidary liability with his co-respondents.

The Ruling of the Appellate Court

In its Joint Decision dated 29 February 2000, the appellate court affirmed the decision of Arbiter Ortiguerra and the resolution of the NLRC. The appellate court stated that “petitioner DAVID cannot just evade his liability by the simple expedience of alleging that he had not affirmed nor adopted the position paper filed by petitioner MAC.” David’s resignation from MAC took place only on 15 October 1993, long after MAC’s closure took place. According to the appellate court, this meant that David willfully and knowingly assented to the unlawful closure of the company without any notice to the employees. David was thus solidarily liable, along with MAC and Carag, for the unpaid wages of MAC’s employees.

The dispositive portion of the appellate court’s decision reads as follows:

IN VIEW WHEREOF, the petitions are DISMISSED. The decision of Labor Arbiter Isabel Panganiban-Ortiguerra dated June 17, 1994, and the Resolution dated January 5, 1995, issued by the National Labor Relations Commission are hereby AFFIRMED. As a consequence of dismissal, the temporary restraining order issued on March 2, 1995, by the Third Division of the Supreme Court is LIFTED. Costs against petitioners.

SO ORDERED.

The appellate court denied David’s motion for reconsideration in a Resolution promulgated on 27 March 2001.

The Issues :

David raises the following issues before this Court:

1. Whether or not in finding petitioner guilty of illegal closure and making him personally liable for payment of private respondent’s claims, petitioner had been afforded due process of law as guaranteed by the 1987 Constitution?

2. Whether or not the Labor Court has acquired jurisdiction over the person of petitioner by ordering him to be impleaded as a party respondent in the course of the proceedings not through a separate order prior to the promulgation of its decision, but through the decision itself, under which, petitioner was adjudged to be jointly and severally liable to pay the monetary award with the original respondent?

3. Whether or not the Labor Arbiter has acted with grave abuse of discretion in adjudging petitioner to be jointly and severally liable with his co-respondents on the sole ground that the valid claims of the employees should not be defeated by the closure of the corporation?

The Ruling of the Court :

The petition has merit. The issues raised by David can be limited to denial of due process and the propriety of David’s solidary liability.

Denial of Due Process

The proceedings before the Labor Arbiter deprived David of due process. MACLU and NAFLU filed their complaint against MAC on 12 August 1993. Arbiter Ortiguerra’s decision shows that MACLU, NAFLU, and MAC were the only parties summoned to a conference for a possible settlement. Because of MAC’s failure to appear, Arbiter Ortiguerra deemed the case submitted for resolution. David’s resignation from MAC took effect on 15 October 1993. NAFLU and MACLU moved to implead Carag and David for the first time only in their position paper dated 3 January 1994. David did not receive any summons and had no knowledge of the decision against him. The records of the present case fail to show any order from Arbiter Ortiguerra summoning David to attend the preliminary conference. Despite this lack of summons, in her Decision dated 17 June 1994, Arbiter Ortiguerra not only granted MACLU and NAFLU’s motion to implead Carag and David, she also held Carag and David solidarily liable with MAC.

Arbiter Ortiguerra’s zeal to rule in favor of MACLU and NAFLU should have been tempered by observance of due process. Like Carag, David was “not issued summons, not accorded a conciliatory conference, not ordered to submit a position paper, not accorded a hearing, not given an opportunity to present his evidence, and not notified that the case was submitted for resolution.” Unlike Carag, David did not even know that Arbiter Ortiguerra issued a decision against him. David was not even able to file an appeal before the NLRC. David’s participation in the present case, albeit belated, questioned his inclusion in the decisions of the tribunals below. David’s protestations are not without basis, as can be seen from Sections 2, 3, 4, 5(b), and 11(c) of Rule V of the New Rules of Procedure of the NLRC.

The records of the case show that NAFLU and MACLU moved to implead Carag and David for the first time only in their position paper dated 3 January 1994. Arbiter Ortiguerra’s decision shows that MACLU, NAFLU, and MAC were the only parties summoned to a conference for a possible settlement. Therefore, at the time of the conference, David was not yet a party to the case. The position paper subsequently filed by MAC was filed at a time when David had already resigned from MAC. David’s knowledge of a labor case against MAC did not serve the same purpose as a summons. David did not receive any summons and had no knowledge of the decision against him.

The Labor Arbiter and the NLRC did not have jurisdiction over David. This utter lack of jurisdiction voids any liability of David for any monetary award or judgment in favor of MACLU and NAFLU.

