CORPORATION LAW – CASE RULINGS (Week 5)
SEC
Jann Claudine M. Amago 3 – A
1. Nielson Co. vs. Lepanto Consolidated Mining
Nielson and Lepanto entered into a contract for a management fee
of P2,500.00 a month and a 10% participation in the net profits
resulting from the operation of the mining properties, for a period of
5 years then world war 2 broke out.
Issue: Whether or not the contract was suspended; Whether or not
Nielson is entitled to a share of dividends
Ruling:
2. Islamic Directorate vs. CA
IDP was organized and incorporated the primary purpose of which
was to establish an Islamic Center in Quezon City for the construction
of a Mosque other religious infrastructures so as to facilitate the
effective practice of Islamic faith in the area. When the president
declared martial law, the BODs left the country to escape. 2
contending groups then claimed to be the legitimate IDP. The Caprizo
Group sold corporate property to INC.
Issue: Whether or not the sale is valid and binding
Ruling: NO, IDP IS NOT BOUND.
A. Sale
 Where a corporate body never gave its consent, thru a
legitimate governing board, to a deed of absolute sale,
the subject sale is void and produces no effect
whatsoever.
 In this case, all act of the Caprizo board in the name of IDP
have to be struck down for having been done without the
consent of IDP thru its BODs. This is a case not only of
vitiated consent but want of consent. Thus, the sale
produces no effects whatsoever.
B. Sale of the only corporate property
 For the sale of the only corporate property to be valid,
the majority vote of the legitimate board, concurred in
by the vote of at least 2/3 of the bona fide members of
the corporation should be obtained.
 In this case, the Tandang Sora property appears to be the
only property of IDP. Hence, its sale to a third party is a
sale of all corporate property which falls squarely within
the contemplation of the foregoing provision. This
requirement was not complied by the Caprizo board since
its BODs are not legitimate members of IDP.
3. Dee vs.
Natelco increased its shares twice. After which, the articles of
incorporation was amended prohibiting the issuance of shares for
one year without approval. Natelco entered into a contract with CSI.
CSI was paid with shares of stock. As a consequence, Dee was
unseated as chairmain and CSI was able to gain control of Natelco.
Issue: Whether or not the issuance of stock to CSI was valid; Whether
or not SEC has jurisdiction; Right of preemption
Ruling:
A. As to validity of issuance; Preemptive right
 The preemptive right of stockholders is recognized only
with respect to new issue of shares, and not with respect
to additional issues of originally authorized shares.
 This is on the theory that when a corporation at its
inception offers its first shares, it is presumed to have
offered all of those which it is authorized to issue.
 The issuance of the 113,800 stocks is not invalid even
assuming that it was made without notice to the
stockholders as claimed by Dee, et. al.. The power to issue
shares of stocks in a corporation is lodged in the board of
directors and no stockholders meeting is required to
consider it because additional issuance of shares of stocks
does not need approval of the stockholders.
Consequently, no pre-emptive right of Natelco
stockholders was violated by the issuance of the 113,800
shares to CSI.
B. Jurisdiction of SEC – SEC HAS NO JURISDICTION TO
DETERMINE WHETHER THE ISSUANCE OF STOCKS VIOLATED
THE PUBLIC SERVICE ACT.
 The jurisdiction of the SEC is limited to matters
intrinsically connected with the regulation of
corporations, partnerships, and associations and those
dealing with the internal affairs of such entities.
 Thus, SEC was correct when it refused to rule on whether
the issuance of the shares of Natelco stocks to CSI violated
Section 20 of the Public Service Act.
4. PNB vs. Andrada
PASUMIL engaged the services of Andrada – patially paid. PNB then
acquired the assets of PASUMIL. PNB organized NASUDECO to take
ownership and possession of all sugar mills controlled by PNB.
Andrada alleged that PNB and NASUDECO should answer for
PASUMIL’S indebtedness.
Issue: Whether or not PNB may be held liable for PASUMIL’s
obligation
Ruling: NO.
A. Liability
 As a rule, a corporation that purchases the assets of
another will not be liable for the debts of the selling
corporation, provided the former acted in good faith
and paid adequate consideration for such assets, except
when any of the following circumstances is present:
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 (1) where the purchaser expressly or impliedly
agrees to assume the debts
(2) where the transaction amounts to a
consolidation or merger of the corporations
(3) where the purchasing corporation is merely a
continuation of the selling corporation, and
(4) where the transaction is fraudulently entered
into in order to escape liability for those debts
 In this case, the mere fact that PNB acquired PASUMIL’s
assets that were forecolosed and sold at a public auction,
will not make PNB liable for its obligations to Andrada.
Moreover, there was failure to establish proof that would
justify the piercing of corporate fiction.
B. Merger
 Since a merger or consolidation involves fundamental
changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express
provision of law authorizing them. For a valid merger or
consolidation, the approval by the Securities and
Exchange Commission (SEC) of the articles of merger or
consolidation is required. These articles must likewise be
duly approved by a majority of the respective
stockholders of the constituent corporations.
 In the case at bar, we hold that there is no merger or
consolidation with respect to PASUMIL and PNB.
5. Loyola Grand Villas Homeowners Association vs. CA
LGVAI found out that there are two homeowners associations within
LGV, namely: Loyola Grand Villas Homeowners (South) Association,
Inc. (LGVAI-South) and Loyola Grand Villas Homeowners (North)
Association, Inc. (LGVAI-North). The two associations asserted that
they have to be formed because LGVAI is inactive. When LGVAI
inquired about its status with HIGC, HIGC advised that LGVAI was
