Corpo 10th Batch

MANAGEMENT STRUCTURE

CORPORATE GOVERNANCE
Power of the Board or Trustees
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.
Acua, Lirazan & Associates for private respondents.
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 Rama-Borromeo, 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 vice-president 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
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

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:

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

WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of merit. With costs
against the petitioners.

Gokongwei vs. SEC Case Digest

Gokongwei vs. Securities and Exchange Commission
[GR L-45911, 11 April 1979]
Facts: [SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of 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. As a first cause of action,
Gokongwei alleged that on 18 September 1976, Andres Soriano, Jr., Jose M. Soriano, Enrique
Zobel, Antonio Roxas, Emeterio Buao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on 13 March 1961, when the outstanding capital stock of the 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 30,127,043, 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, Gokongwei 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, Gokongwei averred that the membership of the
Board of Directors had changed since the authority was given in 1961, there being 6 new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, Gokogwei had
all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that
as a stockholder, Gokongwei 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, Soriano, et.
al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as afore-

mentioned, hence the amended by-laws are null and void. 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 the corporation, which was avowed 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 by-laws 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 Soriano, et. al. be made to pay damages, in specified amounts, to Gokongwei. On 28
October 1976, in connection with the same case, Gokongwei filed with the Securities and Exchange
Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the
Secretary of the corporation refused to allow him to inspect its records despite request made by
Gokongwei for production of certain documents enumerated in the request, and that the 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.
The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and
their opposition to the petition, respectively. Meanwhile, on 10 December 1976, while the petition
was yet to be heard, the 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 10
February 1977. This prompted Gokongwei to ask the SEC 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, Soriano, et. al. admitted the invalidity of the amendments of 18
September 1976. The motion for summary judgment was opposed by Soriano, et. al. Pending action
on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a Temporary Restraining
Order", praying that pending the determination of Gokongwei's application for the issuance of a
preliminary injunction and or Gokongwei's motion for summary judgment, a temporary restraining
order be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as
scheduled. This motion was duly opposed by Soriano, et. al. On 10 February 1977, Cremation
issued an order denying the motion for issuance of temporary restraining order. After receipt of the
order of denial, Soriano, et. al. conducted the special stockholders' meeting wherein the
amendments to the by-laws were ratified. On 14 February 1977, Gokongwei filed a consolidated
motion for contempt and for nullification of the special stockholders' meeting. A motion for
reconsideration of the order denying Gokongwei's motion for summary judgment was filed by
Gokongwei before the SEC on 10 March 1977.
[SEC Case 1423] Gokongwei alleged that, having discovered that the 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 SEC, on
20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and Jose M. Soriano, as well as
the corporation declared guilty of such violation, and ordered to account for such investments and to
answer for damages. On 4 February 1977, motions to dismiss were filed by Soriano, et. al., to which
a consolidated motion to strike and to declare Soriano, et. al. in default and an opposition ad
abundantiorem cautelam were filed by Gokongwei. Despite the fact that said motions were filed as
early as 4 February 1977, the Commission acted thereon only on 25 April 1977, when it denied
Soriano, et. al.'s motions 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. Soriano, et. al. issued notices of the annual
stockholders' meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the

Board of Directors by the stockholders at the meeting on 20 March 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 28 April 1977, Gokongwei filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain Soriano, et. al. from taking up
Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for
hearing on 3 May 1977, the date set for the second hearing of the case on the merits. The SEC,
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, Gokongwei filed an urgent manifestation on 3 May 1977, but this
notwithstanding, no action has been taken up to the date of the filing of the instant petition.
Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for
issuance of writ of preliminary injunction, with the Supreme Court, alleging that there appears a
deliberate and concerted inability on the part of the SEC to act.
Issue:
1.
Whether the corporation has the power to provide for the (additional) qualifications of
its directors.
2.
Whether the disqualification of a competitor from being elected to the Board of
Directors is a reasonable exercise of corporate authority.
3.
Whether the SEC gravely abused its discretion in denying Gokongwei's request for
an examination of the records of San Miguel International, Inc., a fully owned subsidiary of
San Miguel Corporation.
4.
Whether the SEC gravely abused its discretion in allowing the stockholders of San
Miguel Corporation to ratify the investment of corporate funds in a foreign corporation.
Held:
1. It is recognized by all 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.'" 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." 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." 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 can not 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." 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
dissenting 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 Gokongwei
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.
2. 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." "The ordinary trust relationship of directors of a
corporation and stockholders 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." 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
through 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. The doctrine of "corporate opportunity" 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. 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. The offer and assurance of
Gokongwei 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 involved. Apart
from the impractical results that would ensue from such arrangement, it would be inconsistent with
Gokongwei'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.
3. 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 quasi-ownership. 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. 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. 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." 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. 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. herein, considering that the foreign subsidiary is wholly
owned by 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
owned subsidiary which are in the corporation's possession and control.
4. 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 two-thirds of the voting power is necessary. As stated by the 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. 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. 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 purported 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. 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 the corporation
submitted the assailed investment to the stockholders for ratification at the annual meeting of 10
May 1977 cannot be construed as an admission that the corporation had committed an ultra vires
act, considering the common practice of corporations of periodically submitting for the ratification of
their stockholders the acts of their directors, officers and managers.

