Escolar Documentos
Profissional Documentos
Cultura Documentos
CHAPTER 1: INTRODUCTION
law is necessary for its creation such that the mere agreement of the
persons composing it or intending to organize it does not warrant the
grant of its independent existence as a juridical entity;
ADVANTAGES
Eliminates the bureaucratic process
common in corporations where the
board of directors must sit as a
body to have a valid transaction.
The proprietor makes his own
decisions and can act without delay.
Proprietor owns all the profits
without having to share the same
DISADVANTAGES
Unlimited personal liability of the
proprietor
2.
3.
PARTNERSHIP
Has a personality separate and
distinct from the partners
Has for its object a general business
of particular kind, although there
may be partnership for a single
transaction
Corporations, generally are not
allowed to enter into partnerships*
JOINT VENTURE
Does not acquire a separate and
distinct
personality
from
the
venturers
Object is an undertaking of a
particular or single transaction
Corporations
ventures
may
enter
joint
A.
2.
3.
4.
POWERS,
ATTRIBUTES
AND
PROPERTIES
EXPRESSLY
AUTDHORIZED BY LAW it can exercise only such powers and can
hold only such properties as are granted to it by the enabling statutes
unlike natural persons who can do anything as they please.
LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept. 21,
1994]) Private respondent Carloto, incumbent President-Manager of private
respondent Rural Bank of Labason, alleged that he was instructerd to go to
Manila to follow up on the Banks plan of payment of rediscounting
obligations with Central Banks main office, where he purchased a round trip
ticket and phone his sister to send him P1,000 for his pocket money which
LBC failed to deliver and eventually Carloto was not able to submit the
rediscounting documents and the Bank was made to pay the Central Bank
P32,000 s penalty interest and alleged that he suffered embarrassment and
humiliation. Respondent Rural Bank was later on joined as one of the plaintiff
and prayed for the reimbursement of P32,000. Carloto and the Bank was
awarded moral and exemplary damages of P10,000 and P5,000, respectively.
ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should be
awarded moral damages?
HELD: No. Moral damages are granted in recompense for physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, oral shock, social humiliation and social injury. A corporation, being
an artificial person and having existence only in legal contemplation, has no
feelings, no emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills, sorrows and grieves
of life all of which cannot be suffered by respondent bank as an artificial
person.
BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel,
slander and other forms of defamation, a corporation is entitled to moral
damages.
C.
1.
2.
3.
4.
DEFINITION
ATTRIBUTES (CARP)
1.
5.
6.
7.
corporation law. The corporation statutes enter into the charter contract
and these are constantly being interpreted by courts. An established
system of management and protection of shareholders and creditors
rights has thus been and are being evolved.
D.
1.
2.
3.
4.
5.
6.
7.
8.
E.
DISADVANTAGES
To have a valid and binding corporate act, formal proceedings, such as
board meetings are required;
The business transactions of a corporation is limited to the State of its
incorporation and may not act as such corporation in other jurisdiction
unless it has obtained a license or authority from the foreign state;
The shareholders limited liability tends to limit the credit available to the
corporation as a separate legal entity;
Transferability of shares may result to uniting incompatible and
conflicting interests;
The minority shareholders have practically no say in the conduct of
corporate affairs;
In large scale enterprises, stockholders voting rights may become
merely fictitious and theoretical because of disinterest in management,
wide-scale ownership and inaccessible place of meeting;
Double taxation may be imposed on corporate income; and
Corporations are subject to governmental regulations, supervision and
control including submission of reportorial requirements not otherwise
imposed in other business form.
CORPORATION VS. PARTNERSHIP
CORPORATION
Created by operation of law (Sec.
2&4, Corp Code)
There must be at least 5
incorporations (Sec. 10), except
corporation
sole
which
is
incorporated by one single individual
(Sec. 110)
Can exercise only such powers and
functions expressly granted to it by
law and those that are necessary or
incidental to its existence (Sec. 2,
45)
Unless validly delegated expressly or
impliedly,
a
corporation
must
transact its business through the
board of directors (Sec. 23)
Right of succession, it continues to
exist despite the death, withdrawal,
incapacity or civil interdiction of the
stockholders or members. (Sec. 3)
Transferability of shares without
the
consent
of
the
other
stockholders. (Sec. 63)
Limited liability only to the extent
of their subscription or their
promised contribution.
PARTNERSHIP
Created by mere agreement of the
parties (Art. 1767, Civil Code)
Maybe formed by two or more
natural persons (Art. 1767)
F.
The Corporation Code places all corporations registered under its provision to
be under the control and supervision of the Securities and Exchange
Commission (Sec. 19 and 144). Its powers and functions are clearly spelled
out in PD 902-A, as amended by RA No. 8799, otherwise known as the
Securities Regulation Code.
CHAPTER 3: CLASSIFICATION OF CORPORATION
A.
not detract from the finding of the trial court that it is not engaged in the
business of operator of bar and restaurant. What is determinative of whether
or not the Club is engaged in such business is its object or purpose as stated
in its articles and by-laws.
Moreover, for a stock corporation to exists, two requisites must be
complied with: (1) a capital stock divided into shares; and (2) an
authority to distribute to the holders of such shares, dividends or
allotments of surplus profits on the basis of the shares held. In the
case at bar, nowhere it its AOI or by-laws could be found an authority for the
distribution of its dividends or surplus profits. Strictly speaking, it cannot
therefore, be considered as stock corporation, within the contemplation of
the Corporation Code.
B.
Sec. 4. Corporations created by special laws or charters. Corporations created by special laws or charters shall be governed primarily
by the provisions of the special law or charter creating them or applicable to
them, supplemented by the provisions of this Code, insofar as they are
applicable.
Among these corporations created by special law are the Philippine National
Oil Company, the National Development Company, the Philippine Export and
Foreign Loan Guarantee Corporation and the GSIS. All these are government
owned or controlled, operating under a special law or charter such that
registration with the SEC is not required for them to acquire legal and
juridical personality. They owe their own existence as such not by virtue of
their compliance with the requirements of registration under the Corporation
Code but by virtue of the law specially creating them.
They are primarily governed by the special law creating them. But unless
otherwise provided by such law, they are not immune from suits, it is thus
settled that when the government engages in a particular business through
the instrumentality of a corporation, it divests itself pro hoc vice of its
sovereign character so as to subject itself to the rules governing private
corporations (PNB vs. Pabolar 82 SCRA 595)
Officers and employees of GOCCs created by special laws are governed by
the law of their creation, usually the Civil Service Law. Their subsidiaries,
organized under the provisions of the Corporation Code are governed by the
LAbor Code. The test in determining whether they are governed by the Civil
Service Law is the manner of their creation.
PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991) Danilo Mercado,
an employee of herein petitioner was dismissed on the ground of dishonesty
and violation of company rules and regulations. He filed an illegal dismissal
complaint before herein respondent NLRC who ruled on his favour, despite
the motion to dismiss of petitioner that the Civil Service Commission has
jurisdiction over the case.
ISSUE: WON NLRC has jurisdiction over the case?
HELD: Yes. Employees of GOCCs, whether created by special law or formed
as subsidiaries under the Corporation Law are governed by the Civil Service
Law and not the Labor Code, under the 1973 Constitution has been
supplanted by the present Constitution.
Thus, under the present state of the law, the test in determining
whether a GOCC is subject to the Civil Service Law is the manner of
its creation, such that government corporations created by special
charter are subject to its provisions while those incorporated under
the General Corporation Law are not within its coverage.
PNOC has its special charter, but its subsidiary, PNOC-EDC, having been
incorporated under the General Corporation Law was held to be a GOCC
whose employees are subject to the provisions of the Labor Code.
C.
1.
despite common
PROMOTIONAL STAGE
LIABILITY OF PROMOTERS:
2.
6.
QUASI-PUBLIC CORPORATIONS
These are private corporations which have accepted from the state the grant
of a franchise or contract involving the performance of public duties. The
term is sometimes applied to corporations which are not strictly public in the
sense of being organized for governmental purposes, but whose operations
contribute to the convenience or welfare of the general public, such as
telegraph and telephone companies, water and electric companies. More
appropriately, they are known as public service corporations.
8.
PROCESS OF INCORPORATION
2.
3.
PREFATORY PARAGRAPH
xxx
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a majority of
whom are residents of the Philippines, have this day voluntarily
agreed to form a (stock) (non-stock) corporation under the laws of
the Republic of the Philippines
xxx
It must specify the nature of the corporation being organized in order to
prevent difficulties of administration and supervision. Thus, the corporation
should indicate whether it is a stock or a non-stock corporation, a close
corporation, corporation sole or a religious corporation.
4.
5.
6.
b.
CORPORATE NAME
xxx
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";
xxx
The name of the corporation is essential to its existence since it is through it
that it can act and perform all legal acts. Each corporation should therefore,
have a name by which it is to sue and be sued and do all legal acts.
A corporation, once formed, cannot use any other name, unless it has been
amended in accordance with law as this would result in confusion and may
open the door to fraud and evasion as well as difficulties of administration
and supervision.
Thus, the organizers must make sure that the name they intend to use as a
corporate name is not similar or confusingly similar to any other name
already registered and protected by law since the SEC would refuse
registration if such be the case.
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
7.
8.
9.
10.
11.
12.
13.
1.
1 http://www.disini.ph/res_sec__mc142000.html
Herein, the Court does not consider that the corporate names of the
academic institutions are "identical with, or deceptively or confusingly similar"
to that of Lyceum of the Philippines Inc.. True enough, the corporate names
of the other schools (defendant institutions) entities all carry the word
"Lyceum" but confusion and deception are effectively precluded by the
appending of geographic names to the word "Lyceum." Thus, the "Lyceum of
Aparri" cannot be mistaken by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan" would be confused with
the Lyceum of the Philippines. Further, etymologically, the word "Lyceum" is
the Latin word for the Greek lykeion which in turn referred to a locality on the
river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo
and adorned with fountains and buildings erected by Pisistratus, Pericles and
Lycurgus frequented by the youth for exercise and by the philosopher
Aristotle and his followers for teaching."
In time, the word "Lyceum" became associated with schools and other
institutions providing public lectures and concerts and public discussions.
Thus today, the word "Lyceum" generally refers to a school or an institution
of learning. Since "Lyceum" or "Liceo" denotes a school or institution of
learning, it is not unnatural to use this word to designate an entity which is
organized and operating as an educational institution. To determine whether
a given corporate name is "identical" or "confusingly or deceptively similar"
with another entity's corporate name, it is not enough to ascertain the
presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate
names in their entirety and when the name of Lyceum of the Philippines is
juxtaposed with the names of private respondents, they are not reasonably
regarded as "identical" or "confusingly or deceptively similar" with each other.
ISSUE2: WON the word Lyceum has acquired a secondary meaning
although originally generic?
HELD: No. The Court of Appeals recognized this issue and answered it in the
negative: "Under the doctrine of secondary meaning, a word or
phrase originally incapable of exclusive appropriation with
reference to an article in the market, because geographical or
otherwise descriptive might nevertheless have been used so long
and so exclusively by one producer with reference to this article
that, in that trade and to that group of the purchasing public, the
word or phrase has come to mean that the article was his produce
(Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been
referred to as the distinctiveness into which the name or phrase has
evolved through the substantial and exclusive use of the same for a
considerable period of time. . . . No evidence was ever presented in the
hearing before the Commission which sufficiently proved that the word
'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If
there was any of this kind, the same tend to prove only that the appellant
had been using the disputed word for a long period of time.
The number alone of the private respondents in the present case suggests
strongly that the Lyceum of the Philippines' use of the word "Lyceum" has
not been attended with the exclusivity essential for applicability of the
doctrine of secondary meaning. It may be noted also that at least one of the
private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the
term "Lyceum" 17 years before Lyceum of the Philippines registered its own
corporate name with the SEC and began using the word "Lyceum." It follows
that if any institution had acquired an exclusive right to the word "Lyceum,"
that institution would have been the Western Pangasinan Lyceum, Inc. rather
than Lyceum of the Philippines. Hence, Lyceum of the Philippines is not
entitled to a legally enforceable exclusive right to use the word "Lyceum" in
its corporate name and that other institutions may use "Lyceum" as part of
their corporate names.
PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS (206 SCRA 457;
Feb. 21, 1992) Petitioner is the registered owner of the trademark PHILIPS
and PHILIPS SHIELD EMBLEM issued by the Philippine Patent Office. Philips
Electric Lamp Inc. and Philips Industrial Development Inc., also petitioners,
are the authorized users of such trademark.
Petitioner filed a case with SEC praying for a writ of injunction to prohibit
herein respondent Standard Philips Corporation from using the word
PHILIPS in its corporate name, which was denied. On appeal, the CA
affirmed the SEC.
ISSUE: WON Standard Philips should be directed to delete the word PHILIPS
from its corporate name?
HELD: Yes. As early as Western Equipment and Supply Co. v. Reyes , 51 Phil.
115 (1927), the Court declared that a corporation's right to use its
corporate and trade name is a property right, a right in rem, which
it may assert and protect against the world in the same manner as it
may protect its tangible property, real or personal, against trespass
or conversion. It is regarded, to a certain extent, as a property right
and one which cannot be impaired or defeated by subsequent
appropriation by another corporation in the same field (Red Line
Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence of
a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L
ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First
National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its
name is one of its attributes, an element of its existence, and essential to its
identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations
is that each corporation must have a name by which it is to sue and
be sued and do all legal acts. The name of a corporation in this
respect designates the corporation in the same manner as the name
of an individual designates the person (Cincinnati Cooperage Co. vs.
Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH
123); and the right to use its corporate name is as much a part of the
corporate franchise as any other privilege granted (Federal Secur. Co.
vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs.
Portuguese Beneficial Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name
identical with or similar to one already appropriated by a senior corporation
while an individual's name is thrust upon him (See Standard Oil Co. of New
Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A
corporation can no more use a corporate name in violation of the
rights of others than an individual can use his name legally acquired
so as to mislead the public and injure another (Armington vs. Palmer,
21 RI 109. 42 A 308).
The statutory prohibition (under Sec. 18 of the Corporation Code) cannot be
any clearer. To come within its scope, two requisites must be proven,
namely:
(1) that the complainant corporation acquired a prior right over the use of
such corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with freedom
from infringement by similarity is determined by priority of
adoption. In this regard, there is no doubt with respect to Petitioners' prior
adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners
Philips Electrical and Philips Industrial were incorporated on 29 August 1956
and 25 May 1956, respectively, while Respondent Standard Philips was issued
a Certificate of Registration on 12 April 1982, twenty-six (26) years later.
Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of
all types and their accessories since 30 September 1922.
The second requisite no less exists in this case. In determining the
existence of confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a person, using ordinary
care and discrimination. In so doing, the Court must look to the record as
well as the names themselves. While the corporate names of Petitioners and
Private Respondent are not identical, a reading of Petitioner's corporate
names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and
PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude
that "PHILIPS" is, indeed, the dominant word in that all the companies
affiliated or associated with the principal corporation, PEBV, are known in the
Philippines and abroad as the PHILIPS Group of Companies.
Respondents argue that there were no evidence presented that there was
actual confusion. It is settled, however, that proof of actual confusion
need not be shown. It suffices that confusion is probably or likely to
occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).
In allowing Private Respondent the continued use of its corporate name, the
SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL
LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least
two words different from that of the corporate name of respondent
STANDARD PHILIPS CORPORATION, which words will readily identify Private
Respondent from Petitioners and vice-versa.
PURPOSE CLAUSE
xxx
SECOND: That the purpose or purposes for which such corporation
is incorporated are: (If there is more than one purpose, indicate
primary and secondary purposes);
xxx
nor limit the number of purpose or purposes which a corporation may have,
Sec. 14 thereof, requires that if it has more than one purpose, the primary
purpose as well as the secondary ones must be indicated therein.
PROHIBITION: The following are prohibited by special laws for having any
1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC
is duty bound to determine the legality of the corporate purpose/s before it
issues the certificate of registration;
2. A corporation may not be formed for the purpose of practicing a profession
like law, medicine or accountancy, either directly or indirectly. These are
reserved exclusively for professional partnerships;
3. The retail trade, where the corporate capital is less than $2.5M, or its peso
equivalent are reserved exclusively for Filipinos, or for corporations or
partnerships wholly owned by such citizen.
4. As a general rule, corporations with foreign equity are not allowed to
engage in restaurant business but corporations with such foreign equity can
purse such undertaking if it is incidental or in connection with hotel or innkeeping business.
5. Management consultants, advisers and/or specialists, must submit the
personal information sheet of the incorporators and directors in order that
the SEC may be able to find out or determine whether or not the applicant
corporation is qualified to act as such.
6. As a matter of policy, financing companies are required by the SEC to
submit certain additional documents together with their applications for
registration to verify compliance with RA 8556.
7. For bonded warehousing companies, an undertaking to comply with the
General Bonded Warehousing Act must be submitted along with the AOI.
8. In case the applicant proposes to engage in the business of hospital
and/or clinic, the purpose clause must contain the following proviso:
Provided that purely medical or surgical services in connection therewith
shall be performed by duly qualified physician and surgeon who may or may
not be freely and individually contracted by the parties.
9. In the case of Customs Brokerage business, the applicant must submit the
license of at least two customs broker connected with the applicant
corporation;
10. Transfer Agents, Broker and Clearing Houses must submit the certificate
of admission to the profession of the CPA of any officer of the corporation;
11. Carriage of mails cannot be a purpose of a corporation unless a special
franchise has been granted to it.
12. If the corporate purpose or objective includes any purpose under the
supervision of another government agency, prior clearance and/or
approval of the concerned government agencies or instrumentalities
will be required pursuant to the last paragraph of Sec. 17 of the Code.
GENERAL LIMITATIONS:
PRINCIPAL OFFICE
xxx
THIRD: That the principal office of the corporation is located in the
City/Municipality of............................................, Province
of................................................., Philippines
xxx
It must be located within the Philippines. The AOI must not only specify the
province, but also the City or Municipality where it is located. In this regard, it
is to be observed that the principal office may be in one place but the
business operations are actually conducted in other areas. The law does not,
of course, require a statement of the place of corporate operations and,
therefore, may be dispensed with.
The principal office serves as the residence of the corporation, and is thus
important in: (1) venue of actions; (2) registration of chattel mortgage of
shares; (3) validity of meetings of stockholders or members in so far as
venue thereof is concerned.
CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb. 18,
1967) The New Cagayan Grocery filed a complaint against CRS for some
irregularities in the transmission of a message which changed the context
and purport causing damages. The complaint was filed in the City Court of
Cagayan de Oro.
f.
INCORPORATORS
xxx
FIFTH: That the names, nationalities and residences of the
incorporators of the corporation are as follows:
NAME
.....................
.....................
.....................
.....................
.....................
NATIONALITY
RESIDENCE
............................. ............................
............................. ............................
............................. ............................
............................. ............................
............................. ............................
xxx
Sec. 5. Corporators and incorporators, stockholders and members. Corporators are those who compose a corporation, whether as stockholders
or as members. Incorporators are those stockholders or members mentioned
in the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members.
CORPORATORS apply to all who compose the corporation at any given time
and need not be among those who executed the AOI at the start of its
formation or organization.
HELD: No. The action was based on tort and not upon a written contract and
as such, under the Rules of Court, it should be filed in the municipality where
the defendant or any of the defendants resides or may be served with
summons.
TERM OF EXISTENCE
xxx
FOURTH: That the term for which said corporation is to exist
is............... years from and after the date of issuance of the
certificate of incorporation;
xxx
Sec. 11. Corporate term. - A corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner
dissolved or unless said period is extended. The corporate term as originally
stated in the articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an amendment of the
articles of incorporation, in accordance with this Code; Provided, That no
extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange Commission
The corporate term is necessary in determining at what point in time the
corporation will cease to exist or have lost its juridical personality. Once it
ceases to exist, its legal personality also expires and could not thereafter, act
in its own name for the purpose of prosecuting it business.
EXTENSION: can be made not earlier than 5 years prior to the expiry date
unless there are justifiable reasons.
QUALIFICATIONS OF INCORPORATORS:
DIRECTORS/TRUSTEES
xxx
SIXTH: That the number of directors or trustees of the corporation
shall be............; and the names, nationalities and residences of the
first directors or trustees of the corporation are as follows:
NAME
.....................
.....................
.....................
NATIONALITY
.............................
.............................
.............................
RESIDENCE
............................
............................
............................
.....................
.....................
............................. ............................
............................. ............................
xxx
QUALIFICATIONS OF DIRECTORS/TRUSTEES:
1. Must own at least 1 share in their own names or a member (in the case of
trustees);
2. Majority must be resident of the Philippines. Even aliens may be elected as
directors, provided that the majority of such directors are residents of the
Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like
the management of educational institutions and those governed by the Retail
Trade Law.
Sec. 27. Disqualification of directors, trustees or officers. - No person
convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within
five (5) years prior to the date of his election or appointment, shall qualify as
a director, trustee or officer of any corporation.
DISQUALIFICATIONS:
FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the
SEC for the declaration of nullity of the by-laws etc. against the majority
members of the BOD and San Miguel. The amended by-laws provided for the
disqualification of competitors from nomination and election in the Board of
irectors of SMC. This was denied by the SEC.
ISSUE: Is the disqualification valid?
HELD: Yes. The Court held that a corporation has authority prescribed, by
10
law, the qualifications of directors. It has the inherent power to adopt bylaws for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. A corporation, under the
Corporation law, may prescribe in its by-laws the qualifications,
duties and compensation of directors, officers, and employees. Any
person who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majority of the stockholders and he impliedly
contracts that the will of the majority shall govern in all matters within the
limits of the acts of incorporation and lawfully enacted by-laws and not
forbidden by law. Any corporation may amend its by-laws by the owners of
the majority of the subscribed stock. It cannot thus be said that petitioners
has the vested right, as a stock holder, to be elected director, in the face of
the fact that the law at the time such stockholder's right was acquired
contained the prescription that the corporate charter and the by-laws shall be
subject to amendment, alteration and modification. A Director stands in a
fiduciary relation to the corporation and its shareholders, which is
characterized as a trust relationship. An amendment to the
corporate by-laws which renders a stockholder ineligible to be
director, if he be also director in a corporation whose business is in
competition with that of the other corporation, has been sustained
as valid. This is based upon the principle that where the director is
employed in the service of a rival company, he cannot serve both, but must
betray one or the other. The amendment in this case serves to advance the
benefit of the corporation and is good. Corporate officers are also not
permitted to use their position of trust and confidence to further their private
needs, and the act done in furtherance of private needs is deemed to be for
the benefit of the corporation. This is called the doctrine of corporate
opportunity.
h.
CAPITALIZATION
xxx
SEVENTH: That the authorized capital stock of the corporation
is................................................ (P......................) PESOS in lawful
money of the Philippines, divided into.............. shares with the par
value of.................................. (P.......................) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is.......................... shares
without par value. (In case some shares have par value and some
are without par value): That the capital stock of said corporation
consists of....................... shares of which...................... shares are of
the par value of............................. (P.....................) PESOS each, and
of which............................... shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized
capital stock above stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed
........................
.............. ................ ...........................
........................
.............. ................ ...........................
........................
.............. ................ ...........................
........................
.............. ................ ...........................
........................
.............. ................ ...........................
NINTH: That the above-named subscribers have paid at least
twenty-five (25%) percent of the total subscription as follows:
Name of Subscriber
..............................
..............................
..............................
..............................
..............................
Amount Subscribed
..............................
..............................
..............................
..............................
..............................
Total Paid-Up
....................
....................
....................
....................
....................
(Modify Nos. 8 and 9 if shares are with no par value. In case the
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may
be modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified
persons, stating the names, nationalities and residences of the
contributors or donors and the respective amount given by each.)
xxx
The Corporation Code requires the AOI to state the authorized capital stock,
the number of shares and/or kind of shares into which the authorized capital
is divided, the par value of each share, if there by any, the names,
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each. At least 25% of the subscribed capital must be
paid and in no case may the paid-up capital be less than P5,000.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total
value for which there are contracts for their acquisition or subscription. It is
in effect, the stockholders equity account showing that part of the authorized
capital stock which has been paid or promised to be paid, or that portion of
the authorized capital stock which has been subscribed by the subscribers or
stockholders.
11
PURPOSE OF CLASSIFICATION:
from time to time at different prices depending on the net worth of the
company since they do not purport to represent an actual or fixed value.
PREFERRED STOCKS is a stock that gives the holder preference over the
payment not only of current dividends but also back dividends not previously
paid whether or not, during the pas years, dividends were declared or paid.
In light of the provision of the Code stating that all shares are equal in all
respects unless otherwise stated in the AOI, a preferred share to be
considered cumulative, the same must be provided for and specified in the
certificate.
Non-cumulative preferred shares are those which grant the holders of such
shares only to the payment of current dividends but not back dividends,
when and if dividends are paid, to the extent agreed upon before any other
stockholders are paid the same. This type may be divided into three groups:
1. Discretionary dividend type depends on the judgment or discretion of the
board of directors. Unless there is grave abuse of discretion as to result in
oppression, fraud or unfair discrimination, the dividend right of stockholders
of a particular year cannot be made up in subsequent years;
2. Mandatory if earned impose a positive duty on directors to declare
dividends every year when profits are earned. In effect, directors cannot
withhold dividends if there are profits.
3. Earned cumulative or dividend credit type gives the holder the right to
arrears in dividends if there were profits earned during the previous years. In
effect, their right to receive dividends is merely postponed on a later date.
The moment dividends are declared, back dividends earned in previous years
but not declared as such must first be paid to this type of preferred
shareholders before the common shareholders receive theirs.
DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are
entitled to dividends whether or not there are profits. Earned cumulative or
dividend credit type is entitled only to arrears if there are profits in those
years.
Preferred shares, along with redeemable shares, are usually denied voting
rights as they are allowed to be denied of such as provided in Sec. 6, but this
right must clearly be withheld. However, even if deprived, preferred
12
Such preference must also be stated in the contract, accordingly giving tem
the preference to the distribution of corporate assets upon liquidation or
termination of corporate existence. If the preferred shares are cumulative,
they have the right to any arrears in arrears in priority to any distribution of
assets to the common stockholders.
the minimum subscription or original issue price of the shares and indicates
the amount which the original subscribers are supposed to contribute to the
capital, which, however, may not reflect the true value of the shares because
the same may fluctuate depending on the liability and networth of the
enterprise.
Watered Stocks are those issued at less than par value where the
stockholders will remain liable for the difference between what he paid and
the actual par value thereof (Sec. 65).
No Par Value Shares are those whose issued price are not stated in the
certificate of stock but may be fixed in the AOI, or by the BOD when so
authorized the articles or the by-laws, or in the absence thereof, the
stockholders themselves. They do not purport to represent ay stated
proportionate interest in the capital measured by value, but only an aliquot
part of the whole number of shares of the corporation issuing it.
The Code allows the issuance of no par value shares, subject to the following
limitations provided in Sec. 6:
1. Such shares once issued, are deemed fully paid and thus, non-assessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for
dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies,
public utilities and building and loans associations.
Non-voting shares do not grant the holder thereof, a voice in the election of
directors and some other matter requiring stockholders vote.
Only preferred and redeemable shares may be denied the right to vote. But,
even if denied such right, they may still vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
TREASURY SHARES
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board of directors.
Treasury shares, as provided in Sec. 9, are reacquired but not retired. They
may be issued for a price, even less than par, and the purchaser will not be
liable to the creditors of the corporation for the difference of the purchase
price and its par value. They may also be declared as dividends since they
are properties of the corporation.
Such shares do not have the right to share in dividends nor the right to vote.
COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA 14;
Aug. 6, 1975) Julius Reese owned 24,700 of the 25,000 authorized capital
stock of Manta Trading and Supply Co., the rest are owned by herein
respondents. Upon Reese death, his shares was held in trust by the law firm
Ross, Carrascoso and Janda for the private respondent, who were to continue
management of the corporation. These shares considered by the respondents
as treasury shares, prior to full payment, were declared as stock dividends.
Such declaration was assessed by the BIR as distribution of assets subject to
income tax.
ISSUE: WON the subject shares are treasury shares?
13
HELD: No. Treasury shares are stocks issued and fully paid for and
reacquired by the corporation either by purchase, donation,
forfeiture or other means and do not have the status of outstanding
shares. They may be re-issued or sold again and while held by the
company participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor in meeting of
the corporation as voting stock for otherwise equal distribution of
voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the corporation,
though it still represent a paid for interest in the property of the
corporation. These features of a treasury stock are lacking in the
questioned shares.
In this case, and under the terms of the trust agreement, the shares of stock
of Reese participated in dividends which the trustee received and the said
shares were voted upon by the trustee in all corporate meetings. They were
not, therefore, treasury shares. The 24,700 shares were outstanding shares
of Reeses estate until they were fully paid. Such being the case, their
declaration as treasury stock dividend was a complete nullity.
CAPITAL REQUIREMENTS
Sec. 12. Minimum capital stock required of stock corporations. Stock corporations incorporated under this Code shall not be required to have
any minimum authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions of the following
section
Sec. 13. Amount of capital stock to be subscribed and paid for the
purposes of incorporation. - At least twenty-five percent (25%) of the
authorized capital stock as stated in the articles of incorporation must be
subscribed at the time of incorporation, and at least twenty-five (25%) per
cent of the total subscription must be paid upon subscription, the balance to
be payable on a date or dates fixed in the contract of subscription without
need of call, or in the absence of a fixed date or dates, upon call for payment
by the board of directors: Provided, however, That in no case shall the paidup capital be less than five Thousand (P5,000.00) pesos
From the above provisions, it can be said that there is no minimum capital
requirement in order that a corporation may be duly incorporated except in
special cases and provided that at least P5,000 should be paid-in, which
effectively would make the P5,000 the minimum capital requirement.
The 25% minimum paid-in capital can be paid by any shareholder, meaning
that it is not particularly required that each subscriber pay 25% of their
subscription.
There are instances where the SEC, by virtue of an existing law, rules and
regulations or policies, requires the payment of more than the amount
provided in the Code, such as Financing Companies where the required
minimum paid-up capital be P10,000,000 (within Metro Manila), P5,000,000
(other cities), and P2,000,000 (municipalities).
i.
j.
THE TREASURER
xxx
TENTH: That...................................... has been elected by the
subscribers as Treasurer of the Corporation to act as such until his
successor is duly elected and qualified in accordance with the bylaws, and that as such Treasurer, he has been authorized to receive
for and in the name and for the benefit of the corporation, all
subscription (or fees) or contributions or donations paid or given by
the subscribers or members.
xxx
k.
NO TRANSFER CLAUSE
xxx
ELEVENTH: (Corporations which will engage in any business or
activity reserved for Filipino citizens shall provide the following):
This indicates the treasurer who has been elected as such until his successor
has been elected and qualified and who is authorized to receive for and in
the name of the corporation all subscriptions, contributions or donations paid
or given by the subscribers or members.
l.
xxx
IN WITNESS WHEREOF, we have hereunto signed these Articles of
Incorporation, this..............day of....................., 19.......... in the
City/Municipality of......................................., Province
of................................................, Republic of the Philippines.
(Names and signatures of the incorporators)
xxx
The signatures are important as the AOI serves as a contract between the
signatories thereof, by and among themselves, with the corporation, and the
latter with the State.
m. TREASURERS AFFIDAVIT
xxx
TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I,..................................., being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as
Treasurer thereof, to act as such until my successor has been duly
elected and qualified in accordance with the by-laws of the
corporation, and that as such Treasurer, I hereby certify under oath
that at least 25% of the authorized capital stock of the corporation
has been subscribed and at least 25% of the total subscription has
been paid, and received by me, in cash or property, in the amount of
not less than P5,000.00, in accordance with the Corporation Code.
.......................................
(Signature of Treasurer)
n.
xxx
NOTARIAL ACKNOWLEDGMENT
xxx
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in
the City/Municipality of................................. Province
of........................................., this............ day of........................,
14
xxx
corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.
CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO (65 Phil. 233;
Dec. 23, 1937) On May 31, 1930, Manuel Tabora executed a Deed of Sale
where he sold four parcels of land in favor of herein petitioner Cagayan
Fishing Development Co., said to be under the process of incorporation.
Plaintiff company filed its AOI with the Bureau of Commerce and Industry on
Oct. 22, 1930. A year later, before the issuance of the certificate of
incorporation, the BD of the company adopted a resolution to sell the four
parcels of land to Teodoro Sandiko for P42,000.
ISSUE: WON the subsequent sale to Sandiko is valid?
HELD: No. A duly organized corporation has the power to purchase and hold
real property as the purpose for which such corporation was formed may
permit and for this purpose may enter into such contract as may be
necessary. But before a corporation may be said to be lawfully
organized many thing have to be done. Among which, the law
requires the filing of the AOI.
It cannot be denied that the plaintiff was not incorporated when it entered
into the contract of sale. It was not even a de facto corporation at that time.
Not being in legal existence then, it did not possess juridical personality to
enter into the contract.
Corporations are creatures of the law, and can only come into existence in
the manner prescribed by the law. That a corporation should have a full and
complete organization and existence as an entity before it can enter into a
contract or transact any business, would seem to be self-evident. A
corporation, until organized, has no being, franchises or faculties. Nor do
those engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter, there is no corporation, nr does it
possess franchise or faculties for it to exercise, until it acquires complete
existence.
If the company could not and did not acquire the four parcels of and here
involved, it follows that it did not have the resultant right to dispose the same
to the defendant.
D.
DE FACTO CORPORATIONS
REQUISITES:
Herein petitioner claims that the corporation is a de facto corporation, that its
dissolution may be ordered only in a quo warranto proceedings instituted by
the State.
b.
a.
c.
d.
There is a valid statute under which the corporation could have been
created as a de jure corporation (or according to some, an apparently
valid statute);
An attempt, in good faith, to form a corporation according to the
requirements of law which goes far enough to amount to a colourable
compliance with the law;
A user of corporate powers, the transaction of business in some way as
if it were a corporation;
Good faith in claiming to be and doing business as a corporation.
15
CORPORATION BY ESTOPPEL
As to third persons they are estopped from denying the existence of the
16
corporation by estoppel.
ALBERT VS. UNIVERSITY PUBLISHING CO., INC. (13 SCRA 84; Jan. 30,
1965) Jose Aruego, president of defendant University Publishing Co, Inc.
entered into a contract with plaintiff for the publishing of the latters revised
commentaries on the Revised Penal Code, which the defendant failed to pay
the second instalment due. The CFI of Manila rendered judgment in favor of
plaintiff, such judgment reduced by the Supreme Court to P15,000.
The CFI issued a writ of execution against Aruego, as the real defendant,
stating the discovery that there is no such entity as University Publishing Co.,
Inc.
ISSUE: WON the writ of execution may be effected upon Aruego?
HELD: Yes. On account of non-registration, University cannot be considered
a corporation, not even a corporation de facto. It has therefore, no
personality separate from Aruego it cannot be sued independently.
The doctrine of corporation by estoppel is inapplicable. Aruego represented a
non-existent entity and induced not only the plaintiff but even the court of
belief of such representation. He signed the contract as President of
University and obviously misled plaintiff in to believing that University is a
corporation duly organized and existing under the laws of the Philippines.
One who has induced another to act upon his wilful
misrepresentation that a corporation was duly organized and
existing under the law, cannot, thereafter, set up against his victim
the principle of corporation by estoppel.
SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23, 1958)
Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of land, entered
into a contract of lease with Philippine Fibers Processing Co., Inc., allegedly a
corporation. For failure to comply with the obligations under the lease,
petitioner filed a complaint in the CFI where the company was declared in
default and decision was rendered in favor of petitioner. Defendant Refuerzo
filed a motion claiming that he should not be made personally liable in the
decision which was granted by the Court. Hence, this petition.
ISSUE: WON Refuerzon can be made personally liable?
HELD: Yes. While as a general rule, a person who has contracted or dealt
with an association in such a way as to recognize its existence as a corporate
body is estopped from denying the same in an action arising out of such
transaction or dealing, yet this doctrine may not be held applicable
where fraud takes part in the said transaction. In the instant case, on
plaintiffs charge that she was unaware of the fact that the company had no
juridical personality, defendant Refuerzo gave no confirmation or denial and
the circumstances surrounding the execution of the contract led to the
inescapable conclusion that plaintiff Salvatierra was really made to believe
that such corporation was duly organized in accordance with law.
The rule on the separate personality of a corporation is understood to refer
merely to registered corporations and cannot be made applicable to the
liability of members of an unincorporated association. The reason behind this
doctrine is obvious since an organization which before the law is
non-existent has no personality and would be incompetent to act on
its behalf; thus, those who act or purport to act as its
representatives or agent do so without authority and at their own
risk. And, as is it elementary principle of law that a person who acts as an
agent without authority or without principal is himself regarded as
the principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges
and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agents.
In acting on behalf of a corporation which he knew to be unregistered, the
president of the unregistered corporation Refuerzo, assumed the risk of
reaping the con the consequential damages of resultant right, if any, arising
out of such transaction.
CHANG KAI SHEK SCHOOL VS. CA (172 SCRA 389; April 18, 1989)
Private respondent Faustina Oh has been teaching in the herein petitioner
School since 1932 for a continuous period of 33 years until that day that she
was told that she had no assignment for the next semester. She filed a suit
before the CFI against the school and later on amended her complaint to
include certain officials. The CFI of Sorsogon dismissed the complaint. On
appeal, the CA reversed the decision and held herein petitioner school liable
but absolved the other defendants.
ISSUE: WON the School can be held liable?
HELD: Yes. Even though the school failed to incorporate as mandated by
law, it cannot now invoke such non-compliance with the law to immunize it
from the private respondents complaint. There should also be no question
that having contracted with the private respondent every year for 32 years
and thus represented itself possessed of juridical personality to defeat her
claim against it. According to Art. 1431 of the Civil Code: through estoppel
an admission or representation is rendered conclusive upon the person
making it and it cannot be denied as against the person relying on it.
As the school itself may be sued in its own name, there is no need to apply
Rule 3, Sec. 15 ,under which the persons joined in an association without any
juridical personality may be sued with such an association. Besides, it has
been shown that the individual members of the board of trustees are not
liable, having been appointed only after the private respondents dismissal.
ASIA BANKING CORP., plaintiff-appelle VS. STANDARD PRODUCTS
CO., INC., defendant-appellant (46 Phil. 144; Sept. 11, 1924) This action
was brought to recover the balance due of a promissory note executed by
herein appellant. The court rendered judgment in favor of the plaintiff.
At the trial of the case the plaintiff failed to prove affirmatively the corporate
existence of the parties and the appellant insists that under these
circumstances the court erred in finding that the parties were corporations
with juridical personality and assigns same as reversible error.
ISSUE: WON parties herein are corporations with juridical personality?
HELD: Yes. There is no merit whatever in the appellant's contention. The
general rule is that in the absence of fraud a person who has
contracted or otherwise dealt with an association in such a way as
to recognize and in effect admit its legal existence as a corporate
body is thereby estopped to deny its corporate existence in any
action leading out of or involving such contract or dealing, unless its
existence is attacked for cause which have arisen since making the
contract or other dealing relied on as an estoppel and this applies to
foreign as well as to domestic corporations. (14 C. J., 227; Chinese
Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the plaintiff by
making a promissory note in its favor and making partial payments on the
same is therefore estopped to deny said plaintiff's corporate existence. It is,
of course, also estopped from denying its own corporate existence. Under
these circumstances it was unnecessary for the plaintiff to present other
evidence of the corporate existence of either of the parties. It may be noted
that there is no evidence showing circumstances taking the case out of the
rules stated.
INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. VS. CA
(343 SCRA 674; Oct. 19, 2000) Petitioner International Express Travel &
Tours Services, Inc. entered into an agreement with the Philippine Football
Federation through its president Henry Kahn, herein private respondent,
where the former supplied tickets for the trips of the athletes to the
Southeast Asian Games and other various trips. The Federation failed to pay
a balance of P265,894.33 which led petitioner to file a civil case in the RTC of
Manila which decided in its favor and holding Henry Kahn personally liable.
On appeal, the CA reversed the decision of the RTC absolving Kahn from
personal liability holding that the Federation had a separate and distinct
personality.
ISSUE: WON Henry Kahn can be made personally liable?
HELD: Yes. While we agree with the appellate court that associations may be
accorded corporate status, such does not automatically take place by the
17
into a contract and transact business with a third party, the latter has three
possible remedies:
1. He may file a suit against the ostensible corporation to recover from the
corporate properties;
2. He may file the case directly against the associates personally liable who
held out the association as a corporation; and
3. Against both the ostensible corporation and persons forming it, jointly
and severally. The last two remedies may not, however, be availed of if
the third party by his conduct is estopped from denying the existence of
WHO SHOULD BEAR THE LOSS: The better view is that those who actively
a.
CORPORATE ORGANIZATION
COMMENCEMENT OF BUSINESS/TRANSACTION
This means that the corporation has actually functioned and engaged in
business for which it was organized which must be done within two years
from the issuance of the certificate of incorporation lest it is
deemed dissolved. This may take the form of entering into contracts which
tend to pursue its business undertaking or other acts related thereto.
18
CORPORATE CHARTER
THREE-FOLD CONTRACT:
1.
2.
3.
Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation
Between the corporation and the stockholders or members insofar as it
governs their respective rights and obligations;
Between and among the stockholders or members themselves as far as
their relationship with one another is concerned.
appellant herein, has no personality to bring an action for and in behalf of its
stockholders or members for the purpose of recovering property which
belongs to said stockholders or members in their personal capacities.
It is fundamental that there cannot be a cause of action without an
antecedent primary legal right conferred by law upon a person. Evidently,
there can be no wrong without a corresponding right, and no breach of duty
by one person without a corresponding right belonging to some other person.
FERMIN CARAM, JR. AND ROSA DE CARAM VS. CA AND ALBERTO V.