Corporate President’s Solidary Liability

Assuming arguendo that the NLRC and the Labor Arbiter had jurisdiction over David, we rule that it was still improper to hold David liable for MAC’s obligations to its employees.

Arbiter Ortiguerra held David liable for MAC’s debts pursuant to Article 212(e) of the Labor Code, which reads:

‘Employer’ includes any person acting in the interest of an employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents except when acting as employer.

However, Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation. Section 31 of the Corporation Code provides:

Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. x x x

There was no showing of David willingly and knowingly voting for or assenting to patently unlawful acts of the corporation, or that David was guilty of gross negligence or bad faith.

WHEREFORE, we GRANT the petition. We SET ASIDE the Joint Decision dated 29 February 2000 and the Resolution dated 27 March 2001 of the Court of Appeals in CA-G.R. SP Nos. 54404-06.

SO ORDERED.

Discussion Questions with Answers:

(1) Is there an instance where corporate officers liable are held jointly and severally liable with the corporation? Explain and cite legal basis.

Answer: Yes. Section 31 of the Corporation Code provides: Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

(2) In what instances corporate officers are held liable? Cite legal basis. Answer: Section 31 of the Corporation Code provides: Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

(3) How is the rule related to separate personality doctrine? Answer: The Main Doctrine that “A Corporation has a personality Separate and Distinct from its Stockholders or Members, which includes directors, trustees or officers, was upheld in the

ruling of the above case which simply means that the liability of the corporation is not the liability of its stockholders, members, directors, trustees or officers and vice versa.

Pantranco Employees Asso., et al. vs. NLRC, et al./Philippine National Bank Vs. Pantranco Employees Association Inc., et al., G.R. No. 170689/G.R. No. 170705, March 17, 2009

The Gonzales family owned two corporations, namely, the Pantranco North Express, Inc. (PNEI) and Macris Realty Corporation (Macris). PNEI provided transportation services to the public, and had its bus terminal at the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood on four valuable pieces of real estate (known as Pantranco properties) registered under the name of Macris. The Gonzales family later incurred huge financial losses despite attempts of rehabilitation and loan infusion. In March 1975, their creditors took over the management of PNEI and Macris. By 1978, full ownership was transferred to one of their creditors, the National Investment Development Corporation (NIDC), a subsidiary of the PNB.

Macris was later renamed as the National Realty Development Corporation (Naredeco) and eventually merged with the National Warehousing Corporation (Nawaco) to form the new PNB subsidiary, the PNB-Madecor.

In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by Gregorio Araneta III. In 1986, PNEI was among the several companies placed under sequestration by the Presidential Commission on Good Government (PCGG) shortly after the historic events in EDSA. In January 1988, PCGG lifted the sequestration order to pave the way for the sale of PNEI back to the private sector through the Asset Privatization Trust (APT). APT thus took over the management of PNEI.

In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension of payments. A management committee was thereafter created which recommended to the SEC the sale of the company through privatization. As a cost-saving measure, the committee likewise suggested the retrenchment of several PNEI employees. Eventually, PNEI ceased its operation. Along with the cessation of business came the various labor claims commenced by the former employees of PNEI where the latter obtained favorable decisions.

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution commanding the National Labor Relations Commission (NLRC) sheriffs to levy on the assets of PNEI in order to satisfy the P722,727,150.22 due its former employees, as full and final satisfaction of the judgment awards in the labor cases. The sheriffs were likewise instructed to proceed against PNB, PNB-Madecor and Mega Prime. In implementing the writ, the sheriffs levied upon the four valuable pieces of real estate located at the corner of Quezon and Roosevelt Avenues, on which the former Pantranco Bus Terminal stood. These properties were covered by Transfer Certificate of Title (TCT) Nos. 87881-87884, registered under the name of PNB-Madecor. Subsequently, Notice of Sale of the foregoing real properties was published in the newspaper and the sale was set on July 31, 2002.

Having been notified of the auction sale, motions to quash the writ were separately filed by PNB-Madecor and Mega Prime, and PNB. They likewise filed their Third-Party Claims. PNB-Madecor anchored its motion on its right as the registered owner of the Pantranco properties, and Mega Prime as the successor-in-interest. For its part, PNB sought the nullification of the writ on the ground that it was not a party to the labor case. In its Third-Party Claim, PNB alleged that PNB-Madecor was indebted to the former and that the Pantranco properties would answer for such debt.

