FILIPINAS PORT SERVICES, INC. V.
GO ○ FilPort’s Board of Directors has the power to create positions not
DOCTRINE: ​If the cause of the losses is merely error in judgment, not amounting to
bad faith or negligence, directors and/or officers are not liable.
FACTS:
● Petitioner Eliodoro C. Cruz, FilPort’s president until he lost his bid for
re-election as its president during the general stockholders’ meeting,
wrote a letter to the corporation’s Board of Directors questioning the
board’s creation of different positions in the company with a monthly
remuneration of P13, 050 each, and the election of certain members of the
board.
ISSUES:
● Since his request for the board to take necessary action remained
unheeded, he was constrained to file a case with RTC in representation of
Filport purportedly and its stockholders calling it a derivative suit against
the respondents who were the incumbent members of FilPort’s Board of
Directors for alleged acts of mismanagement resulting to corporate
damages and/or business losses.
HELD 1: The Board acted within its powers.
● RESPONDENT BOARD OF DIRECTORS’ ARGUMENTS:
○ The creation of the executive committee and the grant of
emoluments are allowed under the by-laws of the corporation;
○ The said increases in the salaries were within the corporation’s
financial capacity;
○ The said positions being criticized by Cruz were already in
existence during the tenure of Cruz as president of the
corporation, and were merely recreated by the Board.
○ Cruz was not the proper party to file the case, but FilPort.
○ Cruz allegedly filed the derivative suit in bad faith and purely for
harassment purposes on account of his non-reelection to the
board in the 1991 general stockholders’ meeting.
● RTC​, despite finding that:
CLEMENTE 
provided for in the by-laws of the corporation since the board is
governing body; and
○ The increases in the salaries of the officers
The trial court nonetheless rendered judgment against the respondents
Board of Directors and ordered for the officers to refund the amounts they
received considering that FilPort is not a big corporation requiring multiple
executive positions.
● CA: ​reversed and ruled in favor of respondents Board of Directors.
● FilPort through Cruz now comes to Court.
1. W/N ​the Respondent Board of Directors acted within its powers in
creating the executive committee and the positions each with the
remunerations and in increasing the salaries of the said officers. [YES]
2. W/N ​Cruz is a proper party to file a case on behalf of FilPort. [YES]
A. On the Newly Created Positions
1. The Board of Directors 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. The authority of the board of directors is
restricted to the managements of the regular business affairs of the
corporation, unless more extensive power is expressly conferred.
2. The ​raison d’etre ​behind the conferment of corporate powers on the
boards is that it 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.
3. In applying these concepts to the case at bar, the board’s creation of the
positions was in accordance with the regular business operation of FilPort
 as it is authorized to do so by the corporation’s by-laws and in accordance since the ones to be sued are the directors/officers of the corporation
with Sec. 25 of the Corporation Code through the line: “xxx and ​such other itself, a stockholder, like Cruz, may validly institute a “derivative suit” to
officers as may be provided for in the by-laws​” vindicate the corporate injury.

4. Moreover, Cruz even admitted that 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 different other
positions being assailed by him.

B. On the Increased emoluments of the Board Members

1. Cruz’s testimony on this claim was not supported by evidence showing that
the acts of mismanagement allegedly done by the officers resulted to
financial losses.
2. But assuming ​arguendo ​that there was mismanagement resulting to
corporate damages and/or business losses, still the respondent Board of
Directors may not be held liable in the absence of a showing of bad faith in
doing the acts complained of.

3. If the cause of the losses is merely error in business judgment, not

amounting to bad faith or negligence, directors and/or officers are not
liable. For them to be held accountable, the mismanagement and the
resulting losses on account thereof are not the only matters to be proven;
it is likewise necessary to show that the directors and/or officers acted in
bad faith and with malice in doing the assailed acts.

4. Bad faith does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or interest or ill-will
partaking of the nature of fraud.

5. Besides, the determination of the necessity for additional offices and

positions in a corporation is a management prerogative which courts are
not wont to review in the absence of any proof that such prerogative was
exercised in bad faith.

HELD 2: Cruz is a proper party to file the case.

1. As a general rule, the entity that was directly affected must be the proper
party to file the case in court which, in the case at bar, is FilPort. However,
CLEMENTE