Must act as a body!

Case Digest:
Ramirez vs Orientalist Co (1918)
Facts: Orientalist Company was engaged in the business of maintaining and conducting a theatre in
the city of Manila for the exhibition of cinematographic films. 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. The directors of the Orientalist Company 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. The defendant Ramon J. Fernandez, one of the directors of
the Orientalist Company and also its treasure, was chiefly active in this matter. Ramon J. Fernandez
had an informal conference with all the members of the companys 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 the exclusive agency of the Eclair films
and Milano films. In due time the films began to arrive in Manila, it appears that the Orientalist
Company was without funds to meet these obligations. Action was instituted by the plaintiff to
Orientalist Company, and Ramon J. Fernandez for sum of money.
Issue: WON the Orientalist Co. is liable for the acts of its treasurer, Fernandez?
Held: Yes. 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. 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
companys 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.

Islamic Directorate of the Philippines vs. CA Case Digest

Islamic Directorate of the Philippines vs. Court of Appeals
[GR 117897, 14 May 1997]
Facts: 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. Towards this end,
that is, in the same year, the Libyan government donated money to the IDP to purchase land 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, we covered by two titles: TCTs RT-26520 (176616) and RT-26521
(170567), both registered in the name of IDP. In 1971, the Board of Trustees of the IDP was
composed of Senator Mamintal Tamano, Congressman Ali Dimaporo, Congressman Salipada
Pendatun, Dean Cesar Adib Majul, Sultan Harun Al-Rashid Lucman, Delegate Ahmad Alonto,
Commissioner Datu Mama Sinsuat and Mayor Aminkadra Abubakar. 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 3 October 1986, the SEC, in a suit between
these two contending groups, came out with a Decision in SEC Case 2687 declaring the election of
both the Carpizo Group and the Abbas Group as IDP board members to be null and void. Neither
group, however, took the necessary steps prescribed by the SEC in its 3 October 1986 Decision,
and no valid election of the members of the Board of Trustees of IDP was ever called. Although the
Carpizo Group attempted to submit a set of by-laws, the SEC found that, aside from that 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 20
April 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 of the IDP, authorizing the sale
of the subject two parcels of land to the Iglesia ni Cristo (INC) for a consideration of P22,343,400.00,
which sale was evidenced by a Deed of Absolute Sale 12 dated 20 April 1989. On 30 May 1991, the
1971 IDP Board of Trustees headed by former Senator Mamintal Tamano, or the Tamano Group,
filed a petition before the SEC (SEC Case 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, 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 (Civil Case 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 owner's duplicate copy of TCTs RT-26521 and RT-26520
covering the two parcels of land, so that the sale in INC's 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. Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of
Quezon City, denied IDP's 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. Apprised of the pendency of SEC Case
4012 involving the controverted status of the IDP-Carpizo Group but without waiting for the outcome
of said case, Judge Reyes, on 12 September 1991, rendered Partial Judgment in Civil Case Q-906937 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. Thereupon
Judge Reyes in another Order, dated 2 March 1992, pertaining also to Civil Case Q-90-6937, treated
INC as the rightful owner of the real properties and disposed. On 6 April 1992, the Order was
amended by Judge Reyes directing Ligon "to deliver the owner's duplicate copies of TCT Nos. RT26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City for the purposes
stated in the Order of March 2, 1992." Mortgagee Ligon went to the Court of Appeals, thru a petition
for certiorari (CA-GR SP-27973), assailing the Orders of Judge Reyes. The appellate court

