G.R. No.

L-40620 May 5, 1979

RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE LA RAMA, and the HEIRS
OF MERCEDES DE LA RAMA-BORROMEO, 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. DACLESrespondents.
Exequiel T. A Alejandro for petitioners.

Acting upon the complaint, the respondent judge, after proper hearing, directed the clerk of court "to issue the
corresponding writ of preliminary injunction restraining the defendants and/or their representatives, agents, or persons
acting in their behalf from the commission or continuance of any act tending in any way to prejudice, diminish or
otherwise injure plaintiffs' rights in the corporate properties and funds of the corporation Inocentes de la Rama, Inc.'
and from disposing, transferring, selling or otherwise impairing the value of the certificates of stock allegedly issued
illegally in their names on February 11, 1972, or at any date thereafter, and ordering them to deposit with the Clerk of
Court the corresponding certificates of stock for the 823 shares issued to said defendants on February 11, 1972, upon
plaintiffs' posting a bond in the sum of P50,000.00, to answer for any damages and costs that may be sustained by the
defendants by reason of the issuance of the writ, copy of the bond to be furnished to the defendants. " 2 Pursuant
thereto, the defendants deposited with the clerk of court the corporation's certificates of stock Nos. 80 to 86, inclusive,
representing the disputed 823 shares of stock of the corporation. 3

Acua, Lirazan & Associates for private respondents.

On October 31, 1972, the plaintiffs therein, now private respondents, entered into a compromise agreement with the
defendants Ramon de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi , 4 whereby the contracting parties
withdrew their respective claims against each other and the aforenamed defendants waived and transferred their
rights and interests over the questioned 823 shares of stock in favor of the plaintiffs, as follows:
CONCEPCION JR., J,:
Petition for certiorari to review the order of the respondent judge, dated January 2, 1975, denying the petitioners'
motion to dismiss the complaint filed in Civil Case No. 10257 of the Court of First Instance of Negros Occidental,
entitled, "Benjamin Lopue Sr., et al., plaintiffs, versus Ricardo Gamboa, et al., defendants," as well as the order dated
April 4, 1975, denying the motion for the reconsideration of Said order.
In the aforementioned Civil Case No. 10257 of the Court of First Instance of Negros Occidental, the herein petitioners,
Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Eduardo de la Rama, and the late Mercedes de la RamaBorromeo, now represented by her heirs, as well as Ramon de la Rama, Paz de la Rama-Battistuzzi, and Enzo
Battistuzzi, were sued by the herein private respondents, Benjamin Lopue, Sr., Benjamin Lopue, Jr., Leonito Lopue,
and Luisa U. Dacles to nullify the issuance of 823 shares of stock of the Inocentes de la Rama, Inc. in favor of the said
defendants. The gist of the complaint, filed on April 4, 1972, is that the plaintiffs, with the exception of Anastacio Dacles
who was joined as a formal party, are the owners of 1,328 shares of stock of the Inocentes de la Rama, Inc., a
domestic corporation, with an authorized capital stock of 3,000 shares, with a par value of P100.00 per share, 2,177 of
which were subscribed and issued, thus leaving 823 shares unissued; that upon the plaintiffs' acquisition of the shares
of stock held by Rafael Ledesma and Jose Sicangco, Jr., then President and Vice-President of the corporation,
respectively, the defendants Mercedes R. Borromeo, Honorio de la Rama, and Ricardo Gamboa, remaining members
of the board of directors of the corporation, in order to forestall the takeover by the plaintiffs of the afore-named
corporation, surreptitiously met and elected Ricardo L. Gamboa and Honorio de la Rama as president and vicepresident of the corporation, respectively, and thereafter passed a resolution authorizing the sale of the 823 unissued
shares of the corporation to the defendants, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Ramon de la
Rama, Paz R. Battistuzzi Eduardo de la Rama, and Mercedes R. Borromeo, at par value, after which the defendants
Honorio de la Rama, Lydia de la Rama-Gamboa, and Enzo Battistuzzi were elected to the board of directors of the
corporation; that the sale of the unissued 823 shares of stock of the corporation was in violation of the plaintiffs' and
pre-emptive rights and made without the approval of the board of directors representing 2/3 of the outstanding capital
stock, and is in disregard of the strictest relation of trust existing between the defendants, as stockholders thereof; and
that the defendants Lydia de la Rama-Gamboa, Honorio de la Rama, and Enzo Battistuzzi were not legally elected to
the board of directors of the said corporation and has unlawfully usurped or intruded into said office to the prejudice of
the plaintiffs. Wherefore, they prayed that a writ of preliminary injunction be issued restraining the defendants from
committing, or continuing the performance of an act tending to prejudice, diminish or otherwise injure the plaintiffs'
rights in the corporate properties and funds of the corporation, and from disposing, transferring, selling, or otherwise
impairing the value of the 823 shares of stock illegally issued by the defendants; that a receiver be appointed to
preserve and administer the property and funds of the corporation; that defendants Lydia de la Rama-Gamboa,
Honorio de la Rama, and Enzo Battistuzzi be declared as usurpers or intruders into the office of director in the
corporation and, consequently, ousting them therefrom and declare Luisa U. Dacles as a legally elected director of the
corporation; that the sale of 823 shares of stock of the corporation be declared null and void; and that the defendants
be ordered to pay damages and attorney's fees, as well as the costs of suit . 1

3. That the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi
will waive, cede, transfer or other wise convey, as they hereby waive, cede, transfer and
convey, free from all liens and encumbrances unto the plaintiffs, in such proportion as the
plaintiffs may among themselves determine, all of the rights, interests, participations or title that
the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi Enzo Battistuzzi now have
or may have in the eight hundred twenty-three (823) shares in the capital stock of the
corporation INOCENTES DELA RAMA, INC.' which were issued in the names of the
defendants in the above-entitled case on or about February 11, 1972, or at any date thereafter
and which shares are the subject-matter of the present suit.
The compromise agreement was approved by the trial court on December 4, 1972, 5 As a result, the defendants filed a
motion to dismiss the complaint, on November 19, 1974, upon the grounds: (1) that the plaintiffs' cause of action had
been waived or abandoned; and (2) that they were estopped from further prosecuting the case since they have, in
effect, acknowledged the validity of the issuance of the disputed 823 shares of stock. The motion was denied on
January 2, 1975.6
The defendants also filed a motion to declare the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi and
Enzo Battistuzzi in contempt of court, for having violated the writ of preliminary injunction when they entered into the
aforesaid compromise agreement with the plaintiffs, but the respondent judge denied the said motion for lack of
merit. 7
On February 10, 1975, the defendants filed a motion for the reconsideration of the order denying their motion to
dismiss the complaint' and subsequently, an Addendum thereto, claiming that the respondent court has no jurisdiction
to interfere with the management of the corporation by the board of directors, and the enactment of a resolution by the
defendants, as members of the board of directors of the corporation, allowing the sale of the 823 shares of stock to the
defendants was purely a management concern which the courts could not interfere with. When the trial court denied
said motion and its addendum, the defendants filed the instant petition for certiorari for the review of said orders.
The petition is without merit. The questioned order denying the petitioners' motion to dismiss the complaint is merely
interlocutory and cannot be the subject of a petition for certiorari. The proper procedure to be followed in such a case
is to continue with the trial of the case on the merits and, if the decision is adverse, to reiterate the issue on appeal. It
would be a breach of orderly procedure to allow a party to come before this Court every time an order is issued with
which he does not agree.
Besides, the order denying the petitioners' motion to dismiss the complaint was not capriciously, arbitrarily, or
whimsically issued, or that the respondent court lacked jurisdiction over the cause as to warrant the issuance of the

writ prayed for. As found by the respondent judge, the petitioners have not waived their cause of action against the
petitioners by entering into a compromise agreement with the other defendants in view of the express provision of the
compromise agreement that the same "shall not in any way constitute or be considered a waiver or abandonment of
any claim or cause of action against the other defendants." There is also no estoppel because there is nothing in the
agreement which could be construed as an affirmative admission by the plaintiff of the validity of the resolution of the
defendants which is now sought to be judicially declared null and void. The foregoing circumstances and the fact that
no consideration was mentioned in the agreement for the transfer of rights to the said shares of stock to the plaintiffs
are sufficient to show that the agreement was merely an admission by the defendants Ramon de la Rama, Paz de la
Rama Battistuzzi and Enzo Battistuzzi of the validity of the claim of the plaintiffs.
The claim of the petitioners, in their Addendum to the motion for reconsideration of the order denying the motion to
dismiss the complaint, questioning the trial court's jurisdiction on matters affecting the management of the corporation,
is without merit. The well-known rule is that courts cannot undertake to control the discretion of the board of directors
about administrative matters as to which they have legitimate power of, 10 action and contractsintra vires entered into
by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. 11 In the instant
case, the plaintiffs aver that the defendants have concluded a transaction among themselves as will result to serious
injury to the interests of the plaintiffs, so that the trial court has jurisdiction over the case.
The petitioners further 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. 12 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. 13

ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction,
arose out of two cases filed by petitioner with the Securities and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the Securities and
Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of
filing of amended by- laws, injunction and damages with prayer for a preliminary injunction" against the majority of the
members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition, entitled "John
Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B.
Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of
the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when
the outstanding capital stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3
should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment
was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of
the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and
1963, after which the authority of the Board ceased to exist.

WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of merit. With costs against the petitioners.
SO ORDERED.
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL,
ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN
MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.

As a third cause of action, petitioner averred that the membership of the Board of Directors had changed since the
authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the qualifications
to be a director of respondent corporation, being a Substantial stockholder thereof; that as a stockholder, petitioner
had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of
directors; and that in amending the by-laws, respondents purposely provided for petitioner's disqualification and
deprived him of his vested right as afore-mentioned hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from
being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or
Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract)
with respondent corporation, which was allowed because the questioned amendment gave the Board itself the
prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the
portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive
business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive
and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of
directors ... shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the
Annual Meeting" is likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be
cancelled, and that individual respondents be made to pay damages, in specified amounts, to petitioner.

respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of
Directors at the next annual meeting; that thereafter the Board of Directors amended the by-laws as afore-stated.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange Commission
an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of respondent corporation
refused to allow him to inspect its records despite request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been attempting to suppress information from its
stockholders despite a negative reply by the SEC to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance
sheet of San Miguel International, Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in
San Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received
by Andres M. Soriano, Jr. and/or its successor-in-interest.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and attorney's fees
were presented against petitioner.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging, among
others that the motion has no legal basis; that the demand is not based on good faith; that the motion is premature
since the materiality or relevance of the evidence sought cannot be determined until the issues are joined, that it fails
to show good cause and constitutes continued harrasment, and that some of the information sought are not part of the
records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde, Miguel
Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations therein and stating, by
way of affirmative defenses that "the action taken by the Board of Directors on September 18, 1976 resulting in the ...
amendments is valid and legal because the power to "amend, modify, repeal or adopt new By-laws" delegated to said
Board on March 13, 1961 and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim,
"the vote requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined in
relation to the total subscribed capital stock at the time the delegation of said power is made, not when the Board opts
to exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the nullification of
the amendment, which is to secure its repeal by vote of the stockholders representing a majority of the subscribed
capital stock at any regular or special meeting, as provided in Article VIII, section I of the by-laws and section 22 of the
Corporation law, hence the, petition is premature; that petitioner is estopped from questioning the amendments on the
ground of lack of authority of the Board. since he failed, to object to other amendments made on the basis of the same
1961 authorization: that the power of the corporation to amend its by-laws is broad, subject only to the condition that
the by-laws adopted should not be respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to minimize or eliminate situations where its
directors might be tempted to put their personal interests over t I hat of the corporation; that the questioned amended
by-laws is a matter of internal policy and the judgment of the board should not be interfered with: That the by-laws, as
amended, are valid and binding and are intended to prevent the possibility of violation of criminal and civil laws
prohibiting combinations in restraint of trade; and that the petition states no cause of action. It was, therefore, prayed
that the petition be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the material
averments thereof and stating, as part of their affirmative defenses, that in August 1972, the Universal Robina
Corporation (Robina), a corporation engaged in business competitive to that of respondent corporation, began
acquiring shares therein. until September 1976 when its total holding amounted to 622,987 shares: that in October
1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its
total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president and
controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the stockholders' meeting
of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on
the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of documents
was filed by all the respondents. This was duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco,
Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and they accordingly filed their oppositionsintervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and inspection
of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the petitioner and respondents
in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing, by or on
behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders'
meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it appearing that the same is material
and relevant to the issues involved in the main case. Accordingly, the respondents should allow
petitioner-movant entry in the principal office of the respondent Corporation, San Miguel
Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the
rights herein granted; it being understood that the inspection, copying and photographing of the
said documents shall be undertaken under the direct and strict supervision of this Commission.
Provided, however, that other documents and/or papers not heretofore included are not
covered by this Order and any inspection thereof shall require the prior permission of this
Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose M.
Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-ininterest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-movant
is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent right to
inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing his
request to copy and inspect the management contract between San Miguel Corporation and A.
Soriano Corporation and the renewal and amendments thereof for the reason that he had
already obtained the same, the Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of production and
inspection of the authority of the stockholders of San Miguel Corporation to invest the funds of
respondent corporation in San Miguel International, Inc., until after the hearing on the merits of
the principal issues in the above-entitled case.
This Order is immediately executory upon its approval.
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

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

6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the

meeting on March 20, 1972 to invest corporate funds in other companies or businesses or for
purposes other than the main purpose for which the Corporation has been organized, and
ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the issuance of a writ
of preliminary injunction to restrain private respondents from taking up Item 6 of the Agenda at the annual
stockholders' meeting, requesting that the same be set for hearing on May 3, 1977, the date set for the second hearing
of the case on the merits. Respondent Commission, however, cancelled the dates of hearing originally scheduled and
reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no
action has been taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that respondent
Commission gravely abused its discretion when it failed to act with deliberate dispatch on the motions of petitioner
seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against petitioner, in gross derogation of petitioner's rights to
property and due process. He prayed that this Court direct respondent SEC to act on collateral incidents pending
before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from disqualifying or
preventing petitioner from running or from being voted as director of respondent corporation and from submitting for
ratification or confirmation or from causing the ratification or confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws of respondent corporation, until
further orders from this Court or until the Securities and Ex-change Commission acts on the matters complained of in
the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been issued by
this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration, with its
supplement, of the order of the Commission denying in part petitioner's motion for production of documents,
petitioner's motion for reconsideration of the order denying the issuance of a temporary restraining order denying the
issuance of a temporary restraining order, and petitioner's consolidated motion to declare respondents in contempt
and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of respondent
corporation but stating that he should not sit as such if elected, until such time that the Commission has decided the
validity of the bylaws in dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders' meeting;
and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration of the order of
respondent Commission denying petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with indecent haste and
without circumspection in issuing the aforesaid orders to petitioner's irreparable damage and injury; (2) that it acted
without jurisdiction and in violation of petitioner's right to due process when it decided en banc an issue not raised
before it and still pending before one of its Commissioners, and without hearing petitioner thereon despite petitioner's
request to have the same calendared for hearing , and (3) that the respondents acted oppressively against the
petitioner in violation of his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and that
respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to San Miguel
International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after receiving a copy of
the restraining order issued by this Court and noting that the restraining order did not foreclose action by it, the
Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging that the
petition is without merit for the following reasons:

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied deferment of Item 6
of the Agenda of the annual stockholders' meeting of respondent corporation, took into consideration an urgent
manifestation filed with the Commission by petitioner on May 3, 1977 which prayed, among others, that the discussion
of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that "such action is within the
authority of the corporation as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to
express their wishes regarding disposition of corporate funds considering that their investments are the ones directly
affected." It was alleged that the main petition has, therefore, become moot and academic.

(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to that of
respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of his SMC stock thru
the Universal Robina Corporation and the Consolidated Foods Corporation, which corporations are engaged in
business directly and substantially competing with the allied businesses of respondent SMC and of corporations in
which SMC has substantial investments. Further, when CFC and Robina had accumulated investments. Further, when
CFC and Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and present
danger that competitors or antagonistic parties may be elected directors and thereby have easy and direct access to
SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and present danger
that business competitors, if allowed to become directors, will illegally and unfairly utilize their direct access to its
business secrets and plans for their own private gain to the irreparable prejudice of respondent SMC, and, ultimately,
its stockholders. Further, it is asserted that membership of a competitor in the Board of Directors is a blatant disregard
of no less that the Constitution and pertinent laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and protect itself
by excluding competitors and antogonistic parties, under the law of self-preservation, and it should be allowed a wide
latitude in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to petitioner's own acts
or omissions, since he failed to have the petition to suspend, pendente lite the amended by-laws calendared for
hearing. It was emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is
apparent that respondent Commission was not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and academic because respondent
Commission has acted on the pending incidents, complained of. It was, therefore, prayed that the petition be
dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has become moot
and academic for the reason, among others that the acts of private respondent sought to be enjoined have reference
to the annual meeting of the stockholders of respondent San Miguel Corporation, which was held on may 10, 1977;
that in said meeting, in compliance with the order of respondent Commission, petitioner was allowed to run and be
voted for as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and
confirmed. Further it was averred that the questions and issues raised by petitioner are pending in the Securities and
Exchange Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had;
hence the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions for the
determination of this Court because (1) the respondent Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of stockholders, such that the discussion, ratification and confirmation
of Item 6 of the Agenda of the annual stockholders' meeting of May 10, 1977 did not render the case moot; that the
amendment to the bylaws which specifically bars petitioner from being a director is void since it deprives him of his
vested rights.

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary injunction, alleging
that the actuations of respondent SEC tended to deprive him of his right to due process, and "that all possible
questions on the facts now pending before the respondent Commission are now before this Honorable Court which
has the authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a competitor from
nomination or election to the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of
the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6 of the Agenda
of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the investment in a foreign corporation of
the corporate funds, allegedly in violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question which public interest requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an appropriate
ruling on the intrinsic validity of the amended by-laws in compliance with the principle of exhaustion of administrative
remedies", considering that: first: "whether or not the provisions of the amended by-laws are intrinsically valid ... is
purely a legal question. There is no factual dispute as to what the provisions are and evidence is not necessary to
determine whether such amended by-laws are valid as framed and approved ... "; second: "it is for the interest and
guidance of the public that an immediate and final ruling on the question be made ... "; third: "petitioner was denied
due process by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same intrinsically valid; and
finally: "to remand the case to SEC would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal issues raised
by the parties in keeping with the "cherished rules of procedure" that "a court should always strive to settle the entire
controversy in a single proceeding leaving no root or branch to bear the seeds of future ligiation", citingGayong v.
Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve on the merits the validity of
its amended by laws and the rights and obligations of the parties thereunder, otherwise "the time spent and effort
exerted by the parties concerned and, more importantly, by this Honorable Court, would have been for naught because
the main question will come back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya submits
a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and decision of
the issues involved, invoking the latter's primary jurisdiction to hear and decide case involving intra-corporate
controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a
single proceeding, leaving nor root or branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of
Davao, 5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security
Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved to decide the
case on the merits "because public interest demands an early disposition of the case", and in Republic v. Central
Surety and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for further
proceedings, citing precedent where this Court, in similar situations resolved to decide the cases on the merits, instead
of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or
(b) where public interest demand an early disposition of the case; or (c) where the trial court had already received all
the evidence presented by both parties and the Supreme Court is now in a position, based upon said evidence, to
decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only a
question of law is involved. 8a Because uniformity may be secured through review by a single Supreme Court,
questions of law may appropriately be determined in the first instance by courts. 8b In the case at bar, there are facts
which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel
Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the
Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws
were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery
and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and
that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of
Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-law is in
conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore
unlawful is a question of law. 10 This rule is subject, however, to the limitation that where the reasonableness of a bylaw is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who
have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the
minority and prevent them from having representation in the Board", at the same time depriving petitioner of his
"vested right" to be voted for and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that
ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor,
petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is essentially a preventive
measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest
of those charged with the promotion of the corporate enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the
promotion of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a
combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the
detriment of the consuming public. It is further argued that there is not vested right of any stockholder under Philippine
Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally
or thru two corporations owned or controlled by him, control over the following shareholdings in San Miguel

Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b) Universal Robina Corporation 738,647 shares; (c)
CFC Corporation 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares
owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation.
It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and
CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also claimed that
both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially
competing with the alleged businesses of San Miguel Corporation, and of corporations in which SMC has substantial
investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL
CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board the areas of
competition are enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over
P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the combined market shares
of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and woven
fabrics would result in a position of such dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which, for SMC,
represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly competing in the sale of
coffee with Filipro, a subsidiary of SMC, which product line represented sales for SMC amounting to more than P275
million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in
direct competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million.
The areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of
more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894 stockholders, in
person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total outstanding shares of SMC,
rejected petitioner's candidacy for the Board of Directors because they "realized the grave dangers to the corporation
in the event a competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by
"virtue of powers delegated to it by the stockholders," approved the amendment to ' he by-laws in question. At the
meeting of February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005
shares, opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy,
while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders'
Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of the total outstanding shares.
voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED

BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board of Directors of San
Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and present danger that the
election of a business competitor to the Board may cause upon the corporation and the other stockholders inseparable
prejudice. Submitted for resolution, therefore, is the issue whether or not respondent San Miguel Corporation could,
as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal
government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. 12 At common law, the rule was "that the power to make and
adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is
settled throughout the United States that in the absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any
specific enabling provision in its charter or in general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the
qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a
qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must
own in his right at least one share of the capital stock of the stock corporation of which he is a director ... "
InGovernment v. El Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that
persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be
held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in conformity with good
practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of
the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits
of the act of incorporation and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of
his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or
written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If
the amendment changes, diminishes or restricts the rights of the existing shareholders then the disenting minority has
only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law,
the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It
cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at
the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications of its directors, the next question that
must be considered is whether the disqualification of a competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot
be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are
concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders,
"they occupy a fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of
directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or technical
law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of
the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the directors of
corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary
position cannot serve himself first and his cestuis second. ... He cannot manipulate the affairs
of his corporation to their detriment and in disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate the ancient precept against serving two
masters ... He cannot utilize his inside information and strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly through the corporation what
he could not do so directly. He cannot violate rules of fair play by doing indirectly though the
corporation what he could not do so directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter how absolute in
terms that power may be and no matter how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable limitation that it may not be exercised for
the aggrandizement, preference or advantage of the fiduciary to the exclusion or detriment of
the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment to one of them. A
judge cannot be impartial if personally interested in the cause. No more can a director. Human
nature is too weak -for this. Take whatever statute provision you please giving power to
stockholders to choose directors, and in none will you find any express prohibition against a
discretion to select directors having the company's interest at heart, and it would simply be
going far to deny by mere implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being a director,
the same reasoning would apply to disqualify the wife and immediate member of the family of such stockholder, on
account of the supposed interest of the wife in her husband's affairs, and his suppose influence over her. It is perhaps
true that such stockholders ought not to be condemned as selfish and dangerous to the best interest of the corporation
until tried and tested. So it is also true that we cannot condemn as selfish and dangerous and unreasonable the action
of the board in passing the by-law. The strife over the matter of control in this corporation as in many others is perhaps
carried on not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or
not the action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE
DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH
THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have the power to make by-laws
declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of

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

protected if this opportunity for conflicting loyalties and potential misuse and leakage of
confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in any other firm,
company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in any other
firm, company, or association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm,
company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding office.
(5) No person who is an attorney against the corporation in a law suit is eligible for service on
the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person cannot serve two hostile
masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be
discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the
impractical results that would ensue from such arrangement, it would be inconsistent with petitioner's primary motive in
running for board membership which is to protect his investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and enforce responsible corporate management. As explained by
Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and conscientious participation in
the managerial functions of the company. As directors, it is their duty to control and supervise the day to day business
activities of the company or to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it
that these policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to the
corporation."
Sound principles of corporate management counsel against sharing sensitive information with a director whose
fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. These dangers are
enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as
director.
Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San
Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for
advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of Article XIV
of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand pesos, or
both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce
or to prevent by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or commerce, or shall
combine with any other person or persons to monopolize said merchandise or object in order to
alter the price thereof by spreading false rumors or making use of any other artifice to restrain
free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any merchandise or object
of commerce or an importer of any merchandise or object of commerce from any foreign
country, either as principal or agent, wholesale or retailer, shall combine, conspire or agree in
any manner with any person likewise engaged in the manufacture, production, processing,
assembling or importation of such merchandise or object of commerce or with any other
persons not so similarly engaged for the purpose of making transactions prejudicial to lawful
commerce, or of increasing the market price in any part of the Philippines, or any such
merchandise or object of commerce manufactured, produced, processed, assembled in or
imported into the Philippines, or of any article in the manufacture of which such manufactured,
produced, processed, or imported merchandise or object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of trade.

33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising
levels of competition by improving the consumers' effectiveness as the final arbiter in free markets. These laws are
designed to preserve free and unfettered competition as the rule of trade. "It rests on the premise that the unrestrained
interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices and the
highest quality ... ." 34 they operate to forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well defined
meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which is to prevent
competition in the broad and general sense, or to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material consideration in determining its existence is not that
prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when
desired. 38Further, it must be considered that the Idea of monopoly is now understood to include a condition produced
by the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of
competition by the qualification of interest or management, or it may be thru agreement and concert of action. It is, in
brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with reality. The
election of petitioner to the Board of respondent Corporation can bring about an illegal situation. This is because an
express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade. 40 It is
enough that a concert of action is contemplated and that the defendants conformed to the arrangements, 41 and what
is to be considered is what the parties actually did and not the words they used. For instance, the Clayton Act prohibits

a person from serving at the same time as a director in any two or more corporations, if such corporations are, by
virtue of their business and location of operation, competitors so that the elimination of competition between them
would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the anticompetitive dangers which may arise when an individual simultaneously acts as a director of two or more competing
corporations. A common director of two or more competing corporations would have access to confidential sales,
pricing and marketing information and would be in a position to coordinate policies or to aid one corporation at the
expense of another, thereby stifling competition. This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one director is that
theinterlock permits the coordination of policies between nominally independent firms to an
extent that competition between them may be completely eliminated. Indeed, if a director, for
example, is to be faithful to both corporations, some accommodation must result. Suppose X is
a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that
would injure B without violating his duty of loyalty to B at the same time he could hardly abstain
from voting without depriving A of his best judgment. If the firms really do compete in the
sense of vying for economic advantage at the expense of the other there can hardly be any
reason for an interlock between competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton Act, it
was established that: "By means of the interlocking directorates one man or group of men have been able to dominate
and control a great number of corporations ... to the detriment of the small ones dependent upon them and to the injury
of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders,
shipments, capacity and inventories may lead to control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel
Corporation, the essence of competition in a free market for the purpose of serving the lowest priced goods to the
consuming public would be frustrated, The competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most out of the consumers. Where the two competing
firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade.
Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates
between companies that are related to each other as competitors is to blunt the edge of rivalry between the
corporations, to seek out ways of compromising opposing interests, and thus eliminate competition. As respondent
SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in the country win
enable the former to practice price discrimination. CFC-Robina can segment the entire consuming population by
geographical areas or income groups and change varying prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable volume at which it could produce for every product line in
which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition
and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of
petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the
Corporation Law. Said section provides in part that "any stockholder of more than one corporation organized for the
purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the
purpose of bringing about or attempting to bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner for election
to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it
could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by law, by its
terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate
equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must

be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles
of public policy and management, therefore, support the view that a by-law which disqualifies a competition from
election to the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in
adopting measures to protect legitimate corporation interests. Thus, "where the reasonableness of a by-law is a mere
matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have
expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to perpetua themselves in power
such fears appear to be misplaced. This power, but is very nature, is subject to certain well established limitations.
One of these is inherent in the very convert and definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each possessing, in substantially similar if not Identical
degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more
persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure
trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an indirect and
highly unsubstantial duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not every
person or entity engaged in business of the same kind is a competitor. Such factors as quantum and place of
business, Identity of products and area of competition should be taken into consideration. It is, therefore, necessary to
show that petitioner's business covers a substantial portion of the same markets for similar products to the extent of
not less than 10% of respondent corporation's market for competing products. While We here sustain the validity of the
amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant
with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the
stockholders, it is the responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this obligation
and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed
by the Securities behind Exchange Commission en banc and its decision shall be final unless reversed by this Court
on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an abuse of discretion, or
forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or
will result in waste, dissipation or misapplication of the corporation assets, a court of equity has the power to grant
appropriate relief. 50

a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC's former President, the late
Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost P400
million (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4)
that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a
program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the aforementioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of
the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of
the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is
granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other words,
the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the
right to examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not
to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious
purposes. The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is
proper for the court to inquire into and consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused when the information
is not sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of purpose such as will
defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification.
In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place
upon the corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of
its funds, and to inspection to obtain such information, especially where it appears that the company is being
mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to
the exclusion of others." 59

III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the
records of San Miguel International Inc., a fully owned subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied inspection
rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific period, petitioner had
been furnished numerous documents and information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual stockholders' meeting of
May 18, 1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's
P186.6 million investment in associated companies and other companies as of December 31, 1975; (5) a listing of the
salaries, allowances, bonuses and other compensation or remunerations received by the directors and corporate
officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes
of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which
deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1) that SMC's
foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda and wholly owned by
SMC; this was SMC's first venture abroad, having started in 1948 with an initial outlay of ?500,000.00, augmented by

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of
law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in
which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that where
a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely
agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded
and the books, papers and documents of all the corporations may be required to be produced for examination, 60 and
that a writ of mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes, the
records of the parent even though subsidiary was not named as a party. 61 mandamus was likewise held proper to
inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate
and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to
the control of the parent company, although it owned a vast majority of the stock of the subsidiary. 63 Likewise,
inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the

subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an
interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders to inspect
books and records of the corporation included the right to inspect corporation's subsidiaries' books and records which
were in corporation's possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary
corporation which used the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner contended that
respondent corporation "had been attempting to suppress information for the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled to copies of some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the petitioner notwithstanding the fact that no harm would be
caused thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the books and
records of a corporation in order to investigate the conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and,
therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory
right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and
records of such wholly subsidiary which are in respondent corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation
to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate funds in SMI
without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that
respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for ratification is a sound
corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or
for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been
so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose
of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least twothirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the
same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It
appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a
beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel
beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax
free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears relevant. In
said case, one of the issues was the legality of an investment made by Manao Sugar Central Co., Inc., without prior
resolution approved by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing
Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the
stand that if the investment is made in a corporation whose business is important to the investing corporation and
would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of
Directors." This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private corporation, in order to
accomplish is purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose
of shares, bonds, securities, and other evidence of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case, the purchase of such shares or
securities must be subject to the limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to own not more than 15% of the
voting stock of nay agricultural or mining corporation; and (c) that such holdings shall be solely
for investment and not for the purpose of bringing about a monopoly in any line of commerce of
combination in restraint of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967
Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the main
purpose for which it was organized, provide that 'its board of directors has been so authorized
in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling
them to exercise at least two-thirds of the voting power on such a propose at a stockholders'
meeting called for that purpose,' and provided further, that no agricultural or mining corporation
shall in anywise be interested in any other agricultural or mining corporation. When the
investment is necessary to accomplish its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis ours.)
(pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no
question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized
acts of its officers or other agents. 70 This is true because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is
defective from a supported failure to observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the
benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the
investment and its ratification by said stockholders obliterates any defect which it may have had at the outset.
"Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable
when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently
relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the
stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that
respondent corporation had committed an ultra vires act, considering the common practice of corporations of
periodically submitting for the gratification of their stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books
and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6) Justices, namely,
Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity per se of the
amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification
of petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation being
decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to
this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws
shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the validity of the
foreign investment of respondent corporation as moot.

Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal groups in
the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE
PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic Center in Quezon City for the construction
of a Mosque (prayer place), Madrasah (Arabic School), and other religious infrastructures so as to facilitate the
effective practice of Islamic faith in the area. [2]
Towards this end, that is, in the same year, the Libyan government donated money to the IDP to purchaseland
at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with an area of
49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616) [3]and RT-26521
(170567),[4] both registered in the name of IDP.
It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its
Articles of Incorporation:
Senator Mamintal Tamano[5]

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court
on the applicability of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the
result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion,
wherein they voted against the validity of the questioned amended bylaws and that this question should properly be
resolved first by the SEC as the agency of primary jurisdiction. They concur in the result that petitioner may be allowed
to run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until
disqualified after proper hearing by the respondent's Board of Directors and petitioner's disqualification shall have
been sustained by respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition by allowing
petitioner to examine the books and records of San Miguel International, Inc. as specified in the petition. The petition,
insofar as it assails the validity of the amended by- laws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No costs.
[G.R. No. 117897. May 14, 1997]
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE
COMMISSION, petitioners, vs. COURT OF APPEALS and IGLESIA NI CRISTO, respondents.
DECISION
HERMOSISIMA, JR., J.:
The subject of this petition for review is the Decision of the public respondent Court of Appeals, [1] dated October
28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission (SEC, for short) in SEC
Case No. 4012 which declared null and void the sale of two (2) parcels of land in Quezon City covered by the Deed of
Absolute Sale entered into by and between private respondent Iglesia Ni Cristo (INC, for short) and the Islamic
Directorate of the Philippines, Inc., Carpizo Group, (IDP, for short).
The following facts appear of record.

Congressman Ali Dimaporo

Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar[6]
According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name of
IDP, Martial Law was declared by the late President Ferdinand Marcos. Most of the members of the 1971 Board of
Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman Al-Rashid Lucman
flew to the Middle East to escape political persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the Abbas
Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the legitimate
IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups, came out with a
Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board
members to be null and void. The dispositive portion of the SEC Decision reads:
WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners [7] and respondents[8] as null
and void for being violative of the Articles of Incorporation of petitioner corporation. With the nullification of the election
of the respondents, the approved by-laws which they certified to this Commission as members of the Board of
Trustees must necessarily be likewise declared null and void. However, before any election of the members of the
Board of Trustees could be conducted, there must be an approved by-laws to govern the internal government of the
association including the conduct of election. And since the election of both petitioners and respondents have been
declared null and void, a vacuum is created as to who should adopt the by-laws and certify its adoption. To remedy
this unfortunate situation that the association has found itself in, the members of the petitioning corporation are hereby

authorized to prepare and adopt their by-laws for submission to the Commission. Once approved, an election of the
members of the Board of Trustees shall immediately be called pursuant to the approved by-laws.

Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioners motion to
intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being raised by
way of intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to the SEC. [15]

SO ORDERED.[9]
Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision, and,
thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although the Carpizo
Group[10] attempted to submit a set of by-laws, the SEC found that, aside from Engineer Farouk Carpizo and Atty.
Musib Buat, those who prepared and adopted the by-laws were not bona fide members of the IDP, thus rendering the
adoption of the by-laws likewise null and void.
On April 20, 1989, without having been properly elected as new members of the Board of Trustees of IDP, the
Carpizo Group caused to be signed an alleged Board Resolution [11] of the IDP, authorizing the sale of the subject two
parcels of land to the private respondent INC for a consideration of P22,343,400.00, which sale was evidenced by a
Deed of Absolute Sale[12] dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal Tamano, or
the Tamano Group, filed a petition before the SEC, docketed as SEC Case No. 4012, seeking to declare null and void
the Deed of Absolute Sale signed by the Carpizo Group and the INC since the group of Engineer Carpizo was not the
legitimate Board of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an action
for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of the Regional Trial
Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to clear the property of squatters
and deliver complete and full physical possession thereof to INC. Likewise, INC filed a motion in the same case to
compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of Deeds of Quezon City the owners
duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the aforementioned two parcels of land, so that the sale
in INCs favor may be registered and new titles issued in the name of INC.Mrs. Ligon was alleged to be the mortgagee
of the two parcels of land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco
claimed to be in behalf of the Carpizo Group.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring, inter alia:

Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo Group
but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered Partial Judgment in
Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its obligation under the Deed of Sale of
clearing the subject lots of squatters and of delivering the actual possession thereof to INC. [16]
Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-6937,
treated INC as the rightful owner of the real properties and disposed as follows:
WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff [17] the owners copy of RT26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of Absolute Sale in the latters
name and the annotation of the mortgage executed in her favor by herein defendant Islamic Directorate of the
Philippines on the new transfer certificate of title to be issued to plaintiff.
SO ORDERED.[18]
On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon to deliver the owners
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City for
the purposes stated in the Order of March 2, 1992.[19]
Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R. No. SP27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on October 28,
1992.[20]
Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No.
107751.
In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this wise:

xxx xxx xxx

1. Declaring the by-laws submitted by the respondents [21] as unauthorized, and hence, null and void.

2. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against Mr. Farouk
Carpizo,et, al., who, through false schemes and machinations, succeeded in executing the Deed of Sale between the
IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of Sale is the subject of the case at bar;

2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into
by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc. [22] null and void.
3. Declaring the election of the Board of Directors [23] of the corporation from 1986 to 1991 as null and void;

3. That the said case before the SEC is docketed as Case No. 04012, the main issue of which is whether or not the
aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void, hence, Intervenors legal interest in the
instant case. A copy of the said case is hereto attached as Annex A;
4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully and legally represent the Islamic
Directorate of the Philippines;
xxx xxx xxx.[13]
Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by way of
intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC.[14]

4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as members of the IDP null
and void.
No pronouncement as to cost.
SO ORDERED.[24]
Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012, but
the same was denied on account of the fact that the decision of the case had become final and executory, no appeal
having been taken therefrom.[25]

INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil action
for certiorari, docketed as CA-G.R. SP No. 33295. On October 28, 1994, the court a quo promulgated a Decision in
CA-G.R. SP No. 33295 granting INCs petition. The portion of the SEC Decision in SEC Case No. 4012 which declared
the sale of the two (2) lots in question to INC as void was ordered set aside by the Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994, submitting that
the Court of Appeals gravely erred in:
1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel and laches. [26]
While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No. 107751 on
the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon petition and affirmed the
October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge
Reyes compelling mortgagee Ligon to surrender the owners duplicate copies of TCT Nos. RT-26521 (170567) and RT26520 (176616) to the Register of Deeds of Quezon City so that the Deed of Absolute Sale in INCs favor may be
properly registered.
Before we rule upon the main issue posited in this petition, we would like to point out that our disposition in G.R.
No. 107751 entitled, Ligon v. Court of Appeals, promulgated on June 1, 1995, in no wise constitutes res judicata such
that the petition under consideration would be barred if it were the case. Quite the contrary, the requisites of res
judicata do not obtain in the case at bench.
Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in
personam, to wit:
Effect of judgment. - The effect of a judgment or final order rendered by a court or judge of the Philippines, having
jurisdiction to pronounce the judgment or order, may be as follows:
xxx xxx xxx
(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to any other
matter that could have been raised in relation thereto, conclusive between the parties and their
successors in interest by title subsequent to the commencement of the action or special proceeding,
litigating for the same thing and under the same title and in the same capacity;
(c) In any other litigation between the same parties or their successors in interest, that only is deemed to
have been adjudged in a former judgment which appears upon its face to have been so adjudged, or
which was actually and necessarily included therein or necessary thereto.
Section 49(b) enunciates the first concept of res judicata known as bar by prior judgment, whereas, Section
49(c) is referred to as conclusiveness of judgment.
There is bar by former judgment when, between the first case where the judgment was rendered, and the
second case where such judgment is invoked, there is identity of parties, subject matter and cause of action.When the
three identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the
subsequent action. But where between the first case wherein judgment is rendered and the second case wherein such

judgment is invoked, there is only identity of parties but there is no identity of cause of action, the judgment is
conclusive in the second case, only as to those matters actually and directly controverted and determined, and not as
to matters merely involved therein. This is what is termed conclusiveness of judgment.[27]
Neither of these concepts of res judicata find relevant application in the case at bench. While there may be
identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties in G.R. No.
107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, as
represented by the 1971 Board of Trustees or the Tamano Group, was only made an ancillary party in G.R. No.
107751 as intervenor.[28] It was never originally a principal party thereto. It must be noted that intervention is not an
independent action, but is merely collateral, accessory, or ancillary to the principal action. It is just an interlocutory
proceeding dependent on or subsidiary to the case between the original parties. [29] Indeed, the IDP-Tamano Group
cannot be considered a principal party in G.R. No. 107751 for purposes of applying the principle of res judicata since
the contrary goes against the true import of the action of intervention as a mere subsidiary proceeding without an
independent life apart from the principal action as well as the intrinsic character of the intervenor as a mere
subordinate party in the main case whose right may be said to be only in aid of the right of the original party. [30] It is
only in the present case, actually, where the IDP-Tamano Group became a principal party, as petitioner, with the
Iglesia Ni Cristo, as private respondent. Clearly, there is no identity of parties in both cases.
In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751, was
entitled, Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant, [31] the IDP can not be considered
essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate Board of
Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for Specific Performance with
Damages, a mere action in personam, did not become final and executory insofar as the true IDP is concerned since
petitioner corporation, for want of legitimate representation, was effectively deprived of its day in court in said
case. Res inter alios judicatae nullum aliis praejudicium faciunt. Matters adjudged in a cause do not prejudice those
who were not parties to it. [32] Elsewise put, no person (natural or juridical) shall be affected by a proceeding to which he
is a stranger.[33]
Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a bar by former
judgment will still not set in on the ground that the cause of action in the two cases are different. The cause of action in
G.R. No. 107751 is the surrender of the owners duplicate copy of the transfer certificates of title to the rightful
possessor thereof, whereas the cause of action in the present case is the validity of the Carpizo Group-INC Deed of
Absolute Sale.
Res Judicata in the form of conclusiveness of judgment cannot likewise apply for the reason that any mention
at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed incidental to the
resolution of the primary issue posed in said case which is: Who between Ligon and INC has the better right of
possession over the owners duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be
considered determinative and conclusive on the matter of the validity of the sale for this particular issue was not the
principal thrust of Ligon. To rule otherwise would be to cause grave and irreparable injustice to IDP which never gave
its consent to the sale, thru a legitimate Board of Trustees.
In any case, while it is true that the principle of res judicata is a fundamental component of our judicial system, it
should be disregarded if its rigid application would involve the sacrifice of justice to technicality.[34]
The main question though in this petition is: Did the Court of Appeals commit reversible error in setting aside
that portion of the SECs Decision in SEC Case No. 4012 which declared the sale of two (2) parcels of land in Quezon
City between the IDP-Carpizo Group and private respondent INC null and void?
We rule in the affirmative.

There can be no question as to the authority of the SEC to pass upon the issue as to who among the different
contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling within the
original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:

The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Groups failure to
comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the
corporation:

Section 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships
or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to
operate in the Philippines xxx xxx.

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon terms and
conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of
money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized
by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders or members meeting duly
called for the purpose.Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this Code.

xxxxxxxxx
Section 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:
xxxxxxxxx
c) Controversies in the selection or appointment of directors, trustees, officers, or managers of such corporations,
partnerships or associations. x x x.
If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare who is not the
legitimate IDP Board. This is precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of the
Carpizo Group to the IDP Board of Trustees to be null and void. [35] By this ruling, the SEC in effect made the
unequivocal finding that the IDP-Carpizo Group is a bogus Board of Trustees. Consequently, the Carpizo Group is
bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of IDP
property.
It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to pass
upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687, [36] in a suit between
the Carpizo Group and the Abbas Group, already declared the election of the Carpizo Group (as well as the Abbas
Group) to the IDP Board as null and void for being violative of the Articles of Incorporation. [37] Nothing thus becomes
more settled than that the IDP-Carpizo Group with whom private respondent INC contracted is a fake Board.
Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora
property, allegedly in the name of the IDP, have to be struck down for having been done without the consent of the IDP
thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the essential requisites of contracts:

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was
incorporated.
x x x x x x x x x.
The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence, its sale
to a third-party is a sale or disposition of all the corporate property and assets of IDP falling squarely within the
contemplation of the foregoing section. For the sale to be valid, the majority vote of the legitimate Board of Trustees,
concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been obtained. These
twin requirements were not met as the Carpizo Group which voted to sell the Tandang Sora property was a fake Board
of Trustees, and those whose names and signatures were affixed by the Carpizo Group together with the sham Board
Resolution authorizing the negotiation for the sale were, from all indications, not bona fide members of the IDP as they
were made to appear to be. Apparently, there are only fifteen (15) official members of the petitioner corporation
including the eight (8) members of the Board of Trustees. [39]
All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent INC
was intrinsically void ab initio.
Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made
outside of its jurisdiction, the same not being an intra-corporate dispute.

There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
All these elements must be present to constitute a valid contract. For, where even one is absent, the contract is
void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and where it is wanting, the
contract is non-existent.[38] In this case, the IDP, owner of the subject parcels of land, never gave its consent, thru a
legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case
not only of vitiated consent, but one where consent on the part of one of the supposed contracting parties is totally
wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.

The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale null and
void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack of consent of the IDP,
owner of the subject property. No end of substantial justice will be served if we reverse the SECs conclusion on the
matter, and remand the case to the regular courts for further litigation over an issue which is already determinable
based on what we have in the records.
It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board of
Trustees in Civil Case No. Q-90-6937, a case for Specific Performance with Damages between INC and the Carpizo
Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been granted ample opportunity
before the regional trial court to shed light on the true status of the Carpizo Board and settled the matter as to the
validity of the sale then and there. But INC, wanting to acquire the property at all costs and threatened by the
participation of the legitimate IDP Board in the civil suit, argued for the denial of the motion averring, inter alia, that the
issue sought to be litigated by the movant is intra-corporate in nature and outside the jurisdiction of the regional trial
court.[40] As a result, the motion for intervention was denied. When the Decision in SEC Case No. 4012, came out

nullifying the sale, INC came forward, this time, quibbling over the issue that it is the regional trial court, and not the
SEC, which has jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We cannot put a
premium on this clever legal maneuverings of private respondent which, if countenanced, would result in a failure of
justice.
Furthermore, the Court observed that the INC bought the questioned property from the Carpizo Group without
even seeing the owners duplicate copy of the titles covering the property. This is very strange considering that the
subject lot is a large piece of real property in Quezon City worth millions, and that under the Torrens System of
Registration, the minimum requirement for one to be a good faith buyer for value is that the vendee at least sees the
owners duplicate copy of the title and relies upon the same. [41] The private respondent presumably knowledgeable on
the aforesaid working of the Torrens System, did not take heed of this and nevertheless went through with the sale
with undue haste. The unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even
being presented with the owners copy of the titles casts very serious doubt on the rightfulness of its position as vendee
in the transaction.
WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated
October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange Commission
dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of Quezon City is hereby ordered
to cancel the registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if one has already
been made. If new titles have been issued in the name of Iglesia Ni Cristo, the register of Deeds is hereby ordered to
cancel the same, and issue new ones in the name of petitioner Islamic Directorate of the Philippines. Petitioner
corporation is ordered to return to private respondent whatever amount has been initially paid by INC as consideration
for the property with legal interest, if the same was actually received by IDP.Otherwise, INC may run after Engineer
Farouk Carpizo and his group for the amount of money paid.

Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father, placed in the hands of
Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the terms upon which the plaintiff would undertake to
supply from Paris the aforesaid films. This officer was declared to be good until the end of July; and as only about for
the Orientalist Company to act on the matter speedily, if it desired to take advantage of said offer. Accordingly, Ramon
J. Fernandez, on July 30, had an informal conference with all the members of the company's board of directors except
one, and with approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in Manila,
accepting the offer contained in the memorandum of July 4th for the exclusive agency of the Eclair films. A few days
later, on August 5, he addressed another letter couched in the same terms, likewise accepting the office of the
exclusive agency for the Milano Films.
The memorandum offer contained a statement of the price at which the films would be sold, the quantity which the
representative of each was required to take and information concerning the manner and intervals of time for the
respective shipments. The expenses of packing, transportation and other incidentals were to be at the cost of the
purchaser. There was added a clause in which J. F. Ramirez described his function in such transactions as that of a
commission agent and stated that he would see to the prompt shipment of the films, would pay the manufacturer, and
take care that the films were insured his commission for such services being fixed at 5 per cent.
What we consider to be the most portion of the two letters of acceptance written by R. J. Fernandez to Jose Ramirez is
in the following terms:
We willingly accepted the officer under the terms communicated by your father in his letter dated at Paris
on July 4th of the present year.
These communications were signed in the following form, in which it will be noted the separate signature of R. J.
Fernandez, as an individual, is placed somewhat below and to the left of the signature of the Orientalist Company as
singed by R. J. Fernandez, in the capacity of treasurer:

SO ORDERED.
G.R. No. 11897

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,
Treasurer,

September 24, 1918

J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.
Jose Moreno Lacalle for appellant Fernandez.
Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.
STREET, J.:
The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands, and in 1913 and
1914, the time of the occurrences which gave rise to this lawsuit, was engaged in the business of maintaining and
conducting a theatre in the city of Manila for the exhibition of cinematographic films. Under the articles of incorporation
the company is authorized to manufacture, buy, or otherwise obtain all accessories necessary for conducting such a
business. The plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris, France, and was engaged in
the business of marketing films for a manufacturer or manufacturers, there engaged in the production or distribution of
cinematographic material. In this enterprise the plaintiff was represented in the city of Manila by his son, Jose Ramirez.
In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became apprised of the fact
that the plaintiff in Paris had control of the agencies for two different marks of films, namely, the "Eclair Films" and the
"Milano Films;" and negotiations were begun with said officials of the Orientalist Company by Jose Ramirez, as agent
of the plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the Orientalist Company.
The defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was chiefly
active in this matter, being moved by the suggestions and representations of Vicente Ocampo, manage of the Oriental
Theater, to the effect that the securing of the said films was necessary to the success of the corporation.

R. J. FERNANDEZ.
Both of these letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that his
offer had been accepted by the Orientalist Company and instruct him to make a contract with the film companies,
according to the tenor of the offer, and in the capacity of attorney-in-fact for the Orientalist Company. The idea behind
the latter suggestion apparently was that the contract for the films would have to be made directly between the filmproducing companies and the Orientalist Company; and it seemed convenient, in order to save time, that the
Orientalist Company should clothed J. F. Ramirez with full authority as its attorney-in-fact. This idea was never given
effect; and so far as the record shows, J. F. Ramirez himself procured the films upon his own responsibility, as he
indicated in the officer of July 4 that he would do, with the result that the only contracting parties in this case are J. F.
Ramirez of the one part, and the Orientalist Company, with Ramon J. Fernandez of the other.
In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment being
attached to the proper bill of lading. It appears that the Orientalist Company was without funds to meet these
obligations and the first few drafts were dealt with in the following manner: The drafts, upon presented through the
bank, were accepted in the name of the Orientalist Company by its president B. Hernandez, and were taken up by the
latter with his own funds. As the drafts had thus been paid by B. Hernandez, the films which had been procured by he
payment of said drafts were treated by him as his own property; and they in fact never came into the actual possession
of the Orientalist Company as owner at all, though it is true Hernandez rented the films to the Orientalist Company and
they were exhibited by it in the Oriental Theater under an arrangement which was made between him and the theater's
manager.

During the period between February 27, 1914, and April 30, 1914, there arrived in the city of Manila several
remittances of films from Paris, and it is these shipments which have given occasion for the present action. All of the
drafts accompanying these films were drawn, as on former occasions, upon the Orientalist Company; and all were
accepted in the name of B. Hernandez, except the last, which was accepted by B. Hernandez individually. None of the
drafts thus accepted were taken up by the drawee or by B. Hernandez when they fell due; and it was finally necessary
for the plaintiff himself to take them up as dishonored by non-payment.
Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist Company, and Ramon J.
Fernandez. As the films which accompanied the dishonored were liable to deteriorate, the court, upon application of
the plaintiff, and apparently without opposition on the part of the defendants, appointed a receiver who took charge of
the films and sold them. The amount realized from this sale was applied to the satisfaction of the plaintiff's claim and
was accordingly delivered to him in part payment thereof. At trial judgment was given for the balance due to the
plaintiff, namely P6,018.93, with interest from May 19, 1914, the date of the institution of the action. In the judgment of
the trial court the Orientalist Company was declared to be a principal debtor and Ramon J. Fernandez was declared to
be liable subsidiarily as guarantor. From this judgment both of the parties defendant appealed.
In this Court neither of the parties appellant make any question with respect to the right of the plaintiff to recover from
somebody the amount awarded by the lower court; but each of the defendants insists the other is liable for the whole.
It results that the real contention upon this appeal is between the two defendants.
It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not challenged by the Orientalist
Company that the judgment has already been executed as against the company is exclusively and primarily liable the
entire indebtedness, the question as to the liability of Ramon J. Fernandez would be academic. But if the latter is liable
as principal obligor for the whole or any part of the debt, it will be necessary to modify the judgment in order to adjust
the rights of the defendants in accordance with such finding.
It will be noted that the action is primarily founded upon the liability created by the letters dated July 30th and August 5,
1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters mentioned are copied into the
complaint as the foundation of the action. The action is not based upon the dishonored drafts which were accepted by
B. Hernandez in the name of the Orientalist Company; and although these drafts, as well as the last draft, which was
accepted by B. Hernandez individually, have been introduced in evidence, this was evidently done for the purpose of
proving the amount of damages which the plaintiff was entitled to recover.
In the discussion which is to follow we shall consider, first, the question of the liability of the corporation upon the
contracts contained in the letters of July 30 and August 5, 1913, and, secondly the question of the liability of Ramon J.
Fernandez, based upon his personal signature to the same documents.
As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The action, as already
stated, is based upon documents purporting to be signed by the Orientalist Company, and copies of the documents
are set out in the complaint. It was therefore incumbent upon the corporation, if it desired to question the authority of
Fernandez to bind it, to deny the due execution of said contracts under oath, as prescribed in section 103 of the Code
of Civil procedure. Said section, in the part pertinent to the situation now under consideration, reads as follows:
When an action is brought upon a written instrument and the complaint contains or has annexed or has
annexed a copy of such instrument, the genuineness and due execution of the instrument shall be deemed
admitted, unless specifically denied under oath in the answer.
No sworn answer denying the genuineness and due execution of the contracts in question or questioning the authority
of Ramon J. Fernandez to bind the Orientalist Company was filed in this case; but evidence was admitted without
objection from the plaintiff, tending to show that Ramon J. Fernandez had no such authority. This evidence consisted
of extracts from the minutes of the proceedings of the company's board of directors and also of extracts from the
minutes of the proceedings of the company's stockholders, showing that the making of this contract had been under
consideration in both bodies and that the authority to make the same had been withheld by the stockholders. It
therefore becomes necessary for us to consider whether the administration resulting from the failure of the defendant
company to deny the execution of the contracts under oath is binding upon it for all purposes of this lawsuit, or whether
such failure should be considered a mere irregularity of procedure which was waived when the evidence referred to
was admitted without objection from the plaintiff. The proper solution of this problem makes it necessary to consider
carefully the principle underlying the provision above quoted.