On September 10, 2002, the Labor Arbiter declared that the subject Pantranco properties were owned by PNB-Madecor. It being a corporation with a distinct and separate personality, its assets could not answer for the liabilities of PNEI. Considering, however, that PNB-Madecor executed a promissory note in favor of PNEI for P7,884,000.00, the writ of execution to the extent of the said amount was concerned was considered valid. PNB’s third-party claim – to nullify the writ on the ground that it has an interest in the Pantranco properties being a creditor of PNB-Madecor, – on the other hand, was denied because it only had an inchoate interest in the properties.

The NLRC affirmed the Labor Arbiter’s decision. The CA also affirmed the NLRC’s decision. The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from PNEI. As such, there being no cogent reason to pierce the veil of corporate fiction, the separate personalities of the above corporations should be maintained. The CA added that the Pantranco properties were never owned by PNEI; rather, their titles were registered under the name of PNB-Madecor. If PNB and PNB-Madecor could not answer for the liabilities of PNEI, with more reason should Mega Prime not be held liable being a mere successor-in-interest of PNB-Madecor.

The former PNEI employees argued before the Supreme Court that PNB, through PNB-Madecor, directly benefited from the operation of PNEI and had complete control over the funds of PNEI. Hence, they are solidarily answerable with PNEI for the unpaid money claims of the employees. Citing A.C. Ransom Labor Union-CCLU v. NLRC, the employees insist that where the employer corporation ceases to exist and is no longer able to satisfy the judgment awards in favor of its employees, the owner of the employer corporation should be made jointly and severally liable. The Supreme Court ruled that the former PNEI employees cannot attach the properties (specifically the Pantranco properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI. According to the Supreme Court:

“First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere in the records was it shown that PNEI owned the Pantranco properties. Petitioners, in fact, never alleged in any of their pleadings the fact of such ownership. What was established, instead, in PNB MADECOR v. Uy and PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB was that the properties were owned by Macris, the predecessor of PNB-Madecor. Hence, they cannot be pursued against by the creditors of PNEI. We would like to stress the settled rule that the power of the court in executing judgments extends only to properties unquestionably belonging to the judgment debtor alone. To be sure, one man’s goods shall not be sold for another man’s debts. A sheriff is not authorized to attach or levy on property not belonging to the judgment debtor, and even incurs liability if he wrongfully levies upon the property of a third person.

Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from that of PNEI. PNB is sought to be held liable because it acquired PNEI through NIDC at the time when PNEI was suffering financial reverses. PNB-Madecor is being made to answer for petitioners’ labor claims as the owner of the subject Pantranco properties and as a subsidiary of PNB. Mega Prime is also included for having acquired PNB’s shares over PNB-Madecor.

The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected. This is a fiction created by law for convenience and to prevent injustice. Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI are corporations with their own personalities. The “separate personalities” of the first three corporations had been recognized by this Court in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime

Realty and Holdings Corporation v. PNB where we stated that PNB was only a stockholder of PNB-Madecor which later sold its shares to Mega Prime; and that PNB-Madecor was the owner of the Pantranco properties. Moreover, these corporations are registered as separate entities and, absent any valid reason, we maintain their separate identities and we cannot treat them as one.

Neither can we merge the personality of PNEI with PNB simply because the latter acquired the former. Settled is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.

Lastly, while we recognize that there are peculiar circumstances or valid grounds that may exist to warrant the piercing of the corporate veil, none applies in the present case whether between PNB and PNEI; or PNB and PNB-Madecor.

Under the doctrine of “piercing the veil of corporate fiction,” the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation of this doctrine is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or as one and the same.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist that because the company, PNEI, has already ceased operations and there is no other way by which the judgment in favor of the employees can be satisfied, corporate officers can be held jointly and severally liable with the company. Petitioners rely on the pronouncement of this Court in A.C. Ransom Labor Union-CCLU v. NLRC and subsequent cases.

This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant case.

For one, in the said cases, the persons made liable after the company’s cessation of operations were the officers and agents of the corporation. The rationale is that, since the corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of the employer. The corporation, only in the technical sense, is the employer. In the instant case, what is being made liable is another corporation (PNB) which acquired the debtor corporation (PNEI).

Moreover, in the recent cases Carag v. National Labor Relations Commission and McLeod v. National Labor Relations Commission, the Court explained the doctrine laid down in AC Ransom relative to the personal liability of the officers and agents of the employer for the debts of the latter. In AC Ransom, the Court imputed liability to the officers of the corporation on the strength of the definition of an employer

in Article 212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer includes any person acting in the interest of an employer, directly or indirectly, but does not include any labor organization or any of its officers or agents except when acting as employer. It was clarified in Carag and McLeod that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation. It added that the governing law on personal liability of directors or officers for debts of the corporation is still Section 31 of the Corporation Code.