dismissed her petition on 28 October 1992. Undaunted, Ligon filed a petition for review before the
Supreme Court (GR 107751).
In the meantime, the SEC, on 5 July 1993, finally came out with a Decision in SEC Case 4012,
Declaring the by-laws submitted by the IDP-Caprizo group as unauthorized, and hence, null and
void; 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. null
and void; declaring the election of the Board of Directors 23 of the corporation from 1986 to 1991 as
null and void; and Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib
Buat, as members of the IDP null and void. The INC filed a Motion for Intervention, dated 7
September 1993, in SEC Case 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. INC
elevated SEC Case 4012 to the Court of Appeals by way of a special civil action for certiorari (CAGR SP 33295). On 28 October 1994, the appeallate court promulgated a Decision granting INC's
petition. The portion of the SEC Decision in SEC Case 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 IDPTamano Group brought the petition for review, dated 21 December 1994, to the Supreme Court.
While the petition was pending, however, the Supreme Court rendered judgment in GR 107751 on
the petition filed by Mrs. Leticia P. Ligon. The Decision, dated 1 June 1995, denied the Ligon petition
and affirmed the 28 October 1992 Decision of the Court of Appeals in CA-GR SP-27973 which
sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owner's duplicate
copies of TCTs RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon
City so that the Deed of Absolute Sale in INC's favor may be properly registered.
Issue: Whether the Tandang Sora property was legitimately sold to the INC.
Held: As far back as 3 October 1986, the SEC, in Case 2687, 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. Nothing
thus becomes more settled than that the IDP-Carpizo Group with whom 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, and where all these elements must be present
to constitute a valid contract. For, where even one is absent, the contract is void. Specifically,
consent is essential for the existence of a contract, and where it is wanting, the contract is nonexistent. Herein, 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 Carpizo Group-INC sale is further deemed null and void ab initio because of
the Carpizo Group's failure to comply with Section 40 of the Corporation Code pertaining to the
disposition of all or substantially all assets of the corporation. 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 no 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 15 official members of the IDP including the 8 members of the

Board of Trustees. All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board
and INC was intrinsically void ab initio.
Ramirez vs Orientalist (1918)
Facts: Orientalist Company was engaged in the business of maintaining and conducting a theatre in
the city of Manila for the exhibition of cinematographic films. 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. The directors of the Orientalist Company 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. The defendant Ramon J. Fernandez, one of the directors of
the Orientalist Company and also its treasure, was chiefly active in this matter. Ramon J. Fernandez
had an informal conference with all the members of the companys 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 the exclusive agency of the Eclair films
and Milano films. In due time the films began to arrive in Manila, it appears that the Orientalist
Company was without funds to meet these obligations. Action was instituted by the plaintiff to
Orientalist Company, and Ramon J. Fernandez for sum of money.
Issue: WON the Orientalist Co. is liable for the acts of its treasurer, Fernandez?
Held: Yes. 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. 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
companys 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.

Board of Liquidators v. Heirs of Kalaw (1967)

Doctrine:
It is possible for an express provision of the by-laws to be violated and the Board may, incertain
corporate actions, bind the corporation in spite of the fact that it is contrary to the by-law provision.

There are 2 ways by which corporate actions may come about through its Board of Directors:
The board may empower or authorize the act or contract; or
Ratification from the board
As long as there is approval by the board, express or implied, it is valid to bind the corporation.Facts:
National Coconut Corporation (NACOCO) was a chartered as a non-profit governmental
organization, in charge of all transactions involving coconut and its by-products. Maximo Kalaw sat
as its General Manager and board chairman. Because of 4 typhoons that hit the country in,
NACOCO was unable to fulfill its obligations under the numerous contracts it entered into with
several buyers. The aggrieved buyers threatened to bring damage suits but most of these were
settled, except for one who actually pushed through with the suit (Louis Dreyfus ltd.).Subsequently,
NACOCO was abolished by EO 372, giving the Board of Liquidators the function of settling and
closing its affairs. All the settlements sum up to P1,343,274.52. It is this sum that NACOCO, through
the Board of Liquidators, now seeks to recover from General Manager Kalaw and the other two
directors, charging the latter with negligence and bad faith/breach of trust for having approved
entered intothe aforementioned unprofitable contracts. It is alleged that while the by-laws required
prior approval of the board, Kalaw entered into the contracts alone as general manager and without
the boards prior approval. Sometime after, Kalaw died and the suit was brought against his estate.
Issues:
1. W/N Kalaw and the rest of the board were guilty negligence and bad faith and/or breach of trustfor
having entered into the unprofitable contracts2. [civpro related] w/n the action survives his death;
and if so, is his heirs liable
Held:
HELD:1. NO. Under the circumstances, Kalaws acts were valid corporate acts. Although the by-laws
required that a general manager first procure approval of the board members before entering into
contracts that would bind the corporation, the contrary practice by Kalawwas ratified by the Board.
Evidence shows that it was the practice of the corporation toallow its general manager to negotiate
contracts, in its copra trading for and in NACOCOs behalf,without prior board approval
. The Court ruled that if the by-laws were to be literally followed, the board should give its stamp of
prior approval on all corporate contracts. But [in this case]the board itself, by its acts and through
acquiescence, practically laid aside the by-law requirement of prior approval.