ARELLANO (151 SCRA 372; June 30, 1987) Herein petitioners were
ordered jointly and severally to pay the plaintiff P50,000 for the preparation
of the project study and his technical services that led to the organization of
the defendant corporation. The petitioners questioned the order stating that
they are mere subsequent investors in the corporation that was later created,
that they should not be held solidarily liable with the Filipinas Orient Airways,
a separate juridical entity, and with co-defendants who were the ones who
requested the said services from the private respondent.
ISSUE: WON petitioners can be held personally liable for such expenses?
HELD: No. Petitioners were not involved in the initial stages of the
organization of the airline, which were being directed by Baretto, respondent,
as the main promoter. It was he who was putting all the pieces together, so
to speak. The petitioners were merely among the financiers whose interest
was to be invited and who were in fact persuaded, on the strength of the
project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a
fictitious corporation and did not have a separate juridical personality, to
justify making the petitioner, as principal stockholder thereof, responsible for
its obligations. As a bona fide corporation, the Filipinas Orient Airways should
alone be liable for its corporate acts as duly authorized by its directors and
officers.
The most that can be said is that they benefited from the services, but that
surely is no justification t hold them personally liable therefor. Otherwise, all
other stockholders of the corporation, including those who came in later, and
regardless of the amount of their stockholdings would be equally and
personally liable also with the petitioners for the claims of the private
respondents.
Petitioners are not liable under the challenged decision.
RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA 665; Oct.
19, 1992) Petitioner Rustan entered into a conract of sale with respondent
Lluch which was later on stopped by Rustan through a letter. Lluch sent a
letter to clarify whether the letter sent by Rustan was for the stoppage of
delivery or termination of the contract of sale. Unanswered, respondent Lluch
resumed devliveries and later on filed a complaint for contractual breach
which was dimissed. On appeal, the CA modified the decision of the trial
court directing petitioner including Tantoco, president and general manager,
and Vergara, resident manager, to pay private respondents.
ISSUE: WON individual petitioners may be held liable?
HELD: No. The president and manager of a corporation, who entered
into and signed a contract in his official capacity, cannot be made
liable thereunder in his individual capacity in the absence of
stipulation to that effect due to the personality of a corporation
being separate and distinct from the person composing it. And
because of this precept, Vergaras supposed non-participation in the contract
of sale although he signed the letter terminating it is completely immaterial.
CRUZ VS. DALISAY (152 SCRA 482; July 31, 1987) Adelio Cruz charged
Quiterio Dalisay, Senior Deputy Sheriff of Manila, with malfeasance in office,
corrupt practices and serious irregularities when the respondent sheriff
attached and/or levied the money belonging to complainant Cruz when he
was not himself the judgment debtor in the final judgment of NLRC sought to
be enforced but rather the company known as Qualitrans Limousine Service,
Inc., a duly registered corporation.
19
ISSUE: WON the charge against the respondent should be upheld for
attaching personal property of the corporate president?
HELD: Yes. The respondents action in enforcing judgment against complaint
who is not the judgment debtor in the case calls for disciplinary action.
Considering the ministerial duty in enforcing writs of execution, what is
incumbent upon him is to ensure that only that portion of a decision ordered
or decreed in the dispositive part should be the subject of execution. No
more, no less. That the title of the case specifically names complaint as one
of the respondent is of no moment as execution must conform to that
directed in the dispositive portion and not in the title of the case. The tenor
of the NLRC judgment and the implementing writ are clear enough. It
directed Qualitrans to reinstate the discharged employee and pay the full
backwages. Respondent, however, chose to pierce the veil of corporate
entity usurping a power belonging to the court and assumed improvidently
that since the complainant is the owner/president, they are one and the
same. It is well-settled doctrine, both in law and in equity that as a legal
entity, a corporation has a personality distinct and separate from its
individual stockholders or members. The mere fact that one is
president of a corporation does not render the property he owns or
possesses the property of the corporation, since the president, as
individual, and the corporation are separate entities.
PALAY INC. VS. CLAVE (124 SCRA 638; Sept. 21, 1983) Petitioner Palay,
Inc. through its president Albert Onstott, executed in favor of respondent
Naario Dumpit a Contract to Sell a parcel of land which provided for
automatic rescission upon default in payment of any monthly amortization
without need of notice and forfeiture of all instalments paid. Respondent
failed to pay some instalments and later offered to update all his overdue
account but was informed that the contract has already been rescinded.
Respondent filed with the NHA a complaint questioning the validity of the
rescission which decided in its favor holding Palay, Inc. and Alberto Onstott,
in his capacity as president, jointly and severally liable.
ISSUE: WON the corporate president is liable to refund the amount state in
the NHA ruling?
HELD: No. As a general rule, a corporation may not be made to answer for
acts or liabilities of its stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of corporate fiction may
be pierced when it is used as a shield to further an end subversive of justice;
or for purposes that could not have been intended by the law that created it;
or to defeat public convenience, justify wrong, protect fraud, or defend
crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent
the law or perpetuate deception; or as an alter ego, adjunct or business
conduit for the sole benefit of the stockholders.
We find no badges of fraud on petitioners part. They had literally relied,
albeit mistakenly, on its contract with private respondent when it rescinded
the contract to sell extrajudicially and had sold it to another person.
No sufficient proof exists on record that said petitioner used the corporation
to defraud private respondent. He cannot, therefore, be made personally
liable just because he appears to be the controlling stockholder. Mere
ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not, of itself,
sufficient ground for disregarding the separate corporate
personality.
PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO G.
MACADANGDANG, petitioners,
vs.
HON. COURT OF APPEALS (Former Sixth Division) and GERVACIO CU,
respondents
FACTS: Petitioners were held solidarily liable by the appellate court in their
personally capacity to the private respondent for non-payment of tobacco
under an agreement between them embodied in a receipt which states as
follows:
GREETINGS:
WE, the President, Manager, Treasurer and Director Representative of
Bacarra (I.N.) Facoma, Inc., do hereby execute this document:
That we received from Mr. Gervacio Cu, a truck load of Virginia tobacco
consisting of ONE HUNDRED SIXTY (160) bales of fifty (50) kilos each bale
(sic) the said Virginia tobacco consists of different grades or class from E
to A (sic) the said tobaccos are to be shipped to the redrying plants
through the Bacarra Facoma under Guia number 236.
Conditions of the deal between Mr. Cu and the Association. Upon payment
of the said tobacco by the Philippine Virginia Tobacco Administration then
Mr. Cu, will collect the corresponding payments as graded by the redrying
plant as further stipulated that the check representing the payment shall
only be cashed in the presence of Mr. Cu, or his authorized representative.
(Sic)
This instrument is executed for the protection, guidance and information of
the parties concerned.
Done this 10th day of August 1964 at Bacarra, Ilocos Norte.
(Sgd.) Paulino Soriano
PAULINO SORIANO
President
(Sgd.) Nenita C. Esperanza
NENITA C. ESPERANZA
Sec. Treasurer
by:
(Sgd.) Erlinda V. Acosta BIENVENIDO
E. ACOSTA Director, Official
Representative
(Sgd.) A. Macadangdang
A.G. MACADANGDANG
Manager
ISSUE: WON petitioners are liable?
HELD: No. We cannot accept the conclusion that the official designations of
petitioners were written on the document merely as meaningless and hollow
decorations or as mere descripto personae without any relevance to the
liability of the corporation these officers obviously represented. Indeed,
taking in conjunction with the other obtaining circumstances, the receipt
discloses the capacity by which the petitioners entered into the deal with
private respondent.
The subject receipt itself states tht the conditions contained therein were
between the private respondent and the Association. The lower court held
that the Association referred only to the signatories. We disagree. It is quite
plain and we are convinced that the Association is none other than the
Bacarra (I.N.) Facoma, Inc. which is a farmers cooperative marketing
association. Not only that , we cannot find any cogent reason why the
petitioners used the word Association when they could have more easily
and conveniently placed the undersigned or words to the same effect in its
stead.
In light of the foregoing, it is clear that the liability of the petitioners under
the document subject of the instant case is not personal but corporate, and
therefore attached to the Bacarra (I.N.) Facoma, Inc. which being a
corporation, has a personality distinct and separate from that of the
petitioners who are only its officers. It is the general rule that the
protective mantle of a corporations separate and distinct
personality could only be pierced and liability attached directly to its
officers and/or member-stockholders, when the same is used for
fraudulent, unfair or illegal purpose.
C.
The notion of corporate legal entity is not, at all ties respected. This is
because the applicability of the corporate entity theory is confined to
20
accounts were kept as if they belonged to Maria Castro alone these facts
are of patent and potent significance.
In our opinion, the facts and circumstances duly set forth, all of which have
been proved to our satisfaction, prove conclusively and beyond reasonable
doubt that Maria Castro is the sole and exclusive owner of all the shares of
stock of the corporation and that the other partners are her dummies.
YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961) Herein
petitioner Yutivo purchased its cars and trucks from General Motors Overseas
Corporation (GM), the latter paying the sales tax once on original sales,
Yutivo no longer paid sales tax on its sales to the public. Later no, GM
withdrew from the Philippines and appointed Yutivo as importer. Yutivo in
turn exclusively sold to Southern Motors, Inc. (SM), a corporation where the
incorporators are sons fo the founders of Yutivo. Under this arrangement,
Yutivo paid the sales tax on original sale, while SM did not subject to sales
tax its sales to the public.
The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes
which the CTA affirmed.
ISSUE: WON Yutivo is liable for the deficiency taxes?
HELD: No. It is elementary rule and fundamental principle of corporation law
that a corporation is an entity separate and distinct from its stockholders and
from other corporations to which it may be connected. However, when the
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime, the law will regard the corporation as an
association of persons, or in case of two corporations merge them into one.
Another rule is that, when the corporation is a mere alter-ego or business
conduit of a person, it may disregarded.
The sales tax liability of Yutivo did not arise until it became the importer and
simply continued its practice of selling to SM. The decision, therefore, of the
Tax Court that SM was organized purposely as a tax evasion device runs
counter to the fact that there was no tax to evade.
We are, however, inclined to agree with the court below that SM was actually
owned and controlled by petitioner as to make it a mere subsidiary or branch
of the latter created for the purpose of selling the vehicles at retail and
maintaining stores for spare parts as well as service repair shops. It is not
disputed that the petitioner, which is engaged principally in hardware
supplies and equipment, is completely controlled by the Yutivo, Young and Yu
family. The founders of the corporation are closely related to each other
either by blood or affinity and most of its stockholders are members of the Yu
(Yutivo or Young) family.
According to the AOI, the amount of P62,500 was actually advanced by
Yutivo. The additional subscriptions to SM were paid by Yutivo. The
shareholders in SM are mere nominal stockholders holding the share for and
in behalf of Yutivo, so even conceding that the original subscribers were bona
fide stockholders, Yutivo was at all tie in control of the stock of SM and that
the latter was a mere subsidiary of the former.
SM is under the management control of Yutivo by virtue of the management
contract entered into between the two parties. In fact, the controlling
majority of the BOD of Yutivo is also the controlling majority of the Board of
SM. At the same time, the principal officers of both corporations are identical.
In addition, both corporations have a common comptroller. There is therefore
no doubt that by virtue of such control, the business, financial and
management policies of both corporations would be directed towards
common ends. Likewise, cash or funds of SM, including those of its branches
which are directly remitted to Yutivo, and subject to withdrawal only by
Yutivo, SMs being under Yutivos control, the formers operations and
existence became dependent upon the latter.
During the existence of the agreement, Norton acquired by purchase all the
outstanding stocks of Jackbilt. Due to this, the Commissioner of Internal
Revenue, assess respondent Norton for deficiency taxes making the basis of
sales tax the sales of Norton to the public, which is the higher price compare
to the sale of Jackbilt to Norton. The CTA decided in favor of Norton.
ISSE: WON the two corporations may be merged into a single corporation?
HELD: Yes. It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily breed an
identity of corporate interest between the two companies and be
considered as a sufficient ground for disregarding distinct
personalities. However, in the case at bar, we find sufficient grounds to
support the theory that the separate identities of the two companies should
be disregarded.
(a) Norton owned all the outstanding stocks of Jackbilt;
(b) Norton constituted Jackbilts directors;
(c) Norton financed the operations of Jackbilt;
(d) Norton treats Jackbilts employees as its own;
(e) Compensation given to board members of Jackbilt indicate that Jackbilt is
merely a department of Norton;
(f) The offices of Norton and Jackbilt are located in the same compound;
(g) Payments were effected by Norton of accounts for Jackbilt and vice versa;
(h) Payments were also made to Norton of accounts due or payable to
Jackbilt and vice versa.
The circumstances presented by the facts of the case, yields to the
conclusion that Jackbiltis merely an adjunct, business conduit or alter-ego of
Norton and that the fiction of corporate entities, separate and distinct from
each other should be disregarded.
LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG MGA
MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160; May 25, 1953)
Tan Tong, one of herein petitioners, is engaged in the buying and selling of
guagua under the trade name La Campana Guagua Packing. Later on, Tong
and his family organized a family corporation known as La Campana Coffee
Factory Co, Inc. with its principal office located at the same place as that of
La Campana Guagua Packing.
Tan Tongs employees later on formed a union (herein respondent) through
which they demanded (from both companies) higher salaries and more
privileges. As the demand was not granted and an attempt at a settlement
through mediation had given no result, the Department of Labor certified the
dispute to the Court of Industrial Relations (CIR). Petitioners filled a motion
to dismiss which was denied. Hence, this present petition for certiorari.
ISSUE: WON the corporate entity of La Campana Coffee Factory, Inc. may
be disregarded?
SM, being but a mere instrumentality or adjunct of Yutivo, the CTA correctly
disregarded the technical defense of separate corporate entity to arrive at the
true tax liability of Yutivo.
In the present case, Tan Tong appears to be the owner of the guagua
factory. And the factory, though an incorporated business, is in reality owned
21
exclusively by Tan Tong and his family. As found by the CIR, one payroll,
except after July 17, the day the case was certified to the CIR, when the
person who was discharging the office of cashier for both branches of the
business began preparing separate payrolls for the two. And above all, it
should not be overlooked that, as also found by the industrial court, the
laborers of the guagua factory and the coffee factory were interchangeable.
In view of all these, the attempt to make the two factories appear as two
separate businesses, when in reality they are but one, is but a device to
defeat the ends of the law and should not be permitted to prevail.
EMILIO CANO ENTERPRISES, INC. VS. COURT OF INDUSTRIAL
RELATIONS (CIR) (13 SCRA 290; Feb. 26, 1965) In a complaint for
unfair labor practice, the Court of Industrial Relations rendered a decision in
favor of Honorata Cruz, ordering Emilio and Rodolfo Cano, officials of herein
petitioner corporation, to reinstate Cruz. An order of execution was issued
directed against the properties of herein petitioner. Hence, this petition.
ISSUE: WON execution may be had on the properties of the corporation?
HELD: Yes. We should not lose sight of the fact that Emilio Cano Enterprises,
Inc. is a closed family corporation where the incorporators and directors
belong to one single family. Here is an instance where the corporation and its
members are considered as one. And to hold such entity liable for the
acts of its members is not to ignore the legal fiction but merely to
give meaning to the principle that such fiction cannot be invoked if
its purpose is to use it as a shield to further an end subversive of
justice. And so it has been held that while a corporation is a legal
entity existing separate and apart from the person composing it,
that concept cannot be extended to a point beyond it reason and
policy, and when invoked in support of an end subversive of this
policy it should be disregarded by the courts.
Emilio and Rodlfo Cano were indicted in the case, not in their personal
capacity, but as president and manager of the corporation. Having been sued
officialy, their connection with the case must be deemed to be impressed
with the representation of the corporation. In fact, the courts order is for
them to reinstate Honorata Cruz to her former position in the corporation and
incidentally pay her the wages she had been deprived of during her
separation. Verily, the order against them is in effect against the corporation.
No benefit can be attained if this case were to be remanded to the court a
quo merely in response to a technical substitution of parties.
TELEPHONE ENGINEERING SERVICE CO. VS. WCC (104 SCRA 354; May
13, 1981) The late Pacifico Gatus was an employee of Utilities Management
Corporation (UMACOR), a sister company of herein Petitioner TESCO. He was
later on detailed with Petitioner Company and returned back to UMACOR. But
he contracted illness and later on died of liver cirrhosis with malignant
degeneration.
His wife, respondent Leonila Gatus filed a Notice and Claim for Compensation
with the Workmens Compensation Commission (WCC) alleging Pacifico to be
an employee of TESCO. An employers report was submitted to WCC where
UMACOR was indicated as the employer of the deceased and stated that it
would not contravert the claim and admitted that Pacifico contracted illness
in regular occupation.
The sheriff levied on and attached the property of TESCO and scheduled the
sale of the same at public auction. Thus, the present petition for certiorari
with preliminary injunction.
ISSUE: WON the award may be rendered against TESCO?
HELD: Yes. We note that it is only in this Petition that petitioner denied, for
the first time, the employer-employee relationship. In fact, in the letters it
submitted to the Acting Referee and to the Commission, petitioner
represented and defended itself as the employer of the deceased. Petitioner
even admitted that TESCO and UMACOR are sister companies operating
under one single management and housed in the same building. Although
respect for the corporate personality as such, is the general rule,
there are exceptions. In appropriate cases, the veil of corporate
fiction may be pierced as when the same is made as a shield to
confuse the legitimate issues.
22
23
will or existence of its own and is a business conduit of its principal. It must
be kept in mind that the control must be shown to have been exercised at
the time the acts complained of took place. Moreover, the control and breach
of duty must proximately cause the injury or unjust loss for which the
complaint is made
The test in determining the applicability of piercing the veil of
corporate fictions is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only in 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;
2. 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 plaintiffs legal
rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust los complained of.
The absence of one of the elements prevents piercing the corporate veil. In
applying the instrumentality or alter-ego doctrine, the courts are
concerned with reality and not form, with how the corporation operated and
the individual defendants relationship to that operation. Thus, the question
of whether a corporation is mere alter-ego, a mere sheet of paper
corporation, a sham or a subterfuge is purely one of fact.
In this case, while petitioner claimed that it ceased on operations on April 29,
1986, it filed an information sheet with the SEC on May 15, 1987 stating that
its office address is at 355 Maysan Road, Valenzuela Metro Manila. On the
other hand, third-party claimant Hydro, on the same day, filed an information
sheet with the same address, both information sheets filed by the same
Virgilio O. Casino. Both companies have the same president, the same BOD,
the same corporate officers and substantially the same subscribers.
Clearly, petitioner ceased its business operations in order to evade the
payment to private respondents of back wages and to bar their reinstatement
to their former position. Hydro is obviously a business conduit of petitioner
corporation and its emergence was skilfully orchestrated to avoid the financial
liability attached to petitioner orporaiton.
MC CONNEL VS. CA (1 SCRA 722; March 1, 1961) Petitioners, original
incorporators of Park Rite Co., Inc. was ordered to pay the unsatisfied
balance of a judgment rendered in favor of lot owners whose property they
used in the operations of their parking business without the owners consent.
ISSUE: WON the incorporators may be held liable for obligations of the
corporation?
HELD: Yes. The Court has already answered the question in the affirmative
wherever the circumstances have shown that the corporate entity is being
used as an alter-ego or business conduit for the sole benefit of the
stockholders, or else to defeat public convenience, justify wrong, protect
fraud, or defend crime.
The evidence shows that Cirilio Paredes and Ursula Tolentino (present
stockholders) and M. McConnel, WP Cochrane and Ricardo Rodriguez
(previous stockholders) completely dominated and controlled the corporation
and that the functions of the corporation were solely for their benefit, as
shown that the other shareholders were merely qualifying shares. This is
strengthened by the fact that the office of Cirilio Paredes and that of Park
Rite Co., Inc. were located in the same building, in the same floor, and in the
same room. This is further shown by the fact that the funds of the
corporation were kept by Cirilio Paredes in his own name. The corporation
itself had no visible assets, as correctly found by the trial court, except
perhaps the toll house, the wire fence around the lot and the signs thereon It
was for this reason that the judgment against it could not be fully satisfied.
While the mere ownership of all or nearly all of the capital stock of a
corporation does not necessarily mean that it is a mere business
conduit of the stockholder, that conclusion is amply unjustified
where it is shown, as in this case before us, that the operations of
While the records show that originally, the incorporators were aliens, friends
or third-parties in relation of one to another, in the course of its existence, it
developed into a close family corporation. The BOD and stockholders belong
to one family the head of which FL Cease always retained the majority and
hence, the control and management of its affairs. In fact, during the
reconstruction of its records before the SEC, only 9 nominal shares out of 300
appear in the name of his 3 eldest children then and another person close to
them (Ternate). It is likewise noteworthy to observe that as his children
increase or perhaps become of age, he continued distributing his shares
among them adding Florence, Teresa and Marion until at the time of his
death, only 190 were left to his name. Definitely, only the members of his
family benefited from the corporation.
The accounts of the corporation and therefore its operation, as well as that of
the family appears to be indistinguishable and apparently joined together. As
admitted by the defendants, the corporation never had any account with
any banking institution or if any account was carried in a bank on its behalf, it
was in the name of FL Cease. In brief, the operation of the Corporation is
merged with those of the majority stockholders, the latter using the former
as his instrumentality and for the exclusive benefit of all his family. From the
foregoing indication, therefore, there is truth in plaintiffs allegation that the
corporation is only a business conduit of his father and an extension of his
personality, they are once and the same thing. Thus, the assets of the
corporation are also the estate of FL Cease, the father of the parties herein
who are al legitimate children of full blood
Were we to sustain petitioners, the legal fiction of separate corporate
personality shall have been used to delay and ultimately deprive and defraud
the respondents of their successional right to the estate of their deceased
father.
D.
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2.
3.
DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) - Pursuant to a
complaint for money claims which was ultimately decided by the NLRC
against PHILSA Construction and Trading Co. (recruiter) and Arieb
Enterprises (employer), a writ of execution was issed by the POEA which was
returned unsatisfied as PHILSA was no longer operating and was financially
incapable of satisfying the judgment.
At the motion of private respondent, an alias writ was issued against the
properties of Mr. Francisco del Rosario and if insufficient, against the cash
and/or surety bond of the Bonding Company concerned.
Petitioner appealed to the NLRC which was denied together with his MR.
ISSUE: WON the writ of execution must be upheld?
HELD: No. Under the law, a corporation is bestowed juridical personality,
separate and distinct from its stockholders. But when the juridical personality
of the corporation is used to defeat public convenience, Justify wrong,
protect fraud or defend crime, the corporation shall be considered as a
mere association of persons, and its responsible officers and/or
stockholders shall be held individually liable. For the same reasons, a
corporation shall be liable for he obligation of a stockholder or a corporation
and its successor-in-interest shall be considered as one and the liability of the
former shall attach to the latter.
But for the separate juridical personality of a corporation to be disregarded,
the wrongdoing must be clearly and convincingly established. It cannot be
presumed. In this regard, we find the NLRC decision wanting.
1. PHILSA allowed its license to expire so as to evade payment of private
respondents claim not supported by facts. The license expired in 1985,
it was delisted in 1986, there was no judgment yet in favour of PR. An
intent to evade payment of his claims cannot therefore be implied
from the expiration of PHILSAs license and its delisting.
2. Organization of PHILSA International Placemen and Services Corp. and its
registration with POEA implies fraud it was organized and registered in
1981, several years before private respondent filed his complaint with the
POEA in 1985. The creation of the second corporation could not
25
HELD: No. Under the doctrine of piercing the veil of corporate entity, when
valid grounds therefore exist, the legal fiction that a corporation is an entity
with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or
stockholders of a corporation will be considered as the corporation,
that is, liability will attach directly to the officers and stockholders.
In the case at bar, petitioner alleges that the creation of the ACRYLIC is a
devise to evade the application of the CBA between petitioner and TEXTILE
MILL. While we do not discount the possibility of the similarities of the
businesses of the two corporations, neither are we inclined to apply the
doctrine invoked by petitioner.
1. The fact that the business of Indophil Textile Mills and Indphil Acrylic
Manufacturing are related;
2. That some of the employees of PR are the same persons manning and
providing for auxilliary services to the units of ACRILYC, and that;
3. The physical plants, offices and facilities are situated in the same
compound.
It is our considered opinion that these facts are not sufficient to
justify piercing the corporate veil of ACRILYC.
UMALI VS. CA the legal corporate entity is disregarded only if its sought
to hold the officers and stockholders directly liable for a corporate debt or
obligation. In the instant case, petitioner does not seek to impose a
claim against the members of ACRILYC.
PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July 31, 2001)
- PNB International Finance Ltd. (IFL), a wholly-owned subsidiary of PNB,
organized and doing business in HK, extended a letter of credit in favor of
respondent RITRATTO in the amount of US$300K , later increased to 1.14M,
to 1.29M, to 1.425M and decreased to 1,421,316.18, secured by a real
estate mortgage constituted in 4 parcels of land in Makati City.
As of April 1998, the outstanding obligation of respondents stood at
US$1,497,274.70. Pursuant to the terms of the mortgages, IFL, through its
attorney-in-fact PNB, notified respondents of the foreclosure of all the real
estate mortgages and that the properties would be sold at a public auction.
Respondents filed a complaint for injunction for which a TRO was issued and
later on a writ of preliminary injunction, which petitioner assailed with the CA
through petition for certiorari.
The CA dismissed the petition.
ISSUE: WON the corporate entity of IFL may be disregarded?
HELD: No. Respondents, therefore do not have any cause of action against
it. The trial court erred in disregarding the corporate entity by saying that IFL
is a wholly owned subsidiary of PNB and that it is a mere alter-ego or
business conduit of the latter.
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
subsidiarys separate existence may be respected, and the liability
of the parent corporation as well as the subsidiary will be confined
to those arising in their respective businesses.
KOPPEL PHIL VS. YATCO this Court disregarded the separate existence
of the parent and subsidiary on the ground that the latter was formed
merely for the purpose of evading the payment of higher taxes. In the case
at bar, respondents failed to show any cogent reason why the
separate entities of PNB and IFL should be disregarded.
While there exists no definite test of general application in determining when
a subsidiary may be treated as a mere instrumentality of the parent
corporation some factors have been identified that will justify the application
of the treatment of the doctrine of piercing the corporate veil:
1. As a general rule, the stock ownership alone by one corporation ofhte
stock of anoher does not thereby render the dominant corporation liable for
the torts of the subsidiary unless the separate corporate existence of
the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is by an instrumentality or adjunct of the
dominant corporation (Garrett vs. Southern Railway Co.; Tennessee SC);
2. The doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of
a corporation is abused or used for wrongful purpose. The doctrine applies
when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or when it is used as a shield to
confuse legitimate issues 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;
3. The test in determining the doctrine of piercing the veil of corporation
fiction:
a. Control, not mere majority of complete control, but complete
domination, not only of finances, but of policy and business
practices 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
to plaintiffs legal rights; and
26
Such a stance is not supported by the facts. The name of the company
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin
Ace was only a subsequent interested buyer. PRs have not presented any
proof as to communality of ownership and management to support
their contention that the two companies are one firm or closely
related.
The complaint was filed against TDI. Only later when the manufacture
The buyer (Twin Ace) did not buy TDI as a corporation, only most of its
assets, equiment and machinery. Thus, Tanduay Distillers or Twin-Ace
did not take over the corporate personality of TDI although they
manufacture the same product at the same plant with the same
equipment and machinery. Obviously, the trade name Tanduay went
with the sale because the new firm does business as Tanduay Distillers and
its main product of rum is sold as Tanduay Rum. There is no showing,
however, that TDI itself was absorbed by Twin Ace or that it ceased
to exist as a separate corporation. In point of fact, TDI is now herein a
party respondent represented by its own counsel.
The fiction of separate and distinct corporate entites cannot, in the instant
case, be disregarded and brushed aside, there being not the lease
indication that the second corporation was a dummy or servces as a
client of the first corporate entity.
AMENDMENT OF THE CORPORATE CHARTER
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
xxx
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by
a majority vote of the board of directors or trustees and the vote or written
assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of
dissenting stockholders in accordance with the provisions of this Code, or the
vote or written assent of at least two-thirds (2/3) of the members if it be a
non-stock corporation.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such articles, as
amended shall be indicated by underscoring the change or changes made,
and a copy thereof duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of the
stockholders or members, shall be submitted to the Securities and Exchange
Commission.
The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if
not acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation
The steps to be followed for an effective amendment of the articles of
incorporation would thus be:
1. Resolution by at least a majority of the board of directors or trustees;
2. Vote OR WRITTEN ASSENT of the stockholders representing at least
2/3 of the outstanding capital stocks or members in case of a non-stock
corporation. (Note: non-voting shares are considered in determining the
voting and quorum requirement in case of amendments of the articles of
incorporation as provided in Sec. 6);
3. Submission and filing of the amendments with the SEC as follows:
a. The original and amended articles together shall contain all the
provision required by law to be set out in the articles of
incorporation. Such articles, as amended, shall be indicated by
underscoring the change or changes made;
27
b.
c.
When to take effect? (1) Upon approval by the SEC; or (2) From the date of
filing if not acted upon within 6 months for a cause not attributed to the
corporation (does not apply to increasing or decreasing the capital stock or
shortening the corporate term, which shall require the approval of the SEC
[Sec. 38 and 120])
SPECIAL AMENDMENTS
Sec. 37.Power to extend or shorten corporate term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds
(2/3) of the members in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may exercise his
appraisal right under the conditions provided in this code.
Sec. 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors
and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3)
of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the
capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder's meeting at which
the proposed increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be considered, must be
addressed to each stockholder at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number
of shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not accept for
filing any certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has been subscribed and that
at least twenty-five (25%) percent of the amount subscribed has been paid
either in actual cash to the corporation or that there has been transferred to
the corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease of the capital
stock shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase
the same, with the approval by a majority vote of the board of trustees and
of at least two-thirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
SEC. 37&38 vs. SEC. 16:
1. In the former a meeting of the stockholders would be REQUIRED, unlike in
Sec. 16, where the written assent would suffice.
2. Former requires the approval of the SEC.
NOTE: When the amendment of the corporate charter involves shortening
the life of the corporation with the effect of dissolution, Sec. 120 would
apply, requiring approval by the SEC.
GROUNDS FOR DISAPPROVAL OF AMENDMENT
Sec. 17. Grounds when articles of incorporation or amendment may
be rejected or disapproved.- The Securities and Exchange Commission
may reject the articles of incorporation or disapprove any amendment thereto
if the same is not in compliance with the requirements of this Code: Provided,
That the Commission shall give the incorporators a reasonable time within
which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by existing
laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of
banks, banking and quasi-banking institutions, building and loan associations,
trust companies and other financial intermediaries, insurance companies,
public utilities, educational institutions, and other corporations governed by
special laws shall be accepted or approved by the Commission unless
accompanied by a favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in accordance with
law.
PROVISIONS NOT SUBJECT TO AMENDMENT (fait accompli):
1. Names of the incorporations and the incorporating directors or trustees;
2. Name of the treasurer originally or first elected by the subscribers or
members to act as such;
3. Number of shares and the amount originally subscribed and paid out of
the original authorized capital stock of the corporation; and
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4.
compelling reason why a corporation may not enjoy the same right.
The law gives a certain length of time for the filing of records in this court,
and provides that the time may be extended by the court, but under this
provision it has uniformly been held that when the time was expired, there
is nothing to extend, and that the appeal must be dismissed... So, when
the articles of a corporation have expired, it is too late to adopt an
amendment extending the life of a corporation; for, the corporation having
expired, this is in effect to create a new corporation ..."
FACTS: ACCMC was incorporated on Jan. 15, 1912 for a period of 50 years
which expired on Jan. 15, 1962.
On July 15, 1963, during the period within which it is to liquidate, the board
of directors resolved to amend its articles of incorporation extending its
corporate life for another 50 years which was approved by the stockholders
but denied by the SEC.
ISSUE: WON the extension of corporate term should be allowed?
HELD: No. The privilege of extension is purely statutory. All the statutory
conditions precedent must be complied with in order that the
extension may be effectuated. And, generally, these conditions must be
complied with, and the steps necessary to effectuate an extension must be
taken, during the life of the corporation, and before the expiration of
the term of existence as originally fixed by its charter or the general law,
since, as a rule, the corporation is ipso facto dissolved as soon as the
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FACTS: The Board of Directors were apprised of the fact the plaintiff JF
Ramirez, who is based in Paris and represented by his son Jose Ramirez, had
control of agencies for two different marks of films, clair Films and Milano
Films.
Negotiations began between Jose Ramirez and the board of directors of
Orientalist Co. where Ramon Fernandez, one of the members of the board
and TOCs treasurer was chiefly active.
Near the end of July 1913, Jose Ramirez offered to supply from Paris the
aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an
informal conference with the BOD except one, and with approval of those
whom he had communicated, accepted the offer through letters signed by
Fernandez in his capacity as treasurer.
Upon arrival of the said films, it turned out that TOC was without funds, so
the first drafts, taken in the name of TOC were received and paid by its
president, Hernandez, through his own funds and such films were treated by
him as his own property; and in fact, they never came into the possession of
TOC and were rented by Hernandez to TOC as they are exhibited in the
Oriental Theater.
Other films arrived together with their drafts, taken in the name of TOC
through its president, which were not paid and gave rise to the present
action. TOC was declared the principal debtor and Ramon Fernandez, the
guarantor.
ISSUE: WON the corporation could be held liable for the contract?
HELD: Yes. The public is not supposed nor required to know the transactions
which happen around the table where the corporate board of directors or the
stockholders are
from time to time convoked. In dealing with
corporations, the public at large is bound to rely to a large extent
upon outward appearances. If a man is acting for a corporation with the
external indicia of authority, any person not having notice of want of
authority may usually rely upon those appearances; and if it be found that
the directors had permitted the agent to exercise that authority and thereby
held him out as a person competent to bind the corporation, or had
acquiesced in a contract and retained the benefit supposed to have been
conferred by it, the corporation will be bound, notwithstanding the actual
authority may ever have been granted.
The failure of the defendant corporation to make an issue in its answer with
regard to the authority of Ramon Fernandez to bind it, and particularly to
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deny specifically under oath the genuineness and due execution of the
contracts sued upon have the effect of eliminating the question of his
authority from the case.
It is declared under Sec. 28 (now 23) that corporate powers shall be
exercised, and all corporate business conducted by the board of
directors, and this principle is recognized in the by-laws of the
corporation in question which contain a provision declaring that the
power to make contracts shall be vested in the board of directors.
It is true that it is also true in the by-laws, that the president shall have the
power and it shall be his duty, to sigh contract; but this has reference
rahter to the formality of reducing to proper form the contract which
are authorized by the board and is not intended to confer an independent
power to make contract binding on the corporation.
The fact that the power to make corporate contracts is thus vested in the
board of directors does not signify that a formal vote of the board must
always be taken before contractual liability can be fixed upon a corporation;
for a board can create liability, like an individual, by other means
than by a formal expression of its will.
Both upon the principle and authority it is clear that the action of the
stockholders, whatever its character, must be ignored. The theory of
a corporation is that the stockholders may have all the profits but shall
turn over the complete management of the enterprise to their
representatives and agents, called directors. Accordingly, there is little
for the stockholders to do beyond electing directors, making by-laws, and
exercising certain other special powers defined by law. In conformity with
this idea, it is settled that contract between a corporation and third
person must be made by the director and not by the stockholders.
The corporation, in such matters, is represented by the former and not by the
latter. It results that where a meeting of the stockholders is called for the
purpose of passing on the propriety of making a corporate contract, its
resolutions are at most advisory and not in any wise binding on the board.
BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932)
Petitioners, directors of respondent upto March 1929, sought to recover 1%
(to each plaintiff) of the profits of the copany for the year 1929, under and in
accordance with an amendment to the by-laws which was made at the
general meeting of the stockholders on Feb. 1929, to which the lower court
rendered in their favor.
ISSUE: WON the amendment has a binding effect as to grant plaintiffs
claim?
HELD: No. Sec. 20 of the Corporation Law limits the authority of a
corporation to adopt by-laws which are not consistent with the provisions of
the law. The appellees contend that the articled in question is merely a
provision of the compensation of directors which is not only consistent with
but expressly authorized by Sec. 21 of the Corporation Law.
We cannot agree with this contention. The authority conferred upon
corporations in that section refers only to providing compensation for the
future services of directors, officers, and employees thereof after the
adoption of the by-law or other provisions in relation thereto, and cannot in
any sense be held to authorize the giving, as in this case, of continuous
compensation to particular directors after their employment has terminated
for part services rendered gratuitously by them to the corporation. To permit
the transaction involved in this case would be to create an obligation
unknown to law, and to countenance a misapplication of the funds of the
DIRECTORS/TRUSTEES in chapter 4)
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2.
Every action of the board without a meeting and without the required voting
and quorum requirement will not bind the corporation unless subsequently
ratified, expressly or impliedly.
Individual directors, however, can rightfully be considered as agents of the
corporation. And although they cannot bind the corporation by their
individual acts, this is subject to certain EXCEPTIONS: (1) by delegation of
authority; (2) when expressly conferred; or (3) where the officer or agent is
clothed with actual or apparent authority.
YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) Constacio
B. Malagna, President and Chairman of the Board of private respondent
Prime White Cement Corporation (PWCC), sent a letter-offer (Exhibit A) to
Mr. Yao for the delivery of cement, which was accepted by the latter by
delivering a check for P243,000.
ISSUE: WON the letter-offer sent by Malagna binds the corporation?
HELD: No. A corporation can act only through its officers and agents, all acts
within the powers of said corporation may be performed by agents of his
selection and except in so far as limitations or restrictions may be imposed by
special charter, by-law or statutory provisions, the same general provision of
law which govern the relation of agency for natural person govern the officer
or agent of a corporation, of whatever status or rank, in respect to his power
to act for the corporation; and the agents once appointed, or members acting
in their stead, are subject to the same rules, liabilities and incapacities as are
agents of individuals and private persons.
Moreover, a corporate officer or agent may represent and bind the
corporation in transactions with third person to the extent that authority has
been conferred upon him, and this includes powers which have been (1)
intentionally conferred, and (2) also such powers as, in the usual course of
business, are incidental thereto, or may be implied therefrom, (3) powers
added by custom and usage, as usually pertaining to the particular officer
or agent, and (4) such apparent powers as the corporation has caused
persons dealing with the officer or agent to believe that it has conferred.
While Mr. Maglana was an officer, the by-laws do not in any way confer upon
the president the authority to enter into contracts for the corporation
independently of the BOD. That power is expressly lodged in the latter.
Nevertheless, to expedite or facilitate the execution of the contract, only the
President shall sign the contact for the corporation. No greater power can be
implied from such express, but limited delegated authority. Neither can it be
logically claimed that any power greater than that expressly conferred is
inherent in Mr. Maglanas position as president and chairman of the
corporation.
Although there is authority "that if the president is given general control and
supervision over the affairs of the corporation, it will be presumed that he
has authority to make contract and do acts within the course of its ordinary
business," We find such inapplicable in this case. We note that the private
corporation has a general manager who, under its By-Laws has, inter
alia, the following powers: "(a) to have the active and direct management of
the business and operation of the corporation, conducting the same
accordingly to the order, directives or resolutions of the Board of Directors or
of the president." It goes without saying then that Mr. Maglana did not have
a direct and active and in the management of the business and operations of
the corporation.
Petitioner's last refuge then is his alternative proposition, namely, that private
respondent had clothed Mr. Maglana with the apparent power to act for it
and had caused persons dealing with it to believe that he was conferred with
such power. The rule is of course settled that "[a]lthough an officer or
agent acts without, or in excess of, his actual authority if he acts
within the scope of an apparent authority with which the
corporation has clothed him by holding him out or permitting him to
appear as having such authority, the corporation is bound thereby
Despite lack of notice to Asuncion, we can glean from the records that she
was aware of the corporations obligations under the said resolution. More
importantly she acquiesced thereto by affixing her signature on two cash
vouchers. The conduct of petitioners had estopped them from assailing the
validity of the said board resolutions.
PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924)
W. Neumark, president of defendant corporation borrowed P15000 from
plaintiff which was delivered by means of a check in favor of defendant and
deposited in BPI and the amount of it credited to the corporations current
account.
ISSUE: WON the corporation is responsible for the money borrowed by its
president?
HELD: Yes. W. Neumark is the principal stockholder, president and general
business manager of the defendant corporation. On behalf of the corporation,
he solicited a loan and was given a check, which was endorsed by him in his
capacity as president and deposited to the corporations account. It may be
true that a large part of the amount so deposited was diverted by Neumark
to his own use, but that does not alter that the money was borrowed for the
corporation and was placed in its possession.
It is conceded that Neumark was not expressly authorized by the board of
directors to borrow the money in question and the general rule is that a
business manager or other officer of a corporation, has no implied power to
borrow money on its behalf. But much depends upon the circumstances of
each particular case and the rule state is subject to important exceptions.
Thus, where a general business manager of a corporation is clothed
with apparent authority to borrow money and the amount borrowed
does not exceed the ordinary requirements of the business, it has
often been held that the authority is implied and that the
corporation is bound.
A complaint was filed before the labor arbiter who decided in favor of private
respondents.
ISSUE: WON Chen had the power to bind the corporation under a contract
of that character?
HELD: No. The general rule is that the power to bind a corporation by
contract lies with its board of directors or trustees, but this power may either
be expressly or impliedly be delegated to other officers or agents of the
corporation, and it is well settled that except where the authority of
employing servants and agents is expressly vested in the BOD/T, an
officer or agent who has general control and management of the
corporations business, or a specific part thereof, may bind the
corporation as are usual and necessary in th conduct of such
business. But the contracts of employment must be reasonable.
HELD: Yes. The general rules is that a corporation, through its board of
directors, should act in the manner and within the formalities, if
any, prescribed by its charter or by the general law. Thus, the
directors must act as a body in a meeting called pursuant to the law or the
corporations by-laws, otherwise, any action taken therein may be questioned
by any objecting director or shareholder.