More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom, foreseeing the possibility or probability of payment of backwages to its employees, organized Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their case. The execution could not be implemented against Ransom because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. Hence, the Court sustained the piercing of the corporate veil and made the officers of Ransom personally liable for the debts of the latter.

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:

1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;

2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or

3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.

The Court ruled that assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI, petitioners still cannot proceed against the Pantranco properties, the same being owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The general rule remains that PNB-Madecor has a personality separate and distinct from PNB. The mere fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses.

Discussion Questions with Answers:

(1) Discuss the doctrine of piercing the corporate veil. Give its rationale.

Answer: The doctrine of piercing the corporate veil is a well-settled principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons. However, the rule is that a court should be careful in assessing the milieu where the

doctrine of the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous application. Thus, cutting through the corporate cover requires an approach characterized by due care and caution: Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Sarona v. National Labor Relations Commission has defined the scope of application of the doctrine of piercing the corporate veil.

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:

i) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;

ii) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or

iii) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

This is the rationale of piercing the corporate veil, when any of the three aforementioned cases exist.

To determine if corporations are used as alter egos(alter ego theory), case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:

(a) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

(b) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and

(c) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

The first prong is the “instrumentality” or “control” test. This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent corporation’s relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, “is operating the business directly for itself.”

The second prong is the “fraud” test. This test requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of “an element of injustice or fundamental unfairness.”

The third prong is the “harm” test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and improper use of the corporate form and, thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.

In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. With respect to the control element, it refers not to paper or formal control by majority or even complete stock control but actual control which amounts to “such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal.” In addition, the control must be shown to have been exercised at the time the acts complained of took place. The doctrine of piercing the corporate veil with regards to ownership of shares: Ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship that will justify the punctuating corporate cover. The “mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.” The “existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.

(2) Relate the doctrine to the limited liability and the separate personality doctrines.

Answer: A corporation is a separate legal entity or personality and the liability of the members are said to be limited. But there is a distinction between the two.

Limited liability is the logical consequence of the existence of a separate personality.

From the creditors’ point of view, the consequence of the limited liability principle is that creditors’ claims are restricted to the corporation’s assets and cannot be asserted against the shareholders’ assets. On the other hand, shareholders benefi t from the limited liability principle because once the business is successful, it is them who gain the profit, and in the event that the corporation is wound up their liability

would be limited only to the value of their unpaid shares or their guarantee; thus the satisfaction of unsecured creditors’ claims is endangered without shareholders being responsible.

(3) When do you apply the said doctrine?

Answer: The limited liability principle is a logical consequence of the existence of corporations being a separate legal entity. The doctrine of separate legal entity of the corporation applies when the corporation’s profits and earnings are proportionately distributed to its shareholders, because the corporation’s earning is not the earning of any of the shareholders, this entity separation is more prominent in the payment of liabilities to creditors because liabilities incurred by the corporation are not liabilities of any of the shareholders. The limited liability principle applies when creditors’ desire to claim payments of liabilities from any of the shareholders, the limited liability principle restricts creditors’s claims to the corporation’s assets and cannot be asserted against the shareholders’ assets.

(4) When can you say that a subsidiary is just a mere instrumentality of the parent corporation?

Answer: The concurrence of three elements must exist: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.

Gloria V. Gomez vs. PNOC Development and Management Corporation (PDMC)G.R. No. 174044, November 27, 2009

This case is about what distinguishes a regular company manager performing important executive tasks from a corporate officer whose election and functions are governed by the companys by-laws.

The Facts and the Case

Petitioner Gloria V. Gomez used to work as Manager of the Legal Department of Petron Corporation, then a government-owned corporation. With Petrons privatization, she availed of the companys early retirement program and left that organization on April 30, 1994. On the following day, May 1, 1994, however, Filoil Refinery Corporation (Filoil), also a government-owned corporation, appointed her its corporate secretary and legal counsel, with the same managerial rank, compensation, and benefits that she used to enjoy at Petron.

But Filoil was later on also identified for privatization. To facilitate its conversion, the Filoil board of directors created a five-member task force headed by petitioner Gomez who had been designated administrator. While documenting Filoils assets, she found several properties which were not in the books of the corporation. Consequently, she advised the board to suspend the privatization until all assets have been accounted for.

With the privatization temporarily shelved, Filoil underwent reorganization and was renamed Filoil Development Management Corporation (FDMC), which later became the respondent PNOC Development Management Corporation (PDMC). When this happened, Gomezs task force was abolished

and its members, including Gomez, were given termination notices on March 5, 1996. The matter was then reported to the Department of Labor and Employment on March 7, 1996.