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 Vice-President, 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.
1w ph1.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. 171175).
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.

HARDEN v BENGUET CONSOLIDATED MINING COMPANY

G.R. No. L-37331, March 18, 1933
FACTS: Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad anonima
in conformity with the provisions of Spanish law. Balatoc Mining Co. was organized in
December 1925, as a corporation, in conformity with the provisions of the Corporation Law (Act
No. 1459). Both were organized for mining of gold and their respective properties are located
only a few miles apart in Benguet. Balatoc capital stock consists of one million shares of the par
value of one peso (P1) each.
When the Balatoc was first organized, its properties were largely undeveloped. To improve its
operations, the companys 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. A contract was entered into wherein Benguet will (1) 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; (2) erect an appropriate power plant. In return, Benguet will
receive from Balatoc shares of a par value of P600,000.
The total cost incurred by Benguet in developing Balatoc was P1,417,952.15. A certificate for
600,000 shares of the stock of the Balatoc Company was given to Benguet and the excess value
was paid to Benguet by Balatoc in cash. Due to the improvements made by Benguet, the value of
shares of Balatoc increased in the market (from P1 to more than P11) and dividends enriched its
stockholders. Harden, the owner of thousands of shares of Balatoc, questioned the transfer of
600,000 shares to Benguet with the success of the development.
ISSUE: W/N it is unlawful for Benguet Company to hold any interest in a mining corporation.
W/N, 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.
RULING:
1st Issue: 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.
2nd Issue: 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 any
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.
A 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.

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.
The provision in 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.

Right to Vote and Attend Meetings Sec 89 of Corpo Code

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:
The trial court erred:
1. In refusing appellants the right to introduce evidence as to the "cultivation agreement"
extensively referred to by the parties herein.
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.
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.
14. In dismissing plaintiffs' complaint herein.
15. In denying plaintiffs' motion for a new trial.
While defendant Martin appeals and assigns the following errors:
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.)
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."
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 liferaft 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.

ROLE OF THE SHAREHOLDERS

De la Rama v. Ma-ao Sugar Central Co., Inc.

Facts:
- This case was filed by four minority stockholders against the Ma-ao Sugar Central and four of
its directors.
- It is alleged that Ma-ao Sugar Central, through its President (Araneta), subscribed for Php
300K worth of capital stock of the Philippine Fiber Processing Co.
- At that at the time the first two payments were made, there was no board resolution
authorizing such investment. It was only a few months after that Araneta was authorized by
the Board of Directors.
- It was also alleged that 355,000 shares of stock of Philippine Fiber, owned by Luzon Industrial,
were transferred to Ma-ao without prior board resolution. Such transfer however was
subsequently approved.
- The lower court held that the investment of corporate funds was not a violation of the
Corporation Law. It considered the defendants correct in contending that since the company
was engaged in the manufacture of sugar bags it was legitimate for Ma-ao to either
manufacture sugar bags or invest in another corporation engaged in said manufacture.

However, the lower court ordered Ma-ao to refrain from making investments in any other
companied whose purpose is not connected with sugar central business.
ISSUES:
Whether the investment of the corporate funds by Ma-ao in Philippine Fiber constitutes
a violation of the Corporation Law.
-

Whether Ma-ao may make investments in any other company whose purpose is not
connected with the sugar central business.

HELD:
- NO. The SC agreed with the finding of the lower court that the investment in question does
not fall under the purview of the Section 17 of the Corporation Law.
- The SC quoted Prof. Guevara in explaining the said provision. 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.
- Also, when the investment is necessary to accomplish its purpose or purposes as stated in
the articles of incorporation, the approval of stockholders is not necessary.
- YES. The SC reversed the order of the lower court refraining Ma-ao from making investments
in other company whose purpose not connected with the sugar central business.
It reasoned that 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 lease 2/3 of the voting
power.
Doctrine:
- An investment of corporate funds in another corporation, 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.
- Further, when the purpose is as stated in its articles of incorporation, the approval of the stockholders is not
necessary.
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 lease 2/3 of the
voting power.

Quorom (Section 52 of Corpo code

Lanuza vs. CA
GR No. 131394 | March 28, 2005
Facts:

Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 414731

promulgated on 18 August 1997, affirming the SEC Order dated 20 June 1996, and the Resolution2
of the Court of Appeals dated 31 October 1997 which denied petitioners motion for reconsideration.

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

Onrubia et. al, 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.

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 two-thirds
(2/3) of the common shares issued and outstanding.

In 1982, Juan Acayan, one of the heirs of the incorporators filed a petition for the registration

of their property rights was filed before the SEC over 120 founders shares and 12 common shares
owned by their father

SEC Hearing Officer: heirs of Acayan were entitled to the claimed shares and called for a

special stockholders meeting to elect a new set of officers.

SEC en banc: affirmed the decision

As a result, the shares of Acayan were recorded in the stock and transfer book.

On May 6, 1992, a special stockholders meeting was held to elect a new set of directors

Onrubia et al filed a petition with SEC questioning the validity of said 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

Petition was dismissed

SC en banc: shares of the deceased incorporators should be duly represented by their

respective administrators or heirs concerned. Called 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

Lanuza, Acayan et al, who are PMMSI stockholders, filed a petition for review with the CA,

raising the following issues:

1.

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
(They contended that the basis is the stock and transfer book, not articles of incorporation in
computing the quorum)
2.

whether the Espejo decision (decision of SEC en banc ordering the recording of the shares of

Jose Acayan in the stock and transfer book) is applicable to the benefit of Onrubia et al

CA decision:

1.

For purposes of transacting business, the quorum should be based on the outstanding capital

stock as found in the articles of incorporation

2.

To require a separate judicial declaration to recognize the shares of the original incorporators

would entail unnecessary delay and expense. Besides. the incorporators have already proved their
stockholdings through the provisions of the articles of incorporation.

Appeal was made by Lanuza et al before the SC

Lanuza et al contention:

1992 stockholders meeting was valid and legal

Reliance on the 1952 articles of incorporation for determining the quorum negates the existence and
validity of the stock and transfer book Onrubia et al prepared

Onrubia et al must show and prove entitlement to the founders and common shares in a separate
and independent action/proceeding in order to avail of the benefits secured by the heirs of Acayan

Onrubia et als contention, based on the Memorandum: petition should be dismissed on the

ground of res judicata

Another appeal was made

Lanuza et als contention: 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

Onrubia et als manifestation and motion: moved for the dismissal of the case

Issue: 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?

Ruling:

Articles of Incorporation
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.

Contents are binding, not only on the corporation, but also on its shareholders.
Stock and transfer book
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

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
-

Not public record, and thus is not exclusive evidence of the matters and things which ordinarily

are or should be written therein

In this case, the articles of incorporation indicate that at the time of incorporation, the

incorporators were bona fide stockholders of 700 founders shares and 76 common shares. Hence,
at that time, the corporation had 776 issued and outstanding shares.

According to Sec. 52 of the Corp Code, a quorum shall consist of the stockholders

representing a majority of the outstanding capital stock. As such, quorum is based on the totality of
the shares which have been subscribed and issued, whether it be founders shares or common
shares

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.

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.

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. A corporations records are not
the only evidence of the ownership of stock in a corporation.

It is no less than the articles of incorporation that 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
WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against
petitioners

Applicable: Voting Trust Agreements (Corporate Law)

FACTS:

November 15, 1985: a complaint for a sum of money was filed by the International
Corporate Bank, Inc. (ICB) against the private respondents

March 17, 1986: private respondents, in turn, filed a 3rd-party complaint against
ALFA and ICB

September 17, 1987: petitioners filed a motion to dismiss the third party complaint
- denied

July 12, 1988: trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP

consequence of the petitioner's letter that ALFA management was transferred to

DBP

July 22, 1988: DBP claimed that it was not authorized to receive summons on behalf
of ALFA

August 4, 1988: trial court issued an order advising the private respondents to take
the appropriate steps to serve the summons to ALFA

September 12, 1988: 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 - denied

January 19, 1989: 2nd 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

attached a copy of the voting trust agreement between all the stockholders of ALFA
and the DBP whereby the management and control of ALFA became vested upon the
DBP

April 25, 1989: 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

October 17, 1989: trial court (NOT notified of the petition for certiorari) declared
final its decision on April 25, 1989

ISSUE: W/N the voting trust agreement is valid despite being 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

HELD:

voting trust

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 (Ballentine's Law Dictionary)

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 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.