Be that as it may, jurisprudence tells us that an action of the board of
directors during a meeting, which was illegal for lack of notice, may
be ratified either (1) expressly, by the action of the directors in
subsequent legal meeting, or (2) impliedly, by the corporations
subsequent conduct.
Ratification by directors may be by an express resolution or vote to that
effect, or it may be implied from adoption of the act, acceptance or
acquiescence. Moreover, the unauthorized acts of an officer of a corporation
may be ratified by the corporation by conduct implying approval and adoption
of the act in question. Such ratification may be expressed or may be inferred
from silence and inaction.
Chen, as general manager of Kong Li Po, had implied authority to bind the
defendant corporation by a reasonable and usual contract of employment
with the plaintiffs, but we do not think that contract here in question can be
so considered. Not only is the term of employment usually long, but the
conditions are otherwise so onerous to the defendant that the possibility of
the corporation being thrown into insolvency thereby is expressly
contemplated in the same contract. This fact, in itself was, in our opinion,
sufficient to put the plaintiffs upon inquiry as to the extent of the business
managers authority; they had not the right to presume that he or any other
single officer or employee of that corporation had implied authority to enter
into a contract of employment which might bring about its ruin.
In the case at bench, it was established that petitioner corporation did not
issue any resolution revoking nor nullifying the board resolution granting
gratuity pay to private respondents. Instead, they paid the gratuity pay,
particularly, the first two installments thereof.
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Long before the disputed contracts came into being, Kalaw contracted by
himself alone as general manager for forward sales of corpra (which is a
necessity in the business) which were profitable. So pleased was NACOCO;s
BOD that it voted to grant Kalaw special bonus in recognition of the signal
achievement rendered by him.
These previous contacts, it should be stressed, were signed by Kalaw without
prior authority from the board. Said contracts were known all along to the
board members. Nothing was said by them. The aforesaid contracts stand to
prove one thing. Obviously, NACOCOs board met difficulties attendant to
forward sales by leaving the adoption of means to end, to the sound
discretion of NACOCOs general manager Maximo Kalaw.
Where similar acts have been approved by the directors as a matter
of general practice, custom, and policy, the general manager may
bind the company without formal authorization of the BOD. In
varying language, existence of such authority is established, by proof of the
course of business, the usages and practices of the company and by the
knowledge which the BOD has, or must be presumed to have, of acts and
doings of its subordinates in and about the affairs of the corporation.
In the case at bar, the practice of the corporation has been to allow its
general manager to negotiate and execute contracts in its copra trading
activities for and in NACOCOs behalf without prior board approval. If the bylaws were to be literally followed, the board should give its stamp of prior
approval on all corporate contracts. But the Board itself, by its acts and
through acquiescence, practically laid aside the by-law requirement of prior
approval.
BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969) As
a consequence of P200,000 worth of ECA allocated to the Bowen & Co., Inc.,
it required a letter of credit in the amount of P100,000 with the PNB. As the
corporation did not have at the time the necessary funds to put up the
required cash marginal deposit of P60,000, its president Geoffrey Bowen,
obligating the corporation and himself in his personal capacity, offered to pay
Fracisco Buenaseda 37 % of the profits to be realized from the sale of the
ECA procurement materials, should he be able to obtain and produce the
amount necessary to cover the cash marginal deposit which Buenaseda
was able to do.
The corporation refused to pay, Buenaseda filed an action in the CFI to
recover the same.
ISSUE: WON the agreement was binding?
HELD: Yes. It is not here pretended that the BOD of the defendant
corporation had no knowledge of the agreement between Bowen and
plaintiff. Indeed, at the time the said Agreement was made, the BOD of the
corporation was composed of Bowen himself, his wife, Buenaseda and two
others, with Bowen and his wife controlling the majority of the stocks of the
corporation. The Board did not repudiate the agreement but on the contrary,
acquiesced in and took advantage of the benefits afforded by said
agreement. Such acts are equivalent to an implied ratification of the
agreement by the BOD and bound the corporation even without formal
resolution passed and recorded.
It is agreed by the respondents, defendants below, that the profits of the
corporation form part of its assets and payment of a certain percentage of
the profits requires a declaration of dividends and/or resolution of the BOD.
The agreement is untenable. Although the plaintiff is a stockholder of the
corporation he does not, however, claim a share of the profits as such
stockholder, but under the agreement between him and the president of the
corporation which has been impliedly ratified by the BOD.
NOTE:
1. By-laws may provide for casues or grounds for removal of a director;
those causes;
3. A director NOT representing the minority may be removed even without
a cause.
REQUIREMENTS FOR A VALID REMOVAL:
1. The removal should take place at a general or special meeting duly call
for that purpose;
2. The removal must be by the vote of the stockholders holding or
representing 2/3 of the outstanding capital stock or the members
entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the
intention to propose such removal at the meeting either by publication
or on written notice to the stockholders or members.
JURISDICTION OF THE COURT: The law, as it stands now, grants the
proper court, the power and authority to hear and decide cases involving
controversies in the election or appointment of directors, trustees, officers, or
managers of such corporation, partnership or association.
DEADLOCK: In the case of deadlock in a close corporation, the SEC is also
authorized to issue an Order as it deems appropriate canceling, altering or
enjoining any resolution or other act of the corporation or its board of
directors or directing or prohibiting any act the corporation or the other
board of directors thereby effectively taking away the rights of the directors
to act as manager of the corporation.
VACANCY:
1.
2.
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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. This holdover period 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.
2.
3.
(3) above: Sec. 30 is clear on the point when it provides as such directors.
Therefore, special and extraordinary service rendered, outside of the regular
duties, may form the basis for a claim of special compensation, such as when
a director acts as a general counsel.
REASON: the office of a director is usually filled up by those chiefly
interested in the welfare of the institution by virtue of their interest in stock
or other advantages and such interests are presumed to be the motive for
executing duties of the office without compensation.
MAY THE COURTS LOOK INTO THE REASONABLENESS OF
COMPENSATION? The courts will not generally undertake to review the
fairness of official salaries, at the suit of a stockholder unless wrongdoing and
oppression or possible abuse of fiduciary position are shown.
When the recipient does not stand in the dual relation of the (1) one
compensated and (2) a participant in fixing his own compensation, it is
considered outside the proper judicial function to go into business policy
question of the fairness or reasonableness of compensation as fixed by the
board. Otherwise, it will call for a scrutiny of the reasonableness or fairness
of the compensation. Likewise, even if consented to by the majority of
stockholders, the courts may still look into such reasonableness if: (1) it
would amount to giving away corporate funds in the guise of compensation
as against the interest of the dissenting minority; or (2) in fraud of creditors,
either amounting to wastage of assets.
CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA
593; June 30, 1970) This is a complaint filed by herein petitioner CCE for
the refund of certain amounts received by respondent when he served as
member of the board of directors of CCE, which were said t be per diems and
transportation expenses, representation expenses and cummutable
discretionary funds.
ISSUE: WON the BOD had the power to appropriate funds for the expenses
claimed by respondent?
HELD: No. The by-laws expressly reserved unto the stockholders the power
to determine the compensation of the members of the BOD, and the
stockholders did restrict such compensation to (1) actual transportation
expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
Even without the express prohibition, the directors are not entitled to
compensation for The law is well-settled that directors of
corporations presumptively serve without compensation and in the
absence of an express agreement or a resolution thereto, no claim
can be asserted therefor. Thus it has been held that there can be no
recovery of compensation, unless expressly provided for, when
director serves as president or vice-president, as secretary or
treasurer or cashier, as member of an executive committee, as
chairman of a building committee, or similar offices.
COMPENSATION OF DIRECTORS
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Ong put a stop payment on the check when NAWASA refused to pay on the
account that aside from the defects on the lawn mower, the engine (sold by
dela Costa) was a reconditioned unit.
HELD: Yes. The proscription under Sec. 30, is against granting compensation
to directors/trustees of a corporation is not a sweeping rule. Worthy of note
is the clear phraseology of Sec 30 which states [T]he directors shall not
receive any compensation, as such directors, The phrase as such
directors is not without significance for it delimits the scope of the
prohibition to compensation given to them for services performed
purely in their capacity as directors or trustees. The unambiguous
implication is that members of the board may receive compensation, in
addition to reasonable per diems, when they render services to the
corporation in a capacity other than as directors/trustees. In the case
at bench, the Resolution granted monthly compensation to private
respondents not in their capacity as members of the board, but rather as
officers of the corporation, more particularly as Chairman, Vice-Chairman,
Treasurer and Secretary of WIT.
Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the
compensation to 10% of the net income before income tax does not likewise
find application in this case since the compensation is being given to private
respondents in their capacity as officers of WIT and not as board members.
GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927)
The members of the board of El Hogar Filipino receives 5% of the net profit
as shown in the balance sheet and is distributed in proportion to their
attendance to meetings of the board. A complaint was filed against the, and
the sixth cause of action alleged that the directors, instead of serving without
pay, or receiving nominal pay or a fixed salary - as the complainant
supposes would be proper have been receiving large compensation in
varying amounts.
ISSUE: WON the courts may declared the by-law provision null and void?
HELD: No. The Corporation Law does not undertake to prescribe the
rate of compensation for the directors of corporations. The power to
fixed the compensation they shall receive, if any, is left to the corporation, to
be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this
authority the compensation for the directors of El Hogar Filipino has been
fixed in section 92 of its by-laws, as already stated. The justice and
propriety of this provision was a proper matter for the shareholders
when the by-laws were framed; and the circumstance that, with the
growth of the corporation, the amount paid as compensation to the
directors has increased beyond what would probably be necessary
to secure adequate service from them is matter that cannot be
corrected in this action; nor can it properly be made a basis for depriving
the respondent of its franchise, or even for enjoining it from compliance with
the provisions of its own by-laws. If a mistake has been made, or the rule
adopted in the by-laws has been found to work harmful results, the remedy
is in the hands of the stockholders who have the power at any lawful meeting
to change the rule. The remedy, if any, seems to lie rather in publicity and
competition, rather than in a court proceeding. The sixth cause of action is in
our opinion without merit.
E.
The general rule is that unless the law specifically provides a corporate officer
or agent is not civilly or criminally liable for acts done by him as such officer
or agent, or when absent bad faith or malice.
TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994)
Melchor dela Cuesta, doing business under the name Farmers Machineries,
sold a tractor to Tramat Mercantile, Inc. In payment, David Ong, Tramats
president and manager issued a check for P33,500. Tramat sold the tractor,
together with an attached lawn mower fabricated by it, to NAWASA. David
37
De la Costa filed an action for recovery of money which was granted by the
court.
HELD: No. It was an error to hold David Ong jointly and severally liable with
TRAMAT to de la Cuesta under the questioned transaction. Ong had there so
acted, not in his personal capacity, but as an officer of a corporation,
TRAMAT, with a distinct and separate personality. As such, it should only be
the corporation, not the person acting for and on its behalf, that properly
could be made liable thereon.
Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly
attach, as a rule, only when
1. He assents (a) to a patently unlawful act of the corporation, or
(b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict
of interest, resulting in damages to the corporation, its stockholders or other
persons;
2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written
objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation;
4. He is made, by a specific provision of law, to personally answer for his
corporate action.
In the case at bench, there is no indication that petitioner David Ong could
be held personally accountable under any of the abovementioned cases.
RICARDO A. LLAMADO, petitioner,
vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents
38
responsible both for reasonable care and also prudence, the formula is
continually repeated that they are not liable for losses due to imprudence or
honest error of judgment. The business judgment rule in effect states that
questions of policy and management are left solely to the honest decision of
the board of directors and the courts are without authority to substitute its
judgment as against the former. The directors are business managers and as
long as they act in good faith, its actuations are not subject to judicial review.
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
64.2%
for 1952-53;
64.3%
for 1953-54;
64.5%
63.5%
for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the terms of its
Resolution of August 20, 1936, duty bound to grant similar increases to
plaintiffs-appellants herein.
Generally: a director is not liable for the acts of their co-directors, unless: (1)
He connives or participates; or (2) He is negligent in not discovering or acting
to prevent it. Thus, absent of actual knowledge of the wrongful activities, on
the part of the co-directors, the same cannot be imputed to the other director
unless in the exercise of reasonable care attending his responsibilities, he
should have been aware of suspicious circumstances demanding correlative
action.
LOYALTY: refers to the proscription imposed on directors on acquiring any
personal or pecuniary interest in conflict with their duty as director. Their
relationship is regarded as fiduciary relation. As fiduciaries, they are obliged
to act with utmost candor and fair dealing for the interest of the corporation
and without selfish motives.
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his
office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding the same, unless
his act has been ratified by a vote of the stockholders owning or representing
at least two-thirds (2/3) of the outstanding capital stock. This provision shall
be applicable, notwithstanding the fact that the director risked his own funds
in the venture.
Apparent from Sec. 31 and 34, the duty of loyalty is violated in the following
instances:
1. When a director or trustee acquires any personal or pecuniary interest
in conflict with (his) duty as such director or trustee;
2. When he attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect to any matter which has
been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf; and
3. When he, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining
profit to the prejudice of such corporation.
are fiduciary representatives of the corporation and as such they are not
allowed to obtain any personal profit, commission, bonus or gain for their
official actions. This may also refer to those arising from transactions of
directors with third persons which may involve misappropriation of corporate
opportunities and disloyal diverting of business. Directors and officers are
39
corporate insiders and cannot, therefore, utilize their strategic position for
their own preferment or use their powers and opportunities for their personal
advantage to the exclusion of the interest which they represent.
RATIFICATION:
1.
2.
Concealing his identity when procuring the purchase of stock, by his agent,
was in itself stock evidence of fraud on the part of the defendant. The
concealment was not a mere inadvertent omission but was a studied and
intentional omission, to be characterized as part of the deceitful machination
to obtain the purchase without giving information whatever as to the state
and probable result of the negotiations, to the vendor of the stock, and to, in
that way, obtain the same at a lower price.
ISSUE: WON the dealership agreement entered into by Te with his own
corporation is valid and binding?
G.
SELF-DEALING DIRECTORS
The self-dealing director is one who deals or transacts business with his own
corporation.
Sec. 32. Dealings of directors, trustees or officers with the
corporation. - A contract of the corporation with one or more of its directors
or trustees or officers is voidable, at the option of such corporation, unless all
the following conditions are present:
1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a quorum
for such meeting;
2. That the vote of such director or trustee was nor necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by
the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may
be ratified by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full disclosure
of the adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable under
the circumstances.
Generally: A contract entered into by a director with his own corporation is
voidable at the latters option, except when all the conditions laid down in
Sec. 32 are met. On the other hand, where any of the first two conditions is
absent, the contract becomes voidable subject to the ratification of the
stockholders representing 2/3 of the outstanding capital stock the
requirements of which are: (1) there must be a meeting called for that
purpose; (2) full disclosure of the adverse interest of the director; and (3) the
contract is fair and reasonable under the circumstances.
If the self-dealing director owns all or substantially all of the shares of stock,
thereby making ratification easily possible, the last sentence of Sec. 32
should be made to apply by determining reasonableness of the transaction to
which there is no yardstick. Every case stands upon its own bottom, and the
ultimate question is whether the contract was honest and beneficial which is
always a question of fact.
PRIME WHITE CEMENT CORPORATION, petitioner,
vs.
IAC and ALEJANDRO TE, respondents
40
The defendant, in turn, sold these rights with R.W. Brown, HDC jones, John
Macleod and TH Twentyman, and retaining one sixth interest, formed Manila
Salvage Association.
ISSUE: WON officers or directors of the corporation may purchase the
corporate property?
the business would be at a loss and where there was no prospect or hope
that the enterprise would be profitable."
We therefore conclude that the sale or transfer made by the quorum of the
board of directors a majority of the stockholders is valid and binding
upon the majority-the plaintiff.
HELD: Yes. While a corporation remains solvent, we can see no reason why
a director or officer, by the authority of a majority of the stockholders or
board of managers, may not deal with the corporation, loan it money or buy
property from it, in like manner as a stranger. So long as a purely private
corporation remains solvent, its directors are agents or trustees for the
stockholders. They owe no duties or obligations to others. But the moment
such a corporation becomes insolvent, its directors are trustees of all the
creditors, whether they are members of the corporation or not, and must
manage its property and assets with strict regard to their interest; and if they
are themselves creditors while the insolvent corporation is under their
management, they will not be permitted to secure to themselves by
purchasing the corporate property or otherwise any personal advantage over
the other creditors. Nevertheless, a director or officer may in good faith and
for an adequate consideration purchase from a majority of the directors or
stockholders the property even of an insolvent corporation, and a sale thus
made to him is valid and binding upon the minority. (Beach et al. vs. Miller,
supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall.,
299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New
Hamphshire Insurance Company, 43 N. H., 263; Morawetz on Corporations
(first edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64
Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage
Company, 21 Fed. Rep., 577.)
H.
In the case of the Twin-Lick Oil Company vs. Marbury, he court said:
41
INTERLOCKING DIRECTORS
NOTE:
1. The contract between corporations with interlocking director is valid
absent fraud and provided it is reasonable under the circumstances;
2. If the interest of the interlocking director in one corporation exceeds
20% and in the other merely nominal, the contract becomes voidable at
the latter corporations option. In effect, the director would be treated
as a self-dealing director under Sec. 32;
3. If the interest in both companies is either both substantial or both
nominal, Sec. 33 will apply.
I.
DERIVATIVE SUIT
purposes the real plaintiff in this case as shown in the prayer of the
complaint.
ISSUE: WON plaintiff has capacity to sue?
HELD: Yes. In suits of this character the corporation itself and not the
plaintiff stockholder is the real party in interest. The rights of the individual
stockholder are merged into that of the corporation. It is a universally
recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation
itself for the benefit of all the stockholders. Text writers illustrate this rule by
the familiar example of one person or entity owning all the stock and still
having no greater or essentially different title than if he owned but one single
share. Since, therefore, the stockholder has no title, it is evident that what he
does have, with respect to the corporation and his fellow stockholder, are
certain rights sui generis. These rights are generally enumerated as being,
first, to have a certificate or other evidence of his status as stockholder
issued to him; second, to vote at meetings of the corporation; third, to
receive his proportionate share of the profits of the corporation; and lastly, to
participate proportionately in the distribution of the corporate assets upon the
dissolution or winding up. (Purdy's Beach on Private Corporations, sec. 554.)
The right of individual stockholders to maintain suits for and on behalf of the
corporation was denied until within a comparatively short time, but his right
is now no longer doubted. Accordingly, in 1843, in the leading case of Foss
vs. Harbottle, a stockholder brought suit in the name of himself and other
defrauded stockholders, and for the benefit of the corporation, against the
directors, for a breach of their duty to the corporation. This case was decided
against the complaining stockholder, on the ground that the complainant had
not proved that the corporation itself was under the control of the guilty
parties, and had not proved that it was unable to institute suit. The court,
however, broadly intimated that a case might arise when a suit instituted by
defrauded stockholders would be entertained by the court and redress given.
Acting upon this suggestion, and impelled by the utter inadequacy of suits
instituted by the corporation, defrauded stockholders continued to institute
these suits and to urge the courts of equity to grant relief. These efforts were
unsuccessful in clearly establishing the right of stockholders herein until the
cases of Atwol against Merriwether, in England, 1867, and of Dodge vs.
Woolsey, in this country, in 1855. These two great and leading cases have
firmly established the law for England and America, that where 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 single stockholder
may institute that suit, suing 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.
So it is clear that the plaintiff, by reason of the fact that he is a stockholder in
the bank (corporation) has a right to maintain a suit for and on behalf of the
bank, but the extent of such a right must depend upon when, how, and for
what purpose he acquired the shares which he now owns. In the
determination of these questions we can not see how, if it be true that the
bank is a quasi-public institution, it can affect in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of November,
1903; that the defendants, as members of the board of directors and board
of government, respectively, during each and all the years 1903, 1904, 1905,
1906, and 1907, did fraudulently, and to the great prejudice of the bank and
its stockholders, appropriate to their own use from the profits of the bank
sums of money amounting approximately to P20,000 per annum.
It is self-evident that the plaintiff in the case at bar was not, before he
acquired in September, 1903, the shares which he now owns, injured or
affected in any manner by the transactions set forth in the second cause of
action. His vendor could have complained of these transactions, but he did
not choose to do so. The discretion whether to sue to set them aside, or to
acquiesce in and agree to them, is, in our opinion, incapable of transfer. If
the plaintiff himself had been injured by the acts of defendants' predecessors
that is another matter. He ought to take things as he found them when he
voluntarily acquired his ten shares. If he was defrauded in the purchase of
these shares he should sue his vendor. (Thus, he may sue for the second half
42
of 1903 to 1907 but not for the years 1989 to the first half of 1903.)
So it seems to be settled by the Supreme Court of the United States, as a
matter of substantive law, that a stockholder in a corporation who was not
such at the time of the transactions complained of, or whose shares had not
devolved upon him since by operation of law, cannot maintain suits of this
character, unless such transactions continue and are injurious to the
stockholder, or affect him especially and specifically in some other way.
HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.
ROBINSON, plaintiffs-appellants,
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC
BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH,
defendants-appellees.
43
Defendants urge that the action is improper because the plaintiff was not
authorized by the corporation to bring suit in its behalf. Any such authority
could not be expected as the suit is aimed to nullify the action taken by the
manager and the board of directors of the Republic Bank; and any demand
for intra-corporate remedy would be futile, as expressly pleaded in the
complaint. These circumstances permit a stockholder to bring a derivative
suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has
chosen to make common cause with plaintiff Perez is irrelevant,
since the smallness of plaintiff's holdings is no ground for denying
him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early
in the proceedings for the absence of other stockholders to be of any
significance, no issues having even been joined.
ISSUE2: WON the Corporation should be a plaintiff or defendant?
HELD2: The English practice is to make the corporation a party plaintiff,
while in the United States, the usage leans in favor of its being joined as
party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be
raised against either method. (1) Absence of corporate authority would
seem to militate against making the corporation a party plaintiff,
while (2) joining it as defendant places the entity in the awkward
position of resisting an action instituted for its benefit. What is
important is that the corporation' should be made a party, in order
to make the Court's judgment binding upon it, and thus bar future
relitigation of the issues. On what side the corporation appears
loses importance when it is considered that it lay within the power
of the trial court to direct the making of such amendments of the
pleadings, by adding or dropping parties, as may be required in the
interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not
a ground to dismiss an action. (Ibid.)
ISSUE3: WON the action of the plaintiff amounts to a quo warranto
proceeding?
HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of
the Republic Bank's board of directors. The suit is aimed at preventing the
waste or diversion of corporate funds in paying officers appointed solely to
protect Pablo Roman from criminal prosecution, and not to carry on the
corporation's bank business. Whether the complaint's allegations to such
effect are true or not must be determined after due hearing.
WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under
Compensation of Directors) Petitioners assert that the motion for
reconsideration of the civil aspect of the RTC decision acquitting respondents
is a derivative suit brought by them as minority stockholders of WIT for and
on behalf of the corporation
ISSUE: WON the appeal may be considered as a derivative action?
HELD: No. A derivative suit is an action brought by minority
shareholders in the name of the corporation to redress wrongs
committed against it, for which the directors refuse to sue. It is a
remedy designed by equity and has been the principal defense of
the minority shareholders against abuses by the majority. Here,
however, the case is not a derivative suit but is merely an appeal on the civil
aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for
estafa and falsification of public document. Among the basic
requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must
allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join. This is necessary to
vest jurisdiction upon the tribunal in line with the rule that it is the allegations
in the complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. This was not
complied with by the petitioners either in their complaint before the court a
quo nor in the instant petition which, in part, merely states that "this is a
petition for review on certiorari on pure questions of law to set aside a
portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since
the trial court's judgment of acquittal failed to impose any civil liability against
the private respondents. By no amount of equity considerations, if at all
deserved, can a mere appeal on the civil aspect of a criminal case be treated
as a derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as insisted
by petitioners, which it is not, the same is outrightly dismissible for having
been wrongfully filed in the regular court devoid of any jurisdiction to
entertain the complaint. The ease should have been filed with the Securities
and Exchange Commission (SEC) which exercises original and exclusive
jurisdiction over derivative suits, they being intra-corporate disputes, per
Section 5 (b) of P.D. No. 902-A.
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO
ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO,
RALPH KAHN and RAMON DEL ROSARIO, JR., respondents.
HELD: Yes. The theory that de los Angeles has no personality to bring suit in
behalf of the corporation because his stockholding is minuscule, and there
is a "conflict of interest" between him and the PCGG cannot be sustained.
HELD: Yes. The evidence of defendants proves very clearly that right from
the start, Chase was by them recognized as a stockholder and initial
incorporator with 600 paid up shares representing a 1/3 interest in Amparts,
and that would be enough for Chase to have the correct personality to
institute this derivative suit; the second place, it also appears apparently
undenied that Chase did not win in California so that he did not recover the
$150,000.00 that he had prayed for there against Overseas, which if he had
would really in the mind of the Court have put him in estoppel to intervene in
any manner as incorporator or stockholder of Amparts; and in the third place
and most important it should not be forgotten that Chase has filed the
present case not for his personal benefit, but for the benefit of Amparts, so
that to the Court the argument of estoppel as against him would appear to
be out of place; the estoppel to be valid as a defense must be an estoppel
against Amparts itself; the long and short of it is that the Court is impelled
and constrained to discard all the other defenses set up by Dr. Buencamino
on the principal complaint; the result of all these would be to sustain so far,
the position of Chase that Dr. Buencamino must account for the P570,000.00
used to pay the second series of payment on the subscription, the
P330,000.00 used in paying the lsst series on the subscription, plus another
sum of P245,000.00 entered as loan on his favor and against Amparts, for
the sum of P434,000.00 earned in the blackmarketing of the excess of
$140,000.00 dollars on the forwarding costs and promotional expenses, for
the sum of P391,200.00 earned in the blackmarketing of the excess of
$117,000.00 in the transaction with Bertoni and Cotti, and all these would
reach a total of P1,970,200.00; and as the appropriation of the profits for
himself was a quasi-delict, the liability therefore assuming that it had been
done with the cooperation of Cranker would have to be solidary, 2194 New
Civil Code.
It is claimed that since de los Angeles 20 shares (owned by him since 1977)
represent only. 00001644% of the total number of outstanding shares (1
21,645,860), he cannot be deemed to fairly and adequately represent the
interests of the minority stockholders. The implicit argument that a
stockholder, to be considered as qualified to bring a derivative suit, must hold
a substantial or significant block of stock finds no support whatever in the
law. The requisites for a derivative suit are as follows:
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; and
c) 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 bona fide ownership by a stockholder of stock in his own right
suffices to invest him with standing to bring a derivative action for
the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for the
protection or vindication of his own particular right, or the redress
of a wrong committed against him, individually, but in behalf and
for the benefit of the corporation.
Neither can the "conflict-of-interest" theory be upheld. From the conceded
premise that de los Angeles now sits in the SMC Board of Directors by the
grace of the PCGG, it does not follow that he is legally obliged to vote as the
PCGG would have him do, that he cannot legitimately take a position
inconsistent with that of the PCGG, or that, not having been elected by the
minority stockholders, his vote would necessarily never consider the latter's
interests. The proposition is not only logically indefensible, non sequitur, but
also constitutes an erroneous conception of a director's role and function, it
44
to the paralyzation of the operations. It was alleged that the supplier of the
said finished goods was United Commercial Company of New York in which
Dalamal, appointed by the BOD of the Textile Mills as co-manager, had
inrterests and that the letter of credit for said goods were guaranteed by the
Indian Commercial Company and Indian Traders in which Dalamal likewise
has interests. It was further alleged that the sale of the finished products was
the business of Indian Commercial Company of Manila who cannot obtain
dollar allocations for imporations of finished goods.
An action for the appointment of a receiver was filed before the trial court
after the BOD refused to proceed against Dalamal, which was granted.
ISSUE: WON Justiniani may be allowed to institute the case for receivership
and damages?
HELD: Yes. It is not denied by petitioner that the allocation of dollars to the
corporation for the importation of raw materials was suspended. In the eyes
of the court below, as well as in our own, the importation of textiles instead
of raw materials, as well as the failure of the Board of Directors to take action
against those directly responsible for the misuse of dollar allocations
constitute fraud, or consent thereto on the part of the directors. Therefore, a
breach of trust was committed which justified the derivative suit by a
minority stockholder on behalf of the corporation.
It is well settled in this jurisdiction that where corporate directors are
guilty of a breach of trust not of mere error of judgment or abuse
of discretion and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders. An illustration of a suit of this kind is
found in the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by this
Court as early as 1911. In that case, the Banco Espaol-Filipino suffered
heavy losses due to fraudulent connivance between a depositor and an
employee of the bank, which losses, it was contended, could have been
avoided if the president and directors had been more vigilant in the
administration of the affairs of the bank. The stockholders constituting the
minority brought a suit in behalf of the bank against the directors to recover
damages, and this over the objection of the majority of the stockholders and
the directors. This court held that the suit could properly be maintained. (64
Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697).
The claim that respondent Justiniani did not take steps to remedy the illegal
importation for a period of two years is also without merit. During that period
of time respondent had the right to assume and expect that the directors
would remedy the anomalous situation of the corporation brought about by
their own wrong doing. Only after such period of time had elapsed could
respondent conclude that the directors were remiss in their duty to protect
the corporation property and business.
We are led to agree with the judge below that the appointment of a receiver
was not only expedient but also necessary to restore the faith and confidence
of the Central Bank authorities in the administration of the affairs of the
corporation, thus ultimately leading to a restoration of the dollar allocation so
essential to the operation of the textile mills.
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA,
EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMABORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First
Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN
LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES respondents.
45
the 823 shares, against which the petitioners filed a motion to dismiss which
was denied.
ISSUE: WON a derivative suit is the more proper action that should have
been filed by respondents?
HELD: No. The petitioners contend that the proper remedy of the plaintiffs
would be to institute a derivative suit against the petitioners in the name of
the corporation in order to secure a binding relief after exhausting all the
possible remedies available within the corporation.
An individual stockholder is permitted to institute a derivative suit on behalf
of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or
are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest. In the case at bar, however, the
plaintiffs are alleging and vindicating their own individual interests
or prejudice, and not that of the corporation. At any rate, it is yet too
early in the proceedings since the issues have not been joined. Besides,
misjoinder of parties is not a ground to dismiss an action.
JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL SANTOS,
defendant-appelle (86 Phil. 387; May 19, 1950) Juan D. Evangelista, et. al.
are minority stockholders of the Vitali Lumber Company, Inc., while Rafael
Santos holds more than 50% of the stocks of said corporation and also is and
always has been the president, manager, and treasurer thereof. Santos, in
such triple capacity, through fault, neglect, and abandonment allowed its
lumber concession to lapse and its properties and assets, among them
machineries, buildings, warehouses, trucks, etc., to disappear, thus causing
the complete ruin of the corporation and total depreciation of its stocks.
Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to
render an account of his administration of the corporate affairs and assets:
(2) to pay plaintiffs the value of their respective participation in said assets
on the basis of the value of the stocks held by each of them; and (3) to pay
the costs of suit. Evangelista, et. al. also ask for such other remedy as may
be and equitable. The trial court dismissed the action on the ground of
improper venue and lack of cause of action.
ISSUE: WON plaintiffs have a right to bring the action for their benefit?
HELD: No. The complaint shows that the action is for damages resulting
from mismanagement of the affairs and assets of the corporation by its
principal officer, it being alleged that defendant's maladministration has
brought about the ruin of the corporation and the consequent loss of value of
its stocks. The injury complained of is thus primarily to that of the
corporation, so that the suit for the damages claimed should be by the
corporation rather than by the stockholders (3 Fletcher, Cyclopedia of
Corporation pp. 977-980). The stockholders may not directly claim
those damages for themselves for that would result in the
appropriation by, and the distribution among them of part of the
corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be
legally done in view of section 16 of the Corporation Law.
But while it is to the corporation that the action should pertain in cases of this
nature, however, if the officers of the corporation, who are the ones called
upon to protect their rights, refuse to sue, or where a demand upon them to
file the necessary suit would be futile because they are the very ones to be
sued or because they hold the controlling interest in the corporation, then in
that case any one of the stockholders is allowed to bring suit (3 Fletcher's
Cyclopedia of Corporations, pp. 977-980). But in that case it is the
corporation itself and not the plaintiff stockholder that is the real property in
interest, so that such damages as may be recovered shall pertain to the
corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is
a derivative suit brought by a stockholder as the nominal party plaintiff for
the benefit of the corporation, which is the real property in interest (13
Fletcher, Cyclopedia of Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the action not for
the benefit of the corporation but for their own benefit, since they ask that
the defendant make good the losses occasioned by his mismanagement and
pay to them the value of their respective participation in the corporate assets
on the basis of their respective holdings. Clearly, this cannot be done until all
corporate debts, if there be any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful dissolution
in view of the provisions of section 16 of the Corporation Law.
It results that plaintiff's complaint shows no cause of action in their favor so
that the lower court did not err in dismissing the complaint on that ground.
While plaintiffs ask for remedy to which they are not entitled unless the
requirement of section 16 of the Corporation Law be first complied with, we
note that the action stated in their complaint is susceptible of being
converted into a derivative suit for the benefit of the corporation by a mere
change in the prayer. Such amendment, however, is not possible now, since
the complaint has been filed in the wrong court, so that the same last to be
dismissed.
The order appealed from is therefore affirmed, but without prejudice to the
filing of the proper action in which the venue shall be laid in the proper
province. Appellant's shall pay costs. So ordered
IN SUMMARY:
1.
2.
3.
4.
5.
J.
46
board; (3) the amendment or repeal of by-laws or the adoption of new bylaws; (4) the amendment or repeal of any resolution of the board which by
its express terms is not so amendable or repealable; and (5) a distribution of
cash dividends to the shareholders
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided
in this Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided,
That no corporation, domestic or foreign, shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in the articles of incorporation.
The statement of the objects, purposes or powers in the AOI results
practically in defining the scope of the authorized corporate enterprise or
undertaking. This statement both confers and also limits the actual authority
of the corporation.
Along with the powers indicated in the AOI, a corporation can also exercise
powers that may be granted by law, particularly those provided under Sec.
36 and 44 of the Corporation Code and those which may be necessary or
incidental to tis existence.
In short, corporate authority may be classified as:
1. Express powers those expressly granted by law inclusive of the
corporate charter or AOI;
2. Implied Powers those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers; and
3. Incidental Powers those incidental to its existence.
A.
A corporation may sue and be sued in its corporate name just like any other
person.
VENUE: the action filed against it must be instituted at the place of principal
office of the corporation.
47
The first limitation practically sets the limit of the corporate authority to
acquire, own, hold or alienate property. As it has been said the purpose
clause in the AOI grants as well as limits the powers which a corporation may
exercise. Verily, WON the acquisition of such property is within the corporate
powers or authority may reasonably be determined from the purpose or
purposes indicated in the AOI.
POWER OF SUCCESSION
This right has be expressly granted by law. However, it is not mandatory but
merely permissive. This is because the corporate seal performs no further or
greater function than to impart prima facie evidence of the due execution by
the corporation of a written document or obligation.
POWER TO AMEND ITS ARTICLES OF INCORPORATION
The procedures for the exercise of this right are provided under Sec. 16, Sec.
37 and 38 as discussed earlier under CHAPTER 5: CORPORATE CHARTER
AND ITS AMENDMENTS.
As far as corporations created by special law are concerned, amendment may
NOT be considered as a matter of right. The law creating it may or may not
authorize or empower the corporation to make any changes in its AOI or
charter. However, whether empowered or not, Congress may amend or
repeal a corporate charter by virtue of its inherent authority to amend or
repeal laws under the Consitution.
E.
This right basically means that the corporation persists to exist despite death,
incapacity, civil interdiction, or withdrawal of the stockholders or members
thereof.
D.
Accordingly, we rule that the service of summons upon the branch manager
of petitioner at its branch office at Cagayan de Oro, instead of upon the
general manager at its principal office at Davao City is improper.
Consequently, the trial court did not acquire jurisdiction over the person of
the petitioner.
C.
F.
. . (emphasis supplied).
B.
48
49
FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
registration of a parcel of land which it claimed to have acquired by virtue of
a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant
and its predecessors-in-interest have been in actual, continuous, public,
peaceful and adverse possession and occupation of the said land for more
than 30 years, which was opposed by the Government as represented by the
Director of Lands. The CFI and the CA ruled in favor of INC.
ISSUE: WON the corporation may acquire the land in question?
HELD Yes. As observed at the outset, had this case been resolved
immediately after it was submitted for decision, the result may have been
quite adverse to private respondent. For the rule then prevailing under the
case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799,
reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other
subsequent cases involving private respondent adverted to above', is that a
juridical person, private respondent in particular, is disqualified under the
1973 Constitution from applying for registration in its name alienable public
land, as such land ceases to be public land "only upon the issuance of title to
any Filipino citizen claiming it under section 48[b]" of Commonwealth Act No.
141, as amended. These are precisely the cases cited by petitioner in support
of its theory of disqualification.
Since then, however, this Court had occasion to re-examine the rulings in
these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
others. Thus, in the recent case of Director of Lands v. Intermediate
Appellate Court, 146 SCRA 509, We categorically stated that the majority
ruling in Meralco is "no longer deemed to be binding precedent", and that
"[T]he correct rule, ... is that alienable public land held by a possessor,
personally or through his predecessors-in-interest, openly, continuously and
exclusively for the prescribed statutory period [30 years under the Public
Land Act, as amended] is converted to private property by mere lapse or
completion of said period, ipso jure." We further reiterated therein the
timehonored principle of non-impairment of vested rights.
The crucial factor to be determined therefore is the length of time private
respondent and its predecessors-in-interest had been in possession of the
land in question prior to the institution of the instant registration proceedings.
The land under consideration was acquired by private respondent from
Aquelina de la Cruz in 1947, who, in turn, acquired by same by purchase
from the Ramos brothers and sisters, namely: Eusebia, Eulalia, Mercedes,
Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No.
141, as amended, "those who by themselves or through their predecessorsin-interest have been in open, continuous, exclusive and notorious possession
and occupation of agricultural lands of the public domain, under a bona fide
claim of acquisition or ownership, for at least thirty years immediately
preceding the filing of the application for confirmation of title except when
prevented by war or force majeure" may apply to the Court of First Instance
of the province where the land is located for confirmation of their claims, and
the issuance of a certificate of title therefor, under the Land Registration Act.
Said paragraph [b] further provides that "these shall be conclusively
presumed to have performed all the conditions essential to a Government
grant and shall be entitled to a certificate of title under the provisions of this
chapter." Taking the year 1936 as the reckoning point, there being no
showing as to when the Ramoses first took possession and occupation of the
land in question, the 30-year period of open, continuous, exclusive and
notorious possession and occupation required by law was completed in 1966.
The completion by private respondent of this statutory 30-year period has
dual significance in the light of Section 48[b] of Commonwealth Act No. 141,
as amended and prevailing jurisprudence: [1] at this point, the land in
question ceased by operation of law to be part of the public domain; and [2]
private respondent could have its title thereto confirmed through the
appropriate proceedings as under the Constitution then in force, private
corporations or associations were not prohibited from acquiring public lands,
but merely prohibited from acquiring, holding or leasing such type of land in
excess of 1,024 hectares.
If in 1966, the land in question was converted ipso jure into private land, it
remained so in 1974 when the registration proceedings were commenced.
This being the case, the prohibition under the 1973 Constitution would have
no application. Otherwise construed, if in 1966, private respondent could
have its title to the land confirmed, then it had acquired a vested right
thereto, which the 1973 Constitution can neither impair nor defeat.
H.
This is an express power granted by the law under the Code, particularly Title
IX thereof.
I.
50
came to settle in it mining camp which is far removed from the postal
facilities or means of communication accorded to people living in a city or
municipality.
IMPLIED POWERS
Sec. 36. Xxx
11. To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in the articles of incorporation
It is a question, in each case, of the logical relation of the act to the
corporate purpose expressed in the charter. For if the act is one
which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a substantial and not
in a remote and fanciful sense, it may be fairly considered within
the corporations charter powers (Montelibano vs. Bacolod-Murcia Milling
TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA 198;
Sept. 25, 1967) Respondent Filipinas Cement Corporation filed an
application with herein respondent PSC for a certificate of public convenience
to install, maintain and operate an electric plant in Teresa, Rizal for the
purpose of supplying electric power and light to its cement factory and its
employees living within its compound. Herein petitioner, operating an electric
plant in Teresa Rizal filed an opposition claiming that Filipinas is not
authorized to operate the proposed electric plant under its articles of
incorporation. PSC decided in favor of Filipinas.
ISSUE: WON under its articles of incorporation, Filipinas is authorized to
operate and maintain an electric plant?
HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to
secure from any governmental, state, municipality, or provincial, city or other
authority, and to utilize and dispose of in any lawful manner, rights, powers,
privileges, franchises and concessions obviously necessary or at least
related to the operation of its cement factory. Moreover, said AOI also
provide that the corporation may generally perform any and all acts
connected with the business of manufacturing portland cement or arising
therefrom or incidental thereto.
It cannot be denied that the operation of an electric light, heat and power
plant is necessarily connected with the business of manufacturing cement. If
in the modern world where we live today electricity is virtually a necessity for
our daily needs, it is more so in the case of industries like the manufacture of
cement.
NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)
FACTS: Private Respondent Sea Lion International Port Terminal Services
Inc. filed a complaint for prohibition and mandamus with damages against
petitioner NPC and Philippine Ports Authority after NPC did not renew its
Contract for Stevedoring Services for coal-handling of NPCs plant and in
taking over its stevedoring services.
ISSUE: WON NPC may embark in stevedoring and arrastre services?