Meantime, petitioner Gomez continued to serve as corporate secretary of respondent PDMC. On September 23, 1996 its president re-hired her as administrator and legal counsel of the company. In accordance with company guidelines, it credited her the years she served with the Filoil task force. On May 24, 1998, the next president of PDMC extended her term as administrator beyond her retirement age, pursuant to his authority under the PDMC Approvals Manual. She was supposed to serve beyond retirement from August 11, 1998 to August 11, 2004. Meantime, a new board of directors for PDMC took over the company.

On March 29, 1999 the new board of directors of respondent PDMC removed petitioner Gomez as corporate secretary. Further, at the boards meeting on October 21, 1999 the board questioned her continued employment as administrator. In answer, she presented the former presidents May 24, 1998 letter that extended her term. Dissatisfied with this, the board sought the advice of its legal department, which expressed the view that Gomez’s term extension was an ultra vires act of the former president. It reasoned that, since her position was functionally that of a vice-president or general manager, her term could be extended under the companys by-laws only with the approval of the board. The legal department held that her de facto tenure could be legally put to an end.

Sought for comment, the Office of the Government Corporate Counsel (OGCC) held the view that while respondent PDMCs board did not approve the creation of the position of administrator that Gomez held, such action should be deemed ratified since the board had been aware of it since 1994. But the OGCC ventured that the extension of her term beyond retirement age should have been made with the boards approval.

Petitioner Gomez for her part conceded that as corporate secretary, she served only as a corporate officer. But, when they named her administrator, she became a regular managerial employee. Consequently, the respondent PDMCs board did not have to approve either her appointment as such or the extension of her term in 1998.

Pending resolution of the issue, the respondent PDMCs board withheld petitioner Gomezs wages from November 16 to 30, 1999, prompting her to file a complaint for non-payment of wages, damages, and attorneys fees with the Labor Arbiter on December 8, 1999. She later amended her complaint to include other money claims.

In a special meeting held on December 29, 1999 the respondent PDMCs board resolved to terminate petitioner Gomez’s services retroactive on August 11, 1998, her retirement date. On January 5, 2000 the board informed petitioner of its decision. Thus, she further amended her complaint to include illegal dismissal.

Respondent PDMC moved to have petitioner Gomez’s complaint dismissed on ground of lack of jurisdiction. The Labor Arbiter granted the motion upon a finding that Gomez was a corporate officer and that her case involved an intra-corporate dispute that fell under the jurisdiction of the Securities and Exchange Commission (SEC) pursuant to Presidential Decree (P.D.) 902-A. On motion for reconsideration, the National Labor Relations Commission (NLRC) Third Division set aside the Labor Arbiters order and remanded the case to the arbitration branch for further proceedings. The Third

Division held that Gomez was a regular employee, not a corporate officer; hence, her complaint came under the jurisdiction of the Labor Arbiter.

Upon elevation of the matter to the Court of Appeals (CA) in CA-G.R. SP 88819, however, the latter rendered a decision on May 19, 2006, reversing the NLRC decision. The CA held that since Gomez’s appointment as administrator required the approval of the board of directors, she was clearly a corporate officer. Thus, her complaint is within the jurisdiction of the Regional Trial Court (RTC) under P.D. 902-A, as amended by Republic Act (R.A.) 8799. With the denial of her motion for reconsideration, Gomez filed this petition for review on certiorari under Rule 45.

The Issue Presented

The key issue in this case is whether or not petitioner Gomez was, in her capacity as administrator of respondent PDMC, an ordinary employee whose complaint for illegal dismissal and non-payment of wages and benefits is within the jurisdiction of the NLRC.

The Court’s Ruling

Ordinary company employees are generally employed not by action of the directors and stockholders but by that of the managing officer of the corporation who also determines the compensation to be paid such employees. Corporate officers, on the other hand, are elected or appointed by the directors or stockholders, and are those who are given that character either by the Corporation Code or by the corporations by-laws.

Here, it was the PDMC president who appointed petitioner Gomez administrator, not its board of directors or the stockholders. The president alone also determined her compensation package. Moreover, the administrator was not among the corporate officers mentioned in the PDMC by-laws. The corporate officers proper were the chairman, president, executive vice-president, vice-president, general manager, treasurer, and secretary.

Respondent PDMC claims, however, that since its board had under its by-laws the power to create additional corporate offices, it may be deemed to have simply ratified its presidents creation of the corporate position of administrator. But creating an additional corporate office was definitely not respondent PDMCs intent based on its several actions concerning the position of administrator.