That the situation was one in which an answer under oath denying the authority of the agent should have been
interposed, supposing that the company desired to contest this point, is not open to question. In the case of
Merchant vs. International Banking Corporation, (6 Phil. Rep., 314), it appeared that one Brown has signed the name
of the defendant bank as guarantor of a promissory note. The bank was sued upon this guaranty and at the hearing
attempted to prove that Brown had no authority to bind the bank by such contract. It was held that buy failing to deny
the contract under oath, the bank had admitted the genuineness and due execution thereof, and that this admission
extended not only to the authenticity of the signature of Brown but also to his authority. Said Justice Willard: "The
failure of the defendant to deny the genuineness and due execution of this guaranty under oath was an admission not
only of the signature of Brown, but also his authority to make the contract in behalf of the defendant and of the power
the contract in behalf of the defendant and of the power of the defendant to enter into such a contract.
The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be seen by reference to
the following, among other authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining corporation upon an appeal
bond. The name of the company had been affixed to the obligation by an agent, and no sufficient affidavit was filed by
the corporation questioning its signature or the authority of the agent to bind the company. It was held that the plaintiff
did not have to prove the due execution of the bond and that the corporation as to be taken as admitting the authority
of the agent to make the signature. Among other things the court said: "But it is said that the authority of Barrett to
execute the bond is distinguishable from the signing and, although the signature must be denied under oath, the
authority of the agent need not be. Upon this we observe that the statute manifestly refers to the legal effect of the
signature, rather than the manual act of singing. If the name of the obligor, in a bond, is subscribed by one in his
presence, and by his direction, the effect is the same as if his name should be signed with his own hand, and under
such circumstances we do not doubt that the obligor must deny his signature under oath, in order to put the obligee to
proof of the fact. Quit facit per aliam facit per se, and when the name is signed by one thereunto authorized, it is as
much as the signature of the principal as if written with his own hand. Therefore, if the principal would deny the
authority of the agent, as the validity of the signature is thereby directly attacked, the denial must be under oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note purporting to have been
given by on A. B., as the treasurer of the defendant company. Said the court: "Under the Judiciary Act of 1799,
requiring the defendant to deny on oath an instrument of writing, upon which he is sued, the plea in this case should
have been verified.
If the person who signed this note for the company, and upon which they are sued, was not authorized to make it, let
them say so upon oath, and the onus is then on the plaintiff to overcome the plea."
It should be noted that the provision contained in section 103 of our Code of Civil Procedure is embodied in some form
or other in the statutes of probably all of the American States, and it is not by any means peculiar to the laws of
California, though it appears to have been taken immediately from the statutes of that State. (Secs. 447, 448,
California Code of Civil Procedure.)
There is really a broader question here involved than that which relates merely to the formality of verifying the answer
with an affidavit. This question arises from the circumstance that the answer of the corporation does not in any was
challenge the authority of Ramon J. Fernandez to bind it by the contracts in question and does not set forth, as a
special defense, any such lack of authority in him. Upon well-established principles of pleading lack of authority in an
officer of a corporation to bind it by a contract executed by him in its name is a defense which should be specially
pleaded and this quite apart from the requirement, contained in section 103, that the answer setting up such
defense should be verified by oath. But is should not here escape observation that section 103 also requires in
denial contemplated in that section shall be specific. An attack on the instrument in general terms is insufficient, even
though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)
In the first edition of a well-known treatise on the laws of corporations we find the following proposition:
If an action is brought against a corporation upon a contract alleged to be its contract, if it desires to set up
the defense that the contract was executed by one not authorized as its agent, it must plead non est
factum. (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)
Again, says the same author:

A corporation can not avail itself of the defense that it had no power to enter into the obligation to enforce
which the suit is brought, unless it pleads that defense. This principle applies equally where the defendant
intends to challenge the power of its officer or agent to execute in its behalf the contract upon which the
action brought and where it intends to defend on the ground of total want of power in the corporation to
make such a contract. (Opus citat. sec. 7619.)
In Simon vs. Calfee (80 Ark., 65), it was said:
Though the power of the officers of a business corporation to issue negotiable paper in its name is not
presumed, such corporation can not avail itself of a want of power in its officers to bind it unless the
defense was made on such ground.
The rule has been applied where the question was whether corporate officer, having admitted power to make a
contract, had in the particular instance exceeded that authority, (Merill vs. Consumers' Coal Co., 114 N.Y., 216); and it
has been held that where the answer in a suit against a corporation on its note relies simply on the want of power of
the corporation to issue notes, the defendant can not afterwards object that the plaintiff has not shown that the officer
executing the note were empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)
The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with
corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found 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 never have been granted. 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. Whether a
particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and
the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an officer
of a corporation has made a contract in its name, that the corporation should be required, if it denies his authority, to
state such defense in its answer. By this means the plaintiff is apprised of the fact that the agent's authority is
contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the
contract was ratified and approved.
We are of the opinion that the failure of the defendant corporation to make any issue in its answer with regard to the
authority of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the genuineness
and due execution of the contracts sued upon, have the effect of elimination the question of his authority from the
case, considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a written instrument, the
foundation of the suit, is not denied upon oath, it shall be deemed to be admitted. It is familiar doctrine that an
admission made in a pleading can not be controverted by the party making such admission; and all proof submitted by
him contrary thereto or inconsistent therewith should simply be ignored by the court, whether objection is interposed by
the opposite party or not. We can see no reason why a constructive admission, created by the express words of the
statute, should be considered to have less effect than any other admission.
The parties to an action are required to submit their respective contentions to the court in their complaint and answer.
These documents supply the materials which the court must use in order to discover the points of contention between
the parties; and where the statute says that the due execution of a document which supplies the foundation of an
action is to be taken as admitted unless denied under oath, the failure of the defendant to make such denial must be
taken to operate as a conclusive admission, so long as the pleadings remain that form.
It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances between the
allegations of a pleading and the proof shall be disregarded and the facts shall be found according to the evidence.
The same section, however, recognizes the necessity for an amendment of the pleadings. And judgment must be in
conformity with the case made in conformity with the case made in the pleadings and established by the proof, and
relief can not be granted that is substantially inconsistent with either. A party can no more succeed upon a case proved
but not alleged than upon a case alleged but nor proved. This rule of course operates with like effect upon both
parties, and applies equality to the defendants special defense as to the plaintiffs cause of action.

Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to permit the answer of
the defendant to be amended; and if we believed that the interests of justice so required, we would either exercise that
authority or remand the cause for a new trial in court below. As will appear further on in this opinion, however, we think
that the interests of justice will best be promoted by deciding the case, without more ado, upon the issues presented in
the record as it now stands.
That we may not appear to have overlooked the matter, we will observe that two cases are cited from California in
which the Supreme Court of the State has held that where a release is pleaded by way of defense and evidence
tending to destroy its effect is introduced without objection, the circumstance that it was not denied under oath is
immaterial. In the earlier of these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a
railroad company to recover damages for the death of the plaintiff's minor son, alleged to have been killed by the
negligence of the defendant. The defendant company pleaded by way of defense a release purporting to be signed by
the plaintiff, and in its answer inserted a copy of the release. The execution of the release was not denied under oath;
but at the trial evidence was submitted on behalf of the plaintiff tending to show that at the time he signed the release,
he was incompetent by reason of drunkenness to bind himself thereby. It was held that inasmuch as this evidence had
been submitted by the plaintiff without objection, it was proper for the court to consider it. We do not question the
propriety of that decision, especially as the issue had been passed upon by a jury; but we believe that the decision
would have been more soundly planted if it had been said that the incapacity of the plaintiff, due to his drunken
condition, was a matter which did not involve either the genuineness or due execution of the release. Like the
defenses of fraud, coercion, imbecility, and mistake, it was a matter which could be proved under the general issue
and did not have to be set up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat similar
explanation can, we think, be given of the case of Clark vs. Child in which the rule declared in the earlier case was
followed. With respect to both decisions which we merely observe that upon point of procedure which they are
supposed to maintain, the reasoning of the court is in our opinion unconvincing.
We shall now consider the liability of the defendant company on the merits just as if that liability had been properly put
in issue by a specific answer under oath denying the authority of Fernandez go to bind it. Upon this question it must at
the outset be premised that Ramon J. Fernandez, as treasurer, had no independent authority to bind the company by
signing its name to the letters in question. It is declared by signing its name to the letters in question. It is declared in
section 28 of the Corporation Law that corporate power 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
declared in the same by-laws that the president shall have the power, and it shall be his duty, to sign contract; but this
has reference rather 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 contract 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 the
board can create liability, like an individual, by other means than by a formal expression of its will. In this connection
the case of Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there appeared that the
secretary of the defendant corporation had signed an obligation on its behalf binding it as guarantor of the
performance of an important contract upon which the name of another corporation appeared as principal. The
defendant company set up by way of defense that is secretary had no authority to bind it by such an engagement. The
court found that the guaranty was given with the knowledge and consent of the president and directors, and that this
consent of the president and directors, and that this consent was given with as much observance of formality as was
customary in the transaction of the business of the company. It was held that, so far as the authority of the secretary
was concerned, the contract was binding. In discussing this point, the court quoted with approval the following
language form one of its prior decisions:
The authority of the subordinate agent of a corporation often depends upon the course of dealings which
the company or its director have sanctioned. It may be established sometimes without reference to official
record of the proceedings of the board, by proof of the usage which the company had permitted to grow up
in business, and of the acquiescence of the board charged with the duty of supervising and controlling the
company's business.
It appears in evidence, in the case now before us, that on July 30, the date upon which the letter accepting the offer of
the Eclair films was dispatched the board of directors of the Orientalist Company convened in special session in the
office of Ramon J. Fernandez at the request of the latter. There were present the four members, including the
president, who had already signified their consent to the making of the contract. At this meeting, as appears from the
minutes, Fernandez informed the board of the offer which had been received from the plaintiff with reference to the

importation of films. The minutes add that terms of this offer were approved; but at the suggestion of Fernandez it was
decided to call a special meeting of the stockholders to consider the matter and definite action was postponed.
The stockholders meeting was convoked upon September 18, 1913, upon which occasion Fernandez informed those
present of the offer in question and of the terms upon which the films could be procured. He estimated that the
company would have to make an outlay of about P5,500 per month, if the offer for the two films should be accepted by
it.

Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of the board of
directors of the Orientalist Company, we find that upon October 27, 1913, after Fernandez had departed from the
Philippine Islands, to be absent for many months, said board adopted a resolution conferring the following among
other powers on Vicente Ocampo, the manager of the Oriental theater, namely:
(1) To rent a box for the films in the "Kneeler Building."
(4) To be in charge of the films and of the renting of the same.

The following extracts from the minutes of this meeting are here pertinent:
(5) To advertise in the different newspapers that we are importing films to be exhibited in the Cine Oriental.
Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for the purpose of
avoiding that other importers should get ahead of the corporation in this regard, he and Messrs. B.
Hernandez, Leon Monroy, and Dr. Papa met for the purpose of considering the acceptance of the offer
together with the responsibilities attached thereto, made to the corporation by the film manufacturers
ofEclair and Milano of Paris and Italy respectively, inasmuch as the first shipment of films was then
expected to arrive.
At the same time he informed the said stockholders that he had already made arrangements with respect
to renting said films after they have been once exhibited in the Cine Oriental, and that the corporation
could very well meet the expenditure involved and net a certain profit, but that, if we could enter into a
contract with about nine cinematographs, big gains would be obtained through such a step.
The possibility that the corporation might not see fit to authorize the contract, or might for lack of funds be unable to
make the necessary outlay, was foreseen; and in such contingency the stockholders were informed, that the four
gentlemen above mentioned (Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their
own account and risk, and shall be entitled only to a compensation of 10 per cent of their outlay in importing the films,
said payment to be made in shares of said corporation, inasmuch as the corporation is lacking available funds for the
purpose, and also because there are 88 shares of stock remaining still unsold."
In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the Eclair and Milano
films should be accepted, if the corporation could obtain the money with which to meet the expenditure involved, and
to this end appointed a committee to apply to the bank for a credit. The evidence shows that an attempt was made, on
behalf of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine Islands for the purpose
indicated, but the bank declined to grant his credit. Thereafter another special meeting of the shareholders of the
defendant corporation was called at which the failure of their committee to obtain a credit from the bank was made
known. A resolution was thereupon passed to the effect that the company should pay to Hernandez, Fernandez,
Monroy, and Papa an amount equal to 10 per cent of their outlay in importing the films, said payment to be made in
shares of the company in accordance with the suggestion made at the previous meeting. At the time this meeting was
held three shipment of the films had already been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of September 18, and
especially from the first paragraph above quoted, that this body was then cognizant that the officer had already been
accepted in the name of the Orientalist Company and that the films which were then expected to arrive were being
imported by virtue of such acceptance. Certainly four members of the board of directors there present were aware of
this fact, as the letter accepting the offer had been sent with their knowledge and consent. In view of this circumstance,
a certain doubt arises whether they meant to utilize the financial assistance of the four so-called importers in order that
the corporation might bet the benefit of the contract for the films, just as it would have utilized the credit of the bank if
such credit had been extended. If such was the intention of the stockholders their action amounted to a virtual, though
indirect, approval of the contract. It is not however, necessary to found the judgment on this interpretation of the
stockholders proceedings, inasmuch as we think for reasons presently to be stated, that the corporation is bound, and
we will here assume that in the end the contract were not approved by the stockholders.
It will be observed that Ramon J. Fernandez was the particular officer and member of the board of directors who was
most active in the effort to secure the films for the corporation. The negotiations were conducted by him with the
knowledge and consent of other members of the board; and the contract was made with their prior approval. As
appears from the papers in this record, Fernandez was the person to who keeping was confided the printed stationery
bearing the official style of the corporation, as well as rubber stencil with which the name of the corporation could be
signed to documents bearing its name.

(6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for the payment
thereof.
(7) To buy a book and cards for indexing the names of the films.
(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the Hon. R. Acua to enter
into agreements with cinematograph proprietors in the provinces for the purpose of renting films from us.
It thus appears that the board of directors, before the financial inability of the corporation to proceed with the project
was revealed, had already recognized the contract as being in existence and had proceeded to take the steps
necessary to utilize the films. Particularly suggestive is the direction given at this meeting for the publication of
announcements in the newspapers to the effect that the company was engaged in importing films. In the light of all the
circumstances of the case, we are of the opinion that the contracts in question were thus inferentially approved by the
company's board of directors and that the company is bound unless the subsequent failure of the stockholders to
approve said contracts had the effect of abrogating the liability thus created.
Both upon principle and authority it is clear that the action of the stockholders, whatever its character, must be ignored.
The functions of the stockholders of a corporation are, it must be remembered, of a limited nature. 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. (Cook on
Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely accordant with the provisions of section 28 of our
Corporation Law already referred to. 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.
In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law, and we would be sorry to announce a doctrine which would
permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the
earth without recourse against the corporations whose name and authority had been used in the manner disclosed in
this case. As already observed, it is familiar doctrine that if a corporation knowingly permits one of its officer, or any
other agent, to do acts within the scope of an apparent authority, and thus hold him out to the public as possessing
power to do those acts, the corporation will as against any one who has in good faith dealt with the corporation through
such agent, be estopped from denying his authority; and where it is said "if the corporation permits" this means the
same as "if the thing is permitted by the directing power of the corporation."
It being determined that the corporation is bound by the contract in question, it remains to consider the character of the
liability assumed by R. J. Fernandez, in affixing his personal signature to said contract. The question here is whether
Fernandez is liable jointly with the Orientalists Company as a principal obligor, or whether his liability is that of a
guarantor merely.

As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is not in line with the
signature of the Orientalist Company, but is set off to the left of the company's signature and somewhat who sign
contracts in some capacity other than that of principal obligor to place their signature alone would justify a court in
holding that Fernandez here took upon himself the responsibility of a guarantor rather than that of a principal obligor.
We do, however, think, that the form in which the contract is signed raises a doubt as to what the real intention was;
and we feel justified, in looking to the evidence to discover that intention. In this connection it is entirely clear, from the
testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the latter was intended to be that of
guarantor. There is, to be sure, a certain difference between these witnesses as to the nature of this guaranty,
inasmuch as Fernandez would have us believe that his name was signed as a guaranty that the contract would be
approved by the corporation, while Ramirez says that the name was put on the contract for the purpose of
guaranteeing, not the approval of the contract, but its performance. We are convinced that the latter was the real
intention of the contracting parties.

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b., delivery: August
and September, 1947. This contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton, f.o.b., Philippine
ports, to be shipped: September-October, 1947. This contract was also assigned to Louis Dreyfus & Co.
(Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los Angeles,
California, delivery: November, 1947.

We are not unmindful of the force of that rule of law which declares that oral evidence is admissible to show the
character in which the signature was affixed. This conclusion is perhaps supported by the language of the second
paragraph of article 1281 of the Civil Code, which declares that if the words of a contract should appear contrary to the
evident intention of the parties, the intention shall prevail. But the conclusion reached is, we think, deducible from the
general principle that in case of ambiguity parol evidence is admissible to show the intention of the contracting parties.

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long tons, $164,00
per ton, c.i.f., New York, to be shipped in November, 1947.

It should be stated in conclusion that as the issues in this case have been framed, the only question presented to this
court is: To what extent are the signatory parties to the contract liable to the plaintiff J. F. Ramirez? No contentious
issue is raised directly between the defendants, the Orientalist Company and Ramon H. Fernandez; nor does the
present the present action involve any question as to the undertaking of Fernandez and his three associates to effect
the importation of the films upon their own account and risk. Whether they may be bound to hold the company
harmless is a matter upon which we express no opinion.

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery: November and
December, 1947. This contract was assigned to Pacific Vegetable Co.

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per ton, f.o.b., 3
Philippine ports, delivery: November, 1947.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery:
December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable Co.

The judgment appealed from is affirmed, with costs equally against the two appellant. So ordered.
G.R. No. L-18805

August 14, 1967

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery:
January, 1948. This contract was assigned to Pacific Vegetable Co.

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE

PHILIPPINES, plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO GARCIA, 3 and
LEONOR MOLL, defendants-appellees.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature supervened. Four
devastating typhoons visited the Philippines: the first in October, the second and third in November, and the fourth in
December, 1947. Coconut trees throughout the country suffered extensive damage. Copra production decreased.
Prices spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export facilities increased
the time necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a problem.

Simeon M. Gopengco and Solicitor General for plaintiff-appellant.

L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna, Montecillo and
Belo for defendants-appellees.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval. It was
not until December 22, 1947 when the membership was completed. Defendant Moll took her oath on that date. A
meeting was then held. Kalaw made a full disclosure of the situation, apprised the board of the impending heavy
losses. No action was taken on the contracts. Neither did the board vote thereon at the meeting of January 7, 1948
following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO head did his best to avert
the losses, emphasized that government concerns faced the same risks that confronted private companies, that
NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter, that is, on January
30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the
contracts hereinbefore enumerated.

SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental organization on
May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation and development of the coconut
industry in the Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that
corporation the express power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra, and
dessicated coconut, as well as their by-products, and to act as agent, broker or commission merchant of the
producers, dealers or merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve
coconut producers by securing advantageous prices for them, to cut down to a minimum, if not altogether eliminate,
the margin of middlemen, mostly aliens. 4

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers
Pacific Vegetable Oil

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were
members of the Board; defendant Leonor Moll became director only on December 22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the scores of contracts
executed by general manager Kalaw are the disputed contracts, for the delivery of copra, viz:

Tons Delivered

Undelivered

2,386.45

4,613.55

Spencer Kellog

None

1,000

Franklin Baker

1,000

500

800

2,200

Louis Dreyfus

Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under Section 3,
Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation Law] 7 whereby, upon voluntary
Louis Dreyfus (Adamson Contract of August 14, 1947)
1,755
245 dissolution of a corporation, the court may direct "such disposition of its assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation Law,
whereby a corporation whose corporate existence is terminated, "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
T O TALS
7,091.45
9,408.55 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;" and (3) under
Section 78 of the Corporation Law, by virtue of which the corporation, within the three year period just mentioned, "is
authorized and empowered to convey all of its property to trustees for the benefit of members, stockholders, creditors,
The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in copra
and others interested."8
delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.
Louis Dreyfus (Adamson contract of July 30, 1947)

1,150

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of Manila, upon
claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459); P287,028.00; for the
balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per the September 12 contract reduced to
judgment (Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-of-court
amicable settlement when the Kalaw management was already out. The corporation thereunder paid Dreyfus
P567,024.52 representing 70% of the total claims. With particular reference to the Dreyfus claims, NACOCO put up
the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do
business here; and (2) failure to deliver was due to force majeure, the typhoons. To project the utter unreasonableness
of this compromise, we reproduce in haec verba this finding below:
x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd.]
against Santiago Syjuco for non-delivery of copra also involving a claim of P345,654.68 wherein defendant
set upsame defenses as above, plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.)
Following the same proportion, the claim of Dreyfus against NACOCO should have been compromised for
only P10,000.00, if at all. Now, why should defendants be held liable for the large sum paid as compromise
by the Board of Liquidators? This is just a sample to show how unjust it would be to hold defendants liable
for the readiness with which the Board of Liquidators disposed of the NACOCO funds, although there was
much possibility of successfully resisting the claims, or at least settlement for nominal sums like what
happened in the Syjuco case.5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from general
manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It
charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and
defendant board members, including Kalaw, with bad faith and/or breach of trust for having approved the contracts.
The fifth amended complaint, on which this case was tried, was filed on July 2, 1959. Defendants resisted the action
upon defenses hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint without costs as well as defendants'
counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid
salaries and cash deposit due the deceased Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.
Right at the outset, two preliminary questions raised before, but adversely decided by, the court below, arrest our
attention. On appeal, defendants renew their bid. And this, upon established jurisprudence that an appellate court may
base its decision of affirmance of the judgment below on a point or points ignored by the trial court or in which said
court was in error.6
1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has lost its legal
personality to continue with this suit.

850

It is defendants' pose that their case comes within the coverage of the second method. They reason out that suit was
commenced in February, 1949; that by Executive Order 372, dated November 24, 1950, NACOCO, together with other
government-owned corporations, was abolished, and the Board of Liquidators was entrusted with the function of
settling and closing its affairs; and that, since the three year period has elapsed, the Board of Liquidators may not now
continue with, and prosecute, the present case to its conclusion, because Executive Order 372 provides in Section 1
thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation, the National
Tobacco Corporation, the National Food Producer Corporation and the former enemy-owned or controlled
corporations or associations, . . . are hereby abolished. The said corporations shall be liquidated in
accordance with law, the provisions of this Order, and/or in such manner as the President of the Philippines
may direct; Provided, however, That each of the said corporations shall nevertheless be continued as a
body corporate for a period of three (3) years from the effective date of this Executive 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.
Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible within the 3 year
period to reduce disputed claims to judgment, nonetheless, "suits by or against a corporation abate when it ceases to
be an entity capable of suing or being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus
Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its existence so that
there must be statutory authority for prolongation of its life even for purposes of pending litigation"9 and that suit
"cannot be continued or revived; nor can a valid judgment be rendered therein, and a judgment, if rendered, is not only
erroneous, but void and subject to collateral attack." 10 So it is, that abatement of pending actions follows as a matter of
course upon the expiration of the legal period for liquidation, 11 unless the statute merely requires a commencement of
suit within the added time. 12 For, the court cannot extend the time alloted by statute. 13
We, however, express the view that 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 conclusion. Thus, liquidation by the Board of Liquidators may, under section 1,
proceed in accordance with law, the provisions of the executive order, "and/or in such manner as the President of the
Philippines may direct." By Section 4, when any property, fund, or project is transferred to any governmental
instrumentality "for administration or continuance of any project," the necessary funds therefor shall be taken from the
corresponding special fund created in Section 5. Section 5, in turn, talks of special funds established from the "net
proceeds of the liquidation" of the various corporations abolished. And by Section, 7, fifty per centum of the fees
collected from the copra standardization and inspection service shall accrue "to the special fund created in section 5
hereof for the rehabilitation and development of the coconut industry." Implicit in all these, is that the term of life of the

Board of Liquidators is without time limit. Contemporary history gives us the fact that the Board of Liquidators still
exists as an office with officials and numerous employees continuing the job of liquidation and prosecution of several
court actions.
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 threeyear 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. Defendant moved to dismiss, questioned the
corporation's capacity to sue. The lower court ordered plaintiff to include as co-party plaintiff, The Board of Liquidators,
to which the corporation's liquidation was entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The
lower court dismissed the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its counsel
prepared the amended complaint, as directed, and instructed the board's incoming and outgoing correspondence
clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court and a copy of the same to defendant's
counsel. She mailed the copy to the latter but failed to send the original to the court. This motion was rejected below.
Plaintiff came to this Court on appeal. We there said that "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." We there said that "[o]ur 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." 14 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 what impelled the President to create a Board of Liquidators, to continue the management of such matters
as may then be pending." 15 We accordingly directed the record of said case to be returned to the lower court, with
instructions to admit plaintiff's amended complaint to include, as party plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another direction.

appear in court, so that plaintiffs' expenditure and trouble turned out to be in vain, causing them mental anguish and
undue embarrassment. Defendant died before he could answer the complaint. Upon leave of court, plaintiffs amended
their complaint to include the heirs of the deceased. The heirs moved to dismiss. The court dismissed the complaint on
the ground that the legal representative, and not the heirs, should have been made the party defendant; and that,
anyway, the action being for recovery of money, testate or intestate proceedings should be initiated and the claim filed
therein. This Court, thru Mr. Justice Jose B. L. Reyes, there declared:
Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of Court,
those concerning claims that are barred if not filed in the estate settlement proceedings (Rule 87, sec. 5)
and those defining actions that survive and may be prosecuted against the executor or administrator (Rule
88, sec. 1), it is apparent that actions for damages caused by tortious conduct of a defendant (as in the
case at bar) survive the death of the latter. Under Rule 87, section 5, the actions that are abated by death
are: (1) claims for funeral expenses and those for the last sickness of the decedent; (2) judgments for
money; and (3) "all claims for money against the decedent, arising from contract express or implied." None
of these includes that of the plaintiffs-appellants; for it is not enough that the claim against the deceased
party be for money, but it must arise from "contract express or implied", and these words (also used by the
Rules in connection with attachments and derived from the common law) were construed in Leung Ben vs.
O'Brien, 38 Phil. 182, 189-194,
"to include all purely personal obligations other than those which have their source
in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that survive against a decedent's executors
or administrators, and they are: (1) actions to recover real and personal property from the estate; (2)
actions to enforce a lien thereon; and (3) actions to recover damages for an injury to person or property.
The present suit is one for damages under the last class, it having been held that "injury to property" is not
limited to injuries to specific property, but extends to other wrongs by which personal estate is injured or
diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a party to
incur unnecessary expenses, as charged in this case, is certainly injury to that party's property (Javier vs.
Araneta, L-4369, Aug. 31, 1953).

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its assets in the
hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of the government. It
was an express trust. The legal interest became vested in the trustee the Board of Liquidators. The beneficial
interest remained with the sole stockholder the government. At no time had the government withdrawn the property,
or the authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we cannot stay the
hand of the Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions of Section 78 of
the Corporation Law the third method of winding up corporate affairs find application.

The ruling in the preceding case was hammered out of facts comparable to those of the present. No cogent reason
exists why we should break away from the views just expressed. And, the conclusion remains: Action against the
Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia survives.

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this case.

The preliminaries out of the way, we now go to the core of the controversy.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted
contracts without the prior approval of the corporation's directorate. Plaintiff leans heavily on NACOCO's corporate bylaws. Article IV (b), Chapter III thereof, recites, as amongst the duties of the general manager, the obligation: "(b) To
perform or execute on behalf of the Corporation upon prior approval of the Board, all contracts necessary and
essential to the proper accomplishment for which the Corporation was organized."

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their nineteenth special
defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and may not be deemed to have survived
after his death.18 They say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of Court. 19 which
provides that "[a]ll claims for money against the decedent, arising from contract, express or implied", must be filed in
the estate proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts
without prior approval of the board of directors, to the damage and prejudice of plaintiff; and is against Kalaw and the
other directors for having subsequently approved the said contracts in bad faith and/or breach of trust." Clearly then,
the present case is not a mere action for the recovery of money nor a claim for money arising from contract. The suit
involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for an injury to person or
property, real or personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There, plaintiffs sought
to recover damages from defendant Llemos. The complaint averred that Llemos had served plaintiff by registered mail
with a copy of a petition for a writ of possession in Civil Case 4824 of the Court of First Instance at Catbalogan, Samar,
with notice that the same would be submitted to the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the
copy and notice served, plaintiffs proceeded to the said court of Samar from their residence in Manila accompanied by
their lawyers, only to discover that no such petition had been filed; and that defendant Llemos maliciously failed to

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general manager's
position in the corporate structure. A rule that has gained acceptance through the years is that a corporate officer
"intrusted with the general management and control of its business, has implied authority to make any contract or do
any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. 21As such
officer, "he may, without any special authority from the Board of Directors perform all acts of an ordinary nature, which
by usage or necessity are incident to his office, and may bind the corporation by contracts in matters arising in the
usual course of business. 22
The problem, therefore, is whether the case at bar is to be taken out of the general concept of the powers of a general
manager, given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this enterprise are copra
sales for future delivery. The movement of the market requires that sales agreements be entered into, even though the
goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is concededly the practice
of the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was much more conservative

than the exporters with big capital. This short-selling was inevitable at the time in the light of other factors such as
availability of vessels, the quantity required before being accepted for loading, the labor needed to prepare and sack
the copra for market. To NACOCO, forward sales were a necessity. Copra could not stay long in its hands; it would
lose weight, its value decrease. Above all, NACOCO's limited funds necessitated a quick turnover. Copra contracts
then had to be executed on short notice at times within twenty-four hours. To be appreciated then is the difficulty of
calling a formal meeting of the board.

radical rise or decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has been
closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

Such were the environmental circumstances when Kalaw went into copra trading.

521. In connection with the buying and selling of copra the Board inquired whether it is the practice of the
management to close contracts of sale first before buying. The General Manager replied that this practice
is generally followed but that it is not always possible to do so for two reasons:

Long before the disputed contracts came into being, Kalaw contracted by himself alone as general manager for
forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for the sale of
copra to divers parties. During that period, from those copra sales, NACOCO reaped a gross profit of P3,631,181.48.
So pleased was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to grant him
a special bonus "in recognition of the signal achievement rendered by him in putting the Corporation's business on a
self-sufficient basis within a few months after assuming office, despite numerous handicaps and difficulties."

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying even
when it does not have actual contracts of sale since the suspension of buying by the Nacoco will result in
middlemen taking advantage of the temporary inactivity of the Corporation to lower the prices to the
detriment of the producers.

These previous contract 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, NACOCO board met the difficulties attendant to forward sales by leaving the adoption of
means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by NACOCO's general manager and submitted to
the board after their consummation, not before. These agreements were not Kalaw's alone. One at least was executed
by a predecessor way back in 1940, soon after NACOCO was chartered. It was a contract of lease executed on
November 16, 1940 by the then general manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for
the lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general manager Kalaw, sold
3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22, 1947, when the
controversy over the present contract cropped up, the board voted to approve a lease contract previously executed
between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On the same date, the board
gave its nod to a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the board
requested Kalaw to report for action all copra contracts signed by him "at the meeting immediately following the
signing of the contracts." This practice was observed in a later instance when, on January 7, 1948, the board approved
two previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and a certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of Smith, Bell and
Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such ratification was necessary because,
as stated by Kalaw in that same meeting, "under an existing resolution he is authorized to give a brokerage fee of only
1% on sales of copra made through brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on three
export contracts, and 2% on three others, for the sale of copra were approved by the board with a proviso authorizing
the general manager to pay a commission up to the amount of 1-1/2% "without further action by the Board." On
February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably
acted upon by the board. On March 19, 1947, a 2% brokerage commission was similarly approved by the board for
Pacific Trading Corporation on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the board,not the
sales contracts themselves. And even those fee agreements were submitted only when the commission exceeded the
ceiling fixed by the board.
Knowledge by the board is also discernible from other recorded instances.1wph1.t
When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow downward trend
but belief was entertained that the nadir might have already been reached and an improvement in prices was
expected. In view thereof, Kalaw informed the board that "he intends to wait until he has signed contracts to sell before
starting to buy copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: The copra market
appeared to have become fairly steady; it was not expected that copra prices would again rise very high as in the
unprecedented boom during January-April, 1947; the prices seemed to oscillate between $140 to $150 per ton; a

(2) The movement of the market is such that it may not be practical always to wait for the consummation of
contracts of sale before beginning to buy copra.
The General Manager explained that in this connection a certain amount of speculation is unavoidable.
However, he said that the Nacoco is much more conservative than the other big exporters in this respect. 25
Settled jurisprudence has it that 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 board of
directors. 26 In varying language, existence of such authority is established, by proof of the course of business,
the usage and practices of the company and by the knowledge which the board of directors has, or must
be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. 27So also,
x x x authority to act for and bind a corporation may be presumed from acts of recognition in other
instances where the power was in fact exercised. 28
x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in his
official capacity to manage its affairs, his authority to represent the corporation may be implied from the
manner in which he has been permitted by the directors to manage its business. 29
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 NACOCO's behalf without prior board approval. If the by-laws were to
be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself,
by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on January 30,
1948, though it is our (and the lower court's) belief that ratification here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by
its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;" and
that " [t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract
had been authorized at the time." 30 The language of one case is expressive: "The adoption or ratification of a contract
by a corporation is nothing more or less than the making of an original contract. The theory of corporate ratification
is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior
authority." 31
Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the moment it was
constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus purged of whatever vice or defect
they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of prior approval, the
law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations. And, the
conclusion inevitably is that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach of trust" in the
board's ratification of the contracts without prior approval of the board. For, in reality, all that we have on the
government's side of the scale is that the board knew that the contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior approval. Everybody,
including Kalaw himself, thought so, and for a long time. Doubts were first thrown on the way only when the contracts
turned out to be unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or
interest or ill will; it partakes of the nature of fraud.34 Applying this precept to the given facts herein, we find that there
was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or
"Some motive or interest or ill will" that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their own private
interests, or to pocket money at the expense of the corporation. 35 We have had occasion to affirm that bad faith
contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will or
for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval from
Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all the reported cases,
although there are many dicta not easily reconcilable, yet I have found no judgment or decree which has held directors
to account, except when they have themselves been personally guilty of some fraud on the corporation, or have known
and connived at some fraud in others, or where such fraud might have been prevented had they given ordinary
attention to their duties. . . ." Plaintiff did not even dare charge its defendant-directors with any of these malevolent
acts.
Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of fairness. They did
not think of raising their voice in protest against past contracts which brought in enormous profits to the corporation. By
the same token, fair dealing disagrees with the idea that similar contracts, when unprofitable, should not merit the
same treatment. Profit or loss resulting from business ventures is no justification for turning one's back on contracts
entered into. The truth, then, of the matter is that in the words of the trial court the ratification of the contracts
was "an act of simple justice and fairness to the general manager and the best interest of the corporation whose
prestige would have been seriously impaired by a rejection by the board of those contracts which proved
disadvantageous." 37
The directors are not liable."

38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions. Result: Copra
production was impaired, prices spiralled, warehouses destroyed. Quick turnovers could not be expected. NACOCO
was not alone in this misfortune. The record discloses that private traders, old, experienced, with bigger facilities, were
not spared; also suffered tremendous losses. Roughly estimated, eleven principal trading concerns did run losses to
about P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department of NACOCO,
observed that from late 1947 to early 1948 "there were many who lost money in the trade." 39 NACOCO was not
immune from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus & Co. by pleading in
its answers force majeure as an affirmative defense and there vehemently asserted that "as a result of the said
typhoons, extensive damage was caused to the coconut trees in the copra producing regions of the Philippines and
according to estimates of competent authorities, it will take about one year until the coconut producing regions will be
able to produce their normal coconut yield and it will take some time until the price of copra will reach normal levels;"
and that "it had never been the intention of the contracting parties in entering into the contract in question that, in the
event of a sharp rise in the price of copra in the Philippine market produce byforce majeure or by caused beyond

defendant's control, the defendant should buy the copra contracted for at exorbitant prices far beyond the buying price
of the plaintiff under the contract." 40
A high regard for formal judicial admissions made in court pleadings would suffice to deter us from permitting plaintiff
to stray away therefrom, to charge now that the damage suffered was because of Kalaw's negligence, or for that
matter, by reason of the board's ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual obligations. Stock
accessibility was no problem. NACOCO had 90 buying agencies spread throughout the islands. It could purchase
2,000 tons of copra a day. The various contracts involved delivery of but 16,500 tons over a five-month period. Despite
the typhoons, NACOCO was still able to deliver a little short of 50% of the tonnage required under the contracts.
As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and wrong is
here absent. There cannot be an actionable wrong if either one or the other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented which would link Kalaw's acts ratified
by the board to a matrix for defraudation of the government. Kalaw is clear of the stigma of bad faith.
Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he had authority to enter into the contracts,
that he did so in the best interests of the corporation; that he entered into the contracts in pursuance of an overall
policy to stabilize prices, to free the producers from the clutches of the middlemen. The prices for which NACOCO
contracted in the disputed agreements, were at a level calculated to produce profits and higher than those prevailing in
the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to think that one would sign
(a) contract when you are going to lose money" and that no contract was executed "at a price unsafe for the
Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO envisioned a profit of around P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with NACOCO's Chief
Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and quotations from abroad were
guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the coming of
unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He exerted efforts to
stave off losses. He asked the Philippine National Bank to implement its commitment to extend a P400,000.00 loan.
The bank did not release the loan, not even the sum of P200,000.00, which, in October, 1947, was approved by the
bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained about the
bank's short-sighted policy. In the end, nothing came out of the negotiations with the bank. NACOCO eventually
faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem to be supported
by the fact that even as the contracts were being questioned in Congress and in the NACOCO board itself, President
Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas expressed his desire "that the
Board of Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut
Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly disputed, the board, at
its regular meeting, appointed Maximo M. Kalaw as acting general manager of the corporation.
Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-15092, May
18, 1962:
"They (the directors) hold such office charged with the duty to act for the corporation according to their best judgment,
and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the
business of a corporation should be operated at a loss during a business depression, or closed down at a smaller loss,
is a purely business and economic problem to be determined by the directors of the corporation, and not by the court.
It is a well known rule of law that questions of policy of management are left solely to the honest decision of officers
and directors of a corporation, and the court is without authority to substitute its judgment for the judgment of the board
of directors; the board is the business manager of the corporation, and solong as it acts in good faith its orders are not
reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.)48
Kalaw's good faith, and that of the other directors, clinch the case for defendants.

49

Viewed in the light of the entire record, the judgment under review must be, as it is hereby, affirmed.
Without costs. So ordered.

G.R. No. L-20333

June 30, 1967

EMILIANO ACUA, plaintiff-appellant,

vs.
BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION, INC., JUSTINO GALANO, TEODORO
NARCISO, PABLO BACTIN, (DR.) EMMANUEL BUMANGLAG, VENANCIO DIRIC, MARCOS ESQUIVEL,
EVARISTO CAOILI, FIDEL BATTULAYAN, DAMIAN ROSSINI, RAYMUNDO BATALLONES, PLACIDO QUIAOIT,
and LEON Q. VERANO defendants-appellees.
Marquez and Marquez for plaintiff-appellant.
Estanislao A. Fernandez for defendants-appellees.
MAKALINTAL, J.:
Appeal taken from the order dated September 10, 1962 of the Court of First Instance of Rizal, Branch V (Quezon City)
dismissing plaintiff's complaint on the ground that it states no cause of action, and discharging the writ of preliminary
attachment issued therein.
On August 9, 1962, plaintiff Emiliano Acua filed a complaint, which was later amended on August 13, against the
defendant Batac Producers Cooperative Marketing Association, Inc., hereinafter called the Batac Procoma, Inc., or
alternatively, against all the other defendants named in the caption. The complaint alleged, inter alia, that on or about
May 5, 1962 it was tentatively agreed upon between plaintiff and defendant Leon Q. Verano, as Manager of the
defendant Batac Procoma, Inc., that the former would seek and obtain the sum of not less, than P20,000.00 to be
advanced to the defendant Batac Procoma, Inc., to be utilized by it as additional funds for its Virginia tobacco buying
operations during the current redrying season; that plaintiff would be constituted as the corporation's representative in
Manila to assist in handling and facilitating its continuous shipments of tobacco and their delivery to the redrying plants
and in speeding up the prompt payment and collection of all amounts due to the corporation for such shipments; that
for his services plaintiff would be paid a remuneration at the rate of P0.50 per kilo of tobacco; that said tentative
agreement was favorably received by the Board of Directors of the defendant Batac Procoma Inc., and on May 6, 1962
all the defendants named above, who constituted the entire Board of Directors of said corporation (except Leon Q.
Verano, who was its Manager), together with defendants Justino Galano and Teodoro Narciso, as President and VicePresident, respectively, unanimously authorized defendant Leon Q. Verano, by a formal resolution, "to execute any
agreement with any person or entity, on behalf of the corporation, for the purpose of securing additional funds for the
corporation, as well as to secure the services of such person or entity, in the collection of all payments due to the
corporation from the PVTA for any tobacco sold and delivered to said administration; giving and conferring upon the
Manager, full and complete authority to bind the corporation with such person or entity in any agreement, and under
such considerations, which the said Manager may deem expedient and necessary for that purpose; that plaintiff was
made to understand by all of said defendants that the original understanding between him and defendant Leon Q.
Verano was acceptable to the corporation, except that the remuneration for the plaintiff's services would be P0.30 per
kilo of tobacco; that on May 10, 1962, the formal "Agreement" was executed between plaintiff and defendant Leon Q.
Verano, as Manager of the defendant corporation, duly authorized by its Board of Directors for such purpose, and
signed by defendants Justino Galano and Dr. Emmanuel Bumanglag as instrumental witnesses and acknowledged by
Atty. Fernando Alcantara, the Secretary and Legal Counsel of the defendant corporation; that upon plaintiff's inquiry,
he was assured by these defendants that a formal approval of said "Agreement" by the Board was no longer

necessary, as it was a mere "formality" appended to its authorizing resolution and as all the members of the Board had
already agreed to the same; that on the same date, May 10, 1962, plaintiff gave and turned over to the defendant
corporation, thru its treasurer, Dominador T. Cocson the sum of P20,000.00, in the presence of defendants Leon Q.
Verano, Justino Galano, Dr. Emmanuel Bumanglag and Atty. Fernando Alcantara, for which said treasurer issued to
plaintiff its corresponding Official Receipt No. 130852; that from then on, plaintiff diligently and religiously kept his part
of the "Agreement;" that plaintiff even furnished the defendant corporation, upon request of its Manager Leon Q.
Verano three thousand (3,000) sacks which it utilized in the shipment of its tobacco costing P6,000.00 and that plaintiff
had personally advanced out of his own personal funds the total sum of P5,000.00 with the full knowledge,
acquiescence and consent of all the individual defendants; that after the defendant corporation was enabled to
replenish its funds with continuous collections from the PVTA for tobacco delivered due to the help, assistance and
intervention of plaintiff, for which the said corporation collected from the PVTA the total sum of P381,495.00, the
"Agreement" was disapproved by its Board of Directors on June 6, 1962. Upon the foregoing allegations plaintiff prays:
(a) that an order of attachment be issued against the properties of defendant corporation; (b) that after due trial,
judgment be rendered condemning defendant corporation, or alternatively, all the other individual defendants, jointly
and severally, to comply with their contractual obligations and to pay plaintiff the sum of P300,000.00 for his services,
plus P31,000.00 for cash advances made by him and P25,000.00 for attorney's fees.
On August 14, 1962, the lower court ordered the issuance of a writ of preliminary attachment against the properties of
the defendants and on the following day, after the plaintiff had posted the required bond, the writ was accordingly
issued by the Clerk of Court.1wph1.t
On August 22, 1962, the defendants filed a motion to dismiss the complaint on the ground that it stated no cause of
action and to discharge the preliminary attachment on the ground that it was improperly or irregularly issued. In
support of the motion defendants alleged that the contract for services was never perfected because it was not
approved or ratified but was instead disapproved by the Board of Directors of defendant Batac Procoma, Inc., and that
on the basis of plaintiff's pleadings the contract is void and unenforceable. Defendants further denied the fact that
plaintiff had performed his part of the contract, alleging that he had not in any manner intervened in the delivery and
payment of tobacco pertaining to the defendant corporation.
On August 25, 1962, plaintiff filed a written opposition to the motion to dismiss and to discharge the preliminary
attachment.
On September 10, 1962, the trial court sustained defendants' motion and issued the following order:
In resume the Court believes that the complaint states no cause of action and that contract in question is
void ab initio.
IN VIEW OF THE FOREGOING, the amended complaint filed in this case is hereby ordered DISMISSED,
without special pronouncement as to costs. Consequently, the writ of preliminary attachment issued herein
is ordered discharged. However, it is of record that the defendants has (sic) deposited the Court the
amount of P20,400.00 representing the amount of money invested by the plaintiff plus the corresponding
interest thereon. Plaintiff, by virtue of this order, may withdraw the same in due time, if he so desires, upon
proper receipt therefor.
From the foregoing order plaintiff interposed the present appeal.
Appellant has assigned four errors, which we shall consider seriatim:
The first assignment reads: "As the defendants' motion to dismiss the complaint and to discharge the preliminary
attachment was based on the specific ground that the complaint states no cause of action (Sec. 1 [f], Rule 8, Rules of
Court), the lower court should not have gone beyond, and it should have limited itself, to the facts alleged in the
complaint in considering and resolving said motion to dismiss.

It is a settled principle that when a motion to dismiss is based on the ground that the complaint does not state a cause
of action (Rule 8, Section 1, par. 7 of the old Rules; Rule 16, Section 1., par. [g] of the Revised Rules) the averments in
the complaint are deemed hypothetically admitted and the inquiry is limited to whether or not they make out a case on
which relief can be granted. If said motion assails directly or indirectly the veracity of the allegations, it is improper to
grant the motion upon the assumption that the averments therein are true and those of the complaint are not (Carreon
vs. Prov. Board of Pampanga, 52 O.G. 6557.) The sufficiency of the motion should be tested on the strength of the
allegations of facts contained in the complaint, and no other. If these allegations show a cause of action, or furnish
sufficient basis by which the complaint can be maintained, the complaint should not be dismissed regardless of the
defenses that may be averred by the defendants. (Josefa de Jesus, et al. vs. Santos Belarmino, 50 O.G. 3004-3068;
Verzosa vs. Rigonan, G.R. No. L-6459, April 23, 1954; Dimayuga vs. Dimayuga, 51 O.G. 2397-2400.)
The first ground upon which the order of dismissal issued by the lower court is predicated is that the Board of Directors
of defendant corporation did not approve, the agreement in question in fact disapproved it by a resolution passed
on June 6, 1962 and that as a consequence the "suspensive condition" attached to the agreement was never
fulfilled. The specific stipulation referred to by the Court as a suspensive condition states: "provided, however that the
contract entered into by said manager to carry out the purposes above-mentioned shall be subject to the approve by
the Board."
A perusal of the complaint reveals that it contains sufficient allegations indicating such approval or at least subsequent
ratification. On the first point we note the following averments: that on May 9th the plaintiff met with each and all of the
individual defendants (who constituted the entire Board of Directors) and discussed with them extensively the tentative
agreement and he was made to understand that it was acceptable to them, except as to plaintiff's remuneration; that it
was finally agreed between plaintiff and all said Directors that his remuneration would be P0.30 per kilo (of tobacco);
and that after the agreement was formally executed he was assured by said Directors that there would be no need of
formal approval by the Board. It should be noted in this connection that although the contract required such approval it
did not specify just in what manner the same should be given.
On the question of ratification the complaint alleges that plaintiff delivered to the defendant corporation the sum of
P20,000.00 as called for in the contract; that he rendered the services he was required to do; that he furnished said
defendant 3,000 sacks at a cost of P6,000.00 and advanced to it the further sum of P5,000.00; and that he did all of
these things with the full knowledge, acquiescence and consent of each and all of the individual defendants who
constitute the Board of Directors of the defendant corporation. There is abundant authority in support of the proposition
that ratification may be express or implied, and that implied ratification may take diverse forms, such as by silence or
acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom.
Significantly the very resolution of the Board of Directors relied upon by defendants appears to militate against their
contention. It refers to plaintiff's failure to comply with certain promises he had made, as well as to his interpretation of
the contract with respect to his remuneration which, according to the Board, was contrary to the intention of the
parties. The resolution then proceeds to "disapprove and/or rescind" the said contract. The idea of conflicting
interpretation, or rescission on the ground that one of the parties has failed to fulfill his obligation under the contract, is
certainly incompatible with defendants' theory here that no contract had yet been perfected for lack of approval by the
Board of Directors.
Appellants' second assignment of error reads: "Assuming that in resolving the defendants' motion to dismiss the lower
court could consider the new facts alleged therein and the documents annexed thereto it committed an error in
extending such consideration beyond ascertaining only if an issue of fact has been presented and in actually deciding
instead such fact in issue."
The assignment is well taken, and is the logical corollary of the rule that a motion to dismiss on the ground that the
complaint fails to state a cause of action addresses itself to the averments in the complaint and, admitting their
veracity, merely questions their sufficiency to make out a case on which the court can grant relief. Affidavits, such as
those presented by defendants in support of the motion, can only be considered for the purpose of ascertaining

whether an issue of fact is presented, but not as a basis for deciding the factual issue itself. This should await the trial
on the merits.
The third assignment of error assails the lower court's ruling that even assuming that a contract had been perfected no
action can be maintained thereon because its object was illegal and therefore void. Specific reference was made by
said court to an affidavit executed by appellant on May 10, 1962 which reads:
That I, EMILIANO ACUA, the party of the Second Part in the contract entered into with the Batac Procoma,
Inc., the party of the First Part in same contract declares that the amount of P0.30 per kilo is referred to
upgraded tobacco only as delivered. This supplements paragraph three of the contract referred to.
Deliveries downgraded or maintained at the redrying plant are deemed not included.
The lower court, in its order of dismissal, held that "the upgrading of tobaccos is clearly prohibited under our laws," and
hence the contract cannot be validly ratified. Evidently the court had in mind a fraudulent upgrading of tobacco by
appellant as part of the services called for under the contract. This conclusion, however, is squarely traversed by
appellant in another affidavit attached to his reply and opposition to the motion to dismiss, in which he explained the
circumstances which led to the execution of the one relied upon by the court, and the real meaning of the word
"upgraded" therein. It is therein stated:
That after the execution of the agreement (Annex "B" to the amended complaint in said Civil Case No. Q-6547),
Messrs. Verano, Galano and Dr. Bumanglag of the defendant Corporation indicated to me that if the price of P0.30 per
kilo stipulated there to be paid to me were to be indiscriminately applied to all deliveries of tobaccos, the Corporation
would be placed in a disadvantageous and losing position, and they proceeded to explain to me the following,
(a) that when the farmers sell their tobaccos to the Facoma, they do so in bunches of assorted qualities
which may belong either to Class A, B, C, D and E, and upon such purchase they are initially given an
arbitrary classification of any of such classes as the case may be, the tendency generally being to give
them a lower classification to equalize or average the assorted qualities as much as possible, and this is
what is termed "downgrading;"
(b) that after the tobaccos have been purchased by the Facoma from the farmers, they are then reassorted
and re-classified in accordance with their actual quality or grade as found by the officials of the Facoma,
thus in a bunch which are purchased as Class C, D or E, upon reclassification those found to belong to
Class A are separated from Class B, those belonging to Class B are separated from Class C, and so on,
and these bunches so reclassified necessarily have a higher grade than the farmers, and this is what is
termed "upgrading" upon delivery original arbitrary classification given when purchased from the which was
used in the addendum;
(c) the Facoma, in turn, delivers these properly re-classified tobaccos to the redrying plant, and there, a
group of officials composed of a representative of the redrying plant, the Bureau of Internal Revenue, the
General Auditing Office, the PVTA and the Facoma representative, then examines and grades the
tobaccos, and if the classification given by the Facoma is found correct and not changed, then and only
then would or should be entitled to collect the P0.30 per kilo, and this they said is what is termed "grade
maintained" on the other hand, if these officials found the classification incorrect and lowers the
classification given by the Facoma, thus class A to B, or from B to C, then the tobaccos are considered or
said to be "downgraded" and in that event I should not receive any centavo for such deliveries, and it is in
this sense that I was made to understand the term;
Believing implicitly in the foregoing explanations of the defendants and in the reasonableness of their proposal, I
agreed readily and Atty. Fernando Alcantara, Legal Counsel and Secretary of the defendant Corporation forthwith
prepared, drafted and typed the "addendum" in question in their own typewriter of the Corporation; and as I am not a
lawyer and was not well versed with the usage, customs and phraseology usually used in tobacco trading, I relied in

absolute good faith that, as explained by the defendants, there was nothing wrong nor illegal in the use of the words
"upgrading" and "downgrading" used in said addendum, which Atty. Alcantara unfortunately used in the same;
Apart from the above, defendants knew the physical impossibility of "upgrading" the tobaccos at the redrying plant,
because at the time of the transaction, only the PTFC & RC was allowed to accept tobacco for redrying and under the
existing regulations and practices the delivery area for tobaccos at the redrying plant is enclosed by a high wire fence
inaccessible to the general public and the only ones who actually make the grading of tobaccos delivered, are the (1)
American representative of the redrying plant (PTFC & RC), (2) the PVTA, (3) the BIR, and (4) the General Auditing
Office in the presence of the representative of the FACOMA, and since the redrying plant is compelled to purchase
41% of all tobaccos delivered and redried under their negotiated management contract, it is highly improbable that the
representative of the redrying plant (PTFC & RC) whose conformity to the actual grading done must appear in the
corresponding "guia" or tally sheet, would allow the "upgrading" of tobaccos, aside from the fact that stringent
measures had been devised under the present administration to prevent the "upgrading" of tobaccos by any party.
Certainly, an impossible condition could not have been contemplated by me and the defendants; (Record on Appeal,
pp. 171-175).
The foregoing explanation, on its face, is satisfactory and deprives the term "upgraded" of the sinister and illegal
connotation attributed to it by the lower court. To be sure, whether the allegations in this subsequent affidavit are true
or not is a question of fact; but it is precisely for this reason that they can neither be summarily admitted nor rejected
for purposes of a motion to dismiss. Due process demands that they be the subject of proof and considered only after
trial on the merits.
The other errors assigned by appellant are merely incidental to those already discussed, and require no separate
treatment.
Wherefore, the order appealed from is set aside and the case is remanded to the court a quo for further proceedings,
without prejudice to, the right of plaintiff-appellant to ask for another writ of attachment in said court, as the
circumstances may warrant. Costs against defendants-appellees.