HELD: Yes. The NPC was created and empowered not only to construct,
operate and maintain power plants, reservois, transmission lines and other
works, but also:
above provision, the Court must decide whether or not a logical and
necessary relation exists between the act questioned and the
corporate purpose expressed in the NPC charter. For if the act is one
which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a substantial and not
in a remote and fanciful sense, it may be fairly considered within
the corporations charter powers (Montelibano vs. Bacolod-Murcia Milling
Co., Inc.)
In the instant case, it is an undisputed fact that the pier owned by NPC,
receives various shipment of coal which is used exclusively to fuel the
Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of
electric power. The stevedoring services which involve the unloading of the
coal shipments into the NPC pier for its eventual conveyance to the power
plant are incidental and indispensable to the operation of the plant. The
Court holds that NPC is empowered under its Charter to undertake such
services, it being reasonably necessary to the operation and maintenance of
the power plant.
POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988)
FACTS: 14 plaintiffs, all associate members of the International School, Inc.
brought an action for injunction against 10 members of the Board of
Trustees, after a letter of Donal Marshall, president of the board, was sent
stating that the school would be collecting a development fee of P2,625 per
enrollee for the purpose of constructing new buildings and remodel existing
ones to accommodate the increasing enrollment in the school which would
need P35M. The CFI of Manila dismissed the complaint.
ISSUE: WON the imposition of the development fee is within the powers of
the school?
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the sch0ol,
expressly authorized the Board of Trustees upon consultation with the
Secretary of Education and Culture to determine the amount of fees and
assessments which may be reasonably imposed upon its students, to
maintain or conform to the schools standard of education. Such consultation
complied with and the Secretary expressed his conformity with the
reasonableness of the assessment. The lower court observed that:
Xxx the expansion of the school facilities, which is to be done by improving
old buildings and/or constructing new ones, is an ordinary business
transaction well within the competence of the Board of Trustees to act upon.
Xxx Being directly related to the purpose of elevating and maintaining the
schools standard of instruction, which is ordained in fact by PD 732, the
expansion cannot result in any radical or fundamental change in the kind of
activity being conducted by the school that might require the consent of the
members composing it.
J.
51
3.
4.
5.
6.
7.
8.
9.
(25%) percent of such increased capital stock has been subscribed and that
at least twenty-five (25%) percent of the amount subscribed has been paid
either in actual cash to the corporation or that there has been transferred to
the corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease of the capital
stock shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase
the same, with the approval by a majority vote of the board of trustees and
of at least two-thirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
The following requirements or procedure should be complied with:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the
outstanding capital stock (including non-voting shares) or 2/3 of the
members in case of non-stock corporations at a meeting duly called for
that purpose;
3. Prior written notice of the proposal to extend or shorten the corporate
term must be made stating the time and place of meeting addressed to
each stockholder or member at his place of residence, either by mail or
personal service;
4. A certificaate in duplicate must be signed by a majority of the directors
of the corporation, countersigned by the chairman and the secretary of
the stockholders meeting, setting forth the matters contained in
subsection 1 to 7 of Sec. 38;
5. In case of increase in capital stock, 25% of such increased capital must
be subscribed and that at least 25% of the amount subscribed must be
paid either in cash or property;
6. In case of decrease of capital stock, the same must not prejudice the
right of the creditors;
7. Filing of the certificate of increase and amended AOI with the SEC; and
8. Approval thereof by the SEC.
Expansion;
Payment of Debt Obligations;
To acquire additional assets such as providing cars to employees to
distribute the goods;
PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29, 1923)
- Shortly after its incorporation, the stockholders of Cooperativa Naval
Filipina, adopted a resolution to the effect that the capital should be reduced
52
by 50% and the subscribers be released from the obligation to pay their
unpaid balance.
In the course of time, the company became insolvent and went into the
hands of Philippine Trust Company (Philtrust), as assignee in bankruptcy, and
by it this action was instituted to recover of the stock subscription of
herein defendant who subscribed to 450 of the 1,000 authorized capital
stock.
It does not appear that the formalities under the Corporation Code for the
reduction of capital stock were observed and in particular it does not appear
that any certificate was at any time filed in the Bureau of Commerce and
Industry, showing such reduction.
Respondent judge ruled in favor of Philtrust and directed respondent to pay
of the subscription price of his shares.
ISSUE: WON the reduction is valid and proper?
HELD: No. 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; and as against creditors a reduction of the
capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the AOI. Moreover, strict
compliance with the statutory regulations is necessary. In the case before us,
the resolution releasing the shareholders from their obligation to pay 50% of
their respective subscriptions was an attempted withdrawals of so much
capital from the fund upon which the companys creditors were entitled
ultimately to rely and, having been effected without compliance with the
statutory requirements, was wholly ineffectual.
MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987) The Madrigal Central Office Employees Union sought for the renewal of its
CBA, proposing a P200 wage increase and an allowance of P100 a month.
Petitioner company requested for the deferment of its negotiation.
Meanwhile, the company effected two reductions of its capital stock by
issuing marketable securities owned by petitioner in exchange for
shareholders shares.
After the petitioners failure to sit down with the respondent union, the latter
commenced a case with the NLRC for unfair labor practice. In due time,
petitioner filed its position paper, alleging operating losses.
The Labor Arbiter rendered a decision in favor of respondent Union.
ISSUE: WON the decrease in capital stock is valid and binding?
HELD: No. What clearly emerges from the recorded facts is that the
petitioner, awash with profits from its business operations but confronted
with the demand of the union for wage increase, decided to evade its
responsibility towards the employees by a devised capital reduction. While
the reduction in capital stock created an apparent need for retrenchment, it
was, by all indications, just a mask for the purge of union members, who, by
then, had agitated for wage increases. In the face of the petitioner
companys piling profits, the unionists had the right to demand for such
salary adjustments.
That the petitioner made quite handsome profits is clear from the records.
This court is convinced that the petitioners capital reduction efforts were, to
begin with, a subterfuge, a deception as it were, to camouflage the fact that
it had been making profits, and consequently, to justify the mass layoff in it
employee ranks, especially the union members. They were nothing but a
premature and plain distribution of corporate assets to obviate a just sharing
to labor of the vast profits obtained by its joint efforts with capital through
the years. Surely, we can neither countenance nor condone this. It is an
unfair labor practice.
L.
BASIS OF RIGHT: The grant of this right is for the preservation, unimpaired
and undiluted, of the old stockholders relative and proportionate voting
strength and control, that is, the existing ratio of their property interest and
voting power in the corporation.
The exceptions will not apply to stockholders of close corporation whose preemptive right, is broader if not absolute. See Sec. 102.
The right may likewise be lost by waiver, express or implied or inability or
failure to exercise it having been notified of the proposed disposition of
shares.
BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent Jamiatul
Philippines Al Islamia, Inc. was incorporated with P2,000,000 authorized
capital stock divided into 20,000 shares, of which 460 belong to herein
petitioner. In a stockholders meeting, an increase of the authorized capital
stock to P1,000,000 was approved, where the previously unissued shares
were all issued.
Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC
alleging that the additional issue of previously unissued shares was made in
violation of his pre-emptive right and that the increase of capital stock was
illegal considering that the stockholders on record were not notified, and that
such issuance be cancelled.
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the
original unsubscribed shares, but can exercise such right with regards the
increase capitalization.
ISSUE: WON the above ruling is correct?
HELD: Yes. The issuance of the unsubscribed portion of the capital stock or
P110,980 is valid even if assuming that it was made without notice to the
stockholders as claimed by petitioner. The power to issue shares of stocks in
a corporation is lodged in the bard of directors and no stockholders meeting
is necessary to consider it because such issuance does not need approval of
stockholders.
The general rule is that pre-emptive right is recognized only with respect to
new issue of shares, and not with respect to additional issues of originally
authorized shares. This is on theory that when a corporation, at its inception
offers its first shares, it is presumed to have offered all of those which it is
authorized to issue. An original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole number of
authorized shares. When the shares left unsubscribed are reoffered, he
cannot therefore claim a dilution of interest.
With respect to the claim that the increase in the authorized capital stock was
without consent, expressed or implied, of the stockholder, it was the finding
53
of the Commission that a meeting was called for the purpose. The petitioner
had not sufficiently overcome the evidence of respondent that such meeting
was in fact held. What petitioner successfully proved, however, was the fact
that he was not notified of said meeting and that he never attended the
same as he was out of the country at the time, attending the Mecca
pilgrimage. Another thing that petitioner was able to disprove was the
allegation that all stockholders who did not subscribe to the increase have
waived their pre-emptive right. As far as petitioner is concerned, he had not
waived his pre-emptive right to subscribe as he could not have done so for
the reason that he was not present at the meeting and had not executed a
waiver, thereof. Not having waived such right and for reasons of equity, he
may still be allowed to subscribe to the increased capital stock proportionate
to his present shareholdings.
M.
54
Sec. 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; and
3. To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code.
The limitation that the corporation must at all times have unrestricted
retained earnings is a condition for the exercise of this power, EXCEPT:
1. Redemption of redeemable shares under Sec. 8;
2. Exercise of stockholders right to compel a close corporation to purchase
his shares for any reason under Sec. 105 when the corporation has
sufficient assets in its book to cover its debts and liabilities exclusive of
capital stock;
3. In case of deadlocks under Sec. 104.
Once purchased, the shares are considered as treasury shares and while they
remain so, they have no voting rights and dividend rights. The corporation
may (1) re-issue them even below par; (2) issue them as stock dividends; (3)
retire or cancel them and thereby remove from issue effectively reducing the
number of shares issued stated in the AOI.
STEINBERG VS. VELASCO (52 Phil 953; March 12, 1929) - the Board of
Directors of Trading Company approved and authorized the purchases of the
capital stock of the company from its various stockholder, herein
respondents, at par value amounting to P3,300. Petitioner assails the
recovery of the amount paid to such stockholders and the P3,000 dividends
declared which were claimed to be made to the injury and in fraud of its
creditors. The complaint was dismissed.
ISSUE: WON recovery can be made?
HELD: Yes. The Board of Directors acted on the assumption that it had
accounts receivable of the face value of P19,126.02 but there was no
stipulation as to the value of such accounts and P12,512.47 of which had but
little, if any value. The purchase of the stocks and the dividend declaration
further decreased the assets of the corporation. The profits amounted only to
P3,314.72. In other words, that the corporation did not then have actual
bona fide surplus from which the dividends could be paid, and that the
payment of them in full at the time would affect the financial condition of
the corporation.
It is indeed peculiar that the action of the board in the assailed acts was all
done at the same meeting of the board of directors, and it appears that the
stockholders, whose shares were purchased, were former directors and
resigned before the board approved the purchase and declaration of
dividends. In other words, the directors were permitted to resign so that they
could sell their stock to the corporation. In this situation and upon this state
of facts, it is very apparent that the directors did not act in good faith or that
they were grossly ignorant of their duties.
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets
of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are
important and we have given them consideration which they deserve.
O.
SECONDARY PURPOSE: the law uses the phrase for any purpose other
than the primary purpose signifying that even if the business or undertaking
is allowed or authorized in the secondary purpose or purposes of the
corporation, the provision of Sec. 42 would apply.
1.
2.
3.
4.
5.
55
DIVIDENDS are corporate profits set aside, declared and ordered by the
BOD to be paid to the stockholders. It is a fruit of investment, the recurrent
return, analogous to interest and rent upon other forms of invested capital.
56
TYPES OF DIVIDENDS:
1.
2.
3.
Cash and property dividends have the effect of reducing corporate assets to
the extent of the dividends declared. In stock dividends, it would generally
not increase the proportionate interest of the stockholders of the corporation
although it will have the effect of increasing the subscribed and paid-up
capital (exception is when the stock dividend declaration would result in
fractional shares like when 1 share is declared as dividend for every 9 shares
held)
the first paragraph of Sec. 43. Such that, cash dividends declared are first
applied on the unpaid balance on the subscription plus costs and expenses
and stock dividends are withheld until the subscription is fully paid.
The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad
faith; (2) for a dishonest purpose; (3) they act fraudulently, oppressively,
unreasonably or unjustly; or (4) abuse of discretion can be shown as to
impair the rights of the complaining shareholders. The TEST of bad faith is to
determine if the policy of the directors is dictated by their personal interest
WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the
right of the stockholders to be paid dividends vest as soon as they have been
lawfully and finally declared by the BOD. It is not revocable unless: (1) it has
not been officially communicated to the stockholders; or (2) it is in the form
of stock dividends which is revocable any time prior to distribution because
this does not result in the distribution of assets but merely the division of
existing shares of a stockholder into smaller units or integers.
5.
The term "dividend" both in the technical sense and its ordinary acceptation,
is that part or portion of the profits of the enterprise which the corporation,
by its governing agents, sets apart for ratable division among the holders of
the capital stock. It means the fund actually set aside, and declared by the
directors of the corporation as dividends and duly ordered by the director, or
by the stockholders at a corporate meeting, to be divided or distributed
among the stockholders according to their respective interests.
It is Our considered view, therefore, that under Section 16 of the Corporation
Law stock dividends cannot be issued to a person who is not a stockholder in
payment of services rendered. And so, in the case at bar Nielson can not be
paid in shares of stock which form part of the stock dividends of Lepanto for
services it rendered under the management contract. We sustain the
contention of Lepanto that the understanding between Lepanto and Nielson
was simply to make the cash value of the stock dividends declared as the
basis for determining the amount of compensation that should be paid to
Nielson, in the proportion of 10% of the cash value of the stock dividends
declared. And this conclusion of Ours finds support in the record.
Q.
57
R.
2.
3.
READ AGAIN: Government vs. EL Hogar and Republic vs. Acoje Mining (both
in this chapter)
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil. 335; Dec.
29, 1954) - The Board of directors of defendant company adopted a
resolution wherein the proceeds of the insurance taken on the life of its
previous President and General Manager Enrico Privano be set aside and
used to purchase 4,000 shares to be given to Privanos heirs, which was
approved by the stockholders in a meeting duly called for the purpose.
The donation of the shares was later on modified to transfer all the proceeds
directly to the heirs which would become a loan of the company with 5%
interest per annum and payable after the settlement of its bonded
indebtedness, and still later, modified to be payable whenever the company
is in a position to meet said obligation.
On an opinion by the SEC, sought by the President of the corporation, Sergio
Osmena, Jr., it was opined by the SEC that the donation was void for being
ultra vires. The Board planned to adopt a different resolution to effect the
donation but failed to act on it. The heirs, through Mrs. Estefania R. Privano,
acting as guardian, demanded the settlement of the obligation.
ISSUE: WON the donation was an ultra vires act?
HELD: No. After a careful perusal of the AOI, we find that the corporation
was given broad and almost unlimited powers to carry out the purposes for
which it was organized among them, (1) to invest and deal with the money
of the company not immediately required, in such manner as fro time to time
may be determined and (2) to aid in any manner any person association, or
corporation or in the affairs of the property of which this corporation has
lawful interest. The donation in question undoubtedly comes within the
scope of this broad power for it is a fact appearing in the evidence that the
insurance proceeds were not immediately required when they were given
away.
We dont see much distinction between the acts of generosity of the
benevolence extended to some employees of the corporation, and
even to some in whom the corporation was merely interested
because of certain moral or political consideration, and the
donations which the corporation has seen fit to give the children of
the late Enrico Privano from the point of view of the power of the
corporation as expressed in the AOI. And if the former had been sanctioned
and had been valid and intra-vires, we see no plausible reaons why the latter
should now be deemed ultra-vires. It may perhaps be argued that the
donation given to the children of the late Enrico Privano is so large and
disproportionate that it can hardly be considered a pension or gratuity that
can be placed ona par with the instances above-mentioned, but this
argument overlooks one consideration: the gratuity here given was not
merely motivated by pure liberality or act of generosity, but by a deep sense
of recognition of the valuable services rendered by the late Enrico Privano
58
it would at any rate, be valid and the said corporation is bound to pay the
appellant their value with the accrued interest in view of the fact that they
become due on account of the lapse of 60 days, without the accrued interest
due having been paid; and the reason is that it is estopped from denying the
validity of its guarantee.
The doctrine of ultra vires as a defense, is by some courts regarded as an
ungracious and odious one, to be sustained only where the most persuasive
consideration of public policy are involved, and there are numerous decisions
and dicta to the effect that the plea should not as a general rule prevail
whether interposed for or against the corporation, where it will not advance
justice but on the contrary will accomplish a legal wrong.
When a contract is not on its face necessarily beyond the scope of the power
of the corporation by which it was made, it will, in the absence of proof to
the contrary, be presumed to be valid. Corporations are presumed to contract
within their powers. The doctrine of untra vires, when invoked for or against
a corporation, should not be allowed to prevail where it would defeat the
ends of justice or work a legal wrong.
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC (101 Phil
540; May 23, 1957) - The SEC issued an order requiring petitioner herein and
its President Alfredo Abcede to show cause why it should not be proceeded
against for making misrepresentations to the public about the need of
registering and depositing war notes, with a view of probable redemption as
contemplated in Senate Bill No. 163 and in Senate Concurrent Resolution No.
14, for otherwise they would be valueless.
Petitioner contended that the statement was made in good faith as President
Magsaysay would soon make representations to the US to have the war notes
redeemed.
Respondent SEC found that according to its AOI, the petitioner has the
privilege to work for the redemption of the war notes of its members alone,
but that it cannot offer its services to the public for a valuable consideration,
because there is nothing definite and tangible about the redemption of the
war notes and its success is speculative that any authority given to offer
services can easily degenerate into a racket; that under its AOI the petitioner
is a civic and non-stock corporation and upon should not engage in business
for profit; that it has received war notes for deposit, upon payment of fees,
without authority in its articles to do so; that it had previously been rendered
to desist from collecting from those registering the war notes, but
notwithstanding this prohibition it has done so in the guise of service fees.
Hence the Commission ordered to stop receiving war notes, receiving same
for deposit and chargin fees therefore.
ISSUE: WON the SEC erred in issuing the questioned order?
HELD: No. The articles authorize collection of fees from members; but they
do not authorize the corporation to engage in the business of registering and
accepting war notes for deposit and collecting fees from such services. This
was the ruling of the Commission and this we find to be correct.
Neither do we find any merit in the third contention that the association has
authority to accept and collect fees for reparation claims for civilian casualties
and other injuries. This is beyond any of the powers of the association as
embodied in its articles and have absolutely no relation to the avowed
purpose of the association to work for the redemption of war notes.
ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989) The Vice-president of Mover Enterprises, Inc. issued a check drawn against
Traders Royal Bank, payable to petitioner Ernestina Crisologo-Jose, for the
accommodation of his client. Petitioner-payee was charged with the
knowledge that the check was issued at the instance and for the personal
account of the President who merely prevailed upon respondent vicepresident to act as co-signatory in accordance with the arrangement of the
corporation with its depository bank. While it was the corporation's check
which was issued to petitioner for the amount involved, petitioner actually
had no transaction directly with said corporation.
ISSUE: WON private respondent, one of the signatories of the check issued
under the account of Mover Enterprises, Inc., is an accommodation party
59
under NIL and a debtor of petitioner to the extent of the amount of said
check?
HELD: Yes. The liability of an accommodation party to a holder for value,
although such holder does not include nor apply to corporations which are
accommodation parties. This is because the issue or indorsement of
negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. One who has taken the
instrument with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation party. By
way of exception, an officer or agent of a corporation shall have the power to
execute or indorse a negotiable paper in the name of the corporation for the
accommodation of a third person only if specifically authorized to do so.
Corollarily, corporate officers, such as the president and vice-president, have
no power to execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising from or in relation
to matters in which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of the corporate business or
operations, the signatories thereof (president and vice-president) shall be
personally liable therefor, as well as the consequences arising from their acts
in connection therewith.
CHAPTER 8: BY-LAWS
BY-LAWS are rules and ordinances made by a corporation for its own
government; to regulate the conduct and define the duties of the
stockholders or members towards the corporation and among themselves.
They are the rules and regulations or private laws enacted by the corporation
to regulate, govern and control its own actions, affairs and concerns and tis
stockholder or members and directors and officers with relation thereto and
among themselves in their relation to it.
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code
must, within one (1) month after receipt of official notice of the issuance of
its certificate of incorporation by the Securities and Exchange Commission,
adopt a code of by-laws for its government not inconsistent with
this Code. For the adoption of by-laws by the corporation the affirmative
vote of the stockholders representing at least a majority of the outstanding
capital stock, or of at least a majority of the members in case of non-stock
corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the principal
office of the corporation, subject to the inspection of the stockholders or
members during office hours. A copy thereof, duly certified to by a majority
of the directors or trustees countersigned by the secretary of the corporation,
shall be filed with the Securities and Exchange Commission which shall be
attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the Securities
and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws are
not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building and
loan association, trust company, insurance company, public utility,
educational institution or other special corporations governed by special laws,
unless accompanied by a certificate of the appropriate government agency to
the effect that such by-laws or amendments are in accordance with law.
EFFECTIVITY: After approval of the SEC.
BY-LAWS PRIOR TO INCORPORATION: it must be signed by all the
incorporators without the need of the affirmative vote of the majority of the
outstanding capital stock or the members provided it is submitted together
with the AOI.
60
FACTS: Petitioner Association was organized on Feb. 8, 1983, but for some
reason failed to file its corporate by-laws. Victorio Soliven, himslef the owner
and developer of the subdivision was the first president of the Association.
Later on, asking on the status of petitioner, Soliven discovered that the said
association was already dissolved (according to the head of the legal
department of HIGC), and accordingly caused the registration of HIGC as the
association covering Phases West I, East I and East II of the subdivision.
ISSUE: WON the Association can be considered dissolved for non-adoption
of by-laws?
HELD: Yes. As correctly postulated by the petitioner, interpretation of this
provision of Sec. 46 begins with the determination of the meaning and import
of the word "must" in this section. Ordinarily, the word "must" connotes an
imperative act or operates to impose a duty which may be enforced. It is
synonymous with "ought" which connotes compulsion or mandatoriness.
However, the word "must" in a statute, like "shall," is not always imperative.
It may be consistent with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret "shall" as the context or a reasonable
construction of the statute in which it is used demands or requires. This is
equally true as regards the word "must." Thus, if the languages of a statute
considered as a whole and with due regard to its nature and object reveals
that the legislature intended to use the words "shall" and "must" to be
directory, they should be given that meaning.
In this respect, the following portions of the deliberations of the Batasang
Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
within one month after the issuance? In other words, would this be
mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
effect of the failure of the corporation to file these by-laws within one
month?
MR. MENDOZA. There is a provision in the latter part of the Code which
identifies and describes the consequences of violations of any provision
of this Code. One such consequences is the dissolution of the
corporation for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution
of the corporation by merely failing to file the by-laws within one month.
Supposing the corporation was late, say, five days, what would be the
mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic
or ipso facto dissolution of the corporation. Perhaps, as in the case, as
you suggested, in the case of El Hogar Filipino where a quo warranto
action is brought, one takes into account the gravity of the violation
committed. If the by-laws were late the filing of the by-laws were late
by, perhaps, a day or two, I would suppose that might be a tolerable
delay, but if they are delayed over a period of months as is
happening now because of the absence of a clear requirement that
by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences.
This exchange of views demonstrates clearly that automatic corporate
dissolution for failure to file the by-laws on time was never the intention of
the legislature. Moreover, even without resorting to the records of
deliberations of the Batasang Pambansa, the law itself provides the answer to
the issue propounded by petitioner.
Taken as a whole and under the principle that the best interpreter of a
statute is the statute itself (optima statuli interpretatix est ipsum statutum),
Section 46 aforequoted reveals the legislative intent to attach a directory, and
not mandatory, meaning for the word "must" in the first sentence thereof.
Note should be taken of the second paragraph of the law which
allows the filing of the by-laws even prior to incorporation. This
provision in the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws "within one
(1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange
Commission." It necessarily follows that failure to file the by-laws
within that period does not imply the "demise" of the corporation.
By-laws may be necessary for the "government" of the corporation but these
are subordinate to the articles of incorporation as well as to the Corporation
Code and related statutes. There are in fact cases where by-laws are
unnecessary to corporate existence or to the valid exercise of corporate
powers, thus:
In the absence of charter or statutory provisions to the contrary, bylaws are not necessary either to the existence of a corporation or to the
valid exercise of the powers conferred upon it, certainly in all cases
where the charter sufficiently provides for the government of the body;
and even where the governing statute in express terms confers upon
the corporation the power to adopt by-laws, the failure to exercise the
power will be ascribed to mere nonaction which will not render void any
acts of the corporation which would otherwise be valid. (Emphasis
supplied.)
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within
the period provided for in Section 46. However, such omission has been
rectified by Presidential Decree No. 902-A, the pertinent provisions on the
jurisdiction of the SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission
shall possess the following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law, including the
following:
xxx xxx xxx
Failure to file by-laws within the required period.
Even under the foregoing express grant of power and authority,
there can be no automatic corporate dissolution simply because the
incorporators failed to abide by the required filing of by-laws
embodied in Section 46 of the Corporation Code. There is no
outright "demise" of corporate existence. Proper notice and hearing
61
and transferability of shares of stock. Under said section they are personal
property and may be transferred as therein provided. Said section
contemplates no restriction as to whom they may be transferred or sold. It
does not suggest that any discrimination may be created by the corporation
in favor or against a certain purchaser. The holder of shares, as owner of
The power to enact by-laws restraining the sale and transfer of stock
must be found in the governing statute or the charter. Restrictions upon
the traffic in stock must have their source in legislative enactment, as the
corporation itself cannot create such impediments. By-laws are intended
merely for the protection of the corporation, and prescribe regulation and
not restriction; they are always subject to the charter of the corporation.
The corporation, in the absence of such a power, cannot ordinarily
inquire into or pass upon the legality of the transaction by which
its stock passes from one person to another, nor can it question
the consideration upon which a sale is based. A by-law cannot
take away or abridge the substantial rights of stockholder. Under a
statute authorizing by- laws for the transfer of stock, a corporation can do
no more than prescribe a general mode of transfer on the corporate books
and cannot justify an unreasonable restriction upon the right of sale. (4
Thompson on Corporations, sec. 4137, p. 674.
The foregoing authorities go farther than the stand we are taking on this
question. They hold that the power of a corporation to enact by-laws
restraining the sale and transfer of shares, should not only be in
harmony with the law or charter of the corporation, but such power
should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number
62
It result 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 then
personality of the individuals chosen by the directors to fill vacancies in the
body. Certainly it is no fair criticism to say that they have chosen competent
businessmen of financial responsibility instead of electing poor persons to so
responsible a position. The possession of means does not disqualify a man
for filling positions of responsibility in corporate affairs.
63
It is also well established that corporate officers "are not permitted to use
their position of trust and confidence to further their private interests." In a
case where directors of a corporation cancelled a contract of the corporation
for exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the
foreign firm for exclusive sale of its products, the court held that equity would
regard the new contract as an offshoot of the old contract and, therefore, for
the benefit of the corporation, as a "faultless fiduciary may not reap the fruits
of his misconduct to the exclusion of his principal.
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
and diversification; (c) research and development; and (d) sources of
funding, availability of personnel, proposals of mergers or tie-ups with other
firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of a
competing corporation, from taking advantage of the information which he
acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned
amendment of the by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to
satisfy his loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require
that he disclose this information to a competitive arrival. These dangers are
enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the corporate plans and
policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel Corporation would
subject the latter to a competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of the strategies for
the development of existing or new markets of existing or new products
could enable said competitor to utilize such knowledge to his advantage.
Neither are We persuaded by the claim that the by-law was Intended to
prevent the candidacy of petitioner for election to the Board. If the by-law
were to be applied in the case of one stockholder but waived in the case of
another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the Constitution
requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there
must be hearing and evidence must be submitted to bring his case within the
ambit of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which disqualifies a
competition from election to the Board of Directors of another corporation is
64
STOCKHOLDERS MEETING
Sec. 50. Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually on a
date fixed in the by-laws, or if not so fixed, on any date in April of every year
as determined by the board of directors or trustees: Provided, That written
notice of regular meetings shall be sent to all stockholders or members of
record at least two (2) weeks prior to the meeting, unless a different period
is required by the by-laws.
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the by-laws: Provided, however, That at
least one (1) week written notice shall be sent to all stockholders or
members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
Whenever, for any cause, there is no person authorized to call a meeting, the
Securities and Exchange Commission, upon petition of a stockholder or
member on a showing of good cause therefor, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the
corporation by giving proper notice required by this Code or by the by-laws.
The petitioning stockholder or member shall preside thereat until at least a
majority of the stockholders or members present have been chosen one of
their number as presiding officer.
The stockholders have no power to act as or for the corporation except at a
corporate meeting called and conducted according to law. This rule arises
from the need to protect the stockholder by providing them with notice of
meeting and giving them opportunity to attend the meeting, discuss the
issues and vote (an exception would be an ordinary amendment where
written asset is acceptable).
DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not
fixed, on any date of April of very year as the BOD/T may determine. April,
because this is the time the Audited Financial Statements are already
available.
DATE OF SPECIAL MEETING: At any time deemed necessary or as
provided for in the by-laws.
REQUIREMENTS FOR A VALID STOCKHOLDERS MEETING:
1. It Must Be Held On The Date Fixed In The By-Laws Or In
Accordance With The Law.
The date required, as previously discussed, admits of an exception, as
when the annual meeting cannot be held on the appointed time for
some valid and meritorious reasons.
2.
vs.
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.
FACTS: A meeting electing the BOD of herein petitioner was declared null
and void by the Court in a suit filed by John Castillo, et. al.
In compliance with the order, another election was scheduled on March 28 at
5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the
meeting is composed of the same people that had conducted and supervised
the previously nullified meeting; that the election to be conducted did not
comply with the 5 day notice requirement required by the by-laws and the
constitution of the association, since the notice was posted and sent out only
on March 26 and the election was to be held on March 28.
ISSUE: WON the notice requirement is complied with?
HELD: No. Section 3, article III, of the constitution and by-laws the
association provides:
Notice of the time and place of holding of any annual meeting, or any
special meeting, the members, shall be given either by posting the same in
a postage prepaid envelope, addressed to each member on the record at
the address left by such member with the Secretary of the Association, or
at his known post-office address or by delivering the same person at least
(5) days before the date set for such meeting. . . . In lieu of addressing or
serving personal notices to the members, notice of the members, notice of
a regular annual meeting or of a special meeting of the members may be
given by posting copies of said notice at the different departments and
plants of the San Miguel Brewery Inc., not less than five (5) days prior to
the date of the meeting. (Annex K.)
Notice of a special meeting of the members should be given at least five days
before the date of the meeting. Therefore, the five days previous notice
required would not be complied with.
3.
Sec. 51. Place and time of meetings of stockholders or members. Stockholders' or members' meetings, whether regular or special, shall be held
in the city or municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation: Provided,
That Metro Manila shall, for purposes of this section, be considered a city or
municipality.
Notice of meetings shall be in writing, and the time and place thereof stated
therein.
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or called,
provided all the stockholders or members of the corporation are present or
duly represented at the meeting.
Meeting must, at all times, be held in the city or municipality where the
principal office is located, or if practicable at the principal office of the
corporation. For this purpose, Metro Manila is considered as one city or
municipality.
c.
d.
5.
65
Sec. 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.
A by-law provision may provide for a higher quorum requirement than that
prescribed in the Code, but not less. Otherwise, the by-law provision
providing for a lesser quorum requirement have no force and effect since a
by-law provision is subordinate to the statute and could not defeat the
requirements of the law. The same goes for a by-law provision providing for
a voting requirement less than that provided in the Code.
If the voting requirement is met, any resolution passed in the meeting, even
if improperly held or called will be valid if ALL the stockholders or members
are present or duly represented thereat, as provided under the last
paragraph of Sec. 51:
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or called,
provided all the stockholders or members of the corporation are present or
duly represented at the meeting.
B.
DIRECTORS/TRUSTEES MEETING
Sec. 53. Regular and special meetings of directors or trustees. Regular meetings of the board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any
time upon the call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or
outside of the Philippines, unless the by-laws provide otherwise. Notice of
regular or special meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least one (1) day prior to the
scheduled meeting, unless otherwise provided by the by-laws. A director or
trustee may waive this requirement, either expressly or impliedly.
REGULAR MEETINGS: those held monthly or as the by-laws may provide;
SPECIAL MEETINGS: those that are held at any time upon call of the
President or the person authorized to do so as may be provided in the bylaws.
PLACE: Unlike the meeting of stockholders, the meetings of
directors/trustees may be held anywhere, within or even outside the
Philippines, except when the by-laws provide otherwise.
NOTICE REQUIREMENT: is necessary for the purpose of determining the
legality of and binding effect of the resolution/s passed, EXCEPT:
1. When subsequently ratified;
2. In close corporations where a director may bid the corporation even
without a meeting;
3. When the right to a notice is waived.
The SEC has ruled that a special meeting conducted in the absence of some
of the directors and without any notice to them is illegal and the action at
such meeting although by a majority of the directors is invalid, unless ratified.
However, if all the directors are present, their presence at the meeting
waives the want of notice.
PRESIDING OFFICER: Unless the by-laws otherwise provide, the presidnet.
Sec. 54. Who shall preside at meetings. - The president shall preside at
all meetings of the directors or trustee as well as of the stockholders or
members, unless the by-laws provide otherwise.
QUORUM: Unless the AOI or by-laws provide for a greater majority, a
majority of the members of the BOD/T as fixed in the AOI will constitute a
quorum for the transaction of corporate business and the decision of the
majority of those present shall be valid as a corporate act. EXCEPT: election
66
Being a property right, a stockholder can vote his share the way he pleases
except in the following:
1. Non-voting shares are not entitled to vote except in those instances
provided in the penultimate paragraph of Sec. 6 of the Code;
2. Treasury shares have no voting rights while they remain in the treasury
(Sec. 57);
3. Shares of stock declared delinquent are not entitled to vote at any
meeting; and
4. Unregistered transferee of shares of stock.
PROXY VOTING: is allowed or through a voting trust agreement, or by the
executor, administrator, receiver or other legal representative appointed by
the court.
PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor are
entitled to vote in the absence of an agreement to the contrary:
Sec. 55. Right to vote of pledgors, mortgagors, and administrators. In case of pledged or mortgaged shares in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of
stockholders, unless the pledgee or mortgagee is expressly given by the
pledgor or mortgagor such right in writing which is recorded on the
appropriate corporate books.
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy.
SHARES OWNED BY TWO OR MORE PERSONS JOINTLY:
Sec. 56. Voting in case of joint ownership of stock. - In case of shares
of stock owned jointly by two or more persons, in order to vote the same, the
consent of all the co-owners shall be necessary, unless there is a written
proxy, signed by all the co-owners, authorizing one or some of them or any
other person to vote such share or shares: Provided, That when the shares
are owned in an "and/or" capacity by the holders thereof, any one of the
joint owners can vote said shares or appoint a proxy therefor.
D.
PROXY: is a species of absentee voting by mail by a one way ballot for the
slate or proposals suggested by the management or even perhaps, the
solicitor thereof. It is the authority given by the stockholder or member to
another to vote for him at a stockholders or members meeting. The term is
also used to refer to the instrument or paper which is evidence of the
authority of an agent or the holder thereof to vote for and in behalf of the
stockholder or member.
Sec. 58. Proxies. - Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members. Proxies shall be in writing,
signed by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is intended. No proxy shall be valid
and effective for a period longer than five (5) years at any one time.
PROXY VOTING: is a right granted by law to all stockholders entitled to
vote in stock corporations and cannot, therefore, be denied. EXCEPT: In a
non-stock corporation with by-laws providing for a prohibition on the use of
proxies (Sec. 89).
REQUIREMENTS: In the absence of a by-law provision regulating the form
and execution of proxy, Sec. 58 requires:
1.
2.
3.
67
The voting trustee or trustees may vote by proxy unless the agreement
provides otherwise.
VOTING TRUSTS DISTINGUISHED FROM PROXY
VOTING TRUST
The beneficial owner of the shares
ceased to be stockholder of record of
the corporation since the shares are
transferred to the trustee
Trustee votes as owner of the shares
The beneficial owner is disqualified
to be a director
Purpose is to acquire voting control
of the corporation
Irrevocable
The trustee can act and vote at any
meeting during the duration of the
VTA
Trustee may vote in person or by
proxy
Duration may exceed five years
VTA to be valid and effective, must
be notarized and filed with the SEC
PROXY
Legal title to the shares remain with
the beneficial owner
Proxy votes merely as an agent
The owner of the shares may be
elected as such since legal title
thereof remains with him
Generally used to secure voting an
quorum requirements or merely for
the purpose of representing an
absent stockholder
Revocable anytime unless coupled
with an interest
Proxy can generally act as such only
at a particular meeting
Proxy holder must vote in person
Proxy is of a shorter duration and
may not exceed 5 years
Unless required by the by-laws,
proxies need not be notarized nor is
it required to be filed with the SEC.
FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into a
Voting Trust Agreement with petitioner NIDC, in order to assist the former
with its financial obligations. The VTA was for a period of 5 years constituting
60% of the outstanding paid-up and subscribed shares of Batjak. 5 years
therafter, or on Aug. 31, 1970, Batjak represented by majority stockholders,
through Atty. Amado Duran, legal counsel, wrote to NIDC inquiring if the
atter was still interest in negotiating the renewal of the VTA, but there was
no reply even with the second letter sent on Sept. 22, 1970.
On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking for a
complete accounting of the assets, properties, management and operation of
Batjak, preparatory to their turn-over and transfer to the stockholders of
Batjak.
NIDC replied that it had no intention to comply with such demand. Batjak
filed an action for mandamus with preliminary injunction which was granted.
ISSUE: WON Batjak has the personality to enforce the voting trust
agreement executed by its stockholders and whether it may compel the
trustee to turn over the assets of the corporation?
HELD: No. In support of the third ground of their motion to dismiss, PNB and
NIDC contend that Batjak's complaint for mandamus is based on its claim or
right to recovery of possession of the three (3) oil mills, on the ground of an
alleged breach of fiduciary relationship. Noteworthy is the fact that, in the
Voting Trust Agreement, the parties thereto were NIDC and certain
stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec.
2, Rule 3 of the Rules of Court, every action must be prosecuted and
defended in the name of the real party in interest. Applying the rule in the
present case, the action should have been filed by the stockholders of Batjak,
who executed the Voting Trust Agreement with NIDC, and not by Batjak itself
which is not a party to said agreement, and therefore, not the real party in
interest in the suit to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays that the
petition for mandamus be dismissed. A careful reading of the Voting Trust
Agreement shows that PNB was really not a party thereto. Hence, mandamus
will not lie against PNB.
Batjak has no clear right to be entitled to the writ prayed for. What
Batjak seeks to recover is title to, or possession of, real property
(the three (3) oil mills which really made up the assets of Batjak)
but which the records show already belong to NIDC. It is not disputed
that the mortgages on the three (3) oil mills were foreclosed by PNB and
NIDC and acquired by them as the highest bidder in the appropriate
foreclosure sales. Ownership thereto was subsequently consolidated by PNB
and NIDC, after Batjak failed to exercise its right of redemption. The three
(3) oil mills are now titled in the name of NIDC. From the foregoing, it is
evident that Batjak had no clear right to be entitled to the writ prayed for. In
Lamb vs. Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs.
The Board of Pharmacy, 20 Phil. 367, the Court said that the writ of
mandamus will not issue to give to the applicant anything to which he is not
entitled by law.
Batjak premises its right to the possession of the three (3) off mills on the
Voting Trust Agreement, claiming that under said agreement, NIDC was
constituted as trustee of the assets, management and operations of Batjak,
that due to the expiration of the Voting Trust Agreement, on 26 October
1970, NIDC should tum over the assets of the three (3) oil mills to Batjak
From the foregoing provisions, it is clear that what was assigned to NIDC was
the power to vote the shares of stock of the stockholders of Batjak,
representing 60% of Batjak's outstanding shares, and who are the signatories
to the agreement. The power entrusted to NIDC also included the authority
to execute any agreement or document that may be necessary to express the
consent or assent to any matter, by the stockholders. Nowhere in the said
provisions or in any other part of the Voting Trust Agreement is mention
made of any transfer or assignment to NIDC of Batjak's assets, operations,
and management. NIDC was constituted as trustee only of the voting rights
of 60% of the paid-up and outstanding shares of stock in Batjak. This is
confirmed by paragraph No. 9 of the Voting Trust Agreement, thus:
9. TERMINATION Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof
shall be returned and delivered to the undersigned stockholders as the
absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and terminate.Under the aforecited provision, what was to be returned by NIDC as trustee
to Batjak's stockholders, upon the termination of the agreement, are the
certificates of shares of stock belonging to Batjak's stockholders, not the
properties or assets of Batjak itself which were never delivered, in the first
place to NIDC, under the terms of said Voting Trust Agreement.
In any event, a voting trust transfers only voting or other rights pertaining to
the shares subject of the agreement or control over the stock. The law on the
matter is Section 59, Paragraph 1 of the Corporation Code (BP 68) which
provides:
Sec. 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of confering upon
a trustee or trusties the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: ...
68
SUBSCRIPTION CONTRACT
shareholder only upon full payment of the price. UNISSUE shares cannot be
the subject of a purchase.
We may add that the law in force in this jurisdiction makes no distinction, in
respect to the liability of the subscriber, between shares subscribed before
incorporation is effected and shares subscribed thereafter. All like are bound
to pay full value in cash or its equivalent, and any attempt to discriminate in
favor of one subscriber by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference of course primarily to
subscriptions to shares that have not been previously issued. It is conceivable
that the power of the corporation to make terms with the purchaser would be
greater where the shares which are the subject of the transaction have been
acquired by the corporation in course of commerce, after they have already
been once issued. But the shares with which are here concerned are not of
this sort. (National Exchange Co., Inc. vs. Dexter)
shares with a par value of P1. 500,000 has already been subscribed:
1. Z purchased 100,000 of the UNISSUED shares paying 50% down
payment and the balance payable after 6 months, with a condition that
he will not be considered a shareholder until full payment. He is still
liable for the balance because this will be considered a subscription no
matter how the parties refer to it and accordingly, Z is liable as a
shareholder therein.