Respondent PDMC never told Gomez that she was a corporate officer until the tail-end of her service after the board found legal justification for getting rid of her by consulting its legal department and the OGCC which supplied an answer that the board obviously wanted. Indeed, the PDMC president first hired her as administrator in May 1994 and then as administrator/legal counsel in September 1996 without a board approval. The president even extended her term in May 1998 also without such approval. The companys mindset from the beginning, therefore, was that she was not a corporate officer.

Respondent PDMC of course claims that as administrator petitioner Gomez performed functions that were similar to those of its vice-president or its general manager, corporate positions that were mentioned in the companys by-laws. It points out that Gomez was third in the line of command,

next only to the chairman and president, and had been empowered to make major decisions and manage the affairs of the company.

But the relationship of a person to a corporation, whether as officer or agent or employee, is not determined by the nature of the services he performs but by the incidents of his relationship with the corporation as they actually exist. Here, respondent PDMC hired petitioner Gomez as an ordinary employee without board approval as was proper for a corporate officer. When the company got her the first time, it agreed to have her retain the managerial rank that she held with Petron. Her appointment paper said that she would be entitled to all the rights, privileges, and benefits that regular PDMC employees enjoyed. This is in sharp contrast to what the former PDMC presidents appointment paper stated: he was elected to the position and his compensation depended on the will of the board of directors.

What is more, respondent PDMC enrolled petitioner Gomez with the Social Security System, the Medicare, and the Pag-Ibig Fund. It even issued certifications dated October 10, 2008, stating that Gomez was a permanent employee and that the company had remitted combined contributions during her tenure. The company also made her a member of the PDMCs savings and provident plan and its retirement plan. It grouped her with the managers covered by the companys group hospitalization insurance. Likewise, she underwent regular employee performance appraisals, purchased stocks through the employee stock option plan, and was entitled to vacation and emergency leaves. PDMC even withheld taxes on her salary and declared her as an employee in the official Bureau of Internal Revenue forms. These are all indicia of an employer-employee relationship which respondent PDMC failed to refute.

Estoppel, an equitable principle rooted on natural justice, prevents a person from rejecting his previous acts and representations to the prejudice of others who have relied on them. This principle of law applies to corporations as well. The PDMC in this case is estopped from claiming that despite all the appearances of regular employment that it weaved around petitioner Gomez’s position it must have technically hired her only as a corporate officer. The board and its officers made her stay on and work with the company for years under the belief that she held a regular managerial position.

That petitioner Gomez served concurrently as corporate secretary for a time is immaterial. A corporation is not prohibited from hiring a corporate officer to perform services under circumstances which will make him an employee. Indeed, it is possible for one to have a dual role of officer and employee. In Elleccion Vda. De Lecciones v. National Labor Relations Commission, the Court upheld NLRC jurisdiction over a complaint filed by one who served both as corporate secretary and administrator, finding that the money claims were made as an employee and not as a corporate officer.

WHEREFORE, the Court GRANTS the petition, REVERSES and SETS ASIDE the decision dated May 19, 2006 and the resolution dated August 15, 2006 of the Court of Appeals in CA-G.R. SP 88819, and REINSTATES the resolution dated November 22, 2002 of the National Labor Relations Commissions Third Division in NLRC NCR 30-12-00856-99. Let the records of this case be REMANDED to the arbitration branch of origin for the conduct of further proceedings.

SO ORDERED.

Discussion Questions with Answers:

(1) Give the distinction between ordinary employees and corporate officers.

Answer: Ordinary company employees are generally employed not by action of the directors and stockholders but by that of the managing officer of the corporation who also determines the compensation to be paid such employees. Corporate officers, on the other hand, are elected or appointed by the directors or stockholders, and are those who are given that character either by the Corporation Code or by the corporation’s by-laws.

(2) When is an employee considered corporate officer?

Answer: A corporation is not prohibited from hiring a corporate officer to perform services under circumstances which will make him an employee. It is possible for one to have a dual role of officer and employee. Employees can be elected or appointed by the directors or stockholders and become a Corporate officer, these corporate officers are those who are given that character either by the Corporation Code or by the corporation’s by-laws.

(3) Give five (5) examples of corporate officers and their corresponding duties.

Answer:

CEO or president. The president must be a director. The corporation’s CEO or president is responsible for the overall day-to-day activities of the corporation (some of which are often delegated to other officers). The CEO signs major contracts, stock certificates and other legal documents, as required. The CEO acts under the direction of the board. For substantial actions to be taken, the CEO will act on behalf of the corporation by corporate resolution.

