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142. ANGELES vs SANTOS HIGINIO ANGELES, JOSE E.

LARA and AGUEDO BERNABE, as stockholders for an in behalf and for the benefit of the corporation, Paraaque Rice Mill, Inc. and the other stockholders who may desire to join, plaintiffs-appellees, vs. TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO PASCUAL, and BASILISA RODRIGUEZ, defendant-appellants. August 31, 1937 LAUREL, J. Elevated to the SC by way of bill of exceptions [whatever the hell that is] SHORT VERSION: The minority group of the board of directors in Paraaque Rice Mill, Inc. sued the majority group alleging mismanagement, unauthorized use of funds, and corporate sabotage. They wanted the corporation be put under receivership and the majority members held liable, then kicked out of the board. The lower court ruled for the minority group and gave them everything they wanted. Majority members question the courts power to terminate them from their positions in the board9among other things). [SEE BOLD PART IN THE END OF DIGEST FOR SYLLABUS RELEVANT PART] FACTS: The Parties are all stockholders and member of the board of directors of the "Paraaque Rice Mill, Inc., a corp organized or the purpose of operating a rice mil. In 1962, Angeles et al (minority) filed a complaint as stockholders, for and in behalf of the corporation, against Santos et al (majority) in CFI Rizal. The complaint alleged that: a special meeting was held in Feb. 1932 where the Board formed an investigation committee (headed by the minority) to look into the losses of the corporation in the year 1931, however, Santos et al denied access to the properties, books and record of the corporation which were in their possession According to the by-laws, said documents should be under the exclusive control and possession of the secretarytreasurer, not Santos Santos had appropriated to his own benefit properties, funds, and income of the corporation in the sum of P10,000 he refused to sign over fully paid-up shares of stock to Higinio Angeles so that he can control the affairs of the corp that he refused to hold monthly meetings of the board, even after due request, and Santos et al was disposing of the properties and records of the corporation without authority from the board of directors or the stockholders of the corporation and suspended Jose Lara from the office of general manager to prevent any interferrence with or examination of his arbitrary acts. The complaint prayed that: Jose Lara be reinstated and appointed as receiver of the properties of the corp Santos be ordered to make a detailed accounting of the properties He be required to pay to the corporation the amount of P10,000 and other amounts which may be found due to the said corporation as damages be ordered to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles, and the members of the board of directors of the Paraaque Rice Mill, Inc., be removed and an exrtraodinary meeting of the stockholders called for the purpose of electing a new board of directors. Santos et al filed an answer with general and specific denials and allege that Santos did not sign over the paid-up shares due to Angeles for 600 shares valued at P15,000, because the board of directors decided to give Higinio Angeles only 320 shares of stock worth P8,000. It also puts up a counter-claim for malicious procurement of a receivership along with damages. They also included a cross-complaint against the minority members based on the alleged failure of the Higinio Angeles to render a report of his administration of the corporation from February to June 1928, during which time the corporation is alleged to have accrued earnings. Angeles et al renewed their petition for the appointment of a receiver pendent lite alleging pretty much the same stuff they did in the complaint and that without the knowledge and consent of the stockholders and of the board of directors, Santos installed a small rice mill for converting rice husk into "tiqui-tiqui", the income of which was never turned over or reported to the treasurer of the corporation. Santos et al opposed saying that the court had no jurisdiction over the Paraaque Rice Mill, Inc., because it had not been include as party defendant and, therefore the court could not properly appoint a receiver of the corporation pendente lite.

Preliminarily, Melchor de Lara was appointed by the court a receiver, then upon opposition by Santos et al, Benigno Agco took his place. After trial, the court appointed Emilio Figueroa as receiver of the corporation. Santos et al filed and MR which was denied. After trial, the court ruled in favor of Angeles et al, ordering Santos to render an accounting and pay whatever may be owing to the corporation, sign over to Angeles the shares in the amount of 15,000, and that a new set of board of directors be elected in a general meeting. ISSUE: WON Paraaque Rice Mill, Inc. was a neccessary party to the case and trial court had jurisdiction to appoint a receiver. (YES) WON Santos was liable to render an accounting and to pay whatever may be owing to the corporation (YES, but later) WON it was proper for the court to order the removal of Santos et al from their offices as members of the board of directors of the corporation. (NO) RATIO: There is ample evidence showing that Santos et al are guilty of breach of trust as directors of the corporation. The board of directors of a corporation is a creation of the stockholders and controls and directs the affairs of the corporation by allegation of the stockholders. But the board of directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good faith, care and diligence in the administration of the affairs of the corporation and should protect not only the interest of the majority but also those of the minority of the stock. Where a majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the board of directors. 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. The contention of Santos et al that the Paraaque Rice Mill, Inc., should have been brought in as necessary party and the action maintained in its name and in its behalf directly states the general rule, but not the exception recognize by this court in the case of Everrett vs. Asia Banking Corporation: like most rules, the rule in question has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation Teal & Company is under the complete control of the principal defendants in the case, and, in these circumstances it is obvious that a demand upon the board of directors to institute action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. The lower court in its decision not only orders Santos to account for the properties and funds of the corporation, but it also and at the same time adjudges him to pay an undermine amount which is made to depend upon the result of such accounting. This accounting should better be filed with the new board of directors whose election has been ordered by the lower court. The decision of the lower court in this respect is therefore modified so that the defendant Santos shall render a complete accounting of all the corporate properties and funds that may have come to his possession during the period mentioned in the jugment of the lower court to the new board of director to be elected by the stockholders. The Corporation Law, in section 29 to 34, provide for the election and removal of the directors of a corporation. It does not confer expressly upon the court the power to remove a director of a corporation. In some jurisdictions, statutes expressly provide a more or less summary method for the confirmation of the election and for a motion of the directors of a corporation. There are abundant authorities, however, which hold that if the court has acquired jurisdiction to appoint a receiver because of the mismanagement of directors these may thereafter be remove and others appointed in their place by the court in the exercise of its equity jurisdiction. In the present case, however, the properties and assets of the corporation being amply protected by the appointment of a receiver and view of the statutory provisions above referred to, we are of the opinion that the removal of the directors is, under the circumstances, unnecessary and unwarranted. -Mike