2. Z was declared a delinquent shareholder and X Co. was declared as the
winning bidder by paying P100,000 and acquired the delinquent shares.
Later on, 20,000 of the shares were sold to Y here, the shares being
from treasury and not from unissued shares, may be the proper subject
of a purchase and thus, a condition that Y would not became a
shareholder until full payment may be valid.
69
whereby the latter offered its stock for subscription on the terms
stated in the form letter, and Damasa applied for subscription fixing
her own plan of payment, a relation, in the absence as in the
present case of acceptance by the Quezon College, Inc. of the
counter offer of Damasa Crisostomo, that had not ripened into an
enforceable contract.
Indeed, the need for express acceptance on the part of the Quezon College,
Inc. becomes the more imperative, in view of the proposal of Damasa
Crisostomo to pay the value of the subscription after she has harvested fish,
a condition obviously dependent upon her sole will and, therefore, facultative
in nature, rendering the obligation void, under article 1115 of the old Civil
Code which provides as follows: "If the fulfillment of the condition should
depend upon the exclusive will of the debtor, the conditional obligation shall
be void. If it should depend upon chance, or upon the will of a third person,
the obligation shall produce all its effects in accordance with the provisions of
this code." It cannot be argued that the condition solely is void, because it
would have served to create the obligation to pay, unlike a case, exemplified
by Osmea vs. Rama (14 Phil., 99), wherein only the potestative condition
was held void because it referred merely to the fulfillment of an already
existing indebtedness.
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court
already held that "a condition, facultative as to the debtor, is obnoxious to
the first sentence contained in article 1115 and renders the whole obligation
void."
B.
PRE-INCORPORATION SUBSCRIPTION
2.
C.
STOCK ISSUANCE
Stock issuance is generally the initial and primary source of corporate capital.
Other sources may include corporate borrowings, loans and advances from
creditors or stockholders. Corporate earnings may also be a source of
corporate funds if it is reinvested or ploughed back to the company.
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred
upon it by the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.
PAR or ISSUED PRICE: while it may not reflect the true value of the
shares which constantly fluctuates, merely indicates the amount which the
original subscribers are supposed to contribute to the corporate capital as the
basis of the privilege of profit sharing with limited liability.
PROPERTY: If shares are issued in exchange for property, the value of such
should at least be equal to the par or issued value of the stocks. Such value,
may be determined with reference to
a. REAL PROPERTY - (1) independent appraisers appraisal report; (2) BIR
Zonal Valuation; or (3) Market Value indicated in the Real Estate Tax
Declaration.
b. INTANGIBLE PROPERTY as determined by the incorporators or the
BOD subject to the approval of the SEC.
TRUE VALUE RULE: the motives and intent of those making the valuation
are disregarded and the sole and decisive factor or question is whether or not
the property or services are in fact worth the value placed on them.
GOOD FAITH RULE: is based on the proposition that the value of the
70
I hereby subscribe for three hundred (300) shares of the capital stock of C.
S. Salmon and Company, payable from the first dividends declared on any
and all shares of said company owned by me at the time dividends are
declared, until the full amount of this subscription has been paid
Upon subscription, defendant Dexter paid P15,000 from the dividends
declared by the company and supplemented by money supplied personally be
the subscriber. No other payment was made.
ISSUE: WON the subscription to be paid out of the dividends declared on the
shares has the effect of relieving the subscriber from personal liability in an
action to recover the value of the shares?
HELD: No. Under the American regime corporate franchises in the Philippine
Islands are granted subject to the provisions of section 74 of the Organic Act
of July 1, 1902, which, in the part here material, is substantially reproduced
in section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is
among other things, declared: "That all franchises, privileges, or concessions
granted under this Act shall forbid the issue of stock or bonds except in
exchange for actual cash or for property at a fair valuation equal to the par
value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902,
sec. 74.)
Pursuant to this provision we find that the Philippine Commission inserted in
the Corporation Law, enacted March 1, 1906, the following provision: ". . .
no corporation shall issue stock or bonds except in exchange for
actual cash paid to the corporation or for property actually received
by it at a fair valuation equal to the par value of the stock or bonds
so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except for
actual cash to the par value of the stock to its full equivalent in property is
thus enshrined in both the organic and statutory law of the Philippine Islands;
and it would seem that our lawmakers could scarcely have chosen language
more directly suited to secure absolute equality stockholders with respect to
their liability upon stock subscriptions. Now, if it is unlawful to issue stock
otherwise than as stated it is self-evident that a stipulation such as that
now under consideration, in a stock subscription, is illegal, for this
stipulation obligates the subscriber to pay nothing for the shares
except as dividends may accrue upon the stock. In the contingency
that dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subscriber, and hence the
stipulation is unlawful.
The general doctrine of corporation law is in conformity with this conclusion,
as may be seen from the following proposition taken from the standard
encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription upon
such terms as will operate as a fraud upon the other subscribers
or stockholders by subjecting the particular subcriber to lighter
burdens, or by giving him greater rights and privileges, or as a
fraud upon creditors of the corporation by withdrawing or
71
delinquent shares) if any is due, has been paid, a subscriber, even if not yet
fully paid, is entitled to exercise all the rights of a stockholder and the
corresponding liability that attach thereunder:
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder.
In essence, the issuance of a certificate of stock is not a condition sine qua
non to consider a subscriber a stockholder. To all intents and purposes, a
subscriber is a shareholder upon subscription and entitled to the all the rights
as such, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right under Sec. 83.
the sense same sense as a bill or a not, even if its endorsed in blank. Thus,
while it may be transferred by endorsement coupled with delivery thereof, it
is nonetheless non-negotiable in that the transferee takes it without prejudice
to all the rights and defenses which the true and lawful owner may have
except in so far as the principles governing estoppel may apply.
the validity of the transfer at least in so far as the contracting parties are
concerned. As regards, the corporation, the transferee will not be recognized
as such stockholder and could not exercise the rights until the transfer has
been duly recorded in the stock and transfer book. As such, he cannot vote
or be vote for, and he will not be entitled to dividends. The corporation may
be protected when it pays dividends to the registered owner despite a
previous transfer of which it had no knowledge. The purpose of registration
therefore is two-fold: (1) to enable the transferee to exercise all the rights of
stockholder, and (2) to inform the corporation of any change in share
ownership so that it can ascertain the person entitled to the rights and
subject to the liabilities of a corporation (De Erquiga vs. CA)
transfer, mandamus will lie to compel the registration. This is because such
duty is ministerial. HOWEVER, he cannot be compelled to do so when the
transferees title to said shares has no prima facie validity or is uncertain.
The SEC has, however, ruled that when a corporation has already issued
stock certificates, any transfer of the shares can only be effectively made by
endorsement and delivery of the stock certificate. A deed of transfer, sale or
assignment alone would not suffice (as affirmed by the SC in Rural Bank of
Lipa City, Inc. vs. CA) for to rule otherwise would open the door to fraudulent
or fictitious transfer which the SEC seeks to avoid. In effect, while a formal
contract of sale in a notarized document is equivalent to actual delivery of the
certificate itself, this mode of transfer is available only if no certificate of
stock has been issued.
who its stockholders are. Also, as a matter of policy, the SEC allows the grant
of preferential rights to existing stockholders and/or the corporation, giving
them the first option to purchase the shares of a selling stockholder within a
reasonable period not exceeding thirty days provided that the same is
contained in the AOI and in all the stock certificates to be issued. This is
considered reasonable since it merely suspends the right to transfer within
the period specified.
OTHER RESTRICTIONS:
1.
2.
3.
4.
5.
6.
It is not valid, except as between the parties, until recorded in the books
of the corporation;
Shares of stock against which the corporation holds any unpaid claim
shall not be transferrable in the books of the corporation. Unpaid claims,
refer to claims arising from unpaid subscription and not to any
indebtedness which a stockholder may owe the corporation such as
monthly dues;
Restrictions required to be indicated in the AOI, bylaws and stock
certificates of a close corporation;
Restrictions imposed by special law, such as the Public Service Act
requiring the approval of the government agency concerned if it will vest
unto the transferee 40% of the capital of the public service company;
Sale to aliens in violation of maximum ownership of shares under the
Nationalization Laws; and
Those covered by reasonable agreement of the parties.
No share of stock against which the corporation hold, any unpaid claim
shall be transferable on the books of the corporation.
The legal provision just quoted does not require any entry except of transfers
of shares of stock in order that such transfers may be valid as against third
persons. Now, what did the Legislature mean in using the word "transfer"?
Inasmuch as it does not appear from the text of the Corporation Law that an
attempt was made to give a special signification to the word "transfer", we
shall construe it according to its accepted meaning in ordinary parlance.
The word "transferencia" (transfer) is defined by the "Diccionario de la
Academia de la Lengua Castellana" as "accion y efecto de transferir" (the act
and effect of transferring); and the verb "transferir", as "ceder o renunciar en
otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de
ella" (to assign or waive the right in, or absolute ownership of, a thing in
favor of another, making him the owner thereof).
In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589,
the word "transfer" is defined as follows:
"Transfer" means any act by which property of one person is vested in
another, and "transfer of shares", as used in Uniform Stock Transfer Act
(Comp. St. Supp., 690), implies any means whereby one may be divested
of and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136
A., 209, 210.)"
In view of the definitions cited above, the question arises as to whether or
not a mortgage constituted on certain shares of stock in accordance with Act
No. 1508, as amended by Act No. 2496, is a transfer of such shares in the
abovementioned sense.
Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496,
defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows:
SEC. 3. A chattel mortgage is a conditional sale of personal property as
security for the payment of a debt, or the performance of some other
obligation specified therein, the condition being that the sale shall be
avoided upon the seller paying to the purchaser a sum of money or doing
some other act named. If the condition is performed according to its terms
the mortgage and sale immediately become void, and the mortgage is
hereby divested of his title.
Later on, Ceron mortgaged the shares to herein defendant Eduardo Matute,
the latter without knowledge of the existence of the assignment. Due to nonpayment, Matute foreclosed the mortgage and the shares were sold at a
public auction.
Monserrat claims ownership over the shares and the lower court rendered
judgment in his favor, holding that the mortgage on the shares was null and
void, but the mortgage on the usufruct is valid.
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17;
34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases, second
series, vol. 4, p. 978, the following appears:
72
mortgagor resides the mortgage shall be recorded both in the province of the
mortgagor's residence and in the province where the property is situated.
73
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-president,
countersigned by the secretary or clerk and sealed with the by-laws.
Shares of stock so issued are personal property and may be transferred by
delivery of the certificate indorsed by the owner or his attorney in fact or
other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred
We prefer to adopt the line followed by the Supreme Courts of Massachusetts
and of Wisconsin. (See Clews vs. Friedman, 182 Mass., 555; 66 N.E. 201, and
In re Murphy, 51 Wis., 519; 8 N.W., 419.) In this case the court had under
consideration a statute identical with our own section 35, supra, and the
court said:
We think the true meaning of the language is, and the obvious intention of
the legislature in using it was, that all transfers of shares should be
entered, as here required, on the books of the corporation. And it is
equally clear to us that all transfers of shares not so entered are
invalid as to attaching or execution creditors of the assignors, as
well as to the corporation and to subsequent purchasers in good
faith, and indeed, as to all persons interested, except the parties
to such transfers. All transfers not so entered on the books of the
corporation are absolutely void; not because they are without
notice or fraudulent in law or fact, but because they are made so
void by statute.
To us the language of the legislature is plain to the effect that the right of
the owner of the shares of stock of a Philippine corporation to
transfer the same by delivery of the certificate, whether it be
regarded as statutory on common law right, is limited and restricted
by the express provision that "no transfer, however, shall be valid,
except as between the parties, until the transfer is entered and
noted upon the books of the corporation." Therefore, the transfer of
the 75 shares in the North Electric Company, Inc., made by the
defendant Diosomito to the defendant Barcelon was not valid as to
the plaintiff-appellee, Toribia Uson, on January 18, 1932, the date
on which she obtained her attachment lien on said shares of stock
which still stood in the name of Diosomito on the books of the
corporation.
CYRUS PADGETT, plaintiff-appellee,
vs.
BABCOCK & TEMPLETON, INC., and W. R. BABCOCK, defendantsappellants
74
Either party violating this agreement shall pay to the other the sum of one
thousand (P1,000) pesos as liquidated damages, unless previous consent
in writing to such sale, transfer, or other disposition be obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911, sold
his stock in the said corporation to E. C. McCullough of the firm of E. C.
McCullough & Co. of Manila, a strong competitor of the said John R. Edgar &
Co., Inc.
A complaint was filed and the trial court decided in favor of defendant.
ISSUE: WON the stipulation in the contract is valid?
HELD: Yes. It is urged by the appellee in this case that the stipulation in the
contract suspending the power to sell the stock referred to therein is an
illegal stipulation, is in restraint of trade and, therefore, offends public policy.
We do not so regard it. The suspension of the power to sell has a
beneficial purpose, results in the protection of the corporation as
well as of the individual parties to the contract, and is reasonable as
to the length of time of the suspension. We do not here undertake to
discuss the limitations to the power to suspend the right of alienation of
stock, limiting ourselves to the statement that the suspension in this
particular case is legal and valid.
EMBASSY FARMS, INC., petitioner,
vs.
HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT), HON.
ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court, Branch CLVIII,
(158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff, Branch
CLVIII, Regional Trial Court, Pasig, Metro Manila and EDUARDO B.
EVANGELISTA, respondents
EVANGELISTA:
1. To transfer to Asuncion 19 parcels of agricultural land registered in
his name, together with the stocks, equipment and facilities of
Embassy Farms, Inc. wherein 90% of the shares of stock is owned
by Evangelista;
2. To cede, transfer and convey in a manner absolute and
irrevocable any and all of his shares of stocks in Embassy Farms,
Inc. to Asuncion or his nominees until the total of said shares of
stock so transferred shall constitute 90% of the paid-in equity of
said corporation within a reasonable time from signing the
document.
ASUNCION:
1. To pay Evangelista P8,630,999;
2. To organize and register a new corporation with an authorized
capital stock of P10M which upon registration will take over all the
rights and liabilities of Asuncion.
Effective control and management of the piggery at Embassy Farms, Inc. was
transferred by Evangelista to Asuncion pursuant to clause 8 of the MOA. In
accordance with clause 15, Evangelista served as President and Chief
Executive of Embassy Farms.
Evangelista also endorsed in blank all his shares of stock including that of his
wife and three nominees with minor holdings but retained possession of said
shares and opted to deliver to Asuncion only upon full compliance of the
latter of his obligations under the MOA.
For failure to comply with his obligations, Evangelista intimated the institution
of the appropriate legal action. But Asuncion eventually filed for the
rescission of the MOA.
ISSUE: WON Evangelista has a better right to the shares and control of the
corporate affairs?
HELD: Yes. From the pleadings submitted by the parties it is clear that
although Evangelista has indorsed in blank the shares outstanding in his
75
name he has not delivered the certificate of stocks to Asuncion because the
latter has not fully complied with his obligations under the MOA. There
being no delivery of the indorsed shares of stock Asuncion cannot
therefore effectively transfer to other person or his nominees the
undelivered shares of stock. For an effective transfer of shares of stock
the mode and manner of transfer as prescribed by law must be followed
(Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3
of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of
the Philippines, shares of stock may be transferred by delivery to the
transferree of the certificate properly indorsed. Title may be vested
in the transferree by the delivery of the duly indorsed certificate of
stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However,
no transfer shall be valid, except as between the parties until the transfer is
properly recorded in the books of the corporation (Sec. 63, Corporation Code
of the Philippines).
In the case at bar the indorsed certificate of stock was not actually delivered
to Asuncion so that Evangelista is still the controlling stockholder of Embassy
Farms despite the execution of the memorandum of agreement and the turnover of control and management of the Embassy Farms to Asuncion on
August 2, 1984.
When Asuncion filed on April 10, 1986 an action for the rescission of
contracts with damages, the Pasig Court merely restored and established the
status quo prior to the execution of the MOA by the issuance of a restraining
order on July 10, 1987 and the writ of preliminary injunction on July 30,
1987. It would be unjust and unfair to allow Asuncion and his nominees to
control and manage the Embassy Farms despite the fact that Asuncion, who
is the source of their supposed shares of stock in the corporation, is not
asking for the delivery of the indorsed certificate of stock but for the
rescission of the MOA. Rescission would result in mutual restitution
(Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow
Evangelista to manage the farm. Compared to Asuncion or his nominees
Evangelista would be more interested in the preservation of the assets,
equipment and facilities of Embassy Farms during the pendency of the main
case.
ENRIQUE RAZON, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his
capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN,
respondents.
76
Pursuant to said SPA, private respondent Melania Guerrero, as Attorney-inFact, executed the following assignments of shares of stocks: Luz Andico
(457 shares); Wilhelmina Rosales (10 shares); Francisco Guerrero, Jr. (5
shares); and Francisco Guerrero, Sr. (1 share). The last share was
transferred 2 months before the death of Clemente.
Subsequently, Melania Guerrero presented the Deeds of Assignments and
requested for the cancellation of the certificates of stock and new ones to be
issued in the name of transferees. However, petitioner Bank refused.
Melania Guerrero filed for an action for mandamus with the SEC. Maripol
Guerrero, a legally adopted daughter of Melania and Clemente filed for
intervention claiming that two weeks before filing the action for mandamus, a
petition for the administration of the estate of Celemente has been filed and
that the deeds of assignment were fictitious and antedated. SEC denied the
motion for intervention.
Maripol filed a complaint before the CFI for the annulment of the Deeds of
Assignment.
Later on, the SEC rendered a decision granting the action for mandamus
which was affirmed by the SEC en banc and still later, by the CA.
ISSUE: WON the mandamus was properly granted for the registration of the
transfer of the 473 shares in question?
HELD: Yes. Respondent SEC correctly ruled in favor of the registering of the
shares of stock in question in private respondent's names. Such ruling finds
support under Section 63 of the Corporation Code, to wit:
Sec. 63. . . . Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally authorized to make
the transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court
interpreted Sec. 63 in his wise:
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation
Code]) contemplates no restriction as to whom the stocks may
be transferred. It does not suggest that any discrimination may
be created by the corporation in favor of, or against a certain
purchaser. The owner of shares, as owner of personal property,
is at liberty, under said section to dispose them in favor of
whomever he pleases, without limitation in this respect, than
the general provisions of law. . . .
The only limitation imposed by Section 63 of the Corporation
Code is when the corporation holds any unpaid claim against the
shares intended to be transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers, because:
. . . Restrictions in the traffic of stock must have their source in
legislative enactment, as the corporation itself cannot create such
impediment. By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in the
absence of such power, cannot ordinarily inquire into or pass upon the
legality of the transactions by which its stock passes from one person to
another, nor can it question the consideration upon which a sale is
based. . . . (Tomson on Corporation Sec. 4137, cited in Fleisher vs.
Nolasco, Supra).
The right of a transferee/assignee to have stocks transferred to his name is
an inherent right flowing from his ownership of the stocks. Thus:
Whenever a corporation refuses to transfer and register stock
in cases like the present, mandamus will lie to compel the
officers of the corporation to transfer said stock in the books of
the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher
vs. Botica Nolasco, 47 Phil. 583, 594).
The corporation's obligation to register is ministerial.
In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of
ownership. (Fletcher, Sec. 5528, page 434).
The duty of the corporation to transfer is a ministerial one and
if it refuses to make such transaction without good cause, it
may be compelled to do so by mandamus. (See. 5518, 12 Fletcher
394)
For the petitioner Rural Bank of Salinas to refuse registration of the
transferred shares in its stock and transfer book, which duty is ministerial on
its part, is to render nugatory and ineffectual the spirit and intent of Section
63 of the Corporation Code. Thus, respondent Court of Appeals did not err in
upholding the Decision of respondent SEC affirming the Decision of its
Hearing Officer directing the registration of the 473 shares in the stock and
transfer book in the names of private respondents. At all events, the
registration is without prejudice to the proceedings in court to determine the
validity of the Deeds of Assignment of the shares of stock in question.
LIM TAY, petitioner,
vs.
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE
OF ALFONSO LIM, respondents
ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock
77
pledge, and whether laches had set in were difficult legal issues, which were
unpleaded and unresolved when herein petitioner asked the corporate
secretary of Go Fay to effect the transfer, in his favor, of the shares pledged
to him.
In Rural Bank of Salinas: Melenia Guerrero executed deeds of assignment
for the shares in favor of the respondents in that case. When the corporate
secretary refused to register the transfer, an action for mandamus was
instituted. Subsequently, a motion for intervention was filed, seeking the
annulment of the deeds of assignment on the grounds that the same were
fictitious and antedated, and that they were in fact donations because the
considerations therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas were
already prima facie shareholders when the deeds of assignment were
questioned. If the said deeds were to be annulled later on, respondents
would still be considered shareholders of the corporation from the time of the
assignment until the annulment of such contracts.
ISSUE2: WON petitioner is entitled to the relief of mandamus as against the
company?
HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing
the corporate secretary of respondent corporation to have the shares
transferred to his name in the corporate books, to issue new certificates of
stock and to deliver the corresponding dividends to him.
In order that a writ of mandamus may issue, it is essential that the
person petitioning for the same has a clear legal right to the thing
demanded and that it is the imperative duty of the respondent to
perform the act required. It neither confers powers nor imposes
duties and is never issued in doubtful cases. It is simply a command
to exercise a power already possessed and to perform a duty
already imposed.
In the present case, petitioner has failed to establish a clear legal right.
Petitioner's contention that he is the owner of the said shares is completely
without merit. Quite the contrary and as already shown, he does not have
any ownership rights at all. At the time petitioner instituted his suit at the
SEC, his ownership claim had no prima facie leg to stand on. At best, his
contention was disputable and uncertain Mandamus will not issue to establish
a legal right, but only to enforce one that is already clearly established.
ISSUE3: WON by Guiok and Lims failure to pay, the ownership of the shares
automatically passed to Lim Tay?
HELD: No. On appeal, petitioner claimed that ownership over the shares had
passed to him, not via the contracts of pledge, but by virtue of prescription
and by respondents' subsequent acts which amounted to a novation of the
contracts of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not acquire
ownership of the shares by virtue of the contracts of pledge. Article 2112 of
the Civil Code states:
The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale
shall be made at a public auction, and with notification to the debtor and
the owner of the thing pledged in a proper case, stating the amount for
which the public sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be held; and if at the
second auction there is no sale either, the creditor may appropriate the
thing pledged. In this case he shall be obliged to give an acquittance for
his entire claim.
Furthermore, the contracts of pledge contained a common proviso, which we
quote again for the sake of clarity:
3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice
to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and "the PLEDGEE is hereby authorized and empowered at his
option to transfer the said shares of stock on the books of the corporation
to his own name, and to hold the certificate issued in lieu thereof under
the terms of this pledge, and to sell the said shares to issue to him and to
apply the proceeds of the sale to the payment of the said sum and
interest, in the manner hereinabove provided;
There is no showing that petitioner made any attempt to foreclose
or sell the shares through public or private auction, as stipulated in
the contracts of pledge and as required by Article 2112 of the Civil
Code. Therefore, ownership of the shares could not have passed to
him. The pledgor remains the owner during the pendency of the pledge and
prior to foreclosure and sale, as explicitly provided by Article 2103 of the
same Code:
Unless the thing pledged is expropriated, the debtor continues to be the
owner thereof.
RICARDO A. NAVA, petitioner-appellant.
vs.
PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO
CUSI, respondents-appellees
78
status of a stockholder, cannot vote nor be voted for, and will not be
entitled to dividends, insofar as the assigned shares are concerned.
Parenthetically, the private respondents cannot, as yet, be deprived of their
rights as stockholders, until and unless the issue of ownership and transfer of
the shares in question is resolved with finality.
The Villanueva spouses failed to settle their obligation on the due date, and
the BOD sent a demand letter for the surrender of the said shares and for the
delivery of sufficient collateral to cover the balance of the debt, which the
Villanueva spouses ignored. Their shares were converted into Treasury
shares.
There being no showing that any of the requisites mandated by law was
complied with, the SEC Hearing Officer did not abuse his discretion in
granting the issuance of the preliminary injunction prayed for by petitioners
in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the
order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and
the Court of Appeals decision upholding the SEC en banc order, are valid and
in accordance with law and jurisprudence, thus warranting the denial of the
instant petition for review.
The Villanueva spouses questioned the legality of the such conversion and
filed with the SEC a petition for annulment of the stockholders meeting and
election of directors and officers because they were not notified of such
meeting.
The SEC hearing officer dismissed the application for issuance of a
preliminary injunction, but was granted on reconsideration. The decision was
affirmed by the SEC en banc and later by the CA.
ISSUE: WON the transfer of the shares is ineffective for non-indorsement
and non-delivery of the certificate of stocks?
HELD: Yes. The Corporation Code specifically provides:
SECTION 63. Certificate of stock and transfer of shares. The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
79
Moreover, it is safe to infer from the facts deduced in the instant case that,
there was already delivery of the unendorsed Stock Certificate No. 2, which is
essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan and
petitioner Alfonso S. Tan, respectively. What led to the problem was the
return of the cancelled certificate (No. 2) to Alfonso S. Tan for his
endorsement and his deliberate non-endorsement.
For all intents and purposes, however, since this was already cancelled
which cancellation was also reported to the respondent
Commission, there was no necessity for the same certificate to be
endorsed by the petitioner. All the acts required for the transferee
to exercise its rights over the acquired stocks were attendant and
even the corporation was protected from other parties, considering
that said transfer was earlier recorded or registered in the corporate
stock and transfer book.
Following the doctrine enunciated in the case of Tuazon v. La Provisora
Filipina, where this Court held, that:
But delivery is not essential where it appears that the persons
sought to be held as stockholders are officers of the corporation,
and have the custody of the stock book . . . (67 Phi. 36).
Furthermore, there is a necessity to delineate the function of the stock itself
from the actual delivery or endorsement of the certificate of stock itself as is
the question in the instant case. A certificate of stock is not necessary to
render one a stockholder in corporation.
Nevertheless, a certificate of stock is the paper representative or
tangible evidence of the stock itself and of the various interests
therein. The certificate is not stock in the corporation but is merely
evidence of the holder's interest and status in the corporation, his
ownership of the share represented thereby, but is not in law the
equivalent of such ownership. It expresses the contract between
the corporation and the stockholder, but is not essential to the
existence of a share in stock or the nation of the relation of
shareholder to the corporation. (13 Am. Jur. 2d, 769)
Under the instant case, the fact of the matter is, the new holder, Angel S.
Tan has already exercised his rights and prerogatives as stockholder and was
even elected as member of the board of directors in the respondent
corporation with the full knowledge and acquiescence of petitioner. Due to
the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and
responsibilities in the board of the respondent corporation when he was
elected as officer thereof.
Besides, in Philippine jurisprudence, a certificate of stock is not a
negotiable instrument. "Although it is sometime regarded as quasinegotiable, in the sense that it may be transferred by endorsement,
coupled with delivery, it is well-settled that it is non-negotiable,
because the holder thereof takes it without prejudice to such rights
or defenses as the registered owner/s or transferror's creditor may
have under the law, except insofar as such rights or defenses are
subject to the limitations imposed by the principles governing
estoppel." (De los Santos vs. McGrath, 96 Phil. 577)
To follow the argument put up by petitioner which was upheld by the Cebu
SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of
Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the
cancelled "mother" Certificate No. 2 whose endorsement was deliberately
withheld by petitioner, is to prescribe certain restrictions on the transfer of
stock in violation of the corporation law itself as the only law governing
transfer of stocks. While Section 47(s) grants a stock corporation the
authority to determine in the by-laws "the manner of issuing certificates" of
shares of stock, however, the power to regulate is not the power to
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which
prohibits a transfer of stock without the consent or approval of all the
stockholders or of the president or board of directors is illegal as constituting
undue limitation on the right of ownership and in restraint of trade. (47 Phil.
583)
80
On the other hand, it is stated in the appealed order of dismissal that the
plaintiff sought to register the assignment on April 13, 1955; whereas in
plaintiff's brief it is alleged that it was only in February, 1955, when the
defendant refused to recognize the plaintiff. If, as already observed, there is
no fixed period for registering an assignment, how can the complaint
be considered as already barred by the Statute of Limitations when it was
filed on April 26, 1955, or barely a few days (according to the lower court)
and two months (according to the plaintiff), after the demand for registration
and its denial by the defendant. Plaintiff's right was violated only sometime in
1955, and it could not accordingly have asserted any cause of action against
the defendant before that.
The defendant seems to believe that the plaintiff was compelled immediately
to register his assignment. Any such compulsion is obviously for the benefit
of the plaintiff, because it is only after registration that the transfer would be
binding against the defendant. But we are not here concerned with a
situation where the plaintiff claims anything against the defendant allegedly
accruing under the outstanding certificate in question between the date of
the assignment to the plaintiff and the date of the latters demand for
registration and issuance of a new certificate.
APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffsappellees,
vs.
J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED
STATES,
SUCCESSOR
TO THE
PHILIPPINE
ALIEN
PROPERTY
ADMINISTRATION OF THE UNITED STATES, defendant-appellant.
REPUBLIC OF THE PHILIPPINES, intervenor-appellant
title to the shares in question shall remain in the name of the Philippine
Alien Property Administrator.
Consequently, plaintiffs instituted the present action to establish title to the
aforementioned shares of stock.
Defendant Attorney General of the US contends that the shares were bought
by Vicente Madrigal, in trust and for the benefit, of the Mistsui Bussan,
abranch office of a Japanese company; and that Madrigal endorsed in blank
and delivered the shares to Mistsui for safe keeping; that Mitsui never sold or
otherwise disposed of the said shares; and that the stock certificates must
have been stolen or looted during the emergency from the liberation.
ISSUE: WON plaintiffs are the rightful owners of the shares?
HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares
of stock in question, as testified to by De los Santos, the result, insofar as
plaintiffs are concerned, would be the same. It is not disputed that said
shares of stock were registered, in the records of the Lepanto, in the name of
Vicente Madrigal. Neither is it denied that the latter was, as regards said
shares of stock, a mere trustee for the benefit of the Mitsuis. The record
shows and there is no evidence to the contrary that Madrigal had never
disposed of said shares of stock in any manner whatsoever, except by turning
over the corresponding stock certificates, late in 1941, to the Mitsuis, the
beneficial and true owners thereof. It has, moreover, been established, by
the uncontradicted testimony of Kitajima and Miwa, the managers of the
Mitsuis in the Philippines, from 1941 to 1945, that the Mitsuis had neither
sold, conveyed, or alienated said shares of stock, nor delivered the
aforementioned stock certificates, to anybody during said period. Section 35
of the Corporation Law reads:
The capital stock corporations shall be divided into shares for which
certificates signed by the president or the vice-president, countersigned by
the secretary or clerk and sealed with the seal of the corporation, shall be
issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate
endorsed by the owner or his attorney in fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid,
81
In the case at bar, neither madrigal nor the Mitsuis had alienated shares of
stock in question. It is not even claimed that either had, through negligence,
given occasion for an improper or irregular disposition of the
corresponding stock certificates.
E.
unauthorized is the transfer of the certificate from the true and lawful owner
to another person. While the latter refers to the act of the corporation in
issuing the certificate, either fraudulently or by mistake.
In forged or unauthorized transfer:
1. The purchaser or purchasers, no matter how innocent they may have
been, will acquire no title as against the lawful owner by virtue of the
doctrine of non-negotiability of certificates of stock;
2. The purchaser will have no right or remedy against the corporation
because he took the shares not by virtue of a misrepresentation made
by the corporation but on the faith of a forged endorsement or
unauthorized transfer;
3. The corporation incurs no liability to the person in whose favor the
certificate is endorsed or issued.
4. If the old certificate is cancelled and new one is issued by the
corporation, the holder thereof may be required to return the same for
its cancellation;
5. However, if new certificates are issued and passes into the hands of a
subsequent bona fide purchaser, the latter may rightfully acquire title
thereto since the corporation will be estopped to deny the validity
thereof;
6. The subsequent purchaser in good faith took the shares, not by virtue of
a forged or unauthorized transfer but on reliance to the genuineness of
the certificate issued by the corporation or by virtue of the
representation made by the corporation that the same is valid and
therefore, compel the corporation to recognize him as a stockholder or
claim reimbursement and damages against the latter.
Example: A owns 100 shares of X Co., B stole the stock certificate and forged
As signature:
a. If B indorsed and sold it to C:
1. C will not acquire title to the shares whether he is innocent or not;
2. C cannot compel the corporation to register him as stockholder;
3. X Co. does not incur any liability in favor of C
b. If X Co. cancelled the certificate and issued a new one to C:
1. If A later on finds out that his certificate was stolen, C may still be
required to return the new certificate;
2. If C sold it to D, an innocent purchaser, D may rightfully acquire
thereto since X Co. is estopped to deny the validity of the
certificate;
3. If A later on finds out that his certificate was stole, X Co. may be
compelled to recognize both A and D as stockholders.*
*This is so because the A cannot be deprived of his rights as owner by virtue
of a forged transfer, and B, because of X Co.s representation that the person
named therein is the owner of shares in the corporation.
c.
**In this sense, if D sues X Co., the latter will have no valid defense, but he
may institute a third party complaint against C. If C is an innocent purchaser,
X Co., may file a fourth party complaint against B.
ISSUANCE OF STOCK CERTIFICATION
Subscriptions to shares of stock are indivisible such that a subscriber to such
shares will not be entitled to the issuance of a stock certificate until he has
are deemed indivisible and no certificate of stock can be issued unless and
until the full amount of his subscription including interest and expenses, if
any is paid.
The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic Power Co where
a subscriber may opt to apply his partial payment to a corresponding number
of shares, will not hold true. Thus, even if under the old law, where a
corporation may, under a by-law provision or by custom, practice or tradition,
issue stock certificates covering the number of shares that might have been
correspondingly paid, this authority or practice is valid only two years after
the effectivity of the Corporation Code and after which corporations,
registered under the said law should comply with the mandatory requirement
of Sec. 64. The Corporation Code thus provides:
Sec. 148. Applicability to existing corporations. - All corporations
lawfully existing and doing business in the Philippines on the date of the
effectivity of this Code and heretofore authorized, licensed or registered by
the Securities and Exchange Commission, shall be deemed to have been
authorized, licensed or registered under the provisions of this Code, subject
to the terms and conditions of its license, and shall be governed by the
provisions hereof: Provided, That if any such corporation is affected by the
new requirements of this Code, said corporation shall, unless otherwise
herein provided, be given a period of not more than two (2) years from the
effectivity of this Code within which to comply with the same.
FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying 50%
of the subscription price and a corresponding receipt being issued therefor.
Such shares were mortgaged to plaintiff Fua Cun to secure a loan evidenced
by a promissory note, together with the receipt, which was endorsed and
delivered to plaintiff mortgagee. Plaintiff informed the manager of the Bank
about the transaction but was told to await action by the BOD.
In the meantime, Chua Soco became indebted to the bank, and in the action
for recovery of money, his 500 shares were attached.
Fua Cun thereupon instituted the present action maintaining that the
payment of 50% of the subscription entitled Chua Soco to 250 shares and
prayed that his lien on the shares by virtue of the chattel mortgage be
declared to have priority over the claim of defendant Bank.
The trial court rendered judgment in favor of plaintiff.
ISSUE: (1) WON Chua Soco became entitled to 250 shares or the
proportionate share to his partial payment? (2) WON plaintiff had a superior
claim over that of the Bank?
HELD: (1) No. (2) Yes. Though the court below erred in holding that Chua
Soco, by paying one-half of the subscription price of five hundred shares, in
effect became the owner of two hundred and fifty shares, the judgment
appealed from is in the main correct.
The claim of the defendant Banking Corporation upon which it brought the
action in which the writ of attachment was issued, was for the non-payment
82
of drafts accepted by Chua Soco and had no direct connection with the
shares of stock in question. At common law a corporation has no lien upon
the shares of stockholders for any indebtedness to the corporation (Jones on
Liens, 3d ed., sec. 375) and our attention has not been called to any statute
creating such lien here. On the contrary, section 120 of the Corporation Act
provides that "no bank organized under this Act shall make any loan or
discount on the security of the shares of its own capital stock, nor be the
purchaser or holder of any such shares, unless such security or purchase
shall be necessary to prevent loss upon a debt previously contracted in good
faith, and stock so purchased or acquired shall, within six months from the
time of its purchase, be sold or disposed of at public or private sale, or, in
default thereof, a receiver may be appointed to close up the business of the
bank in accordance with law."
There can be no doubt that an equity in shares of stock may be assigned and
that the assignment is valid as between the parties and as to persons to
whom notice is brought home. Such an assignment exists here, though it was
made for the purpose of securing a debt. The endorsement to the plaintiff of
the receipt above mentioned reads:
For value received, I assign all my rights in these shares in favor of
Mr. Tua Cun.
Manila, P. I., May 18, 1921.
WATERED STOCKS
corporation as fully paid-up shares, when in fact the whole amount of the
value thereof has not been paid. If the shares have thus been issued by the
corporation as fully paid, when in fact it has intentionally and knowingly
received or agreed to receive nothing at all for them, or less than their par
value, either in money, property or services, the shares are said to be
watered or fictitiously paid-up to the extent to which they have not been
issued or are not to be paid for
Sec. 65. Liability of directors for watered stocks. - Any director or
officer of a corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a consideration in any
form other than cash, valued in excess of its fair value, or who, having
knowledge thereof, does not forthwith express his objection in writing and
file the same with the corporate secretary, shall be solidarily liable with the
stockholder concerned to the corporation and its creditors for the difference
between the fair value received at the time of issuance of the stock and the
par or issued value of the same.
3.
4.
written dissent. Otherwise, if they did not issue such written dissent or are
passive, they may be held liable for not objecting thereto.
5.
6.
ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into: (1)
5M shares at P1.00 par value; and (2) 1M no par value shares with issued
value at P5.00. A acquired 1M of the par value shares for P.80 and 100,000
no par value shares at P4.00:
1. WATERED STOCK: There is stock watering for both shares. Sec. 65
speaks of issuance of shares at less than its par or issued value;
2. LIABILITY FOR PAR VALUE SHARES: The directors who consented to the
issuance or were passive about it, without written dissent, are solidarily
liable with A for the difference of P.20;
3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because
the no par value shares are deemed fully paid and non-assessable
(Sec. 6). Accordingly, only the directors or officers consenting to the
issuance are liable.
100M shares at P1.00 par value, there is a provision in the by-laws denying
the pre-emptive right of the shareholders. The Board of Directors subscribed
to 1M of the unissued shares at P2.00 each when the fair market value of the
shares was P12.00.
1. WATERED STOCK: No stock watering, since the shares were subscribed
for more than the par value, notwithstanding if it less than the fair
market value;
2. If 3 days later, the members of the Board sold those purchased shares
at P12.00 per share, making a profit of P10.00 per share, they cannot
be held liable for stock watering but they can be question on their duty
of loyalty. Since the whole P12.00 per share couldve gone to the coffers
of the corporation instead of them reaping the profits for themselves.
BASIS OF LIABILITY:
1.
2.
2.
83
payment of unpaid subscription will not prevent the creditors or the receiver
of the corporation to institute a court action to collect the unpaid portion
thereof. This is because the capital of the corporation is the basis of the
credit of and financial responsibility of the corporation. Persons dealing with a
corporation and extending credit to it have a right to insist that the unpaid
subscription shall be paid in when this becomes necessary for the satisfaction
of their claims. This is otherwise known as the Trust Fund Doctrine which
states that subscriptions to the capital of a corporation constitute a fund to
which creditors have the right to look up to for the satisfaction of their
claims.
Sec. 67. Payment of balance of subscription. - Subject to the provisions
of the contract of subscription, the board of directors of any stock corporation
may at any time declare due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the same or such
percentage thereof, in either case with accrued interest, if any, as it may
deem necessary.
PROCEDURE:
1.
2.
3.
4.
5.
6.
7.
8.
9.
84
10.
11.
12.
13.
stockholder, in favor of the bidder who offered to pay the full amount of
the balance in the subscription, inclusive of interest, cost of
advertisement and expenses for the smallest number of shares;
Registration or transfer of the shares of stock in the name of the bidder
and corresponding issuance of the stock certificate covering the shares
successfully bidded;
If there be any remaining shares, the same shall be credited in favor of
the delinquent stockholder who shall be entitled to the issuance of a
certificate of stock covering such shares;
If there is no bidder at the public auction, the corporation may, subject
to the provisions of the Code, bid for the same and the total amount
due shall be credited or paid in full in the corporate books; and
The shares so purchased by the corporation shall be vested in the latter
as treasury shares.
in number 10 above, is such bidder who shall offer to pay the full amount of
the balance on the subscription together with accrued interest, cost of
advertisement and expenses of sale, for the smallest number of shares or
fraction of a share. It should be properly termed Lowest Bidder because the
bidders are offering to pay the same amount, and their bids are based on the
number of shares they are willing to receive, the lowest of which is the
winning bid.
Ex. A subscribed to 100 shares of stock for P100.00 each and paid only 50%
and later on declared to be delinquent. For the full amount of P5,000 (unpaid
balance) and the interests, costs, and expenses, the following bidders are
willing to accept - X: 70 shares; Y: 80 shares; Z: 90 shares. In this case, X
would be the highest bidder. The remaining 30 shares would be credited to
A.
*NO BIDDER: If there was no bidder, the company has to have unrestricted
retained earnings in order to acquire the shares as thus provided under Sec.
41 of the Corporation Code (Power to Acquire Own Shares). Accordingly, if
the company has no unrestricted retained earnings, it cannot acquire the said
shares by virtue of a delinquency sale, however, it may institute an action for
the recovery of the subscription price under Sec. 70.
TWO CONDITIONS:
1.
2.
The party seeking to maintain such action first pays or tenders to the
party holding the stock the sum for which the same was sold, with
interest from the date of the sale at the legal rate; and
The action shall be commenced by the filing of a complaint within 6
months from the date of sale.
CALL: Consistent with Art. 1169 of the Civil Code, a call is a condition
precedent before the right of action to institute a recovery suit accrues. This
is because a demand is required before a debtor may incur a delay in the
performance of his obligation. As earlier said however, a call is not necessary
if the contract of subscription provides for a date or dates when payment is
due, or when the corporation has become insolvent.
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co.
(Ltd.), plaintiff-appellant,
vs.
JEAN M. POIZAT, defendant-appellee
85
ISSUE: WON the BOD may declare the unpaid shares delinquent or collect or
enforce payment of the same despite the provision of the by-laws?
HELD: Yes. It is discretionary on the part of the board of directors to do
whatever is provided in the said article relative to the application of a part of
the 70 percent of the profit distributable in equal parts on the payment of the
shares subscribed to and not fully paid.
If the board of directors does not wish to make, or does not make, use of
said authority it has two other remedies for accomplishing the same purpose.
As was said by this court in the case of Velasco vs. Poizat (37 Phil., 802):
The first and most special remedy given by the statute consists in
permitting the corporation to put the unpaid stock for sale and dispose of
it for the account of the delinquent subscriber. In this case the provisions
of sections 38 to 48, inclusive, of the Corporation Law are applicable and
must be followed. The other remedy is by action in court.
Admitting that the provision of article 46 of the said by-laws maybe regarded
as a contract between the defendant corporation and its stockholders , yet as
it is only to the board of directors of the corporation that said articles gives
the authority or right to apply on the payment of unpaid subscriptions such
amount of the 70 percent of the profit distributable among the shareholders
in equal parts as may be deemed fit, it cannot be maintained that the said
article has prescribe an operative method for the payment of said
subscription continuously until their full amortization.
In the instant case, the defendant corporation, through its board of directors,
made use of its discretionary power, taking advantage of the first of the two
remedies provided by the aforesaid law. On the other hand, the plaintiff has
no right whatsoever under the provision of the above cited article 46 of the
said by-laws to prevent the board of directors from following, for that
purpose, any other method than that mentioned in the said article, for the
very reason that the same does not give the stockholders any right in
connection with the determination of the question whether or not there
should be deducted from the 70 percent of the profit distributable among the
stockholders such amount as may be deemed fit for the payment of
subscriptions due and unpaid. Therefore, it is evident that the defendant
corporation has not violated, nor disregarded any right of the plaintiff
recognized by the said by-laws, nor exceeded its authority in the discharge of
its executive functions, nor abused its discretion when it performed the acts
mentioned in the complaint as grounds thereof, and, consequently, the facts
therein alleged do not constitute a cause of action.
LINGAYEN GULF ELECTRIC POWER
appellant,
vs.
IRINEO BALTAZAR, defendant-appellee.
COMPANY,
INC.,
plaintiff-
HELD: No. We agree with the lower court that the law requires that
notice of any call for the payment of unpaid subscription should be
made not only personally but also by publication. This is clear from the
provisions of section 40 of the Corporation Law, Act No. 1459, as amended.
It will be noted that section 40 is mandatory as regards publication, using the
word "must". As correctly stated by the trial court, the reason for the
mandatory provision is not only to assure notice to all subscribers, but also to
assure equality and uniformity in the assessment on stockholders. (14 C.J.
639).
We find the citation of authorities made by the plaintiff and appellant
inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the corporation
involved was insolvent, in which case all unpaid stock subscriptions become
payable on demand and are immediately recoverable in an action instituted
by the assignee. Said the court in that case:
. . . . it is now quite well settled that when the corporation becomes
insolvent, with proceedings instituted by creditors to wind up and
distribute its assets, no call or assessment is necessary before the
institution of suits to collect unpaid balance on subscription.
But when the corporation is a solvent concern, the rule is:
It is again insisted that plaintiffs cannot recover because the suit was
not proceeded by a call or assessment against the defendant as a
subscriber, and that until this is done no right of action accrues. In a
suit by a solvent going corporation to collect a subscription, and in certain
suits provided by statute this would be true;. . . . . (Id.)
ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17 of
1946 of the BOD released him from the obligation to pay for his unpaid
subscription?
HELD: No. There must be unanimous consent of the stockholders of the
corporation. We quote some authorities:
Subject to certain exceptions, considered in subdivision (3) of this section,
the general rule is that a valid and binding subscription for stock of
a corporation cannot be cancelled so as to release the subscriber
from liability thereon without the consent of all the stockholders or
subscribers. Furthermore, a subscription cannot be cancelled by the
company, even under a secret or collateral agreement for
cancellation made with the subscriber at the time of the
subscription, as against persons who subsequently subscribed or
purchased without notice of such agreement. (18 C.J.S. 874).
(3) Exceptions.
In particular circumstances, as where it is given pursuant to a bona fide
compromise, or to set off a debt due from the corporation, a release,
supported by consideration, will be effectual as against dissenting
stockholders and subsequent and existing creditors. A release which might
originally have been held invalid may be sustained after a considerable lapse
of time. (18 C.J.S. 874).
In the present case, the release claimed by defendant and appellant does not
fall under the exception above referred to, because it was not given pursuant
to a bona fide compromise, or to set off a debt due from the corporation, and
there was no consideration for it.
In conclusion we hold that under the Corporation Law, notice of call for
payment for unpaid subscribed stock must be published, except
when the corporation is insolvent, in which case, payment is
immediately demandable. We also rule that release from such
payment must be made by all the stockholders.
86
when due, 25 per cent of the principal as expenses of collection and judicial
costs in case of litigation.
By virtue of these facts Lumanlan is entitled to a credit against the judgment
in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25
per cent on the principal debt, as he had to file this suit to collect, or receive
credit for the sum which he had paid Valenzuela for and in place of the
corporation, or a total of P13,840. This leaves a balance due Dizon & co.,
Inc., of P1,269 on that judgment with interest thereon at 6 per cent per
annum from August 30, 1930.
It appears from the record that during the trial of the case now under
consideration, the Bank of the Philippine Islands appeared in this case as
assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was
appointed assignee in case No. 43065 of the Court of First Instance of the
City of Manila on November 28, 1932. It is therefore evident that there are
still other creditors of Dizon & Co., Inc. This being the case that corporation
has a right to collect all unpaid stock subscriptions and any other amounts
which may be due it.
It is established doctrine that subscriptions to the capital of a
corporation constitute a fund to which the creditors have a right
to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its
debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.)
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE
LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC.,
GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER CO., INC.,
ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN
LUMBER CO., INC., defendants-appellees.
FACTS: In various suits decided jointly, PNB as creditor, and therefore the
real party in interest, was allowed by the lower court to substitute the
receiver of the Philippine Lumber Distributing Agency in these respective
actions for the recovery from the defendant lumber producers the balance of
their stock subscriptions.
The defendant lumber producers were convinced by the late President
Manuel Roxas to form a cooperative and ensure the stable supply of lumber
in the country and to eliminate alien middlemen. To induce them, the
president promised and agreed to invest P9.00 for every P1.00 that the
members would invest therein.
There was no appropriation made by congress for the P9.00 investment. The
President then instructed Hon. Emilio Abello, then Executive Secretary and
chairman of the BOD of PNB to grant an overdraft of P250,000 (later
increased to P350,000) which was approved by the BOD of PNB with interest
at 6%.
The Philippines did not invest the P9.00 for every peso coming from
defendant lumber producers. The loan extended by PNB was not paid.
Hence, these suits which the trial court dismissed.
ISSUE: WON the lumber producers are liable for the full value of their
subscriptions?
HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case of
Velasco v. Poizat, this Court held: "It is established doctrine that subscriptions
to the capital of a corporation constitute a fund to which creditors have a
right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debt.... 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;
and as against creditors a reduction of the capital stock can take place only in
the manner and under the conditions prescribed by the statute or the charter
or the articles of incorporation. Moreover, strict compliance with the statutory
87
FACTS: Appellant Suarez subscribed to 16 shares of Compania HispanoFilipina, Inc. and paid the value of 4 shares, at P100 par value each, or P400.
Plaintiff-appellee Garcia was appointed by the court as receiver of the
company, to collect the unpaid subscription, among others. On June 18,
1931, Garcia brought an action to recover from Suarez and other
shareholders the balance of their subscriptions, but the complaint was
dismissed for lack of prosecution.
On Oct. 10, 1935, a similar action was instituted which was granted by the
CFI holding defendant liable for the balance of his unpaid subscription and
interest. On appeal, the defendant raises the issue of prescription.
ISSUE: WON defendant Suarez is liable?
HELD: Yes. The premise of the argument is wrong because it confuses two
distinct obligations: the obligation to pay interest and that to pay the amount
of the subscription. The said section 37 of the Corporation Law provides
when the obligation to pay interest arises and when payment should be
made, but it is absolutely silent as to when the subscription to a stock should
be paid. Of course, the obligation to pay arises from the date of the
made on the balance of all or any portion of the subscription on the date or
dates fixed in the contract of subscription without need of call, or on the date
specified by the BOD pursuant to a call made by it in accordance with the
provisions of Sec. 67.
RATIONALE:
1.
2.
3.
Thus, the BOD has the authority to decide the amount and the kind of surety
bond that may be required for the issuance of a certificate of stock, in liey of
the lost or destroyed one, if the same is to be issued prior to the expiration of
the 1 year period provided by Sec. 73.
After the above procedures have been complied with, the new certificate
will be issued 1 year from the date of the last publication;
Nevertheless, the stockholder may file a bond or other security to have
the shares issued before the 1 year prescribed.
If a contest has been present to the corporation or an action is pending
in court, the issuance of the new certificate shall be suspended until
final decision.
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder.
H.
RIGHTS OF A STOCKHOLDER:
1.
2.
3.
88
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in
making his demand.
Stock corporations must also keep a book to be known as the "stock and
transfer book", in which must be kept a record of all stocks in the names of
the stockholders alphabetically arranged; the installments paid and unpaid on
all stock for which subscription has been made, and the date of payment of
any installment; a statement of every alienation, sale or transfer of stock
made, the date thereof, and by and to whom made; and such other entries
as the by-laws may prescribe. The stock and transfer book shall be kept in
the principal office of the corporation or in the office of its stock transfer
agent and shall be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license from the
Securities and Exchange Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or making transfer of its own
stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be
applicable.
2.
89
3.
public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the
financial statements may be certified under oath by the treasurer or any
responsible officer of the corporation.
been said that: The right of the shareholders to ascertain how the affairs of
his company are being conducted by its directors and officers is founded by
his beneficial interest through ownership of shares and the necessity of selfprotection. Managers of some corporations deliberately keep the shareholders
in ignorance or under misapprehension as to the true condition of its affairs.
Business prudence demands that the investor keep a watchful eye on the
management and the condition of the business. Those in charge of the
company may be guilty of gross incompetence or dishonesty for years and
escape liability if the shareholders cannot inspect the records and obtain
information.
2.
3.
W. G. PHILPOTTS, petitioner,
vs.
PHILIPPINE MANUFACTURING
respondents.
COMPANY
and
F.
N.
BERRY,
2.
ISSUE: WON the BOD may choose specific performance and particular dates
when the right of inspection may be exercised?
1.
3.
90
HELD: No. The general right given by the statute may not be lawfully
FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute writ
of mandamus to be issued to each and all of the respondents to, among
others, place at his disposal at reasonable hours the minutes, documents and
books of Isabela Sugar Company, Inc. (which he is a director and
stockholder) for his inspection and to issue immediately, upon payment of
the fees, certified copies of any documentation in connection with said
minutes, documents and the books of the aforesaid corporation.
Director Veraguth telegraphed the secretary of the company, asking the latter
to forward in the shortest possible time a certified copy of the resolution of
the board of directors concerning the payment of attorney's fees in the case
against the Isabela Sugar Company and others. To this the secretary made
answer by letter stating that, since the minutes of the meeting in question
had not been signed by the directors present, a certified copy could not be
furnished and that as to other proceedings of the stockholders a request
should be made to the president of the Isabela Sugar Company, Inc. It
further appears that the board of directors adopted a resolution providing for
inspection of the books and the taking of copies "by authority of the
President of the corporation previously obtained in each case."
ISSUE: WON the corporate secretary is justified in refusing to furnish copies
of the minutes of the meeting of the BOD?
HELD: Yes. The Corporation Law, section 51, provides that:
All business corporations shall keep and carefully preserve a record of all
business transactions, and a minute of all meetings of directors, members,
or stockholders, in which shall be set forth in detail the time and place of
holding the meeting was regular or special, if special its object, those
present and absent, and every act done or ordered done at the meeting. .
..
The record of all business transactions of the corporation and the minutes
of any meeting shall be open to the inspection of any director, member, or
stockholder of the corporation at reasonable hours.
The above puts in statutory form the general principles of Corporation Law.
Directors of a corporation have the unqualified right to inspect the books and
records of the corporation at all reasonable times. Pretexts may not be put
forward by officers of corporations to keep a director or shareholder from
inspecting the books and minutes of the corporation, and the right of
inspection is not to be denied on the ground that the director or shareholder
is on unfriendly terms with the officers of the corporation whose records are
sought to be inspected. A director or stockholder cannot of course make
copies, abstracts, and memoranda of documents, books, and papers as an
incident to the right of inspection, but cannot, without an order of a court, be
permitted to take books from the office of the corporation. We do not
conceive, however, that a director or stockholder has any absolute
right to secure certified copies of the minutes of the corporation
until these minutes have been written up and approved by the
directors. (See Fisher's Philippine Law of Stock Corporations, sec. 153, and
Fletcher Cyclopedia Corporations, vol. 4, Chap. 45.)
91
Combining the facts and the law, we do not think that anything improper
occurred when the secretary declined to furnish certified copies of minutes
which had not been approved by the board of directors, and that while so
much of the last resolution of the board of directors as provides for prior
approval of the president of the corporation before the books of the
corporation can be inspected puts an illegal obstacle in the way of a
stockholder or director, that resolution, so far as we are aware, has not been
enforced to the detriment of anyone. In addition, it should be said that this is
a family dispute, the petitioner and the individual respondents belonging to
the same family; that a test case between the petitioner and the respondents
has not been begun in the Court of First Instance of Occidental Negros
involving hundreds of thousands of pesos, and that the appellate court
should not intrude its views to give an advantage to either party. We rule
that the petitioner has not made out a case for relief by mandamus.
GOKONGWEI VS. SEC (supra, CHAPTER 7 and 8) ISSUE: WON
petitioner may be properly denied examination of the books and records of
San Miguel International, Inc., a fully owned subsidiary of SMC?
HELD: No. Pursuant to the second paragraph of section 51 of the
Corporation Law, "(t)he record of all business transactions of the corporation
and minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It
is, therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial
ownership, or a ownership. This right is predicated upon the necessity of selfprotection. It is generally held by majority of the courts that where the right
is granted by statute to the stockholder, it is given to him as such and must
be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. In
of the subsidiary were, to all incontents and purposes, the records of the
parent even though subsidiary was not named as a party. Mandamus was
likewise held proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or dominion by the parent
showing the relation of principal or agent or something similar thereto.
On the other hand, mandamus at the suit of a stockholder was refused where
the subsidiary corporation is a separate and distinct corporation domiciled
and with its books and records in another jurisdiction, and is not legally
subject to the control of the parent company, although it owned a vast
majority of the stock of the subsidiary. Likewise, inspection of the books of
an allied corporation by stockholder of the parent company which owns all
the stock of the subsidiary has been refused on the ground that the
stockholder was not within the class of "persons having an interest."
In the Nash case, The Supreme Court of New York held that the contractual
right of former stockholders to inspect books and records of the corporation
included the right to inspect corporation's subsidiaries' books and records
which were in corporation's possession and control in its office in New York."
In the Bailey case, stockholders of a corporation were held entitled to inspect
the records of a controlled subsidiary corporation which used the same
offices and had identical officers and directors.
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would
be more in accord with equity, good faith and fair dealing to construe the
statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of
such wholly-owned subsidiary which are in respondent
corporation's possession and control.
The Court voted unanimously to grant the petition insofar as it prays that
petitioner be allowed to examine the books and records of San Miguel
International, Inc., as specified by him.
RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
92
nothing improper in his purpose for asking for the examination and inspection
herein involved.
ISSUE: WON Petitioner is correct in saying that he has an unqualified right
to inspect the books as provided under Sec. 51 of the Corporation Law?
HELD: No. Petitioner may no longer insist on his interpretation of Section 51
of Act No. 1459, as amended, regarding the right of a stockholder to inspect
and examine the books and records of a corporation. The former Corporation
Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg.
68, otherwise known as the "Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No.
1459 has been retained, but with some modifications. The second and third
paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:
The records of all business transactions of the corporation and the
minutes of any meeting 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.
Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine and
copy excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee, stockholder
or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if
such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal; and
Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information
secured through any prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting in good faith or
for a legitimate purpose in making his demand.
As may be noted from the above-quoted provisions, among the changes
introduced in the new Code with respect to the right of inspection
granted to a stockholder are the following (1) the records must be
kept at the principal office of the corporation; (2) the inspection
must be made on business days; (3) the stockholder may demand a
copy of the excerpts of the records or minutes; (4) and the refusal
to allow such inspection shall subject the erring officer or agent of
the corporation to civil and criminal liabilities.
However, while seemingly enlarging the right of inspection, the new Code
has prescribed limitations to the same. It is now expressly required as a
condition for such examination that (1) the one requesting it must
not have been guilty of using improperly any information through a
prior examination, and (2) that the person asking for such
examination must be "acting in good faith and for a legitimate
purpose in making his demand."
The unqualified provision on the right of inspection previously contained in
Section 51, Act No. 1459, as amended, no longer holds true under the
provisions of the present law. The argument of the petitioner that the right
granted to him under Section 51 of the former Corporation Law should not be
dependent on the propriety of his motive or purpose in asking for the
inspection of the books of the respondent bank loses whatever validity it
might have had before the amendment of the law. If there is any doubt in
the correctness of the ruling of the trial court that the right of inspection
granted under Section 51 of the old Corporation Law must be dependent on a
showing of proper motive on the part of the stockholder demanding the
same, it is now dissipated by the clear language of the pertinent provision
contained in Section 74 of Batas Pambansa Blg. 68.
ISSUE2: WON petitioner is in good faith in the exercise of his right to
inspect the books of PNB?
HELD: No. Although the petitioner has claimed that he has justifiable
motives in seeking the inspection of the books of the respondent bank, he
has not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the respondent bank and to
inquire into their validity. The circumstances under which he acquired one
may merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which shall be
the consolidated corporation.
ISSUE3: WON the right of a stockholder to inspect the books provided under
Sec. 74 of the Corporation Code is applicable to PNB?
HELD: No. We also find merit in the contention of the respondent bank that
the inspection sought to be exercised by the petitioner would be violative of
the provisions of its charter. (Republic Act No. 1300, as amended.) Sections
15, 16 and 30 of the said charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and Examination of the
Central Bank. The National Bank shall be subject to inspection by
the Department of Supervision and Examination of the Central
Bank'
Sec. 16. Confidential information. The Superintendent of Banks and the
Auditor General, or other officers designated by law to inspect or
investigate the condition of the National Bank, shall not reveal to any
person other than the President of the Philippines, the Secretary
of Finance, and the Board of Directors the details of the
inspection or investigation, nor shall they give any information
relative to the funds in its custody, its current accounts or
deposits belonging to private individuals, corporations, or any
other entity, except by order of a Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act. Any director,
officer, employee, or agent of the Bank, who violates or permits the
violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or by imprisonment
of not more than five years, or both such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter
of its own, it is not governed, as a rule, by the Corporation Code of the
Philippines. Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters. Corporations
created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to them.
supplemented by the provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new
Corporation Code with respect to the right of a stockholder to
demand an inspection or examination of the books of the
corporation may not be reconciled with the abovequoted provisions
of the charter of the respondent bank. It is not correct to claim,
therefore, that the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity to the
charter of the respondent bank.
CHAPTER 12: MERGER AND CONSOLIDATION
Sec. 36, par. 8 of the Corporation Code of the Philippines expressly
empowers a corporation to merge or consolidate with another corporation
subject to the requirements and procedure prescribed in TITLE IX.
Sec. 76. Plan or merger of consolidation. - Two or more corporations
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2. The terms of the merger or consolidation and the mode of carrying the
same into effect;
3. A statement of the changes, if any, in the articles of incorporation of
the surviving corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the statements required
to be set forth in the articles of incorporation for corporations organized
under this Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
Sec. 77. Stockholder's or member's approval. - Upon approval by
majority vote of each of the board of directors or trustees of the constituent
corporations of the plan of merger or consolidation, the same shall be
submitted for approval by the stockholders or members of each of such
corporations at separate corporate meetings duly called for the purpose.
Notice of such meetings shall be given to all stockholders or members of the
respective corporations, at least two (2) weeks prior to the date of the
meeting, either personally or by registered mail. Said notice shall state the
purpose of the meeting and shall include a copy or a summary of the plan of
merger or consolidation. The affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock of each corporation in
the case of stock corporations or at least two-thirds (2/3) of the members in
the case of non-stock corporations shall be necessary for the approval of
such plan. Any dissenting stockholder in stock corporations may exercise his
appraisal right in accordance with the Code: Provided, That if after the
approval by the stockholders of such plan, the board of directors decides to
abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made,
provided such amendment is approved by majority vote of the respective
boards of directors or trustees of all the constituent corporations and ratified
by the affirmative vote of stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such plan, together with any
amendment, shall be considered as the agreement of merger or
consolidation.
Sec. 78. Articles of merger or consolidation. - After the approval by the
stockholders or members as required by the preceding section, articles of
merger or articles of consolidation shall be executed by each of the
constituent corporations, to be signed by the president or vice-president and
certified by the secretary or assistant secretary of each corporation setting
forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case
of non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and
against such plan, respectively.
Sec. 79. Effectivity of merger or consolidation. - The articles of merger
or of consolidation, signed and certified as herein above required, shall be
submitted to the Securities and Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or consolidation of banks or
banking institutions, building and loan associations, trust companies,
insurance companies, public utilities, educational institutions and other
special corporations governed by special laws, the favorable recommendation
3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
2.
1.
3.
4.
5.
6.
are not in every case the same, but for the most part, they are to be found in
the weak financial or insolvent condition of the particular corporations. The
aim of corporate reorganization or combination is generally to put the
company upon a sound financial basis and to enable it to take care of its
obligations thereby avoiding liquidation or bankruptcy. But in some cases, a
reorganization is effected notwithstanding the fact that the corporation is
solvent.
3.
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4.
5.
of the corporation because (1) there are no assets to distribute; (2) no debts
and liabilities to pay since all these are transferred to the surviving or
consolidated corporation.
ASSOCIATED BANK, petitioner,
vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.
95
The records do not show when the SEC approved the merger. Private
respondent's theory is that it took effect on the date of the execution of the
agreement itself, which was September 16, 1975. Private respondent
contends that, since he issued the promissory note to CBTC on September 7,
1977 two years after the merger agreement had been executed CBTC
could not have conveyed or transferred to petitioner its interest in the said
note, which was not yet in existence at the time of the merger. Therefore,
petitioner, the surviving bank, has no right to enforce the promissory note on
private respondent; such right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its
execution, we still cannot agree that petitioner no longer has any interest in
the promissory note. A closer perusal of the merger agreement leads to a
different conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to [CBTC] in any
Thus, the fact that the promissory note was executed after the
effectivity date of the merger does not militate against petitioner.
The agreement itself clearly provides that all contracts
irrespective of the date of execution entered into in the name of
CBTC shall be understood as pertaining to the surviving bank,
herein petitioner. Since, in contrast to the earlier aforequoted provision,
the latter clause no longer specifically refers only to contracts existing at the
time of the merger, no distinction should be made. The clause must have
been deliberately included in the agreement in order to protect the interests
of the combining banks; specifically, to avoid giving the merger agreement a
farcical interpretation aimed at evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the
reference to CBTC in the note shall be construed, under the very provisions
of the merger agreement, as a reference to petitioner bank, "as if such
reference [was a] direct reference to" the latter "for all intents and
purposes."
No other construction can be given to the unequivocal stipulation. Being
clear, plain and free of ambiguity, the provision must be given its literal
meaning and applied without a convoluted interpretation. Verba lelegis non
est recedendum.
In light of the foregoing, the Court holds that petitioner has a valid cause of
action against private respondent. Clearly, the failure of private respondent to
honor his obligation under the promissory note constitutes a violation of
petitioner's right to collect the proceeds of the loan it extended to the former.
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF UNIONS
IN BPI UNIBANK, Respondent
FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the
Articles of Merger executed on January 20, 2000 by and between BPI, herein
petitioner, and FEBTC. This Article and Plan of Merger was approved by the
Securities and Exchange Commission on April 7, 2000.
Pursuant to the Article and Plan of Merger, all the assets and liabilities of
FEBTC were transferred to and absorbed by BPI as the surviving corporation.
FEBTC employees, including those in its different branches across the
country, were hired by petitioner as its own employees, with their status and
tenure recognized and salaries and benefits maintained.
BPI has an existing Union Shop Clause agreement with the BPI Employees
Union-Davao Chapter-Federation of Unions in BPI Unibank (BPI Union)
whereby it is a pre-condition that new employees must join the union before
they can be regularized otherwise they will not have a continued
employment. By reason of the failure of the FEBTC employees to join the
union, BPI Union recommended to BPI their dismissal. BPI refused. The issue
went to voluntary arbitration where BPI won but the Court of Appeals
reversed the Voluntary Arbitrator. Hence, this petition.
ISSUE: WON employees of a dissolved corporation in a merger are
considered absorbed by the surviving corporation?
HELD: No. Absorbed FEBTC Employees are neither assets nor
liabilities. In legal parlance, however, human beings are never embraced in
the term "assets and liabilities." Moreover, BPIs absorption of former FEBTC
employees was neither by operation of law nor by legal consequence of
contract. There was no government regulation or law that compelled
the merger of the two banks or the absorption of the employees of
the dissolved corporation by the surviving corporation. Had there
been such law or regulation, the absorption of employees of the
non-surviving entities of the merger would have been mandatory on
the surviving corporation. In the present case, the merger was voluntarily
entered into by both banks presumably for some mutually acceptable
consideration. In fact, the Corporation Code does not also mandate the
absorption of the employees of the non-surviving corporation by the
surviving corporation in the case of a merger. Section 80 of the
Corporation Code provides.
This Court believes that it is contrary to public policy to declare the former
FEBTC employees as forming part of the assets or liabilities of FEBTC that
were transferred and absorbed by BPI in the Articles of Merger. Assets and
liabilities, in this instance, should be deemed to refer only to property rights
and obligations of FEBTC and do not include the employment contracts of its
personnel. A corporation cannot unilaterally transfer its employees to another
employer like chattel. Certainly, if BPI as an employer had the right to choose
who to retain among FEBTCs employees, FEBTC employees had the
concomitant right to choose not to be absorbed by BPI. Even though FEBTC
employees had no choice or control over the merger of their employer with
BPI, they had a choice whether or not they would allow themselves to be
absorbed by BPI. Certainly nothing prevented the FEBTCs employees from
resigning or retiring and seeking employment elsewhere instead of going
along with the proposed absorption.
Employment is a personal consensual contract and absorption by BPI of a
former FEBTC employee without the consent of the employee is in violation
of an individuals freedom to contract. It would have been a different matter
if there was an express provision in the articles of merger that as a condition
for the merger, BPI was being required to assume all the employment
contracts of all existing FEBTC employees with the conformity of the
employees. In the absence of such a provision in the articles of merger, then
BPI clearly had the business management decision as to whether or not
employ FEBTCs employees. FEBTC employees likewise retained the
prerogative to allow themselves to be absorbed or not; otherwise, that would
be tantamount to involuntary servitude.
There appears to be no dispute that with respect to FEBTC employees that
BPI chose not to employ or FEBTC employees who chose to retire or be
separated from employment instead of "being absorbed," BPIs assumed
liability to these employees pursuant to the merger is FEBTCs liability to
them in terms of separation pay, retirement pay or other benefits that may be
due them depending on the circumstances.
Although not binding on this Court, American jurisprudence on the
consequences of voluntary mergers on the right to employment and seniority
rights is persuasive and illuminating. We quote the following pertinent
discussion from the American Law Reports:
Several cases have involved the situation where as a result of mergers,
consolidations, or shutdowns, one group of employees, who had accumulated
seniority at one plant or for one employer, finds that their jobs have been
discontinued except to the extent that they are offered employment at the
place or by the employer where the work is to be carried on in the future.
Such cases have involved the question whether such transferring employees
should be entitled to carry with them their accumulated seniority or whether
they are to be compelled to start over at the bottom of the seniority list in the
"new" job. It has been recognized in some cases that the accumulated
seniority does not survive and cannot be transferred to the "new" job.
96
In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the court saying that,
absent some specific contract provision otherwise, seniority rights were
ordinarily limited to the employment in which they were earned, and
concluding that the contract for which specific performance was sought was
not such a completed and binding agreement as would support such
equitable relief, since the railroad, whose concurrence in the arrangements
made was essential to their effectuation, was not a party to the agreement.
Indeed, from the tenor of local and foreign authorities, in voluntary mergers,
absorption of the dissolved corporations employees or the
recognition of the absorbed employees service with their previous
employer may be demanded from the surviving corporation if
required by provision of law or contract. The dissent of Justice Arturo D.
Brion tries to make a distinction as to the terms and conditions of
employment of the absorbed employees in the case of a corporate merger or
consolidation which will, in effect, take away from corporate management the
prerogative to make purely business decisions on the hiring of employees or
will give it an excuse not to apply the CBA in force to the prejudice of its own
employees and their recognized collective bargaining agent. In this regard,
we disagree with Justice Brion.
Justice Brion takes the position that because the surviving corporation
continues the personality of the dissolved corporation and acquires all the
latters rights and obligations, it is duty-bound to absorb the dissolved
corporations employees, even in the absence of a stipulation in the plan of
merger. He proposes that this interpretation would provide the necessary
protection to labor as it spares workers from being "left in legal limbo."
However, there are instances where an employer can validly discontinue or
terminate the employment of an employee without violating his right to
security of tenure. Among others, in case of redundancy, for example,
superfluous employees may be terminated and such termination would be
authorized under Article 283 of the Labor Code.
The lack of a provision in the plan of merger regarding the transfer of
employment contracts to the surviving corporation could have very well been
deliberated on the part of the parties to the merger, in order to grant the
surviving corporation the freedom to choose who among the dissolved
corporations employees to retain, in accordance with the surviving
corporations business needs. If terminations, for instance due to redundancy
or labor-saving devices or to prevent losses, are done in good faith, they
would be valid. The surviving corporation too is duty-bound to protect the
rights of its own employees who may be affected by the merger in terms of
seniority and other conditions of their employment due to the merger. Thus,
we are not convinced that in the absence of a stipulation in the merger plan
the surviving corporation was compelled, or may be judicially compelled, to
absorb all employees under the same terms and conditions obtaining in the
dissolved corporation as the surviving corporation should also take into
consideration the state of its business and its obligations to its own
employees, and to their certified collective bargaining agent or labor union.
Even assuming we accept Justice Brions theory that in a merger situation the
surviving corporation should be compelled to absorb the dissolved
corporations employees as a legal consequence of the merger and as a social
justice consideration, it bears to emphasize his dissent also recognizes that
the employee may choose to end his employment at any time by voluntarily
resigning. For the employee to be "absorbed" by BPI, it requires the
employees implied or express consent. It is because of this human element
in employment contracts and the personal, consensual nature thereof that we
cannot agree that, in a merger situation, employment contracts are
automatically transferable from one entity to another in the same manner
that a contract pertaining to purely proprietary rights such as a promissory
note or a deed of sale of property is perfectly and automatically
transferable to the surviving corporation.
That BPI is the same entity as FEBTC after the merger is but a legal fiction
intended as a tool to adjudicate rights and obligations between and among
the merged corporations and the persons that deal with them. Although in a
merger it is as if there is no change in the personality of the employer, there
is in reality a change in the situation of the employee. Once an FEBTC
employee is absorbed, there are presumably changes in his condition of
employment even if his previous tenure and salary rate is recognized by BPI.
DEFINITION
Appraisal Right is the method of paying a shareholder for the taking of his
property. It is a statutory means whereby a stockholder can avoid the
conversion of this property into another property not of his own choosing and
is given to a shareholder as compensation for the abrogation of the commonlaw rule that a single stockholder could block a certain corporate act such as
merger.
actions by the majority shareholders which alters the nature and character of
their investment. In effect, it is a right granted to dissenting stockholders on
certain corporate or business decisions to demand payment of the fair market
value of their shares.
B.
WHEN EXERCISED
4.
amendment which has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence.
Accordingly, if the amendment is to increase or decrease the number of
directors, or change the corporate name, or change of principal office, the
appraisal right is not available.
Sec. 82. How right is exercised. The appraisal right may be exercised
by any stockholder who shall have voted against the proposed corporate
action, by making a written demand on the corporation within thirty (30)
days after the date on which the vote was taken for payment of the fair value
of his shares: Provided, That failure to make the demand within such period
shall be deemed a waiver of the appraisal right. If the proposed corporate
action is implemented or affected, the corporation shall pay to such
stockholder, upon surrender of the certificate or certificates of stock
representing his shares, the fair value thereof as of the day prior to the date
on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the shares, it shall be
determined and appraised by three (3) disinterested persons, one of whom
shall be named by the stockholder, another by the corporation, and the third
by the two thus chosen. The findings of the majority of the appraisers shall
be final, and their award shall be paid by the corporation within thirty (30)
days after such award is made: Provided, That no payment shall be made to
any dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment: and Provided, further, That
upon payment by the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the corporation.
3.
4.
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5.
D.
The stockholder must have voted against the proposed corporate action
in any of the instances allowed by law for the exercise of the right of
appraisal;
The written demand for payment must be made by the dissenting
stockholder within 30 days after the date on which the vote was taken.
Failure to make the demand within the said period shall be deemed a
waiver on the part of the stockholder concerned to exercise his appraisal
right;
Surrender of the certificate of stock by the dissenting stockholder for
notation in the corporate books and the payment of the corporation of
the fair market value of the said shares as of the day prior to the date
on which the vote was taken. If the stockholder and the corporation
cannot agree on the fair market value thereof, the same shall be
determined in accordance with the provisions of par.2 of Sec. 82;
The fair value of the shares of the dissenting stockholder must be paid
by the corporation only if it has unrestricted retained earnings in its
books to cover such payment. If the corporation has no unrestricted
retained earnings, the dissenting stockholder may not, therefore, be
able to effectively exercise his appraisal right, EXCEPT in the case of a
close corporation under Sec. 105;
Upon payment of the shares by the corporation, the dissenting
stockholder shall transfer his shares to the corporation.
EFFECT OF EXERCISE OF APPRAISAL RIGHT
Sec. 83. Effect of demand and termination of right. - From the time of
demand for payment of the fair value of a stockholder's shares until either
the abandonment of the corporate action involved or the purchase of the said
shares by the corporation, all rights accruing to such shares, including voting
and dividend rights, shall be suspended in accordance with the provisions of
this Code, except the right of such stockholder to receive payment of the fair
value thereof: Provided, 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.
6.
F.
COST OF APPRAISAL
2.
3.
4.
5.
b.
The price offered by the corporation is lower than the fair value of the
shares of the dissenting stockholder as determined by the appraisers;
Where an action is filed by the dissenting stockholder to recover such
fair value and the refusal of the stockholder to receive payment is found
by the court to be justified.
98
b.
G.
SALE: The law does not prohibit the dissenting stockholder to sell, transfer
or assign his shares. If such be the case, the right of the dissenting
stockholder to be paid the fair value of his shares shall cease and the
transferee will acquire all the rights of a regular stockholder inclusive of all
dividends which would have accrued on such shares.
CHAPTER 14: NON-STOCK CORPORATIONS (TITLE XI)
A.
DEFINITION
PURPOSE
Sec. 89. Right to vote. - The right of the members of any class or classes
to vote may be limited, broadened or denied to the extent specified in the
articles of incorporation or the by-laws. Unless so limited, broadened or
denied, each member, regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a
member may vote by proxy in accordance with the provisions of this Code.
Voting by mail or other similar means by members of non-stock corporations
may be authorized by the by-laws of non-stock corporations with the
approval of, and under such conditions which may be prescribed by, the
Securities and Exchange Commission.
allowed, accordingly, even if the members may cast as many votes are there
are trustees to be elected, he may not cast more than one vote for one
candidate, UNLESS: allowed in the AOI or the by-laws.
PROXY VOTING: Generally, allowed unless disallowed by the AOI or the bylaws.
99
consonance with the express power granted by law under Sec. 36, par. 6 of
the Code, authorizing them to admit members thereof and that authority
carries with it the power to prescribe rules on membership.
It has thus been stated that in the absence of charter or statutory
restrictions, non-stock corporations may determine who shall be admitted to
membership and how they shall be admitted. It may exclude any person
whom it deems unfit for membership. Indeed, in the absence of restrictions,
it may act arbitrarily and exclude any persons it may see fit, and the courts
have no power to interfere. In other words, it is free to fix qualifications for
membership and to provide for termination of membership.
SPECIAL CASES: the law itself may provide certain limitations or even
perhaps proscription on transfer of membership. Thus, RA 4726, otherwise
known as the Condominium Act requires that membership therein shall not
be transferred separately from the condominium unit of which it is
appurtenant and that when a member ceases to own a unit, he shall
automatically cease to be a member.
manner and for causes provided in the AOI or by-laws and when a member is
so terminated it shall extinguish all his rights in the corporation or in its
property unless otherwise provided in the said articles or by-laws.
The power or authority to terminate members in non-stock corporations is
said to be inherent but strict compliance with the manner and procedure laid
down in the by-laws must be observed, otherwise it may render the expulsion
ineffective and invalid.
In the absence of any provision in the AOI or by-laws relative to the manner
and causes of termination or expulsion of member, the decided weight of
authority is to the effect that the power is inherent and may be exercised in
certain situations, namely:
1. When an offense is committed which, although it has no immediate
relation to a members duty as such, it is so infamous as to render him
unfit for society of honest men, and which is indictable at common law;
2. When the offense is a violation of his duty as member of the
corporation; and
3. When the offense is of a mixed nature, being both against his duty as a
member of the corporation, and also indictable at common law.
As to whether or not a member should be expelled or maintained is the
established right of the corporation to determine and the courts are without
authority to strip a member of his membership without cause.
CHINESE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINE ISLANDS, WILLIAM GOLANGCO, in his capacity as Director
and President of the said Association, and JUANITO K. TAN, in his capacity as
Recording Secretary of the said Association, petitioners,
vs.
VICTOR CHING and THE COURT OF APPEALS, respondents
HELD: No. The documentary evidence itself as cited by the trial court,
consisting of the applications and the receipts for payment of the
membership fees show that they were filed and paid not later than the
November 26, 1965 deadline, and this was further supported by the bank
statement of the petitioner YMCA deposit account with the China Banking
Corporation and the checks paid by certain members to the YMCA which
show that the application fees corresponding to the questioned 74
applications (that raised the total to 249 from 175) were already paid to
petitioner YMCA as the time of the said deadline. (Exhibits 4, 6, 6-A, 6-B and
6-C). No evidence could be cited by the trial court to rebut this well nigh
conclusive documentary evidence other than respondent's unsupported
suspicion which the trial court adopted in a negative manner with its
statement that it is "not improbable" that "some of those applications filed
after said deadline". If there were indeed any applications filed after the
deadline, they certainly should have been positively pin-pointed and
specifically annulled.
What is worse, 175 membership applications were undisputedly filed within
the deadline (including the 75 withdrawn by respondent) and yet the 100
remaining unquestioned memberships were nullified by the questioned
decision without the individuals concerned ever having been impleaded or
heard (except the individual petitioners president and secretary).
The appealed decision thus contravened the established principle that the
courts cannot strip a member of a non-stock non-profit corporation
of his membership therein without cause. Otherwise, that would be
an unwarranted and undue interference with the well-established
right of a corporation to determine its membership, as announced by
Fletcher, as follows:
Compliance with provisions of charter, constitution or by-laws. In order
that membership may be acquired in a non-stock corporation and valid bylaws must be complied with, except in so far as they may be and are
waived. *** But provisions in the by-laws as to formal steps to be taken to
acquire membership may be waived by the corporation, or it may be
estopped to assert that they have not been taken. [12A Fletcher
Cyclopedia Corporations, Perm. ed., pp. 583-585; emphasis supplied.]
Finally, the appealed decision did not give due importance to the undisputed
fact therein stated that "at the board meeting of the association held on
December 7, 1965, a list of 174 applications for membership, old and new,
was submitted to the board and approved by the latter, over the objection of
the petitioner [therein private respondent] who was present at said meeting."
Such action of the petitioner association's board of directors approving the
174 membership applications of old and new members constituting its active
membership as duly processed and screened by the authorized committee
just be deemed a waiver on its part of any technicality or requirement of
form, since otherwise the association would be practically paralyzed and
deprived of the substantial revenues from the membership dues of
P17,400.00 (at P100.00 per application).
WHEREFORE the respondent court's decision is hereby set aside and in lieu
thereof judgment is rendered dismissing private respondent's petition in the
Court of First Instance of Manila and dissolving the preliminary injunction,
with costs against private respondent.
100
unmeritorious, the candidate shall be qualified for inclusion in the "Eligiblefor-Membership List";
(d) Once included in the "Eligible-for-Membership List" and after the
candidate shall have acquired in his name a valid POC duly recorded in the
books of the corporation as his own, he shall become a Proprietary
Member, upon a non-refundable admission fee of P1,000.00, provided that
admission fees will only be collected once from any person.