Vice president. This officer may or may not be required by the corporation’s by-laws. When the position does exist, the vice president fills in when the CEO is unavailable or when the board assigns specific duties.

Treasurer or chief financial officer. The treasurer may or may not be a director, is responsibile for the financial matters of the corporation. In a larger corporation, this may consist mainly of oversight; in smaller corporations, this charge will include daily responsibility for financial matters. The treasurer is responsible for maintaining the financial corporate records and for preparing and presenting financial reports to the board, officers and shareholders.

Secretary. The secretary must be a resident and citizen of the Philippines, is charged with maintaining the corporate records of the corporation and preparing minutes of board and shareholder meetings. The secretary may also be required to provide certification for banks or other financial institutions and may also be required to provide requested copies of corporate documents.

Chief Legal Officer. This officer may or may not be required by the corporation’s by-laws. When the position does exist, the CLO deals with legal matters affecting the corporation.

Valle Verde Country Club vs. Victor AfricaG.R. No. 151969 dated September 4, 2009

In this petition for review on certiorari, the parties raise a legal question on corporate governance: Can the members of a corporation’s board of directors elect another director to fill in a vacancy caused by the resignation of a hold-over director? The Facts

On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle Verde Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa. In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders meeting could not be obtained. Consequently, the above-named directors continued to serve in the VVCC Board in a hold-over capacity.

On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In a meeting held on October 6, 1998, the remaining directors, still constituting a quorum of VVCCs nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy created by the resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining members of the VVCC Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC), respectively. The SEC case questioning the validity of Roxas appointment was docketed as SEC Case No. 01-99-6177. The RTC case questioning the validity of Ramirez appointment was docketed as Civil Case No. 68726.

In his nullification complaint before the RTC, Africa alleged that the election of Roxas was contrary to Section 29, in relation to Section 23, of the Corporation Code of the Philippines (Corporation Code). These provisions read:

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 until their successors are elected and qualified. x x x x

Sec. 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. xxx.

Africa claimed that a year after Makalintals election as member of the VVCC Board in 1996, his [Makalintals] term as well as those of the other members of the VVCC Board should be considered to have already expired. Thus, according to Africa, the resulting vacancy should have been filled by the stockholders in a regular or special meeting called for that purpose, and not by the remaining members of the VVCC Board, as was done in this case.

Africa additionally contends that for the members to exercise the authority to fill in vacancies in the board of directors, Section 29 requires, among others, that there should be an unexpired term during which the successor-member shall serve. Since Makalintals term had already expired with the lapse of the one-year term provided in Section 23, there is no more unexpired term during which Ramirez could serve.

Through a partial decision promulgated on January 23, 2002, the RTC ruled in favor of Africa and declared the election of Ramirez, as Makalintals replacement, to the VVCC Board as null and void.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as member of the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested its intent to appeal from the SECs ruling, no petition was actually filed with the Court of Appeals; thus, the appellate court considered the case closed and terminated and the SECs ruling final and executory.

The Petition

VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial decision for being contrary to law and jurisprudence. VVCC made a direct resort to the Court via a petition for review on certiorari, claiming that the sole issue in the present case involves a purely legal question.

As framed by VVCC, the issue for resolution is whether the remaining directors of the corporations Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the resignation of a hold-over director is expressly granted to the remaining members of the corporation’s board of directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board of directors caused by the expiration of a member’s term shall be filled by the corporation’s stockholders. Correlating Section 29 with Section 23 of the same law, VVCC alleges that a member’s term shall be for one year and until his successor is elected and qualified; otherwise stated, a member’s term expires only when his successor to the Board is elected and qualified. Thus, until such

time as [a successor is] elected or qualified in an annual election where a quorum is present, VVCC contends that the term of [a member] of the board of directors has yet not expired.

As the vacancy in this case was caused by Makalintals resignation, not by the expiration of his term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.

In support of its arguments, VVCC cites the Courts ruling in the 1927 El Hogar] case which states:

Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it has been the practice of the directors to fill in vacancies in the directorate by choosing suitable persons from among the stockholders. This custom finds its sanction in Article 71 of the By-Laws, which reads as follows:

Art. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board of directors until the election at the general meeting.

xxxx Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that an office shall become vacant at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to hold over until his successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation. The doctrine above stated finds expression in article 66 of the by-laws of the respondent which declares in so many words that directors shall hold office "for the term of one year or until their successors shall have been elected and taken possession of their offices." xxx. It results that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to the personality of the individuals chosen by the directors to fill vacancies in the body.

Africa, in opposing VVCCs contentions, raises the same arguments that he did before the trial court.