Outstanding hostelry commensurate with the generally progressive character of the city. All other things
aside, it would be a manifest injustice to the large number of holders of bonds and preferred stocks, not
parties to the suit, to adjudge and hold illegal a TA upon the strength of which they had invested their
money in the enterprise. A consideration of this phase of the questions alone should sustain the TA here
Also, it appears that both the plaintiff and the intervener here became purchasers of the trust
certificates after the creation of the TA and thereby presumably had full knowledge of the limitation of
their rights which went with such holdings at the time of purchase.

NIDC v. Aquino
(1988)
1)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.
2)1965-Batjak's financial condition deteriorated to the point of bankruptcy. As of that year, Batjak's
indebtedness to some private banksand to the PNB amounted to P11.9M.
3)As security for the payment of its obligations and advances against shipments, Batjak mortgaged its 3
coco-processing oil mills in:
a)Davao City
b)Misamis Occidental and
c)Leyte to Manilabank, Republic Bank (RB), and PCIB, respectively.
4)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.
5) On 5 October 1965, a Financial Agreement was submitted by PNB to Batjak for acceptance. The
Financial Agreement reads:
"We are pleased to advise that our Board of Directors approved for you the following: 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 P10 million subscription by
an additional investment of P3,277,500 within a period of one to two years at NIDC's option;5) That a

voting trust agreement for five (5) years over 60% of the outstanding paid up and subscribed shares shall
be executed by your stockholders in favor of NIDC;
6)Batjak accepted the terms and conditions of the Financia lAgreement. Under said Agreement:
a) 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,
b) to liquidate Batjak's obligations to Republic Bank (RB), Manufacturers Bank and Trust Company
(MBTC) and Philippine Commercial & Industrial Bank (PCIB), and
c) the balance of the investment was to be applied to Batiak's past due account of P5 million with the
PNB.7)Oct 65-a Voting Trust Agreement was executed 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. (see VTA in the
case)
8) July 67-forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings
against the oil mills of Batjak located in Leyte and Misamis Occidental. The properties were sold to PNB
as the highest bidder.
1 year after-final Certificates of Sale were issued by the provincial sheriffs of Leyte and Misamis
Occidental for the (2) oil mills in favor of PNB, after Batjak failed to exercise its right to redeem the
foreclosed properties within the allowable 1 year period of redemption. Subsequently, PNB transferred
the ownership of the (2) oil mills to NIDC which, as afore stated, was a wholly-owned PNBsubsidiary.
9)As regards the oil mill located at 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.
10)5 years after execution of VTA (31 Aug 70)-Batjak(represented by majority stockholders) through
Atty. Amado Duran (Batjak legal counsel) wrote a letter to NIDC inquiring if the latter was still interested
in negotiating the renewal of theVTA.11)22 Sept 1970-Batjak legal counsel 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 VTA and, in view thereof, requested for the turn-over and transfer of all Batjak assets,
properties, management and operations.12)NIDC replied, confirming the fact that it had no intention
whatsoever to comply with the demands of Batjak.13)(ACTION1)24 Feb 1971-Batjak filed a special civil
action for mandamus with preliminary injunction against herein petitioners Batjak premises its right to
the possession of the three (3)oil 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 October1970, NEDC should turn over the
assets of the three (3) oil mills to Batjak.14)(ACTION 2)RECEIVERSHIP

HELD: 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 Batiak does not impugn the validity of the foreclosure Proceedings. Neither Batjak nor
its stockholders have instituted any legal proceedings to annul the mortgage foreclosure sales
aforementioned. Under the provision of the VTA, 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
toBatjak'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. The relevant provisions of the
Voting Trust Agreement, particularly paragraph 4 & No. 1 thereof, are hereby reproduced:"NOW
THEREFORE, the undersigned stockholders, inconsideration 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:"I. 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 nameof 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 theelection
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 inBatjak. This is
confirmed by paragraph No. 9 of the same 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.