On March 1, 1978, Section 3(c) was amended to read as follows:
(c) After the expiration of the aforesaid thirty (30) days, the Board may, by
unanimous vote of all directors present at a regular or special
meeting, approve the inclusion of the candidate in the "Eligible-forMembership List".
As shown by the records, the Board adopted a secret balloting known as the
"black ball system" of voting wherein each member will drop a ball in the
ballot box. A white ball represents conformity to the admission of an
applicant, while a black ball means disapproval. Pursuant to Section 3(c), as
amended, cited above, a unanimous vote of the directors is required. When
respondents application for proprietary membership was voted upon during
the Board meeting on July 30, 1997, the ballot box contained one (1) black
ball. Thus, for lack of unanimity, his application was disapproved.
Obviously, the CCCI Board of Directors, under its Articles of Incorporation,
has the right to approve or disapprove an application for proprietary
membership. But such right should not be exercised arbitrarily. Articles 19
and 21 of the Civil Code on the Chapter on Human Relations provide
restrictions.
In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated it
with Article 21, thus:
This article, known to contain what is commonly referred to as the
principle of abuse of rights, sets certain standards which must be observed
not only in the exercise of one's rights but also in the performance of one's
duties. These standards are the following: to act with justice; to give
everyone his due; and to observe honesty and good faith. The law,
therefore, recognizes a primordial limitation on all rights; that in their
exercise, the norms of human conduct set forth in Article 19 must be
observed. A right, though by itself legal because recognized or
granted by law as such, may nevertheless become the source of
some illegality. When a right is exercised in a manner which does
not conform with the norms enshrined in Article 19 and results in
damage to another, a legal wrong is thereby committed for which
the wrongdoer must be held responsible. But while Article 19 lays
down a rule of conduct for the government of human relations and for the
maintenance of social order, it does not provide a remedy for its violation.
Generally, an action for damages under either Article 20 or Article 21
would be proper. (Emphasis in the original)
In rejecting respondents application for proprietary membership, we find that
petitioners violated the rules governing human relations, the basic principles
to be observed for the rightful relationship between human beings and for
the stability of social order. The trial court and the Court of Appeals aptly
held that petitioners committed fraud and evident bad faith in disapproving
respondents applications. This is contrary to morals, good custom or public
policy. Hence, petitioners are liable for damages pursuant to Article 19 in
relation to Article 21 of the same Code.
It bears stressing that the amendment to Section 3(c) of CCCIs Amended ByLaws requiring the unanimous vote of the directors present at a special or
regular meeting was not printed on the application form respondent filled and
submitted to CCCI. What was printed thereon was the original provision of
Section 3(c) which was silent on the required number of votes needed for
admission of an applicant as a proprietary member.
Petitioners explained that the amendment was not printed on the application
form due to economic reasons. We find this excuse flimsy and unconvincing.
Such amendment, aside from being extremely significant, was introduced
way back in 1978 or almost twenty (20) years before respondent filed his
application. We cannot fathom why such a prestigious and exclusive golf
country club, like the CCCI, whose members are all affluent, did not have
enough money to cause the printing of an updated application form.
It is thus clear that respondent was left groping in the dark
wondering why his application was disapproved. He was not even
informed that a unanimous vote of the Board members was
required. When he sent a letter for reconsideration and an inquiry
whether there was an objection to his application, petitioners
apparently ignored him. Certainly, respondent did not deserve this
kind of treatment. Having been designated by San Miguel Corporation as a
special non-proprietary member of CCCI, he should have been treated by
petitioners with courtesy and civility. At the very least, they should have
informed him why his application was disapproved.
The exercise of a right, though legal by itself, must nonetheless be in
accordance with the proper norm. When the right is exercised arbitrarily,
unjustly or excessively and results in damage to another, a legal wrong is
committed for which the wrongdoer must be held responsible. It bears
reiterating that the trial court and the Court of Appeals held that petitioners
disapproval of respondents application is characterized by bad faith.
As to petitioners reliance on the principle of damnum absque injuria or
damage without injury, suffice it to state that the same is misplaced. In
Amonoy v. Gutierrez, we held that this principle does not apply when there
is an abuse of a persons right, as in this case.
As to the appellate courts award to respondent of moral damages, we find
the same in order. Under Article 2219 of the New Civil Code, moral damages
may be recovered, among others, in acts and actions referred to in Article 21.
We believe respondents testimony that he suffered mental anguish, social
humiliation and wounded feelings as a result of the arbitrary denial of his
application.
ISSUE2: WON the liability is solidary considering that only one voted for
disapproval?
HELD: Yes. Section 31 of the Corporation Code provides:
SEC. 31. Liability of directors, trustees or officers. Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors, or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.
(Emphasis ours)
WHEREFORE, we DENY the petition. The challenged Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are AFFIRMED
with modification in the sense that (a) the award of moral damages is
reduced from P2,000,000.00 to P50,000.00; (b) the award of exemplary
damages is reduced from P1,000,000.00 to P25,000.00; and (c) the award of
attorneys fees and litigation expenses is reduced from P500,000.00 and
P50,000.00 to P50,000.00 and P25,000.00, respectively.
D.
101
HELD: No. We adopt the general rule that "... the courts will not
interfere with the internal affairs of an unincorporated association
so as to settle disputes between the members, or questions of
policy, discipline, or internal government, so long as the
government of the society is fairly and honestly administered in
conformity with its laws and the law of the land, and no property or
civil rights are invaded. Under such circumstances, the decision of the
governing body or established private tribunal of the association is binding
and conclusive and not subject to review or collateral attack in the courts. "
(7 C.J.S. pp. 38- 39).
corporation.
Unless otherwise provided in the articles of incorporation or the by-laws,
officers of a non-stock corporation may be directly elected by the members.
QUALIFICATIONS OF TRUSTEES:
1.
2.
3.
TERM: Sec. 92 allows the AOI or by-laws to provide a desired term of office
STAGGERED TERM: The term of office may also be staggered unless the
AOI or by-laws otherwise provide. If such be the case, the board shall classify
themselves in order that 1/3 of their number shall expire every year and
subsequent elections of trustees comprising 1/3 shall be held annually. The
trustees so elected to fill up any vacancy occurring before the expiration of a
particular term shall hold office only for the unexpired portion of his
predecessor.
GOVERNING BOARDS: While the Code speaks of the BOT as the governing
The trial court issued the TRO which was later on lifted and on appeal, the
CA issued a new TRO.
E.
ISSUE: WON the dispute between petitioners and Josefa is a justiciable issue
cognizable by the courts?
Sec. 93. Place of meetings. - The by-laws may provide that the members
of a non-stock corporation may hold their regular or special meetings at any
place even outside the place where the principal office of the corporation is
102
PLACE OF MEETINGS
located: Provided, That proper notice is sent to all members indicating the
date, time and place of the meeting: and Provided, further, That the place of
meeting shall be within the Philippines.
PLACE OF MEETING: another distinctive feature of a non-stock corporation
is that membership meeting may be held anywhere in the Philippines
whereas in a stock corporation, the stockholders meeting is mandated to be
held or conducted within the city or municipality where the principal office is
located, and as far as practicable, within the principal office of the
corporation.
F.
103
DEFINITION
indicated in the AOI as provided by Sec. 96. Absent any of the provisions
required by the said section, the corporation, will not, for all legal intents and
purposes, be considered as a close corporation and would thus not be
governed by TITLE XII of the Code, but by the general provisions governing
ordinary corporation. A corporation does not become a close corporation just
because man and his wife owns 99.86% if the capital stock (San Juan
Structural Steel vs. CA). The qualifying conditions requreid by law must be
complied with.
owns or controls 2/3 of the voting stocks of a close corporation, the latter
may still be considered as such close corporation if the corporation owning or
controlling the shares is also a close corporation.
PERMISSIVE PROVISIONS
may classify its shares into different classes to be held of record only by
specified persons. Example: Classes A, B and C. Class A is to be held only by
the incorporators; Class B by their relatives within the third civil degree of
consanguinity or affinity; Class C by their close business associates.
for a greater quorum or voting requirement under no. 3 above. Although the
AOI or by-laws of other stock corporations may provide for greater quorum
and voting requirements in directors meeting as provided in Sec. 25 of the
Code, those for stockholder meeting, unlike in a close corporation, may not
be altered or increased. This provisions in effect, increases the veto power of
the minority stockholders.
104
qualifying conditions.
persons, not exceeding twenty (20), who are entitled to be holders of record
of its stock, and if the certificate for such stock conspicuously states such
number, and if the issuance or transfer of stock to any person would cause
the stock to be held by more than such number of persons, the person to
whom such stock is issued or transferred is conclusively presumed to
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the stock
is conclusively presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such acquisition
violates the restriction.
4. Whenever any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed under this section to
have, notice either (a) that he is a person not eligible to be a holder of stock
of the corporation, or (b) that transfer of stock to him would cause the stock
of the corporation to be held by more than the number of persons permitted
by its articles of incorporation to hold stock of the corporation, or (c) that the
transfer of stock is in violation of a restriction on transfer of stock, the
corporation may, at its option, refuse to register the transfer of
stock in the name of the transferee.
5. The provisions of subsection (4) shall not applicable if the transfer of
stock, though contrary to subsections (1), (2) of (3), has been consented
to by all the stockholders of the close corporation, or if the close
corporation has amended its articles of incorporation in accordance
with this Title.
6. The term "transfer", as used in this section, is not limited to a transfer for
value.
7. The provisions of this section shall not impair any right which the
transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.
STOCKHOLDERS AGREEMENT
2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in
question and none of them makes prompt objection thereto in writing.
F.
PRE-EMPTIVE RIGHTS
H.
105
DEADLOCKS
WITHDRAWAL OF STOCKHOLDERS/DISSOLUTION
106
No
ORDINARY STOCK
CORPORATION
limitation as to number
exceed 20
To the extent that all stockholders
can be deemed directors, the
number of directors can effectively
be more than 15
Shares of stock are subject to
specified restrictions
Shares of stock are prohibited from
being listed in the stock exchange or
offered for sale to the public
Stockholders may take an active part
in corporate management by vesting
management to them rather than a
Board of Director
Those active in management are
personally liable for corporate torts
unless the corporation has obtained
an adequate liability insurance
Directors can validly act even without
a meeting
Agreements between stockholders
regarding the operations of the
business can validly be made
To the extent that directors may be
classified into one or more classes
and to be voted solely by a particular
class of stock, cumulative voting
may, in effect, be restricted
The articles of incorporation may
provide that all officers shall be
elected or appointed by the
stockholders
It may provide for greater quorum
and voting requirements in meetings
of stockholders and directors
shareholder
Maximum number of directors is 15
107
duty imposed by law. Simply stated, tort is a breach of a legal duty. Article
283 of the Labor Code mandates the employer to grant separation pay to
employees in case of closure or cessation of operations of establishment or
undertaking not due to serious business losses or financial reverses, which is
the condition obtaining at bar. CFTI failed to comply with this law-imposed
duty or obligation. Consequently, its stockholder who was actively engaged in
the management or operation of the business should be held personally
liable.
The Court here finds no application to the rule that a corporate officer cannot
be held solidarily liable with a corporation in the absence of evidence that he
had acted in bad faith or with malice. In the present case, Sergio Naguiat is
held solidarily liable for corporate tort because he had actively engaged in the
management and operation of CFTI, a close corporation.
And, although the witness insisted that Naguiat Enterprises was his employer,
he could not deny that he received his salary from the office of CFTI inside
the base.
Another driver-claimant admitted, upon the prodding of counsel for the
corporations, that Naguiat Enterprises was in the trading business while CFTI
was in taxi services.
In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which,
admittedly, was the union of individual respondents while still working at
Clark Air Base, states that members thereof are the employees of CFTI and
"(f)or collective bargaining purposes, the definite employer is the Clark Field
Taxi Inc."
ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of CFTI
may be solidarily liable with CFTI?
HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as president
of CFTI, cannot be exonerated from joint and several liability in the payment
of separation pay to individual respondents.
Sergio F. Naguiat, admittedly, was the president of CFTI who actively
managed the business. Thus, applying the ruling in A.C. Ransom, he falls
within the meaning of an "employer" as contemplated by the Labor Code,
who may be held jointly and severally liable for the obligations of the
corporation to its dismissed employees.
Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises
were "close family corporations" owned by the Naguiat family. Section 100,
paragraph 5, (under Title XII on Close Corporations) of the Corporation Code,
states:
(5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally
liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance. (emphasis supplied)
Nothing in the records show whether CFTI obtained "reasonably adequate
liability insurance;" thus, what remains is to determine whether there was
corporate tort.
Our jurisprudence is wanting as to the definite scope of "corporate tort."
Essentially, "tort" consists in the violation of a right given or the omission of a
108
As pointed out earlier, the fifth paragraph of Section 100 of the Corporation
Code specifically imposes personal liability upon the stockholder actively
managing or operating the business and affairs of the close corporation.
Antolin T. Naguiat was the vice president of the CFTI. Although he carried
the title of "general manager" as well, it had not been shown that he had
acted in such capacity. Furthermore, no evidence on the extent of his
participation in the management or operation of the business was proferred.
In this light, he cannot be held solidarily liable for the obligations of CFTI and
Sergio Naguiat to the private respondents.
CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII)
A.
subject to the law of their creation. UP for instance has its own special
charter and would thus be governed by the special law creating it. Insofar as
they may be applicable however, the provisions of any special law or the
Corporation Code supplement the law of their creation.
TERM OF OFFICE: Members of the Board may hold office for five years but
they shall be staggered so that 1/5 of their number shall expire every year.
Sec. 108 provides:
Sec. 4 of Article XIV (Education, Science and Technology, Arts, Culture and
Sports)
Educational institutions, other than those established by religious groups and
mission boards, shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of the capital of which
is owned by such citizens. The Congress may, however, require increased
Filipino equity participation in all educational institutions. The control and
administration of educational institutions shall be vested in citizens of the
Philippines.
No educational institution shall be established exclusively for aliens and no
group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this sub section shall not apply to schools
established for foreign diplomatic personnel and their dependents and, unless
otherwise provided by law, for other foreign temporary residents.
Culled from this is that while foreigners may own a maximum of 40% of the
capital stock of an educational corporation, not one of them may sit as a
member of the governing board thereof. Neither may they act as an officer
with the power of control and administration of the institution. In effect their
ownership of any capital would be limited to non-controlling interest.
B.
CORPORATION SOLE
PURPOSE
109
OF
INCORPORATION
AND
PERSONS
WHO
MAY
INCORPORATE:
Sec. 110. Corporation sole. - For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church.
corporation sole does not require a provision for its term of existence. For
obvious reasons, since a corporation sole is supposed to exist in perpetuity. It
may, however, be dissolved in accordance with Sec. 115 of the Code.
Intervention of the court may dispensed with only if the rules, regulations
and discipline of the religious denomination, sect or church concerned
provide or regulate the manner or method of holding or alienating properties.
Sec. 113 provides:
Sec. 113. Acquisition and alienation of property. - Any corporation sole
may purchase and hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and may receive bequests or
gifts for such purposes. Such corporation may sell or mortgage real property
held by it by obtaining an order for that purpose from the Court of First
Instance of the province where the property is situated upon proof made to
the satisfaction of the court that notice of the application for leave to sell or
mortgage has been given by publication or otherwise in such manner and for
such time as said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The application
for leave to sell or mortgage must be made by petition, duly verified, by the
chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole: Provided,
That in cases where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order concerned
represented by such corporation sole regulate the method of acquiring,
holding, selling and mortgaging real estate and personal property, such rules,
regulations and discipline shall control, and the intervention of the courts
shall not be necessary.
FACTS: Mateo Rodis executed a Deed of Sale in favor of the Roman Catholic
Apostolic Administrator of Davao, Inc., with Mgr. Clovit Thibault, a Canadian
citizen, as actual incumbent. When the deed of sale was presented to the
Register of Deeds of Davao for registration, the latter required the
corporation to submit an affidavit declaring that 60% of the members thereof
were Filipino citizens.
Entertaining some doubts as to the registrability of the deed of sale, the
Register of Deeds referred the matter to the Land Registration Commission
which held that by virtue of the provisions of Sec. 1 and 5 of Art. XIII of the
Philippine Constitution, the vendee was not qualified to acquire private lands
in the Philippines in the absence of proof that at least 60% of the capital,
property, or assets of the Roman Catholic Apostolic Administrator of Davao,
Inc. was actually owned or controlled by Filipino citizens.
ISSUE: WON the corporation sole may register the property transferred?
110
This does not mean, however, that the Roman Pontiff is the owner of all
the church property; but merely that he is the supreme guardian
(Bouscaren and Ellis, Cannon Law, A Text and Commentary, p. 764).
PROPERTY)
FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
registration of a parcel of land which it claimed to have acquired by virtue of
a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant
and its predecessors-in-interest have been in actual, continuous, public,
peaceful and adverse possession and occupation of the said land for more
than 30 years, which was opposed by the Government as represented by the
Director of Lands. The CFI and the CA ruled in favor of INC.
ISSUE: WON the registration of the land should be upheld?
HELD: As observed at the outset, had this case been resolved immediately
after it was submitted for decision, the result may have been quite adverse to
private respondent. For the rule then prevailing under the case of Manila
Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in
Republic v. Villanueva, 114 SCRA 875 as well as the other subsequent cases
involving private respondent adverted to above', is that a juridical person,
private respondent in particular, is disqualified under the 1973 Constitution
from applying for registration in its name alienable public land, as such land
ceases to be public land "only upon the issuance of title to any Filipino citizen
claiming it under section 48[b]" of Commonwealth Act No. 141, as amended.
These are precisely the cases cited by petitioner in support of its theory of
disqualification.
Since then, however, this Court had occasion to re-examine the rulings in
these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
others. Thus, in the recent case of Director of Lands v. Intermediate
Appellate Court, 146 SCRA 509, We categorically stated that the majority
111
112
DISSOLUTION:
Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs
settled voluntarily by submitting to the Securities and Exchange Commission
a verified declaration of dissolution.
The declaration of dissolution shall set forth: (NRAN)
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its operations
except for the purpose of winding up its affairs.
RELIGIOUS SOCIETIES
113
B.
METHODS OF DISSOLUTION
option of the lessee to extend the lease for another period of twenty years
can be exercised only if the lessee as corporation renews or extends its
corporate term of existence in accordance with the Corporation Code which is
the applicable law. Contracts are to be interpreted according to their literal
meaning and should not be interpreted beyond their obvious intendment.
Thus, in the instant case, the initial term of the contract of lease which
commenced on March 1, 1954 ended on March 1, 1974. PBM as lessee
continued to occupy the leased premises beyond that date with the
acquiescence and consent of the respondents as lessor. Records show
however, that PBM as a corporation had a corporate life of only twenty-five
(25) years which ended an January 19, 1977. It should be noted however
that PBM allowed its corporate term to expire without complying with the
requirements provided by law for the extension of its corporate term of
existence.
Section 11 of Corporation Code provides that a corporation shall exist for a
period not exceeding fifty (50) years from the date of incorporation unless
sooner dissolved or unless said period is extended. Upon the expiration of the
period fixed in the articles of incorporation in the absence of compliance with
the legal requisites for the extension of the period, the corporation ceases to
exist and is dissolved ipso facto (16 Fletcher 671 cited by Aguedo F.
Agbayani, Commercial Laws of the Philippines, Vol. 3, 1988 Edition p. 617).
When the period of corporate life expires, the corporation ceases to be a
body corporate for the purpose of continuing the business for which it was
organized. But it shall nevertheless be continued as a body corporate for
three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it
gradually to settle and close its affairs, to dispose of and convey its property
and to divide its assets (Sec. 122, Corporation Code). There is no need for
the institution of a proceeding for quo warranto to determine the
time or date of the dissolution of a corporation because the period
of corporate existence is provided in the articles of incorporation.
When such period expires and without any extension having been
made pursuant to law, the corporation is dissolved automatically
insofar as the continuation of its business is concerned. The quo
warranto proceeding under Rule 66 of the Rules of Court, as amended, may
be instituted by the Solicitor General only for the involuntary dissolution of a
corporation on the following grounds: a) when the corporation has offended
against a provision of an Act for its creation or renewal; b) when it has
forfeited its privileges and franchises by non-user; c) when it has committed
or omitted an act which amounts to a surrender of its corporate rights,
privileges or franchises; d) when it has mis-used a right, privilege or franchise
conferred upon it by law, or when it has exercised a right, privilege or
franchise in contravention of law. Hence, there is no need for the SEC to
make an involuntary dissolution of a corporation whose corporate term had
ended because its articles of incorporation had in effect expired by its own
limitation.
Considering the foregoing in relation to the contract of lease between the
parties herein, when PBM's corporate life ended on January 19, 1977 and its
3-year period for winding up and liquidation expired on January 19, 1980, the
option of extending the lease was likewise terminated on January 19, 1977
because PBM failed to renew or extend its corporate life in accordance with
law. From then on, the respondents can exercise their right to terminate the
lease pursuant to the stipulations in the contract.
The rights of the lessor and the lessee over the improvements which the
latter constructed on the leased premises is governed by Article 1678 of the
Civil Code.
The provision gives the lessee the right to remove the improvements if the
lessor chooses not to pay one-half of the value thereof. However, in the case
at bar, the law will not apply because the parties herein have stipulated in
the contract their own terms and conditions concerning the improvements, to
wit, that the lessee, namely PBM, bound itself to remove the improvements
before the termination of the lease. Petitioner PNB, as assignee of PBM
succeeded to the obligation of the latter under the contract of lease. It could
not possess rights more than what PBM had as lessee under the contract.
Hence, petitioner was duty bound to remove the improvements before the
expiration of the period of lease as what we have already discussed in the
preceding paragraphs. Its failure to do so when the lease was terminated
114
was tantamount to a waiver of its rights and interests over the improvements
on the leased premises.
D.
VOLLUNTARY
AFFECTED:
DISSOUTION
WHERE
NO
CREDITORS
ARE
3.
4.
5.
6.
least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members at a meeting of its stockholders or members
called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by
an order reciting the purpose of the petition, fix a date on or before which
objections thereto may be filed by any person, which date shall not be less
than thirty (30) days nor more than sixty (60) days after the entry of the
order. Before such date, a copy of the order shall be published at least once
a week for three (3) consecutive weeks in a newspaper of general circulation
published in the municipality or city where the principal office of the
corporation is situated, or if there be no such newspaper, then in a
newspaper of general circulation in the Philippines, and a similar copy shall
be posted for three (3) consecutive weeks in three (3) public places in such
municipality or city.
Upon five (5) day's notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed to
hear the petition and try any issue made by the objections filed; and if no
such objection is sufficient, and the material allegations of the petition are
true, it shall render judgment dissolving the corporation and directing such
disposition of its assets as justice requires, and may appoint a receiver to
collect such assets and pay the debts of the corporation.
3.
4.
5.
6.
7.
Sec. 120 was inserted to incorporate the long standing practice of dissolving
a corporation by amendment of the AOI by shortening the corporate
existence.
A corporation may exist for 50 years, but there is no law which prevents the
shareholders thereof to shorten that period and effect a dissolution of the
corporation.
115
INVOLUNTARY DISSOLUTION
4.
5.
6.
for their object the forfeiture of corporate franchise, and forfeiture will not be
allowed, except under express limitation, or for plain abuse of power by
which the corporation fails to fulfil the design and purpose of its organization.
But when the abuse or violation constitutes or threatens a substantial injury
to the public or such as to amount to a violation of the fundamental
conditions of its charter, or its conduct is characterized by obduracy or
pertinacity in contempt of law, dissolution will be granted.
Likewise, it has been held that the relief of dissolution will be awarded only
where no other adequate remedy is available and it will not be allowed where
the rights of the stockholders can be, or are, protected in some other way.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellant,
vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO. (LTD.)
defendant-appellant
116
Railroad Company with the view of reselling the same to Manila Railroad for a
profit; that it had continuously offended against the laws of the Philippine
Islands and had misused its corporate authority, franchise and privileges and
had assumed privileges and franchises not granted.
ISSUE: WON defendant corporation should be dissolved?
HELD: No. Section 212 of Act No. 190 provides a judgment which may be
rendered in said case:
When in any such action, it is found and adjudged that the corporation
has, by any act done or omitted surrendered, or forfeited its corporate
rights, privileges, and franchise, or has not used the same during the term
of five years, judgment shall be entered that it be ousted and excluded
therefrom and that it be dissolved; but when it is found and adjudged
that a corporation has offended in any matter or manner which
does not by law work as a surrender or forfeiture, or has misused
a franchise or exercised a power not conferred by law, but not of
such a character as to work a surrender or forfeiture of its
franchise, judgment shall be rendered that it be ousted from the
continuance of such offense or the exercise of such power.
It will be seen that said section (212) gives the court a wide discretion in its
judgment in depriving corporations of their franchise. High, in his work on
Extraordinary Legal Remedies, says at page 606:
It is to be observed in the outset that the courts proceed with extreme
caution in the proceeding which have for their object the
forfeiture of corporate franchises, and a forfeiture will not be
allowed, except under express limitation, or for a plain abuse of
power by which the corporation fails to fulfill the design and
purpose of its organization.
In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co.
(3 L.R.A. 510) the court said (p. 518):
The scope of the remedy furnished by its (quo warranto) is to forfeit the
franchises of a corporation for misuser or nonuser. It is therefore
necessary in order to secure a judicial forfeiture of respondent's charter to
show a misuser of its franchises justifying such a forfeiture. And as already
remarked the object being to protect the public, and not to redress private
grievances, the misuser must be such as to work or threaten a substantial
injury to the public, or such as to amount to a violation of the fundamental
condition of the contract by which the franchise was granted and thus
defeat the purpose of the grant; and ordinarily the wrong or evil must be
one remediable in no other form of judicial proceeding.
Courts always proceed with great caution in declaring a forfeiture of
franchises, and require the prosecutor seeking the forfeiture to bring the
case clearly within the rules of law entitling him to exact so severe a
penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39; State
vs. Portland Natural Gas Co., 153, Ind., 483.)
While it is true that the courts are given a wide discretion in ordering the
dissolution of corporations for violations of its franchises, etc., yet
nevertheless, when such abuses and violations constitute or threaten
a substantial injury to the public or such as to amount to a violation
of the fundamental conditions of the contract (charter) by which the
franchises were granted and thus defeat the purpose of the grant,
then the power of the courts should be exercised for the protection
of the people.
Under the law the people of the Philippine Islands have guaranteed the
payment of the interest upon cost of the construction of the railroad which
occupied or occupies at least some of the lands purchased by the defendant.
Every additional dollar of increase in the price of the land purchased by the
railroad company added that much to the costs of construction and thereby
increased the burden imposed upon the people. The very and sole purpose of
the intervention of the defendants in the purchase of the land from the
original owners was for the purpose of selling the same to the Railroad
Company at profit at an increased price, thereby directly increasing the
burden of the people by way of additional taxation. The purpose of the
117
The second specification under the third cause of action has reference to the
administration and management of properties belonging to delinquent
shareholders of the association
The third specification under this cause of action relates to certain activities
which are described in the following paragraphs contained in the agreed
statements of facts:
El Hogar Filipino has undertaken the management of some parcels of
improved real estate situated in Manila not under mortgage to it, but
owned by shareholders, and has held itself out by advertisement as
prepared to do so
For the services so rendered in the management of such properties El
Hogar Filipino receives compensation in the form of commissions upon the
gross receipts from such properties at rates varying from two and one-half
per centum to five per centum of the sums so collected, according to the
location of the property and the effort involved in its management.
The administration of property in the manner described is more befitting to
the business of a real estate agent or trust company than to the business of a
building and loan association.
ISSUE2: WON the defendant should be dissolved on the above-ground?
HELD: No. It is a general rule of law that corporations possess only
such express powers. The management and administration of the property
of the shareholders of the corporation is not expressly authorized by law, and
we are unable to see that, upon any fair construction of the law, these
activities are necessary to the exercise of any of the granted powers. The
corporation, upon the point now under the criticism, has clearly extended
itself beyond the legitimate range of its powers. But it does not result that
the dissolution of the corporation is in order, and it will merely be
enjoined from further activities of this sort.
FACTS: The AOI of defendant corporation were registered with the SEC on
March 27, 1961. Based on the opinion of legal counsel of the Central Bank of
the Philippines, that the defendant corporation is a banking institution, the
Monetary Board promulgated Resolution No. 1095, declaring that the
corporation is performing banking operations without having first complied
with the provisions of Sec. 2 and 6 of RA No. 337. Despite such resolution,
the company still continued with its operations and was able to establish 74
branches all over the Philippines and induced the public to open 59,643
savings deposit accounts.
The Solicitor General initiated this quo warranto proceeding to dissolve said
company.
118
FACTS: The Solicitor General initiated this quo warranto proceedings against
respondent corporation on the following nine causes of action:
1.
2.
3.
4.
5.
6.
7.
8.
9.
the state, mislead the general public, its creditors, investors and its
stockholders by not accurately and faithfully making
a. an adequate, accurate and complete record of dividend distribution, and
b. an adequate, accurate and complete record of transfers of its stocks
Later on, the Solicitor General filed a motion for the dismissal of the
complaint which was granted by the lower court.
ISSUE: WON the lower court is correct in not dissolving the corporation?
HELD: Yes. After a very careful and deliberate consideration of the evidence
adduced by petitioner, the lower court came to the conclusion that the same
did not really warrant a quo warranto by the State that could truly justify to
decapitate corporate life, and that the corporate acts or missions complained
of had not resulted in substantial injury to the public, nor were they wilful
and clearly obdurate. The court found that the several acts of misuse and
misapplication of the funds and/or assets of the Bisaya Land Transportation
Co., Inc. were committed new particularly by the respondent Dr. Manuel
Cuenco with the cooperation of Jose P. Velez, for the commission of which
they may be personally held liable. There appears to be no reason for us to
disregard the findings of the trial court, which, applying well settled
doctrines, ought to be given due weight and credit (De la Rama vs. Ma-ao
Sugar Central, L-17504 & L-17506, Feb. 28, 1969). Besides, the court a quo
found that the controversy between the parties was more personal
than anything else and did not at all affect public interest.
The Solicitor General himself asserts that the only purpose of his ration for
the of this quo warranto is to take the State out of an unnecessary court
litigation, so that the dismissal of the case would result in the disposition
solely of the quo warranto by and between petitioner Republic of the
Philippines and the respondents named therein. Other interested parties who
might feel aggrieved, therefore, would not be without their remedies since
they can still maintain whatever claims they may have against each other. It
has been held that relief by dissolution will be awarded only where
no other adequate remedy is available, and is not available where
the rights of the stockholders can be, or are, protected in some
other way (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing
"Thwing vs. McDonald", 134 Minn. 148,156 N.W. 780,158 N.W. 820, 159
N.W. 564, Ann. Cas. 1918 E 420; Mitchell vs. Bank of St. Paul, 7 Minn. 252,
cited in De la Rama vs. Ma-ao Sugar Central, supra).
ACCORDINGLY, without prejudice to the rights of the private parties herein to
take proper steps to enforce whatever causes of action they may have
against each other, the order of the lower court embodied in its "Resolution"
dated April 3, 1968, granting the Solicitor General's motion to dismiss the quo
warranto proceedings is hereby upheld.
FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO
ARANETA, petitioners,
vs.
HON. JOSE TEODORO, Judge of the Court of First Instance of Negros
Occidental, Branch II, and ENCARNACION LIZARES VDA. DE
PANLILIO, respondents
FACTS: In civil case No. 1924 of the Court of First Instance of Negros
Occidental, Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. de
Panlilio and Efigenia Vda. de Paredes, in their own behalf and in behalf of the
other minority stockholders of the Financing Corporation of the Philippines,
filed a complaint against the said corporation and J. Amado Araneta, its
president and general manager, claiming among other things alleged gross
mismanagement and fraudulent conduct of the corporate affairs of the
defendant corporation by J. Amado Araneta, and asking that the corporation
be dissolved; that J. Amado Araneta be declared personally accountable for
the amounts of the unauthorized and fraudulent disbursements and
disposition of assets made by him, and that he be required to account for
said assets, and that pending trial and disposition of the case on its merits a
receiver be appointed to take possession of the books, records and assets of
the defendant corporation preparatory to its dissolution and liquidation and
distribution of the assets. Over the strong objection of the defendants, the
trial court granted the petition for the appointment of a receiver and
119
EFFECTS OF DISSOLUTION
terminate where the corporation cease to exist. But unless the lease so
provides, the rights and obligations thereunder are not extinguished by the
corporations dissolution since leases affect property rights and survives the
death of the parties. The stockholders succeed to the rights and liabilities of
the dissolved corporation in an unexpired leasehold state which may be
enforced by or against the receiver or liquidating trustee.
CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not hold
true in cases of contracts for personal services which are deemed terminated
by the dissolution of the corporation. In such cases, there is found an
implied condition that the contract shall terminate in such event.
FACTS: In Aug. and Sept. 1957, Jaime Buenaflor filed applications before the
Public Service Commission for the construction of a 5-ton ice plant and to
establish a cold storage and refrigeration service of about 6,000 cubic feet
capacity in Sabang, respectively. After being served a copy of the application
of petitioner, respondent corporation also filed the same applications on Oct.
1957.
Counsel for Buenaflor presented a motion to dismiss on the ground that the
corporate life of respondent already expired in Nov. 1953. Respondent
Corporation then registered on Oct. 1957, a new AOI and transferred all
assets of the old corporation together with existing certificate of public
convenience to the new corporation.
The PSC provisionally approved the transfer of the assets, as well as the
certificate of public convenience to the new corporation.
On Nov. 1957, the new corporation answered the motion to dismiss by
alleging its recent incorporation.
ISSUE: WON Buenaflors application should be approved?
120
HELD: Yes. It is admitted and the Commission found that the needs of
Sabang Barrio will be conveniently served with the establishment of a 5-ton
ice plant. But it elected to deny Buenaflor's application, even as it awarded
the privilege to the new Camarines Corporation on the ground that it (the old
corporation) had been serving ice in Sabang up to the time of Buenaflor's
application, and was, consequently, the pioneer operator there.
The fact, however, is that since 1953, the old Corporation had been illegally
plying its business of selling ice in Sabang because, under the Corporation
Law, Sec. 77, after November 1953, it could not lawfully continue the
business for which it had been established (operate ice plant, sell ice, etc).
After November 1953, it could only continue to exist for three years for the
purpose of prosecuting and defending suits by or against it, and of enabling it
gradually to settle and close its affairs, to dispose and convey its property
and to divide its capital stock. It could not, without violating the law, continue
to sell ice. And yet, the Commission awarded the certificate on the basis of
such serve and distribution of ice applying the "prior operator" rule. In
other words, the new Camarines Corporation is rewarded, precisely because
the old corporation, its predecessor, had violated the law during that period
(1953-1957). We cannot, and should not countenance such anomalous
result.
On the other hand, when the old Camarines Corporation docketed its
application October 1, 1957, it had no juridical personality, it had
ceased to exist as a corporation and could not sue nor apply for
certificate, for it was incapable of receiving a grant. It was not even
a corporation de facto. And then, there is no application subscribed by the
new Camarines Corporation. Far from being mere technicality, these point
support a conclusion which appears to be just and equitable, not only for the
reasons already indicated, but also to compensate Buenaflor's diligence and
courage in exposing the irregular practice of a "ghost" corporation foisting its
services upon the unsuspecting public of Sabang and neighboring territory
enjoying a franchise without paying, perhaps, the corporate income tax and
other burdens attached to corporate existence.
Remembering the Camarines Corporation's automatic cessation in November
1956 (three years after November 1953) we must decline to regard the new
Camarines Corporation (formed October 30, 1957) as a continuation of the
old. At most, it is the transferee of the properties of the old corporation (or
more properly, the assets of the stockholders) plus the certificate of public
convenience to operate the ice plant in Naga and Magarao. And yet, as
stated, the new corporation has not filed any application for certificate of
public convenience in Sabang, and has not published such application
Wherefore, revoking the appealed decision in so far as it awarded the
certificate to said Corporation, we hereby approve Buenaflor's application for
five tons, instead of one ton, subject to the usual conditions imposed by the
Public Service Commission on ice plant establishments.
CEBU PORT LABOR UNION, represented by this President ALEJO
CABABAJAY, petitioner,
vs.
STATES
MARINE
CORPORATION,
NICASIO
PANSACALA,
ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS,
respondents
attention of the Court that the State Marine Corporation was non-existing and
suggested that proper substitution or amendment of the petition be made.
ISSUE: WON State Marine Corp can be made a party respondent?
HELD: Section 77 of the Corporation Law reads as follows:
SEC. 77. Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be
continued as a body corporate for three years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits
by or against it and of enabling it gradually to settle and close its affairs, to
dispose of and convey its property and to divide its capital stock, but not
for the purpose of continuing the business for which it was established.
Even a cursory reading of the above-quoted provision would convey the idea
clearly manifested in the limitation "but not for the purpose of continuing the
business for which it was established", that the 3-year period allowed by the
law is only for the purpose of winding up its affairs. Petitioner-appellee
prayed that it be declared to have the right to stevedoring work in question
"thereby respecting the contract entered into by petitioner and the Elizalde &
Co. and subsequently enforced and continued by the respondent States
Marine Corporation". It appearing that the said States Marine
Corporation was already dissolved at the time said petition was
filed, and the vessel subject of the agreement having changed
hands, it cannot be compelled now to respect such agreement
specially considering the fact that it cannot even be made a party to
this suit (See. 1, Rule 3, of the Rules of Court.
SPOUSES RAMON A. GONZALES and LILIA Y. GONZALES, petitioners,
vs.
SUGAR REGULATORY ADMINISTRATION, respondent
121
During the course of liquidation and winding up, the assets will be collected
and realized, the rights and claims of creditors will be settled or provided for
and a distribution of the remaining assets to the shareholders who are
entitled thereto.
Therefore, liquidation or winding up of corporate affairs therefore means the
collection of all corporate assets, the payments of all its debts and settlement
of its obligations and the ultimate distribution of corporate assets, if any of it
remains, to all stockholders in accordance with their proportionate
stockholdings in the corporation or in accordance with their respective
contracts of subscription.
After dissolution, a body corporate continues to exist for 3 years for the
purpose of liquidation and winding up of its affairs:
Sec. 122. Corporate liquidation. - Every corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is terminated in any other
manner, shall nevertheless be continued as a body corporate for three (3)
years after the time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it was
established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and
after any such conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders,
members, creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall
be escheated to the city or municipality where such assets are located.
b.
c.
d.
3.
a.
b.
c.
d.
e.
vs. Michelin)
that the case was filed on Nov. 14, 1953, or before the expiration of the 3
year period.
ISSUE: WON the action commenced within the 3 year period may be
continued after the expiration of the said period?
HELD: No. The rule appears to be well settled that, in the absence of
statutory provision to the contrary, pending actions by or against a
corporation are abated upon expiration of the period allowed by law
for the liquidation of its affairs.
It is generally held, that where a statute continues the existence of a
corporation for a certain period after its dissolution for the purpose of
prosecuting and defending suits, etc., the corporation becomes defunct
upon the expiration of such period, at least in the absence of a provision to
the contrary, so that no action can afterwards be brought by or against it,
and must be dismissed. Actions pending by or against the corporation
when the period allowed by the statute expires, ordinarily abate.
. . . This time limit does not apply unless the circumstances are
such as to bring the corporation within the provision of the
statute. However, the wording of the statutes, in some jurisdictions
authorize suits after the expiration of the time limit, where the statute
provides that for the purpose of any suit brought by or against the
corporation shall continue beyond such period for a further named period
after final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp.
892-893.).
Our Corporation Law contains no provision authorizing a corporation, after
three (3) years from the expiration of its lifetime, to continue in its corporate
name actions instituted by it within said period of three (3) years. In fact,
section 77 of said law provides that the corporation shall "be continued as a
body corporate for three (3) years after the time when it would have been . .
. dissolved, for the purpose of prosecuting and defending suits by or against
it . . .", so that, thereafter, it shall no longer enjoy corporate existence for
such purpose. For this reason, section 78 of the same law authorizes the
corporation, "at any time during said three years . . . to convey all of its
property to trustees for the benefit of members, stockholders, creditors and
other interested", evidently for the purpose, among others, of enabling said
trustees to prosecute and defend suits by or against the corporation begun
before the expiration of said period. Hence, commenting on said sections,
Judge Fisher, in his work entitled Philippines Law on Stock Corporations
(1929 ed.), has the following to say:
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be sued
as a corporation is limited to three years from the time the period of
dissolution commences; but that there is no time limit within the
trustees must complete a liquidation placed in their hands. It is
provided only (Corp. Law, Sec. 78) that the conveyance to the
trustees must be made within the three-year period. It may be
found impossible to complete the work of liquidation within the three-year
period or to reduce disputed claims to judgment. The authorities are to the
effect that suits by or against a corporation abate when it ceased to be an
entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but
trustees to whom the corporate assets have been conveyed pursuant to
the authority of section 78 may sue and be sued as such in all matters
connected with the liquidation. By the terms of the statute the effect of
the conveyance is to make the trustees the legal owners of the
property conveyed, subject to the beneficial interest therein of
creditors and stockholders. (pp. 389-390; see also Sumera v. Valencia
[67 Phil. 721, 726-727).
Said court denying reconsideration, plaintiff appealed before the CFI to which
a motion to dismiss was filed by defendant on the ground that EO No. 372
abolished plaintiff and thus it no longer had capacity to sue.
Plaintiff objected there to on the ground that the said EO granted plaintiff to
continue in existence for 3 years from Nov. 30, 1950, the effectivity date of
the EO, for the purpose of prosecuting and defending suits by or against it
and of enabling the Board of Liquidators to gradually settle the its affairs and
122
123
For the foregoing considerations, we are of the opinion and so hold that
when a corporation is dissolved and the liquidation of its assets is
placed in the hands of a receiver or assignee, the period of three
years prescribed by section 77 of Act No. 1459 known as the
Corporation Law is not applicable, and the assignee may institute all
actions leading to the liquidation of the assets of the corporation
even after the expiration of three years.