already terminated; that it was automatically dissolved when it
failed to submit it By-Lawsafter it was issued a certificate of
incorporation by the SEC.
Issue: May the failure of a corporation to file its by-laws within one
month from the date of its incorporation, as mandated by Section 46
of the Corporation Code, result in its automatic dissolution?
Ruling: NO.
 A private corporation like LGVAI commences to have
corporate existence and juridical personality from the
date the Securities and Exchange Commission (SEC) issues
a certificate of incorporation under its official seal. The
submission of its by-laws is a condition subsequent but
although it is merely such, it is a MUST that it be submitted
by the corporation. Failure to submit however does not
warrant automatic dissolution because such a
consequence was never the intention of the law. The
failure is merely a ground for dissolution which may be
raised in a quo warranto proceeding. It is also worthwhile
to note that failure to submit can’t result to automatic
dissolution because there are some instances when a
corporation does not require a by-laws.
6. China Banking Corporation vs. CA
Calapatia shareholder of VGCCI pledged his certificate to secure a
loan from Chinabank. He failed to pay the certificate was sold to the
highest bidder, the petitioner. VGCCI, on the other hand, sold the
certificate by reason of delinquency.
Issue: Whether or not petitioner is a stockholder of VGCCI and
whether or not the nature of the controversy between petitioner and
private respondent corporation is intra-corporate.
Ruling: YES.
 There is no question that the purchase of the subject
share or membership certificate at public auction by
petitioner transferred ownership of the same to the
latter and thus entitled petitioner to have the said share
registered in its name as a member of VGCCI. It is readily
observed that VGCCI did not assail the transfer directly
and has in fact, in its letter, expressly recognized the
pledge agreement executed by the original owner,
Calapatia, in favor of petitioner and has even noted said
agreement in its corporate books. In addition, Calapatia,
the original owner of the subject share, has not contested
the said transfer.
 A by-law of a corporation which provides that transfers
of stock shall not be valid unless approved by the board
of directors, while it may be enforced as a reasonable
regulation for the protection of the corporation against
worthless stockholders, cannot be made available to
defeat the rights of third persons."
 In order to be bound, the third party must have acquired
knowledge of the pertinent by-laws at the time the
transaction or agreement between said third party and
the shareholder was entered into, in this case, at the time
the pledge agreement was executed. VGCCI could have
easily informed petitioner of its by-laws when it sent
notice formally recognizing petitioner as pledgee of one
of its shares registered in Calapatia's name. Petitioner's
belated notice of said by-laws at the time of foreclosure
will not suffice.
7. Associated Bank vs. CA
Associated Banking Corporation and Citizens Bank and Trust
Company merged to form just one banking corporation known as
Associated Citizens Bank, the surviving bank. The defendant
executed in favor of Associated Bank a promissory note whereby the
former undertook to pay the latter the sum of P2,500,000.00
Issue: Whether Associated Bank, the surviving corporation, may
enforce the promissory note made by private respondent in favor of
CBTC, the absorbed company, after the merger agreement had been
signed
Ruling: YES.
 The merger of two or more existing corporations, one of
the combining corporations survives and continues the
combined business, while the rest are dissolved and all
their rights, properties and liabilities are acquired by the
surviving corporation. Although there is a dissolution of
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 the absorbed corporations, there is no winding up of
their affairs or liquidation of their assets, because the
surviving corporation automatically acquires all their
rights, privileges and powers, as well as their liabilities.
The merger, however, does not become effective upon
the mere agreement of the constituent corporations,
shall be effective upon issuance by SEC of certificate of
merger.
 In this case, the fact that the promissory note was
executed after the effectivity date of the merger does not
militate against petitioner. The agreement itself clearly
provides that all contracts -- irrespective of the date of
execution -- entered into in the name of CBTC shall be
understood as pertaining to the surviving bank, herein
petitioner. Thus, although the subject promissory note
names CBTC as the payee, the reference to CBTC in the
note shall be construed, under the very provisions of the
merger agreement, as a reference to petitioner bank, as if
such reference [was a] direct reference to the latter for all
intents and purposes.

8. Babst vs. CA
ELISCON obtained a loan from CBTC evidenced by a promissory note.
ELISCON defaulted on its payments, leaving an outstanding balance
of P2,795,240.67. Subsequently, Antonio Roxas Chua and Chester
Babst executed a continuing Suretyship, whereby they bound
themselves jointly and severally liable to pay any existing
indebtedness of MULTI to CBTC. The Bank of the Philippine Islands
(BPI) and CBTC entered into a merger, wherein BPI, as the surviving
corporation, acquired all the assets and assumed all the liabilities of
CBTC.

Issue:

Ruling:
 The merger of two or more existing corporations, one of
the combining corporations survives and continues the
combined business, while the rest are dissolved and all
their rights, properties and liabilities are acquired by the
surviving corporation. Although there is a dissolution of
the absorbed corporations, there is no winding up of
their affairs or liquidation of their assets, because the
surviving corporation automatically acquires all their
rights, privileges and powers, as well as their liabilities.
 In this case, there is no question that there was a valid
merger between BPI and CBTC. Hence, BPI has the right to
institute the case a quo.

9. Mindanao Savings vs. Willkom