The Court’s Ruling

We are not persuaded by VVCCs arguments and, thus, find its petition unmeritorious.

To repeat, the issue for the Court to resolve is whether the remaining directors of a corporations Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over director. The resolution of this legal issue is significantly hinged on the determination of what constitutes a directors term of office.

The holdover period is not part of the term of office of a member of the board of directors.The word term has acquired a definite meaning in jurisprudence. In several cases, we have

defined term as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. The term of office is not affected by the holdover. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify.

Term is distinguished from tenure in that an officers tenure represents the term during which

the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent.

Based on the above discussion, when Section 23 of the Corporation Code declares that the

board of directors shall hold office for one (1) year until their successors are elected and qualified, we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period that time from the lapse of one year from a member’s election to the Board and until his successors election and qualification is not part of the directors original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term.

After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals term of office is deemed to have already expired. That he continued to serve in the VVCC Board in a holdover capacity cannot be considered as extending his term. To be precise, Makalintals term of office began in 1996 and expired in 1997, but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until his resignation on November 10, 1998. This holdover period, however, is not to be considered as part of his term, which, as declared, had already expired.

With the expiration of Makalintals term of office, a vacancy resulted which, by the terms of Section 29 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called for the purpose. To assume as VVCC does that the vacancy is caused by Makalintals resignation in 1998, not by the expiration of his term in 1997, is both illogical and unreasonable. His resignation as a holdover director did not change the nature of the vacancy; the vacancy due to the expiration of Makalintals term had been created long before his resignation.

The powers of the corporation’s board of directors emanate from its stockholders

VVCCs construction of Section 29 of the Corporation Code on the authority to fill up vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens the stockholders power to participate in the corporate governance by electing their representatives to the board of directors. The board of directors is the directing and controlling body of the corporation. It is a creation of the stockholders and derives its power to control and direct the affairs of the corporation from them. The board of directors, in drawing to themselves the powers of the corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that the board should exercise not only care and diligence, but utmost good faith in the management of corporate affairs.

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

This theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation Code, in cases where the vacancy in the corporations board of directors is caused not by the expiration of a members term, the successor so elected to fill in a vacancy shall be elected only for the unexpired term of the his predecessor in office. The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporations operations; yet, in recognition of the stockholders right to elect the members of the board, it limited the period during which the successor shall serve only to the unexpired term of his predecessor in office.

While the Court in El Hogar approved of the practice of the directors to fill vacancies in the directorate, we point out that this ruling was made before the present Corporation Code was enacted and before its Section 29 limited the instances when the remaining directors can fill in vacancies in the board, i.e., when the remaining directors still constitute a quorum and when the vacancy is caused for reasons other than by removal by the stockholders or by expiration of the term.

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring

within the directors term of office. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporations stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a members term.

As correctly pointed out by the RTC, when remaining members of the VVCC Board elected

Ramirez to replace Makalintal, there was no more unexpired term to speak of, as Makalintals one-year term had already expired. Pursuant to law, the authority to fill in the vacancy caused by Makalintals leaving lies with the VVCCs stockholders, not the remaining members of its board of directors.

WHEREFORE, we DENY the petitioners petition for review on certiorari, and AFFIRM the partial decision of the Regional Trial Court, Branch 152, Manila, promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the petitioners.

SO ORDERED.

Discussion Questions:

(1) Distinguish term from tenure.

Answer: Term is the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another while Tenure is the period during which the incumbent actually holds the office.

(2) Discuss the principle of holdover. Give its rationale.

Answer: The principle of holdover is the situation where the term of the officer have expired, yet he continues to hold the office during the “holdover term”, this arises only when no successors are elected due to valid and justifiable reasons. The rationale of the holdover is for the office to continue performing its functions.

(3) Can the BOD fill the vacancy of directorship brought about by the expiration of the term? Explain.

Answer: When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a director’s term.

(4) What are the instances where the remaining BOD can fill any vacancy in the board? Relate this to the theory of delegated power of BOD.

Answer: The theory of delegated power of the board of directors explains why, under Section 29 of the Corporation Code, in cases where the vacancy in the corporations board of directors is caused not by the expiration of a members term, the successor so elected to fill in a vacancy shall be elected only for the unexpired term of the his predecessor in office. The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporations operations; yet, in recognition of the stockholders right to elect the members of the board, it limited the period during which the successor shall serve only to the unexpired term of his predecessor in office.

(5) Is resignation as director while in a holdover capacity the same with expiration of term? Explain.

Answer: No. The holdover period is not part of the term of office of a member of the board of directors. The term of office is not affected by the holdover. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify.