24. Majority Stockholders of Ruby v.

Lim
G.R. No. 165887: June 7, 2011
FACTS:
Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass
manufacturing. Reeling from severe liquidity problems beginning in 1980, RUBY filed on
December 13, 1983a petition for suspension of payments with the Securities and
Exchange Commission (SEC) docketed as SEC Case No. 2556.On December 20,
1983, the SEC issued an order declaring RUBY under suspension of payments and
enjoining the disposition of its properties pending hearing of the petition, except insofar
as necessary in its ordinary operations, and making payments outside of the necessary
or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel created the management committee
(MANCOM) for RUBY, composed of representatives from Allied Leasing and Finance
Corporation (ALFC), Philippine Bank of Communications (PBCOM), China Banking
Corporation (China Bank), Pilipinas Shell Petroleum Corporation (Pilipinas Shell), and
RUBY represented by Mr. Yu Kim Giang. The MANCOM was tasked to perform the
following functions: (1) undertake the management of RUBY; (2) take custody and
control over all existing assets and liabilities of RUBY; (3) evaluate RUBYs existing
assets and liabilities, earnings and operations; (4) determine the best way to salvage
and protect the interest of its investors and creditors; and (5) study, review and evaluate
the proposed rehabilitation plan for RUBY.
Subsequently, two (2) rehabilitation plans were submitted to the SEC: the
BENHAR/RUBY Rehabilitation Plan of the majority stockholders led by Yu Kim Giang,
and the Alternative Plan of the minority stockholders represented by Miguel Lim (Lim).
Both plans were endorsed by the SEC to the MANCOM for evaluation.
On April 26, 1991, over ninety percent (90%) of RUBYs creditors objected to the
Revised BENHAR/RUBY Plan and the creation of a new management committee.
Instead, they endorsed the minority stockholders Alternative Plan. At the hearing of the
petition for the creation of a new management committee, three (3) members of the
original management committee (Lim, ALFC and Pilipinas Shell) opposed the Revised
BENHAR/RUBY Plan on grounds that:(1) it would legitimize the entry of BENHAR, a
total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY;(2) it
would put RUBYs assets beyond the reach of the unsecured creditors and the minority
stockholders; and (3) it was not approved by RUBYs stockholders in a meeting called
for the purpose.
Notwithstanding the objections of 90% of RUBYs creditors and three members of the
MANCOM, the SEC Hearing Panel approved on September 18, 1991the Revised
BENHAR/RUBY Plan and dissolved the existing management committee. It also
created a new management committee and appointed BENHAR as one of its members.

In addition to the powers originally conferred to the management committee under

Presidential Decree (P.D.) No. 902-A, the new management committee was tasked to
oversee the implementation by the Board of Directors of the revised rehabilitation plan
for RUBY.
ISSUE: Whether the minoritys pre-emptive rights were violated
HELD: Yes.
COMMERCIAL LAW: Corporation Law, Pre-emptive right
Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a
stockholder of a stock corporation to subscribe to all issues or disposition of shares of
any class, in proportion to their respective shareholdings. The right may be restricted or
denied under the articles of incorporation, and subject to certain exceptions and
limitations. The stockholder must be given a reasonable time within which to exercise
their pre-emptive rights. Upon the expiration of said period, any stockholder who has not
exercised such right will be deemed to have waived it.
The validity of issuance of additional shares may be questioned if done in breach of
trust by the controlling stockholders. Thus, even if the pre-emptive right does not exist,
either because the issue comes within the exceptions in Section 39 or because it is
denied or limited in the articles of incorporation, an issue of shares may still be
objectionable if the directors acted in breach of trust and their primary purpose is to
perpetuate or shift control of the corporation, or to "freeze out" the minority interest. In
this case, the following relevant observations should have signalled greater
circumspection on the part of the SEC -- upon the third and last remand to it pursuant to
our January 20, 1998 decision -- to demand transparency and accountability from the
majority stockholders, in view of the illegal assignments and objectionable features of
the Revised BENHAR/RUBY Plan, as found by the CA and as affirmed by this Court:
There can be no gainsaying the well-established rule in corporate practice and
procedure that the will of the majority shall govern in all matters within the limits of the
act of incorporation and lawfully enacted by-laws not proscribed by law. It is, however,
equally true that other stockholders are afforded the right to intervene especially during
critical periods in the life of a corporation like reorganization, or in this case, suspension
of payments, more so, when the majority seek to impose their will and through
fraudulent means, attempt to siphon off Rubys valuable assets to the great prejudice of
Ruby itself, as well as the minority stockholders and the unsecured creditors.
Certainly, the minority stockholders and the unsecured creditors are given some
measure of protection by the law from the abuses and impositions of the majority, more
so in this case, considering the give-away signs of private respondents perfidy strewn
all over the factual landscape. Indeed, equity cannot deprive the minority of a remedy
against the abuses of the majority, and the present action has been instituted precisely
for the purpose of protecting the true and legitimate interests of Ruby against the

Majority Stockholders. On this score, the Supreme Court, has ruled that:
"Generally speaking, the voice of the majority of the stockholders is the law of the
corporation, but there are exceptions to this rule. There must necessarily be a limit upon
the power of the majority. Without such a limit the will of the majority will be absolute
and irresistible and might easily degenerate into absolute tyrannys x x" (Additional
emphasis supplied.)
Lamentably, the SEC refused to heed the plea of the minority stockholders and
MANCOM for the SEC to order RUBY to commence liquidation proceedings, which is
allowed under Sec. 4-9 of the Rules on Corporate Recovery. Under the circumstances,
liquidation was the only hope of the minority stockholders for effecting an orderly and
equitable settlement of RUBYs obligations, and compelling the majority stockholders to
account for all funds, properties and documents in their possession, and make full
disclosure on the nullified credit assignments. Oblivious to these pending incidents so
crucial to the protection of the interest of the majority of creditors and minority
shareholders, the SEC simply stated that in the interim, RUBYs corporate term was
validly extended, as if such extension would provide the solution to RUBYs myriad
problems.
Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a
stockholders meeting called for the purpose. The actual percentage of shareholdings in
RUBY as of September 3, 1996 -- when the majority stockholders allegedly ratified the
board resolution approving the extension of RUBY's corporate life to another 25 years
was seriously disputed by the minority stockholders, and we find the evidence of
compliance with the notice and quorum requirements submitted by the majority
stockholders insufficient and doubtful. Consequently, the SEC had no basis for its ruling
denying the motion of the minority stockholders to declare as without force and effect
the extension of RUBY's corporate existence.
DENIED.

25. FILIPINAS PORT SERVICES, INC vs. GO

G.R. No. 161886

March 16, 2007

FACTS: FilPort is a domestic corporation engaged in stevedoring services with principal

office in Davao City. On 4 September 1992, petitioner Eliodoro Cruz, Filports former
president, wrote a letter to the corporations Board of Directors questioning the boards
creation of the positions of Assistant Vice-Presidents for Corporate Planning,
Operations, Finance and Administration, and the creation of the additional positions of
Special Assistants to the President and the Board Chairman with a monthly
remuneration of P13,050.00 each, and the election thereto of certain members of the
board. In his aforesaid letter, Cruz requested the board to take necessary action/s to
recover from those elected the salaries they have received. However, it was not shown
on the records that action was taken. On 14 June 1993, Cruz, purportedly in
representation of Filport and its stockholders, among which is herein co-petitioner
Mindanao Terminal and Brokerage Services, Inc., filed with the SEC a petition against
the herein respondents who were then the incumbent members of Filports Board of
Directors, for alleged acts of mismanagement detrimental to the interest of the
corporation and its shareholders at large. With the enactment of R.A. No. 8799, the
case was first turned over to the RTC of Manila, Branch 14, sitting as a corporate court.
Thereafter, on respondents motion, it was eventually transferred to the RTC of Davao
City. On 10 December 2001, RTC-Davao City rendered its decision in the case. Even as
it found that (1) Filports Board of Directors has the power to create positions not
provided for in the by-laws of the corporation since the board is the governing body; and
(2) the increases in the salaries of the board chairman, vice-president, treasurer and
assistant general manager are reasonable, the trial court nonetheless rendered
judgment against the respondents by ordering the directors holding the positions of
Assistant Vice President for Corporate Planning, Special Assistant to the President and
Special Assistant to the Board Chairman to refund to the corporation the salaries they
have received as such officers "considering that Filipinas Port Services is not a big
corporation requiring multiple executive positions" and that said positions "were just
created for accommodation." On appeal, the CA granted the respondents appeal,
reversed and set aside the appealed decision of the trial court and accordingly
dismissed the so-called derivative suit filed by Cruz, et al. Hence this petition for review
on certiorari.
ISSUE: Whether or not Filports Board of Directors has the power to create positions not
provided for in the by-laws of the corporation.

RULING: The governing body of a corporation is its board of directors. Section 23 of the
Corporation Code explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be controlled and held by a
board of directors. Thus, with the exception only of some powers expressly granted by
law to stockholders (or members, in case of non-stock corporations), the board of
directors (or trustees, in case of non-stock corporations) has the sole authority to
determine policies, enter into contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and
relevant provisions of law. Verily, the authority of the board of directors is restricted to
the management of the regular business affairs of the corporation, unless more
extensive power is expressly conferred.
The raison detre behind the conferment of corporate powers on the board of directors is
not lost on the Court. Indeed, the concentration in the board of the powers of control of
corporate business and of appointment of corporate officers and managers is necessary
for efficiency in any large organization. Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to conduct its business directly. And so the
plan of corporate organization is for the stockholders to choose the directors who shall
control and supervise the conduct of corporate business.
In the present case, the boards creation of the positions of Assistant Vice Presidents for
Corporate Planning, Operations, Finance and Administration, and those of the Special
Assistants to the President and the Board Chairman, was in accordance with the regular
business operations of Filport as it is authorized to do so by the corporations by-laws,
pursuant to the Corporation Code.
Amended Bylaws of Filport provides the following:
Officers of the corporation, as provided for by the by-laws, shall be elected by the
board of directors at their first meeting after the election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board, President, a
Vice-President, a Secretary, a Treasurer, a General Manager and such other
officers as the Board of Directors may from time to time provide, and these
officers shall be elected to hold office until their successors are elected and
qualified. (Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by its board of
directors of an executive committee. Under Section 35 of the Corporation Code, the
creation of an executive committee must be provided for in the bylaws of the

corporation. Notwithstanding the silence of Filports bylaws on the matter, the creation of
the executive committee by the board of directors cannot be ruled as illegal or unlawful.
One reason is the absence of a showing as to the true nature and functions of said
executive committee considering that the "executive committee," referred to in Section
35 of the Corporation Code which is as powerful as the board of directors and in effect
acting for the board itself, should be distinguished from other committees which are
within the competency of the board to create at anytime and whose actions require
ratification and confirmation by the board. Another reason is that, ratiocinated by both
the 2 courts below, the Board of Directors has the power to create positions not
provided for in Filports bylaws since the board is the corporations governing body,
clearly upholding the power of its board to exercise its prerogatives in managing the
business affairs of the corporation.
As well, it may not be amiss to point out that, as testified to and admitted by petitioner
Cruz himself, it was during his incumbency as Filport president that the executive
committee in question was created, and that he was even the one who moved for the
creation of the positions of the AVPs for Operations, Finance and Administration. By his
acquiescence and/or ratification of the creation of the aforesaid offices, Cruz is virtually
precluded from suing to declare such acts of the board as invalid or illegal. And it makes
no difference that he sues in behalf of himself and of the other stockholders. Indeed, as
his voice was not heard in protest when he was still Filports president, raising a hue
and cry only now leads to the inevitable conclusion that he did so out of spite and
resentment for his non-reelection as president of the corporation.