Wherefore, the order appealed from is reversed and it is ordered that the
case be remanded to the court of origin to the end that it may decide the
same on the merits, with costs against the appellee.
THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE DECEASED
CASIMIRO GARCIA, and LEONOR MOLL, defendants-appellees
FACTS: A suit was filed by the Board of Liquidators for the recovery of a sum
of money from National Coconut Corporations (NACOCO) general manager
and board chairman Maximo Kalaw and other defendants as directors.
The defendants pose that since the three year period has elapsed since its
abolition by virtue of EO 372, the Board of Liquidators may not now continue
with, and prosecute, the present case to its conclusion.
ISSUE: WON the Board of Liquidators has personality to proceed as partyplaintiff in this case?
HELD: Yes. The executive order abolishing NACOCO and creating the Board
of Liquidators should be examined in context. The proviso in Section 1 of
Executive Order 372, whereby the corporate existence of NACOCO was
continued for a period of three years from the effectivity of the order for "the
purpose of prosecuting and defending suits by or against it and of enabling
the Board of Liquidators gradually to settle and close its affairs, to dispose of
and convey its property in the manner hereinafter provided", is to be read
not as an isolated provision but in conjunction with the whole. So reading, it
will be readily observed that no time limit has been tacked to the
existence of the Board of Liquidators and its function of closing the
affairs of the various government owned corporations, including
NACOCO.
By Section 2 of the executive order, while the boards of directors of the
various corporations were abolished, their powers and functions and duties
under existing laws were to be assumed and exercised by the Board of
Liquidators. The President thought it best to do away with the boards of
directors of the defunct corporations; at the same time, however, the
President had chosen to see to it that the Board of Liquidators step into the
vacuum. And nowhere in the executive order was there any mention of the
lifespan of the Board of Liquidators. A glance at the other provisions of the
executive order buttresses our conclusions.
Not that our views on the power of the Board of Liquidators to proceed to the
final determination of the present case is without jurisprudential support. The
first judicial test before this Court is National Abaca and Other Fibers
Corporation vs. Pore, L-16779, August 16, 1961. In that case, the
corporation, already dissolved, commenced suit within the three-year
extended period for liquidation. That suit was for recovery of money
advanced to defendant for the purchase of hemp in behalf of the corporation.
She failed to account for that money. We there said that "the rule appears to
be well settled that, in the absence of statutory provision to the
authorizing a corporation, after three (3) years from the expiration of its
lifetime, to continue in its corporate name actions instituted by it within said
period of three (3) years." However, these precepts notwithstanding,
we, in effect, held in that case that the Board of Liquidators escapes
from the operation thereof for the reason that "[o]bviously, the
complete loss of plaintiff's corporate existence after the expiration
of the period of three (3) years for the settlement of its affairs is
124
STOCKHOLDERS
has elapsed and no effort to finally settle or close the corporate affairs was
undertaken, those having pecuniary interest in the corporate assets, including
not only the stockholders but likewise the creditors, acting for and in behalf,
may make proper representations with the SEC for working out a final
settlement of the corporate concern (Clemente vs. CA).
FACTS: Chung Ka Bio and other petitioners are stockholders of the old
Philippine Blooming Mills Company, Inc. (PBM) which has been
reincorporated on July 14, 1977 after the old was dissolved on Jan. 19 1977.
The assets and liabilities of the old PBM was transferred by the BOD to the
new PBM.
Ching Ka Bio and other petitioners filed with the SEC a petition for liquidation
of both the old and new PBM (for non-usage of its charter and failure to
operate within 2 years).
ISSUE: WON the BOD was justified to convey all the assets of the old PBM
to the new corporation without the express consent of its stockholders?
HELD: Yes. As the contention is based on the negative averment that no
stockholders' meeting was held and the 2/3 consent vote was not obtained,
there is no need for affirmative proof. Even so, there is the presumption of
regularity which must operate in favor of the private respondents, who insist
that the proper authorization as required by the Corporation Law was duly
125
If, indeed, the sociedad has long become defunct, it should behoove
petitioners, or anyone else who may have any interest in the corporation, to
take appropriate measures before a proper forum for a peremptory
settlement of its affairs. We might invite attention to the various modes
provided by the Corporation Code (see Sees. 117-122) for dissolving,
liquidating or winding up, and terminating the life of the corporation. Among
the causes for such dissolution are when the corporate term has expired or
when, upon a verified complaint and after notice and hearing, the Securities
and Exchange Commission orders the dissolution of a corporation.
The said phrase was inserted by framers of the law only as a condition
precedent to the grant of a license to do business in the Philippines.
The corporation continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by and against it
and for enabling it to settle and close its affairs, culminating in the disposition
and distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period. The
termination of the life of a juridical entity does not by itself cause
the extinction or diminution of the rights and liabilities of such
entity (see Gonzales vs. Sugar Regulatory Administration, 174 SCRA 377)
nor those of its owners and creditors. If the three-year extended life has
expired without a trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or trustees) itself,
following the rationale of the Supreme Court's decision in Gelano vs. Court of
Appeals (103 SCRA 90) may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation. Still in the absence
of a board of directors or trustees, those having any pecuniary
interest in the assets, including not only the shareholders but
likewise the creditors of the corporation, acting for and in its behalf,
might make proper representations with the Securities and
Exchange commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final
settlement of the corporate concerns.
WHEREFORE, the decision appealed from is AFFIRMED.
CONTROL TEST: In times of war and for purposes of security of the state,
2. The address, including the street number, of the principal office of the
corporation in the country or state of incorporation;
A.
126
3. The name and address of its resident agent authorized to accept summons
and process in all legal proceedings and, pending the establishment of a local
office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue
in the transaction of its business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in the certificate of authority
issued by the appropriate government agency;
6. The names and addresses of the present directors and officers of the
corporation;
7. A statement of its authorized capital stock and the aggregate number of
shares which the corporation has authority to issue, itemized by classes, par
value of shares, shares without par value, and series, if any;
Within sixty (60) days after the issuance of the license to transact business in
the Philippines, the license, except foreign banking or insurance corporation,
shall deposit with the Securities and Exchange Commission for the benefit of
present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered
enterprises" as this term is defined in Republic Act No. 5186, shares of stock
in domestic corporations registered in the stock exchange, or shares of stock
in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred
thousand (P100,000.) pesos; Provided, however, That within six (6) months
after each fiscal year of the licensee, the Securities and Exchange
Commission shall require the licensee to deposit additional securities
equivalent in actual market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal year exceeds five million
(P5,000,000.00) pesos. The Securities and Exchange Commission shall also
require deposit of additional securities if the actual market value of the
securities on deposit has decreased by at least ten (10%) percent of their
actual market value at the time they were deposited. The Securities and
Exchange Commission may at its discretion release part of the additional
securities deposited with it if the gross income of the licensee has decreased,
or if the actual market value of the total securities on deposit has increased,
by more than ten (10%) percent of the actual market value of the securities
at the time they were deposited. The Securities and Exchange Commission
may, from time to time, allow the licensee to substitute other securities for
those already on deposit as long as the licensee is solvent. Such licensee
shall be entitled to collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do business in the Philippines,
the securities deposited as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the satisfaction of the Securities and
Exchange Commission that the licensee has no liability to Philippine residents,
including the Government of the Republic of the Philippines.
1.
2.
3.
4.
Additional securities may be required by the SEC if the market value of the
securities n deposit has decreased by at least 10%. Sec. 126 provides:
Sec. 126. Issuance of a license. - If the Securities and Exchange
Commission is satisfied that the applicant has complied with all the
requirements of this Code and other special laws, rules and regulations, the
Commission shall issue a license to the applicant to transact business in the
Philippines for the purpose or purposes specified in such license. Upon
issuance of the license, such foreign corporation may commence to transact
business in the Philippines and continue to do so for as long as it retains its
authority to act as a corporation under the laws of the country or state of its
incorporation, unless such license is sooner surrendered, revoked, suspended
or annulled in accordance with this Code or other special laws.
127
6.
7.
D.
RESIDENT AGENT
As a condition precedent to
the Philippines, the foreign
agent on whom summons
actions or legal proceedings
128
shall be without any resident agent in the Philippines on whom any summons
or other legal processes may be served, then in any action or proceeding
arising out of any business or transaction which occurred in the Philippines,
service of any summons or other legal process may be made upon the
Securities and Exchange Commission and that such service shall have the
same force and effect as if made upon the duly-authorized officers of the
corporation at its home office."
Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10)
days thereafter, transmit by mail a copy of such summons or other legal
process to the corporation at its home or principal office. The sending of such
copy by the Commission shall be necessary part of and shall complete such
service. All expenses incurred by the Commission for such service shall be
paid in advance by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its duty
to immediately notify in writing the Securities and Exchange Commission of
the new address.
As to who may be appointed as resident agent, the Corporation Code
provides:
Sec. 127. Who may be a resident agent. - A resident agent may be
either an individual residing in the Philippines or a domestic corporation
lawfully transacting business in the Philippines: Provided, That in the case of
an individual, he must be of good moral character and of sound financial
standing.
Culled from the provisions of Sec. 128 is that the necessity of the
appointment of a resident agent is only for the purpose of receiving
summons and other legal processes in any legal action or proceeding against
the foreign corporation. And, when a foreign corporation has designated a
person to receive summons in judicial proceedings affecting the corporation
that designation is exclusive and service of summons is without force and
effect unless made on him (Poizat vs. Mogan). Thus, while the law allows
service upon the SEC (Sec. 128), or any of its officers or agents within the
Philippines (Sec. 13, Rule 14, Rules of Civil Procedure), the latter two modes
may become effective only if the foreign corporation failed or neglected to
designate such a person or an agent. In a decision, therefore, rendered by
the SC in the case of General Corporation of the Philippines vs. Union
Insurance Soc. Of Canton Ltd (87 Phil 313), it was held that where such
foreign corporation actually doing business here has not applied for a license
to do and has not designated an agent to receive summons, then service of
summons on it will be made pursuant to the provisions of the Rules of
Court. If such foreign corporation has a license to do business, then
summons to it will be served on the agent designated by it for the purpose,
or otherwise in accordance with the Corporation Law.
E.
A foreign corporation must secure the necessary license before it can transact
or do business in the Philippines. This is the clear import of Sec. 123 when it
states that it shall have the right to transact business in the Philippines after
it shall have obtained a license. Without such a license, the law provides for
certain consequences:
Sec. 133. Doing business without a license. - No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under
Philippine laws.
CAPACITY TO SUE and BE SUED: The corporation may not likewise sue or
intervene in any action, suit or proceeding in any court or administrative
2.
3.
4.
5.
Foreign corporations can sue before the Philippine Courts if the act or
transaction involved is an isolated transaction or the corporation is
not seeking to enforce any legal or contractual rights arising from, or
growing out of, any business which it has transacted in the Philippines
Provided, however, that the phrase doing business shall not be deemed to
129
does not constitute doing business the doing of which would not bar a
foreign corporation from access to Philippine Courts (Facilities Mgt. vs. Dela
Osa)
ISOLATED TRANSACTION
MARSHALL-WELLS COMPANY, plaintiff-appellant,
vs.
HENRY W. ELSER & CO., INC., defendant-appellee
FACTS: Plaintiff sued defendant for the unpaid balance of a bill of goods
amounting to P2,660.74, for which the plaintiff holds accepted drafts.
Defendant demurred on the ground that plaintiff had no capacity to sue
which the trial court granted. And in as much as the plaintiff could not allege
compliance with the statute, the order was allowed to become final and no
appeal was perfected.
ISSUE: WON obtaining a license is required before a foreign corporation can
maintain any kind of action in the courts of the Philippine Islands?
HELD: No. The object of the statute was to subject the foreign
corporation doing business in the Philippines to the jurisdiction of
its courts. The object of the statute was not to prevent the foreign
corporation from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business without taking the
steps necessary to render it amenable to suit in the local courts. The
implication of the law is that it was never the purpose of the Legislature to
exclude a foreign corporation which happens to obtain an isolated order for
business from the Philippines, from securing redress in the Philippine courts,
and thus, in effect, to permit persons to avoid their contracts made with such
foreign corporations. The effect of the statute preventing foreign corporations
from doing business and from bringing actions in the local courts, except on
compliance with elaborate requirements, must not be unduly extended or
improperly applied. It should not be construed to extend beyond the plain
meaning of its terms, considered in connection with its object, and in
connection with the spirit of the entire law.
The law simply means that no foreign corporation shall be
permitted "to transact business in the Philippine Islands," as this
phrase is known in corporation law, unless it shall have the license
required by law, and, until it complies with the law, shall not be
permitted to maintain any suit in the local courts. A contrary holding
would bring the law to the verge of unconstitutionality, a result which should
be and can be easily avoided.
The order appealed from shall be set aside and the record shall be returned
to the court of origin for further proceedings. Without special finding as to
costs in this instance, it is so ordered.
HATHIBHAI BULAKHIDAS, petitioner,
vs.
THE HONORABLE PEDRO L. NAVARRO, as Presiding Judge of the
Court of First Instance of Rizal, Seventh Judicial District, Pasig,
Metro Manila, Branch 11 and DIAMOND SHIPPING CORPORATION,
respondent.
130
In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:
xxx xxx xxx
131
FACTS: Respondent Leonardo dela Osa filed a petition for reinstatement with
recovery of his overtime compensation, swing shift and graveyard shift
differentials.
132
(10) Any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, or in
the progressive prosecution of, commercial gain or of the purpose and
objective of the business organization
Indeed, if a foreign corporation, not engaged in business in the Philippines, is
not banned from seeking redress from courts in the Philippines, a fortiori,
that same corporation cannot claim exemption from being sued in Philippine
courts for acts done against a person or persons in the Philippines.
WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST
THE PETITIONERS
FACTS: Plaintiff Far East entered into a contract with herein appellant Nankai
for the sale of steel scrap. Only 1,058.6 metric tons were delivered upon the
expiration of the export license of Far East.
Far East later on wrote to Everett Steamship Corporation, requesting the
issuance of a complete set of the Bill of Lading for the shipment, in order that
payment thereof be effected against the letter of credit opened by Nankai.
For failure of Nankai and the shipping agent to comply, Far East filed a
complaint for specific performance.
Nankai filed a motion to dismiss, on the ground of lack of jurisdiction over its
person and the subject matter, which was denied.
ISSUE: WON the trial court acquired jurisdiction over the subject matter and
over the person of the defendant-appellant through the proper service of
summons?
HELD: Yes. Defendant contends that Philippine Courts have no jurisdiction to
take cognizance of the case because the Nankai is not doing business in the
islands; and that while it has entered into the transaction in question, same,
however, does not constitute "doing business", so as to make it amenable to
summons and subject it to the Court's jurisdiction. It bolstered this claim by a
provision in the contract which provides that "In case of disputes, Board of
Arbitration may be formed in Japan. Decision of the Board of Arbitration shall
be final and binding on both BUYER and SELLER".
The rule pertinent to the questions in issue provides
SEC. 14. Service upon private foreign corporations. If the defendant is a
foreign corporation, or a non-resident joint stock company or association,
COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC MULTITRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.) and
FRANCISCO S. AGUIRRE, petitioners,
vs.
THE COURT OF APPEALS, ITEC INTERNATIONAL, INC., and ITEC,
INC., respondents
him as member of the crew in one of its ships. That act apparently is an
isolated one, incidental, or casual, and "not of a character to indicate a
purpose to engage in business" within the meaning of the rule. (Emphasis
ours.)
ISSUE2: WON the single act done in this case can be considered as doing
business in the Philippines?
HELD: Yes. In the instant case, the testimony of Atty. Pablo Ocampo that
appellant was doing business in the Philippines corroborated by no less than
Nabuo Yoshida, one of appellant's officers, that he was sent to the Philippines
by his company to look into the operation of mines, thereby revealing the
defendant's desire to continue engaging in business here, after
receiving the shipment of the iron under consideration, making the
Philippines a base thereof.
The rule stated in the preceding section that the doing of a single act
doesnot constitute business within the meaning of statutes prescribing the
conditions to be complied with the foreign corporations must be qualified
to this extent, that a single act may bring the corporation. In such a
case, the single act of transaction is not merly incidental or casual, but is
of such character as distinctly to indicate a purpose on the part of the
foreign corporation to do other business in the state, and to make the
state a basis of operations for the conduct of a part of corporation's
ordinary business. (17 Fletchers Cyc. of Corporations, sec. 8470, pp. 572573, and authorities cited therein.) (Emphasis ours.)
133
business from the Philippines, and thus, in effect, to permit persons to avoid
their contracts made with such foreign corporations.
There is no exact rule or governing principle as to what constitutes "doing" or
"engaging" or "transacting" business. Indeed, such case must be judged in
the light of its peculiar circumstances, upon its peculiar facts and upon the
language of the statute applicable. The true test, however, seems to be
whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized.
Article 44 of the Omnibus Investments Code of 1987 defines the
phrase to include:
soliciting orders, purchases, service contracts, opening offices,
whether called "liaison" offices or branches; appointing
representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the Philippines for
a period or periods totalling one hundred eighty (180) days or
more; participating in the management, supervision or control of
any domestic business firm, entity or corporation in the
Philippines, and any other act or acts that imply a continuity or
commercial dealings or arrangements and contemplate to that
extent the performance of acts or works, or the exercise of some
of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of
the business organization.
Thus, a foreign corporation with a settling agent in the Philippines which
issued twelve marine policies covering different shipments to the Philippines
and a foreign corporation which had been collecting premiums on
outstanding policies were regarded as doing business here.
The same rule was observed relating to a foreign corporation with an
"exclusive distributing agent" in the Philippines, and which has been selling
its products here since 1929, and a foreign corporation engaged in the
business of manufacturing and selling computers worldwide, and had
installed at least 26 different products in several corporations in the
Philippines, and allowed its registered logo and trademark to be used and
made it known that there exists a designated distributor in the Philippines.
In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the
uninterrupted performance by a foreign corporation of acts
pursuant to its primary purposes and functions as a regional area
headquarters for its home office, qualifies such corporation as one
doing business in the country.
These foregoing instances should be distinguished from a single or
isolated transaction or occasional, incidental, or casual transactions,
which do not come within the meaning of the law, for in such case,
the foreign corporation is deemed not engaged in business in the
Philippines.
Where a single act or transaction, however, is not merely incidental or casual
but indicates the foreign corporation's intention to do other business in the
Philippines, said single act or transaction constitutes "doing" or "engaging in"
or "transacting" business in the Philippines.
In determining whether a corporation does business in the Philippines or not,
aside from their activities within the forum, reference may be made to the
contractual agreements entered into by it with other entities in the country.
Thus, in the Top-Weld case (supra), the foreign corporation's LICENSE AND
TECHNICAL AGREEMENT and DISTRIBUTOR AGREEMENT with their local
contacts were made the basis of their being regarded by this Tribunal as
corporations doing business in the country. Likewise, in Merill Lynch Futures,
Inc. vs. Court of Appeals, etc., the FUTURES CONTRACT entered into by the
petitioner foreign corporation weighed heavily in the court's ruling.
With the above-stated precedents in mind, we are persuaded to conclude
that private respondent had been "engaged in" or "doing business" in the
Philippines for some time now. This is the inevitable result after a scrutiny of
the different contracts and agreements entered into by ITEC with its various
business contacts in the country, particularly ASPAC and Telephone
134
Equipment Sales and Services, Inc. (TESSI, for brevity). The latter is a local
electronics firm engaged by ITEC to be its local technical representative, and
to create a service center for ITEC products sold locally. Its arrangements,
with these entities indicate convincingly ITEC's purpose to bring about the
situation among its customers and the general public that they are dealing
directly with ITEC, and that ITEC is actively engaging in business in the
country.
In its Master Service Agreement with TESSI, private respondent required its
local technical representative to provide the employees of the technical and
service center with ITEC identification cards and business cards, and to
correspond only on ITEC, Inc., letterhead. TESSI personnel are instructed to
answer the telephone with "ITEC Technical Assistance Center.", such
telephone being listed in the telephone book under the heading of ITEC
Technical Assistance Center, and all calls being recorded and forwarded to
ITEC on a weekly basis.
What is more, TESSI was obliged to provide ITEC with a monthly report
detailing the failure and repair of ITEC products, and to requisition monthly
the materials and components needed to replace stock consumed in the
warranty repairs of the prior month.
A perusal of the agreements between petitioner ASPAC and the respondents
shows that there are provisions which are highly restrictive in nature, such as
to reduce petitioner ASPAC to a mere extension or instrument of the private
respondent.
The "No Competing Product" provision of the Representative Agreement
between ITEC and ASPAC provides: "The Representative shall not represent
or offer for sale within the Territory any product which competes with an
existing ITEC product or any product which ITEC has under active
development." Likewise pertinent is the following provision: "When acting
under this Agreement, REPRESENTATIVE is authorized to solicit sales within
the Territory on ITEC's behalf but is authorized to bind ITEC only in its
capacity as Representative and no other, and then only to specific customers
and on terms and conditions expressly authorized by ITEC in writing."
When ITEC entered into the disputed contracts with ASPAC and
TESSI, they were carrying out the purposes for which it was
created, i.e., to market electronics and communications products.
The terms and conditions of the contracts as well as ITEC's conduct indicate
that they established within our country a continuous business, and not
merely one of a temporary character.
Notwithstanding such finding that ITEC is doing business in the country,
petitioner is nonetheless estopped from raising this fact to bar ITEC from
instituting this injunction case against it.
A foreign corporation doing business in the Philippines may sue in Philippine
Courts although not authorized to do business here against a Philippine
citizen or entity who had contracted with and benefited by said corporation.
To put it in another way, a party is estopped to challenge the
personality of a corporation after having acknowledged the same by
entering into a contract with it. And the doctrine of estoppel to deny
corporate existence applies to a foreign as well as to domestic corporations.
One who has dealt with a corporation of foreign origin as a corporate entity is
estopped to deny its corporate existence and capacity: The principle will be
applied to prevent a person contracting with a foreign corporation from later
taking advantage of its noncompliance with the statutes chiefly in cases
where such person has received the benefits of the contract.
The rule is deeply rooted in the time-honored axiom of Commodum ex injuria
sua non habere debet no person ought to derive any advantage of his own
wrong. This is as it should be for as mandated by law, "every person must in
the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith."
Concededly, corporations act through agents, like directors and officers.
Corporate dealings must be characterized by utmost good faith and fairness.
Corporations cannot just feign ignorance of the legal rules as in most cases,
they are manned by sophisticated officers with tried management skills and
legal experts with practiced eye on legal problems. Each party to a corporate
transaction is expected to act with utmost candor and fairness and, thereby
allow a reasonable proportion between benefits and expected burdens. This
is a norm which should be observed where one or the other is a foreign
entity venturing in a global market.
As observed by this Court in TOP-WELD (supra), viz:
FACTS: The present case was filed and tried on the following facts:
1. Petitioner Western Equipment and Supply Company, through its duly
authorized agent, the plaintiff, Felix Reyes, applied to the defendant
Director of Bureau of Commerce and Industry (BCI) for the issuance of
a license to engage in business in the Philippine Islands which was
granted on Aug. 23, 1926.
The parties are charged with knowledge of the existing law at the time they
enter into a contract and at the time it is to become operative. (Twiehaus v.
Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). Moreover, a person
is presumed to be more knowledgeable about his own state law than his alien
or foreign contemporary. In this case, the record shows that, at least,
petitioner had actual knowledge of the applicability of R.A. No. 5455 at the
time the contract was executed and at all times thereafter. This conclusion is
compelled by the fact that the same statute is now being propounded by the
petitioner to bolster its claim. We, therefore sustain the appellate court's view
that "it was incumbent upon TOP-WELD to know whether or not IRTI and
ECED were properly authorized to engage in business in the Philippines when
they entered into the licensing and distributorship agreements." The very
purpose of the law was circumvented and evaded when the petitioner
entered into said agreements despite the prohibition of R.A. No. 5455. The
parties in this case being equally guilty of violating R.A. No. 5455, they are in
pari delicto, in which case it follows as a consequence that petitioner is not
entitled to the relief prayed for in this case.
2.
On the other hand, Western Electric Company, Inc, also organized and
existing under the laws of Nevada, was not issued such license but it
was alleged that it has never engaged in business herein.
3.
4.
That defendant Henry Herman signed and filed AOI with the defendant
Fidel Reyes, as Director of BCI, with the intention to organize a domestic
corporation to be known as Western Electric Company, Inc. for the
purpose, among others things, of manufacturing, buying, selling and
dealing generally in electrical and telephone apparatus and supplies in
violation of a trademark over Western Electric existing in Washington,
DC.
TRADEMARK INFRINGEMENT
WESTERN EQUIPMENT AND SUPPLY COMPANY, WESTERN
ELECTRIC COMPANY, INC., W. Z. SMITH and FELIX C. REYES,
plaintiffs-appellees,
vs.
FIDEL A. REYES, as Director of the Bureau of Commerce and
Industry, HENRY HERMAN, PETER O'BRIEN, MANUEL B. DIAZ,
FELIPE MAPOY and ARTEMIO ZAMORA, defendants-appellants.
135
HELD: Yes. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. (46
Phil., 70, 76), this court held:
The noncompliance of a foreign corporation with the
pleaded as an affirmative defense. Thereafter, it must
evidence, first, that the plaintiff is a foreign corporation,
doing business in the Philippines, and third, that it has
proper license as provided by the statute.
statute may be
appear from the
second, that it is
not obtained the
If it had been stipulated that the plaintiff, Western Electric Company, Inc.,
had been doing business in the Philippine Islands without first obtaining a
license, another and a very different question would be presented. That
company is not here seeking to enforce any legal or contract rights arising
from, or growing out of, any business which it has transacted in the
Philippine Islands. The sole purpose of the action:
"Is to protect its reputation, its corporate name, its goodwill,
whenever that reputation, corporate name or goodwill have,
through the natural development of its trade, established
themselves." And it contends that its rights to the use of its corporate
and trade name:
Is a property right, a right in rem, which may assert and protect against all
the world, in any of the courts of the world even in jurisdictions where it
does not transact business just the same as it may protect its tangible
property, real or personal, against trespass, or conversion. Citing sec. 10,
Nims on Unfair Competition and Trade-Marks and cases cited; secs. 21-22,
Hopkins on Trade-Marks, Trade Names and Unfair Competition and cases
cited." That point is sustained by the authorities, and is well stated in
Hanover Star Milling Co. vs. Allen and Wheeler Co. (208 Fed., 513), in which
they syllabus says:
Since it is the trade and not the mark that is to be protected, a
trade-mark
acknowledges
no
territorial
boundaries
of
municipalities or states or nations, but extends to every market
where the trader's goods have become known and identified by
the use of the mark
It is very apparent that the purpose and intent of Herman and his associates
in seeking to incorporate under the name of Western Electric Company, Inc.,
was to unfairly and unjustly compete in the Philippine Islands with the
Western Electric Company, Inc., in articles which are manufactured by, and
bear the name of, that company, all of which is prohibited by Act No. 666,
and was made known to the defendant Reyes by the letter known in the
record to the defendant Reyes by the letter known in the record as Exhibit A.
The plaintiff, Western Electric Company, Inc., has been in existence as a
corporation for over fifty years, during which time it has established a
reputation all over the world including the Philippine Islands, for the kind and
quality of its manufactured articles, and it is very apparent that the whole
purpose and intent of Herman and his associates in seeking to incorporate
another corporation under the identical name of Western Electric Company,
Inc., and for the same identical purpose as that of the plaintiff, is to trespass
upon and profit by its good name and business reputation. The very fact that
Herman and his associates have sought the use of that particular name for
that identical purpose is conclusive evidence of the fraudulent intent with
which it is done.
The judgment of the lower court is affirmed, with costs
GENERAL GARMENTS CORPORATION, petitioner,
vs.
THE DIRECTOR OF PATENTS and PURITAN
CORPORATION, respondents
SPORTSWEAR
136
But even assuming the truth of the private respondents allegation that the
petitioner failed to allege material facto in its petition relative to capacity to
sue, the petitioner may still maintain the present suit against respondent
Hernandes. As early as 1927, this Court was, and it still is, of the view that
a foreign corporation not doing business in the Philippines needs
no license to sue before Philippine courts for infringement of
trademark and unfair competition. Thus, in Western Equipment and
Supply Co. v. Reyes (51 Phil. 11 5), this Court held that a foreign
corporation which has never done any business in the Philippines and
which is unlicensed and unregistered to do business here, but is widely
and favorably known in the Philippines through the use therein of its
products bearing its corporate and tradename, has a legal right to maintain
an action in the Philippines to restrain the residents and inhabitants thereof
from organizing a corporation therein bearing the same name as the
foreign corporation, when it appears that they have personal knowledge of
the existence of such a foreign corporation, and it is apparent that the
purpose of the proposed domestic corporation is to deal and trade in the
same goods as those of the foreign corporation.
Quoting the Paris Convention and the case of Vanity Fair Mills, Inc. v. T.
Eaton, Co. (234 F. 2d 633), this Court further said:
By the same token, the petitioner should be given the same treatment in
the Philippines as we make available to our own citizens. We are obligated
to assure to nationals of 'countries of the Union' an effective protection
against unfair competition in the same way that they are obligated to
similarly protect Filipino citizens and firms.
In the case of of Cerverse Rubber Corporation V. Universal Rubber Products,
Inc. (174 SCRA 165), we likewise re-aafirmed our adherence to the Paris
Convention:
The ruling in the aforecited case is in consonance with the Convention of
Converse Rubber Corporation v. Universal Rubber Products, Inc. (I 47
SCRA 165), we likewise re-affirmed our adherence to the Paris Convention:
the Union of Paris for the Protection of Industrial Property to which the
Philippines became a party on September 27, 1965. Article 8 thereof
provides that 'a trade name [corporation name] shall be protected in all
the countries of the Union without the obligation of filing or registration,
We held that it was not enough for Leviton, a foreign corporation organized
and existing under the laws of the State of New York, United States of
America, to merely allege that it is a foreign corporation. It averred in
Paragraph 2 of its complaint that its action was being filed under the
provisions of Section 21-A of Republic Act No. 166, as amended. Compliance
with the requirements imposed by the above-cited provision was necessary
because Section 21-A of Republic Act No. 166 having explicitly laid down
certain conditions in a specific proviso, the same must be expressly averred
before a successful prosecution may ensue. It is therefore, necessary for the
foreign corporation to comply with these requirements or aver why it should
be exempted from them, if such was the case. The foreign corporation may
have the right to sue before Philippine courts, but our rules on pleadings
require that the qualifying circumstances necessary for the assertion of such
right should first be affirmatively pleaded.
We, therefore, hold that the petitioner had the legal capacity to file the action
below.
137
The argument has no merit. The Mentholatum case is distinct from and
inapplicable to the case at bar. Philippine American Drug Co., Inc., was
admittedly selling products of its principal Mentholatum Co., Inc., in the
latter's name or for the latter's account. Thus, this Court held that "whatever
transactions the Philippine-American Drug Co., Inc. had executed in view of
the law, the Mentholatum Co., Inc., did it itself. And, the Mentholatum Co.,
Inc., being a foreign doing business in the Philippines without the license
138
HELD: Yes. We are moreover recognizing our duties and the rights of foreign
states under the Paris Convention for the Protection of Industrial Property to
which the Philippines and France are parties. We are simply interpreting and
enforcing a solemn international commitment of the Philippines embodied in
a multilateral treaty to which we are a party and which we entered into
because it is in our national interest to do so.
The Paris Convention provides in part that:
ARTICLE 2
(2) Nationals of each of the countries of the Union shall as regards the
protection of industrial property, enjoy in all the other countries of the
Union the advantages that their respective laws now grant, or may
hereafter grant, to nationals, without prejudice to the rights specially
provided by the present Convention. Consequently, they shall have the
same protection as the latter, and the same legal remedy against any
infringement of their rights, provided they observe the conditions and
formalities imposed upon nationals.
xxx xxx xxx
ARTICLE 6
(1) The countries of the Union undertake, either administratively if their
legislation so permits, or at the request of an interested party, to refuse or
to cancel the registration and to prohibit the use of a trademark which
constitutes a reproduction, imitation or translation, liable to create
confusion, of a mark considered by the competent authority of the country
of registration or use to be well-known in that country as being already the
mark of a person entitled to the benefits of the present Convention and
used for Identical or similar goods. These provisions shall also apply when
the essential part of the mark constitutes a reproduction of any such wellknown mark or an imitation liable to create confusion therewith.
xxx xxx xxx
ARTICLE 8
A trade name shall be protected in all the countries of the Union without
the obligation of filing or registration, whether or not it forms part of a
trademark.
xxx xxx xxx
ARTICLE 10bis
(1) The countries of the Union are bound to assure to persons entitled to
the benefits of the Union effective protection against unfair competition
A treaty or convention is not a mere moral obligation to be enforced
or not at the whims of an incumbent head of a Ministry. It creates a
legally binding obligation on the parties founded on the generally
accepted principle of international law of pacta sunt servanda which
has been adopted as part of the law of our land. (Constitution, Art.
II, Sec. 3).
We have carefully gone over the records of all the cases filed in this Court
and find more than enough evidence to sustain a finding that the petitioner is
the owner of the trademarks "LACOSTE", "CHEMISE LACOSTE", the crocodile
or alligator device, and the composite mark of LACOSTE and the
representation of the crocodile or alligator. Any pretensions of the private
respondent that he is the owner are absolutely without basis. Any further
ventilation of the issue of ownership before the Patent Office will be a
superfluity and a dilatory tactic.
The records show that the goodwill and reputation of the petitioner's
products bearing the trademark LACOSTE date back even before 1964 when
LACOSTE clothing apparels were first marketed in the Philippines. To allow
Hemandas to continue using the trademark Lacoste for the simple reason
that he was the first registrant in the Supplemental Register of a trademark
CAPACITY TO SUE
EXCEPTIONS:
EFFECT OF NON-PLEADING: If the dismissal of the case is based on the
failure of the foreign corporation to aver its capacity to sue, would not,
however, bar the institution of the same action, dismissal should not be
allowed, especially so if it would be an idle, circuitous ceremony considering
the absence of any meritorious substantial defense of the defendant.
Technical rules should not be accorded undue importance to frustrate and
defeat a plainly valid claim (Olympia Business Machines vs. E. Razon, Inc.)
suit is not in dispute in the great bulk of cases, and that pleading and proof
can be simplified by a rule that an averment of such matter is not necessary,
except to show jurisdiction."1 But where as in the present case, the law
denies to a foreign corporation the right to maintain suit unless it has
previously complied with a certain requirement, then such compliance, or the
fact that the suing corporation is exempt therefrom, becomes a necessary
averment in the complaint. These are matters peculiarly within the
knowledge of appellants alone, and it would be unfair to impose upon
appellee the burden of asserting and proving the contrary. It is enough that
foreign corporations are allowed by law to seek redress in our courts under
certain conditions: the interpretation of the law should not go so far as to
include, in effect, an inference that those conditions have been met from the
mere fact that the party suing is a foreign corporation.
It was indeed in the light of these and other consideration that this Court has
seen fit to amend the former rule by requiring in the Revised Rules (Section
4, Rule 8) that "facts showing the capacity of a party to sue or be sued or the
authority of a party to sue or be sued in a representative capacity or the legal
existence of an organized association of persons that is made a party, must
be averred."
The orders appealed from are affirmed, with costs against plaintiffsappellants
OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. and CALIFORNIA
INSURANCE CO., LTD., petitioners,
vs.
E. RAZON, INC., TOYO LINE, LTD., and SEA BRIDGE CONTAINER
SHIPPING LINES, INC., respondents.
The typewriters were discharged at North Harbor, Manila into the custody of
the carriers agent which in turn turned it over to E. Razon, Inc. While in the
latters possession, part of the shipment was stolen. California Insurance was
subrogated to the claim for loss after paying Olympia (Phil).
FACTS: Plaintiff-appellants, organized and existing under the laws of the US,
sued herein defendant-appellee, as subrogee to the shipper and consignee,
alleging that the latter undertook to carry a shipment of copra for delivery to
P&G Company at Cebu City but upon discharge, a portion of the copra was
found damaged.
Defendant moved to dismiss on the ground that the complaints on the
ground of failure to allege compliance with Sec. 69 of the Corporation Law
which was granted after failure of the plaintiff to comply with the amendment
of the complaint.
ISSUE: WON plaintiff-appellants have the right to sue as to the defects n the
pleadings and procedures?
HELD: No. It should be noted that insofar as the allegations in the complaint
have a bearing on appellants' capacity to sue, all that is averred is that they
are both foreign corporations existing under the laws of the United States.
This averment conjures two alternative possibilities: either they are engaged
in business in the Philippines or they are not so engaged. If the first, they
must have been duly licensed in order to maintain this suit; if the second, if
the transaction sued upon is singular and isolated, no such license is
required. In either case, the qualifying circumstance is an essential part of
the element of plaintiffs' capacity to sue and must be affirmatively pleaded.
To be sure, under the Rules of Court (Section 11, Rule 15) in force prior to
the promulgation of the Revised Rules on January 1, 1964, it was not
necessary to aver the capacity of a party to sue except to the extent required
to show jurisdiction of the court. In our opinion, however, such rule does not
apply in all situations and under all circumstances. The theory behind a
similar rule in the United States is "that capacity ... of a party for purpose of
139
Both Olympia (Phil.) and California thereafter brought a suit against E. Razon,
Inc., the carrier and the container company, which had earlier refused to
make good the loss of the goods.
For E.Razons failure to appear at the pre-trial and after ex-parte reception of
evidence, the trial court decided for California. On Razons motion, the order
was set aside and Razon amended his answer that California is a foreign
corporation doing business in the Philippines without a license to do so and
that it cannot maintain suit in this jurisdiction. But once again, Razon failed to
appear at the pre-trial, as a result, the trial court revived the decision.
On appeal, the IAC reversed the decision holding, among others, that
California failed to allege in the complaint its capacity to sue.
ISSUE: WON the failure of California to aver its capacity to sue is fatal?
HELD: The slightest reflection will however immediately make Tear that
between the factual settings of the Atlantic Mutual case and the case at bar,
there are distinctions of no little significance. In the former, Atlantic Mutual
Insurance Co. and Continental Insurance Co., two (2) American firms,
brought suit as subrogees of the shipper and/or consignee of the goods
ensured without joining the latter. In the case at hand, the action was
instituted by both the subrogee, California Insurance Co., Ltd., and
the subrogor, a domestic corporation, Olympia (Philippines) about
whose capacity to sue no dispute exists. In Atlantic Mutual, the
plaintiffs' lack of capacity to sue was raised by the defendant at the
earliest opportunity, through a motion to dismiss filed within the
reglementary period to answer in accordance with Rule 16 of the
Rules of Court. In the case at bar, the defendant was twice declared
in default, and the defense of lack of capacity to sue, was not raised
until after 'the first declaration of default had been lifted. Moreover,
FACTS: Herein respondents Antonio Villegas and Juan Ponce Enrile sought to
recover from herein petitioner damages upon an alleged libel arising from a
publication of Time (Asia Edition) magazine, in its issue entitled Corruption
in Asia.
Petitioner filed a motion to dismiss on lack of jurisdiction and improper venue
which was deferred until after the trial of the case.
ISSUE: WON the petition for certiorari and prohibition will prosper?
HELD: The dismissal of the present petition is asked on the ground that the
petitioner foreign corporation failed to allege its capacity to sue in the courts
of the Philippines. Respondents rely on section 69 of the Corporation law,
which provides:
SEC. 69. No foreign corporation or corporations formed, organized, or
existing under any laws other than those of the Philippines shall be
permitted to ... maintain by itself or assignee any suit for the recovery of
any debt, claim, or demand whatever, unless it shall have the license
prescribed in the section immediately preceding. ..." ...;
They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 that
no foreign corporation may be permitted to maintain any suit in the local
courts unless it shall have the license required by the law, and the ruling in
Atlantic Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc. 8 that "where ...
the law denies to a foreign corporation the right to maintain suit unless it has
previously complied with a certain requirement, then such compliance or the
fact that the suing corporation is exempt therefrom, becomes a necessary
averment in the complaint." We fail to see how these doctrines can be a
propos in the case at bar, since the petitioner is not "maintaining
any suit" but is merely defending one against itself; it did not file
any complaint but only a corollary defensive petition to prohibit the
lower court from further proceeding with a suit that it had no
jurisdiction to entertain.
140
Petitioner's failure to aver its legal capacity to institute the present petition is
not fatal, for ...
A foreign corporation may, by writ of prohibition, seek relief against the
wrongful assumption of jurisdiction. And a foreign corporation seeking
a writ of prohibition against further maintenance of a suit, on the
ground of want of jurisdiction in which jurisdiction is not bound
by the ruling of the court in which the suit was brought, on a
motion to quash service of summons, that it has jurisdiction.
WHEREFORE, the writs applied for are granted: the respondent Court of First
Instance of Rizal is declared without jurisdiction to take cognizance of its Civil
Case No. 10403; and its orders issued in connection therewith are hereby
annulled and set aside,. Respondent court is further commanded to desist
from further proceedings in Civil case No. 10403 aforesaid. Costs against
private respondents, Antonio J. Villegas and Juan Ponce Enrile.
G.
(b) That said right to examine and inspect the books of the corporation
must be exercised in good faith, for a specific and honest purpose, and not
to gratify curiosity, or for speculative or vexatious purposes. (14 C. J., 854,
855.)
The appellant has made no effort to prove or even allege that the information
he desired to obtain through the examination and inspection of defendant's
books was necessary to protect his interests as stockholder of the
corporation, or that it was for a specific and honest purpose, and not to
gratify curiosity, nor for speculative or vexatious purposes.
In view of the foregoing, we affirm the judgment of the lower court, with
costs against the appellant.
H.
AMENDMENT OF LICENSE
MERGER/CONSOLIDATION
REVOCATION OF LICENSE
141
142