G.R. No. L-37331

March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all other stockholders
of the Balatoc Mining Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W.
JAUSSERMANN, and A. W. BEAM, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden, acting in his
own behalf and that of all other stockholders of the Balatoc Mining Co. who might join in the action and contribute to
the expense of the suit. With the plaintiff Harden two others, J. D. Highsmith and John C. Hart, subsequently
associated themselves. The defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E. Renz,
John W. Haussermann, and A. W. Beam. The principal purpose of the original action was to annul a certificate
covering 600,000 shares of the stock of the Balatoc Mining Co., which have been issued to the Benguet Consolidated

Mining Co., and to secure to the Balatoc Mining Co., the restoration of a large sum of money alleged to have been
unlawfully collected by the Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of the
amount expended by the latter company under a contract between the two companies, bearing date of March 9, 1927.
The complaint was afterwards amended so as to include a prayer for the annulment of this contract. Shortly prior to the
institution of this lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate for
600,000 shares of the Balatoc Mining Co. which constitute the principal subject matter of the action. This was done
apparently to facilitate the splitting up to the shares in the course of the sale or distribution. To prevent this the
plaintiffs, upon filing their original complaint, procured a preliminary injunction restraining the defendants, their agents
and servants, from selling, assigning or transferring the 600,000 shares of the Balatoc Mining Co., or any part thereof,
and from removing said shares from the Philippine Islands. This explains the connection of Renz with the case. The
other individual defendants are made merely as officials of the Benguet Consolidated Mining Co. Upon hearing the
cause the trial court dismissed the complaint and dissolved the preliminary injunction, with costs against the plaintiffs.
From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial interests involve are immense. Briefly told
these facts are as follows: The Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad
anonima in conformity with the provisions of Spanish law; while the Balatoc Mining Co. was organized in December
1925, as a corporation, in conformity with the provisions of the Corporation Law (Act No. 1459). Both entities were
organized for the purpose of engaging in the mining of gold in the Philippine Islands, and their respective properties
are located only a few miles apart in the subprovince of Benguet. The capital stock of the Balatoc Mining Co. consists
of one million shares of the par value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped; and the
original stockholders were unable to supply the means needed for profitable operation. For this reason, the board of
directors of the corporation ordered a suspension of all work, effective July 31, 1926. In November of the same year a
general meeting of the company's stockholders appointed a committee for the purpose of interesting outside capital in
the mine. Under the authority of this resolution the committee approached A. W. Beam, then president and general
manager of the Benguet Company, to secure the capital necessary to the development of the Balatoc property. As a
result of the negotiations thus begun, a contract, formally authorized by the management of both companies, was
executed on March 9, 1927, the principal features of which were that the Benguet Company was to proceed with the
development and construct a milling plant for the Balatoc mine, of a capacity of 100 tons of ore per day, and with an
extraction of at least 85 per cent of the gold content. The Benguet Company also agreed to erect an appropriate power
plant, with the aerial tramlines and such other surface buildings as might be needed to operate the mine. In return for
this it was agreed that the Benguet Company should receive from the treasurer of the Balatoc Company shares of a
par value of P600,000, in payment for the first P600,000 be thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had spent upon
the development the sum of P1,417,952.15. In compensation for this work a certificate for six hundred thousand
shares of the stock of the Balatoc Company has been delivered to the Benguet Company, and the excess value of the
work in the amount of P817,952.15 has been returned to the Benguet Company in cash. Meanwhile dividends of the
Balatoc Company have been enriching its stockholders, and at the time of the filing of the complaint the value of its
shares had increased in the market from a nominal valuation to more than eleven pesos per share. While the Benguet
Company was pouring its million and a half into the Balatoc property, the arrangements made between the two
companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of many
thousands of the shares of the Balatoc Company. But as soon as the success of the development had become
apparent, he began this litigation in which he has been joined by two others of the eighty shareholders of the Balatoc
Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold any
interest in a mining corporation and that the contract by which the interest here in question was acquired must be
annulled, with the consequent obliteration of the certificate issued to the Benguet Company and the corresponding
enrichment of the shareholders of the Balatoc Company.

When the Philippine Islands passed to the sovereignty of the United States, in the attention of the Philippine
Commission was early drawn to the fact that there is no entity in Spanish law exactly corresponding to the notion of
the corporation in English and American law; and in the Philippine Bill, approved July 1, 1902, the Congress of the
United States inserted certain provisions, under the head of Franchises, which were intended to control the lawmaking
power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions
are found in section 74 and 75 of the Act. The provisions of section 74 have been superseded by section 28 of the Act
of Congress of August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still
remains the law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful for any
member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except
irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered
upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather
elaborate piece of legislation is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine
Commission). The evident purpose of the commission was to introduce the American corporation into the Philippine
Islands as the standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would
be obsolete. That statute is a sort of codification of American corporate law.
For the purposes general description only, it may be stated that the sociedad anonima is something very much like the
English joint stock company, with features resembling those of both the partnership is shown in the fact that sociedad,
the generic component of its name in Spanish, is the same word that is used in that language to designate other forms
of partnership, and in its organization it is constructed along the same general lines as the ordinary partnership. It is
therefore not surprising that for purposes of loose translation the expression sociedad anonima has not infrequently
the other hand, the affinity of this entity to the American corporation has not escaped notice, and the
expression sociedad anonima is now generally translated by the word corporation. But when the word corporation is
used in the sense of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish
expression sociedad anonima either in a parenthesis or connected by the word "or". This latter device was adopted in
sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section 13 of that Act
(No. 1459) the words which we have already quoted from section 75 of the Act of Congress of July 1, 1902 (Philippine
Bill); and it is of course obvious that whatever meaning originally attached to this provision in the Act of Congress, the
same significance should be attached to it in section 13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into Philippine law in
the place of the sociedad anonima, it was necessary to make certain adjustments resulting from the continued coexistence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a
provision is found making the sociedad anonima subject to the provisions of the Corporation Law "so far as such
provisions may be applicable", and giving to the sociedades anonimas previously created in the Islands the option to
continue business as such or to reform and organize under the provisions of the Corporation Law. Again, in section
191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The
purpose of the commission in repealing this part of the Code of Commerce was to compel commercial entities
thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other
of the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected
to continue their business as such, instead of reforming and reorganizing under the Corporation Law, should continue
to be governed by the laws that were in force prior to the passage of this Act "in relation to their organization and
method of transacting business and to the rights of members thereof as between themselves, but their relations to the
public and public officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902 (Philippine Bill),
generally prohibiting corporations engaged in mining and members of such from being interested in any other
corporation engaged in mining, was amended by section 7 of Act No. 3518 of the Philippine Legislature, approved by
Congress March 1, 1929. The change in the law effected by this amendment was in the direction of liberalization.
Thus, the inhibition contained in the original provision against members of a corporation engaged in agriculture or

mining from being interested in other corporations engaged in agriculture or in mining was so modified as merely to
prohibit any such member from holding more than fifteen per centum of the outstanding capital stock of another such
corporation. Moreover, the explicit prohibition against the holding by any corporation (except for irrigation) of an
interest in any other corporation engaged in agriculture or in mining was so modified as to limit the restriction to
corporations organized for the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly penalizing the
act of a corporation, a member of a corporation , in acquiring an interest contrary to paragraph (5) of section 13 of the
Act. The Philippine Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the Philippine
Legislature, approved on February 18, 1919, but this provision was declared invalid by this court inGovernment of the
Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act. Subsequently the
Legislature reenacted substantially the same penal provision in section 21 of Act No. 3518, under a title sufficiently
broad to comprehend the subject matter. This part of Act No. 3518 became effective upon approval by the GovernorGeneral, on December 3, 1928, and it was therefore in full force when the contract now in question was made.
This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said Act as it now
stands. Omitting the proviso, which seems not to be pertinent to the present controversy, said provision reads as
follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its amendments not
otherwise penalized therein, shall be punished by a fine of not more than five thousand pesos and by
imprisonment for not more than five years, in the discretion of the court. If the violation is committed by a
corporation, the same shall, upon such violation being proved, be dissolved by quo warranto proceedings
instituted by the Attorney-General or by any provincial fiscal by order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved in this
controversy. The first is whether the plaintiffs can maintain an action based upon the violation of law supposedly
committed by the Benguet Company in this case. The second is whether, assuming the first question to be answered
in the affirmative, the Benguet Company, which was organized as a sociedad anonima, is a corporation within the
meaning of the language used by the Congress of the United States, and later by the Philippine Legislature, prohibiting
a mining corporation from becoming interested in another mining corporation. It is obvious that, if the first question be
answered in the negative, it will be unnecessary to consider the second question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with a sole view
to the public policy that should control in the granting of mining rights. Furthermore, the penalties imposed in what is
now section 190 (A) of the Corporation Law for the violation of the prohibition in question are of such nature that they
can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be
maintained only by the Attorney-General in representation of the Government.
What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant Benguet
Company has committed no civil wrong against the plaintiffs, and if a public wrong has been committed, the directors
of the Balatoc Company, and the plaintiff Harden himself, were the active inducers of the commission of that wrong.
The contract, supposing it to have been unlawful in fact, has been performed on both sides, by the building of the
Balatoc plant by the Benguet Company and the delivery to the latter of the certificate of 600,000 shares of the Balatoc
Company. There is no possibility of really undoing what has been done. Nobody would suggest the demolition of the
mill. The Balatoc Company is secure in the possession of that improvement, and talk about putting the parties in
status quo ante by restoring the consideration with interest, while the Balatoc Company remains in possession of what
it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet Company in many
millions of dollars in favor of individuals who have not the slightest equitable right to that money in a proposition to
which no court can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of the
contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the other party, the

Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would then have us apply the second
paragraph of article 1305 of the Civil Code which declares that an innocent party to an illegal contract may recover
anything he may have given, while he is not bound to fulfill any promise he may have made. But, supposing that the
first hurdle can be safely vaulted, the general remedy supplied in article 1305 of the Civil Code cannot be invoked
where an adequate special remedy is supplied in a special law. It has been so held by this court in Go Chioco vs.
Martinez (45 Phil., 256, 280), where we refused to apply that article to a case of nullity arising upon a usurious loan.
The reason given for the decision on this point was that the Usury Act, as amended, contains all the provisions
necessary for the effectuation of its purposes, with the result that the remedy given in article 1305 of the Civil Code is
unnecessary. Much more is that idea applicable to the situation now before us, where the special provisions give
ample remedies for the enforcement of the law by action in the name of the Government, and where no civil wrong has
been done to the party here seeking redress.
The view of the case presented above rest upon considerations arising upon our own statutes; and it would seem to
be unnecessary to ransack the American decisions for analogies pertinent to the case. We may observe, however, that
the situation involved is not unlike that which has frequently arisen in the United States under provisions of the
National Bank Act prohibiting banks organized under that law from holding real property. It has been uniformly held
that a trust deed or mortgaged conveying property of this kind to a bank, by way of security, is valid until the
transaction is assailed in a direct proceeding instituted by the Government against the bank, and the illegality of such
tenure supplies no basis for an action by the former private owner, or his creditor, to annul the conveyance. (National
Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same
direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs.
Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs. Registrar (19 Porto Rico, 143), for
the reason that this case arose under a provision of the Foraker Act, a law analogous to our Philippine Bill. It appears
that the registrar had refused to register two deeds in favor of the Compaia Azucarera on the ground that the land
thereby conveyed was in excess of the area permitted by law to the company. The Porto Rican court reversed the
ruling of the registrar and ordered the registration of the deeds, saying:
Thus it may be seen that a corporation limited by the law or by its charter has until the State acts every
power and capacity that any other individual capable of acquiring lands, possesses. The corporation may
exercise every act of ownership over such lands; it may sue in ejectment or unlawful detainer and it may
demand specific performance. It has an absolute title against all the world except the State after a proper
proceeding is begun in a court of law. ... The Attorney General is the exclusive officer in whom is confided
the right to initiate proceedings for escheat or attack the right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the infraction of
law supposed to have been committed, we forego cny discussion of the further question whether a sociedad
anonima created under Spanish law, such as the Benguet Company, is a corporation within the meaning of the
prohibitory provision already so many times mentioned. That important question should, in our opinion, be left until it is
raised in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered, with costs against the
appellants.

G.R. No. L-37281

November 10, 1933

W. S. PRICE and THE SULU DEVELOPMENT COMPANY, plaintiffs-appellants,

vs.
H. MARTIN, defendant-appellant.
THE AGUSAN COCONUT COMPANY, defendant-appellee.
J.W. Ferrier for plaintiff-appellants.
G.E. Campbell and W.A. Caldwell for defendant-appellant.
DeWitt, Perkins and Brady for appellee.

HULL, J.:
Plaintiffs brought suit in the Court of First Instance of Manila praying that a mortgage executed by the Sulu
Development Company on its properties in favor of the Agusan Coconut Company be dissolved and declared null and
void, the principal contentions being that at the stockholders' meeting in which the officers of the Sulu Development
Company were elected and at which the proposed mortgage was approved of, 97 shares of stock of the Sulu
Development Company were voted by the proxy of Mrs. Worcester, in whose name the stock at that time stood upon
the books of the company, whereas defendant Martin claimed that he was the true owner and that he should have
voted the stock.
From the records of the Sulu Development Company it appears that at the meeting of November 12, 1925, Martin
presented evidence to the effect that he, and not Mrs. Worcester, was the owner of the 97 shares of stock. Copies of
the documents relied upon by Martin were made a part of the record, but apparently no action was taken by the
stockholders or by the directors, and at the meetings of November 12, 17, and 19, Mrs. Worcester's proxy apparently
voted the stock without protest on the part of Martin or any other stockholder.
As far as the record shows, every formal action taken at those three meetings was unanimous, and Martin at the last
two meetings was accompanied by two members of the Bar of the Philippine Islands as his counsel.
The Sulu Development Company from its inception up to the time of executing the contract was virtually owned and
controlled by Martin. Prince purchased one share of stock about a month before the called meeting but was not
present at the meetings in question.
Another ground relied upon by plaintiffs is a claim that the mortgage was without consideration. The evidence shows
that for years the Agusan Coconut Company, through its general manager, had been advancing sums through Martin
in order that the Sulu Development Company might secure good and sufficient title to a large tract of land situated
near Siasi and thereon develop a coconut plantation. The amount of money so advanced was in dispute, but between
the meeting on November 12 and the final action on November 19, the attorney of the Sulu Development Company,
one of whom was also an accountant, and the attorneys of the Agusan Coconut Company went over the mutual
accounts with care and arrived at the sum set forth in the mortgaged. Had there been no agreement, suit would have
been instituted by the Agusan Company against the Sulu Development Company.
There is also a claim that there was a parol agreement between Martin and Worcester, representing the two
companies, that after the death of Mr. Worcester on May 2, 1924, the Agusan Coconut Company failed to comply with
the terms and conditions of the so-called cultivation agreement, and Martin prayed in his special cross-complaint and

counter-claim that the Defendant Agusan Coconut Company be required to make such further cash advances to "carry
out the full scale development of the tract of land in the cultivation agreement and as contemplated therein."
The trial court, on timely objection, refused to receive the parol evidence as to the cultivation agreement, and after trial
and a lengthy opinion, held that the mortgage in question was valid and refused to order its cancellation.
From that decision plaintiff appeal and make the following assignments of error:

11. In not holding that said mortgage is null and void for want of legal consideration.
12. In finding that the plaintiffs and appellants herein are legally bound by the said mortgage contract
Exhibit U.
13. In holding that the plaintiffs and appellants herein are legally estopped to contest the efficacy and
validity of the mortgage contract, Exhibit, U.

The trial court erred:

14. In dismissing plaintiffs' complaint herein.

1. In refusing appellants the right to introduce evidence as to the "cultivation agreement" extensively
referred to by the parties herein.

15. In denying plaintiffs' motion for a new trial.

While defendant Martin appeals and assigns the following errors:

2. In refusing to reopen the case on motion filed in due form and manner by the plaintiffs and appellants
herein, on the ground of newly discovered evidence, such motion having been filed the rendition of the
judgment herein.
3. In finding that the plaintiff, W.S. Price, did not appear here as a plaintiff to depend his own right but for
the purpose of giving aid to the defendant, Harry Martin.
4. In ruling that although the 97 shares voted by Mrs. Nanon L. Worcester at the meetings in question thru
her proxy belonged to Harry Martin and were only held in trust by her late husband, Dean C. Worcester, yet
such trusteeship was for the benefit of the Agusan Coconut Company, and that such company is the actual
cestui que trust thereunder, in violation of the express terms of the trust agreement.
5. In holding that Mrs. Nanon L. Worcester could legally vote the said 97 shares she actually voted at the
meeting in question, notwithstanding the facts as found by said court, that said shares belonged to H.
Martin and were merely held in trust by her deceased husband.
6. In finding that the 97 shares of stock in question had been adjudicated to Mrs. Nanon L. Worcester by
the commissioners on claims against the estate of her deceased husband; that such adjudication had been
approved by the Court of First Instance of the City of Manila, and that the said Nanon L. Worcester had
inherited said shares by virtue of the will of her deceased husband.
7. In holding the effect that there was a quorum in the pretended meetings of the stockholders of the Sulu
Development Company alleged to have taken place on November 12, 17 and 19, 1925, particularly that
one asserted to have been held on November 19, 1925, when in law and in fact there was no
such quorum.
8. In finding in effect that the meetings pretended to be held by Sulu Development on the dates
aforementioned were validly and legally held and that the action taken and proceedings had thereat were
valid and effective.
9. In finding that if the defendant H. Martin had had the 97 shares in question in his own name at the
alleged meetings of the Sulu Development Company, he would have voted them in the same way and to
the same effect as the said Nanon L. Worcester voted them.
10. In not finding that there was attendant fraud, misrepresentation and deceit in the execution and
issuance of the mortgage contract, Exhibit U.

1. The trial court erred in refusing to find that the one hundred shares of the capital stock of the appellant,
the Sulu Development Company, delivered on November 23, 1922, by the appellant, H. Martin, to the late
Dean C. Worcester, were so delivered in trust to be held and used for the benefit of the said H. Martin.
2. The trial court erred in finding that the voting by Mrs. Nanon L. Worcester, in the meeting held by the
stockholders of the appellant, the Sulu Development Company, on November 12, 17, and 19, 1925, was
legal.
3. The trial court erred in refusing to find that the mortgage involved in this litigation, purported to have
been executed by the appellant, the Sulu Development Company, in favor of the appellee, the Agusan
Coconut Company, is null and void.
4. The trial court erred in excluding, as being within the statute of frauds, testimony regarding a certain
verbal agreement entered into by and between the appellee, the Agusan Coconut Company, and the
appellant, H. Martin, which agreement had been fully performed by the latter.
5. The trial court erred in excluding as "Hearsay Evidence", testimony regarding statements made by
certain officials of the appellee, the Agusan Company.
6. The trial court erred in excluding the testimony of the appellant, H. Martin, regarding matters of fact
which occurred between him and certain officials of the appellee, the Agusan Coconut Company, who had
died prior to the trial of this action.
An examination of the assignments of error will show that although this case in its main aspects is a simple one and
confined to the questions, first, as to whether the mortgage was duly executed by the Sulu Development Company
and, second, whether it was given for a valuable consideration, many side issues of no moment were urged upon the
trial court, which probably accounts for the voluminous record with which we are confronted and numerous
assignments of error which we do not deem it necessary to discuss in detail.
Plaintiffs contend that the transference on the books of the company of 97 shares of stock in the name of Mrs.
Worcester was fraudulent and illegal. The evidence of record, however, under all the circumstances of the case, fails
to demonstrate the allegation of fraud, and this court believes that she acted in good faith and in the honest belief that
she had not only a legal right but a duty to participate in the stockholders meeting.

As to whether the stock was rightfully the property of Martin, that is a question for the courts and for a stockholder's
meeting. Until challenged in a proper proceeding, a stockholder according to the books of the company has a right to
participate in that meeting, and in the absence of fraud the action of the stockholders' meeting cannot be collaterally
attacked on account of such participation. "A person who has purchased stock, and who desires to be recognized as a
stockholder, for the purpose of voting, must secure such a standing by having the transfer recorder upon the books. If
the transfer is not duly made upon request, he has, as his remedy, to compel it to be made." (Morrill vs. Little Falls Mfg.
Co., 53 Minn., 371; 21 L.R.A., 175-178, citing Cook, Stock & Stockholders, par. 611; People vs. Robinson, 64 Cal.,
373; Downing vs. Potts, 23 N.J.L., 66; State vs. Ferris, 42 Conn., 560; New York & N.H.R. Co. vs. Schuyler, 34 N.Y.,
80; Bank of Commerce's App., 73 Pa., 59; Hoppin vs. Buffum, 9 R.I., 513; 11 Am. Rep., 219; Re St. Lawrence S.R.
Co., 44 N. J. L., 529.)

CAPISTRANO, J.:

As to the question of lack of consideration for the mortgage, throughout the brief for appellants it appears by the
constant reiteration of the phrase that all the advances were made "by the Agusan Coconut Company and/or its then
General Manager, the late Dean C. Worcester, to H. Martin and/or the Sulu Development Company."

Plaintiffs prayed, in substance, as follows:

It must be remembered that there is no dispute between the Worcester interests and the Agusan Coconut Company as
to who advanced the money, namely, the Agusan Coconut Company, nor is there any difficulty in determining to whom
the money was advanced. Although Martin was virtually the owner of all the capital stock of the Sulu Development
Company, business was carried on in the name of the company, and the land and properties were secured in the
name of the company, and up to the time of the execution of the mortgage and some time thereafter there was no
claim from anybody the money had been advanced to Martin instead of the company. Even a repeated use of the
questionable phrase "and/or" as to the grantor "and/or" as to the grantee, will not fabricate a life-raft on which a
recalcitrant debtor can reach a safe harbor of repudiation.lawphil.net
We are therefore convinced that the contention that the mortgage was made without consideration was a afterthought
without foundation in fact and in a vain attempt to avoid a legal and binding obligation.
We find no merit in the contention that the trial court should have concerned itself with an alleged parol contract
between Martin and Dean C. Worcester, deceased. The alleged contract not being in writing or to be executed within a
year, it is within the statute of frauds. The value of the rule is shown in this case as it was some time after Mr.
Worcester's death before anything was heard of such an alleged agreement. Even if such an agreement had been
made and it had been proper to receive proof thereof, it would not benefit plaintiffs as the mortgage was executed
pursuant to a compromise agreement to settle the affairs between the two companies, and all the transactions
between the two companies were merged and settle by that compromise.
The contention that a new trial should have been granted in order that plaintiffs could present in evidence a letter from
Mr. Worcester to the late Governor-General Wood, is likewise without merit. The letter, even if admitted, would not
have changed the result of these proceedings, as a fair reading of the letter is not repugnant to a single contention of
defendant-appellee.
The judgment appealed from is therefore affirmed. Costs against appellants. So ordered.
G.R. No. L-17504 & L-17506

February 28, 1969

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

This was a representative or derivative suit commenced on October 20, 1953, in the Court of First Instance of Manila
by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three other
directors of the corporation.
The complaint comprising the period November, 1946 to October, 1952, stated five causes of action, to wit: (1) for
alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and unauthorized investments; (2) for
alleged gross mismanagement; (3) for alleged forfeiture of corporate rights warranting dissolution; (4) for alleged
damages and attorney's fees; and (5) for receivership.

Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his individual co-defendants be
ordered to render an accounting of all transactions made and carried out by them for defendant corporation, and "to
collect, produce and/or pay to the defendant corporation the outstanding balance of the amounts so diverted and still
unpaid to defendant corporation";
Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and be ordered to pay to the
defendant corporation "whatever amounts may be recovered by the plaintiffs in Civil Case No. 20122, entitled
'Francisco Rodriguez vs. Ma-ao Sugar Central Co.'"; to return to the defendant corporation all amounts withdrawn by
way of discretionary funds or backpay, and to account for the difference between the corporation's crop loan accounts
payable and its crop loan accounts receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net assets be distributed to the
stockholders; and
Under the FOURTH CAUSE OF ACTION, that the defendants be ordered "to pay the sum of P300,000.00 by way of
compensatory, moral and exemplary damages and for expenses of litigation, including attorney's fees and costs of the
suit."
THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of receivership.
In their answer originally filed on December 1, 1953, and amended on February 1, 1955, defendants denied "the
allegations regarding the supposed gross mismanagement, fraudulent use and diversion of corporate funds, disregard
of corporate requirements, abuse of trust and violation of fiduciary relationship, etc., supposed to have been
discovered by plaintiffs, all of which are nothing but gratuitous, unwarranted, exaggerated and distorted conclusions
not supported by plain and specific facts and transactions alleged in the complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the complaint "is premature,
improper and unjustified"; (2) that plaintiffs did not make an "earnest, not simulated effort" to exhaust first their
remedies within the corporation before filing their complaint; (3) that no actual loss had been suffered by the defendant
corporation on account of the transactions questioned by plaintiffs; (4) that the payments by the debtors of all amounts
due to the defendant corporation constituted a full, sufficient and adequate remedy for the grievances alleged in the
complaint and (5) that the dissolution and/or receivership of the defendant corporation would violate and impair the
obligation of existing contracts of said corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among others, that the complaint was
premature, improper and malicious, and that the language used was "unnecessarily vituperative abusive and insulting,
particularly against defendant J. Amado Araneta who appears to be the main target of their hatred." Wherefore, the
defendant sought to recover "compensation for damages, actual, moral, exemplary and corrective, including
reasonable attorney's fees."
After trial, the Lower Court rendered its Decision (later supplemented by an Order resolving defendants' Motion for
Reconsideration), the dispositive portion of which reads:

IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns J. Amado Araneta to
pay unto Ma-ao Sugar Central Co., Inc. the amount of P46,270.00 with 8% interest from the date of the
filing of this complaint, plus the costs; the Court reiterates the preliminary injunction restraining the Ma-ao
Sugar Central Co., Inc. management to give any loans or advances to its officers and orders that this
injunction be as it is hereby made, permanent; and orders it to refrain from making investments in Acoje
Mining, Mabuhay Printing, and any other company whose purpose is not connected with the Sugar Central
business; costs of plaintiffs to be borne by the Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme Court.

II.
THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL CO., INC. WAS
INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS COMMITTED AGAINST
PLANTERS DID NOT CONSTITUTE MISMANAGEMENT.

Before taking up the errors respectively, assigned by the parties, we should state that the following findings of the
Lower Court on the commission of corporate irregularities by the defendants have not been questioned by the
defendants:
1. Failure to hold stockholders' meetings regularly. No stockholders' meetings were held in 1947, 1950 and
1951;
2. Irregularities in the keeping of the books. Untrue entries were made in the books which could not simply
be considered as innocent errors;
3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000.00. The
investments were made not in pursuance of the corporate purpose and without the requisite authority of
two-thirds of the stockholders;
4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to the defendants, had
been fully paid), in violation of the by-laws of the corporation which prohibits any director from borrowing
money from the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:

J. Amado Araneta & Co.

IV.
THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE ACTS WERE INSUFFICIENT FOR
THE DISSOLUTION OF THE CORPORATION.
The portions of the Decision of the Lower Court assailed by the plaintiffs as appellants are as follows:
(1) ".... Finally, as to the Philippine Fiber, the Court takes it that defendants admit having invested
P655,000.00 in shares of stock of this company but that this was ratified by the Board of Directors in
Resolutions 60 and 80, Exhibits "R" and "R-2"; more than that, defendants contend that since said
company was engaged in the manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar either
to manufacture sugar bags or invest in another corporation engaged in said manufacture, and they quote
authorities for the purpose, pp. 28-31, memorandum; the Court is persuaded to believe that the defendants
on this point are correct, because while Sec. 17-1/2 of the Corporation Law provides that:
No corporation organized under this act shall invest its funds in any other corporation or
business or for any purpose other than the main purpose for which it was organized unless its
board of directors has been so authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least two-thirds of the voting
power on such proposal at the stockholders' meeting called for the purpose.

P243,415.62

Luzon Industrial Corp.

585,918.17

Associated Sugar

463,860.36

General Securities

86,743.65

Bacolod Murcia

501,030.61

Central Azucarera del Danao

97,884.42

Talisay-Silay

4,365.90

The Court found that sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc. and delivered to these
affiliated companies, and vice versa, without the approval of the Ma-ao Board of Directors, in violation of Sec. III, Art.
6-A of the by-laws.
The errors assigned in the appeal of the plaintiffs, as appellants, are as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE FUNDS OF THE
MA-AO SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER PROCESSING CO., INC. WAS NOT A
VIOLATION OF SEC. 17- OF THE CORPORATION LAW.

the Court is convinced that that law should be understood to mean as the authorities state, that it is
prohibited to the Corporation to invest in shares of another corporation unless such an investment is
authorized by two-thirds of the voting power of the stockholders, if the purpose of the corporation in which
investment is made is foreign to the purpose of the investing corporation because surely there is more
logic in the stand that if the investment is made in a corporation whose business is important to the
investing corporation and would aid it in its purpose, to require authority of the stockholders would be to
unduly curtail the Power of the Board of Directors; the only trouble here is that the investment was made
without any previous authority of the Board of Directors but was only ratified afterwards; this of course
would have the effect of legalizing the unauthorized act but it is an indication of the manner in which
corporate business is transacted by the Ma-ao Sugar administration, the fact that off and on, there would
be passed by the Board of Directors, resolutions ratifying all acts previously done by the management, e.g.
resolutions passed on February 25, 1947, and February 25, 1952, by the Board of Directors as set forth in
the affidavit of Isidro T. Dunca p. 127, etc. Vol. 1. (Decision, pp. 239-241 of Record on Appeal.)
xxx

xxx

xxx

(2) "On the other hand, the Court has noted against plaintiffs that their contention that Ma-ao Sugar is on
the verge of bankruptcy has not been clearly shown; against this are Exh. C to Exh. C-3 perhaps the best
proof that insolvency is still far is that this action was filed in 1953 and almost seven years have passed
since then without the company apparently getting worse than it was before; ..." (Decision, pp. 243244,supra.)
xxx

xxx

xxx

(3) "As to the crop loan anomalies in that instead of giving unto the planters the entire amount alloted for
that, the Central withheld a certain portion for their own use, as can be seen in Appendix A of Exh. C-1,
while the theory of plaintiffs is that since between the amount of P3,791,551.78 the crop loan account
payable, and the amount of P1,708,488.22, the crop loan receivable, there is a difference of
P2,083,063.56, this would indicate that this latter sum had been used by the Central itself for its own
purposes; on the other hand, defendants contend that the first amount did not represent the totality of the
crop loans obtained from the Bank for the purpose of relending to the planters, but that it included the
Central's own credit line on its 40% share in the standing crop; and that this irregularity amounts to a
grievance by plaintiffs as planters and not as stockholders, the Court must find that as to this count, there
is really reason to find that said anomaly is not a clear basis for the derivative suit, first, because plaintiffs'
evidence is not very sufficient to prove clearly the alleged diversion in the face of defendants' defense;
there should have been a showing that the Central had no authority to make the diversion; and secondly, if
the anomaly existed, there is ground to hold with defendants that it was an anomaly pernicious not to the
Central but to the planters; it was not even pernicious to the stockholders.
Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of cane allotments, withholding
of molasses and alcohol shares, withholding of trucking allowance, formation of rival planters associations,
refusal to deal with legitimate planters group, Exh. S; the Court notices that as to the failure to provide
hauling transportation, this in a way is corroborated by Exh. 7, that part containing the decision of the Court
of First Instance of Manila, civil 20122, Francisco Rodriguez v. Ma-ao Sugar; for the reason, however, that
even if these were true, those grievances were grievances of plaintiffs as planters and not as stockholders
just as the grievance as to the crop loans already adverted to, this Court will find insufficient merit on
this count. (Decision, pp. 230-231, supra.)
xxx

xxx

xxx

(4) "...; for the Court must admit its limitations and confess that it cannot pretend to know better than the
Board in matters where the Board has not transgressed any positive statute or by-law especially where as
here, there is the circumstance that presumably, an impartial representative in the Board of Directors,
the one from the Philippine National Bank, against whom apparently plaintiffs have no quarrel, does not
appear to have made any protest against the same; the net result will be to hold that the culpable acts
proved are not enough to secure a dissolution; the Court will only order the correction of abuses, proved as
already mentioned; nor will the Court grant any more damages one way or the other. (Decision, p.
244,supra.)
On the other hand, the errors assigned in the appeal of the defendants as appellants are as follows:
I.
THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO SUGAR
CENTRAL CO., INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST FROM THE DATE OF FILING
OF THE COMPLAINT.
II.
THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE DEFENDANTS,
PARTICULARLY J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN THE COUNTERCLAIM OF
SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the defendants as appellants are as follows:
(1) "As to the alleged juggling of books in that the personal account of J. Amado Araneta of P46,270.00
was closed on October 31, 1947 by charges transferred to loans receivable nor was interest paid on this
amount, the Court finds that this is related to charge No. 1, namely, the granting of personal loans to J.
Amado Araneta; it is really true that according to the books, and as admitted by defendants, J. Amado
Araneta secured personal loans; in 1947, the cash advance to him was P132,082.00 (Exh. A); the Court
has no doubt that this was against the By-Laws which provided that:

The Directors shall not in any case borrow money from the Company. (Sec. III, Art. 7);
the Court therefore finds this count to be duly proved; worse, the Court also finds that as plaintiffs contend,
while the books of the Corporation would show that the last balance of P46,270.00 was written off as paid,
as testified to by Auditor Mr. Sanchez, the payment appeared to be nothing more than a transfer of his loan
receivable account, stated otherwise, the item was only transferred from the personal account to the loan
receivable account, so that again the Court considers established the juggling of the books; and then
again, it is also true that the loans were secured without any interest and while it is true that in the
Directors' meeting of 21 October, 1953, it was resolved to collect 8%, the Court does not see how such a
unilateral action of the Board could bind the borrowers. Be it stated that defendants have presented in
evidence Exh. 5 photostatic copy of the page in loan receivable and it is sought to be proved that J. Amado
Araneta's debt was totally paid on 31 October, 1953; to the Court, in the absence of definite primary proof
of actual payment having found out that there had already been a juggling of books, it cannot just believe
that the amount had been paid as noted in the books. (Decision, pp. 233-235 of Record on Appeal.)
(2) "With respect to the second point in the motion for reconsideration to the effect that the Court did not
make any findings of fact on the counterclaim of defendants, although the Court did not say that in so
many words, the Court takes it that its findings of fact on pages 17 to 21 of its decision were enough to
justify a dismissal of the counterclaim, because the counterclaims were based on the fact that the
complaint was premature, improper, malicious and that the language is unnecessarily vituperative abusive
and insulting; but the Court has not found that the complaint is premature; nor has the Court found that the
complaint was malicious; these findings can be gleaned from the decision with respect to the allegation
that the complaint was abusive and insulting, the Court does not concur; for it has not seen anything in the
evidence that would justify a finding that plaintiffs and been actuated by bad faith, nor is there anything in
the complaint essentially libelous; especially as the rule is that allegations in pleading where relevant, are
privileged even though they may not clearly proved afterwards; so that the Court has not seen any merit in
the counterclaims; and the Court had believed that the decision already carried with it the implication of the
dismissal of the counterclaims, but if that is not enough, the Court makes its position clear on this matter in
this order, and clarifies that it has dismissed the counterclaims of defendant; ..." (Order of September 3,
1960, pp. 248-249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as appellants, it appears to us
that the Lower Court was correct in its appreciation (1) that the evidence presented did not show that the defendant
Ma-ao Sugar Company was insolvent (2) that the alleged discriminatory acts committed by the defendant Central
against the planters were not a proper subject of derivative suit, but, at most, constituted a cause of action of the
individual planters; and (3) that the acts of mismanagement complained of and proved do not justify a dissolution of
the corporation.
Whether insolvency exists is usually a question of fact, to be determined from an inventory of the assets
and their value, as well as a consideration of the liabilities.... But the mere impairment of capital stock
alone does not establish insolvency there being other evidence as to the corporation being a going
concern with sufficient assets. Also, the excess of liabilities over assets does not establish insolvency,
when other assets are available. (Fletcher Cyc. of the Law of Private Corporations, Vol. 15A, 1938 Ed pp.
34-37; Emphasis supplied).
But relief by dissolution will be awarded in such cases only where no other adequate remedy is available,
and is not available where the rights of the stockholders can be, or are, protected in some other way. (16
Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing "Thwing v. McDonald", 134 Minn. 148, 156 N.W.
780, 158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell v. Bank of St. Paul, 7 Minn. 252).
The First Assignment of Error in the brief of the plaintiffs as appellants, contending that the investment of corporate
funds by the Ma-ao Sugar Co., Inc., in another corporation (the Philippine Fiber Processing Co., Inc.) constitutes a
violation of Sec. 17- of the Corporation Law, deserves consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through its President, J. Amado Araneta,,
subscribed for P300,000.00 worth of capital stock of the Philippine Fiber Processing Co. Inc., that payments on the
subscription were made on September 20, 1950, for P150,000.00, on April 30, 1951, for P50,000.00, and on March 6,
1952, for P100,000.00; that at the time the first two payments were made there was no board resolution authorizing

the investment; and that it was only on November 26, 1951, that the President of Ma-ao Sugar Central Co., Inc., was
so authorized by the Board of Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by Luzon Industrial,
corporation were transferred on May 31, 1952, to the defendant Ma-ao Sugar Central Co., Inc., with a valuation of
P355,000.00 on the basis of P1.00 par value per share. Again the "investment" was made without prior board
resolution, the authorizing resolution having been subsequentIy approved only on June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board Resolutions are valid, the
transaction, is still wanting in legality, no resolution having been approved by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least two-thirds of the voting power, as required in Sec.
17- of the Corporation Law.

40. Power to invest corporate funds. A private corporation has the power to invest its corporate funds in
any other corporation or business, or for any purpose other than the main purpose for which it was
organized, provided that 'its board of directors has been so authorized in a resolution by the affirmative
vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the
voting power on such a proposal at a stockholders' meeting called for that purpose,' and provided further,
that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining
corporation. When the investment is necessary to accomplish its purpose or purposes as stated in it
articles of incorporation, the approval of the stockholders is not necessary. (Id., p. 108.) (Emphasis ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the investment in question does not fall under the purview
of Sec. 17- of the Corporation Law.

The legal provision invoked by the plaintiffs, as appellants, Sec. 17- of the Corporation Law, provides:
No corporation organized under this act shall invest its funds in any other corporation or business, or for
any purpose other than the main purpose for which it was organized, unless its board of directors has been
so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the voting power on such proposal at a stockholders'
meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law, which provides:
SEC. 13. Every corporation has the power:
xxx

xxx

xxx

(9) To enter into any obligation or contract essential to the proper administration of its corporate affairs or
necessary for the proper transaction of the business or accomplishment of the purpose for which the
corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in the
articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities and
other evidences of indebtedness of any domestic or foreign corporation.
A reading of the two afore-quoted provisions shows that there is need for interpretation of the apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th edition, Professor Sulpicio S. Guevara of the
University of the Philippines, College of Law, a well-known authority in commercial law, reconciled these two
apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities. A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation
Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other
evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to accomplish the purpose of its incorporation,
the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or
securities must be subject to the limitations established by the Corporation Law; namely, (a) that no
agricultural or mining corporation shall in anywise be interested in any other agricultural or mining
corporation; or (b) that a non-agricultural or non-mining corporation shall be restricted to own not more
than 15% of the voting stock of any agricultural or mining corporation; and (c) that such holdings shall be
solely for investment and not for the purpose of bringing about a monopoly in any line of commerce or
combination in restraint of trade. (The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89.)
(Emphasis ours.)lawphi1.nt

With respect to the defendants' assignment of errors, the second (referring to the counterclaim) is clearly without merit.
As the Lower Court aptly ruled in its Order of September 3, 1960 (resolving the defendants' Motion for
Reconsideration) the findings of fact were enough to justify a dismissal of the counterclaim, "because the
counterclaims were based on the fact that the complaint was premature, improper, malicious and that the language is
unnecessarily vituperative abusive and insulting; but the Court has not found that the complaint is premature; nor has
the Court found that the complaint was malicious; these findings can be gleaned from the decision; with respect to the
allegation that the complaint was abusive and insulting, the Court does not concur; for it has not seen anything in the
evidence that would justify a finding that plaintiffs had been actuated by bad faith, nor is there anything in the
complaint essentially libelous especially as the rule is that allegations in pleadings where relevant, are privileged even
though they may not be clearly proved afterwards; ..."
As regards defendants' first assignment of error, referring to the status of the account of J. Amado Araneta in the
amount of P46,270.00, this Court likewise agrees with the finding of the Lower Court that Exhibit 5, photostatic copy of
the page on loans receivable does not constitute definite primary proof of actual payment, particularly in this case
where there is evidence that the account in question was transferred from one account to another. There is no better
substitute for an official receipt and a cancelled check as evidence of payment.
In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to refrain from making
investments in Acoje Mining, Mabuhay Printing and any other company whose purpose is not connected with the
sugar central business." This portion of the decision should be reversed because, Sec. 17- of the Corporation Law
allows a corporation to "invest its fund in any other corporation or business, or for any purpose other than the main
purpose for which it was organized," provided that its board of directors has been so authorized by the affirmative vote
of stockholders holding shares entitling them to exercise at least two-thirds of the voting power.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao Sugar Central Co., Inc. "to
refrain from making investments in Acoje Mining, Mabuhay Printing, and any other: company whose purpose is not
connected with the sugar central business," is reversed. The other parts of the judgment are, affirmed. No special
pronouncement as to costs.

[G.R. No. 131394. March 28, 2005]

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, petitioners, vs.COURT OF
APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO,
JUAN O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE
SCHOOL, INC., respondents.
DECISION

TINGA, J.:
Presented in the case at bar is the apparently straight-forward but complicated question: What should be the
basis of quorum for a stockholders meetingthe outstanding capital stock as indicated in the articles of incorporation or
that contained in the companys stock and transfer book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 41473[1] promulgated on 18 August
1997, affirming the SEC Order dated 20 June 1996, and the Resolution[2] of the Court of Appeals dated 31 October
1997 which denied petitioners motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700)
founders shares and seventy-six (76) common shares as its initial capital stock subscription reflected in the articles of
incorporation. However, private respondents and their predecessors who were in control of PMMSI registered the
companys stock and transfer book for the first time in 1978, recording thirty-three (33) common shares as the only
issued and outstanding shares of PMMSI. Sometime in 1979, a special stockholders meeting was called and held on
the basis of what was considered as a quorum of twenty-seven (27) common shares, representing more than twothirds (2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and
Exchange Commission (SEC) for the registration of their property rights over one hundred (120) founders shares and
twelve (12) common shares owned by their father. The SEC hearing officer held that the heirs of Acayan were entitled
to the claimed shares and called for a special stockholders meeting to elect a new set of officers. [3]The SEC En
Banc affirmed the decision. As a result, the shares of Acayan were recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a new set of directors. Private respondents
thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders meeting, alleging that
the quorum for the said meeting should not be based on the 165 issued and outstanding shares as per the stock and
transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as reflected in the
1952 Articles of Incorporation. The petition was dismissed. [4] Appeal was made to the SEC En Banc, which granted
said appeal, holding that the shares of the deceased incorporators should be duly represented by their respective
administrators or heirs concerned. The SEC directed the parties to call for a stockholders meeting on the basis of the
stockholdings reflected in the articles of incorporation for the purpose of electing a new set of officers for the
corporation.[5]
Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals. [6] Rebecca
Acayan, Jayne O. Abuid, Willie O. Abuid and Renato Cervantes, stockholders and directors of PMMSI, earlier filed
another petition for review of the same SEC En Bancs orders. The petitions were thereafter consolidated. [7]The
consolidated petitions essentially raised the following issues, viz: (a) whether the basis the outstanding capital stock
and accordingly also for determining the quorum at stockholders meetings it should be the 1978 stock and transfer
book or if it should be the 1952 articles of incorporation; and (b) whether the Court of Appeals gravely erred in applying
the Espejo Decision to the benefit of respondents. [8] The Espejo Decision is the decision of the SEC en banc in SEC
Case No. 2289 which ordered the recording of the shares of Jose Acayan in the stock and transfer book.
The Court of Appeals held that for purposes of transacting business, the quorum should be based on the
outstanding capital stock as found in the articles of incorporation. [9] As to the second issue, the Court of Appeals held
that the ruling in the Acayan case would ipso facto benefit the private respondents, since to require a separate judicial
declaration to recognize the shares of the original incorporators would entail unnecessary delay and expense.
Besides, the Court of Appeals added, the incorporators have already proved their stockholdings through the provisions
of the articles of incorporation.[10]
In the instant petition, petitioners claim that the 1992 stockholders meeting was valid and legal. They submit
that reliance on the 1952 articles of incorporation for determining the quorum negates the existence and validity of the
stock and transfer book which private respondents themselves prepared. In addition, they posit that private
respondents cannot avail of the benefits secured by the heirs of Acayan, as private respondents must show and prove
entitlement to the founders and common shares in a separate and independent action/proceeding.
In private respondents Memorandum[11] dated 08 March 2000, they point out that the instant petition raises the
same facts and issues as those raised in G.R. No. 131315 [12], which was denied by the First Division of this Court on
18 January 1999 for failure to show that the Court of Appeals committed any reversible error. They add that as a
logical consequence, the instant petition should be dismissed on the ground of res judicata. Furthermore, private
respondents claim that in view of the applicability of the rule on res judicata, petitioners counsel should be cited for
contempt for violating the rule against forum-shopping. [13]

For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They argue
that the instant petition is separate and distinct from G.R. No. 131315, there being no identity of parties, and more
importantly, the parties in the two petitions have their own distinct rights and interests in relation to the subject matter
in litigation. For the same reasons, they claim that counsel for petitioners cannot be found guilty of forum-shopping. [14]
In their Manifestation and Motion[15] dated 22 September 2004, private respondents moved for the dismissal of
the instant petition in view of the dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of
the Entry of Judgment[16] issued by the First Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No. 131315 it
fails to impute reversible error to the challenged Court of Appeals Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by
judgment.[17] The doctrine of res judicata provides that a final judgment, on the merits rendered by a court of competent
jurisdiction is conclusive as to the rights of the parties and their privies and constitutes an absolute bar to subsequent
actions involving the same claim, demand, or cause of action. [18] The elements of res judicata are (a) identity of parties
or at least such as representing the same interest in both actions; (b) identity of rights asserted and relief prayed for,
the relief being founded on the same facts; and (c) the identity in the two (2) particulars is such that any judgment
which may be rendered in the other action will, regardless of which party is successful, amount to res judicata in the
action under consideration.[19]
There is no dispute as to the identity of subject matter since the crucial point in both cases is the propriety of
including the still unproven shares of respondents for purposes of determining the quorum. Petitioners, however, deny
that there is identity of parties and causes of actions between the two petitions.
The test often used in determining whether causes of action are identical is to ascertain whether the same facts
or evidence would support and establish the former and present causes of action. [20] More significantly, there is identity
of causes of action when the judgment sought will be inconsistent with the prior judgment. [21] In both petitions,
petitioners assert that the Court of Appeals Decision effectively negates the existence and validity of the stock and
transfer book, as well as automatically grants private respondents shares of stocks which they do not own, or the
ownership of which remains to be unproved. Petitioners in the two petitions rely on the entries in the stock and transfer
book as the proper basis for computing the quorum, and consequently determine the degree of control one has over
the company. Essentially, the affirmance of the SEC Order had the effect of diminishing their control and interests in
the company, as it allowed the participation of the individual private respondents in the election of officers of the
corporation.
Absolute identity of parties is not a condition sine qua non for res judicata to applya shared identity of interest is
sufficient to invoke the coverage of the principle. [22] However, there is no identity of parties between the two cases. The
parties in the two petitions have their own rights and interests in relation to the subject matter in litigation. As stated by
petitioners in their Reply to Respondents Memorandum,[23] there are no two separate actions filed, but rather, two
separate petitions for review on certiorari filed by two distinct parties with the Court and represented by their own
counsels, arising from an adverse consolidated decision promulgated by the Court of Appeals in one action or
proceeding.[24] As such, res judicata is not present in the instant case.
Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against forumshopping. In the Verification/Certification[25] portion of the petition, petitioners clearly stated that there was then a
pending motion for reconsideration of the 18 August 1997 Decision of the Court of Appeals in the consolidated cases
(CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a motion for clarification.
Moreover, the records indicate that petitioners filed their Manifestation[26] dated 20 January 1998, informing the Court
of their receipt of the petition in G.R. No. 131315 in compliance with their duty to inform the Court of the pendency of
another similar petition. The Court finds that petitioners substantially complied with the rules against forum-shopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and substantially the same issues and arguments as those in
G.R. No. 131315 which the First Division has long denied with finality. The First Division found the petition before it
inadequate in failing to raise any reversible error on the part of the Court of Appeals. We reach a similar conclusion as
regards the present petition.
The crucial issue in this case is whether it is the companys stock and transfer book, or its 1952 Articles of
Incorporation, which determines stockholders shareholdings, and provides the basis for computing the quorum.

We agree with the Court of Appeals.

The articles of incorporation has been described as one that defines the charter of the corporation and the
contractual relationships between the State and the corporation, the stockholders and the State, and between the
corporation and its stockholders.[27] When PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise
known as The Corporation Law. Section 6 thereof states:

Martin P. Sagarbarria

100 "

2, 000.00

Mauricio G. Gallaga

50 "

1, 000.00

Luis Renteria

50 "

1, 000.00

Faustina M. de Onrubia

140 "

2, 800.00

Mrs. Ramon Araneta

40 "

800.00

Carlos M. Onrubia

80 "

1,600.00

700

P 14,000.00

Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines, may form a
private corporation for any lawful purpose or purposes by filing with the Securities and Exchange Commission articles
of incorporation duly executed and acknowledged before a notary public, setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the number of
shares into which it is divided, and if such stock be in whole or in part without par value then such fact shall be
stated; Provided,however, That as to stock without par value the articles of incorporation need only state the number
of shares into which said capital stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually subscribed, the
amount or number of shares of no-par stock subscribed by each and the sum paid by each on his subscription. . . . [28]
A review of PMMSIs articles of incorporation [29] shows that the corporation complied with the requirements laid
down by Act No. 1459. It provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into two classes,
namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P 90,000.00
....

SUBSCRIBER

8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE THOUSAND SIX
HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the number of shares and amount of
capital stock set out after their respective names:

SUBSCRIBER

SUBSCRIBED

AMOUNT SUBSCRIBED

No. of Shares

Par Value

Crispulo J. Onrubia

120 Founders

P 2,400.00

Juan H. Acayan

120 "

2, 400.00

Crispulo J. Onrubia

SUBSCRIBED

AMOUNT SUBSCRIBED

No. of Shares

Par Value

12 Common

Juan H. Acayan

12 "

Martin P. Sagarbarria

8"

Mauricio G. Gallaga

8"

P 1,200.00

1,200.00

800.00

800.00

Sec. 137. Outstanding capital stock defined. The term outstanding capital stock as used in this code, means the total
shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is binding
subscription agreement) except treasury shares.

