Pirovano vs. De la Rama Steamship Co.

Facts:

Enrico Pirovano became the president of the De la Rama seamship where it grew and progressed and became a multi-million corporation by the time he was executed by the Jupanese during the occupation He was married to Estefania de la Rama (one of the stockholders) and to them 4 children were born who are the plaintiffs in this case The stocks were practically owned and controlled by Don Esteban de la Rama, which he distributed among his 5 daughters including Estefania. The company had an outstanding bonded indebtedness to the National Development Company (NDC) and had all the assets of the company, plus other properties of its sister corporations as security. The outstanding bonded indebtedness was converted into non-voting preferred shares of stock of the De la Rama Company under the express condition that they would bear a fixed cumulative dividend of 6% per annum and would be redeemable within 15 yrs. This increased the representation of NDC from 2 to 4 of the 9 members of said Board of Directors In July 1946, the Board of Directors granted a resolution in favor of the minor heirs of Enrico Pirovano. o Sum of P400,000 be set aside for the minor children (from the life insurance policy that the company would receive) o Said sum of money to be convertible into 4,000 shares of stock of the Company, at par, or 1000 shares for each child. The resolution was submitted to the stockholders at a meeting properly convened and on the same day, the same was approved. Lourdes de la Rama later on found out that because the calue then of the shares of stock was actually 3.6 times their par value, the donation putporting to be only P400,000, would actually amount to a total of P1,440,000. In lieu of the amount, Mrs. Pirovano, as the guardian of the children, would have a voting power twice as much as that of her sisters. This caused Lourdes to ask for the cancellation and waiver of her preemptive rights. Don Esteban asked the corporate secretary to nullify the said resolution The board adopted a resolution changing the form of the donation of 4,000 shares of stock as originally planned into a renunciation in favor of the children of all the companys right, title, and interest as beneficiary in and to the proceeds of the life insurance policies subject to the the express condition that said proceeds shuld be retained as a loan drawing interest at 5% per annum and shall be payable after the company shall have first settled in full the balance of its present remaining bonded indebtedness to NDC Estefania, acting as guardians of her children, accepted the donation in their behalf Said donation was ratified in 1949 when the board approved of the proposition of Estefania to buy the house of New York amounting to $75,000, which would be paid from the funds held in trust belonging to the minor children. In 1950, Osmea, president of the corporation, addressed an inquiry to SEC asking for opinion regarding the validity of the donation of the proceeds of the insurance policies to the Pirovino children. SEC rendered it void because the corporation could not dispose of its assets by gift and therefore the corporation acted beyond the scope if its corporate powers. Board revoked the donation.

Issue: Whether or not the said resolution was an ultra vires act? Held: No. The grant or donation in question is remunerative in nature and was given in consideration of the services rendered by the heirs father to the corporation. The donation has already been perfected such that the corporation could no loner rescind it. It was embodied in a Board Resolution. Representatives of the corporation and even its creditors as the NDC have given their concurrence. The resolution was actually carried out when the corporation and Estefania entered into an agreement that the proceeds will be entered as a loan. Estefania accepted the donation and such was recorded by the corporation. The Board of Directors approved Estefanias purchase of the house in New York. Company stockholders formally ratified the donation. The donation was a corporate act carried out by the corporation not only with the sanction of the Board of Directors but also of its stockholders. The donation has reached a stage of perfection which is valid and binding upon the corporation and cannot be rescinded unless there exists legal grounds for doing so. The SEC opinion nor the subsequent Board Resolution are not sufficient reasons to nullify the donation.

Estefania seeks to enforce the resolution adapted by the Board and Stockholders but the company contends that the execution of the resolution was an ultra vires act and if valid, the obligation to pay is not yet due and demandable Lower court decided in favor of the minor children

The donation is also not an ultra vires act. The corporation was given broad and unlimited powers to carry out the purpose for which it was organized which includes the power to (1) invest and deal with corporate money not immediately required in such manner as from time to time may be determined (2) aid in any other manner to any person, association or corporation of which any obligation is held by this corporation. The donation undoubtedly comes within the scope of this broad power. An ultra vires act is (1) an act contrary to law, morals, or public order or contravene some rules of public policy or duty. It cannot acquire validity by performance, ratification, estoppel. It is essentially void (2) those within the scope of the Articles of Incorporation and not always illegal. It is merely voidable and may become binding and enforceable when ratified by stockholders. Since it is not contended that the donation is illegal or contrary to any of the expressed provisions of the Articles of Incorporation nor prejudicial to the creditors of the corporation, said donation even if ultra vires is not void and if voidable, its infirmity has been cured by ratification and subsequent acts of the corporation. The corporation is now estopped or prevented from contesting the validity of the donation. To allow the corporation to undo what it has done would be most unfair and contravene the well-settled doctrine that the defense of ultra vires cannot be se up or availed of in any completed transaction. NOTE: The ratification of the stockholders of the donation made is the key in this case. Because such ratification is meant to protect the contractual relationship or interest of stockholders