Luis Renteria

8"

Faustina M. de Onrubia

Mrs. Ramon Araneta

Carlos M. Onrubia

12 "

8"

Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be
founders shares or common shares.[37] In the instant case, two figures are being pitted against each other those
contained in the articles of incorporation, and those listed in the stock and transfer book.

800.00

To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book,
and completely disregarding the issued and outstanding shares as indicated in the articles of incorporation would work
injustice to the owners and/or successors in interest of the said shares. This case is one instance where resort to
documents other than the stock and transfer books is necessary. The stock and transfer book of PMMSI cannot be
used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been
subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book. As aptly stated by the SEC in its Order dated 15
July 1996:[38]

1,200.00

800.00

8"

800.00

76

P 7,600.00[30]

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation,
but also on its shareholders. In the instant case, the articles of incorporation indicate that at the time of incorporation,
the incorporators were bona fide stockholders of seven hundred (700) founders shares and seventy-six (76) common
shares. Hence, at that time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been
made, and the date of payment thereof; 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 may be prescribed by law. [31] A stock and transfer book is
necessary as a measure of precaution, expediency and convenience since it provides the only certain and accurate
method of establishing the various corporate acts and transactions and of showing the ownership of stock and like
matters.[32] However, a stock and transfer book, like other corporate books and records, is not in any sense a public
record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein.
[33]
In fact, it is generally held that the records and minutes of a corporation are not conclusive even against the
corporation but are prima facie evidence only,[34] and may be impeached or even contradicted by other competent
evidence.[35] Thus, parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to
contradict such records.[36]
In 1980, Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the Philippines supplanted Act
No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of directors or trustees, there must be present, either in person
or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if
there be no capital stock, a majority of the members entitled to vote. . . .
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 majority of the members in the case of nonstock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:

It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the Stock and
Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the company of its own
shares, in which it becomes treasury shares, would not affect the total number of shares in the Stock and Transfer
Book. All that will change are the entries as to the owners of the shares but not as to the amount of shares already
subscribed.
This is precisely the reason why the Stock and Transfer Book was not given probative value. Did the shares, which
were not recorded in the Stock and Transfer Book, but were recorded in the Articles of Iincorporation just vanish into
thin air? . . . .[39]
As shown above, at the time the corporation was set-up, there were already seven hundred seventy-six (776)
issued and outstanding shares as reflected in the articles of incorporation. No proof was adduced as to any transaction
effected on these shares from the time PMMSI was incorporated up to the time the instant petition was filed, except for
the thirty-three (33) shares which were recorded in the stock and transfer book in 1978, and the additional one
hundred thirty-two (132) in 1982. But obviously, the shares so ordered recorded in the stock and transfer book are
among the shares reflected in the articles of incorporation as the shares subscribed to by the incorporators named
therein.
One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the
corporate officers failed to keep its records accurately. [40] A corporations records are not the only evidence of the
ownership of stock in a corporation. [41] In an American case,[42] persons claiming shareholders status in a professional
corporation were listed as stockholders in the amendment to the articles of incorporation. On that basis, they were in
all respects treated as shareholders. In fact, the acts and conduct of the parties may even constitute sufficient
evidence of ones status as a shareholder or member.[43] In the instant case, no less than the articles of incorporation
declare the incorporators to have in their name the founders and several common shares. Thus, to disregard the
contents of the articles of incorporation would be to pretend that the basic document which legally triggered the
creation of the corporation does not exist and accordingly to allow great injustice to be caused to the incorporators and
their heirs.
Petitioners argue that the Court of Appeals gravely erred in applying the Espejo decision to the benefit of
respondents. The Court believes that the more precise statement of the issue is whether in its assailed Decision, the
Court of Appeals can declare private respondents as the heirs of the incorporators, and consequently register the
founders shares in their name. However, this issue as recast is not actually determinative of the present controversy
as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in PMMSI
as recorded in the stock and transfer book and instantly created inexistent shares in favor of private respondents. We
do not agree.
The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the
original incorporators would entail unnecessary delay and expense on the part of the litigants, considering that the
incorporators had already proved ownership of such shares as shown in the articles of incorporation. [44]There was no
declaration of who the individual owners of these shares were on the date of the promulgation of the Decision. As
properly stated by the SEC in its Order dated 20 June 1996, to which the appellate courtsDecision should be related, if

at all, the ownership of these shares should only be subjected to the proper judicial (probate) or extrajudicial
proceedings in order to determine the respective shares of the legal heirs of the deceased incorporators. [45]
WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.
SO ORDERED.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons upon ALFA
through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was
erroneously served upon them considering that the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons on behalf of
ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and
existence.
On August 4, 1988, the trial court issued an order advising the private respondents to take the appropriate steps to
serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of Proper Service of
Summons which the trial court granted on August 17, 1988.

G.R. No. 93695 February 4, 1992

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS
GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who owns the stocks of
the corporation under the terms of the voting trust agreement? How long can a voting trust agreement remain valid
and effective? Did a director of the corporation cease to be such upon the creation of the voting trust agreement?
These are the questions the answers to which are necessary in resolving the principal issue in this petition
for certiorari whether or not there was proper service of summons on Alfa Integrated Textile Mills (ALFA, for short)
through the petitioners as president and vice-president, allegedly, of the subject corporation after the execution of a
voting trust agreement between ALFA and the Development Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank, Inc. against the
private respondents who, in turn, filed a third party complaint against ALFA and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the Regional Trial
Court of Makati, Branch 58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.

On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14, section 13 of the
Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents
should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e.,through publication to
effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents argued that
the voting trust agreement dated March 11, 1981 did not divest the petitioners of their positions as president and
executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate officers
was proper.
On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the petitioners, thus,
denying the latter's motion for reconsideration and requiring ALFA to filed its answer through the petitioners as its
corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their stand that by
virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no longer
receive summons or any court processes for or on behalf of ALFA. In support of their second motion for
reconsideration, the petitioners attached thereto a copy of the voting trust agreement between all the stockholders of
ALFA (the petitioners included), on the one hand, and the DBP, on the other hand, whereby the management and
control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989 and declared
that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper
service of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was affirmed by the
court in its Order dated August 14, 1989 denying the private respondent's motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent before the public
respondent which, nonetheless, resolved to give due course thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with public
respondent issued an Order declaring as final the Order dated April 25, 1989. The private respondents in the said
Order were required to take positive steps in prosecuting the third party complaint in order that the court would not be
constrained to dismiss the same for failure to prosecute. Subsequently, on October 25, 1989 the private respondents
filed a motion for reconsideration on which the trial court took no further action.

On March 19, 1990, after the petitioners filed their answer to the private respondents' petition for certiorari, the public
respondent rendered its decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989
and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file its
answer within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent which resolved
to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition imputing grave abuse of
discretion amounting to lack of jurisdiction on the part of the public respondent in reversing the questioned Orders
dated April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that there was proper service of summons
on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990 erroneously
applying the rule that the period during which a motion for reconsideration has been pending must be deducted from
the 15-day period to appeal. However, in its Resolution dated January 3, 1991, the public respondent set aside the
aforestated entry of judgment after further considering that the rule it relied on applies to appeals from decisions of the
Regional Trial Courts to the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the case
of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp.
249-250)
In their memorandum, the petitioners present the following arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders whereby all his shares to
the corporation have been transferred to the trustee deprives the stockholders of his position as
director of the corporation; to rule otherwise, as the respondent Court of Appeals did, would be
violative of section 23 of the Corporation Code ( Rollo, pp. 270-3273); and
(2) that the petitioners were no longer acting or holding any of the positions provided under
Rule 14, Section 13 of the Rules of Court authorized to receive service of summons for and in
behalf of the private domestic corporation so that the service of summons on ALFA effected
through the petitioners is not valid and ineffective; to maintain the respondent Court of Appeals'
position that ALFA was properly served its summons through the petitioners would be contrary
to the general principle that a corporation can only be bound by such acts which are within the
scope of its officers' or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on the nature of a
voting trust agreement and the consequent effects upon its creation in the light of the provisions of the Corporation
Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders of a corporation and the
trustee or by a group of identical agreements between individual stockholders and a common
trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain
event, or until the agreement is terminated, control over the stock owned by such stockholders,
either for certain purposes or for all purposes, is to be lodged in the trustee, either with or
without a reservation to the owners, or persons designated by them, of the power to direct how
such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a more definitive
meaning may be gathered. The said provision partly reads:
Sec. 59. Voting Trusts One or more stockholders of a stock corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights
pertaining to the share for a period rights pertaining to the shares for a period not exceeding
five (5) years at any one time: Provided, that in the case of a voting trust specifically required
as a condition in a loan agreement, said voting trust may be for a period exceeding (5) years
but shall automatically expire upon full payment of the loan. A voting trust agreement must be
in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of
such agreement shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating that they are issued pursuant to
said agreement. In the books of the corporation, it shall be noted that the transfer in the name
of the trustee or trustees is made pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder from his other
rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain
interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of
the corporation. However, in order to distinguish a voting trust agreement from proxies and other voting pools and
agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the
other attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a definite period of
time; and (3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5
Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p. 331citing Tankersly v. Albright, 374 F.
Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust agreement is not
entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or
used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the traditional concept of a
voting trust agreement primarily intended to single out a stockholder's right to vote from his other rights as such and
made irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholder's
shares is effected subject to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial
ownership of the corporate shares of a stockholders, on the one hand, and the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing whereby one or more stockholders of
a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights
pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory conditions and such
other terms and conditions specified in the agreement. The five year-period may be extended in cases where the
voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the
loan.
In the instant case, the point of controversy arises from the effects of the creation of the voting trust agreement. The
petitioners maintain that with the execution of the voting trust agreement between them and the other stockholders of
ALFA, as one party, and the DBP, as the other party, the former assigned and transferred all their shares in ALFA to
DBP, as trustee. They argue that by virtue to of the voting trust agreement the petitioners can no longer be considered
directors of ALFA. In support of their contention, the petitioners invoke section 23 of the Corporation Code which
provides, in part, that:

Every director must own at least one (1) share of the capital stock of the corporation of which
he is a director which share shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the DBP had all the
more safeguarded the petitioners' continuance as officers and directors of ALFA inasmuch as the general object of
voting trust is to insure permanency of the tenure of the directors of a corporation. They cited the commentaries by
Prof. Aguedo Agbayani on the right and status of the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing stockholder", is equitable owner for
the stocks represented by the voting trust certificates and the stock reversible on termination of
the trust by surrender. It is said that the voting trust agreement does not destroy the status of
the transferring stockholders as such, and thus render them ineligible as directors. But a more
accurate statement seems to be that for some purposes the depositing stockholder holding
voting trust certificates in lieu of his stock and being the beneficial owner thereof, remains and
is treated as a stockholder. It seems to be deducible from the case that he may sue as a
stockholder if the suit is in equity or is of an equitable nature, such as, a technical stockholders'
suit in right of the corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3 pp.
492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust
agreement on the status of a stockholder who is a party to its execution from legal titleholder or owner of the shares
subject of the voting trust agreement, he becomes the equitable or beneficial owner. (Salonga,Philippine Law on
Private Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private Corporations and Corporate Practice,
1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981,
ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed.,
p. 536). The penultimate question, therefore, is whether the change in his status deprives the stockholder of the right
to qualify as a director under section 23 of the present Corporation Code which deletes the phrase "in his own right."
Section 30 of the old Code states that:
Every director must own in his own right at least one share of the capital stock of the stock
corporation of which he is a director, which stock shall stand in his name on the books of the
corporation. A director who ceases to be the owner of at least one share of the capital stock of
a stock corporation of which is a director shall thereby cease to be a director . . . (Emphasis
supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected by the
simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (although
beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old Corporation Code). No disqualification
arises by virtue of the phrase "in his own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other persons who in fact are not
beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized
(see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear indication that in order to be eligible as a
director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the
corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969]citing People v. Lihme,
269 Ill. 351, 109 N.E. 1051).

The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981 disposed
of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners
ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the
new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The
petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their
respective positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is the
essence of the subject voting trust agreement as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of
the stocks owned by them respectively and shall do all things necessary for the transfer of their
respective shares to the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of
shares transferred, which shall be transferrable in the same manner and with the same effect
as certificates of stock subject to the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or
special, upon any resolution, matter or business that may be submitted to any such
meeting, and shall possess in that respect the same powers as owners of the equitable as well
as the legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share of stock for the
purpose of qualifying such person as director of ALFA, and cause a certificate of stock
evidencing the share so transferred to be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his shares to the same
trustees without the need of revising this agreement, and this agreement shall have the same
force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis supplied)
Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stock
covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said
shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of
stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have retained their
status as officers of ALFA which was the case before the execution of the subject voting trust agreement. There
appears to be no dispute from the records that DBP has taken over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra, VicePresident of its Special Accounts Department II, Remedial Management Group, the petitioners were no longer
included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting trust
agreement did not deprive the petitioners of their position as directors of ALFA, the public respondent committed a
reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be
president and vice-president, respectively, of the corporation at the time of service of summons
on them on August 21, 1987, they were at least up to that time, still directors . . .

The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of the subject voting
trust agreement. Both parties, ALFA and the DBP, were aware at the time of the execution of the agreement that by
virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA were stripped of their positions as such.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or partnership. If the defendant is a
corporation organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent or any of its
directors.

There can be no reliance on the inference that the five-year period of the voting trust agreement in question had
lapsed in 1986 so that the legal title to the stocks covered by the said voting trust agreement ipso facto reverted to the
petitioners as beneficial owners pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificate as well as the certificates
of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors.
On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the DBP that the
duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA with the DBP. This is shown
by the following portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first
mortgage on the manufacturing plant of said company;
WHEREAS, ALFA is also indebted to other creditors for various financial accomodations and
because of the burden of these obligations is encountering very serious difficulties in continuing
with its operations.
WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA had
offered and the TRUSTEE has accepted participation in the management and control of the
company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have
agreed to execute a voting trust covering their shareholding in ALFA in favor of the TRUSTEE;

It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from the officers or
members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v.
Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule on
service of processes of a corporation enumerates the representatives of a corporation who can validly receive court
processes on its behalf. Not every stockholder or officer can bind the corporation considering the existence of a
corporate entity separate from those who compose it.
The rationale of the aforecited rule is that service must be made on a representative so integrated with the corporation
sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any
legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far
East Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The service of summons upon ALFA,
through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the petitioners, will contravene
the general principle that a corporation can only be bound by such acts which are within the scope of the officer's or
agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March 19, 1990
and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October
17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as the
obligations of ALFA with DBP, or any portion thereof, remains outstanding; (CA Rollo, pp. 137138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have transferred all its
rights, titles and interests in ALFA "effective June 30, 1986" to the national government through the Asset Privatization
Trust (APT) as attested to in a Certification dated January 24, 1989 of the Vice President of the DBP's Special
Accounts Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had handled APT's
account which included ALFA's assets pursuant to a management agreement by and between the DBP and APT
(CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on ALFA through the
petitioners on August 21, 1987, the voting trust agreement in question was not yet terminated so that the legal title to
the stocks of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on ALFA through
the petitioners is readily answered in the negative.

Philippine Commercial and

G.R. No. L-34192 June 30, 1988

Industrial Bank 1,346,000.00

NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and
ROBERTO S. BENEDICTO, petitioners,
vs.
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of Branch VIII of the Court of First
Instance of Rizal, BATJAK INC., GRACIANO A. GARCIA and MARCELINO CALINAWAN JR., respondents.

Manila Banking Corporation 2,000,000.00

Manufacturers Bank 440,000.00
Hongkong and Shanghai

G.R. No. L-34213 June 30, 1988

Banking Corporation 250,000.00
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch
VIII and BATJAK INCORPORATED, respondents.

Foreign Export Advances

(against immediate shipment) 555,000.00

Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No. 34192.

PNB export advance line

The Chief Legal Counsel for petitioner PNB in G.R. No. 34213.

(against immediate shipment) 5,000,000.00

Reyes and Sundiam Law Office for respondent Batjak, Inc.

Duran, Chuanico Oebanda, Benemerito & Associates for private respondents in G.R. Nos. 34192 & 34213.
Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L-34192.

TOTAL 11,915,000.00
As security for the payment of its obligations and advances against shipments, Batjak mortgaged its three (3) cocoprocessing oil mills in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte to Manila Banking
Corporation (Manila Bank), Republic Bank (RB), and Philippine Commercial and Industrial Bank (PCIB), respectively.
In need for additional operating capital to place the three (3) coco-processing mills at their optimum capacity and
maximum efficiency and to settle, pay or otherwise liquidate pending financial obligations with the different private
banks, Batjak applied to PNB for additional financial assistance. On 5 October 1965, a Financial Agreement was
submitted by PNB to Batjak for acceptance. The Financial Agreement reads:

PADILLA, J.:
PHILIPPINE NATIONAL BANK
These two (2) separate petitions for certiorari and prohibition, with preliminary injunction, seek to annul and set aside
the orders of respondent judge, dated 16 August 1971 and 30 September 1971, in Civil Case No. 14452 of the Court
of First Instance of Rizal, entitled Batjak Inc. vs. NIDC et al." The order of 16 August 1971 1 granted the alternative
petition of private respondent Batjak, Inc. Batjak for short) for the appointment of receiver and denied petitioners'
motion to dismiss the complaint of said private respondent. The order dated 30 September 1971 2 denied petitioners'
motion for reconsideration of the order dated 16 August 1971.

Manila, Philippines
International Department

October 5, 1
The herein petitions likewise seek to prohibit the respondent judge from hearing and/or conducting any further
proceedings in Civil Case No. 14452 of said court.
Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a Filipino-American corporation organized
under the laws of the Philippines, primarily engaged in the manufacture of coconut oil and copra cake for export. In
1965, Batjak's financial condition deteriorated to the point of bankruptcy. As of that year, Batjak's indebtedness to
some private banks and to the Philippine National Bank (PNB) amounted to P11,915,000.00, shown as follows:
Republic Bank P 2,324,000.00

BATJAK, INCORPORATED
3rd Floor, G. Puyat Bldg.
Escolta, Manila
Attn.: Mr. CIRIACO B. MENDOZA

Vice-President & General Manager

b) That drawings against the line shall be allowed only when an

irrevocable export L/C for coconut products has been established or
assigned in your favor and you shall assign to us all proceeds of
negotiations to be received from your letters of credit;

Gentlemen:
We are pleased to advise that our Board of Directors approved for you
the following:

c) That drawings against the line be limited to 60% of the peso value of
the export letters of credit computed at P3.50 per $1.00 but total
drawings shall not in any event exceed P3,000,000.00;

1) That NIDC shall invest P6,722,500.00 in the form of preferred shares of stocks at 9%
cumulative, participating and convertible within 5 years at par into common stocks to liquidate
your accounts with the Republic Bank, Manufacturers Bank & Trust Company and the PCIB
which, however, shall be applied to the latter three (3) banks accounts with the Loans &
Discounts Dept. NIDC shall match your P 10 million subscription by an additional investment of
P3,277,500 within a period of one to two years at NIDC's option;

d) That release or releases against the line shall be covered by

promissory note or notes for 90 days but not beyond the expiry dates of
the coveting L/C and proceeds of said L/C shall first be applied to the
correspondent drawings on the line;
e) That drawings against the line shall be charged interest at the rate of
9% per annum and subject to 1/2% penalty charge on all drawings not
paid or extended on maturity date; and

2) That NIDC will guaranty for five (5) years your account with the Manila Banking Corporation;
3) That the above banks (Republic Bank, PCIB, MBTC and Manila Banking Corp.) shall release
in favor of PNB the first and any mortgage they hold on your properties;

f) That within 90 days from date of release against the line, you shall
negotiate with us on equivalent amount in export bills, otherwise, the
line shag be temporarily suspended until the outstanding export
advance is fully liquidated.

4) That you shall exercise (execute) a first mortgage on all your properties located at Sasa,
Davao City; Jimenez, Misamis Occidental; and Tanauan, Leyte and assign leasehold rights on
the property on which your plant at Sasa, Davao City is erected in favor of PNB;
5) That a voting trust agreement for five (5) years over 60% of the oustanding paid up and
subscribed shares shall be executed by your stockholders in favor of NIDC;
6) That this accomodation shall be secured by the joint and several signatures of officers and
directors;
7) That the number of the Board of Directors shall be increased to seven (7), three (3) from
your firm and the other four (4) from the PNB-NIDC;

We are writing the National Investment & Development Corporation, the Republic Bank, the
Philippine Commercial & Industrial Bank and the Manufacturers Bank & Trust Company and
the Manila Banking Corporation regarding the above.
In connection with the above, kindly submit to us two (2) copies of your board resolution
certified to under oath by your corporate secretary accepting the conditions enumerated above
authorizing the above transactions and the officer or officers to sign on behalf of the
corporation.
Thank you.

8) That a comptroller, at your expense, shall be appointed by PNB-NIDC to supervise the

financial management of your firm;

Very truly yo

9) That the past due accounts of P 5 million with the International Department of the PNB shall
be transferred to the Loans & Discount Department and to be treated as a Demand Loan;

(SGD.) JOS
SAMSON 3

10) That any excess of NIDC investment as required in Condition 1 after payment of the
obligations to three (3) Banks (RB, MBTC, & PCIB) shall be applied to reduce the above
Demand Loan of P 5 million;
11) That we shall grant you an export advance of P3 million to be used for copra purchases,
subject to the following conditions:
a) That the line shall expire on September 30, 1966 but revocable at the
Bank(s) option;

The terms and conditions of the Financial Agreement were duly accepted by Batjak. Under said Agreement, NIDC
would, as it actually did, invest P6,722,500.00 in Batjak in the form of preferred shares of stock convertible within five
(5) years at par into common stock, to liquidate Batjak's obligations to Republic Bank (RB), Manufacturers Bank and
Trust Company (MBTC) and Philippine Commercial & Industrial Bank (PCIB), and the balance of the investment was
to be applied to Batjak's past due account of P 5 million with the PNB.
Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any mortgages they held on the
properties of Batjak.

As agreed, PNB also granted Batjak an export-advance line of P 3 million, later increased to P 5million, and a standby
letter of credit facility in the amount of P5,850,000.00. As of 29 September 1966, the financial accomodation that had
been extended by PNB to Batjak amounted to a total of P 14,207,859.51.
As likewise agreed, Batjak executed a first mortgage in favor of PNB on all its properties located at Jimenez, Misamis
Occidental and Tanauan, Leyte. Batjak's plant in Sasa, Davao City was mortgaged to the Manila Bank which, in 1967,
instituted foreclosure proceedings against the same but which were aborted by the payment by Batjak of the sum of
P2,400,000.00 to Manila Bank, and which amount was advanced to Batjak by NIDC, a wholly-owned subsidiary of
PNB. To secure the advance, Batjak mortgaged the oil mill in Sasa, Davao City to NIDC. 4

JAMES A. KEISTER 21,500 shares

JOHNNY LIEUSON 20,300 shares
CBM FINANCE & INVESTMENT
CORP. (C.B. Mendoza, Pres.) 5,000 shares
ALEJANDRO G. BELTRAN 4,000 shares

Next, a Voting Trust Agreement was executed on 26 October 1965 in favor of NIDC by the stockholders representing
60% of the outstanding paid-up and subscribed shares of Batjak. This agreement was for a period of five (5) years
and, upon its expiration, was to be subject to negotiation between the parties. The voting Trust Agreement reads:
VOTING TRUST AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT made and executed by the undersigned stockholders of BATJAK, INC., a
corporation duly organized and existing under the laws of the Philippines, whose names are
hereinbelow subscribed hereinafter caged the SUBSCRIBERS, and the NATIONAL
INVESTMENT AND DEVELOPMENT CORPORATION, hereinafter referred to as the trustee.

ESPERANZA A. ZAMORA 3,000 shares

CIRIACO B. MENDOZA 2,000 shares
FIDELA DE GUZMAN 2,000 shares
LLOYD D. COMBS 2,000 shares
RENATO B. BEJAR 200 shares
TOTAL 60,000 shares

WITNESSETH:
WHEREAS, the SUBSCRIBERS are owners respectively of the capital stock of the BATJAK,
INC. (hereinafter called the CORPORATION) in the amounts represented by the number of
shares set fort opposite their respective names hereunder;
AND WHEREAS, with a view or establishing a safe and competent management to operate the
corporation for the best interest of all the stockholders thereof, and as mutually agreed between
the SUBSCRIBERS and the TRUSTEE, this Voting Trust Agreement has been executed under
the following terms and conditions.
NOW THEREFORE, the undersigned stockholders, in consideration of the premises and of the
mutual covenants and agreements herein contained and to carry out the foregoing purposes in
order to vest in the TRUSTEE the voting rights of the shares of stock held by the undersigned
in the CORPORATION as hereinafter stated it is mutually agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5) years from and after date hereof,
without power of revocation on the part of the SUBSCRIBERS, the TRUSTEE designated in
the manner herein provided is hereby made, constituted and appointed as a VOTING
TRUSTEE to act for and in the name of the SUBSCRIBERS, it being understood, however, that
this Voting Trust Agreement shall, upon its expiration be subject to a re-negotiation between the
parties, as may be warranted by the balance and attending circumstance of the loan
investment of the TRUSTEE or otherwise in the CORPORATION.
2. ASSIGNMENT OF STOCK CERTIFICATES UPON ISSUANCE The undersigned
stockholders hereby transfer and assign their common shares to the capital stock of the
CORPORATION to the extent shown hereunder:

to the TRUSTEE by virtue of the provisions hereof and do hereby authorize the Secretary of
the CORPORATION to issue the corresponding certificate directly in the name of the
TRUSTEE and on which certificates it shall appear that they have been issued pursuant to this
Voting Trust Agreement and the said TRUSTEE shall hold in escrow all such certificates during
the term of the Agreement. In turn, the TRUSTEE shall deliver to the undersigned stockholders
the corresponding Voting Trust certificates provided for in Sec. 36 of Act No. 1459.
3. VOTING POWER OF TRUSTEE The TRUSTEE and its successors in trust, if anym shall
have the power and it shall be its duty to vote the shares of the undersigned subject hereof and
covered by this Agreement at all annual, adjourned and special meetings of the
CORPORATION on all questions, motions, resolutions and matters including the election of
directors and such matters on which the stockholders, by virtue of the by-laws of the
CORPORATION and of the existing legislations are entitled to vote, which may be voted upon
at any and all said meetings and shall also have the power to execute and acknowledge any
agreements or documents that may be necessary in its opinion to express the consent or
assent of all or any of the stockholders of the CORPORATION with respect to any matter or
thing to which any consent or assent of the stockholders may be necessary, proper or
convenient.
4. FILING of AGREEMENT An executed copy of this Agreement shall be filed with the
CORPORATION at its office in the City of Manila wherever it may be transfered therefrom and
shall constitute irrevocable authority and absolute direction of the officers of the
CORPORATION whose duty is to sign and deliver stock certificates to make delivery only to
said voting trustee of the shares and certificates of stock subject to the provisions of this
Agreement as aforesaid. Such copy of this Agreement shall at all times be open to inspection
by any stockholder, as provided by law.

5. DIVIDEND the full and absolute beneficial interest in the shares subject of this Agreement
shall remain with the stockholders executing the same and any all dividends which may be
declared by the CORPORATION shall belong and be paid to them exclusively in accordance
with their stockholdings after deducting therefrom or applying the same to whatever liabilities
the stockholders may have in favor of the TRUSTEE by virtue of any Agreement or Contract
that may have been or will be executed by and between the TRUSTEE and the
CORPORATION or between the former and the undersigned stockholders.

By: (SGD) C.B. MENDOZA

President
ESPERANZA A. ZAMORA (SGD) ALEJANDRO G. BELTRAN
By: (SGD) MARIANO ZAMORA Stockholder

6 COMPENSATION; IMMUNITY The TRUSTEE or its successor in trust shall not receive
any compensation for its serviceexcept perhaps that which the CORPORATION may grant to
the TRUSTEE's authorized representative, if any. Expenses costs, champs, and other liabilities
incurred in the carrying out of the but herein established or by reason thereof, shall be paid for
with the funds of the CORPORATION. The TRUSTEE or any of its duly authorized
representative shall incur no liability by reason of any error of law or of any matter or thing done
or omitted under this Agreement, except for his own individual malfeasance.
7. REPRESENTATION The TRUSTEE, being a corporation and a juridical person shall
accomplish the foregoing objectives and perform its functions under this Agreement as well as
enjoy and exercise the powers, privileges, rights and interests herein established through its
duly authorized and accredited re resentatives . p with full authority under the specific
appointment or designation or Proxy.

ESPERANZA A. ZAMORA
(SGD) FIDELA DE GUZMAN (SGD) CIRIACO B. MENDOZA
Stockholder Stockholder
(SGD) RENATO B. BEJAR (SGD) LLOYD D. COMBS
Stockholder Stockholder

Vice-Preside
8. IRREVOCABILITY This Agreement shall during its 5-year term or any extension thereof
be binding upon and inure to the benefit of the undersigned stockholders and their respective
legal representatives, pledges, transferees, and/or assigns and shall be irrevocable during the
said terms and/or its extension pursuant to the provisions of paragraph 1 hereof. It is hereby
understood and the undersigned stockholders have bound as they hereby bind themselves to
make a condition of every pledge, transfer of assignment of their interests in the
CORPORATION that the interests and participation so pledged, transferred or assigned is
evidenced by annotations in the certificates of stocks or in the books of the corporation, shall
be subject to this Agreement and the same shall be binding upon the pledgees, transferees
and assigns while the trust herein created still subsists.
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.
10. ACCEPTANCE OF TRUST The TRUSTEE hereby accepts the trust created by this
Agreement under the signature of its duly authorized representative affixed hereinbelow and
agrees to perform the same in accordance with the term/s hereof.
IN WITNTESS HEREOF, the undersigned stockholders and the TRUSTEE by its
representatives, have hereunto affixed their signatures this 26 day of October, 1965 in the City
of Manila, Philippines.
(SGD) JAMES A. KEISER (SGD) JOHNNY LIEUSON
Stockholder Stockholder
CBM FINANCE & INVESTMENT CORPORATION

In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings against the oil
mills of Batjak located in Tanauan, Leyte and Jimenez, Misamis Occidental. The properties were sold to PNB as the
highest bidder. One year thereafter, or in September 1968, final Certificates of Sale were issued by the provincial
sheriffs of Leyte 6 and Misamis Occidental 7 for the two (2) oil mills in Tanauan and Jimenez in favor of PNB, after
Batjak failed to exercise its right to redeem the foreclosed properties within the allowable one year period of
redemption. Subsequently, PNB transferred the ownership of the two (2) oil mills to NIDC which, as aforestated, was a
wholly-owned PNB subsidiary.
As regards the oil mill located at Sasa, Davao City, the same was similarly foreclosed extrajudicial by NIDC. It was
sold to NIDC as the highest bidder. After Batjak failed to redeem the property, NIDC consolidated its ownership of the
oil mill. 8
Three (3) years thereafter, or on 31 August 1970, Batjak represented by majority stockholders, through Atty. Amado
Duran, legal counsel of private respondent Batjak, wrote a letter to NIDC inquiring if the latter was still interested in
negotiating the renewal of the Voting Trust Agreement. 9 On 22 September 1970, legal counsel of Batjak wrote another
letter to NIDC informing the latter that Batjak would now safely assume that NIDC was no longer interested in the
renewal of said Voting Trust Agreement and, in view thereof, requested for the turn-over and transfer of all Batjak
assets, properties, management and operations. 10
On 23 September 1970, legal counsel of Batjak sent stin another letter to NIDC, this time 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. 11
NIDC replied, confirming the fact that it had no intention whatsoever to comply with the demands of Batjak.

12

On 24 February 1971, Batjak filed before the Court of First Instance of Rizal a special civil action for mandamus with
preliminary injunction against herein petitioners docketed as Civil Case No. 14452. 13

On 14 April 1971, in said Civil Case No. 14452, Batjak filed an urgent ex parte motion for the issuance of a writ of
preliminary prohibitory and mandatory injunction. 14 On the same day, respondent judge issued a restraining order
"prohibiting defendants (herein petitioners) from removing any record, books, commercial papers or cash, and leasing,
renting out, disposing of or otherwise transferring any or all of the properties, machineries, raw materials and finished
products and/or by-products thereof now in the factory sites of the three (3) modem coco milling plants situated in
Jimenez, Misamis Occidental, Sasa, Davao City, and Tanauan, Leyte." 15
The order of 14 April 1971 was subsequently amended by respondent judge upon an ex parte motion of private
respondent Batjak so as to include the premises of NIDC in Makati and those of PNB in Manila, as among the
premises which private respondent Batjak was authorized to enter in order to conduct an inventory.
On 24 April 1971, NIDC and PNB filed an opposition to the ex parte application for the issuance of a writ of preliminary
prohibitory and mandatory injunction and a motion to set aside restraining order.
Before the court could act on the said motion, private respondent Batjak filed on 3 May 1971 a petition for receivership
as alternative to writ of preliminary prohibitory and mandatory injunction. 16 This was opposed by PNB and NIDC . 17
On 8 May 1971., NIDC and PNB filed a motion to dismiss Batjak's complaints.

18

On 16 August 1971, respondent judge issued the now assailed order denying petitioners' motion to dismiss and
appointing a set of three (3) receivers. 19 NIDC moved for reconsideration of the aforesaid order. 20 On 30 September
1971, respondent judge denied the motion for reconsideration. 21
Hence, these two (2) petitions, which have been consolidated, as they involve a resolution of the same issues. In their
manifestation with motion for early decision, dated 25 August 1986, private respondent, Batjak contends that the NIDC
has already been abolished or scrapped by its parent company, the PNB.
After a careful study and examination of the records of the case, the Court finds and holds for the petitioners.
1. On the denial of petitioners' motion to dismiss.
As a general rule, an order denying a motion to quash or to dismiss is interlocutory and cannot be the subject of a
petition for certiorari. The remedy of the aggrieved party in a denied motion to dismiss is to file an answer and
interpose, as defense or defenses, the objection or objections raised by him in said motion to dismiss, then proceed to
trial and, in case of adverse decision, to elevate the entire case by appeal in due course. However, under certain
situations, recourse to the extraordinary legal remedies of certiorari, prohibition and mandamus to question the denial
of a motion to dismiss or quash is considered proper, in the interest of more enlightened and substantial justice. As the
court said in Pineda and Ampil Manufacturing Co. vs. Bartolome, 95 Phil. 930,938
For analogous reasons it may be said that the petition for certiorari interposed by the accused
against the order of the court a quo denying the motion to quash may be entertained, not only
because it was rendered in a criminal case, but because it was rendered, as claimed, with
grave abuse of discretion, as found by the Court of Appeals. ..
and reiterated in Mead v. Argel 22 citing Yap v. Lutero (105 Phil. 1307):
However, were we to require adherence to this pretense, the case at bar would have to be
dismissed and petitioner required to go through the inconvenience, not to say the mental agony
and torture, of submitting himself to trial on the merits in Case No. 166443, apart from the
expenses incidental thereto, despite the fact that his trial and conviction therein would violate

one of this [sic] constitutional rights, and that, an appeal to this Court, we would, therefore,
have to set aside the judgment of conviction of the lower court. This would, obviously, be most
unfair and unjust. Under the circumstances obtaining the present case, the flaw in the
procedure followed by petitioner herein may be overlooked, in the interest of a more
enlightened and substantial justice.
Thus, where there is patent grave abuse of discretion, in denying the motion to dismiss, as in the present case, this
Court may entertain the petition for certiorari interposed by the party against whom the said order is issued.
In their motion to dismiss Batjaks complaint, in Civil Case No. 14452, NIDC and PNB raised common grounds for its
allowance, to wit:
1. This Honorable Court (the trial court) has no jurisdiction over the subject of the action or suit;
2. The venue is improperly laid; and
3. Plaintiff has no legal capacity to sue.
In addition, PNB contended that the complaint states no cause of action (Rule 16, Sec. 1, Par. a, c, d & g, Rules of
Court).
Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of First Instance to issue a writ of
preliminary or permanent injunction is confined within the boundaries of the province where the land in controversy is
situated. 23 The petition for mandamus of Batjak prayed that NIDC and PNB be ordered to surrender, relinquish and
turnover to Batjak the assets, management and operation of Batjak particularly the three (3) oil mills located in Sasa,
Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte.
Clearly, what Batjak asked of respondent court was the exercise of power or authority outside its jurisdiction.
On the matter of proper venue, Batjak's complaint should have been filed in the provinces where said oil mills are
located. Under Rule 4, Sec. 2, paragraph A of the Rules of Court, "actions affecting title to, or for recovery of
possession, or for partition or condemnation of, or foreclosure of mortgage on, real property, shall be commenced and
tried in the province where the property or any part thereof lies."
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.
Moreover, the action instituted by Batjak before the respondent court was a special civil action for mandamus with
prayer for preliminary mandatory injunction. Generally, mandamus is not a writ of right and its allowance or refusal is a
matter of discretion to be exercised on equitable principles and in accordance with well-settled rules of law, and that it

should never be used to effectuate an injustice, but only to prevent a failure of justice. 24 The writ does not issue as a
matter of course. It will issue only where there is a clear legal right sought to be enforced. It will not issue to enforce a
doubtful right. A clear legal right within the meaning of Sec. 3, Rule 65 of the Rules of Court means a right clearly
founded in or granted by law, a right which is enforceable as a matter of law.
Applying the above-cited principles of law in the present case, the Court finds no clear right in Batjak to be entitled to
the writ prayed for. It should be noted that the petition for mandamus filed by it prayed that NIDC and PNB be ordered
to surrender, relinquish and turn-over to Batjak the assets, management, and operation of Batjak particularly the three
(3) oil mills and to make the order permanent, after trial, and ordering NIDC and PNB to submit a complete accounting
of the assets, management and operation of Batjak from 1965. In effect, 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.
2. On the appointment of receiver.
A receiver of real or personal property, which is the subject of the action, may be appointed by the court when it
appears from the pleadings that the party applying for the appointment of receiver has an interest in said
property. 25 The right, interest, or claim in property, to entitle one to a receiver over it, must be present and existing.
As borne out by the records of the case, PNB acquired ownership of two (2) of the three (3) oil mills by virtue of
mortgage foreclosure sales. NIDC acquired ownership of the third oil mill also under a mortgage foreclosure sale.
Certificates of title were issued to PNB and NIDC after the lapse of the one (1) year redemption period. Subsequently,
PNB transferred the ownership of the two (2) oil mills to NIDC. There can be no doubt, therefore, that NIDC not only
has possession of, but also title to the three (3) oil mills formerly owned by Batjak. The interest of Batjak over the three
(3) oil mills ceased upon the issuance of the certificates of title to PNB and NIDC confirming their ownership over the
said properties. More so, where Batjak does not impugn the validity of the foreclosure proceedings. Neither Batjak nor
its stockholders have instituted any legal proceedings to annul the mortgage foreclosure aforementioned.
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. The relevant provisions of the Voting Trust Agreement, particularly paragraph 4 & No. 1 thereof, are
hereby reproduced:
NOW THEREFORE, the undersigned stockholders, in consideration of the premises and of the
mutual covenants and agreements herein contained and to carry out the foregoing purposes in
order to vest in the TRUSTEE the voting right.8 of the shares of stock held by the undersigned
in the CORPORATION as hereinafter stated it is mutually agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5) years from and after date hereof,
without power of revocation on the part of the SUBSCRIBERS, the TRUSTEE designated in
the manner herein provided is hereby made, constituted and appointed as a VOTING
TRUSTEE to act for and in the name of the SUBSCRIBERS, it being understood, however, that
this Voting Trust Agreement shall, upon its expiration be subject to a re-negotiation between the
parties, as may be warranted by the balance and attending circumstance of the loan
investment of the TRUSTEE or otherwise in the CORPORATION.

and No. 3 thereof reads:

3. VOTING POWER OF TRUSTEE The TRUSTEE and its successors in trust, if any, shall
have the power and it shall be its duty to vote the shares of the undersigned subject hereof and
covered by this Agreement at all annual, adjourned and special meetings of the
CORPORATION on all questions, motions, resolutions and matters including the election of
directors and all such matters on which the stockholders, by virtue of the by-laws of the
CORPORATION and of the existing legislations are entitled to vote, which may be voted upon
at any and all said meetings and shall also have the power to execute and acknowledge any
agreements or documents that may be necessary in its opinion to express the consent or
assent of all or any of the stockholders of the CORPORATION with respect to any matter or
thing to which any consent or assent of the stockholders may be necessary, proper or
convenient.
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: ... 26
The acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee
but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak.
Moreover, the prevention of imminent danger to property is the guiding principle that governs courts in the matter of
appointing receivers. Under Sec. 1 (b), Rule 59 of the Rules of Court, it is necessary in granting the relief of
receivership that the property or fired be in danger of loss, removal or material injury.
In the case at bar, Batjak in its petition for receivership, or in its amended petition therefor, failed to present any
evidence, to establish the requisite condition that the property is in danger of being lost, removed or materially injured
unless a receiver is appointed to guard and preserve it.

WHEREFORE, the petitions are GRANTED. The orders of the respondent judge, dated 16 August 1971 and 30
September 1971, are hereby ANNULLED and SET ASIDE. The respondent judge and/or his successors are ordered to
desist from hearing and/or conducting any further proceedings in Civil Case No. 14452, except to dismiss the same.
With costs against private respondents.SO ORDERED.
G.R. No. L-15568

November 8, 1919

W. G. PHILPOTTS, petitioner,
vs.
PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY, respondents.
Lawrence and Ross for petitioner.
Crossfield and O'Brien for defendants.

STREET, J.:
The petitioner, W. G. Philpotts, a stockholder in the Philippine Manufacturing Company, one of the respondents herein,
seeks by this proceeding to obtain a writ of mandamus to compel the respondents to permit the plaintiff, in person or
by some authorized agent or attorney, to inspect and examine the records of the business transacted by said company
since January 1, 1918. The petition is filed originally in this court under the authority of section 515 of the Code of Civil
Procedure, which gives to this tribunal concurrent jurisdiction with the Court of First Instance in cases, among others,
where any corporation or person unlawfully excludes the plaintiff from the use and enjoyment of some right to which he
is entitled. The respondents interposed a demurrer, and the controversy is now before us for the determination of the
questions thus presented.
The first point made has reference to a supposed defect of parties, and it is said that the action can not be maintained
jointly against the corporation and its secretary without the addition of the allegation that the latter is the custodian of
the business records of the respondent company.
By the plain language of sections 515 and 222 of our Code of Civil Procedure, the right of action in such a proceeding
as this is given against the corporation; and the respondent corporation in this case was the only absolutely necessary
party. In the Ohio case of Cincinnati Volksblatt Co. vs. Hoffmister (61 Ohio St., 432; 48 L. R. A., 735), only the
corporation was named as defendant, while the complaint, in language almost identical with that in the case at bar,
alleged a demand upon and refusal by the corporation.
Nevertheless the propriety of naming the secretary of the corporation as a codefendant cannot be questioned, since
such official is customarily charged with the custody of all documents, correspondence, and records of a corporation,
and he is presumably the person against whom the personal orders of the court would be made effective in case the
relief sought should be granted. Certainly there is nothing in the complaint to indicate that the secretary is an improper
person to be joined. The petitioner might have named the president of the corporation as a respondent also; and this
official might be brought in later, even after judgment rendered, if necessary to the effectuation of the order of the
court.
Section 222 of our Code of Civil Procedure is taken from the California Code, and a decision of the California Supreme
Court Barber vs. Mulford (117 Cal., 356) is quite clear upon the point that both the corporation and its officers
may be joined as defendants.
The real controversy which has brought these litigants into court is upon the question argued in connection with the
second ground of demurrer, namely, whether the right which the law concedes to a stockholder to inspect the records

can be exercised by a proper agent or attorney of the stockholder as well as by the stockholder in person. There is no
pretense that the respondent corporation or any of its officials has refused to allow the petitioner himself to examine
anything relating to the affairs of the company, and the petition prays for a peremptory order commanding the
respondents to place the records of all business transactions of the company, during a specified period, at the disposal
of the plaintiff or his duly authorized agent or attorney, it being evident that the petitioner desires to exercise said right
through an agent or attorney. In the argument in support of the demurrer it is conceded by counsel for the respondents
that there is a right of examination in the stockholder granted under section 51 of the Corporation Law, but it is insisted
that this right must be exercised in person.
The pertinent provision of our law is found in the second paragraph of section 51 of Act No. 1459, which reads as
follows: "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."
This provision is to be read of course in connecting with the related provisions of sections 51 and 52, defining the duty
of the corporation in respect to the keeping of its records.
Now it is our opinion, and we accordingly hold, that the right of inspection given to a stockholder in the provision above
quoted can be exercised either by himself or by any proper representative or attorney in fact, and either with or without
the attendance of the stockholder. This is in conformity with the general rule that what a man may do in person he may
do through another; and we find nothing in the statute that would justify us in qualifying the right in the manner
suggested by the respondents.
This conclusion is supported by the undoubted weight of authority in the United States, where it is generally held that
the provisions of law conceding the right of inspection to stockholders of corporations are to be liberally construed and
that said right may be exercised through any other properly authorized person. As was said in Foster vs. White (86
Ala., 467), "The right may be regarded as personal, in the sense that only a stockholder may enjoy it; but the
inspection and examination may be made by another. Otherwise it would be unavailing in many instances." An
observation to the same effect is contained in Martin vs. Bienville Oil Works Co. (28 La., 204), where it is said: "The
possession of the right in question would be futile if the possessor of it, through lack of knowledge necessary to
exercise it, were debarred the right of procuring in his behalf the services of one who could exercise it." In
Deadreck vs. Wilson (8 Baxt. [Tenn.], 108), the court said: "That stockholders have the right to inspect the books of the
corporation, taking minutes from the same, at all reasonable times, and may be aided in this by experts and counsel,
so as to make the inspection valuable to them, is a principle too well settled to need discussion." Authorities on this
point could be accumulated in great abundance, but as they may be found cited in any legal encyclopedia or treaties
devoted to the subject of corporations, it is unnecessary here to refer to other cases announcing the same rule.
In order that the rule above stated may not be taken in too sweeping a sense, we deem it advisable to say that there
are some things which a corporation may undoubtedly keep secret, notwithstanding the right of inspection given by
law to the stockholder; as for instance, where a corporation, engaged in the business of manufacture, has acquired a
formula or process, not generally known, which has proved of utility to it in the manufacture of its products. It is not our
intention to declare that the authorities of the corporation, and more particularly the Board of Directors, might not adopt
measures for the protection of such process form publicity. There is, however, nothing in the petition which would
indicate that the petitioner in this case is seeking to discover anything which the corporation is entitled to keep secret;
and if anything of the sort is involved in the case it may be brought out at a more advanced stage of the
proceedings.lawphil.net
The demurrer is overruled; and it is ordered that the writ of mandamus shall issue as prayed, unless within 5 days from
notification hereof the respondents answer to the merits. So ordered.

The contention for the respondent is that this resolution of the board constitutes a lawful restriction on the
right conferred by statute; and it is insisted that as the petitioner has not availed himself of the permission
to inspect the books and transactions of the company within the ten days thus defined, his right to
inspection and examination is lost, at least for this year.
We are entirely unable to concur in this contention. The general right given by the statute may not be lawfully abridged
to the extent attempted in this resolution. It may be admitted that the officials in charge of a corporation may deny
inspection when sought at unusual hours or under other improper conditions; but neither the executive officers nor the
board of directors have the power to deprive a stockholder of the right altogether. A by-law unduly restricting the right
of inspection is undoubtedly invalid. Authorities to this effect are too numerous and direct to require extended
comment. (14 C.J., 859; 7 R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27
Utah, 248; 107 Am., St. Rep., 664. 681.) Under a statute similar to our own it has been held that the statutory right of
inspection is not affected by the adoption by the board of directors of a resolution providing for the closing of transfer
books thirty days before an election. (State vs. St. Louis Railroad Co., 29 Mo., Ap., 301.)
G.R. No. L-22442

August 1, 1924

ANTONIO PARDO, petitioner,

vs.
THE HERCULES LUMBER CO., INC., and IGNACIO FERRER, respondents.
W.J. O'Donovan and M.H. de Joya for petitioner.
Sumulong and Lavides and Ross, Lawrence and Selph for respondents.
STREET, J.:
The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber Company, Inc., one of the respondents herein,
seeks by this original proceeding in the Supreme Court to obtain a writ of mandamus to compel the respondents to
permit the plaintiff and his duly authorized agent and representative to examine the records and business transactions
of said company. To this petition the respondents interposed an answer, in which, after admitting certain allegations of
the petition, the respondents set forth the facts upon which they mainly rely as a defense to the petition. To this answer
the petitioner in turn interposed a demurrer, and the cause is now before us for determination of the issue thus
presented.
It is inferentially, if not directly admitted that the petitioner is in fact a stockholder in the Hercules Lumber Company,
Inc., and that the respondent, Ignacio Ferrer, as acting secretary of the said company, has refused to permit the
petitioner or his agent to inspect the records and business transactions of the said Hercules Lumber Company, Inc., at
times desired by the petitioner. No serious question is of course made as to the right of the petitioner, by himself or
proper representative, to exercise the right of inspection conferred by section 51 of Act No. 1459. Said provision was
under the consideration of this court in the case of Philpotts vs. Philippine Manufacturing Co., and Berry (40 Phil.,
471), where we held that the right of examination there conceded to the stockholder may be exercised either by a
stockholder in person or by any duly authorized agent or representative.
The main ground upon which the defense appears to be rested has reference to the time, or times, within which the
right of inspection may be exercised. In this connection the answer asserts that in article 10 of the By-laws of the
respondent corporation it is declared that "Every shareholder may examine the books of the company and other
documents pertaining to the same upon the days which the board of directors shall annually fix." It is further averred
that at the directors' meeting of the respondent corporation held on February 16, 1924, the board passed a resolution
to the following effect:
The board also resolved to call the usual general (meeting of shareholders) for March 30 of the present year, with
notice to the shareholders that the books of the company are at their disposition from the 15th to 25th of the same
month for examination, in appropriate hours.

It will be noted that our statute declares that the right of inspection can be exercised "at reasonable hours." This
means at reasonable hours on business days throughout the year, and not merely during some arbitrary period of a
few days chosen by the directors.
In addition to relying upon the by-law, to which reference is above made, the answer of the respondents calls in
question the motive which is supposed to prompt the petitioner to make inspection; and in this connection it is alleged
that the information which the petitioner seeks is desired for ulterior purposes in connection with a competitive firm
with which the petitioner is alleged to be connected. It is also insisted that one of the purposes of the petitioner is to
obtain evidence preparatory to the institution of an action which he means to bring against the corporation by reason of
a contract of employment which once existed between the corporation and himself. These suggestions are entirely
apart from the issue, as, generally speaking, the motive of the shareholder exercising the right is immaterial. (7 R.C.L.,
327.)
We are of the opinion that, upon the allegations of the petition and the admissions of the answer, the petitioner is
entitled to relief. The demurrer is, therefore, sustained; and the writ of mandamus will issue as prayed, with the costs
against the respondent. So ordered.
G.R. No. L-37064

October 4, 1932

EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar Company, Inc., petitioner,
vs.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and AGUSTIN B. MONTILLA, Secretary of
the same corporation, respondents.
Jose B. Gamboa for petitioner.
Agustin P. Seva for respondents.

MALCOLM, J.:
The parties to this action are Eugenio Veraguth, a director and stockholder of the Isabela Sugar Company, Inc., who is
the petitioner, and the Isabela Sugar Company, Inc., Gil Montilla, acting president of the company, and Agustin B.
Montilla, secretary of the company, who are the respondents. The petitioner prays: (a) That the respondents be
required within five days from receipt of notice of this petition to show cause why they refuse to notify the petitioner, as
director, of the regular and special meetings of the board of directors, and to place at his disposal at reasonable hours,

the minutes, and documents, and books of the aforesaid corporation, for his inspection as director and stockholder,
and to issue, upon payment of the fees, certified copies of any documentation in connection with said minutes,
documents, and books of the corporation; and (b) that, in view of the memoranda and hearing of the parties, a final
and absolute writ of mandamus be issued to each and all of the respondents to notify immediately the petitioner within
the reglamentary period, of all regular and special meetings of the board of directors of the Isabela Sugar Central
Company, Inc., and to place at his disposal at reasonable hours the minutes, documents, and books of said
corporation for his inspection as director and stockholder, 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.
To the petition an answer has been interposed by the respondent, too long to be here summarized, which raised
questions of fact and law. Following the taking of considerable before the clerk as commissioner, the case has been
submitted on memoranda.
It should first be observed that when the case was filed here, it was, in accordance with settled practice, dismissed
without prejudice to the right of the petitioner to present the action before the Court of First Instance of Occidental
Negros. Thereafter, on a motion of reconsideration being presented, this order was set aside and the case was
permitted to continue in this court. On further reflection, we now feel that this was error, and that it would have been
the correct practice to have required the petitioner to present the action in a court of First Instance which is better
equipped for the taking of testimony and the resolution of questions of fact than is the appellate court. Only with
considerable difficulty, therefore, can we decide the issues of fact, since none of the members of the court saw or
heard the witnesses testify.
Speaking to the first point with which the petition is concerned, relating to the alleged failure of the secretary of the
company to notify the petitioner in due time of a special meeting of the company, we find by-laws, together with a
resolution of the board of directors, providing for the holding of ordinary and special meetings. Whether there was a
malicious attempt to keep Director Veraguth from attending a special meeting of the board of the board of directors at
which the compensation of the attorneys of the company was fixed, or whether Director Veraguth, in a spirit of
antogonism, has made this merely a pretext to cause trouble, we are unable definitely to say. This much, however, can
appropriately be stated and is decisive, and this is that the meeting in question is in the past and, therefore, now
merely presents an academic question; that no damage was caused to Veraguth by the action taken at the special
meeting which he did not attend, since his interests were fully protected by the Philippine National Bank; and that as to
meetings in the future it is to be presumed that the secretary of the company will fulfill the requirements of the
resolutions of the company pertaining to regular and special meetings. It will, of course, be incumbent upon Veraguth
to give formal notice to the secretary of his post-office address if he desires notice sent to a particular
residence. 1awphil.net
On the second question pertaining to the right of inspection of the books of the company, we find Director Veraguth
telegraphing 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."
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 can not 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.)
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.
Petition denied with costs.

G.R. No. L-33320 May 30, 1983

RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.

VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil action for
mandamus against the herein respondent praying that the latter be ordered to allow him to look into the books and
records of the respondent bank in order to satisfy himself as to the truth of the published reports that the respondent
has guaranteed the obligation of Southern Negros Development Corporation in the purchase of a US$ 23 million
sugar-mill to be financed by Japanese suppliers and financiers; that the respondent is financing the construction of the
P 21 million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at
Iloilo by the Honiron Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner has alleged

hat his written request for such examination was denied by the respondent. The trial court having dismissed the
petition for mandamus, the instant appeal to review the said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth by the trial court in the decision herein sought to
be reviewed, as follows:
Briefly stated, the following facts gathered from the stipulation of the parties served as the
backdrop of this proceeding.
Previous to the present action, the petitioner instituted several cases in this Court questioning
different transactions entered into by the Bark with other parties. First among them is Civil Case
No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza of
Public Works and Communications, the Commissioner of Public Highways, the Bank,
Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis Chalmers and General
Motors Corporation In the course of the hearing of said case on August 3, 1967, the personality
of herein petitioner to sue the bank and question the letters of credit it has extended for the
importation by the Republic of the Philippines of public works equipment intended for the
massive development program of the President was raised. In view thereof, he expressed and
made known his intention to acquire one share of stock from Congressman Justiniano Montano
which, on the following day, August 30, 1967, was transferred in his name in the books of the
Bank.
Subsequent to his aforementioned acquisition of one share of stock of the Bank, petitioner, in
his dual capacity as a taxpayer and stockholder, filed the following cases involving the bank or
the members of its Board of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the Bank; the
National Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or
Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other Directors of the
Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated Farming, Inc.,
Talog sugar Milling Co., Inc., Safary Central, Inc., and Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors of both
the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter to the President of the Bank
(Annex A, Pet.), requesting submission to look into the records of its transactions covering the
purchase of a sugar central by the Southern Negros Development Corp. to be financed by
Japanese suppliers and financiers; its financing of the Cebu-Mactan Bridge to be constructed
by V.C. Ponce, Inc. and the construction of the Passi Sugar Mills in Iloilo. On January 23, 1969,
the Asst. Vice-President and Legal Counsel of the Bank answered petitioner's letter denying his
request for being not germane to his interest as a one-share stockholder and for the cloud of
doubt as to his real intention and purpose in acquiring said share. (Annex B, Pet.) In view of the
Bank's refusal the petitioner instituted this action.' (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its brief which he characterized as
having been "correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)

The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books and records of
the respondent bank regarding the transactions mentioned on the grounds that the right of a stockholder to inspect the
record of the business transactions of a corporation granted under Section 51 of the former Corporation Law (Act No.
1459, as amended) is not absolute, but is limited to purposes reasonably related to the interest of the stockholder,
must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious
purposes; that such examination would violate the confidentiality of the records of the respondent bank as provided in
Section 16 of its charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his
administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower court of having
ruled that his alleged improper motive in asking for an examination of the books and records of the respondent bank
disqualifies him to exercise the right of a stockholder to such inspection under Section 51 of Act No. 1459, as
amended. Said provision reads in part as follows:
Sec. 51. ... 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.
Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower court that the
inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose, the
law having granted such right to a stockholder in clear and unconditional terms. He further argues that, assuming that
a proper motive or purpose for the desired examination is necessary for its exercise, there is nothing improper in his
purpose for asking for the examination and inspection herein involved.
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
shag 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 the records must be kept at the principal office of the

corporation; the inspection must be made on business days; the stockholder may demand a copy of the excerpts of
the records or minutes; 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 the one
requesting it must not have been guilty of using improperly any information through a prior examination, and 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.

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.
WHEREFORE, the petition is hereby DISMISSED, without costs.

Richardson v. Arizona Fuels Corp.

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 share of stock in the respondent bank
purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. Admittedly
he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he
became a stockholder. His obvious purpose was to arm himself with materials which he can use against the
respondent bank for acts done by the latter when the petitioner was a total stranger to the same. He could have been
impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest
as a stockholder.

Annotate this Case

614 P.2d 636 (1980)

Donald J. RICHARDSON, Grove L. Cook and Wayne Weaver, Individually and for and on behalf of all similarly situated
shareholders of Major Oil Corporation, Plaintiffs and Respondents, v. ARIZONA FUELS CORPORATION, a Utah
Corporation, Eugene Dalton, an Individual, Deanna J. Dalton, an Individual, and Major Oil Corporation, a Utah

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'

Corporation, Defendants and Appellants.

No. 15691.

Supreme Court of Utah.

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,'

May 1, 1980.

*637 LeRoy S. Axland and David R. Olsen, of Suitter, Axland & Armstrong, Salt Lake City, for defendants and
appellants.

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.

Paul N. Cotro-Manes, Parker M. Nielson, Salt Lake City, for plaintiffs and respondents.

STEWART, Justice:
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:

We here review on interlocutory appeal an order of the district court of Salt Lake County appointing a receiver for

Defendants attack the appointment on the ground that it is not justified by allegations on information and belief, even

defendant Major Oil Corporation (hereafter "Major") and certifying this case as a class action. All references to rules

though those allegations were stated in a verified complaint. The amended complaint contains numerous allegations

refer to the Utah Rules of Civil Procedure.

based on information and belief of fraudulent and otherwise wrongful conduct on the part of defendants. The
allegations specify suspect transactions and state details of alleged fraud. The allegations requesting appointment of a

Plaintiffs Donald J. Richardson, Grove L. Cook, and Wayne Weaver are stockholders of Major who brought this action
individually and on behalf of all other stockholders of Major. The original complaint named as defendants Arizona

receiver, however, are made without any qualification as to information and belief, and these allegations are not
controverted by defendants, either by pleading or affidavit.

Fuels, Inc.; Eugene Dalton; and Deanna J. Dalton. Arizona Fuels is alleged to be the legal or beneficial owner of 47%
of the issued and outstanding shares of stock of Major. Eugene Dalton is alleged to be the controlling stockholder,

In determining whether a receiver should be appointed, the district court should consider the pleadings as a whole.

officer and director of Arizona Fuels and the controlling officer and director of Major. Deanna Dalton is alleged to be an

Receivers have historically been appointed in cases where misappropriation of corporate assets by corporate insiders

officer and director of both Major and Arizona Fuels.

is asserted. Stevens v. South Ogden Land, Bldg. & Improvement Co., 14 Utah 232, 47 P. 81 (1896); Bookout v. Atlas
Financial Corp., 395 F. Supp. 1338 (D.Ga. 1974). If defendants seriously contend that insolvency is not imminent or

The complaint was subsequently amended, inter alia, to name Major as an involuntary defendant, pursuant to Rule
19(a). The amended complaint describes this action as one brought as a class action pursuant to Rule 23 and as a

that a receivership is not appropriate under the circumstances, they had abundant opportunity to provide factual
support for their contention. The record discloses that they did not do so.

stockholders' derivative action pursuant to Rule 23.1. Plaintiffs moved for an order certifying this suit as a class action
and for appointment of a receiver for Major pursuant to Rule 66. Both motions were granted by the district court.

The appointment of a receiver is among those discretionary powers subject to review for abuse, but we cannot find
abuse where the ground for appointment is stated in the language of the rules and remains uncontroverted through a

Defendants attack the order on the grounds (1) that the appointment of a receiver was not justified, (2) that certification

full hearing with extensive preliminary written memoranda.

of all the claims in the suit as a class action was improper, and (3) alternatively, that the district court erred in not
designating under which subsection of Rule 23(b) this action is to proceed. Plaintiffs' motions were granted solely on

The next issue is whether the district court erred in certifying this matter as a class action. It is alleged in the amended

the basis of the verified amended complaint.

complaint that "some" of the causes of action found therein belong to Major, and that as to those causes plaintiffs bring
the suit derivatively on behalf of the corporation pursuant to Rule 23.1.

*638 We first consider the propriety of the appointment of a receiver. The ground for appointment, as stated in the
amended complaint, is that the defendants' conduct has caused Major to become insolvent or placed Major in

A class action and a derivative action rest upon fundamentally different principles of substantive law; to ignore those

imminent danger of becoming insolvent. Rule 66(a)(5) permits appointment of a receiver "[i]n cases where a

differences is not a minor procedural solecism. A derivative action must necessarily be based on a claim for relief

corporation . . . is insolvent or in imminent danger of insolvency . . .."

which is owned by the stockholders' corporation. Indeed, a prerequisite for filing a derivative action is the failure of the
corporation to initiate the action in its own name. The stockholder, as a nominal party, has no right, title or interest

The authorities are generally in agreement that the appointment of a receiver for a corporation is permissible at the
request of stockholders of the corporation suing either individually or on behalf of the corporation. 3 Clark on Receivers
738(d) (3rd ed. 1959); 16 Fletcher, Cyclopedia of the Law of Private Corporations 7688 (rev. perm. ed. 1979)
(hereinafter cited as "Fletcher"); 65 Am.Jur.2d Receivers 11 (1972); 19 C.J.S. Corporations 833c. (1940).

whatsoever in the claim itself whether the action is brought by the corporation or by the stockholder on behalf of the
corporation.

A class action, on the other hand, is predicated on ownership of the claim for relief sued upon in the representative of

Cir.1973); Weathers v. Peters Realty Corp., 499 F.2d 1197, 1200 (6th Cir.1974). We therefore direct our attention to the

the class and all other class members in their capacity as individuals. Shareholders of the corporation may, of course,

contents of the verified amended complaint, which was the basis upon which the district court made its determination.

have claims for relief directly against their corporation because the corporation itself has violated rights possessed by
the shareholders, and a class action would be an appropriate means for enforcing their claims. A recovery in a class
action is a recovery which belongs directly to the shareholders. However, in a derivative action, the plaintiff
shareholder recovers nothing and the judgment runs in favor of the corporation.

The amended complaint states twelve causes of action, the first eight of which allege some fraudulent appropriation of
or scheme to appropriate Major's assets by defendants. These causes of action seek to require the defendants to
disgorge and return to Major the assets wrongfully obtained. Of the remaining four causes, three seek compensatory
or punitive damages for injury attributable to alleged breaches of fiduciary duty implicit in the fraudulent acts

The difference in the two procedures and their relationship to underlying substantive law has been stated as follows:

enumerated in the first eight causes. The final cause of action seeks appointment of a receiver.

*639 Suits which are said to be derivative, and therefore come within the rule, are those which seek to enforce any

There is no doubt that the first eight causes of action allege injury to the corporation only. The injury alleged can be

right which belongs to the corporation and is not being enforced, such as the liability of corporate officers or majority

asserted by plaintiffs only derivatively as stockholders on behalf of the corporation. This leaves the ninth, tenth and

shareholders for mismanagement, to recover corporate assets and related claims, to enforce rights of the corporation

eleventh causes of action to be analyzed to determine if they state claims which may be pursued by the stockholders

by virtue of its contract with a third person, and to enjoin those in charge of the corporation from causing it to commit

as a class to redress injuries to the stockholders as individuals.

an ultra vires act. [Footnotes omitted.] [3B Moore's Federal Practice 23.1.16[1] (2nd ed. 1980).]
The ninth cause of action alleges initially that the defendants "breached their fiduciary duties to Major Oil and to its
On the other hand,

[i]f the injury is one to the plaintiff as a stockholder and to him individually, and not to the corporation, as where the
action is based on a contract to which he is a party, or on a right belonging severally to him, or on a fraud affecting him
directly, it is an individual action. [Footnotes omitted.] [13 Fletcher 5911 (1970).]

stockholders . . .." As a general rule, directors and other officers of a corporation stand in a fiduciary relation to the
corporation. Branch v. Western Factors, Inc., 28 Utah 2d 361, 502 P.2d 570 (1972); 3 Fletcher 838. While the
statement is made that directors and officers stand in a like relation to the stockholders of the corporation, 3 Fletcher
838, in Utah it is clear that that relation is to the stockholders collectively. Jones Min. Co. v. Cardiff Min. & Mill. Co., 56
Utah 449, 456, 191 P. 426, 428 (1920); accord, Hansen v. Granite Holding Co., 117 Utah 530, 218 P.2d 274 (1950); 3

It is the duty of the district court to apply carefully the criteria set forth in Rule 23(a) and (b) to the facts of the case to
determine whether an action may be maintained as a class action. 3B Moore's Federal Practice 23.5. If the criteria of
Rule 23 are complied with, it is within the sound discretion of the district court to determine whether a suit, or some of
the issues in a lawsuit, should proceed as a class action. Id.

In this case, neither the memorandum decision nor the order of the district court does any more than recite that the suit
may be maintained as a class action. Furthermore, the amended complaint in alleging that the action should be
maintained as a class action, does no more than mimic the language of Rule 23. As was pointed out in Jones v.
Diamond, 519 F.2d 1090, 1098 (5th Cir.1975), "Without more, mere mimicry is insufficient to undergird a decision
either way on the propriety of class certification." See also Rossin v. Southern Union Gas Co., 472 F.2d 707, 712 (10th

Fletcher 838 at 144. The distinction between a fiduciary duty owed to the corporation as a whole as opposed to the
stockholders collectively does not appear to be one of substance in this case. There is no important *640 issue as to
whether the cause of action states a corporate claim. Although plaintiff frames this claim, in the alternative, as one
belonging to the shareholders, the claim for relief belongs to the corporation.

The ninth cause of action then goes on to allege that the defendants "mismanaged the corporate and prudential affairs
of Major Oil . . .." The rule in Utah is that mismanagement of the corporation gives rise to a cause of action in the
corporation, even if the mismanagement results in damage to stockholders by depreciating the value of the
corporation's stock. Morris v. Ogden State Bank, 84 Utah 127, 140-41, 28 P.2d 138, 143 (1934). Therefore, any
compensatory damages which may be recovered on account of any breach by defendants of their fiduciary duty as

directors and officers or arising as a result of mismanagement of the corporation by defendants belong to the

reversing long established substantive rules of law as to the relative priorities of the claims of creditors and

corporation and not to the stockholders individually.

stockholders to the assets of an insolvent corporation.

The ninth cause of action also prays for punitive damages based on the nature of defendants' conduct. Because there

We therefore reverse the district court's certification of this suit as a class action and remand for further proceedings

is no claim for relief for punitive damages as such, a claim for punitive damages must be related to an underlying

not inconsistent with this opinion.

cause of action on which the punitive damages may be based. Graham v. Street, 2 Utah 2d 144, 270 P.2d 456 (1954);
22 Am.Jur.2d Damages 241 (1965). Since we have concluded that the other aspects of the ninth cause of action
state a corporate claim, the punitive damages claim alleged must likewise belong to the corporation. In short, the ninth
cause of action states a claim belonging to the corporation and precludes that claim from being alleged as a class
action.

The tenth cause of action alleges that the defendants "defrauded the stockholders of Major Oil Company . . .." The
fraud is premised on defendants' fiduciary duty owed to the stockholders of the corporation. That duty is alleged to
have been breached in six particulars. Each of the six alleged defalcations states a claim belonging to the corporation
and not to the stockholders or any of them individually. The tenth cause of action is rounded out by allegations of the
defendants' knowledge of their wrongful conduct, the reasonable reliance of the plaintiffs on defendants' performance

Costs to Defendants.
G.R. No. 123553 July 13, 1998
(CA-G.R. No. 33291) July 13, 1998
NORA A. BITONG, petitioner,
vs.
COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS. PUBLISHING
CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA, respondents.
(CA-G.R. No. 33873) July 13, 1998
NORA A. BITONG, petitioner,

of defendants' fiduciary duties, and the resulting damage to the stockholders. However, in no regard can the tenth
cause of action be interpreted as stating a claim belonging to the stockholders individually, and therefore that claim for
relief will not support a class action.

vs.
COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B. ESPIRITU, respondents.

The eleventh cause of action alleges the possibility of other conversions of Major's assets and alleges that the
defendants should be required to account to the stockholders for all of the assets of Major and disgorge themselves of

BELLOSILLO, J.:

any assets so converted. This claim also clearly belongs to the corporation.

These twin cases originated from a derivative suit 1 filed by petitioner Nora A. Bitong before the Securities and
Exchange Commission (SEC hereafter) allegedly for the benefit of private respondent Mr. & Ms. Publishing Co.,
Inc. (Mr. & Ms. hereafter), among others, to hold respondent spouses Eugenia D. Apostol and Jose A. Apostol 2 liable
for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs
of Mr. & Ms. to the damage and prejudice of Mr. & Ms. and its stockholders, including petitioner.

Although class actions have historical antecedents in rules of equity that go back several centuries in English
jurisprudence,[1] it is not to be gainsaid that the modern class action rule is one of the most farreaching and important
changes in legal procedure in many a decade. Its impact on the enforcement of consumer rights, antitrust claims,
securities claims and civil rights actions, to name but a few areas, has been monumental. However, the class action
device, if used inappropriately and in lieu of a derivative action, is likely to result in grave injustices, not the least of
which is the diversion of assets recovered in a lawsuit from creditors of a corporation to stockholders, thereby

Alleging before the SEC that she had been the Treasurer and a Member of the Board of Directors of Mr. & Ms. from
the time it was incorporated on 29 October 1976 to 11 April 1989, and was the registered owner of 1,000 shares of
stock out of the 4,088 total outstanding shares, petitioner complained of irregularities committed from 1983 to 1987 by
Eugenia D. Apostol, President and Chairperson of the Board of Directors. Petitioner claimed that except for the sale of
the name Philippine Inquirer to Philippine Daily Inquirer (PDI hereafter) all other transactions and agreements entered
into by Mr. & Ms. with PDI were not supported by any bond and/or stockholders' resolution. And, upon instructions of
Eugenia D. Apostol, Mr. & Ms. made several cash advances to PDI on various occasions amounting to P3.276 million.

On some of these borrowings PDI paid no interest whatsoever. Despite the fact that the advances made by Mr. & Ms.
to PDI were booked as advances to an affiliate, there existed no board or stockholders' resolution, contract nor any
other document which could legally authorize the creation of and support to an affiliate.
Petitioner further alleged that respondents Eugenia and Jose Apostol were stockholders, directors and officers in both
Mr. & Ms. and PDI. In fact on 2 May 1986 respondents Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion G.
Nuyda subscribed to PDI shares of stock at P50,000.00 each or a total of P150,000.00. The stock subscriptions were
paid for by Mr. & Ms. and initially treated, as receivables from officers and employees. But, no payments were ever
received from respondents, Magsanoc and Nuyda.
The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and Jose A. Apostol from further acting as
president-director and director, respectively, of Mr. & Ms. and disbursing any money or funds except for the payment of
salaries and similar expenses in the ordinary course of business, and from disposing of their Mr. & Ms. shares; (b)
enjoin respondents Apostol spouses, Magsanoc and Nuyda from disposing of the PDI shares of stock registered in
their names; (c) compel respondents Eugenia and Jose Apostol to account for and reconvey all profits and benefits
accruing to them as a result of their improper and fraudulent acts; (d) compel respondents Magsanoc and Nuyda to
account for and reconvey to Mr. & Ms. all shares of stock paid from cash advances from it and all accessions or fruits
thereof; (e) hold respondents Eugenia and Jose Apostol liable for damages suffered by Mr. & Ms. and the other
stockholders, including petitioner, by reason of their improper and fraudulent acts; (f) appoint a management
committee for Mr. & Ms. during the pendency of the suit to prevent further dissipation and loss of its assets and funds
as well as paralyzation of business operations; and, (g) direct the management committee for Mr. & Ms. to file the
necessary action to enforce its rights against PDI and other third parties.
Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the other hand, refuted the allegations of
petitioner by starting with a narration of the beginnings of Mr. & Ms. They recounted that on 9 March 1976 Ex Libris
Publishing Co., Inc. (Ex Libris hereafter) was incorporated for the purpose of publishing a weekly magazine. Its original
principal stockholders were spouses Senator Juan Ponce Enrile (then Minister of National Defense) and Cristina
Ponce Enrile through Jaka Investments Corporation (JAKA hereafter), and respondents Eugenia and Jose Apostol.
When Ex Libris suffered financial difficulties, JAKA and the Apostols, together with new investors Luis Villafuerte and
Ramon Siy, restructured Ex Libris by organizing a new corporation known as Mr. & Ms.
The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy, the Apostols and Ex Libriscontinued to
be virtually the same up to 1989. Thereafter it was agreed among them that, they being close friends, Mr. & Ms. would
be operated as a partnership or a close corporation; respondent Eugenia D. Apostol would manage the affairs of Mr. &
Ms.; and, no shares of stock would be sold to third parties without first offering the shares to the other stockholders so
that transfers would be limited to and only among the original stockholders.
Private respondents also asserted that respondent Eugenia D. Apostol had been informing her business partners of
her actions as manager, and obtaining their advice and consent. Consequently the other stockholders consented,
either expressly or impliedly, to her management. They offered no objections. As a result, the business prospered.
Thus, as shown in a statement prepared by the accounting firm Punongbayan and Araullo, there were increases from
1976 to 1988 in the total assets of Mr. & Ms. from P457,569.00 to P10,143,046.00; in the total stockholders' equity
from P203,378.00 to P2,324,954.00; and, in the net sales, from P301,489.00 to P16,325,610.00. Likewise, cash
dividends were distributed and received by the stockholders.
Private respondents further contended that petitioner, being merely a holder-in-trust of JAKA shares, only represented
and continued to represent JAKA in the board. In the beginning, petitioner cooperated with and assisted the
management until mid-1986 when relations between her and her principals on one hand, and respondent Eugenia D.
Apostol on the other, became strained due to political differences. Hence from mid-1986 to mid-1988 petitioner refused
to speak with respondent Eugenia D. Apostol, and in 1988 the former became openly critical of the management of the
latter. Nevertheless, respondent Eugenia D. Apostol always made available to petitioner and her representatives all
the books of the corporation.

Private respondents averred that all the PDI shares owned by respondents Eugenia and Jose Apostol were acquired
through their own private funds and that the loan of P750,000.00 by PDI from Mr. & Ms. had been fully paid with 20%
interest per annum. And, it was PDI, not Mr. & Ms., which loaned off P250,000.00 each to respondents Magsanoc and
Nuyda. Private respondents further argued that petitioner was not the true party to this case, the real party being JAKA
which continued to be the true stockholder of Mr. & Ms.; hence, petitioner did not have the personality to initiate and
prosecute the derivative suit which, consequently, must be dismissed.
On 6 December 1990, the SEC Hearing Panel 3 issued a writ of preliminary injunction enjoining private respondents
from disbursing any money except for the payment of salaries and other similar expenses in the regular course of
business. The Hearing Panel also enjoined respondent Apostol spouses, Nuyda and Magsanoc from disposing of their
PDI shares, and further ruled
. . . respondents' contention that petitioner is not entitled to the provisional reliefs prayed for
because she is not the real party in interest . . . is bereft of any merit. No less than respondents'
Amended Answer, specifically paragraph V, No. 8 on Affirmative Allegations/Defenses states
that "The petitioner being herself a minor stockholder and holder-in-trust of JAKA shares
represented and continues to represent JAKA in the Board." This statement refers to petitioner
sitting in the board of directors of Mr. & Ms. in two capacities, one as a minor stockholder and
the other as the holder in trust of the shares of JAKA in Mr. & Ms. Such reference alluded to by
the respondents indicates an admission on respondents' part of the petitioner's legal
personality to file a derivative suit for the benefit of the respondent Mr. & Ms. Publishing Co.,
Inc.
The Hearing Panel however denied petitioner's prayer for the constitution of a management committee.
On 25 March 1991 private respondents filed a Motion to Amend Pleadings to Conform to Evidence alleging that the
issue of whether petitioner is the real party-in-interest had been tried by express or implied consent of the parties
through the admission of documentary exhibits presented by private respondents proving that the real party-in-interest
was JAKA, not petitioner Bitong. As such, No. 8, par. V (Affirmative Allegations/Defenses),Answer to the Amended
Petition, was stipulated due to inadvertence and excusable mistake and should be amended. On 10 October 1991 the
Hearing Panel denied the motion for amendment.
Petitioner testified at the trial that she became the registered and beneficial owner of 997 shares of stock of Mr. & Ms.
out of the 4,088 total outstanding shares after she acquired them from JAKA through a deed of sale executed on 25
July 1983 and recorded in the Stock and Transfer Book of Mr. & Ms. under Certificate of Shares of Stock No. 008. She
pointed out that Senator Enrile decided that JAKA should completely divest itself of its holdings in Mr. & Ms. and this
resulted in the sale to her of JAKA's interest and holdings in that publishing firm.
Private respondents refuted the statement of petitioner that she was a stockholder of Mr. & Ms. since 25 July 1983 as
respondent Eugenia D. Apostol signed Certificate of Stock No. 008 only on 17 March 1989, and not on 25 July 1983.
Respondent Eugenia D. Apostol explained that she stopped using her long signature (Eugenia D. Apostol) in 1987 and
changed it to E.D. Apostol, the signature which appeared on the face of Certificate of Stock No. 008 bearing the date
25 July 1983. And, since the Stock and Transfer Book which petitioner presented in evidence was not registered with
the SEC, the entries therein including Certificate of Stock No. 008 were fraudulent. Respondent Eugenia D. Apostol
claimed that she had not seen the Stock and Transfer Book at anytime until 21 March 1989 when it was delivered by
petitioner herself to the office of Mr. & Ms., and that petitioner repeatedly referred to Senator Enrile as "my principal"
during the Mr. & Ms. board meeting of 22 September 1988, seven (7) times no less.
On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed the derivative suit filed by petitioner and
dissolved the writ of preliminary injunction barring private respondents from disposing of their PDI shares and any of
Mr. & Ms. assets. The Hearing Panel ruled that there was no serious mismanagement of Mr. & Ms. which would
warrant drastic corrective measures. It gave credence to the assertion of respondent Eugenia D. Apostol that Mr. &
Ms. was operated like a close corporation where important matters were discussed and approved through informal

consultations at breakfast conferences. The Hearing Panel also concluded that while the evidence presented tended
to show that the real party-in-interest indeed was JAKA and/or Senator Enrile, it viewed the real issue to be the alleged
mismanagement, fraud and conflict of interest on the part of respondent Eugenia D. Apostol, and allowed petitioner to
prosecute the derivative suit if only to resolve the real issues. Hence, for this purpose, the Hearing Panel considered
petitioner to be the real party-in-interest.

The Amended Petition before the SEC alleges

I. THE PARTIES
1. Petitioner is a stockholder and director of Mr. & Ms. . . . .

On 19 August 1993 respondent Apostol spouses sold the PDI shares registered in the name of their holding company,
JAED Management Corporation, to Edgardo B. Espiritu. On 25 August 1993 petitioner Bitong appealed to the SEC En
Banc.
On 24 January 1994 the SEC En Banc 4 reversed the decision of the Hearing Panel and, among others, ordered
private respondents to account for, return and deliver to Mr. & Ms. any and all funds and assets that they disbursed
from the coffers of the corporation including shares of stock, profits, dividends and/or fruits that they might have
received as a result of their investment in PDI, including those arising from the P150,000.00 advanced to respondents
Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion G. Nuyda; account for and return any profits and fruits of all
amounts irregularly or unlawfully advanced to PDI and other third persons; and, cease and desist from managing the
affairs of Mr. & Ms. for reasons of fraud, mismanagement, disloyalty and conflict of interest.

II. THE FACTS

1. Petitioner is the registered owner of 1,000 shares of stock of Mr. & Ms. out of the latter's
4,088 total outstanding shares. Petitioner, at all times material to this petition, is a member of
the Board of Directors of Mr. & Ms. and from the inception of Mr. & Ms. until 11 April 1989 was
its treasurer . . .
On the other hand, the Amended Answer to the Amended Petition states
I. PARTIES

The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of JAED Management Corporation to
Edgardo B. Espiritu to be tainted with fraud, hence, null and void, and considered Mr. & Ms. as the true and lawful
owner of all the PDI shares acquired by respondents Eugenia D. Apostol, Magsanoc and Nuyda. It also declared all
subsequent transferees of such shares as trustees for the benefit of Mr. & Ms. and ordered them to forthwith deliver
said shares to Mr. & Ms.
Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms. filed a petition for review before
respondent Court of Appeals, docketed as CA-GR No. SP 33291, while respondent Edgardo B. Espiritu filed a petition
for certiorari and prohibition also before respondent Court of Appeals, docketed as CA-GR No. SP 33873. On 8
December 1994 the two (2) petitions were consolidated.
On 31 August 1995 respondent appellate court rendered a decision reversing the SEC En Banc and held that from the
evidence on record petitioner was not the owner of any share of stock in Mr. & Ms. and therefore not the real party-ininterest to prosecute the complaint she had instituted against private respondents. Accordingly, petitioner alone and by
herself as an agent could not file a derivative suit in behalf of her principal. For not being the real party-in-interest,
petitioner's complaint did not state a cause of action, a defense which was never waived; hence, her petition should
have been dismissed. Respondent appellate court ruled that the assailed orders of the SEC were issued in excess of
jurisdiction, or want of it, and thus were null and void. 5 On 18 January 1996, petitioner's motion for reconsideration
was denied for lack of merit.
Before this Court, petitioner submits that in paragraph 1 under the caption "I. The Parties" of her Amended
Petition before the SEC, she stated that she was a stockholder and director of Mr. & Ms. In par. 1 under the caption "II.
The Facts" she declared that she "is the registered owner of 1,000 shares of stock of Mr. & Ms. out of the latter's 4,088
total outstanding shares" and that she was a member of the Board of Directors of Mr. & Ms. and treasurer from its
inception until 11 April 1989. Petitioner contends that private respondents did not deny the above allegations in their
answer and therefore they are conclusively bound by this judicial admission. Consequently, private respondents'
admission that petitioner has 1,000 shares of stock registered in her name in the books of Mr. & Ms. forecloses any
question on her status and right to bring a derivative suit on behalf of Mr. & Ms.

1. Respondents admit the allegations contained in Caption I, pars. 1 to 4 of the Petition

referring to the personality, addresses and capacity of the parties to the petition except . . . but
qualify said admission insofar as they are limited, qualified and/or expanded by allegations in
the Affirmative Allegations/Defenses . . .
II. THE FACTS
1. Respondents admit paragraph 1 of the Petition, but qualify said admission as to the
beneficial ownership of the shares of stock registered in the name of the petitioner, the truth
being as stated in the Affirmative Allegations/Defenses of this Answer . . .
V. AFFIRMATIVE ALLEGATIONS/DEFENSES
Respondents respectfully allege by way of Affirmative Allegations/Defenses, that . . . .
3. Fortunately, respondent Apostol was able to convince Mr. Luis Villafuerte to take interest in
the business and he, together with the original investors, restructured the Ex Libris Publishing
Company by organizing a new corporation known as Mr. & Ms. Publishing Co., Inc. . . . Mr. Luis
Villafuerte contributed his own P100,000.00. JAKA and respondent Jose Z. Apostol, original
investors of Ex Libris contributed P100,000.00 each; Ex Libris Publishing Company was paid
800 shares for the name of Mr. & Ms. magazine and goodwill. Thus, the original stockholders of
respondent Mr. & Ms. were:
Cert./No./Date Name of Stockholder No. of Shares %
001-9-15-76 JAKA Investments Corp. 1,000 21%

Not necessarily. A party whose pleading is admitted as an admission against interest is entitled to overcome by
evidence the apparent inconsistency, and it is competent for the party against whom the pleading is offered to show
that the statements were inadvertently made or were made under a mistake of fact. In addition, a party against whom
a single clause or paragraph of a pleading is offered may have the right to introduce other paragraphs which tend to
destroy the admission in the paragraph offered by the adversary. 6

002-9-15-76 Luis Villafuerte 1,000 21%

003-9-15-76 Ramon L. Siy 1,000 21%

004-9-15-76 Jose Z. Apostol 1,000 21%

capacity solely for the purpose of ruling on the application for writ of preliminary injunction as an incident to the main
issues raised in the complaint. Being a mere interlocutory order, it is not appealable.

005-9-15-76 Ex Libris Publishing Co. 800 16%

4,800 96%
4. The above-named original stockholders of respondent Mr. & Ms. continue to be virtually the
same stockholders up to this date . . . .
8. The petitioner being herself a minor stockholder and holder-in-trust of JAKA shares,
represented and continues to represent JAKA in the Board . . . .
21. Petitioner Nora A. Bitong is not the true party to this case, the true party being JAKA
Investments Corporation which continues to be the true stockholder of respondent Mr. & Ms.
Publishing Co., Inc., consequently, she does not have the personality to initiate and prosecute
this derivative suit, and should therefore be dismissed . . . .
The answer of private respondents shows that there was no judicial admission that petitioner was a stockholder of Mr.
& Ms. to entitle her to file a derivative suit on behalf of the corporation. Where the statements of the private
respondents were qualified with phrases such as, "insofar as they are limited, qualified and/or expanded by," "the truth
being as stated in the Affirmative Allegations/Defenses of this Answer" they cannot be considered definite and certain
enough, cannot be construed as judicial admissions. 7
More so, the affirmative defenses of private respondents directly refute the representation of petitioner that she is a
true and genuine stockholder of Mr. & Ms. by stating unequivocally that petitioner is not the true party to the case but
JAKA which continues to be the true stockholder of Mr. & Ms. In fact, one of the reliefs which private respondents
prayed for was the dismissal of the petition on the ground that petitioner did not have the legal interest to initiate and
prosecute the same.
When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to the Amended
Petition alone, clearly raises an issue as to the legal personality of petitioner to file the complaint. Every alleged
admission is taken as an entirety of the fact which makes for the one side with the qualifications which limit, modify or
destroy its effect on the other side. The reason for this is, where part of a statement of a party is used against him as
an admission, the court should weigh any other portion connected with the statement, which tends to neutralize or
explain the portion which is against interest.
In other words, while the admission is admissible in evidence, its probative value is to be determined from the whole
statement and others intimately related or connected therewith as an integrated unit. Although acts or facts admitted
do not require proof and cannot be contradicted, however, evidence aliunde can be presented to show that the
admission was made through palpable mistake. 8 The rule is always in favor of liberality in construction of pleadings so
that the real matter in dispute may be submitted to the judgment of the court. 9
Petitioner also argues that since private respondents failed to appeal the 6 December 1990 Order and the 3 August
1993 Decision of the SEC Hearing Panel declaring that she was the real party-in-interest and had legal personality to
sue, they are now estopped from questioning her personality.
Not quite. The 6 December 1990 Order is clearly an interlocutory order which cannot be considered as having finally
resolved on the merits the issue of legal capacity of petitioner. The SEC Hearing Panel discussed the issue of legal

For, an interlocutory order refers to something between the commencement and end of the suit which decides some
point or matter but it is not the final decision of the whole controversy. 10 Thus, even though the 6 December 1990
Order was adverse to private respondents, they had the legal right and option not to elevate the same to the SEC En
Banc but rather to await the decision which resolves all the issues raised by the parties and to appeal therefrom by
assigning all errors that might have been committed by the Hearing Panel.
On the other hand, the 3 August 1993 Decision of the Hearing Panel dismissing the derivative suit for failure to prove
the charges of mismanagement, fraud, disloyalty and conflict of interest and dissolving the writ of preliminary
injunction, was favorable to private respondents. Hence, they were not expected to appeal therefrom.
In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated that the evidence presented showed that
the real party-in-interest was not petitioner Bitong but JAKA and/or Senator Enrile. Petitioner was merely allowed to
prosecute her complaint so as not to sidetrack "the real issue to be resolved (which) was the allegation of
mismanagement, fraud and conflict of interest allegedly committed by respondent Eugenia D. Apostol." It was only for
this reason that petitioner was considered to be capacitated and competent to file the petition.
Accordingly, with the dismissal of the complaint of petitioner against private respondents, there was no compelling
reason for the latter to appeal to the SEC En Banc. It was in fact petitioner's turn as the aggrieved party to exercise her
right to appeal from the decision. It is worthy to note that even during the appeal of petitioner before the SEC En
Banc private respondents maintained their vigorous objection to the appeal and reiterated petitioner's lack of legal
capacity to sue before the SEC.
Petitioner then contends that she was a holder of the proper certificates of shares of stock and that the transfer was
recorded in the Stock and Transfer Book of Mr. & Ms. She invokes Sec. 63 of The Corporation Code which provides
that no transfer shall be valid except as between the parties until the transfer is recorded in the books of the
corporation, and upon its recording the corporation is bound by it and is estopped to deny the fact of transfer of said
shares. Petitioner alleges that even in the absence of a stock certificate, a stockholder solely on the strength of the
recording in the stock and transfer book can exercise all the rights as stockholder, including the right to file a derivative
suit in the name of the corporation. And, she need not present a separate deed of sale or transfer in her favor to prove
ownership of stock.
Sec. 63 of The Corporation Code expressly provides
Sec. 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 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 showing the names of the parties to the transaction, the date of
the transfer, the number of the certificate or certificates and the number of shares transferred . .
..
This provision above quoted envisions a formal certificate of stock which can be issued only upon compliance with
certain requisites. First, the certificates must be signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a
stockholder of the extent of his ownership in a corporation without qualification and/or authentication cannot be
considered as a formal certificate of stock. 11 Second, delivery of the certificate is an essential element of its issuance.

Hence, there is no issuance of a stock certificate where it is never detached from the stock books although blanks
therein are properly filled up if the person whose name is inserted therein has no control over the books of the
company. 12 Third, the par value, as to par value shares, or the full subscription as to no par value shares, must first be
fully paid. Fourth, the original certificate must be surrendered where the person requesting the issuance of a certificate
is a transferee from a stockholder.

articles of incorporation although no certificate of stock has yet been issued, it is supposed to serve as paper
representative of the stock itself and of the owner's interest therein. Hence, when Certificate of Stock No. 008 was
admittedly signed and issued only on 17 March 1989 and not on 25 July 1983, even as it indicates that petitioner owns
997 shares of stock of Mr. & Ms., the certificate has no evidentiary value for the purpose of proving that petitioner was
a stockholder since 1983 up to 1989.

The certificate of stock itself once issued is a continuing affirmation or representation that the stock described therein
is valid and genuine and is at least prima facie evidence that it was legally issued in the absence of evidence to the
contrary. However, this presumption may be rebutted. 13 Similarly, books and records of a corporation which include
even the stock and transfer book are generally admissible in evidence in favor of or against the corporation and its
members to prove the corporate acts, its financial status and other matters including one's status as a stockholder.
They are ordinarily the best evidence of corporate acts and proceedings.

And even the factual antecedents of the alleged ownership by petitioner in 1983 of shares of stock of Mr. & Ms. are
indistinctive if not enshrouded in inconsistencies. In her testimony before the Hearing Panel, petitioner said that early
in 1983, to relieve Mr. & Ms. from political pressure, Senator Enrile decided to divest the family holdings in Mr. & Ms.
as he was then part of the government and Mr. & Ms. was evolving to be an opposition newspaper. The JAKA shares
numbering 1,000 covered by Certificate of Stock No. 001 were thus transferred to respondent Eugenia D. Apostol in
trust or in blank. 18

However, the books and records of a corporation are not conclusive even against the corporation but are prima
facie evidence only. Parol evidence may be admitted to supply omissions in the records, explain ambiguities, or show
what transpired where no records were kept, or in some cases where such records were contradicted. 14The effect of
entries in the books of the corporation which purport to be regular records of the proceedings of its board of directors
or stockholders can be destroyed by testimony of a more conclusive character than mere suspicion that there was an
irregularity in the manner in which the books were kept. 15

Petitioner now claims that a few days after JAKA's shares were transferred to respondent Eugenia D. Apostol, Senator
Enrile sold to petitioner 997 shares of JAKA. For this purpose, a deed of sale was executed and antedated to 10 May
1983. 19 This submission of petitioner is however contradicted by the records which show that a deed of sale was
executed by JAKA transferring 1,000 shares of Mr. & Ms. to respondent Apostol on 10 May 1983 and not to
petitioner. 20

The foregoing considerations are founded on the basic principle that stock issued without authority and in violation of
law is void and confers no rights on the person to whom it is issued and subjects him to no liabilities. 16 Where there is
an inherent lack of power in the corporation to issue the stock, neither the corporation nor the person to whom the
stock is issued is estopped to question its validity since an estopped cannot operate to create stock which under the
law cannot have existence. 17

Then Senator Enrile testified that in May or June 1983 he was asked at a media interview if his family owned shares of
stock in Mr. & Ms. Although he and his family were stockholders at that time he denied it so as not to embarrass the
magazine. He called up petitioner and instructed her to work out the documentation of the transfer of shares from
JAKA to respondent Apostol to be covered by a declaration of trust. His instruction was to transfer the shares of JAKA
in Mr. & Ms. and Ex Libris to respondent Apostol as a nominal holder. He then finally decided to transfer the
shareholdings to petitioner. 21

As found by the Hearing Panel and affirmed by respondent Court of Appeals, there is overwhelming evidence that
despite what appears on the certificate of stock and stock and transfer book, petitioner was not a bona fidestockholder
of Mr. & Ms. before March 1989 or at the time the complained acts were committed to qualify her to institute a
stockholder's derivative suit against private respondents. Aside from petitioner's own admissions, several corporate
documents disclose that the true party-in-interest is not petitioner but JAKA.

When asked if there was any document or any written evidence of that divestment in favor of petitioner, Senator Enrile
answered that there was an endorsement of the shares of stock. He said that there was no other document evidencing
the assignment to petitioner because the stocks were personal property that could be transferred even
orally. 22 Contrary to Senator Enrile's testimony, however, petitioner maintains that Senator Enrile executed a deed of
sale in her favor.

Thus, while petitioner asserts in her petition that Certificate of Stock No. 008 dated 25 July 1983 was issued in her
name, private respondents argue that this certificate was signed by respondent Eugenia D. Apostol as President only
in 1989 and was fraudulently antedated by petitioner who had possession of the Certificate Book and the Stock and
Transfer Book. Private respondents stress that petitioner's counsel entered into a stipulation on record before the
Hearing Panel that the certificate was indeed signed by respondent Apostol only in 1989 and not in 1983.

A careful perusal of the records shows that neither the alleged endorsement of Certificate of Stock No. 001 in the
name of JAKA nor the alleged deed of sale executed by Senator Enrile directly in favor of petitioner could have legally
transferred or assigned on 25 July 1983 the shares of stock in favor of petitioner because as of 10 May 1983
Certificate of Stock No. 001 in the name of JAKA was already cancelled and a new one, Certificate of Stock No. 007,
issued in favor of respondent Apostol by virtue of a Declaration of Trust and Deed of Sale. 23

In her reply, petitioner admits that while respondent Eugenia D. Apostol signed the Certificate of Stock No. 008 in
petitioner's name only in 1989, it was issued by the corporate secretary in 1983 and that the other certificates covering
shares in Mr. & Ms. had not yet been signed by respondent Eugenia D. Apostol at the time of the filing of the complaint
with the SEC although they were issued years before.

It should be emphasized that on 10 May 1983 JAKA executed, a deed of sale over 1,000 Mr. & Ms. shares in favor of
respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a declaration of trust stating that she
was the registered owner of 1,000 Mr. & Ms. shares covered by Certificate of Stock No. 007.

Based on the foregoing admission of petitioner, there is no truth to the statement written in Certificate of Stock No. 008
that the same was issued and signed on 25 July 1983 by its duly authorized officers specifically the President and
Corporate Secretary because the actual date of signing thereof was 17 March 1989. Verily, a formal certificate of stock
could not be considered issued in contemplation of law unless signed by the president or vice-president and
countersigned by the secretary or assistant secretary.
In this case, contrary to petitioner's submission, the Certificate of Stock No. 008 was only legally issued on 17 March
1989 when it was actually signed by the President of the corporation, and not before that date. While a certificate of
stock is not necessary to make one a stockholder, e.g., where he is an incorporator and listed as stockholder in the

The declaration of trust further showed that although respondent Apostol was the registered owner, she held the
shares of stock and dividends which might be paid in connection therewith solely in trust for the benefit of JAKA, her
principal. It was also stated therein that being a trustee, respondent Apostol agreed, on written request of the principal,
to assign and transfer the shares of stock and any and all such distributions or dividends unto the principal or such
other person as the principal would nominate or appoint.
Petitioner was well aware of this trust, being the person in charge of this documentation and being one of the
witnesses to the execution of this
document. 24 Hence, the mere alleged endorsement of Certificate of Stock No. 001 by Senator Enrile or by a duly

authorized officer of JAKA to effect the transfer of shares of JAKA to petitioner could not have been legally feasible
because Certificate of Stock No. 001 was already canceled by virtue of the deed of sale to respondent Apostol.
And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on respondent Eugenia D.
Apostol. Neither was there any evidence that the principal had requested her to assign and transfer the shares of stock
to petitioner. If it was true that the shares of stock covered by Certificate of Stock No. 007 had been transferred to
petitioner, the person who could legally endorse the certificate was private respondent Eugenia D. Apostol, she being
the registered owner and trustee of the shares of stock covered by Certificate of Stock No. 007. It is a settled rule that
the trustee should endorse the stock certificate to validate the cancellation of her share and to have the transfer
recorded in the books of the corporation. 25
In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of JAKA. Petitioner being the
chief executive officer of JAKA and the sole person in charge of all business and financial transactions and affairs of
JAKA 26 was supposed to be in the best position to show convincing evidence on the alleged transfer of shares to her,
if indeed there was a transfer. Considering that petitioner's status is being questioned and several factual
circumstances have been presented by private respondents disproving petitioner's claim, it was incumbent upon her to
submit rebuttal evidence on the manner by which she allegedly became a stockholder. Her failure to do so taken in the
light of several substantial inconsistencies in her evidence is fatal to her case.
The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person
legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled
with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares
from the lawful owner to the new transferee.
Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of the stock certificate;
(b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make
the transfer; and, (c) to be valid against third parties, the transfer must be recorded in the books of the
corporation. 27 At most, in the instant case, petitioner has satisfied only the third requirement. Compliance with the first
two requisites has not been clearly and sufficiently shown.
Considering that the requirements provided under Sec. 63 of The Corporation Code should be mandatorily complied
with, the rule on presumption of regularity cannot apply. The regularity and validity of the transfer must be proved. As it
is, even the credibility of the stock and transfer book and the entries thereon relied upon by petitioner to show
compliance with the third requisite to prove that she was a stockholder since 1983 is highly doubtful.
The records show that the original stock and transfer book and the stock certificate book of Mr. & Ms. were in the
possession of petitioner before their custody was transferred to the Corporate Secretary, Atty. Augusto San
Pedro. 28 On 25 May 1988, Assistant Corporate Secretary Renato Jose Unson wrote Mr. & Ms. about the lost stock
and transfer book which was also noted by the corporation's external auditors, Punongbayan and Araullo, in their
audit. Atty. Unson even informed respondent Eugenia D. Apostol as President of Mr. & Ms. that steps would be
undertaken to prepare and register a new Stock and Transfer Book with the SEC. Incidentally, perhaps strangely, upon
verification with the SEC, it was discovered that the general file of the corporation with the SEC was missing. Hence, it
was even possible that the original Stock and Transfer Book might not have been registered at all.
On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San Pedro noting the changes he had made
in the Stock and Transfer Book without prior notice to the corporate officers. 29 In the 27 October 1988 directors'
meeting, respondent Eugenia D. Apostol asked about the documentation to support the changes in the Stock and
Transfer Book with regard to the JAKA shares. Petitioner answered that Atty. San Pedro made the changes upon her
instructions conformably with established practice. 30
This simply shows that as of 1988 there still existed certain issues affecting the ownership of the JAKA shares, thus
raising doubts whether the alleged transactions recorded in the Stock and Transfer Book were proper, regular and

authorized. Then, as if to magnify and compound the uncertainties in the ownership of the shares of stock in question,
when the corporate secretary resigned, the Stock and Transfer Book was delivered not to the corporate office where
the book should be kept but to petitioner. 31
That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown by its receipt of the dividends issued in
December 1986. 32 This only means, very obviously, that Mr. & Ms. shares in question still belonged to JAKA and not
to petitioner. For, dividends are distributed to stockholders pursuant to their right to share in corporate profits. When a
dividend is declared, it belongs to the person who is the substantial and beneficial owner of the stock at the time
regardless of when the distribution profit was earned. 33
Finally, this Court takes notice of the glaring and open admissions of petitioner made, not just seven (7) but nine (9)
times, during the 22 September 1988 meeting of the board of directors that the Enriles were her principals or
shareholders, as shown by the minutes thereof which she duly signed 34
5. Mrs. E. Apostol explained to the Directors that through her efforts, the asset base of the
Company has improved and profits were realized. It is for this reason that the Company has
declared a 100% cash dividend in 1986. She said that it is up for the Board to decide based on
this performance whether she should continue to act as Board Chairman or not. In this regard,
Ms. N.A. Bitong expressed her recollection of how Ex-Libris/Mr. & Ms. were organized and her
participation for and on behalf of her principals, as follows: She recalled that her
principals were invited by Mrs. E. Apostol to invest in Ex-Libris and eventually Mr. & Ms. The
relationship between her principals and Mrs. E. Apostol made it possible for the latter to have
access to several information concerning certain political events and issues. In many
instances, her principals supplied first hand and newsworthy information that made Mr. & Ms. a
popular
paper . . . .
6. According to Ms. Bitong, her principals were instrumental in helping Mr. & Ms. survive during
those years that it was cash strapped . . . . Ms. N.A. Bitong pointed out that the practice of
using the former Minister's influence and stature in the government is one thing which her
principals themselves are strongly against . . . .
7. . . . . At this point, Ms. N. Bitong again expressed her recollection of the subject matter as
follows: (a) Mrs. E. Apostol, she remembers, brought up the concept of a cooperative-ran
newspaper company in one of her breakfast session with her principals sometime during the
end of 1985. Her principals when asked for an opinion, said that they recognized the concept
as something very noble and visible . . . . Then Ms. Bitong asked a very specific question
"When you conceptualized Ex-Libris and Mr. & Ms., did you not think of my shareholders the
Ponce Enriles as liabilities? How come you associated yourself with them then and not now?
What is the difference?" Mrs. Apostol did not answer the question.
The admissions of a party against his interest inscribed upon the record books of a corporation are competent and
persuasive evidence against him. 35 These admissions render nugatory any argument that petitioner is a bona
fidestockholder of Mr. & Ms. at any time before 1988 or at the time the acts complained of were committed. There is no
doubt that petitioner was an employee of JAKA as its managing officer, as testified to by Senator Enrile
himself. 36 However, in the absence of a special authority from the board of directors of JAKA to institute a derivative
suit for and in its behalf, petitioner is disqualified by law to sue in her own name. The power to sue and be sued in any
court by a corporation even as a stockholder is lodged in the board of directors that exercises its corporate powers and
not in the president or officer thereof. 37
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. 38 The stockholder's right to institute a
derivative suit is not based on any express provision of The Corporation Code but is impliedly recognized when the
law makes corporate directors or officers liable for damages suffered by the corporation and its stockholders for
violation of their fiduciary duties.
Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special
injury to him for which he is otherwise without redress. 39 In effect, the suit is an action for specific performance of an
obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put
in default by the wrongful refusal of the directors or management to make suitable measures for its protection. 40
The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first complying with the
legal requisites for its institution. The most important of these is the bona fide ownership by a stockholder of a stock in
his own right at the time of the transaction complained of which invests him with standing to institute a derivative action
for the benefit of the corporation. 41
WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the Court of Appeals dismissing the complaint
of petitioner Nora A. Bitong in CA-G.R. No. SP 33291, and granting the petition for certiorari and prohibition filed by
respondent Edgardo U. Espiritu as well as annulling the 5 November 1993, 24 January 1993 and 18 February 1994
Orders of the SEC En Banc in CA-G.R. No. SP 33873, is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 85339 August 11, 1989
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.
Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.
Roco & Bunag Law Offices for respondent Ernest Kahn.
Siguion Reyna, Montecillo and Ongsiako for other respondents.

NARVASA, J.:
On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation were
acquired 1 by fourteen (14) other corporations, 2 and were placed under a Voting Trust Agreement in favor of the late
Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984
with power to delegate the trusteeship in writing to Andres Soriano III. 3 Shortly after the Revolution of February, 1986,
Cojuangco left the country amid "persistent reports" that "huge and unusual cash disbursements from the funds of
SMC" had been irregularly made, and the resources of the firm extensively used in support of the candidacy of
Ferdinand Marcos during the snap elections in February, 1986 . 4
On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14 corporations,
as "Sellers," for the purchase by Soriano, "for himself and as agent of several persons," of the 33,133,266 shares of
stock at the price of P100.00 per share, or "an aggregate sum of Three Billion Three Hundred Thirteen Million Three

Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00) Pesos payable in specified installments. 5 The
Agreement revoked the voting trust above mentioned, and expressed the desire of the 14 corporations to sell the
shares of stock "to pay certain outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order
to institutionalize and stabilize the management of the COMPANY in .. (himself) and the professional officer corps,
mandated by the COMPANY's By- laws, and to direct the COMPANY towards giving the highest priority to its principal
products and extensive support to agriculture programme of' the Government ... 6 Actually, according to Soriano and
the other private respondents, the buyer of the shares was a foreign company, Neptunia Corporation Limited (of
Hongkong, a wholly owned subsidiary of San Miguel International which is, in turn, a wholly owned subsidiary of San
Miguel Corporation; 7 and it was Neptunia which on or about April 1, 1986 had made the down payment of
P500,000,000.00, "from the proceeds of certain loans". 8
At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good Government
(PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of
former President Marcos, and the sale thereof was "in direct contravention of .. Executive Orders Numbered 1 and 2 (..
dated February 28, 1986 and March 12, 1986, respectively) which prohibit .. the transfer, conveyance, encumbrance,
concealment or liquidation of assets and properties acquired by former President Ferdinand Marcos and/or his wife,
Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates. 9 The sequestration was
subsequently lifted, and the sale allowed to proceed, on representations by San Miguel Corporation x x that the shares
were 'owned by 1.3 million coconut farmers;' the seller corporations were 'fully owned' by said farmers and Cojuangco
owned only 2 shares in one of the companies, etc. However, the sequestration was soon re-imposed by Order of the
PCGG dated May 19, 1986 .. The same order forbade the SMC corporate Secretary to register any transfer or
encumbrance of any of the stock without the PCGG's prior written authority. 10
San Miguel promptly suspended payment of the other installments of the price to the fourteen (14) seller corporations.
The latter as promptly sued for rescission and damages. 11
On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in the corporation to seven (7)
individuals, including Eduardo de los Angeles, "from the sequestered shares registered as street certificates under the
control of Anscor- Hagedorn Securities, Inc.," to "be held in trust by .. (said seven [7] persons) for the benefit of
Anscor-Hagedom Securities, Inc. and/or whoever shall finally be determined to be the owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by Neptunia for
the down payment ((P500M)) on the 33,133,266 shares." The Board opined that there was "nothing illegal in this
assumption (of liability for the loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was
no additional expense or exposure for the SMC Group, and there were tax and other benefits which would redound to
the SMC group of companies. 13
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the PCGG
representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was ever adopted, and
stating that what in truth was agreed upon at the meeting of December 4, 1986 was merely a "further study" by
Director Ramon del Rosario of a plan presented by him for the assumption of the loan. De los Angeles also pointed out
certain "deleterious effects" thereof. He was however overruled by private respondents. 14 When his efforts to obtain
relief within the corporation and later the PCGG proved futile, he repaired to the Securities and Exchange Commission
(SEC).lwph1.t
He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel Corporation, against
ten (10) of the fifteen-member Board of Directors who had "either voted to approve and/or refused to reconsider and
revoke Board Resolution No. 86-12-2." 15 His Amended Petition in the SEC recited substantially the foregoing
antecedents and the following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia Corporation, Ltd., had
met and passed a resolution authorizing the company to borrow up to US $26,500,000.00 from
the Hongkong & Shanghai Banking Corporation, Hongkong "to enable the Soriano family to

initiate steps and sign an agreement for the purchase of some 33,133,266 shares of San
,Miguel Corporation. 16
b) The loan of $26,500,000.00 was obtained on the same day, the corresponding loan
agreement having been signed for Neptunia by Ralph Kahn and Carl Ottiger. At the latter's
request, the proceeds of the loan were deposited in different banks 17 for the account of
"Eduardo J. Soriano".
c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the stockholders of
San Miguel Corporation, 18 inter alia soliciting their proxies and announcing that "the Soriano
family, friends and affiliates acquired a considerable block of San Miguel Corporation shares
only a few days ago .., the transaction .. (having been) made through the facilities of the Manila
Stock Exchange, and 33,133,266 shares .. (having thereby been) purchased for the aggregate
price of' P3,313,326,600.00." The letters also stated that the purchase was "an exercise of the
Sorianos' right to buy back the same number of shares purchased in 1983 by the .. (14 seller
corporations)."
d) In implementing the assumption of the Neptunia loan and the purchase agreement for which
said loan was obtained, which assumption constituted an improper use of corporate funds to
pay personal obligations of Andres Soriano III, enabling him; to purchase stock of the
corporation using funds of' the corporation itself, the respondents, through various subsequent
machinations and manipulations, for interior motives and in breach of fiduciary duty, compound
the damages caused San Miguel Corporation by, among other things: (1) agreeing to pay a
higher price for the shares than was originally covenanted in order to prevent a rescission of
the purchase agreement by the sellers; (2) urging UCPB to accept San Miguel Corporation and
Neptunia as buyers of the shares, thereby committing the former to the purchase of its own
shares for at least 25% higher than the price at which they were fairly traded in the stock
exchanges, and shifting to said corporations the personal obligations of Soriano III under the
purchase agreement; and (3) causing to be applied to the part payment of P1,800,000.00 on
said purchase, various assets and receivables of San Miguel Corporation.
The complaint closed with a prayer for injunction against the execution or consummation of any agreement causing
San Miguel Corporation to purchase the shares in question or entailing the use of its corporate funds or assets for said
purchase, and against Andres Soriano III from further using or disposing of the funds or assets of the corporation for
his obligations; for the nullification of the SMC Board's resolution of April 2, 1987 making San Miguel Corporation a
party to the purchase agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:
1 De los Angeles has no legal capacity to sue because
a) having been merely imposed by the PCGG as
a director on San Miguel, he has no standing to
bring a minority derivative suit;
b) he personally holds only 20 shares and hence
cannotfairly and adequately represent the
minority stockholders of the corporation;
c) he has not come to court with clean hands;
and

2. The Securities & Exchange Commission has no jurisdiction over the controversy because
the matters involved are exclusively within the business judgment of the Board of Directors. 19
Kahn's motion to dismiss was subsequently adopted by his correspondents . 20
The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order dated September 4,
1987. 21 In her view
1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law, ownership
of even one share only, sufficed to qualify a person to bring a derivative suit;
2) it is indisputable that the action had been brought by de los Angeles for the benefit of the
corporation and all the other stockholders;
3) he was a stockholder at the time of the commission of the acts complained of, the number of
shares owned by him being to repeat, immaterial;
4) there is no merit in the assertion that he had come to Court with unclean hands, it not having
been shown that he participated in the act complained of or ratified the same; and
5) where business judgment transgresses the law, the securities and Exchange Commission
always has competence to inquire thereinto.
Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of this adverse
resolution of the SEC Hearing Officer and her perpetual inhibition from proceeding with SEC Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two. The majority 22 ruled that de los Angeles
had no egal capacity to institute the derivative suit, a conclusion founded on the following propositions:
1) a party "who files a derivative suit should adequately represent the interests of the minority
stockholders;" since "De los Angeles holds 20 shares of stock out of 121,645,860 or
0.00001644% (appearing to be undisputed), (he) cannot even be remotely said to adequately
represent the interests of the minority stockholders, (e)specially so when .. de los Angeles was
put by the PCGG to vote the majority stock," a situation generating "a genuine conflict of
interest;"
2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position as PCGGnominated director is inconsistent with his assumed role of representative of minority
stockholders; not having been elected by the minority, his voting would expectedly consider the
interest of the entity which placed him in the board of directors;
3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a) PCGG cannot
exercise acts of dominion over sequestered property, (b) it has only powers of administration,
and (c) its voting of sequestered stock must be done only pursuant to its power of
administration; and
4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for the benefit
of the corporation.

The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been properly brought by de los
Angeles because
1) the number of shares owned by him was immaterial, he being a stockholder in his own right;

d) the Order of the SEC Investigating Officer denying the motion to dismiss was issued
without or in excess of jurisdiction, hence was correctly nullified by the Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for reconsideration by
respondents in the SEC case; in any event, such a motion was unnecessary in the premises.

2) he had not voted in favor of the resolution authorizing the purchase of the shares; and
De los Angeles' Reply seeks to make the following points:
3) even if PCGG was not the owner of the sequestered shares, it had the right to seek the
protection of the interest of the corporation, it having been held that even an unregistered
shareholder or an equitable owner of shares and pledgees of shares may be deemed a
shareholder for purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of Appeals, imputing to
the latter the following errors:
1) having granted the writ of certiorari despite the fact that Kahn had not first resorted to the
plain remedy available to him, i.e., appeal to the SEC en banc and despite the fact that no
question of jurisdiction was involved;
2) having ruled on Kahn's petition on the basis merely of his factual allegations, although he
(de los Angeles) had disputed them and there had been no trial in the SEC; and
3) having held that he (de los Angeles) could not file a derivative suit as stockholder and/or
director of the San Miguel Corporation.
For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the ownership of the
33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos. 74910, 5075,
75094, 76397, 79459 and 79520, promulgated on August 10, 1988; 25
2) de los Angeles was beholden to the controlling stockholder in the corporation (PCGG), which
had "imposed" him on the corporation; since the PCGG had a clear conflict of interest with the
minority, de los Angeles, as director of the former, had no legal capacity to sue on behalf of the
latter;
3) even assuming absence of conflict of interest, de los Angeles does not fairly and adequately
represent the interest of the minority stockholders;
4) the respondents had properly applied for certiorari with the Court of Appeals because
a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies exercising
quasi-judicial functions, and hence file competence to issue the writ of certiorari;
b) the principle of exhaustion of administrative remedies does not apply since the issue
involved is one of law;
c) said respondents had no plain, speedy and adequate remedy within SEC;

1) since the law lays down three (3) requisites for a derivative suit, viz:
a) the party bringing suit should be a shareholder as of the time of the
act or transaction complained of,
b) he has exhausted 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) c)the cause of action actually devolves on the corporation, the
,wrongdoing or harm having been caused to the corporation and not
to .the particular stockholder bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired those shares as
early as 1977, (2) he had sought without success to have the board of' directors remedy with wrong, and (3) that
wrong was in truth a 'wrong against the stockholders of the corporation, generally, ,and not against him individually
and it was the corporation, and not he, particularly, that would be entitled to the appropriate' relief the propriety of
his suit cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings in the Court of Appeals
and hence could not claim exclusion from the scope of the doctrine of exhaustion of remedies;
moreover, Rule 65, invoked by him, bars a resort to certiorari. where a plain, speedy and
accurate remedy was available to him in this case, to wit, a motion for reconsideration before
the Sec en banc and, contrary to the respondent's claim, De Los Angeles had in fact asserted
to this propositions before the Appellate Tribunal; and
3) the respondent had not raised the issue of jurisdiction before the Court of Appeals; indeed,
they admit to their Comment that that
issue has not yet been resolved by the SEC," be this as it may, the derivative suit does not fall
within the BASECO doctrine since it does not involve any question of ownership of the
33,133,266 sequestered SMC shares but rather, the validity of the resolution of the board of
directors for the assumption by the corporation, for the benefit of certain of its officers and
stockholders, of liability for loans contracted by another corporation, which is an intra-corporate
dispute within the exclusive jurisdiction of the SEC.
1. De los Angeles is not opposed to the asserted position of the PCGG that the sequestered
SMC shares of stock belong to Ferdinand Marcos and/or his dummies and/or cronies. His
consent to sit in the board as nominee of PCGG unquestionably indicates his advocacy of the
PCGG position. He does not here seek, and his complaint in the SEC does not pray for, the
annulment of the purchase by SMC of the stock in question, or even the subsequent purchase
of the same stock by others 26which proposition was challenged by (1) one Evio, in SEC Case
No. 3000; (2) by the 14 corporations which sold the stock to SMC, in Civil Case No. 13865 of

the Manila RTC, said cases having later become subject of G.R. No. 74910 of this Court; (3) by
Neptunia, SMC, and others, in G.R. No. 79520 of this Court; and (4) by Eduardo Cojuangco
and others in Civil Case No. 16371 of the RTC, Makati, [on the theory that the sequestered
stock in fact belonged to coconut planters and oil millers], said case later having become
subject of G.R. No. 79459 of this court . 27 Neither does de los Angeles impugn, obviously, the
right of the PCGG to vote the sequestered stock thru its nominee directors as was done by
United Coconut Planters Bank and the 14 seller corporations (in SEC Case No. 3005, later
consolidated with SEC Case No. 3000 above mentioned, these two (2) cases later having
become subject of G.R.No. 76397) as well as by one Clifton Ganay, a UCPB stockholder (in
G.R. No. 75094 of this Court).lwph1.t 28
The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court's Resolution of
August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pena, et al 29 an cases of the
Commission regarding 'the funds, moneys, assets, and properties illegally acquired or misappropriated by former
President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close relatives, Subordinates, Business
Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within the exclusive and original
jurisdiction of the Sandiganbayan,' and all incidents arising from, incidental to, or related to, such cases necessarily fall
likewise under the Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by the
Supreme Court." His complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or
"any incidents arising from, incidental to, or related to" any case involving such property, but assets indisputably
belonging to San Miguel Corporation which were, in his (de los Angeles') view, being illicitly committed by a majority of
its board of directors to answer for loans assumed by a sister corporation, Neptunia Co., Ltd.
De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption by the corporation of the
indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers and stockholders, an issue
evidently distinct from, and not even remotely requiring inquiry into the matter of whether or not the 33,133,266 SMC
shares sequestered by the PCGG belong to Marcos and his cronies or dummies (on which- issue, as already pointed
out, de los Angeles, in common with the PCGG, had in fact espoused the affirmative). De los Angeles' dispute, as
stockholder and director of SMC, with other SMC directors, an intra-corporate one, to be sure, is of no concern to the
Sandiganbayan, having no relevance whatever to the ownership- of the sequestered stock. The contention, therefore,
that in view of this Court's ruling as regards the sequestered SMC stock above adverted to, the SEC has no
jurisdiction over the de los Angeles complaint, cannot be sustained and must be rejected. The dispute concerns acts of
the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the
stockholders, or is one arising out of intra-corporate relations between and among stockholders, or between any or all
of them and the corporation of which they are stockholders . 30
2. 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, either.
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 31 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; 32
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; 33 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. 34
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.
3. 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 being plainly a director's duty to vote
according to his own independent judgment and his own conscience as to what is in the best
interests of the company. Moreover, it is undisputed that apart from the qualifying shares given
to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from any
aspect be deemed to be "beholden" to the PCGG, his ownership of these shares being
precisely what he invokes as the source of his authority to bring the derivative suit.
4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no power
to vote sequestered shares of stock as an act of dominion but only in pursuance to its power
of administration. The inference is that the PCGG's act of voting the stock to elect de los
Angeles to the SMC Board of Directors was unauthorized and void; hence, the latter could not
bring suit in the corporation's behalf. The argument is strained and obviously of no merit. As
already more than plainly indicated, it was not necessary for de los Angeles to be a director in
order to bring a derivative action; all he had to be was a stockholder, and that he was owning in
his own right 20 shares of stock, a fact not disputed by the respondents.
Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered stock may not under
any circumstances be voted by the PCGG to elect a director in the company in which such stock is held. On the
contrary, that it held such act permissible is evident from the context of its reference to the Presidential Memorandum
of June 26, 1986 authorizing the PCGG, "pending the outcome of proceedings to determine the ownership of ..
sequestered shares of stock,"'to vote such shares .. at all stockholders' meetings called for the election of directors ..,"
the only caveat being that the stock is not to be voted simply because the power to do so exists, whether it be to oust
and replace directors or to effect substantial changes in corporate policy, programs or practice, but only "for
demonstrably weighty and defensible grounds" or "when essential to prevent disappearance or wastage of corporate
property."
The issues raised here do not peremptorily call for a determination of whether or not in voting petitioner de los Angeles
to the San Miguel Board, the PCGG kept within the parameters announced in Baseco; and absent any showing to the
contrary, consistently with the presumption that official duty is regularly performed, it must be assumed to have done
so.
WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA- G.R. SP No. 12857
setting aside the order of September 4, 1987 issued in SEC Case No. 3153 and dismissing said case is
REVERSED AND SET ASIDE. The further disposition in the appealed decision for the issuance of a writ of preliminary
injunction upon the filing and approval of a bond of P500,000.00 by respondent Ernest Kahn (petitioner in the
Appellate Court) is also SET ASIDE, and any writ of injunction issued pursuant thereto is lifted. Costs against private
respondents.

SO ORDERED.
G.R. No. L-7945 December 1, 1914
CANDIDO PASCUAL, plaintiff-appellant,
vs.
EUGENIO DEL SAZ OROZCO, ET AL., defendants-appellees.
C. W. Ney and O'Brien & De Witt for appellant.
Hausermann, Cohn & Fisher for appellees.

of directors, five per cent for the board of managers (composed of counselors and trustees) in
compensation for their services as such, and the remainder, eighty-five per cent, integrally for the
shareholders of the said bank, the defendants, as such members of the said boards of directors and
managers, respectively, did, during each and all of the years specified, fraudulently and to the great
detriment of the said Bank and its shareholders, and without the knowledge, consent or acquiescence of
the latter, appropriate to themselves for their own use from the profits of the said Bank sums of money
reaching an approximate amount of twenty thousand pesos, or a total sum of one hundred thousand pesos
during the five years aforementioned, by deducting their said ten and five per cent, respectively, from the
gross profits instead of deducting them from the net profits of the said bank.
XI. That the said defendants, during the time mentioned, carefully concealed in all the balances and
reports of the said Bank published by them every indication that might gave the stockholders of the said
Bank the slightest suspicion that the said defendants were fraudulently appropriating to themselves the
funds of the same; and that the plaintiff learned of such appropriation, by a mere chance, in the month of
November, 1907.

TRENT, J.:
The plaintiff appeals from a judgment upon the merits in favor of the defendants, and insists that the court erred:
1. In holding that the interpretation placed upon article 30 of the bank's charter by the decision of the
Supreme Court herein is not the law of the case.
2. In holding that the defendants had a right to deduct their compensation from the gross profits of the
bank.
3. In holding that it was proper for defendants to compute their compensation upon the gross profits before
charging against such gross profits the aggregate amount of accounts written off as uncollectible (dudosa y
fallida) as shown in Exhibits C-1 to C-9, inclusive.
4. In holding that any of the debit items appearing in Exhibits C-1 to C-9 and especially the industrial and
internal-revenue taxes, are items that should be charged against capital and not against current
profits.1awphil.net
5. In holding that it was within the power of the stockholders of the bank to ratify the so-called interpretation
by defendants of said article 30.
This action was commenced by the plaintiff as a shareholder of the Banco Espaol-Filipino for the benefit of the bank
and all of the stockholders thereof. Its purpose is to require the defendants as former directors and councilors of the
bank to refund a portion of the compensation paid to them for their services, on the ground that the amounts thereof
have been wrongfully computed.
The complaint contains three separate causes of action, of which the first only is here involved. The defendants'
demurrer to this cause of action was sustained upon the ground that the facts alleged therein were not sufficient to
entitle the plaintiff to the relief sought. Upon appeal this judgment was reversed and the record returned for further
proceedings. (19 Phil. Rep., 82.) The complaint was not thereafter amended.
The question raised by the plaintiff in his first assignment of error requires an examination of the pertinent allegations
in the first cause of action. These allegations are as follows.
X. That, notwithstanding the fact that article 30 of the said by-laws (Exhibit B) clearly and unequivocally
prescribes that the net profits of the said bank shall be apportioned as follows: Then per cent for the board

The Banco Espaol-Filipino was a banking corporation which, until January 1, 1908, was controlled by the by-laws and
regulations annexed to the complaint as Exhibits A and B. On November 13, 1903, the plaintiff acquired 10 shares of
the capital stock and has been the registered holder of these shares since that date. The defendants filled, during the
time mentioned in the complaint, the offices of director, consiliario, and sindico, and collectively constituted the board
of government. The only compensation to which the defendants were entitled for their services is that prescribed by
article 30 of the by-laws then in force.
This article reads: "Of the profits or gains which may result from the bank's operations, after deducting all the
expenses of its administration and the part, if any, which corresponds to the legal reserve fund, there shall be set apart
ten per cent remaining shall belong integrally to the shareholders pro data the number of shares owned by each."
Since the date on which the plaintiff acquired his shares, the earnings of each half-year of the bank have been
liquidated in the manner set forth in the Exhibits C-1 to C-9, inclusive, attached to the agreed statement of facts, and
the respective defendants have individually collected for their services the sums specified in Exhibit D.
Under date of November 15, 2907, the plaintiff addressed to the defendants a letter alleging that the earnings of the
bank had not been apportioned in accordance with the provisions of article 30, supra, and making demand upon them
for the refund to the bank of a portion of the amounts received by them in compensation for their services. The
defendants refused to comply with this demand and on December 7, 1907, the plaintiff commenced an action seeking
the same relief herein prayed for. This action was dismissed, and on December 21, 1907, the shareholders of the bank
were convened in a special meeting "for the express purpose of discussing and taking action relative to the alleged
interpretation of article 30 of the by-laws." At this shareholders' meeting there were present, either in person or by
proxy, 183 persons and entities, holding 6,499 shares of the total issue of 7,500. Among those present at this meeting
was plaintiff's attorney. The plaintiff's letter, referred to above, was read, as was the complaint which the plaintiff had
previously filed, and, after a discussion in which the appellant's attorney took part, a resolution was adopted ratifying
and approving the distribution of the bank's earnings as made, and authorizing the defendants to proceed in the same
manner with the earnings of the latter half of the year 1907. In favor of this resolution there was a total of 555 votes,
representing 5,550 shares. Soon thereafter the present action was commenced.
As will be seen from the plaintiff's first assignment of error and the argument of counsel relating thereto, it is strongly
urged that inquiry respecting the interpretation and application of article 30, supra, has been closed by the decision of
this court rendered upon the demurrer of the defendants to the complaint. Under the doctrine ofstare decisis the
plaintiff insists that "the law of the case" has been established and that it has been necessarily decided that the
remuneration received by the defendants for their services was not in accordance with article 30.

The decision is relied upon by the plaintiff is that of Pascual vs. Del Saz Orozco (19 Phil. Rep., 82). "The law of the
case," established by that decision, is the law of the case which was before the court and which the court thereby
decided.1awphil.net
The plaintiff, as will be seen from paragraphs 10 and 11, above quoted, whose sufficiency was then and there under
consideration, alleged that the defendants, in violation of article 30, had fraudulently misappropriated to themselves
certain funds of the bank by computing their percentages upon the gross earnings of the bank and, by a series of
fraudulent concealment's, had withheld the knowledge thereof from the shareholders. The demurrer admitted the facts
as alleged and raised the question of the right of the plaintiff to recover upon those facts. The ruling of the lower court
was to the effect that, even assuming the facts to be as alleged in the complaint, the plaintiff had no right of action. On
appeal the Supreme Court considered this very question and necessarily none other, which relates to the point now
under consideration, and, in reversing the ruling of the lower court, decided that, assuming the facts to be as alleged in
the complaint, the plaintiff did have a cause of action. If these were the facts of the case now under consideration,
there would be neither occasion nor opportunity to further discuss the law applicable thereto. But the case which the
present appeal presents is not the case at all. Since that decision was rendered the case has been tried and the facts
now before the court for consideration are not the allegations that the defendants fraudulently mis-appropriated to
themselves certain funds of the bank, and by a series of concealment's withheld the knowledge thereof from the
shareholders, but the real facts as they have been stipulated in the agreed statement. These facts are that the
defendants did not, as alleged, fraudulently misappropriate certain funds of the bank by computing their percentages
upon the gross earnings, but the first deduct the expenses of administration, and that none of the acts of the
defendants were tainted in any way with fraud.
In this particular the case now under consideration is clearly differentiated and distinguished from the former case. In
the case the court decided that the defendants may not fraudulently compute their percentages upon the gross
earnings, and that a complaint which alleges that they have done so states a cause of action. This was question
submitted and decided. The question submitted upon the present appeal is whether the computation really made is in
accordance with article 30. This holding is not in conflict with the rule announced in the cases cited and relied upon by
counsel for the plaintiff.
For example, in the case of Heidt vs. Minor (113 Cal., 385), the court said: "Moreover, the rule of the law of the case
only applies when, on subsequent trial, the issues and the facts found remain substantially the same."itc@alf
In the case of Foregerson et al. vs. Smith (104 Ind., 246), the court laid down this rule: "But where the questions are
necessarily involved, . . . the judgment on appeal rules the case throughout all its subsequent stages. The decision is
an adjudication concluding the courts and the parties. It is not, of course, conclusive in judgment in the case in which it
was rendered, upon the parties and those in privity with them. . . . We regard the former decision as adjudicating all of
the controlling questions in the case, for it was not possible to reach the conclusion there announced without deciding
that the property in the promissory notes in controversy was in the administrator of the estate of Mahala Shaw
deceased."
In Standard Sewing Machine Co. vs. Leslie (118 Fed., 557), the court used this language: "It is a familiar and entirely
righteous rule that a court of review is precluded from agitating the questions that were made, considered, and decided
on previous reviews. The former decision furnishes 'the law of the case' not only to the tribunal to which the cause is
remanded, but to the appellate tribunal itself on a subsequent writ or appeal."
Now, has the remuneration of the defendants for their services been computed in accordance with article 30 of the bylaws?
The item of "profit and loss" for each half year, during the entire period covered by the complaint, was made up by
crediting to it all the items of net profits produced by the various accounts of the bank, including the accounts of current
debtors, the profits from exchange, the profits in the sale of money, the profits from the discount of bills and notes, the
net proceeds from the real properties of the bank after the payment of all the expense thereof, including taxes,
insurance, and repairs, and all other net profits obtained by the bank. To the debit of this "profit and loss" account were

entered all sums paid out by the bank as interest upon fixed deposits or credit balances of current accounts. The items
of "general expenses" included salaries, light , water, stationery, stamps, attorneys' fees, and all other items of general
expenses incurred either by the main office in Manila or by the branch office in Iloilo. In short, it appears that every
expenditure of whatever nature made from the funds of the bank, with the exception of the industrial tax (later internalrevenue tax) and amounts set off against bad accounts, was included in the item of "general expenses," or, what
amounted to the same thing, deducted from the "profit and loss" account before computing the remuneration received
by the respective defendants for their services. Upon this point it might be well to set out in full Exhibit C-1. (Exhibits C2 to
C-9, inclusive, were made up in the same manner.) This exhibit is as follows:
1903.
December 31. Balance of the account of profit and loss ............................. $196,580.22 Deduction of
surplus of June 30, last ..................................... 7,816.38
188,763.84 Do. General expenses ............................................................... 51,753.77
137,010.07 Compensation for the board of government, 15
per cent ....................................................................................... 20,551.51 116,458.56
Dividend of 4 per cent on $1,500,000 .................................... 60,000.00 56,458.56 Industrial tax
(later internal revenue) 5 per cent of
$60,000 ....................................................................................... 3,000.00 53,458.56 Balance
on June 30 carried forward ..................................... 7,816.38 61,274.94 Amount for bad
accounts .................................................... 60,000.00 Balance for next
semester ................................. 1,274.94
To this method of computing the defendants' remuneration the objection of the plaintiff is twofold:
(a) That before computing the defendants' remuneration there was not first deducted from the earnings or
gains the amount payable as industrial tax (later internal revenue), and
(b) That before computing the defendant's remuneration there was not first deducted from the earnings or
gains the amounts retained to cover bad accounts.
From an examination of article 30 it will be seen that only two items from the gross profits of the bank are to be
deducted before computing the compensation of the directors and board of government (the defendants constituted
both the directors and the board of government), to wit: Expenses of administration and the amount, if any,
corresponding to the legal reserve fund. On December 31, 1903, the legal reserve fund of P225,000 was not only
completed, but a voluntary reserve fund of P665,000, authorized by the charter, had accumulated. From the various
Exhibits, C-1 to C-9, inclusive, it is apparent that nothing whatever was applied to this reserve fund, and, as the
correctness of these exhibits is not disputed, it is also apparent that nothing was due this fund at any time during the
period covered by the complaint. Unless, therefore, the items of industrial tax (later internal-revenue tax) and the
amounts set aside to cover bad debts that there is no merit in the plaintiff's contention.
At the outset it may be said that the proper disposition of this case is rendered difficult by the inaccurate language
used in article 30. This article provides for a percentage of the profits (utilidades y ganacias), and it may be at once
said that these are not necessarily net profits, as claimed by counsel for the plaintiff. Profits may be either gross profits
or net profits, and there are innumerable methods of computing each of these. Likewise, "expenses of administration"
may or may not include all amounts expended in the conduct of business. Indeed, it is somewhat unusual that a
provision of the bank's charter, so difficult of exact definition, should be so lacking in precision. Hardly less unusual,
from an American point of view, is the incorporation into the bank's charter of the measure of remuneration of the
board of government. This, is America, has generally been considered a detail in the internal management of a
corporation to be controlled by the shareholders themselves, who, in many instances, even delegate to the directors
the power of fixing their own salaries.

The remuneration received by the defendants is not even alleged to be excessive. The two active managers of the
bank received, during the period in question, sums amounting to approximately P15,000 per year, while the other
defendants, not participating in the active management of the corporation, received sums amounting in no instance to
a salary of P2,500 per year. All of the defendants received, during the four and a half years, P201,825.81, or an
approximate yearly average of P45,000 per year Bearing in mind the magnitude of the business and the fact that the
bank prospered under the management of the defendants, there is no wonder that no claim is made of excessive
compensation. During all these years the plaintiff, as well as the other shareholders of the bank, remained silent,
apparently content with the increased prosperity of the business, although at the increased prosperity of the business,
although at the end of each fiscal year they had the opportunity to examine the books of the bank and inform
themselves of the method by which the defendants computed their compensation. And, furthermore, an extraordinary
meeting of the shareholders was duly convened on December 21, 1907, for the express purpose, as we have
indicated, of discussing the interpretation placed upon article 30 by the defendants.
The industrial tax, which the appellant insists should be first deducted from the earnings before computing the
percentages, was fixed by law at 5 per cent of the dividends distributed among the shareholders of the bank. In order
to make the deduction of this tax, its amount must first be a known quantity. Since its amount is a percentage of the
dividends, the amount of the latter must likewise by a known quantity before the operation can be made. The amount
available as dividends is dependent upon the amount due and payable out of profits to the defendants for their
services. Therefore, this amount due the defendants from the profits must be known before the amount remaining for
dividends can be fixed. For example, if the remaining earnings, after deducting from the gross earnings the general
expenses, is the sum of P58,000, how much is to be deducted therefrom as internal-revenue tax before computing the
percentage of the defendants? The law said that the amount of this tax should be 5 per cent of the dividends
distributed. The amount to be distributed depends upon how much may be left after the remuneraton of the defendants
is paid. It is no reply to this argument to point out that the total profits may be or are usually sufficiently great to permit
a declaration of the maximum dividend of P60,000 and that in such cases t is simple matter to compute 5 per cent of
P60,000, for the rule of computation, established by article 30, is a general one, applicable alike in all cases, whether
the earnings of the bank be great in small. This article does not establish two rules of computations, one which is only
feasible or practicable when the earnings are sufficiently large to warrant a dividend in the maximum amount and
another and different rule when the dividend falls below that amount.
Again, in our opinion the nature of the old industrial tax negatives the idea that it is one of the items of "expenses of
administration" referred to in article 30. This tax was levied by law, not upon the earnings or profits of the bank, but
only upon such earnings or profits as were actually distributed among the shareholders as dividends. It was purely a
dividend tax, collected for convenience in a lump sum from the company, but levied solely and exclusively upon the
distributed dividends. To deduct this tax from the amount upon which the remuneration of the defendants was
computed would have made the defendants contributors to the tax levied upon the company-shareholders. Article 30
does not require the defendants as employees of the bank to contribute to the payment of the bank's taxes. The
discrimination made by article 30 between "expenses of administration" and other disbursements is reasonable and in
accordance with the principles of the contract which existed between the bank and the defendants. That was a
contract of employment in which one of the contracting parties agreed to supply the capital and the other his services,
and to divide in a stipulated proportion the proceeds of the application of the services of the one to the capital of the
other. Since it was incumbent upon the bank to furnish the capital, so it was incumbent upon it to maintain the same.
Any tax which tended directly to impair the amount of the capital should consequently have been paid by the hirer of
the services and not by the servant. There could be no real difference in principle between the failure to furnish the
capital in the first place and the failure to replace any part of it which disappears by reason of a tax levied thereon. We,
therefore, conclude that the method employed by the defendants for the liquidation of the bank's business, in so far as
the industrial tax (internal-revenue tax) is concerned, was strictly in accordance with article 30 of the by-laws.
DEDUCTION OF AMOUNTS TO COVER BAD ACCOUNTS
When the defendant Orozco took over the management of the bank, he reported to the board of directors its financial
situation, embracing among other thins a loss from bad accounts for the past of over P500,000. It probably would have
been possible to cover this entire amount of losses from funds in the reserve, existing for just such purposes, but to
have done so would have left the bank without a present reserve. It was decided to preserve the reserve fund intact,

and carry the bad accounts as accounts in suspense until the same could be gradually and conveniently wiped out.
Consequently, in each half yearly liquidation the dividends distributed to the shareholders were strictly limited to 4 per
cent per semester, and the earnings after payment of the expenses of administration, the remuneration of defendants,
the taxes, and the said dividends were applied pro tanto to the extinction of the ad accounts held in suspense. It does
not clearly appear whether these funds, which were used for that purpose, first went into the voluntary reserve fund
and were then applied to the extinction of the bad accounts in suspense or were applied directly by the semiannual
liquidation's from the profit and loss accounts. The process followed is immaterial since the result must be the same.
The important fact is that in each semester there was an excess of net profits over and above the 4 per cent provided
in article 31 of the by-laws. This excess of net profits was divisible under that article, one-half to the shareholders and
one-half to the legal reserve, voluntary reserve, or additional dividends as the case might be. Instead, the entire
excess of net profits went to extinguish bad accounts whose extinction would have exhausted the reserve fund and
required its replenishment. To the extent that one-half of the excess of net profits were not distributed as dividends, but
were put to the purposes of reserve, the shareholders made a sacrifice for their own welfare. Whether this was validly
done or not is of no importance of this time for the reason that the remuneration of the defendants was not affected in
any way thereby. As to the remaining half of the excess net profits, the application made was in direct accord with the
by-laws, since the application of the funds to the purposes of the reserve fund is exactly the same as if the reserve
fund had been employed for the purpose and then replenishment by these funds.
According to article 30, the net profits belonged to the shareholders. According to article 31, these not profits,
belonging to the shareholders, should be partially divided among them and partially kept intact in the bank, according
to the amount thereof, to the status of the legal reserve, and to the wishes of the board of government respecting a
voluntary reserve. From the fact that part of either the legal or voluntary reserve, it cannot be said that such portion of
the net profits had ceased to belong to the share-holders. these excess net profits are, in a sense, still in the bank and
still belong to the shareholders within the meaning of article 30. to hold that the bad accounts of the bank should have
been extinguished by the gross earnings instead of the net profits, would, in effect, compel the defendants, as
employees, to contribute to the replenishing of the depleted reserves of the bank.
It would be wholly unjust to include under "expenses of administration" during the time the defendants were in charge,
the losses previously sustained by the defendants' predecessors in office. These defendants were in no wise
connected with the bank no were they in any way responsible for those losses. To interpret article 30 so would result in
the incoming manager becoming an heir to an insolvent inheritance. Under such conditions no one would be found to
accept the office and the bank would have to cease its operations.
As to the responsibility of the defendants for the losses which occurred during the period covered by the complaint, it
might be said in the first place that the greater part of these losses constitutes the third cause of action of appellant's
complaint and was made the subject of a separate appeal to this court. In the second place, it has not been shown that
any part of such losses were written off as bad debts during the period of time in question. And it is upon this fact that
we rest our holding on this point. Therefore, we are not now called upon to decide whether the defendants could have
treated these losses in the same manner as they did those occurring prior to December 31, 1905.
The judgment appealed from is affirmed. 1 In this opinion it has been our intention to set forth at some length our
reasons for affirming this judgment at the close of the last session.
G.R. No. L-1721

May 19, 1950

JUAN D. EVANGELISTA ET AL., plaintiffs-appellants,

vs.
RAFAEL SANTOS, defendant-appellee.
Antonio Gonzales for appellants.
Benjamin H. Tirol for appellee.

REYES, J.:
This is an action by the minority stockholders of a corporation against its principal officer for damages resulting from
his mismanagement of its affairs and misuse of its assets.
The complaint alleges that plaintiffs are minority stockholders of the Vitali Lumber Company, Inc., a Philippine
corporation organized for the exploitation of a lumber concession in Zamboanga, Philippines; that defendant holds
more than 50 per cent of the stocks of said corporation and also is and always has been the president, manager, and
treasurer thereof; and that defendant, 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. The complaint
therefore prays for judgment requiring defendant: (1) to render an account of his administration of the corporate affairs
and assets: (2) to pay plaintiffs the value of t heir 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. Plaintiffs also ask for such other remedy as may be and
equitable.
The complaint does not give plaintiffs' residence, but, but purposes of venue, alleges that defendant resides at 2112
Dewey Boulevard, corner Libertad Street, Pasay, province of Rizal. Having been served with summons at that place,
defendant filed a motion for the dismissal of the complaint on the ground of improper venue and also on the ground
that the complaint did not state a cause of action in favor of plaintiffs.
In support of the objection to the venue, the motion, which is under oath, states that defendant is a resident of Iloilo
City and not of Pasay, and at the hearing of the motion defendant also presented further affidavit to the effect that
while he has a house in Pasay, where members of his family who are studying in Manila live and where he himself is
sojourning for the purpose of attending to his interests in Manila, yet he has permanent residence in the City of Iloilo
where he is registered as a voter for election purposes and has been paying his residence certificate. Plaintiffs
opposed the motion for dismissal but presented no counter proof and merely called attention to the Sheriff's return
showing service of summons on defendant personally at his alleged residence at No. 2112 Dewey Boulevard, Pasay.
After hearing, the lower court rendered its order, granting the motion for dismissal upon the two grounds alleged by
defendant, and reconsideration of this order having been denied, plaintiffs have appealed to this Court.
The appeal presents two questions. The first refers to venue and the second, to the right of the plaintiffs to bring this
action for their benefit.
As to the first question, it is important to remember that the laying of the venue of an action is not left to plaintiff's
caprice. The matter is regulated by the Rules of Court. And in actions like the present, which is one in personam, the
regulation applicable is that contained in section 1 of Rule 5, which provides:
Civil actions in Courts of First Instance may be commenced and tried where the defendant or any of the
defendant resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of
the plaintiff.
Objection to improper venue may be interposed at any time prior to the trial. (Moran's Comments on the Rules of
Court, Vol. I, 2nd ed., p. 108.)
Believing that defendant resided in the province of Rizal, herein plaintiffs brought their action in the Court of First
Instance of that province. But that belief proved erroneous, for the lower court found after hearing that defendant had
his residence in Iloilo. The finding is based on defendant's sworn statement not rebutted by any proof to the contrary.

There is nothing to the contention that defendant's motion to dismiss necessarily presupposes a hypothetical
admission of the allegations of the complaint, among them the averment that defendant is a resident of Rizal province,
for the motion precisely denies that averment and alleges that his real residence is in Iloilo City. This, defendant had
the right to do in objecting to the court's jurisdiction on the ground of improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the venue in the province where the defendant
"may be found." But this phrase has already been held to have a limited application. It is the same phrase used in
section 377 of Act 190 from which section 1 of Rule 5 was taken, and as construed by this Court it applies only to
cases where defendant has no residence in the Philippine Islands. This was the construction adopted in the case of
Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526, which was an action brought in Manila by a nonresident
against a corporation which had its residence for legal purposes in Baguio but whose President was found in Manila
and there served with summons. This Court there said:
Section 377 provides that actions of this character "may be brought in any province where the defendants
or any necessary party defendant may reside or be found, or in any province where the plaintiff or one of
the plaintiffs resides, at the election of the plaintiff." The plaintiff in this action has no residence in the
Philippine Islands. Only one of the parties to the action resides here. There can be, therefore, no election
by plaintiff as to the trial. It must be in the province where the defendant resides. The defendant resides, in
the eye of the law, in Baguio. Was it "found" in the city of Manila under section 377, its president being in
that city where the service of summons was made? We think not. The word "found" as used section 377
has a different meaning that belongs to it as used in section 394, which refers exclusively to the place
where the summons may be served. As we have said a summons may be legally served on a defendant
wherever he may be "found," i. e., wherever he may be, provided he be in the Philippine Islands; but the
venue cannot be laid wherever the defendant may be "found." There is an element entering in section 377
which is not present in section 394, that is a residence. Residence of the plaintiff or defendant does not
affect the place where a summons may be served; but residence is the vital thing when we deal with
venue. The venue must be laid in the province where one of the parties resides. If the plaintiff is a
nonresident the venue must laid in the province of the defendant's residence. The venue can be laid in the
province where defendant is "found" only when defendant has no residence in the Philippine Islands. A
defendant can not have a residence in one province and be "found" in another. As long as he has a
residence in the Philippine Islands he can be "found," for the purposes of section 377, only in the province
of his residence. In such case the words "residence" and "found" are synonymous. If he is a nonresident
then the venue may laid in the province where he is "found" at the time venue the action is commenced or
in the province of plaintiff's residence. This applies also to a domestic corporation.
While the service of the summons was good in either Baguio or Manila we are of the opinion that the
objection of the defendant to the place of trial was proper in both cases and that the trial court should have
held that the venue was improperly laid.
And elaborating on the point when the case came up for reconsideration, the Court further said:
The moving party contends that the venue was properly laid under section 377 in that was laid in the
province where the defendant was found at the time summons was served on its president, he having
been found and served with process in the city of Manila. for the purpose of the discussion we assumed in
the main case, as the plaintiff claimed, that the defendant was in fact and in law found in the city of Manila;
and proceeded to decide the cause upon the theory that, even if the defendant were found in the city of
Manila, that did not justify, under the facts of the case, the laying of the venue in the city of Manila.
We do not believe that the moving party's objection that our construction deprives the word "found" of all
significance and results, in effect, in eliminating it from the statue, is sound. We do not deprive it of all
significance and effect and do not eliminate it from the statue. We give it the only effect which can be given
it and still accord with the other provisions of the section which give defendant the right to have the venue
laid in the province of his residence, the effect which it was intended by the legislature they should have.

We held that the word "found" was applicable in certain cases, and in such cases gave it full significance
and effect. We declared that it was applicable and effective in cases where the defendant is a nonresident.
In such cases where the defendant is a nonresident. In such cases the venue may be laid wherever he
may be found in the Philippine Islands at the time of the service of the process, but we also held that where
he is a resident of the Philippine Islands the word "found" has no application and the venue must be laid in
the province where he resides.
The construction which the moving party asks us to place on that provision of section 377 above quoted
would result in the destruction of the privilege conferred by the section upon a resident defendant which
requires the venue to be laid in the province where he resides. This is clear; for, if the venue may be laid in
any province where the defendant, although a resident of some other province, any be found at the time
process is served on him, then the provision that it shall be laid in the province where he resides is no
value to him. If a defendant residing in the province of Rizal is helpless when the venue is laid in the
province of Mindoro in an action in which the plaintiff is a nonresident or resides in Manila, what is the
value of a residence in Rizal? If a defendant residing in Jolo is without remedy when a nonresident plaintiff
or a plaintiff residing in Jolo lays the venue in Bontoc because the defendant happens to be found there, of
what significance is a residence in Jolo? The phrases "where the defendant ... may reside" and "or be
found" must be construed together and in such manner that both may be given effect. The construction
asked for by the moving party would deprive the phrase "where the defendant ... may reside" of all
significance, as the plaintiff could always elect to lay the venue in the province where the defendant was
"found" and not where he resided; whereas the construction which we place upon these phrases permits
both to have effect. We declare that, when the defendant is a resident of the Philippine Islands, the venue
must be laid either in the province where the plaintiff resides or in the province where the defendant
resides, and in no other province. Where, however, the defendant is a nonresident the venue may be laid
wherever defendant may be found in the Philippine Islands. This construction gives both phrases their
proper and legitimate effect without doing violence to the spirit which informs all laws relating to venue and
which insists always that the action shall tried in the place where the greater convenience of the parties will
be served. Ordinarily a defendant's witness are found where the defendant resides; and plaintiff's
witnesses are generally found where he resides or where the defendant resides. It is, therefore, generally
desirable to have the action tried where on of the resides. Where the plaintiff is a nonresident and the
contract upon which suit is brought was made in the Philippine Islands it may safely be asserted that the
convenience of the defendant would be best served by a trial in the province where he resides.
The fact that defendant was sojourning in Pasay t the time he was served with summons does not make him a
resident of that place for purposes of venue. Residence is "the permanent home, the place to which, whenever absent
for business or pleasure, one intends to return, ..." (67 C.J., pp. 123-124.) A man can have but one domicile at a time
(Alcantara vs. Secretary of Interior, 61 Phil., 459), and residence is anonymous with domicile under section 1 of Rule 5
(Moran's Comments, supra, p. 104).
In view of the foregoing, we hold that the objection to the venue was correctly sustained by the lower court.
As to the second question, 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 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, which provides:
No shall corporation shall make or declare any stock or bond dividend or any dividend whatsoever from the
profits arising from its business, or divide or distribute its capital stock or property other than actual profits
among its members or stockholders until after the payment of its debts and the termination of its existence
by limitation or lawful dissolution.

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.
G.R. No. L-22399

March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant,

vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF THE CENTRAL
BANK OF THE PHILIPPINES, defendants-appellees.
Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiff-appellant.
N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board.
Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.
REYES, J.B.L., J.:
Direct appeal from an order of the Court of First Instance of Manila, in its civil case No. 53936, dismissing the
petitioner's complaint on the ground of failure to state cause of action.
In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine banking corporation domiciled in
Manila, instituted a derivative suit for and in behalf of said Bank, against Miguel Cuaderno, Bienvenido Dizon, the
Board of Directors of the Republic Bank, and the Monetary Board of the Central Bank of the Philippines. Paragraph 6
of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following: .

6. That the relator herein filed the present derivative suit without any further demand on the Board of
Directors of the Republic Bank for the reason that such formal demand to institute the present complaint
would be a futile formality since the members of the board are personally chosen by defendant Pablo
Roman himself.
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the Monetary Board of the
Central Bank against certain frauds allegedly committed by defendant Pablo Roman, in that being chairman of the
Board of Directors of the Republic Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of his
fiduciary duty and taking advantage of his said positions and in connivance with other officials of the Republic Bank",
Roman had fraudulently granted or caused to be granted loans to fictitious and non-existing persons and to their close
friends, relatives and/or employees, who were in reality their dummies, on the basis of fictitious and inflated appraised
values of real estate properties; that said loans amounted to almost 4 million pesos; that acting upon the complaint,
Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an investigation, which was
carried out by Bank Examiners; that they and the Superintendent of Banks of the Central Bank reported that certain
mortgage loans amounting to P2,303,400.00 were granted in violation of sections 77, 78 and 88 of the General
Banking Act; that acting on said reports, the Monetary Board, of which defendant Cuaderno was a member, ordered a
new Board of Directors of the Republic Bank to be elected, which was done, and subsequently approved by the
Monetary Board; that on January 5, 1960, the latter accepted the offer of Pablo Roman to put up adequate security for
the questioned loans made by the Republic Bank, and such security was made a condition for the resumption of the
Bank's normal operations; that subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to
special prosecutors of the Department of Justice on July 22, 1960, the banking frauds and violations of the Banking
Act, reported by the Superintendent of Banks, for investigation and prosecution, but no information was filed up to the
time of the retirement of Cuaderno in 1961; that other similar frauds were subsequently discovered; that to neutralize
the impending action against him, Pablo Roman engaged Miguel Cuaderno as technical consultant at a compensation
of P12,500.00 per month, and selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank;
that the Board of Directors composed of individuals personally selected and chosen by Roman, connived and
confederated in approving the appointment and selection of Cuaderno and Dizon; that such action was motivated by
bad faith and without intention to protect the interest of the Republic Bank but were prompted to protect Pablo Roman
from criminal prosecution; that the appointment of Cuaderno and his acceptance of the position of technical consultant
are immoral, anomalous and illegal, and his compensation highly unconscionable, because court actions involving the
actuations of Cuaderno as Governor and Member or Chairman of the Monetary Board are still pending in court; that as
member of the Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision over the Republic Bank;
that the selection of Dizon as chairman of the Board of the Republic Bank after he was forced to resign from the
presidency of the Philippine National Bank and from membership of the Monetary Board and within one year thereafter
is in violation of option 3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act; that both Cuaderno and Dizon
were alter egos of Pablo Roman; that the Monetary Board was about to approve the appointment of Cuaderno and
Dizon and would do so unless enjoined.
The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary Board to prevent its
confirmation of the appointments of Dizon and Cuaderno; against the Board of Directors of the Republic Bank from
recognizing Cuaderno as technical consultant and Dizon as Chairman of the Board; and against Pablo Roman from
appointing or selecting officers or directors of the Republic Bank, and against the recognition of any such appointees
until final determination of the action. And concluded by praying that after due hearing, judgment be rendered,
a) making the writ of injunction permanent;
b) declaring the appointment of defendant Miguel Cuaderno as technical consultant with monthly
compensation of P12,500.00 unconscionable, immoral, illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman of the Board of Directors of the
Republic Bank violative of Section 3, sub-paragraph (d) of Republic Act No. 5019, otherwise known as the
Anti-Graft and Corrupt Practices Act, and therefore, illegal and null and void;

d) declaring that defendant Pablo Roman, in view of his criminal liability for the fraudulent real estate
mortgage loans in the Republic Bank amounting to P4 million, has no right to select or to be allowed to
select person or persons who are his alter egos to manage the Republic Bank, and enjoining the defendant
Board of Directors of the Republic Bank from recognizing any officers or directors appointed or selected by
defendant Pablo Roman;
e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the Republic Bank all amounts
they may have received either in the form of compensation, remuneration or emolument, with an interest
thereon at the rate of 6%; or to order defendant Pablo Roman to refund the amounts paid to said
defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay such reasonable damages to the
plaintiff Republic Bank;
f) ordering all the defendants to pay the sum of P25,000.00 as attorney's fees, including all expenses of
litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and affirmative defenses; but the other defendants filed
separate motions to dismiss on practically the same grounds: no valid cause of action against the individual movants;
lack of legal capacity of plaintiff-relator to sue; and non-exhaustion of intra-corporate remedies. These motions were
duly opposed by plaintiff Damaso Perez.1wph1.t
On October 24, 1963, the court, "taking into consideration the grounds alleged in the motions to dismiss and the
opposition for the issuance of a writ of preliminary injunction and the affirmative defenses filed by the defendants and
the arguments in support thereof", and "that there are already eight cases pending in the different branches of this
court between practically the same parties", denied the petition for a writ of preliminary injunction and dismissed the
case. The court in effect suggested that the matter at issue in the case may be presented in any of the pending eight
cases by means of amended and supplemental pleadings.
Plaintiff Damaso Perez thereupon appealed to this Court.
The issue in this appeal, then, is whether or not the Court below erred in dismissing the complaint. In this connection, it
should be remembered that the defenses of the Monetary Board of the Central Bank, being interposed in an answer
and not in a motion to dismiss, are not here at issue. Our sole concern is with the motions to dismiss of the other
defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the Republic Bank.
They mainly controvert the right of plaintiff to question the appointment and selection of defendants Cuaderno and
Dizon, which they contend to be the result of corporate acts with which plaintiff, as stockholder, cannot interfere.
Normally, this is correct, but Philippine jurisprudence is settled that an individual stockholder is permitted to institute a
derivative or representative 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 (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518;
Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in
conformity, with these principles. He is neither alleging nor vindicating his own individual interest or prejudice, but the
interest of the Republic Bank and the damage caused to it. The action he has brought is a derivative one, expressly
manifested to be for and in behalf of the Republic Bank, because it was futile to demand action by the corporation,
since its Directors were nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by
plaintiff are frauds against the Bank that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon to
head the Board of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal prosecution
and not to further the interests of the Bank, and avers that both men are Roman's alter egos. There is no denying that
the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments were

made solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures and nominees,
then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate
funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving the
appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin
disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in
this case (Angeles vs. Santos, supra.).
Facts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to dismiss the
complaint for failure to state a cause of action. This is the cardinal principle in the matter. And, it has been ruled that
the test of sufficiency of the facts alleged is whether or not the Court could render a valid judgment as prayed for,
accepting as true the exclusive facts set forth in the complaint. 1So rigid is the norm prescribed that if the Court should
doubt the truth of the facts averred it must not dismiss the complaint but require an answer and proceed to trial on the
merits.2
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.
There remains the procedural question whether the corporation itself must be made party defendant. 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.
Absence of corporate authority would seem to militate against making the corporation a party plaintiff, while 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.)
We see no reason to support the contention of defendant Bienvenido Dizon that the action of plaintiff amounts to a quo
warranto proceeding. 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.
Independently of the grounds advanced by the defendants in their motions to dismiss, the Court a quo gave as a
further pretext for the dismissal of the action the pendency of eight other lawsuits between practically the same parties;
reasoning that the question at issue in the present case could be incorporated in any one of the other actions by
amended or supplemental pleading. We fail to see that this justifies the dismissal of the case under appeal. In the first
place, there is no pretense that the cause of action here was already included in any of the other pending cases. As a
matter of fact, dismissal of the present action was not sought on the ground of pendency of another action between the
same parties. Secondly, the amendment of a complaint after a responsive pleading is filed, would rest upon the
discretion of the party and the Court. Hence, this case cannot be dismissed simply because of the possibility that the
cause of action here can be incorporated or introduced in any of those of the pending cases.
In view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is remanded to the
court of origin with instructions to overrule the motions to dismiss and require the defendants to answer the complaint.
Thereafter, the case shall be tried and decided on its merits. Costs against defendants-appellees. So ordered.

G.R. No. L-16982

September 30, 1961

CATALINA R. REYES, petitioner,

vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila, Branch XIII and FRANCISCA R.
JUSTINIANI, respondents.
Jose W. Diokno for petitioner.
Norberto J. Quisumbing for respondents.

LABRADOR, J.:
This is a petition for certiorari to review and set aside an order of the Court of First Instance of Manila, Hon.
Bienvenido A. Tan, presiding, in Civil Case No. 42375, entitled "Francisca R. Justiniani vs. Wadhumal Dalamal, et al.",
appointing a receiver of the corporation Roxas-Kalaw Textile Mills, Inc. In said action, plaintiff Justiniani asks the court
to order the directors of the corporation, jointly and severally, to repair the damage caused to the corporation, of which
all the plaintiff and defendants are members. The action was filed about January of 1960 and the order for the
appointment of the receiver issued on February 15, 1960, while the designation of the receiver was made in an order
of the court dated April 30, 1960.
In the complaint in said Civil Case No. 42375, it is alleged that the corporation, Roxas-Kalaw Textile Mills, Inc., was
organized on June 5, 1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona
and Morris Wilson, for and on behalf of the following primary principals with the following shareholdings: Adelia K.
Roxas, 1200 Class A shares; I. Sherman, 900 Class A shares; Robert W. Born, 450 Class A shares and Morris Wilson,
450 Class A shares; that the plaintiff holds both Class A and Class B shares and number and value thereof are is
follows: Class A 50 shares, Class B 1,250 shares; that on May 8, 1957, the Board of Directors approved a
resolution designating one Dayaram as co-manager with the specific understanding that he was to act as defendant
Wadhumal Dalamal's designee, Morris Wilson was likewise designated as co-manager with responsibilities for the
management of the factory only, that an office in New York was opened for the purpose of supervising purchases,
which purchases must have the unanimous agreement of Cesar K. Roxas, New York resident member of the board of
directors, Robert Born and Wadhumal Dalamal or their respective representatives; that several purchases aggregating
$289,678.86 were made in New York for raw materials such as greige cloth, rayon and grey goods for the textile mill
and shipped to the Philippines, which shipment were found out to consist not of raw materials but already finished
products, such as, West Point Khaki rayon suiting materials dyed in the piece, finished rayon tafetta in cubes, cotton
eyelets, etc., for which reasons the Central Bank of the Philippines stopped all dollar allocations for raw materials for
the corporation which necessarily led to the paralyzation of the operation of the textile mill and its business; that the
supplier of the aforesaid finished goods was the United Commercial Company of New York in which defendant
Dalamal had interests and the letter of credit for said goods were guaranteed by the Indian Commercial Company and
the Indian Traders in which firms defendant Dalamal likewise held interests; that the resale of the finished goods was
the business of the Indian Commercial Company of Manila, which company could not obtain dollar allocations for
importations of finished goods under the Central Bank regulations; that plaintiff and some members of the board of
directors urged defendants to proceed against Dalamal, exposing his offense to the Central Bank, and to initiate suit
against Dalamal for his fraud against the corporation; that defendants refused to proceed against Dalamal and instead

continued to deal with the Indian Commercial Company to the damage and prejudice of the corporation. The prayer
asks for the appointment of a receiver and a judgment marking defendants jointly and severally liable for the damages.
After a denial of a motion to dismiss and the filing of an answer alleging that the complaint states no cause of action,
the motion for the appointment of a receiver was set for hearing and subsequently the court entered the order for the
appointment of a receiver. The court found and held:
The second ground of the defendant's motion to dismiss and or deny the petition is the allegedly want of a
cause of action of the plaintiff's complaint. Philippine jurisprudence is complete with authorities upholding
the principle that this ground for dismissal must appear in the face of the complaint itself; and that to
determine the sufficiency of the cause of action, only the facts alleged in the complaint and no other,
should be considered; in fine, the test of sufficiency of cause of action is whether or not, admitting the facts
alleged in the complaint, the Court could render a valid judgment upon the same in accordance with the
prayer of the petition (e.g., Paminsan v. Costales, 29 Phil. 587, 489). The complaint in the instant case
abounds with arguments establishing and supporting plaintiff's cause of action for and in behalf of the
Roxas-Kalaw Textile Mills, Inc. against all the defendants (See e.g. paragraphs 4, 5, 6 and 7 of the
Complaint). Taking these paragraphs of the complaint in context, it is clear that the plaintiff has sufficient
averred facts constituting a cause or basis for a derivative suit for "injuries to the corporation, as by
negligence, mismanagement or fraud of its directors, are normally dealt with as wrong to the whole group
of share holders in their corporate capacity, to be redressed in a suit by or on behalf of the
corporation.1awphl.nt
Evident from the defendants' motion to dismiss and/or to deny the petition for receivership is their complete
failure to come up with a valid and substantial defense against or denial of the complaint's allegations of
mismanagement, if not the actual commission of ultra vires and illegal acts. Invariably the props of
defendants' motion consist of the unconvincing countercharges of the plaintiff's non-observance of the
technicalities of our procedural law and disregard of technical and evidently futile intracorporate remedies
to redress the violations charged against the defendants. It is clear that the controlling majority did nothing
for two years to protect the interests of corporation. (See pars. 5-7, complaint.)
The defendants themselves having admitted in open court during the oral discussion of their motion to
dismiss and the plaintiff's motion for receivership that the majority stockholders will under any condition
entertain any suggestion of the minority shareholders, the appointment of an independent third party in the
management of the corporation becomes imperative for the survival of the company. (Order dated Feb. 15,
1960).
On April 30, 1960, the court issued mother order which reads as follows:
After this incident wherein it was clearly shown that the minority stockholders, represented by the plaintiff,
have no recourse whatsoever before the majority stockholders of the company, and after it has been
shown that the majority has violated the law by importing into the Philippines finished goods instead of raw
materials as stipulated in their license, and since these acts are prejudicial to the company because it
might result in the cancellation of their license, the Court is of the opinion and so holds that the
appointment of a receiver is absolutely necessary for the protection not only of the rights of the minority but
also those of the majority stockholders of the company.
In the first assignment of error, petitioner claims that respondent Justiniani neither alleged nor proved the existence of
an emergency requiring the immediate appoinment of a receiver of the Roxas-Kalaw Textile Mill, Inc.; that the alleged
fraudulent transaction took place more than two years before the application for receivership, and so was the refusal of
the directors to sue or prosecute Dalamal. This contention is not well founded. At the hearing of the petition for the
appointment of a receiver held on January 30, 1960, various records of shipments of finished textile goods on dollar
allocations for raw materials were exhibited. Publicity had also been given to the importations of textiles by the
corporation, in place of cotton raw materials. The record shows the list of the various documents proving the purchase

of letters of credit for textiles. These textiles were denied importation and had to be re-exported. The fact of the
importation of finished textiles on dollar allocations for raw materials in violation of Central Bank regulations was,
therefore, conclusively shown.
It is also 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.
Counsel for petitioner claims that respondent Justiniani was treasurer of the corporation for sometime and had control
of funds and this notwithstanding, she had not taken the steps to remedy the situation. In answer we state that the
fraud consisted in importing finished textile instead of raw cotton for the textile mill; the fraud, therefore, was committed
by the manager of the business and was consented to by the directors, evidently beyond reach of respondent.
The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been done to
remove the erring purchasing managers. In a way the appointment of a receiver may have been thought of by the
court below so that the dollar allocation for raw material may be revived and the textile mill placed on an operating
basis. It is possible that if a receiver in which the Central Bank may have confidence is appointed, the dollar allocation
for raw material may be restored. Claim is made that if a receiver is appointed, the Philippine National Bank to which
the corporation owes considerable sums of money might be led to foreclose the mortgage. Precisely the appointment
of a receiver in whom the bank may have had confidence might rehabilitate the business and bring a restoration of the
dollar allocation much needed for raw material and an improvement in the business and assets the corporation, thus
insuring the collection of the bank's loan.
Considering the above circumstances 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. The first assignment of error is, therefore, overruled.
In the second assignment of error, petitioner claims that the management has been changed and the new
management has not been afforded a chance to show what it can do. This ground of the petition was not mentioned or
raised as a ground of defense or objection to the appointment of a receiver in the court below. It is only raised for the
first time before Us in the petition for certiorari. The principle has long ago been enunciated by Us that an appellate

court may not consider any ground of objection that was not raised in the court below. (Tan Machan v. Trinidad, 3 Phil.
684; Ramiro v. Grao, 54 Phil. 744; Vda. de Villaruel, et al. v. Manila Motor Co., Inc., et al., G.R. No. L-10394, Dec. 13,
1958; Collector of Internal Revenue v. Estate of F. P. Buan, et al., G.R. Nos. L-11438-39, and L-11542-46, July 31,
1958; S.V.S. Pictures, Inc., et al. v. The Court of Appeals, et al., G.R. No. L-7075, January 29, 1960; Elena Peralta
Vda. de Caina vs. Hon. Andres Reyes, et al., G.R. No. L-15792, May 30, 1960).
The supposed new management, alleged as a ground for the reversal of the order of the court below appointing a
receiver, is not in itself a ground of objection to the appointment of a receiver. The parties found to be guilty of the
fraud, as a cause of which receivership proceedings were instituted, were the Board of Directors, which took no action
to stop the anomalies being perpetrated by the management. But it appears that the management must have acted
directly under orders of the Board of Directors. The appointment of a new management, therefore, would not remedy
the anomalous situation in which the corporation is found, because such situation was not due to the management
alone but principally because of direction of the Board of Directors.

WHEREFORE, in view of all the foregoing findings, decision is hereby rendered whereby the [petitioner]
Rural Bank of Milaor (Camarines Sur), Inc. through its Board of Directors is hereby ordered to immediately
issue a Board Resolution confirming the Deed of Sale it executed in favor of Renato Ocfemia marked
Exhibits C, C-1 and C-2); to pay [respondents] the sum of FIVE HUNDRED (P500.00) PESOS as actual
damages; TEN THOUSAND (P10,000.00) PESOS as attorney's fees; THIRTY THOUSAND (P30,000.00)
PESOS as moral damages; THIRTY THOUSAND (P30,000.00) PESOS as exemplary damages; and to
pay the costs. 4
Also assailed is the February 26, 1999 CA Resolution 5 which denied petitioner's Motion for Reconsideration.
The Facts
The trial court's summary of the undisputed facts was reproduced in the CA Decision as follows:

The second ground for the petition is, therefore, also without merit.
WHEREFORE, the court finds that the court below did not commit an abuse of discretion in appointing a receiver for
the corporation and the petition to set aside the order for the appointment of a receiver should be, as it is hereby,
dismissed. With costs against the petitioner.

G.R. No. 137686

This is an action for mandamus with damages. On April 10, 1996, [herein petitioner] was declared in
default on motion of the [respondents] for failure to file an answer within the reglementary-period after it
was duly served with summons. On April 26, 1996, [herein petitioner] filed a motion to set aside the order
of default with objection thereto filed by [herein respondents].
On June 17, 1996, an order was issued denying [petitioner's] motion to set aside the order of default. On
July 10, 1996, the defendant filed a motion for reconsideration of the order of June 17, 1996 with objection
thereto by [respondents]. On July 12, 1996, an order was issued denying [petitioner's] motion for
reconsideration. On July 31, 1996, [respondents] filed a motion to set case for hearing. A copy thereof was
duly furnished the [petitioner] but the latter did not file any opposition and so [respondents] were allowed to
present their evidence ex-parte. A certiorari case was filed by the [petitioner] with the Court of Appeals
docketed as CA GR No. 41497-SP but the petition was denied in a decision rendered on March 31, 1997
and the same is now final.

February 8, 2000

RURAL BANK OF MILAOR (CAMARINES SUR), petitioner,

vs.
FRANCISCA OCFEMIA, ROWENA BARROGO, MARIFE O. NIO, FELICISIMO OCFEMIA, RENATO OCFEMIA JR,
and WINSTON OCFEMIA, respondents.
PANGANIBAN, J.:
When a bank, by its acts and failure to act, has clearly clothed its manager with apparent authority to sell an acquired
asset in the normal course of business, it is legally obliged to confirm the transaction by issuing a board resolution to
enable the buyers to register the property in their names. It has a duty to perform necessary and lawful acts to enable
the other parties to enjoy all benefits of the contract which it had authorized.
The Case
Before this Court is a Petition for Review on Certiorari challenging the December 18, 1998 Decision of the Court of
Appeals 1 (CA) in CA-GR SP No. 46246, which affirmed the May 20, 1997 Decision 2 of the Regional Trial Court (RTC)
of Naga City (Branch 28). The CA disposed as follows:
Wherefore, premises considered, the Judgment appealed from is hereby AFFIRMED. Costs against the
respondent-appellant. 3
The dispositive portion of the judgment affirmed by the CA ruled in this wise:

The evidence presented by the [respondents] through the testimony of Marife O. Nio, one of the
[respondents] in this case, show[s] that she is the daughter of Francisca Ocfemia, a co-[respondent] in this
case, and the late Renato Ocfemia who died on July 23, 1994. The parents of her father, Renato Ocfemia,
were Juanita Arellano Ocfemia and Felicisimo Ocfemia. Her other co-[respondents] Rowena O. Barrogo,
Felicisimo Ocfemia, Renato Ocfemia, Jr. and Winston Ocfemia are her brothers and sisters.1wphi1.nt
Marife O. Nio knows the five (5) parcels of land described in paragraph 6 of the petition which are located
in Bombon, Camarines Sur and that they are the ones possessing them which [were] originally owned by
her grandparents, Juanita Arellano Ocfemia and Felicisimo Ocfemia. During the lifetime of her
grandparents, [respondents] mortgaged the said five (5) parcels of land and two (2) others to the
[petitioner] Rural Bank of Milaor as shown by the Deed of Real Estate Mortgage (Exhs. A and A-1) and the
Promissory Note (Exh. B).
The spouses Felicisimo Ocfemia and Juanita Arellano Ocfemia were not able to redeem the mortgaged
properties consisting of seven (7) parcels of land and so the mortgage was foreclosed and thereafter
ownership thereof was transferred to the [petitioner] bank. Out of the seven (7) parcels that were
foreclosed, five (5) of them are in the possession of the [respondents] because these five (5) parcels of
land described in paragraph 6 of the petition were sold by the [petitioner] bank to the parents of Marife O.
Nio as evidenced by a Deed of Sale executed in January 1988 (Exhs. C, C-1 and C-2).
The aforementioned five (5) parcels of land subject of the deed of sale (Exh. C), have not been, however
transferred in the name of the parents of Merife O. Nio after they were sold to her parents by the
[petitioner] bank because according to the Assessor's Office the five (5) parcels of land, subject of the sale,

cannot be transferred in the name of the buyers as there is a need to have the document of sale registered
with the Register of Deeds of Camarines Sur.
In view of the foregoing, Marife O. Nio went to the Register of Deeds of Camarines Sur with the Deed of
Sale (Exh. C) in order to have the same registered. The Register of Deeds, however, informed her that the
document of sale cannot be registered without a board resolution of the [petitioner] Bank. Marife Nio then
went to the bank, showed to if the Deed of Sale (Exh. C), the tax declaration and receipt of tax payments
and requested the [petitioner] for a board resolution so that the property can be transferred to the name of
Renato Ocfemia the husband of petitioner Francisca Ocfemia and the father of the other [respondents]
having died already.
The [petitioner] bank refused her request for a board resolution and made many alibi[s]. She was told that
the [petitioner] bank ha[d] a new manager and it had no record of the sale. She was asked and she
complied with the request of the [petitioner] for a copy of the deed of sale and receipt of payment. The
president of the [petitioner] bank told her to get an authority from her parents and other [respondents] and
receipts evidencing payment of the consideration appearing in the deed of sale. She complied with said
requirements and after she gave all these documents, Marife O. Nio was again told to wait for two (2)
weeks because the [petitioner] bank would still study the matter.
After two (2) weeks, Marife O. Nio returned to the [petitioner] bank and she was told that the resolution of
the board would not be released because the [petitioner] bank ha[d] no records from the old manager.
Because of this, Marife O. Nio brought the matter to her lawyer and the latter wrote a letter on December
22, 1995 to the [petitioner] bank inquiring why no action was taken by the board of the request for the
issuance of the resolution considering that the bank was already fully paid [for] the consideration of the
sale since January 1988 as shown by the deed of sale itself (Exh. D and D-1 ).
On January 15, 1996 the [petitioner] bank answered [respondents'] lawyer's letter (Exh. D and D-1)
informing the latter that the request for board resolution ha[d] already been referred to the board of
directors of the [petitioner] bank with another request that the latter should be furnished with a certified
machine copy of the receipt of payment covering the sale between the [respondents] and the [petitioner]
(Exh. E). This request of the [petitioner] bank was already complied [with] by Marife O. Nio even before
she brought the matter to her lawyer.
On January 23, 1996 [respondents'] lawyer wrote back the branch manager of the [petitioner] bank
informing the latter that they were already furnished the receipts the bank was asking [for] and that the
[respondents] want[ed] already to know the stand of the bank whether the board [would] issue the required
board resolution as the deed of sale itself already show[ed] that the [respondents were] clearly entitled to
the land subject of the sale (Exh. F). The manager of the [petitioner] bank received the letter which was
served personally to him and the latter told Marife O. Nio that since he was the one himself who received
the letter he would not sign anymore a copy showing him as having already received said letter (Exh. F).
After several days from receipt of the letter (Exh. F) when Marife O. Nio went to the [petitioner] again and
reiterated her request, the manager of the [petitioner] bank told her that they could not issue the required
board resolution as the [petitioner] bank ha[d] no records of the sale. Because of this Merife O. Nio
already went to their lawyer and ha[d] this petition filed.
The [respondents] are interested in having the property described in paragraph 6 of the petition transferred
to their names because their mother and co-petitioner, Francisca Ocfemia, is very sickly and they want to
mortgage the property for the medical expenses of Francisca Ocfemia. The illness of Francisca Ocfemia
beg[a]n after her husband died and her suffering from arthritis and pulmonary disease already became
serious before December 1995.

Marife O. Nio declared that her mother is now in serious condition and they could not have her
hospitalized for treatment as they do not have any money and this is causing the family sleepless nights
and mental anguish, thinking that their mother may die because they could not submit her for medication
as they do not have money. 6
The trial court granted the Petition. As noted earlier, the CA affirmed the RTC Decision.
Hence, this recourse. 7 In a Resolution dated June 23, 1999, this Court issued a Temporary Restraining Order directing
the trial court "to refrain and desist from executing [pending appeal] the decision dated May 20, 1997 in Civil Case No.
RTC-96-3513, effective immediately until further orders from this Court." 8
Ruling of the Court of Appeals
The CA held that herein respondents were "able to prove their present cause of action" against petitioner. It ruled that
the RTC had jurisdiction over the case, because (1) the Petition involved a matter incapable of pecuniary estimation;
(2) mandamus fell within the jurisdiction of RTC; and (3) assuming that the action was for specific performance as
argued by the petitioner, it was still cognizable by the said court.
Issues
In its Memorandum, 9 the bank posed the following questions:
1. Question of Jurisdiction of the Regional Trial Court. Has a Regional Trial Court original jurisdiction
over an action involving title to real property with a total assessed value of less than P20,000.00?
2. Question of Law. May the board of directors of a rural banking corporation be compelled to confirm a
deed of absolute sale of real property owned by the corporation which deed of sale was executed by the
bank manager without prior authority of the board of directors of the rural banking corporation? 10
This Court's Ruling
The present Petition has no merit.
First Issue:
Jurisdiction of the Regional Trial Court
Petitioner submits that the RTC had no jurisdiction over the case. Disputing the ruling of the appellate court that the
present action was incapable of pecuniary estimation, petitioner argues that the matter in fact involved title to real
property worth less than P20,000. Thus, under RA 7691, the case should have been filed before a metropolitan trial
court, a municipal trial court or a municipal circuit trial court.
We disagree. The well-settled rule is that jurisdiction is determined by the allegations of the complaint. 11 In the present
case, the Petition for Mandamus filed by respondents before the trial court prayed that petitioner-bank be compelled to
issue a board resolution confirming the Deed of Sale covering five parcels of unregistered land, which the bank
manager had executed in their favor. The RTC has jurisdiction over such action pursuant to Section 21 of BP 129,
which provides:
Sec. 21. Original jurisdiction in other cases. Regional Trial Courts shall exercise original jurisdiction;

(1) in the issuance of writ of certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunction
which may be enforced in any part of their respective regions; and
(2) In actions affecting ambassadors and other public ministers and consuls.
A perusal of the Petition shows that the respondents did not raise any question involving the title to the property, but
merely asked that petitioner's board of directors be directed to issue the subject resolution. Moreover, the bank did not
controvert the allegations in the said Petition. To repeat, the issue therein was not the title to the property; it was
respondents' right to compel the bank to issue a board resolution confirming the Deed of Sale.
Second Issue:
Authority of the Bank Manager
Respondents initiated the present proceedings, so that they could transfer to their names the subject five parcels of
land; and subsequently, to mortgage said lots and to use the loan proceeds for the medical expenses of their ailing
mother. For the property to be transferred in their names, however, the register of deeds required the submission of a
board resolution from the bank confirming both the Deed of Sale and the authority of the bank manager, Fe S. Tena, to
enter into such transaction. Petitioner refused. After being given the runaround by the bank, respondents sued in
exasperation.
Allegations in the Petition for Mandamus Deemed Admitted
Respondents based their action before the trial court on the Deed of Sale, the substance of which was alleged in and a
copy thereof was attached to the Petition for Mandamus. The Deed named Fe S. Tena as the representative of the
bank. Petitioner, however, failed to specifically deny under oath the allegations in that contract. In fact, it filed no
answer at all, for which reason it was declared in default. Pertinent provisions of the Rules of Court read:
Sec. 7. Action or defense based on document. Whenever an action or defense is based upon a written
instrument or document, the substance of such instrument or document shall be set forth in the pleading,
and the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to
be a part of the pleading, or said copy may with like effect be set forth in the pleading.
Sec. 8. How to contest genuineness of such documents. When an action or defense is founded upon a
written instrument, copied in or attached to the corresponding pleading as provided in the preceding
section, the genuineness and due execution of the instrument shall be deemed admitted unless the
adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts; but this
provision does not apply when the adverse party does not appear to be a party to the instrument or when
compliance with an order for an inspection of the original instrument is refused. 12
In failing to file its answer specifically denying under oath the Deed of Sale, the bank admitted the due execution of the
said contract. Such admission means that it acknowledged that Tena was authorized to sign the Deed of Sale on its
behalf. 13 Thus, defenses that are inconsistent with the due execution and the genuineness of the written instrument
are cut off by an admission implied from a failure to make a verified specific denial.

Likewise, Tena had previously transacted business on behalf of the bank, and the latter had acknowledged her
authority. A bank is liable to innocent third persons where representation is made in the course of its normal business
by an agent like Manager Tena, even though such agent is abusing her authority. 14 Clearly, persons dealing with her
could not be blamed for believing that she was authorized to transact business for and on behalf of the bank. Thus,
this Court has ruled in Board of Liquidators v. Kalaw: 15
Settled jurisprudence has it that 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 board of directors. 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
board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about
the affairs of the corporation. So also,
. . . authority to act for and bind a corporation may be presumed from acts of recognition in other instances
where the power was in fact exercised.
. . . Thus, when, in the usual course of business of a corporation, an officer has been allowed in his official
capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in
which he has been permitted by the directors to manage its business.
Notwithstanding the putative authority of the manager to bind the bank in the Deed of Sale, petitioner has failed to file
an answer to the Petition below within the reglementary period, let alone present evidence controverting such
authority. Indeed, when one of herein respondents, Marife S. Nino, went to the bank to ask for the board resolution,
she was merely told to bring the receipts. The bank failed to categorically declare that Tena had no authority. This
Court stresses the following:
. . . Corporate transactions would speedily come to a standstill were every person dealing with a
corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they
should appear on their face. This Court has observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655,
that
In passing upon the liability of a corporation in cases of this kind it is always well to keep in
mind the situation as it presents itself to the third party with whom the contract is made.
Naturally he can have little or no information as to what occurs in corporate meetings; and he
must necessarily rely upon the external manifestation of corporate consent. The integrity of
commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law; and we would be sorry to announce a
doctrine which would permit the property of man in the city of Paris to be whisked out of his
hands and carried into a remote quarter of the earth without recourse against the corporation
whose name and authority had been used in the manner disclosed in this case. As already
observed, it is familiar doctrine that if a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority, and thus holds him out to the
public as possessing power to do those acts, the corporation will, as against any one who has
in good faith dealt with the corporation through such agent, be estopped from denying his
authority; and where it is said "if the corporation permits this means the same as "if the thing is
permitted by the directing power of the corporation." 16

Other Acts of the Bank

In any event, the bank acknowledged, by its own acts or failure to act, the authority of Fe S. Tena to enter into binding
contracts. After the execution of the Deed of Sale, respondents occupied the properties in dispute and paid the real
estate taxes due thereon. If the bank management believed that it had title to the property, it should have taken some
measures to prevent the infringement or invasion of its title thereto and possession thereof.

In this light, the bank is estopped from questioning the authority of the bank manager to enter into the contract of sale.
If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority,
it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority. 17

Unquestionably, petitioner has authorized Tena to enter into the Deed of Sale. Accordingly, it has a clear legal duty to
issue the board resolution sought by respondent's. Having authorized her to sell the property, it behooves the bank to
confirm the Deed of Sale so that the buyers may enjoy its full use.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons upon ALFA
through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was
erroneously served upon them considering that the management of ALFA had been transferred to the DBP.

The board resolution is, in fact, mere paper work. Nonetheless, it is paper work necessary in the orderly operations of
the register of deeds and the full enjoyment of respondents' rights. Petitioner-bank persistently and unjustifiably
refused to perform its legal duty. Worse, it was less than candid in dealing with respondents regarding this matter. In
this light, the Court finds it proper to assess the bank treble costs, in addition to the award of damages.

In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons on behalf of
ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and
existence.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision and Resolution AFFIRMED. The Temporary
Restraining Order issued by this Court is hereby LIFTED. Treble costs against petitioner.
SO ORDERED.
G.R. No. 93695 February 4, 1992
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS
GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who owns the stocks of
the corporation under the terms of the voting trust agreement? How long can a voting trust agreement remain valid
and effective? Did a director of the corporation cease to be such upon the creation of the voting trust agreement?
These are the questions the answers to which are necessary in resolving the principal issue in this petition
for certiorari whether or not there was proper service of summons on Alfa Integrated Textile Mills (ALFA, for short)
through the petitioners as president and vice-president, allegedly, of the subject corporation after the execution of a
voting trust agreement between ALFA and the Development Bank of the Philippines (DBP, for short).

On August 4, 1988, the trial court issued an order advising the private respondents to take the appropriate steps to
serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of Proper Service of
Summons which the trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14, section 13 of the
Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents
should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e.,through publication to
effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents argued that
the voting trust agreement dated March 11, 1981 did not divest the petitioners of their positions as president and
executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate officers
was proper.
On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the petitioners, thus,
denying the latter's motion for reconsideration and requiring ALFA to filed its answer through the petitioners as its
corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their stand that by
virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no longer
receive summons or any court processes for or on behalf of ALFA. In support of their second motion for
reconsideration, the petitioners attached thereto a copy of the voting trust agreement between all the stockholders of
ALFA (the petitioners included), on the one hand, and the DBP, on the other hand, whereby the management and
control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989 and declared
that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper
service of summons on ALFA.

From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank, Inc. against the
private respondents who, in turn, filed a third party complaint against ALFA and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the Regional Trial
Court of Makati, Branch 58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was affirmed by the
court in its Order dated August 14, 1989 denying the private respondent's motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent before the public
respondent which, nonetheless, resolved to give due course thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with public
respondent issued an Order declaring as final the Order dated April 25, 1989. The private respondents in the said
Order were required to take positive steps in prosecuting the third party complaint in order that the court would not be
constrained to dismiss the same for failure to prosecute. Subsequently, on October 25, 1989 the private respondents
filed a motion for reconsideration on which the trial court took no further action.

On March 19, 1990, after the petitioners filed their answer to the private respondents' petition for certiorari, the public
respondent rendered its decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989
and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file its
answer within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent which resolved
to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition imputing grave abuse of
discretion amounting to lack of jurisdiction on the part of the public respondent in reversing the questioned Orders
dated April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that there was proper service of summons
on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990 erroneously
applying the rule that the period during which a motion for reconsideration has been pending must be deducted from
the 15-day period to appeal. However, in its Resolution dated January 3, 1991, the public respondent set aside the
aforestated entry of judgment after further considering that the rule it relied on applies to appeals from decisions of the
Regional Trial Courts to the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the case
of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp.
249-250)
In their memorandum, the petitioners present the following arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders whereby all his shares to
the corporation have been transferred to the trustee deprives the stockholders of his position as
director of the corporation; to rule otherwise, as the respondent Court of Appeals did, would be
violative of section 23 of the Corporation Code ( Rollo, pp. 270-3273); and
(2) that the petitioners were no longer acting or holding any of the positions provided under
Rule 14, Section 13 of the Rules of Court authorized to receive service of summons for and in
behalf of the private domestic corporation so that the service of summons on ALFA effected
through the petitioners is not valid and ineffective; to maintain the respondent Court of Appeals'
position that ALFA was properly served its summons through the petitioners would be contrary
to the general principle that a corporation can only be bound by such acts which are within the
scope of its officers' or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on the nature of a
voting trust agreement and the consequent effects upon its creation in the light of the provisions of the Corporation
Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders of a corporation and the
trustee or by a group of identical agreements between individual stockholders and a common
trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain
event, or until the agreement is terminated, control over the stock owned by such stockholders,
either for certain purposes or for all purposes, is to be lodged in the trustee, either with or
without a reservation to the owners, or persons designated by them, of the power to direct how
such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a more definitive
meaning may be gathered. The said provision partly reads:
Sec. 59. Voting Trusts One or more stockholders of a stock corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights
pertaining to the share for a period rights pertaining to the shares for a period not exceeding
five (5) years at any one time: Provided, that in the case of a voting trust specifically required
as a condition in a loan agreement, said voting trust may be for a period exceeding (5) years
but shall automatically expire upon full payment of the loan. A voting trust agreement must be
in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of
such agreement shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating that they are issued pursuant to
said agreement. In the books of the corporation, it shall be noted that the transfer in the name
of the trustee or trustees is made pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder from his other
rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain
interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of
the corporation. However, in order to distinguish a voting trust agreement from proxies and other voting pools and
agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the
other attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a definite period of
time; and (3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5
Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p. 331citing Tankersly v. Albright, 374 F.
Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust agreement is not
entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or
used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the traditional concept of a
voting trust agreement primarily intended to single out a stockholder's right to vote from his other rights as such and
made irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholder's
shares is effected subject to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial
ownership of the corporate shares of a stockholders, on the one hand, and the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing whereby one or more stockholders of
a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights
pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory conditions and such
other terms and conditions specified in the agreement. The five year-period may be extended in cases where the
voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the
loan.
In the instant case, the point of controversy arises from the effects of the creation of the voting trust agreement. The
petitioners maintain that with the execution of the voting trust agreement between them and the other stockholders of
ALFA, as one party, and the DBP, as the other party, the former assigned and transferred all their shares in ALFA to
DBP, as trustee. They argue that by virtue to of the voting trust agreement the petitioners can no longer be considered
directors of ALFA. In support of their contention, the petitioners invoke section 23 of the Corporation Code which
provides, in part, that:

Every director must own at least one (1) share of the capital stock of the corporation of which
he is a director which share shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the DBP had all the
more safeguarded the petitioners' continuance as officers and directors of ALFA inasmuch as the general object of
voting trust is to insure permanency of the tenure of the directors of a corporation. They cited the commentaries by
Prof. Aguedo Agbayani on the right and status of the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing stockholder", is equitable owner for
the stocks represented by the voting trust certificates and the stock reversible on termination of
the trust by surrender. It is said that the voting trust agreement does not destroy the status of
the transferring stockholders as such, and thus render them ineligible as directors. But a more
accurate statement seems to be that for some purposes the depositing stockholder holding
voting trust certificates in lieu of his stock and being the beneficial owner thereof, remains and
is treated as a stockholder. It seems to be deducible from the case that he may sue as a
stockholder if the suit is in equity or is of an equitable nature, such as, a technical stockholders'
suit in right of the corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3 pp.
492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust
agreement on the status of a stockholder who is a party to its execution from legal titleholder or owner of the shares
subject of the voting trust agreement, he becomes the equitable or beneficial owner. (Salonga,Philippine Law on
Private Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private Corporations and Corporate Practice,
1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981,
ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed.,
p. 536). The penultimate question, therefore, is whether the change in his status deprives the stockholder of the right
to qualify as a director under section 23 of the present Corporation Code which deletes the phrase "in his own right."
Section 30 of the old Code states that:
Every director must own in his own right at least one share of the capital stock of the stock
corporation of which he is a director, which stock shall stand in his name on the books of the
corporation. A director who ceases to be the owner of at least one share of the capital stock of
a stock corporation of which is a director shall thereby cease to be a director . . . (Emphasis
supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected by the
simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (although
beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old Corporation Code). No disqualification
arises by virtue of the phrase "in his own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other persons who in fact are not
beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized
(see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear indication that in order to be eligible as a
director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the
corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969]citing People v. Lihme,
269 Ill. 351, 109 N.E. 1051).

The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981 disposed
of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners
ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the
new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The
petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their
respective positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is the
essence of the subject voting trust agreement as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of
the stocks owned by them respectively and shall do all things necessary for the transfer of their
respective shares to the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of
shares transferred, which shall be transferrable in the same manner and with the same effect
as certificates of stock subject to the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or
special, upon any resolution, matter or business that may be submitted to any such
meeting, and shall possess in that respect the same powers as owners of the equitable as well
as the legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share of stock for the
purpose of qualifying such person as director of ALFA, and cause a certificate of stock
evidencing the share so transferred to be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his shares to the same
trustees without the need of revising this agreement, and this agreement shall have the same
force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis supplied)
Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stock
covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said
shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of
stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have retained their
status as officers of ALFA which was the case before the execution of the subject voting trust agreement. There
appears to be no dispute from the records that DBP has taken over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra, VicePresident of its Special Accounts Department II, Remedial Management Group, the petitioners were no longer
included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting trust
agreement did not deprive the petitioners of their position as directors of ALFA, the public respondent committed a
reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be
president and vice-president, respectively, of the corporation at the time of service of summons
on them on August 21, 1987, they were at least up to that time, still directors . . .

The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of the subject voting
trust agreement. Both parties, ALFA and the DBP, were aware at the time of the execution of the agreement that by
virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA were stripped of their positions as such.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or partnership. If the defendant is a
corporation organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent or any of its
directors.

There can be no reliance on the inference that the five-year period of the voting trust agreement in question had
lapsed in 1986 so that the legal title to the stocks covered by the said voting trust agreement ipso facto reverted to the
petitioners as beneficial owners pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificate as well as the certificates
of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors.
On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the DBP that the
duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA with the DBP. This is shown
by the following portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first
mortgage on the manufacturing plant of said company;
WHEREAS, ALFA is also indebted to other creditors for various financial accomodations and
because of the burden of these obligations is encountering very serious difficulties in continuing
with its operations.
WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA had
offered and the TRUSTEE has accepted participation in the management and control of the
company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have
agreed to execute a voting trust covering their shareholding in ALFA in favor of the TRUSTEE;

It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from the officers or
members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v.
Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule on
service of processes of a corporation enumerates the representatives of a corporation who can validly receive court
processes on its behalf. Not every stockholder or officer can bind the corporation considering the existence of a
corporate entity separate from those who compose it.
The rationale of the aforecited rule is that service must be made on a representative so integrated with the corporation
sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any
legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far
East Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The service of summons upon ALFA,
through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the petitioners, will contravene
the general principle that a corporation can only be bound by such acts which are within the scope of the officer's or
agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March 19, 1990
and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October
17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as the
obligations of ALFA with DBP, or any portion thereof, remains outstanding; (CA Rollo, pp. 137138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have transferred all its
rights, titles and interests in ALFA "effective June 30, 1986" to the national government through the Asset Privatization
Trust (APT) as attested to in a Certification dated January 24, 1989 of the Vice President of the DBP's Special
Accounts Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had handled APT's
account which included ALFA's assets pursuant to a management agreement by and between the DBP and APT
(CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on ALFA through the
petitioners on August 21, 1987, the voting trust agreement in question was not yet terminated so that the legal title to
the stocks of ALFA, then, still belonged to the DBP.

G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL,
ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN
MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos

In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on ALFA through
the petitioners is readily answered in the negative.

Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction,
arose out of two cases filed by petitioner with the Securities and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the Securities and
Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of
filing of amended by- laws, injunction and damages with prayer for a preliminary injunction" against the majority of the
members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition, entitled "John
Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B.
Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of
the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when
the outstanding capital stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3
should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment
was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of
the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and
1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors had changed since the
authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the qualifications
to be a director of respondent corporation, being a Substantial stockholder thereof; that as a stockholder, petitioner
had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of
directors; and that in amending the by-laws, respondents purposely provided for petitioner's disqualification and
deprived him of his vested right as afore-mentioned hence the amended by-laws are null and void. 1

As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from
being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or
Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract)
with respondent corporation, which was allowed because the questioned amendment gave the Board itself the
prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the
portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive
business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive
and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of
directors ... shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the
Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be
cancelled, and that individual respondents be made to pay damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange Commission
an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of respondent corporation
refused to allow him to inspect its records despite request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been attempting to suppress information from its
stockholders despite a negative reply by the SEC to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance
sheet of San Miguel International, Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in
San Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received
by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging, among
others that the motion has no legal basis; that the demand is not based on good faith; that the motion is premature
since the materiality or relevance of the evidence sought cannot be determined until the issues are joined, that it fails
to show good cause and constitutes continued harrasment, and that some of the information sought are not part of the
records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde, Miguel
Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations therein and stating, by
way of affirmative defenses that "the action taken by the Board of Directors on September 18, 1976 resulting in the ...
amendments is valid and legal because the power to "amend, modify, repeal or adopt new By-laws" delegated to said
Board on March 13, 1961 and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim,
"the vote requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined in
relation to the total subscribed capital stock at the time the delegation of said power is made, not when the Board opts
to exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the nullification of
the amendment, which is to secure its repeal by vote of the stockholders representing a majority of the subscribed
capital stock at any regular or special meeting, as provided in Article VIII, section I of the by-laws and section 22 of the
Corporation law, hence the, petition is premature; that petitioner is estopped from questioning the amendments on the
ground of lack of authority of the Board. since he failed, to object to other amendments made on the basis of the same
1961 authorization: that the power of the corporation to amend its by-laws is broad, subject only to the condition that
the by-laws adopted should not be respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to minimize or eliminate situations where its
directors might be tempted to put their personal interests over t I hat of the corporation; that the questioned amended
by-laws is a matter of internal policy and the judgment of the board should not be interfered with: That the by-laws, as
amended, are valid and binding and are intended to prevent the possibility of violation of criminal and civil laws
prohibiting combinations in restraint of trade; and that the petition states no cause of action. It was, therefore, prayed
that the petition be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the material
averments thereof and stating, as part of their affirmative defenses, that in August 1972, the Universal Robina
Corporation (Robina), a corporation engaged in business competitive to that of respondent corporation, began
acquiring shares therein. until September 1976 when its total holding amounted to 622,987 shares: that in October
1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its
total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president and
controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the stockholders' meeting
of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on
the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of
Directors at the next annual meeting; that thereafter the Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and attorney's fees
were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of documents
was filed by all the respondents. This was duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco,
Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and they accordingly filed their oppositionsintervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and inspection
of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the petitioner and respondents
in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing, by or on
behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders'
meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it appearing that the same is material
and relevant to the issues involved in the main case. Accordingly, the respondents should allow
petitioner-movant entry in the principal office of the respondent Corporation, San Miguel
Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the
rights herein granted; it being understood that the inspection, copying and photographing of the
said documents shall be undertaken under the direct and strict supervision of this Commission.
Provided, however, that other documents and/or papers not heretofore included are not
covered by this Order and any inspection thereof shall require the prior permission of this
Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose M.
Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-ininterest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-movant
is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent right to
inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing his
request to copy and inspect the management contract between San Miguel Corporation and A.
Soriano Corporation and the renewal and amendments thereof for the reason that he had
already obtained the same, the Commission takes note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of production and
inspection of the authority of the stockholders of San Miguel Corporation to invest the funds of
respondent corporation in San Miguel International, Inc., until after the hearing on the merits of
the principal issues in the above-entitled case.
This Order is immediately executory upon its approval.

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued a notice of
special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws",
setting such meeting for February 10, 1977. This prompted petitioner to ask respondent Commission for a summary
judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders'
meeting for the aforesaid purpose, private respondents admitted the invalidity of the amendments of September 18,
1976. The motion for summary judgment was opposed by private respondents. Pending action on the motion,
petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the
determination of petitioner's application for the issuance of a preliminary injunction and/or petitioner's motion for
summary judgment, a temporary restraining order be issued, restraining respondents from holding the special
stockholder's meeting as scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for issuance of temporary
restraining order. After receipt of the order of denial, respondents conducted the special stockholders' meeting wherein
the amendments to the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated motion for
contempt and for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed by petitioner
before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the filing of the instant
petition, the said motion had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the order
granting in part and denying in part petitioner's motion for production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled for May 10,
1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run for the position of
director of respondent corporation. Thereafter, respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of respondent corporation disqualifying and precluding petitioner from
being a candidate for director unless he could submit evidence on May 3, 1977 that he does not come within the
disqualifications specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof,
petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of injunction,
alleging that private respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the
respondent Commission, to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of the stockholders'
meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act hence petitioner
came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been investing corporate funds in
other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17
1/2 of the Corporation Law, he filed with respondent Commission, on January 20, 1977, a petition seeking to have
private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty
of such violation, and ordered to account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated motion to strike
and to declare individual respondents in default and an opposition ad abundantiorem cautelam were filed by petitioner.
Despite the fact that said motions were filed as early as February 4, 1977, the commission acted thereon only on April
25, 1977, when it denied respondents' motion to dismiss and gave them two (2) days within which to file their answer,
and set the case for hearing on April 29 and May 3, 1977.

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with indecent haste and
without circumspection in issuing the aforesaid orders to petitioner's irreparable damage and injury; (2) that it acted
without jurisdiction and in violation of petitioner's right to due process when it decided en banc an issue not raised
before it and still pending before one of its Commissioners, and without hearing petitioner thereon despite petitioner's
request to have the same calendared for hearing , and (3) that the respondents acted oppressively against the
petitioner in violation of his rights as a stockholder, warranting immediate judicial intervention.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the
meeting on March 20, 1972 to invest corporate funds in other companies or businesses or for
purposes other than the main purpose for which the Corporation has been organized, and
ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the issuance of a writ
of preliminary injunction to restrain private respondents from taking up Item 6 of the Agenda at the annual
stockholders' meeting, requesting that the same be set for hearing on May 3, 1977, the date set for the second hearing
of the case on the merits. Respondent Commission, however, cancelled the dates of hearing originally scheduled and
reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no
action has been taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that respondent
Commission gravely abused its discretion when it failed to act with deliberate dispatch on the motions of petitioner
seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against petitioner, in gross derogation of petitioner's rights to
property and due process. He prayed that this Court direct respondent SEC to act on collateral incidents pending
before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from disqualifying or
preventing petitioner from running or from being voted as director of respondent corporation and from submitting for
ratification or confirmation or from causing the ratification or confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws of respondent corporation, until
further orders from this Court or until the Securities and Ex-change Commission acts on the matters complained of in
the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been issued by
this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration, with its
supplement, of the order of the Commission denying in part petitioner's motion for production of documents,
petitioner's motion for reconsideration of the order denying the issuance of a temporary restraining order denying the
issuance of a temporary restraining order, and petitioner's consolidated motion to declare respondents in contempt
and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of respondent
corporation but stating that he should not sit as such if elected, until such time that the Commission has decided the
validity of the bylaws in dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders' meeting;
and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration of the order of
respondent Commission denying petitioner's motion for summary judgment;

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and that
respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to San Miguel
International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging that the
petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to that of
respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of his SMC stock thru
the Universal Robina Corporation and the Consolidated Foods Corporation, which corporations are engaged in
business directly and substantially competing with the allied businesses of respondent SMC and of corporations in
which SMC has substantial investments. Further, when CFC and Robina had accumulated investments. Further, when
CFC and Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and present
danger that competitors or antagonistic parties may be elected directors and thereby have easy and direct access to
SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and present danger
that business competitors, if allowed to become directors, will illegally and unfairly utilize their direct access to its
business secrets and plans for their own private gain to the irreparable prejudice of respondent SMC, and, ultimately,
its stockholders. Further, it is asserted that membership of a competitor in the Board of Directors is a blatant disregard
of no less that the Constitution and pertinent laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and protect itself
by excluding competitors and antogonistic parties, under the law of self-preservation, and it should be allowed a wide
latitude in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to petitioner's own acts
or omissions, since he failed to have the petition to suspend, pendente lite the amended by-laws calendared for
hearing. It was emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is
apparent that respondent Commission was not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and academic because respondent
Commission has acted on the pending incidents, complained of. It was, therefore, prayed that the petition be
dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has become moot
and academic for the reason, among others that the acts of private respondent sought to be enjoined have reference
to the annual meeting of the stockholders of respondent San Miguel Corporation, which was held on may 10, 1977;
that in said meeting, in compliance with the order of respondent Commission, petitioner was allowed to run and be
voted for as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and
confirmed. Further it was averred that the questions and issues raised by petitioner are pending in the Securities and
Exchange Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had;
hence the elevation of these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions for the
determination of this Court because (1) the respondent Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of stockholders, such that the discussion, ratification and confirmation
of Item 6 of the Agenda of the annual stockholders' meeting of May 10, 1977 did not render the case moot; that the
amendment to the bylaws which specifically bars petitioner from being a director is void since it deprives him of his
vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after receiving a copy of
the restraining order issued by this Court and noting that the restraining order did not foreclose action by it, the
Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied deferment of Item 6
of the Agenda of the annual stockholders' meeting of respondent corporation, took into consideration an urgent
manifestation filed with the Commission by petitioner on May 3, 1977 which prayed, among others, that the discussion
of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that "such action is within the
authority of the corporation as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to
express their wishes regarding disposition of corporate funds considering that their investments are the ones directly
affected." It was alleged that the main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary injunction, alleging
that the actuations of respondent SEC tended to deprive him of his right to due process, and "that all possible
questions on the facts now pending before the respondent Commission are now before this Honorable Court which
has the authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a competitor from
nomination or election to the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of
the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6 of the Agenda
of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the investment in a foreign corporation of
the corporate funds, allegedly in violation of section 17-1/2 of the Corporation Law.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal issues raised
by the parties in keeping with the "cherished rules of procedure" that "a court should always strive to settle the entire
controversy in a single proceeding leaving no root or branch to bear the seeds of future ligiation", citingGayong v.
Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve on the merits the validity of
its amended by laws and the rights and obligations of the parties thereunder, otherwise "the time spent and effort
exerted by the parties concerned and, more importantly, by this Honorable Court, would have been for naught because
the main question will come back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya submits
a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and decision of
the issues involved, invoking the latter's primary jurisdiction to hear and decide case involving intra-corporate
controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a
single proceeding, leaving nor root or branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of
Davao, 5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security
Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved to decide the
case on the merits "because public interest demands an early disposition of the case", and in Republic v. Central
Surety and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for further
proceedings, citing precedent where this Court, in similar situations resolved to decide the cases on the merits, instead
of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or
(b) where public interest demand an early disposition of the case; or (c) where the trial court had already received all
the evidence presented by both parties and the Supreme Court is now in a position, based upon said evidence, to
decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only a
question of law is involved. 8a Because uniformity may be secured through review by a single Supreme Court,
questions of law may appropriately be determined in the first instance by courts. 8b In the case at bar, there are facts
which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel
Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the
Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws
were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery
and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and
that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of
Directors of SMC are valid and reasonable

I
Whether or not amended by-laws are valid is purely a legal question which public interest requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an appropriate
ruling on the intrinsic validity of the amended by-laws in compliance with the principle of exhaustion of administrative
remedies", considering that: first: "whether or not the provisions of the amended by-laws are intrinsically valid ... is
purely a legal question. There is no factual dispute as to what the provisions are and evidence is not necessary to
determine whether such amended by-laws are valid as framed and approved ... "; second: "it is for the interest and
guidance of the public that an immediate and final ruling on the question be made ... "; third: "petitioner was denied
due process by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same intrinsically valid; and
finally: "to remand the case to SEC would only entail delay rather than serve the ends of justice."

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-law is in
conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore
unlawful is a question of law. 10 This rule is subject, however, to the limitation that where the reasonableness of a bylaw is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who
have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the
minority and prevent them from having representation in the Board", at the same time depriving petitioner of his
"vested right" to be voted for and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that
ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor,

petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is essentially a preventive
measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest
of those charged with the promotion of the corporate enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the
promotion of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a
combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the
detriment of the consuming public. It is further argued that there is not vested right of any stockholder under Philippine
Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally
or thru two corporations owned or controlled by him, control over the following shareholdings in San Miguel
Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b) Universal Robina Corporation 738,647 shares; (c)
CFC Corporation 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares
owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation.
It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and
CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also claimed that
both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially
competing with the alleged businesses of San Miguel Corporation, and of corporations in which SMC has substantial
investments.

"virtue of powers delegated to it by the stockholders," approved the amendment to ' he by-laws in question. At the
meeting of February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005
shares, opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy,
while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders'
Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of the total outstanding shares.
voted against petitioner.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL

CORPORATION

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal
government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. 12 At common law, the rule was "that the power to make and
adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is
settled throughout the United States that in the absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any
specific enabling provision in its charter or in general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation. 13

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board the areas of
competition are enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over
P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the combined market shares
of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and woven
fabrics would result in a position of such dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which, for SMC,
represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly competing in the sale of
coffee with Filipro, a subsidiary of SMC, which product line represented sales for SMC amounting to more than P275
million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in
direct competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million.
The areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of
more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894 stockholders, in
person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total outstanding shares of SMC,
rejected petitioner's candidacy for the Board of Directors because they "realized the grave dangers to the corporation
in the event a competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED

BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board of Directors of San
Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and present danger that the
election of a business competitor to the Board may cause upon the corporation and the other stockholders inseparable
prejudice. Submitted for resolution, therefore, is the issue whether or not respondent San Miguel Corporation could,
as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors.

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the
qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a
qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must
own in his right at least one share of the capital stock of the stock corporation of which he is a director ... "
InGovernment v. El Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that
persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be
held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in conformity with good
practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of
the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits
of the act of incorporation and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of
his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or
written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If
the amendment changes, diminishes or restricts the rights of the existing shareholders then the disenting minority has
only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law,
the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It
cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at

the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications of its directors, the next question that
must be considered is whether the disqualification of a competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot
be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are
concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders,
"they occupy a fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of
directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or technical
law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of
the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the directors of
corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary
position cannot serve himself first and his cestuis second. ... He cannot manipulate the affairs
of his corporation to their detriment and in disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate the ancient precept against serving two
masters ... He cannot utilize his inside information and strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly through the corporation what
he could not do so directly. He cannot violate rules of fair play by doing indirectly though the
corporation what he could not do so directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter how absolute in
terms that power may be and no matter how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable limitation that it may not be exercised for
the aggrandizement, preference or advantage of the fiduciary to the exclusion or detriment of
the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment to one of them. A
judge cannot be impartial if personally interested in the cause. No more can a director. Human
nature is too weak -for this. Take whatever statute provision you please giving power to
stockholders to choose directors, and in none will you find any express prohibition against a
discretion to select directors having the company's interest at heart, and it would simply be
going far to deny by mere implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being a director,
the same reasoning would apply to disqualify the wife and immediate member of the family of such stockholder, on
account of the supposed interest of the wife in her husband's affairs, and his suppose influence over her. It is perhaps
true that such stockholders ought not to be condemned as selfish and dangerous to the best interest of the corporation
until tried and tested. So it is also true that we cannot condemn as selfish and dangerous and unreasonable the action
of the board in passing the by-law. The strife over the matter of control in this corporation as in many others is perhaps
carried on not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or
not the action of the Board is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases. 23

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

... A bank director has access to a great deal of information concerning the business and plans
of a bank which would likely be injurious to the bank if known to another bank, and it was
reasonable and prudent to enlarge this minimum disqualification to include any director, officer,
employee, agent, nominee, or attorney of any other bank in California. The Ashkins case,
supra, specifically recognizes protection against rivals and others who might acquire
information which might be used against the interests of the corporation as a legitimate object
of by-law protection. With respect to attorneys or persons associated with a firm which is
attorney for another bank, in addition to the direct conflict or potential conflict of interest, there
is also the danger of inadvertent leakage of confidential information through casual office
discussions or accessibility of files. Defendant's directors determined that its welfare was best
protected if this opportunity for conflicting loyalties and potential misuse and leakage of
confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in any other firm,
company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in any other
firm, company, or association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm,
company, or association which compete with the subject corporation.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San
Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for
advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of Article XIV
of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand pesos, or
both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce
or to prevent by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or commerce, or shall
combine with any other person or persons to monopolize said merchandise or object in order to
alter the price thereof by spreading false rumors or making use of any other artifice to restrain
free competition in the market.

(4) A director shall be of good moral character as an essential qualification to holding office.
(5) No person who is an attorney against the corporation in a law suit is eligible for service on
the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person cannot serve two hostile
masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be
discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the
impractical results that would ensue from such arrangement, it would be inconsistent with petitioner's primary motive in
running for board membership which is to protect his investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and enforce responsible corporate management. As explained by
Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and conscientious participation in
the managerial functions of the company. As directors, it is their duty to control and supervise the day to day business
activities of the company or to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it
that these policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to the
corporation."
Sound principles of corporate management counsel against sharing sensitive information with a director whose
fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. These dangers are
enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as
director.

3. Any person who, being a manufacturer, producer, or processor of any merchandise or object
of commerce or an importer of any merchandise or object of commerce from any foreign
country, either as principal or agent, wholesale or retailer, shall combine, conspire or agree in
any manner with any person likewise engaged in the manufacture, production, processing,
assembling or importation of such merchandise or object of commerce or with any other
persons not so similarly engaged for the purpose of making transactions prejudicial to lawful
commerce, or of increasing the market price in any part of the Philippines, or any such
merchandise or object of commerce manufactured, produced, processed, assembled in or
imported into the Philippines, or of any article in the manufacture of which such manufactured,
produced, processed, or imported merchandise or object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of trade.

33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising
levels of competition by improving the consumers' effectiveness as the final arbiter in free markets. These laws are
designed to preserve free and unfettered competition as the rule of trade. "It rests on the premise that the unrestrained
interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices and the
highest quality ... ." 34 they operate to forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well defined
meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which is to prevent
competition in the broad and general sense, or to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material consideration in determining its existence is not that
prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when

desired. 38Further, it must be considered that the Idea of monopoly is now understood to include a condition produced
by the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of
competition by the qualification of interest or management, or it may be thru agreement and concert of action. It is, in
brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with reality. The
election of petitioner to the Board of respondent Corporation can bring about an illegal situation. This is because an
express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade. 40 It is
enough that a concert of action is contemplated and that the defendants conformed to the arrangements, 41 and what
is to be considered is what the parties actually did and not the words they used. For instance, the Clayton Act prohibits
a person from serving at the same time as a director in any two or more corporations, if such corporations are, by
virtue of their business and location of operation, competitors so that the elimination of competition between them
would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the anticompetitive dangers which may arise when an individual simultaneously acts as a director of two or more competing
corporations. A common director of two or more competing corporations would have access to confidential sales,
pricing and marketing information and would be in a position to coordinate policies or to aid one corporation at the
expense of another, thereby stifling competition. This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one director is that
theinterlock permits the coordination of policies between nominally independent firms to an
extent that competition between them may be completely eliminated. Indeed, if a director, for
example, is to be faithful to both corporations, some accommodation must result. Suppose X is
a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that
would injure B without violating his duty of loyalty to B at the same time he could hardly abstain
from voting without depriving A of his best judgment. If the firms really do compete in the
sense of vying for economic advantage at the expense of the other there can hardly be any
reason for an interlock between competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton Act, it
was established that: "By means of the interlocking directorates one man or group of men have been able to dominate
and control a great number of corporations ... to the detriment of the small ones dependent upon them and to the injury
of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders,
shipments, capacity and inventories may lead to control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel
Corporation, the essence of competition in a free market for the purpose of serving the lowest priced goods to the
consuming public would be frustrated, The competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most out of the consumers. Where the two competing
firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade.
Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates
between companies that are related to each other as competitors is to blunt the edge of rivalry between the
corporations, to seek out ways of compromising opposing interests, and thus eliminate competition. As respondent
SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in the country win
enable the former to practice price discrimination. CFC-Robina can segment the entire consuming population by
geographical areas or income groups and change varying prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable volume at which it could produce for every product line in
which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition
and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of
petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the
Corporation Law. Said section provides in part that "any stockholder of more than one corporation organized for the
purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the
purpose of bringing about or attempting to bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner for election
to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it
could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by law, by its
terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate
equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must
be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles
of public policy and management, therefore, support the view that a by-law which disqualifies a competition from
election to the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in
adopting measures to protect legitimate corporation interests. Thus, "where the reasonableness of a by-law is a mere
matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have
expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to perpetua themselves in power
such fears appear to be misplaced. This power, but is very nature, is subject to certain well established limitations.
One of these is inherent in the very convert and definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each possessing, in substantially similar if not Identical
degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more
persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure
trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an indirect and
highly unsubstantial duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not every
person or entity engaged in business of the same kind is a competitor. Such factors as quantum and place of
business, Identity of products and area of competition should be taken into consideration. It is, therefore, necessary to
show that petitioner's business covers a substantial portion of the same markets for similar products to the extent of
not less than 10% of respondent corporation's market for competing products. While We here sustain the validity of the
amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant
with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the
stockholders, it is the responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this obligation
and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed
by the Securities behind Exchange Commission en banc and its decision shall be final unless reversed by this Court
on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an abuse of discretion, or
forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or
will result in waste, dissipation or misapplication of the corporation assets, a court of equity has the power to grant
appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the
records of San Miguel International Inc., a fully owned subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied inspection
rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific period, petitioner had
been furnished numerous documents and information," to wit: (1) a complete list of stockholders and their

stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual stockholders' meeting of
May 18, 1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's
P186.6 million investment in associated companies and other companies as of December 31, 1975; (5) a listing of the
salaries, allowances, bonuses and other compensation or remunerations received by the directors and corporate
officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes
of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which
deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1) that SMC's
foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda and wholly owned by
SMC; this was SMC's first venture abroad, having started in 1948 with an initial outlay of ?500,000.00, augmented by
a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC's former President, the late
Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost P400
million (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4)
that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a
program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the aforementioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of
the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of
the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is
granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other words,
the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the
right to examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not
to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious
purposes. The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is
proper for the court to inquire into and consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused when the information
is not sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of purpose such as will
defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification.
In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place
upon the corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of
its funds, and to inspection to obtain such information, especially where it appears that the company is being
mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to
the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of
law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in
which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that where
a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely
agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded

and the books, papers and documents of all the corporations may be required to be produced for examination, 60 and
that a writ of mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes, the
records of the parent even though subsidiary was not named as a party. 61 mandamus was likewise held proper to
inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate
and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to
the control of the parent company, although it owned a vast majority of the stock of the subsidiary. 63 Likewise,
inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the
subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an
interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders to inspect
books and records of the corporation included the right to inspect corporation's subsidiaries' books and records which
were in corporation's possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary
corporation which used the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner contended that
respondent corporation "had been attempting to suppress information for the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled to copies of some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the petitioner notwithstanding the fact that no harm would be
caused thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the books and
records of a corporation in order to investigate the conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and,
therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory
right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and
records of such wholly subsidiary which are in respondent corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation
to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate funds in SMI
without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that
respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for ratification is a sound
corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or
for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been
so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose

of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least twothirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the
same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It
appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a
beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel
beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax
free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears relevant. In
said case, one of the issues was the legality of an investment made by Manao Sugar Central Co., Inc., without prior
resolution approved by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing
Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the
stand that if the investment is made in a corporation whose business is important to the investing corporation and
would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of
Directors." This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private corporation, in order to
accomplish is purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose
of shares, bonds, securities, and other evidence of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case, the purchase of such shares or
securities must be subject to the limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to own not more than 15% of the
voting stock of nay agricultural or mining corporation; and (c) that such holdings shall be solely
for investment and not for the purpose of bringing about a monopoly in any line of commerce of
combination in restraint of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967
Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the main
purpose for which it was organized, provide that 'its board of directors has been so authorized
in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling
them to exercise at least two-thirds of the voting power on such a propose at a stockholders'
meeting called for that purpose,' and provided further, that no agricultural or mining corporation
shall in anywise be interested in any other agricultural or mining corporation. When the
investment is necessary to accomplish its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis ours.)
(pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no
question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized
acts of its officers or other agents. 70 This is true because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is
defective from a supported failure to observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the
benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the
investment and its ratification by said stockholders obliterates any defect which it may have had at the outset.
"Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable
when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently
relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the
stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that
respondent corporation had committed an ultra vires act, considering the common practice of corporations of
periodically submitting for the gratification of their stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books
and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6) Justices, namely,
Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity per se of the
amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification
of petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation being
decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to
this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws
shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the validity of the
foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court
on the applicability of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the
result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion,
wherein they voted against the validity of the questioned amended bylaws and that this question should properly be
resolved first by the SEC as the agency of primary jurisdiction. They concur in the result that petitioner may be allowed
to run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until
disqualified after proper hearing by the respondent's Board of Directors and petitioner's disqualification shall have
been sustained by respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition by allowing
petitioner to examine the books and records of San Miguel International, Inc. as specified in the petition. The petition,
insofar as it assails the validity of the amended by- laws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

G.R. No. L-23428

November 29, 1968

DETECTIVE & PROTECTIVE BUREAU, INC., petitioner,

vs.
THE HONORABLE GAUDENCIO CLORIBEL, in his capacity as Presiding Judge of Branch VI, Court of First
Instance of Manila, and FAUSTINO S. ALBERTO, respondents.
Crispin D. Biazas and Associates and Jose S. Sarte for petitioner.
Gaudencio T. Bocobo for respondents.
ZALDIVAR, J.:
The complaint, in Civil Case No. 56949 of the Court of First Instance of Manila, dated May 4, 1964, filed by Detective
and Protective Bureau, Inc., therein plaintiff (petitioner herein) against Fausto S. Alberto, therein defendant
(respondent herein), for accounting with preliminary injunction and receivership, alleged that plaintiff was a corporation
duly organized and existing under the laws of the Philippines; that defendant was managing director of plaintiff
corporation from 1952 until January 14, 1964; that in June, 1963, defendant illegally seized and took control of all the
assets as well as the books, records, vouchers and receipts of the corporation from the accountant-cashier, concealed
them illegally and refused to allow any member of the corporation to see and examine the same; that on January 14,
1964, the stockholders, in a meeting, removed defendant as managing director and elected Jose de la Rosa in his
stead; that defendant not only had refused to vacate his office and to deliver the assets and books to Jose de la Rosa,
but also continued to perform unauthorized acts for and in behalf of plaintiff corporation; that defendant had been
required to submit a financial statement and to render an accounting of his administration from 1952 but defendant has
failed to do so; that defendant, contrary to a resolution adopted by the Board of Directors on November 24, 1963, had
been illegally disposing of corporate funds; that defendant, unless immediately restrained ex-parte, would continue
discharging the functions of managing director; and that it was necessary to appoint a receiver to take charge of the
assets and receive the income of the corporation. Plaintiff prayed that a preliminary injunction ex-parte be issued
restraining defendant from exercising the functions of managing director and from disbursing and disposing of its
funds; that Jose M. Barredo be appointed receiver; that, after judgment, the injunction be made permanent and
defendant be ordered to render an accounting.
Herein respondent Judge, the Honorable Gaudencio Cloribel, set for hearing plaintiff's prayer for ancillary relief and
required the parties to submit their respective memoranda. On June 18, 1964, respondent Judge granted the writ of
preliminary injunction prayed for, conditioned upon plaintiff's filing a bond of P5,000.00. Plaintiff filed the bond, but
while the same was pending approval defendant Fausto S. Alberto filed, on July 1, 1964, a motion to admit a counterbond for the purpose of lifting the order granting the writ of preliminary injunction. Inspite of the opposition filed by
plaintiff, respondent Judge issued, on August 5, 1964, an order admitting the counterbond and setting aside the writ of
preliminary injunction.
On the belief that the order approving the counter-bond and lifting the writ of preliminary injunction was contrary to law
and the act of respondent Judge constituted a grave abuse of discretion, and that there was no plain, speedy and
adequate remedy available to it, plaintiff filed with this Court the instant petition for certiorari, praying that a writ of
preliminary injunction enjoining defendant Fausto S. Albert from exercising the functions of managing director be
issued, and that the order dated August 5, 1964 of respondent Judge approving the counter-bond and lifting the writ of
preliminary injunction he had previously issued be set aside and declared null and void. The Court gave due course to
the petition but did not issue a preliminary injunction.
In his answer, now respondent Fausto S. Alberto traversed the material allegations of the petition, justified the order
complained of, and prayed for the dismissal of the petition.

From the pleadings, it appears that the only issue to be resolved is whether the order of respondent Judge dated
August 5, 1964, admitting and approving the counter-bond of P5,000 and setting aside the writ of preliminary injunction
granted in his order dated June 18, 164, was issued contrary to law and with grave abuse of discretion.
Now petitioner contends that the setting aside of the order granting the writ was contrary to law and was done with a
grave abuse of discretion, because: (1) the motion to admit defendant's counter-bond was not supported by affidavits
showing why the counter-bond should be admitted, as required by Section 6 of Rule 58; (2) the preliminary injunction
was not issued ex-parte but after hearing, and the admission of the counter-bond rendered said writ ineffective; (3) the
writ was granted in accordance with Rule 58 of the Rules of Court and established precedents' (4) public interest
required that the writ be not set aside because respondent had arrogated unto himself all the powers of petitioning
corporation, to the irreparable damage of the corporation; and that (5) the counter-bond could not compensate
petitioner's damage.
1. The first reason given by petitioner in support of its contention that the dissolution of the writ of preliminary injunction
was contrary to law is that the motion to admit respondent's counter-bond for the dissolution of the writ was not
supported by affidavits as required by section 6 of Rule 58 of the Rules of Court. The controverted motion, however,
does not appear in the record. However, the record shows that respondent Alberto had filed a verified answer to the
complaint and a verified opposition to the issuance of the writ of preliminary injunction.
Regarding the necessity of verification of the motion for dissolution of a writ of preliminary injunction, this Court has
ruled that the requirement of verification is not absolute but is dependent on the circumstances obtaining in a particular
case. In the case of Sy Sam Bio, et al. vs. Barrios and Buyson Lampa, 1 the only question raised was whether the
respondent Judge exceeded his jurisdiction and abused his discretion in setting aside an order directing the issuance
of a writ of preliminary injunction. In maintaining the affirmative, petitioners in that case alleged that the questioned
order was issued in violation of the provisions of Section 169 of Act 190(which is one of the sources of Sec. 6 of Rule
58 of the revised Rules of Court)inasmuch as the Judge set aside said order and directed the dissolution of the
preliminary injunction without any formal petition of the parties and without having followed the procedure prescribed
by the statute. There was, however, a verbal application for the dissolution of the writ, based upon the ground of the in
suficiency of the complaint which was the basis of the application for the issuance of said writ of preliminary injunction.
This Court said:
Section 169 of Act 1909 does not prescribe the manner of filing the application to annul or modify a writ of
preliminary injunction. It simply states that if a temporary injunction be granted without notice, the
defendant, at any time before trial, may apply, upon reasonable notice to the adverse party, to the judge
who granted the injunction, or to the judge of the court of which the action was brought, to dissolve or
modify the same.
On the strength of the decision in the above-cited case, this Court in Caluya, et al. vs. Ramos, et al.,2 said;
Petitioners' criticism that the motion to dissolve filed by the defendants in Civil Case No. 4634 was not
verified, is also groundless inasmuch as even an indirect verbal application for the dissolution of an ex
parteorder of preliminary injunction has been held to be a sufficient compliance with the provisions of
Section 6 of Rule 60 (Moran, Comments on the Rules of Court, Second Edition, Vol. II, p. 65, citing the
case of Sy Yam Bio v. Barrios, etc., 63 Phil. 206), the obvious reason being that said rule does not
prescribe the form by which an application for the dissolution or modification of an order of preliminary
injunction should be presented.
If according to the above rulings, Section 6 of Rule 60 (now sec. 6, Rule 58) of the Rules of Court did not require any
form for the application for the dissolution of the writ of preliminary injunction, then respondent Fausto Alberto's motion
to lift the preliminary injunction in the court below need not be verified, and much less must the motion be supported by
affidavits, as urged by petitioner.

However, in Canlas, et al. vs. Aquino, et al.,3 this Court ruled that a motion for the dissolution of a writ of preliminary
injunction should be verified. In that case, respondent Tayag filed an unverified motion for the dissolution of a writ of
preliminary injunction, alleging that the same "would work great damage to the defendant who had already spend a
considerable sum of money" and that petitioners "can be fully compensated for any damages that they may suffer."
The court granted the motion and dissolved the preliminary injunction. In an original action for a writ of certiorari filed
with this Court to annual said order, this Court remarked in part:
Petitioners herein are entitled to the writ prayed for. The motion of respondent Tayag for the dissolution of
the writ of preliminary injunction issued on October 22, 1959, was unverified....
From the precedents quoted above, as well as from the terminology of Section 6 of Rule 58 of the new Rules of Court,
it is evident that whether the application for the dissolution of the writ of preliminary injunction must be verified or not
depends upon the ground upon which such application is based. If the application is based on the insufficiency of the
complaint, the motion need not be verified. If the motion is based on the ground that the injunction would cause great
damage to defendant while the plaintiff can be fully compensated for such damages as he may suffer, the motion
should be verified.
In the instant case, it is alleged by petitioner that the motion for the dissolution of the writ of preliminary injunction was
not verified. This allegation was not denied in the answer. But because said motion does not appear in the record of
the case now before this Court, We cannot determine what are the grounds for the dissolution that are alleged therein,
and so We cannot rule on whether the motion should have been verified or not. This Court, therefore, has to rely on
the order of respondent Judge, dated August 5, 1964, which states that "the filing of the counter-bond is in accordance
with law." Consequently, the first ground alleged by petitioner must be brushed aside.

3. The fourth reason alleged by petitioner in support of its stand is that public interest demanded that the writ enjoining
respondent Fausto Alberto from exercising the functions of managing director be maintained. Petitioner contended that
respondent Alberto had arrogated to himself the power of the Board of Directors of the corporation because he refused
to vacate the office and surrender the same to Jose de la Rosa who had been elected managing director by the Board
to succeed him. This assertion, however, was disputed by respondent Alberto who stated that Jose de la Rosa could
not be elected managing director because he did not own any stock in the corporation.
There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own
any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the
Corporation Law, which in part provides:
There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own
any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the
Corporation Law, which in part provides:
Sec. 30. Every director must own in his own right at least one share of the capital stock of the stock
corporation of which he is a director, which stock shall stand in his name on the books of the
corporations....
If he could not be a director, he could also not be a managing director of the corporation, pursuant to Article V, Section
3 of the By-Laws of the Corporation which provides that:
The manager shall be elected by the Board of Directors from among its members.... (Record, p. 48)

2. The second and third reasons alleged by petitioner in its petition for certiorari assume that a preliminary injunction
issued after hearing and in accordance with Rule 58 cannot be set aside. This contention is untenable. The provision
of Section 6 of Rule 58 that "the injunction may be refused, or, if granted ex parte, may be dissolved" can not be
construed as putting beyond the reach of the court the dissolution of an injunction which was granted after hearing.
The reason is because a writ of preliminary injunction is an interlocutory order, and as such it is always under the
control of the court before final judgment. Thus, in Caluya, et al. vs. Ramos, et al.,4this Court said:
The first contention of the petitioners is that, as said injunction was issued after a hearing, the same cannot
be dissolved, specially on the strength of an unverified motion for dissolution and in the absence to support
it. Reliance is placed on Section 6 of Rule 60 of the Rules of Court which provides that "the injunction may
be reduced, or, if granted ex parte, maybe dissolved," thereby arguing that if an injunction is not issued ex
parte the same cannot be dissolved. The contention is clearly erroneous. Although said section prescribes
the grounds for objecting to, or for moving the dissolution of, a preliminary injunction prior to its issuance or
after its granting ex parte, it does not thereby outlaw a dissolution if the injunction has been issued after a
hearing. This is to be so, because a writ of preliminary injunction is an interlocutory order which is always
under the control of the court before final judgment. (Manila Electric Company vs. Artiaga and Green, 50
Phil. 144, 147).
This Court has also ruled that the dissolution of a writ of preliminary injunction issued after hearing, even if the
dissolution is ordered without giving the other party an opportunity to be heard, does not constitute an abuse of
discretion and may be cured not by certiorari but by appeal. In Clarke vs. Philippine Ready Mix Concrete Co., Inc., et
al.,5 one of the issues presented was whether a writ of preliminary injunction granted the plaintiff by a trial court after
hearing, might be dissolved upon an ex parte application by the defendant, and this Court ruled that:
The action of a trial court in dissolving a writ of preliminary injunction already issued after hearing, without
giving petitioner an opportunity to be heard, does not constitute lack or excess of jurisdiction or an abuse of
discretion, and any irregularity committed by the trial court on this score may be cured not by certiorari but
by appeal.

If the managing director-elect was not qualified to become managing director, respondent Fausto Alberto could not be
compelled to vacate his office and cede the same to the managing director-elect because the by-laws of the
corporation provides in Article IV, Section 1 that "Directors shall serve until the election and qualification of their duly
qualified successor."
4. The fifth reason alleged by herein petitioner in support of its contention that respondent Judge gravely abused his
discretion when he lifted the preliminary injunction upon the filing of the counter-bond was that said counter-bond
could not compensate for the irreparable damage that the corporation would suffer by reason of the continuance of
respondent Fausto Alberto as managing director of the corporation. Respondent Alberto, on the contrary, contended
that he really was the owner of the controlling interest in the business carried on the name of the petitioner, having
invested therein a total of P57,727.29 as against the sum of P4,000 only invested by one other director, Jose M.
Barredo. We find that there was a question as to who own the controlling interest in the corporation. Where ownership
is in dispute, the party in control or possession of the disputed interest is presumed to have the better right until the
contrary is adjudged, and hence that party should not be deprived of the control or possession until the court is
prepared to adjudicate the controverted right in favor of the other party.6
Should it be the truth that respondent Alberto is the controlling stockholder, then the damages said respondent would
suffer would be the same, if not more, as the damages that the corporation would suffer if the injunction were
maintained. If the bond of P5,000 filed by petitioner for the injunction would be sufficient to answer for the damages
that would be suffered by respondent Alberto by reason of the injunction, there seems to be no reason why the same
amount would not be sufficient to answer for the damages that might be suffered by the petitioning corporation by
reason of the lifting of the injunction. The following ruling of this Court has a persuasive application in this case:
The rule that a court should not, by means of a preliminary injunction, transfer property in litigation from the
possession of one party to another is more particularly applicable where the legal title is in dispute and the
party having possession asserts ownership in himself.7

Let it be stated, in relation to all the reason given by petitioner, that it is a settled rule that the issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely
within the discretion of the court taking cognizance of the case the only limitation being that this discretion should be
exercised based upon the grounds and in the manner provided by law,8 and it is equally well settled that a wide latitude
is given under Section 7 of Rule 58 of the Rules of Court to the trial court to modify or dissolve the injunction as justice
may require. The court which is to exercise that discretion is the trial court, not the appellate court. 9 The exercise of
sound judicial discretion by the lower court in injunctive matters should not be interfered with except in cases of
manifest abuse.10 In the instant case, We find that petitioner failed to show manifest abuse of discretion by respondent
Judge in setting aside the writ of preliminary injunction.
There is, however, one vital reason why the instant petition for certiorari should be denied. And it is, that from the order
dissolving the writ of preliminary injunction, the petitioner has gone directly to this Court without giving the respondent
Judge (or trial court) a chance or opportunity to correct his error, if any, in an appropriate motion for reconsideration.
An omission to comply with this procedural requirement justifies a denial of the writ applied for.11
The instant case is not one of the exceptions in the application of this rule, which are: where the questions of
jurisdiction has been squarely raised, argued before, submitted to, and met and decided by the respondent court;
where the questioned order is a patent nullity; and where there is a deprivation of the petitioner's fundamental right to
due process.12
It being our considered view that respondent Judge had not committed grave abuse of discretion in issuing the order
dated August 5, 1964 lifting the writ of preliminary injunction which had previously been granted in the order dated
June 18, 1964, and the herein petition for certiorari having been filed without previously complying with a well settled
procedural requirement, there is no alternative for this Court but to order its dismissal.
WHEREFORE, the instant petition for certiorari with preliminary injunction is dismissed, with costs againsts the
petitioner. It is so ordered.

CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF APPEALS, GRACE

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

3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board of Directors of
the Association without the benefit of election is allowed under the law.[1]
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and
secondary courses at the Grace Village in Quezon City. Private respondent Grace Village Association, Inc., on the
other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village, while private
respondents Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee on election,
respectively, in 1990, when this suit was brought.
As adopted in 1968, the by-laws of the association provided in Article IV, as follows:
The annual meeting of the members of the Association shall be held on the first Sunday of January in each calendar
year at the principal office of the Association at 2:00 P.M. where they shall elect by plurality vote and by secret
balloting, the Board of Directors, composed of eleven (11) members to serve for one (1) year until their successors are
duly elected and have qualified.[2]
It appears, that on December 20, 1975, a committee of the board of directors prepared a draft of an
amendment to the by-laws, reading as follows:[3]
VI. ANNUAL MEETING
The Annual Meeting of the members of the Association shall be held on the second Thursday of January of each
year. EachCharter or Associate Member of the Association is entitled to vote. He shall be entitled to as many votes as
he has acquired thru his monthly membership fees only computed on a ratio of TEN (P10.00) PESOS for one vote.

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

GRACE

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

VILLAGE

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

The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first
fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and
qualified.GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.
This draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was
presumably submitted to the board, up to 1990, petitioner was given a permanent seat in the board of directors of the
association. On February 13, 1990, the associations committee on election in a letter informed James Tan, principal of
the school, that it was the sentiment that all directors should be elected by members of the association because to
make a person or entity a permanent Director would deprive the right of voters to vote for fifteen (15) members of the
Board, and it is undemocratic for a person or entity to hold office in perpetuity. [4] For this reason, Tan was told that the
proposal to make the Grace Christian High School representative as a permanent director of the association, although
previously tolerated in the past elections should be reexamined. Following this advice, notices were sent to the
members of the association that the provision on election of directors of the 1968 by-laws of the association would be
observed.
Petitioner requested the chairman of the election committee to change the notice of election by following the
procedure in previous elections, claiming that the notice issued for the 1990 elections ran counter to the practice in
previous years and was in violation of the by-laws (of 1975) and unlawfully deprive[d] Grace Christian High School of
its vested right [to] a permanent seat in the board.[5]

As the association denied its request, the school brought suit for mandamus in the Home Insurance and
Guaranty Corporation to compel the board of directors of the association to recognize its right to a permanent seat in
the board. Petitioner based its claim on the following portion of the proposed amendment which, it contended, had
become part of the by-laws of the association as Article VI, paragraph 2, thereof:
The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first
fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and
qualified.GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.
It appears that the opinion of the Securities and Exchange Commission on the validity of this provision was
sought by the association and that in reply to the query, the SEC rendered an opinion to the effect that the practice of
allowing unelected members in the board was contrary to the existing by-laws of the association and to 92 of the
Corporation Code (B.P. Blg. 68).
Private respondent association cited the SEC opinion in its answer. Additionally, the association contended that
the basis of the petition for mandamus was merely a proposed by-laws which has not yet been approved by
competent authority nor registered with the SEC or HIGC. It argued that the by-laws which was registered with the
SEC on January 16, 1969 should be the prevailing by-laws of the association and not the proposed amended by-laws.
[6]

In reply, petitioner maintained that the amended by-laws is valid and binding and that the association was
estopped from questioning the by-laws.[7]
A preliminary conference was held on March 29, 1990 but nothing substantial was agreed upon. The parties
merely agreed that the board of directors of the association should meet on April 17, 1990 and April 24, 1990 for the
purpose of discussing the amendment of the by-laws and a possible amicable settlement of the case. A meeting was
held on April 17, 1990, but the parties failed to reach an agreement. Instead, the board adopted a resolution declaring
the 1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be
effective.
On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing petitioners action. The
hearing officer held that the amended by-laws, upon which petitioner based its claim, [was] merely a proposed by-laws
which, although implemented in the past, had not yet been ratified by the members of the association nor approved by
competent authority; that, on the contrary, in the meeting held on April 17, 1990, the directors of the association
declared the proposed by-law dated December 20, 1975 prepared by the committee on by-laws . . . null and void and
the by-laws of December 17, 1968 as the prevailing by-laws under which the association is to operate until such time
that the proposed amendments to the by-laws are approved and ratified by a majority of the members of the
association and duly filed and approved by the pertinent government agency. The hearing officer rejected petitioners
contention that it had acquired a vested right to a permanent seat in the board of directors. He held that past practice
in election of directors could not give rise to a vested right and that departure from such practice was justified because
it deprived members of association of their right to elect or to be voted in office, not to say that allowing the automatic
inclusion of a member representative of petitioner as permanent director [was] contrary to law and the registered bylaws of respondent association.[8]
The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated September 13,
1990. It cited the opinion of the SEC based on 92 of the Corporation Code which reads:

92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation or the by-laws, the board
of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles
of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3)
of the number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of
trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected
to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period.
The HIGC appeals board denied claims that the school [was] being deprived of its right to be a member of the Board of
Directors of respondent association, because the fact was that it may nominate as many representatives to the
Associations Board as it may deem appropriate. It said that what is merely being upheld is the act of the incumbent
directors of the Board of correcting a long standing practice which is not anchored upon any legal basis. [9]
Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court on February 9, 1993,
affirmed the decision of the HIGC. The Court of Appeals held that there was no valid amendment of the associations
by-laws because of failure to comply with the requirement of its existing by-laws, prescribing the affirmative vote of the
majority of the members of the association at a regular or special meeting called for the adoption of amendment to the
by-laws. Article XIX of the by-laws provides: [10]
The members of the Association by an affirmative vote of the majority at any regular or special meeting called for the
purpose, may alter, amend, change or adopt any new by-laws.
This provision of the by-laws actually implements 22 of the Corporation Law (Act No. 1459) which provides:
22. The owners of a majority of the subscribed capital stock, or a majority of the members if there be no capital stock,
may, at a regular or special meeting duly called for the purpose, amend or repeal any by-law or adopt new bylaws. The owners of two-thirds of the subscribed capital stock, or two-thirds of the members if there be no capital
stock, may delegate to the board of directors the power to amend or repeal any by-law or to adopt new bylaws: Provided, however, That any power delegated to the board of directors to amend or repeal any by-law or adopt
new by-laws shall be considered as revoked whenever a majority of the stockholders or of the members of the
corporation shall so vote at a regular or special meeting.And provided, further, That the Director of the Bureau of
Commerce and Industry shall not hereafter file an amendment to the by-laws of any bank, banking institution or
building and loan association, unless accompanied by certificate of the Bank Commissioner to the effect that such
amendments are in accordance with law.
The proposed amendment to the by-laws was never approved by the majority of the members of the
association as required by these provisions of the law and by-laws. But petitioner contends that the members of the
committee which prepared the proposed amendment were duly authorized to do so and that because the members of
the association thereafter implemented the provision for fifteen years, the proposed amendment for all intents and
purposes should be considered to have been ratified by them. Petitioner contends:[11]
Considering, therefore, that the agents or committee were duly authorized to draft the amended by-laws and the acts
done by the agents were in accordance with such authority, the acts of the agents from the very beginning were lawful
and binding on the homeowners (the principals) per se without need of any ratification or adoption. The more has the
amended by-laws become binding on the homeowners when the homeowners followed and implemented the
provisions of the amended by-laws. This is not merely tantamount to tacit ratification of the acts done by duly
authorized agents but express approval and confirmation of what the agents did pursuant to the authority granted to
them.
Corollarily, petitioner claims that it has acquired a vested right to a permanent seat in the board. Says petitioner:
The right of the petitioner to an automatic membership in the board of the Association was granted by the members of
the Association themselves and this grant has been implemented by members of the board themselves all through the

years.Outside the present membership of the board, not a single member of the Association has registered any desire
to remove the right of herein petitioner to an automatic membership in the board. If there is anybody who has the right
to take away such right of the petitioner, it would be the individual members of the Association through a referendum
and not the present board some of the members of which are motivated by personal interest.
Petitioner disputes the ruling that the provision in question, giving petitioners representative a permanent seat in the
board of the association, is contrary to law. Petitioner claims that that is not so because there is really no provision of
law prohibiting unelected members of boards of directors of corporations. Referring to 92 of the present Corporation
Code, petitioner says:
It is clear that the above provision of the Corporation Code only provides for the manner of election of the members of
the board of trustees of non-stock corporations which may be more than fifteen in number and which manner of
election is even subject to what is provided in the articles of incorporation or by-laws of the association thus showing
that the above provisions [are] not even mandatory.
Even a careful perusal of the above provision of the Corporation Code would not show that it prohibits a non-stock
corporation or association from granting one of its members a permanent seat in its board of directors or trustees. If
there is no such legal prohibition then it is allowable provided it is so provided in the Articles of Incorporation or in the
by-laws as in the instant case.
....
If fact, the truth is that this is allowed and is being practiced by some corporations duly organized and existing under
the laws of the Philippines.
One example is the Pius XII Catholic Center, Inc. Under the by-laws of this corporation, that whoever is the Archbishop
of Manila is considered a member of the board of trustees without benefit of election. And not only that. He also
automatically sits as the Chairman of the Board of Trustees, again without need of any election.
Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also provided in the by-laws of this
corporation that whoever is the Archbishop of Manila is considered a member of the board of trustees year after year
without benefit of any election and he also sits automatically as the Chairman of the Board of Trustees.
It is actually 28 and 29 of the Corporation Law not 92 of the present law or 29 of the former one which require
members of the boards of directors of corporations to be elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate powers of all corporations formed under this Act shall be
exercised, all business conducted and all property of such corporations controlled and held by a board of not less than
five nor more than eleven directors to be elected from among the holders of stock or, where there is no stock, from the
members of the corporation: Provided, however, That in corporations, other than banks, in which the United States has
or may have a vested interest, pursuant to the powers granted or delegated by the Trading with the Enemy Act, as
amended, and similar Acts of Congress of the United States relating to the same subject, or by Executive Order No.
9095 of the President of the United States, as heretofore or hereafter amended, or both, the directors need not be
elected from among the holders of the stock, or, where there is no stock from the members of the corporation.
(emphasis added)
29. At the meeting for the adoption of the original by-laws, or at such subsequent meeting as may be then determined,
directors shall be elected to hold their offices for one year and until their successors are elected and
qualified. Thereafter thedirectors of the corporation shall be elected annually by the stockholders if it be a stock
corporation or by the members if it be a nonstock corporation, and if no provision is made in the by-laws for the time of
election the same shall be held on the first Tuesday after the first Monday in January. Unless otherwise provided in the

by-laws, two weeks notice of the election of directors must be given by publication in some newspaper of general
circulation devoted to the publication of general news at the place where the principal office of the corporation is
established or located, and by written notice deposited in the post-office, postage pre-paid, addressed to each
stockholder, or, if there be no stockholders, then to each member, at his last known place of residence. If there be no
newspaper published at the place where the principal office of the corporation is established or located, a notice of the
election of directors shall be posted for a period of three weeks immediately preceding the election in at least three
public places, in the place where the principal office of the corporation is established or located. (Emphasis added)
The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980, [12] similarly provides:
23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their
successors are elected and qualified. (Emphasis added)
These provisions of the former and present corporation law leave no room for doubt as to their meaning: the
board of directors of corporations must be elected from among the stockholders or members. There may be
corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner
the unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. But
in the case of petitioner, there is no reason at all for its representative to be given a seat in the board. Nor does
petitioner claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was
only in 1975 that a proposed amendment to the by-laws sought to give it one.
Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or
challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall
a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is
beyond the power of the members of the association to waive its invalidity. For that matter the members of the
association may have formally adopted the provision in question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law.[13]
It is probable that, in allowing petitioners representative to sit on the board, the members of the association
were not aware that this was contrary to law. It should be noted that they did not actually implement the provision in
question except perhaps insofar as it increased the number of directors from 11 to 15, but certainly not the allowance
of petitioners representative as an unelected member of the board of directors. It is more accurate to say that the
members merely tolerated petitioners representative and tolerance cannot be considered ratification.
Nor can petitioner claim a vested right to sit in the board on the basis of practice. Practice, no matter how long
continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioners claim that its right
is coterminus with the existence of the association.[14]
Finally, petitioner questions the authority of the SEC to render an opinion on the validity of the provision in
question. It contends that jurisdiction over this case is exclusively vested in the HIGC.
But this case was not decided by the SEC but by the HIGC. The HIGC merely cited as authority for its ruling the
opinion of the SEC chairman. The HIGC could have cited any other authority for the view that under the law members
of the board of directors of a corporation must be elected and it would be none the worse for doing so.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.

[G.R. No. L-5883. November 28, 1953.]

DOMINGO PONCE and BUHAY L. PONCE, Petitioners, v. DEMETRIO B. ENCARNACION, Judge of the Court of
First Instance of Manila, Branch I, and POTENCIANO GAPOL, Respondents.
Marcelino Lontok, for Petitioners.
Zavalla, Bautista & Nuevas for Respondents.

SYLLABUS

1. CORPORATION LAW; STOCKHOLDERS MEETING TO ELECT A NEW BOARD OF DIRECTORS; CALL OF

MEETING BY A STOCKHOLDER ON COURTS AUTHORITY Under and pursuant to section 26 of Act. No. 1459,
on the showing of good cause therefor the court may authorize a stockholder to call a meeting and to preside thereat
until the majority stockholders representing a majority of the stockholders present and permitted to be voted shall have
chosen one among them to preside it. And this showing of good cause therefor exists when court is apprised of the
fact that the by-laws of the corporation require the calling of a general meeting of the stockholders to elect the board of
directors but the call for such meeting has not been done.
2. ID.; ID.; ID.; PETITION FOR SUCH PURPOSE NEED NOT BE SET FOR HEARING. The requirement that "on
the showing of good cause therefor," the court may grant to a stockholder the authority to call such meeting and to
preside thereat does not mean that the petition for such authority must be set for hearing with notice served upon the
board of directors. It may be likened to a writ of preliminary injunction or of attachment may be issued ex-parte upon
compliance with the requirements of the rules and upon the court being satisfied that the same should issue. Such
provisional reliefs have not been deemed and held as violative of the due process of law clause of the Constitution.
3. ID.; ID.; ID.; "QUO WARRANTO" TO QUESTION AN ILLEGALITY IN THE ELECTION OF A MEMBER OF THE
BOARD OF DIRECTORS. The alleged illegality of the election of one member of the board of directors at the
meeting called as authorized by the court being subsequent to the order complained of cannot affect the validity and
legality of the order. If it be true that one of the directors elected at such meeting was not qualified in accordance with
the provisions of the by-laws, the remedy of an aggrieved party would be quo warranto.
4. ID.; ID.; ID.; AGREEMENT TO DISSOLVE CORPORATION, IS NO HINDRANCE TO THE COURTS POWER TO
AUTHORIZE STOCKHOLDER TO CALL SUCH MEETING. An alleged previous agreement to dissolve the
corporation does not affect or render illegal the said order issued by the court.

DECISION

found after the accounting shall have been rendered to have been misspent, misapplied, misappropriated and
converted by the petitioner Domingo Ponce to his own use and benefit; that on 18 May 1951 the plaintiff in that case,
the respondent Potenciano Gapol in this case, filed a motion praying that the petitioners be removed as members of
the board of directors which was denied by the court; that on 3 January 1952 respondent Potenciano Gapol filed a
petition (civil No. 15445, Exhibit L) praying for an order directing him to call a meeting of the stockholders of the
corporation and to preside at such meeting in accordance with section 26 of the Corporation Law; that two-days later,
without notice to the petitioners and to the other members of the board of directors and in violation of the Rules of
Court which require that the adverse parties be notified of the hearing of the motion three days in advance, the
respondent court issued the order as prayed for (Exhibit M); that the petitioners learned only of this order of the court
on 27 February, when the Bank of America refused to recognize the new board of directors elected at such meeting
and returned the checks drawn upon it by the said board of directors; that the election of Juanito R. Tianzon as
member of the board of directors was illegal because to be elected to the board of directors of the corporation he must
be a member of the Legionarios del Trabajo, as required and provided for in article 7 of the by-laws of the corporation;
that on 5 March the petitioners filed a petition in the respondent court to have the order of 5 January set aside but on 5
April, the date set for the hearing of the petition, as the respondent judge was on leave the vacation judge directed its
transfer to the branch of the respondent judge; that without having set the motion for hearing, the respondent court
denied the motion of 5 March in its order of 7 May; that on 14 May the petitioners filed another motion inviting the
attention of the respondent court to the irregularity and illegality of its procedure and setting the motion for hearing on
21 May, but the court denied the motion by its order of 13 June.
The only question to determine in this case is whether under and pursuant to section 26 of Act No. 1459, known as the
Corporation Law, the respondent court may issue the order complained of. Said section provides:
Whenever, from any cause, there is no person authorized to call a meeting, or when the officer authorized to do so
refuses, fails, or neglects to call a meeting, any judge of a Court of First Instance, on the showing of good cause
therefor, may issue an order to any stockholder or member of a corporation, directing him to call a meeting of the
corporation by giving the proper notice required by this Act or the by-laws; and if there be no person legally authorized
to preside at such meeting, the judge of the Court of First Instance may direct the person calling the meeting to preside
at the same until a majority of the members or stockholders representing a majority of the stock present and permitted
by law to be voted have chosen one of their number to act as presiding officer for the purposes of the meeting.
On the showing of good cause therefor, the court may authorize a stockholder to call a meeting and to preside thereat
until the majority stockholders representing a majority of the stock present and permitted to be voted shall have
chosen one among them to preside it. And this showing of good cause therefor exists when the court is apprised of the
fact that the by-laws of the corporation require the calling of a general meeting of the stockholders to elect the board of
directors but the call for such meeting has not been done.
Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides:chanrob1es virtual 1aw library
The Board of Directors shall compose of five (5) members who shall be elected by the stockholders in a general
meeting called for that purpose which shall be held every even year during the month of January.
Article 20 of the by-laws in part provides:chanrob1es virtual 1aw library
. . . Regular general meetings are those which shall be called for every even year, . . .

PADILLA, J.:

This is a petition for a writ of certiorari to annul an order of the respondent court granting Potenciano Gapol authority,
pursuant to section 26, Act No. 1459, otherwise known as the Corporation Law, to call a meeting of the stockholders of
the Daguhoy Enterprises, Inc. and to preside at such meeting by giving proper notice to the stockholders, as required
by law or the by-laws of the corporation, until after the majority of the stockholders present and qualified to vote shall
have chosen one of them to act as presiding officer of the meeting; another order denying a motion of the petitioners to
have the previous order set aside; and a third order denying a motion to the same effect as the one previously filed.
The petitioners aver that the Daguhoy Enterprises, Inc., was duly registered as such on 24 June 1948; that on 16 April
1951 at a meeting duly called, the voluntary dissolution of the corporation and the appointment of Potenciano Gapol as
receiver were agreed upon and to that end a petition for voluntary dissolution was drafted which was sent to, and
signed by, the petitioner Domingo Ponce; that instead of filing the petition for voluntary dissolution of the corporation as
agreed upon, the respondent Potenciano Gapol, who is the largest stockholder, changed his mind and filed a
complaint in the Court of First Instance of Manila (civil No. 13753) to compel the petitioners to render an accounting of
the funds and assets of the corporation, to reimburse it, jointly and severally, in the sum of P4,500, the purchase price
of a parcel of land acquired by the corporation; P6,190 loaned to the wife of petitioner Domingo Ponce; and P8,000
spent by the latter in his trip to the United States, or a total sum of P18,690, plus interest, or such sum as may be

Article 22 of the by-laws provides:chanrob1es virtual 1aw library

The Chairman shall have the right to fix the date, the time and the place where the general meeting shall be held,
either special or general.
The requirement that "on the showing of good cause therefor," the court may grant to a stockholder the authority to call
such meeting and to preside thereat does not mean that the petition must be. set for hearing with notice served upon
the board of directors. The respondent court was satisfied that there was a showing of good cause for authorizing the
respondent Potenciano Gapol to call a meeting of the stockholders for the purpose of electing the board of directors as
required and provided for in the by-laws, because the chairman of the board of directors called upon to do so had
failed, neglected, or refused to perform his duty. It may be likened to a writ of preliminary injunction or of attachment
which may be issued ex-parte upon compliance with the requirements of the rules and upon the court being satisfied
that the same should issue. Such provisional reliefs have not been deemed and held as violative of the due process of
law clause of the Constitution.
In several states of the Union 1 the remedy which may be availed of or resorted to in a situation such as the one
brought about in this case is mandamus to compel the officer or incumbent board of directors to perform a duty
specifically enjoined by law or the by-laws, to wit: to call a meeting of the stockholders. Delaware is the state that has a
law similar to ours and there the chancellor of a chancery court may summarily issue or enter an order authorizing a

stockholder to call a meeting of the stockholders of the corporation and preside thereat. 2 It means that the chancellor
may issue such order without notice and hearing.
That the relief granted by the respondent court lies within its jurisdiction is not disputed. Having the authority to grant
the relief, the respondent court did not exceed its jurisdiction; nor did it abuse its discretion in granting it.
With persistency petitioners claim that they have been deprived of their right without due process of law. They had no
right to continue as directors of the corporation unless reelected by the stockholders in a meeting called for that
purpose every even year. They had no right to a hold-over brought about by the failure to perform the duty incumbent
upon one of them. If they felt they were sure to be reelected, why did they fail, neglect, or refuse to call the meeting to
elect the members of the board? Or, why did they not seek their reelection at the meeting called to elect the directors
pursuant to the order of the respondent court?
The alleged illegality of the election of one member of the board of directors at the meeting called by the respondent
Potenciano Gapol as authorized by the court being subsequent to the order complained of cannot affect the validity
and legality of the order. If it be true that one of the directors elected at the meeting called by the respondent
Potenciano Gapol, as authorized by the order of the court complained of, was not qualified in accordance with the
provisions of the by-laws, the remedy of an aggrieved party would be quo warranto. Also, the alleged previous
agreement to dissolve the corporation does not affect or render illegal the order issued by the respondent court.
The petition is denied, with costs against the petitioners.

G.R. No. L-26555

November 16, 1926

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J. LACSON, petitioners,

vs.
Honorable MARIANO DE LA ROSA, Auxiliary Judge of First Instance of Occidental Negros, AGUSTIN
CORUNA, MAURO LEDESMA and BINALBAGAN ESTATE, INC., respondents.
Roman J. Lacson, for petitioners.
The respondent judge in his own behalf.
The respondent corporation in its own behalf.
R. Nolan and Feria and La O for the respondents Coruna and Ledesma.

STREET, J.:
This is an original petition for the writ of certiorari whereby the petitioners, Baldomeo Roxas, Enrique Echaus, and
Roman J. Lacson, seek to procure the abrogation of an order of the respondent judge granting a preliminary injunction
in an action in the Court of First Instance of Occidental Negros, instituted by Agustin Coruna and Mauro Ledesma
against the petitioners and the Binalbagan Estate, Inc. The cause is now before us upon the issues made by the
answers filed by the respondents.
It appears that the Binalbagan Estate, Inc., is a corporation having its principal plant in Occidental Negros where it is
engaged in the manufacture of raw sugar from canes grown upon farms accessible to its central. In July, 1924, the
possessors of a majority of the shares of the Binalbagan Estate, Inc., formed a voting trust composed of three
members, namely, Salvador Laguna, Segunda Monteblanco, and Arthur F. Fisher, as trustee. By the document
constituting this voting trust the trustees were authorized to represent and vote the shares pertaining to their
constituents, and to this end the shareholders undertook to assign their shares to the trustees on the books of the
company. The total number of outstanding shares of the corporation is somewhat over 5,500, while the number of
shares controlled by the voting trust is less than 3,000.

On February 1, 1926, the general annual meeting of the shareholders of the Binalbagan Estate, Inc., took place, at
which Mr. J. P. Heilbronn appeared as representative of the voting trust, his authority being recognized by the holders
of all the other shares present at this meeting. Upon said occasion Heilbronn, by virtue of controlling the majority of the
shares, was able to nominate and elect a board of directors to his own liking, without opposition from the minority. After
the board of directors had been thus elected and had qualified, they chose a set of officers constituting of Jose M.
Yusay, president, Timoteo Unson, vice-president, Jose G. Montalvo, secretary-treasurer, and H. W. Corp and Agustin
Coruna, as members. Said officials immediately entered upon the discharged of their duties and have continued in
possession of their respective offices until the present time.
Since the creation of the voting trust there have been a number of vacancies caused by resignation or the absence of
members from the Philippine Islands, with the result that various substitutions have been made in the personnel of the
voting trust. At the present time the petitioners Roxas, Echaus, and Lacson presumably constitute its membership. We
say presumably, because in the present proceedings an issue of fact is made by the respondents upon the point
whether the three individuals named have been regularly substituted for their several predecessors. In the view we
take of the case it is not necessary to determine this issue; and we shall assume provisionally that the three petitioners
are the lawful components of the voting trust.
Although the present officers of the Binalbagan Estate, Inc., were elected by the representative of the voting trust, the
present trustee are apparently desirous of ousting said officers, without awaiting the termination of their official terms
at the expiration of one year from the date of their election. In other to effect this purpose the petitioners in their
character as members of the voting trust, on August 2, 1926, caused the secretary of the Binalbagan Estate, Inc., to
issue to the shareholders a notice calling for a special general meeting of shareholders to be held at 10 a. m., on
August 16, 1926, "for the election of the board of directors, for the amendment of the By-Laws, and for any other
business that can be dealt with in said meeting."
Within a few days after said notice was issued Agustin Corua, as member of the existing board, and Mauro Ledesma,
as a simple shareholder of the corporation, instituted a civil action (No. 3840) in the Court of First Instance of
Occidental Negros against the trustees and the Binalbagan Estate, Inc., for the purpose of enjoining the meeting
completed in the notice above-mentioned.
In response to a proper for a preliminary injunction, in connection with said action, the respondent judge issued the
restraining order, or preliminary injunction, which gave rise to the present petition for the writ of certiorari. In the
dispositive part of said order the Binalbagan Estate, Inc., its lawyers, agents, representatives, and all others who may
be assisting or corroborating with them, are restrained from holding the general shareholders' meeting called for the
date mentioned and from electing new directors for the company in substitution of the present incumbents, said
injunction to be effective until further order of the court. it is now asserted here by the petitioners that the making of this
order was beyond the legitimate powers of the respondent judge, and it is accordingly prayed that said order be set
aside.
We are of the opinion that this contention is untenable and that the respondent judge acted within his legitimate
powers in making the order against which relief is sought. In order to expose the true inwardness of the situation
before us it is necessary to take not of the fact that under the law the directors of a corporation can only be removed
from office by a vote of the stockholders representing at least two-thirds of the subscribed capital stock entitled to vote
(Act No. 1459, sec. 34); while vacancies in the board, when they exist, can be filled by mere majority vote, (Act No.
1459, sec. 25). Moreover, the law requires that when action is to be taken at a special meeting to remove the directors,
such purpose shall be indicated in the call (Act No. 1459, sec. 34).
Now, upon examining into the number of shares controlled by the voting trust, it will be seen that, while the trust
controls a majority of the stock, it does not have a clear two-thirds majority. It was therefore impolitic for the petitioners,
in forcing the call for the meeting of August 16, to come out frankly and say in the notice that one of the purpose of the
meeting was to removed the directors of the corporation from office. Instead, the call was limited to the election of the
board of directors, it being the evident intention of the voting trust to elect a new board as if the directorate had been
then vacant.

But the complaint in civil No. 3840 directly asserts that the members of the present directorate were regularly elected
at the general annual meeting held in February, 1926; and if that assertion be true, the proposal to elect, another
directorate, as per the call of August 2, if carried into effect, would result in the election of a rival set of directors, who
would probably need the assistance of judgment of court in an independent action of quo warrantoto get them installed
into office, even supposing that their title to the office could be maintained. That the trial judge had jurisdiction to
forestall that step and enjoin the contemplated election is a matter about which there cannot be the slightest doubt.
The law contemplates and intends that there will be one of directors at a time and that new directors shall be elected
only as vacancies occur in the directorate by death, resignation, removal, or otherwise. lawphil.net
It is instituted that there was some irregularity or another in the election of the present directorate. We see nothing
upon which this suggestion can be safely planted; And at any rate the present board of directors are de
factoincumbents of the office whose acts will be valid until they shall be lawfully removed from the office or cease from

the discharge of their functions. In this case it is not necessary for us to agitate ourselves over the question whether
the respondent judge properly exercised his judicial discretion in granting the order complained of. If suffices to know
that in making the order he was acting within the limits of his judicial powers.
It will be noted that the order in question enjoins the defendants from holding the meeting called for August 16; and
said order must not be understood as constituting any obstacle for the holding of the regular meeting at the time
appointed in the by-laws of the corporation.
For the reasons stated the petition will be denied, and it is so ordered, with costs.